In a comment, Aussie Jones asks about Article 21 of the OECD’s Multilateral Convention On Mutual Administrative Assistance In Tax Matters, which states, in part:
Article 21 — Protection of persons and limits to the obligation to provide assistance
2. The provisions of this Convention shall not be construed so as to impose on the requested State the obligation:
a. to carry out measures at variance with its own laws or administrative practice or the laws or administrative practice of the applicant State;
b. to carry out measures which would be contrary to public policy (ordre public);
e. to provide administrative assistance if and insofar as it considers the taxation in the applicant State to be contrary to generally accepted taxation principles or to the provisions of a convention for the avoidance of double taxation, or of any other convention which the requested State has concluded with the applicant State;
f. to provide administrative assistance for the purpose of administering or enforcing a provision of the tax law of the applicant State, or any requirement connected therewith, which discriminates against a national of the requested State as compared with a national of the applicant State in the same circumstances.
The U.S. government clearly is not a fan of certain provisions of Article 21, but how helpful can these clauses really be to “U.S. Persons” living in other countries?
The U.S. Congress’ Joint Committee on Taxation staff made the following comments on Article 21 a few months ago. They don’t specifically mention PFIC and “foreign trust” reporting imposed on local retirement savings which host country parliaments think should enjoy simplified and not ridiculously-complicated tax & paperwork treatment, nor FBAR fines of 129 times the tax owed, but I’d bet whoever wrote these paragraphs certainly had those factors in mind when they wrote the following, which condemns the “generally accepted taxation principles” clause as “undermining” U.S. tax enforcement efforts:
The scope and operation of Article 21, as amended by the proposed protocol, accomplishes one of the goals of the OECD transparency standards, in establishing that a requested State cannot rely on bank secrecy or lack of a domestic interest as a basis for a refusal to exchange information, but adds other new potential arguments against exchanging information, based on the requested party’s interpretation of the domestic law of the requesting party. Under Article V of the proposed protocol, and Article 21 as amended, a treaty country is generally not obligated to take any action at variance with its domestic law, including disclosure of professional or trade secrets. That principle is limited by the rule that a treaty country may not decline to provide information on the ground that the information is held by a financial institution, nominee, or person acting in an agency or intermediary capacity.
The effect of this amendment is potentially undermined by the continued inclusion of language that permits a signatory to refuse to exchange information if the requested country determines that the domestic tax law of the requester is outside generally accepted principles of taxation. Thus, the requested country is permitted to make determinations about the merits of a Competent Authorities request based on its interpretation of the domestic law of another country. The Commentary includes a brief discussion of this limitation, to the effect that a rate of tax that is confiscatory or a penalty that is disproportionate to the offense may be considered to be outside generally accepted tax principles, and urges contracting States to consult with one another in instances when such a basis for refusing to exchange information is considered.
The Committee may wish to inquire whether the United States has had experience with application of the “generally accepted principles of taxation” standard in providing administrative assistance. Specifically, it may wish to determine whether similar language exists in any bilateral TIEA or exchange of information article of a tax treaty to which the United States is a party. Although the language was in the original Article 21 that is replaced by Article V of the proposed protocol, it may not have been invoked previously, because most jurisdictions with respect to whom the treaty was in force had a network of bilateral agreements on which they relied. For example, the Committee may ask whether there have been instances in which the United States refused to exchange information based on its view that the requester’s tax regime was outside the norms of the international community. Similarly, the Committee may wish to inquire whether any country or countries have rejected requests from the United States on that basis.
“Explanation Of Proposed Protocol Amending The Multilateral Convention On Mutual Administrative Assistance In Tax Matters”, pp. 26–27. Joint Committee on Taxation, 21 February 2014. Paragraph breaks and emphasis mine; footnotes omitted. They refer to a “brief discussion of this limitation” in “The Commentary”, which I reproduce below to save non-academic readers the trouble of citation-chasing:
197. Sub-paragraph e enables a requested State to refuse to provide assistance “if and insofar as it considers the taxation in the applicant State to be contrary to generally accepted taxation principles”. This might be the case, for instance, where the requested State considers that taxation in the applicant State is confiscatory, or where it considers that the taxpayer’s punishment for the tax offence would be excessive …
199. It is suggested that consultation between competent authorities should also take place whenever there is some doubt as to whether the taxation in the applicant State is of such a kind as to justify a refusal under the provisions of sub-paragraph e.
