Enforcing tax debts overseas - the long arm of the Revenue

It's a generally accepted principle of international tax law that one Country won't assist in the enforcement of tax debts due to another Country.

This rule is being 'stretched' in a number of cases. In the US it's known as the 'Revenue Rule' and in the UK as the rule in the Government of India case.

Examples of this rule in action include claims by foreign governments against the US tobacco companies for loss of excise duty. The courts have struck out such claim by foreign governments on the grounds that it was a claim for the collection of taxes and that this contravened the Revenue Rule.

This Revenue rule as it applies to the UK for instance essentially arises out of the Sovereignty principle in particular that it is not the job of one country to enforce another's debts.

It also ties into the reason why most countries tax their residents on their worldwide income and non-residents on income having its source in their country. A simple explanation for this is that these are the taxes that a country can collect. What they can't do is tax non-residents on income having a source outside the country, even though it might have some other link to the country.

There are though some threats to the general rule that one country won't enforce another's debts.

EU changes

The first of these is the adoption of a European Council Directive amending an existing Directive for the recovery of tax claims.

This amendment extends the existing Directive to require Member States of the European Union to assist one another in the collection of virtually all forms of taxation, including VAT, excise duties, and taxes on income and capital.

(In practice, virtually the only taxes that are not covered are taxes on inheritance and estates and stamp duties.)

Member States were required to adopt any changes to their laws to comply with the Directive by the 30th June 2002. As from this date, effectively the Revenue Rule will have disappeared as between Member States of the European Union: one Member State will be able to ask another to collect taxes on its behalf.

This is effectively the same as a federal state where one states tax debts can be collected in another state (eg the US or Switzerland for enforcement between cantons).

Changes to double tax treaties

The other change is wider in scope. the OECD model treaty has been amended to include a new Article 27 providing for co-operation in the enforcement of tax debts. This is headed 'ASSISTANCE IN THE COLLECTION OF TAXES'.

As the treaties are gradually updated and renegotiated this will mean that many other non EU countries will also be able to collect overseas tax debts (assuming they draft the treaty based on the OECD model treaty).

The Relevant info on this from the OECD is outlined below:

ASSISTANCE IN THE COLLECTION OF TAXES

1. The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistance is not restricted by Articles 1 and 2. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this Article.

2. The term "revenue claim" as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.

3. When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of collection by the competent authority of the other Contracting State.

That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.

4. When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of taking measures of conservancy by the competent authority of the other Contracting State.

That other State shall take measures of conservancy in respect of that revenue claim in accordance with the provisions of its laws as if the revenue claim were a revenue claim of that other State even if, at the time when such measures are applied, the revenue claim is not enforceable in the first-mentioned State or is owed by a person who has a right to prevent its collection.

5. Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be subject to the time limits or accorded any priority applicable to 3.

In some countries, national law, policy or administrative considerations may not allow or justify the type of assistance envisaged under this Article or may require that this type of assistance be restricted, e.g. to countries that have similar tax systems or tax administrations or as to the taxes covered.

For that reason, the Article should only be included in the Convention where each State concludes that, based on the factors described in paragraph 1 of the Commentary on the Article, they can agree to provide assistance in the collection of taxes levied by the other State.

A revenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority applicable to that revenue claim under the laws of the other Contracting State.

6. Proceedings with respect to the existence, validity or the amount of a revenue claim of a Contracting State shall not be brought before the courts or administrative bodies of the other Contracting State.

7. Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4 and before the other Contracting State has collected and remitted the relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be

a) in the case of a request under paragraph 3, a revenue claim of the first-mentioned State that is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, or

b) in the case of a request under paragraph 4, a revenue claim of the first-mentioned State in respect of which that State may, under its laws, take measures of conservancy with a view to ensure its collection the competent authority of the first-mentioned State shall promptly notify the competent authority of the other State of that fact and, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request.

8. In no case shall the provisions of this Article be construed so as to impose on a Contracting State the obligation: a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

b) to carry out measures which would be contrary to public policy (order public);

c) to provide assistance if the other Contracting State has not pursued all reasonable measures of collection or conservancy, as the case may be, available under its laws or administrative practice;

d) to provide assistance in those cases where the administrative burden for that State is clearly disproportionate to the benefit to be derived by the other Contracting State.

So although many existing treaties include exchange of information provisions in order to enforce debts overseas you would need to look at either the EU directive if an EU country or any relevant double tax treaty to identify whether it includes the 'collection' article.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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