Paris 1987 meeting

Many changes are taking place in this field. OECD has prepared a treaty, which the Council of Europe is expected to approve later this year.
The OECD model treaty of 1977 provides in Article 26 for exchange of information, including information about persons resident outside the contracting states. In 1981 the OECD Council issued a form for the standard exchange of information. Article 26 is hedged about with some restrictions; the US Model is a little wider.

A taxpayer acquires no rights of privacy under the treaty, nor a defence to an allegation of fraudulence conveyance, but the information must be concerned with carrying into effect the terms of the treaty, and the scope of the exchange may be limited by domestic law. The right to information does not extend to the giving of full legal assistance, but the Burbank case has established that the IRS is entitled to require a US taxpayer to furnish information required not for any US tax purpose but solely to fulfil its obligation to furnish information under a treaty.

The use of the information article is not very extensive. Wider powers are contained in the EEC directive of 1977 (extended to VAT in 1979). The United States has pioneered the use of subpoenas and other non-treaty methods of obtaining information, both for tax and other purposes.

Note: Although the tax treaties continue to contain the same Exchange of Information Articles and these continue to be used to prevent taxpayers from paying too much tax and to assist them in keeping their tax liabilities from falling into obscurity when complicated by the possibilities of different tax regimes the emphasis on the exchange of information has changed to being a major tool in the detection of criminals and of their funds. The diversionary tactics of the countries in which crimes are committed and which appear unable or unwilling to take adequate measures is to concentrate on possible transfer of the criminal proceeds to offshore centres and to transfer the blame onto them for their own shortcoming with the connivance of international agencies which enjoy the clichés with none of the responsibilities. The current move to make anti money laundering laws applicable to the proceeds of all crimes, which will cover tax evasion and most likely a criminal tax avoidance will increase the uses of exchange of information clauses.

There is now a general agreement at both ends of the political spectrum to reduce taxes and reduce the government’s expenses and deficit.
The first measure of the new government was to abolish the wealth tax, but the 3% tax on foreign entities owning real estate in France remains. It seems likely that a form of wealth tax may be re-introduced, but with lower rates than formerly. The top rate of income tax has been reduced from 65% to 58%; a further reduction to 52% is being studied.

Section 180, permitting tax authorities to estimate income, has been abolished, and s.168, permitting the authorities to arrive at a deemed income by reference to appearance of wealth, has been somewhat modified in the taxpayers’ favour. To encourage construction of dwellings for rent, a deduction of 10% of the cost and 35% of the rent has been introduced. Marriage allowances have been increased. The tax regime on bonds has been liberalised. Death duty rates and tax on inter vivos gifts have been reduced to encourage donors to make gifts earlier in life.

The Amnesty Law permitted French residents to repatriate funds illegally held abroad at a penalty of 10%.

The corporation tax rate has been reduced to 45% and since 1 January 1986 applies to distributed income, though the tax credit on dividends (avoir fiscal) remains at 50%.

Provision for employees’ holidays is deductible, the treatment of losses carried back has been liberalised, the rules for holding companies have been eased, the levy on entertainment expenses is being reduced. Local taxes are being reduced, an allowance for investment in subsidiaries aborad has been introduced, and tax incentives have been introduced for investment in depressed areas and in French overseas territories.

New rules are being introduced to enable the taxpayer to challenge decisions of the tax authorities. Exchange control has been eased, but not abolished.

The present trend is towards reduction of taxes on business.

In a case a short time ago, the client wanted to purchase a UK leasing company. Section 461 (d) of the UK Taxes Act had to be considered: it appears sufficient that the company’s shares are dealt in on a non-UK stock exchange; the “control” test of s.302(2) needs to be applied to all possible “controllers” but the solution to this problem by placing the company in a trust of which the trustee was a “non-D” company.
The purchase of the company would be profitable to the client only if the future tax liabilities of the company could be reduced. Non-residence therefore needed to be considered. Whether or not s.482 (which forbids the emigration of a UK-resident company without Treasury consent) is inconsistent to the Treaty of Rome is now in dispute. At the time of this transaction, it had to be assumed that s.482 was effective law; none of General Consents were available. A further obstacle to making the company non-resident was presented by s.251.

Dual residence offered a solution to the problem – the company remaining resident in the United Kingdom under domestic law, but becoming the resident of another country under the relevant treaty, by application of the “tie-breaker” provision. Denmark was the other country chosen. “Effective management” had to be in Denmark. Little judicial consideration has been given to this expression, but some light is thrown on it by Public Trustee v IR (1949) TR 29.

The board would meet in the United Kingdom but management of the day to day business was moved to Denmark. A small branch was retained in the United Kingdom so that the company did not cease to be within the charge to corporation tax (so that s.251 did not apply).

Instead of granting a credit for foreign tax on the income of a foreign investment, the German tax system utilises “exemptions with progression”: the income counts for determining therate of tax but is not itself subject to tax.
Much German investment in Switzerland has in the past been by way of bank deposits or by way of investment in a Swiss company. By not declaring this income in Germany, the saving of German tax has been rather trifling.

With proper planning, the profit of an active permanent establishment in Switzerland of a German individual or limited partnership may be taxable only in Switzerland; the incidence of Swiss social security contributions by the individuals concerned makes this vehicle generally suitable only for small businesses. In Neuchatel, an active business company can be established with a total tax rate of not more that 11%. Neuchatel allows, in some cases, a similar tax advantage to a permanent establishment of a foreign company.

The use of a company avoids the burden of social security contributions, and the use of a German company (as opposed to a Swiss company) eliminates the withholding tax on dividends. If the holder of the shares in the operating company is a German limited partnership with an individual partner, a form of fiscal unity between the partnership and the operating company results in the “exemption with progression” treatment being accorded to the operating company’s profits.

The introduction of the branch profits tax in the United States has made the use of foreign corporations generally less attractive for carrying on business in the US. However, where a German partner in a US partnership makes a loan to the partnership, the interest ranks as a deduction for US tax purposes and is free of tax under the treaty, while ranking for German tax purposes as a partnership profit and accorded the “exemption with progression” treatment. Unfortunately this position is currently under attack in Germany, but at least the US tax minimisation appears set to continue.

There are several forms of assistance available to companies in the Common Market. They are linked to the company carrying out specific projects which the government wishes to support. In the 50’s and 60’s, support was directed to regional and social objectives – not always successfully; the present tenancy is to support new industries, new technology, technical training and R and D.
Schemes are numerous and their variety confusing. Regional support tends nowadays to be directed to job-creation, and government has found it more effective to make grants discretionary rather than automatic. Support takes the form of soft loans, equity capital or tax concessions.

An overseas corporation contemplating an investment in Western Europe must always consider government assistance as an important factor (among others) in assessing the viability and location of the project.

Support for R and D is embodied in many schemes, involving university research, advanced technology and skill training. There is support for export and development of foreign markets, for new enterprises and for small firms.

The Community budget includes some support, besides the large proportion of the budget devoted to agriculture, for regional development and a small degree of support for R and D. The Community’s R and D schemes are directly administered from Brussels, and is designed to reduce the degree of national fragmentation, which is seen as a disadvantage of European industry as against that of the United States and Japan.

In making an application, a company of course needs to provide past and projected figures, but must also understand the objectives which the government wishes to achieve from the scheme in question.

Exposure to professional liability has become very serious. Lawyers, accountants and nominee directors are at risk. Liability depends on the existence of a duty of care which is breached. The Hedley Byrne case established in English law that there may be a liability for law arising from negligent mis-statements. Solicitors and barristers are not liable for acts done in the course of conducting a case in court, but may be liable in other activities – notably in giving advice. Accountants similarly own a duty of care in making financial statements.
Liability of this kind arises in tort and extends therefore not merely to the client but to others who rely on and are affected by the statement or advice.

A director has a fiduciary relationship with the company: he has a potential liability to the company as well as to third parties.

English law now recognises pure economic loss as a head of damages, but only in rather restricted circumstances.

Some form of limited liability is necessary for professional advisers. But this is yet to come. There are, however, defences open to persons sued for professional negligence – that the client knowingly took a risk (volenti non fit injuria) or that the client’s own negligence contributed to the damage.

A contractual term seeking to limit the liability of a professional adviser may perhaps be effective: it must be reasonable; it must not affect contentious work; it must limit rather than exclude liability. The law and practice in this area is still in a stage of development.

A professional adviser should obtain written instructions. He should consider expressly limiting his liability. Supervision of staff is important. A practitioner should never advise in areas in which he is not expert. Scrupulous keeping of records can prove most valuable.

Article 47 of the Federal Banking Law makes divulgence of secrets a criminal offence. It is also a breach of a banker’s civil duty to his client. Swiss law protects secrecy in other ways also.
Switzerland is anxious to co-operate with other nations in fighting crime, though tax evasion is not a crime in Switzerland. The Marcos case may indicate that the Swiss government has embarked on a new policy.

Tax fraud (as opposed to mere evasion) is a crime in Switzerland. The Swiss court has been willing to allow information to be exchanged under a tax treaty, but only where tax fraud is shown. Switzerland has a treaty with the United States for mutual assistance in criminal matters: it does not extend to tax evasion. In the Mark Rich case, the US court took jurisdiction over the Swiss company, but the Swiss court refused to order the company to reveal information.

The general – and especially American – desire to curb insider trading led to “Agreement XVI”: this attempts to satisfy the Securities and Exchange Commission while preserving bank secrecy.

Agreement XVI may be of limited value only. A Swiss bank can have the dilemma that failure to give information is punished by a fine imposed by the US court, while to give that information is unlawful in Switzerland. The power of the US government may be more powerful than secrecy laws in Switzerland and other countries.

Bank secrecy is still intact in Switzerland but it is undoubtedly under attack and we are likely to see its scope reduced.

Marshall Langer (updated 1998)
Tax return information cannot be disclosed except as authorised by the Internal Revenue Code. This prohibition does not apply to information entered on Customs Form 4790 (currency), Treasury Form 90-22.1 (foreign bank account) or Treasury Form 4789 (currency transaction), which is entered into a computer and can be passed on to law enforcement agencies generally. It does not appear that this information stimulates the IRS to audit a taxpayer, but it is available to the Service and is likely to be utilised in any examination of a taxpayer’s affairs.

The draft Multilateral Convention on Mutual Assistance in Tax matters is now public knowledge. Member states of the Council of Europe and OECD are invited to be signatories: it is expected that these bodies will approve the draft, with some abstentions, in the course of March 1987. The United States strongly supports this treaty: it follows the information exchange provisions of the 1981 U.S. model. The treaty also deals with assistance in service of documents and assistance in collection of taxes.

Article 29 of the draft deals with the territorial application of the treaty. It is possible that the Dutch and British governments will extend its operation to their overseas territories, which include many of the leading tax havens.

The treaty covers all taxes (except customs duties), including local taxes, and applies to all persons, whether or not citizens or residents of a contracting state. It extends to all information “likely to be relevant” to the assessment and collection of tax. Information must be exchanged on request and a contracting state must take steps to obtain it. Article 9 provides for foreign tax authorities to participate in a domestic tax examination. The draft requires the state receiving information to inform the providing state if the information is inconsistent with what it has already. Another article provides for each state to collect taxes due to other states and to make “measures of conservancy” where the liability has not been finalised. Documents – including tax assessments – may be served by post; translation into another language is not compulsory.

The draft is a long and detailed document; its effect will be very far-reaching.

The Multilateral Convention on Mutual Assistance in Tax Matters entered into force in 1995. The treaty applies only to those countries that have signed and ratified it, namely Denmark, Finland, Iceland, the Netherlands, Norway, Sweden and the United States. The Netherlands has not extended the treaty to cover its overseas territories.