“The Multilateral Convention on Mutual Administrative Assistance in Tax Matters Amended by the 2010 Protocol”, pp. 82–83. OECD Publishing, 2011. DOI 10.1787/9789264115606-en. Emphasis mine. I omitted Paragraph 198 because it discusses the “contrary to the provisions of a convention for the avoidance of double taxation” limitation, which is not helpful for us thanks to our host countries’ surrender of sovereignty through U.S. tax treaty “saving clauses”.
If you find the above quote confusing, it may be helpful to replace “requested State” with your country (e.g. “Canada”) and “applicant State” with “the United States” in your head as you read it. I leave it to your imagination exactly how the U.S. Treasury & State Departments might threaten the “requested State” in those blandly-described “consultation[s] between competent authorities”.
The Commentary goes on to discuss the intent of the non-discrimination clause. As others (most recently Osgood) have concluded in the comments, both the OECD non-discrimination clause and the non-discrimination clauses in the U.S. bilateral tax treaties are likely to be non-starters for “U.S. Persons” outside of the U.S., so if you’re pressed for time or sick of reading bureaucratese, you’re welcome to skip to the end of this post.
200. Sub-paragraph f is designed to ensure that the Convention does not result in discrimination between nationals of the requested State and nationals of the applicant state who are in the same circumstances. In the exceptional circumstances in which this issue may arise, sub-paragraph f allows the requested State to decline a request where the information requested by the applicant State would be used to administer or enforce tax laws of the applicant State, or any requirements connected therewith, which discriminate against nationals of the requested State. Sub-paragraph f is intended to ensure that the Convention does not result in discrimination between nationals of the requested state and identically placed nationals of the applicant state.
Nationals are not identically placed where an applicant State national is a resident of that State while a requested State national is not. Thus, sub-paragraph f does not apply to cases where tax rules differ only on the basis of residence. The person’s nationality as such should not lay the taxpayer open to any inequality of treatment. This restriction should apply both to procedural matters (differences between the safeguards or remedies available to the taxpayer, for instance) and to substantive matters, such as the rate of tax applicable.
The OECD’s non-discrimination clause is focused on cases where the applicant State (e.g. the U.S.) is discriminating against a resident non-national (a Canadian expat in the U.S.) in favour of a resident national (a U.S. citizen); the Commentary specifically points out that it does not intend to cover discrimination between residents & non-residents.
However, various U.S. treaties have broader non-discrimination clauses which might be read to protect nationals of either party against discrimination by either government. Indeed, the U.S. is clearly worried that these non-discrimination clauses might affect their efforts to get a “requested State” to assist them in imposing requirements against a resident dual national (a Canadian citizen in Canada with “clinging U.S. nationality”) in a way that does not apply to a resident single national. As such, some of their bilateral treaties have a second saving clause about the definition of “identically placed”, in addition to the more-widespread one stating that they may tax their citizens as if the treaty did not exist. For example, from the 1982 treaty with New Zealand:
Article 23: Non-discrimination. Citizens of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirements to which citizens of that other State in the same circumstances are or may be subjected. This provision shall apply to persons who are not residents of one or both of the Contracting States. However, for the purposes of United States tax, a United States citizen who is not a resident of the United States and a New Zealand citizen who is not a resident of the United States are not in the same circumstances.
The non-discrimination clause (Article XXV) in the Canada–U.S. treaty, and the U.S.’ interpretation of it as laid out in the “Technical Explanation” of the 2007 Protocol, is far more complicated; I won’t try to unravel it here, but I’ll just end with this quote from the Technical Explanation:
Whether or not the two persons are both taxable on worldwide income is a significant circumstance for this purpose. For this reason, paragraph 1 specifically refers to taxation or any requirement connected therewith, particularly with respect to taxation on worldwide income, as relevant circumstances. This language means that the United States is not obliged to apply the same taxing regime to a national of Canada who is not resident in the United States as it applies to a U.S. national who is not resident in the United States. U.S. citizens who are not resident in the United States but who are, nevertheless, subject to U.S. tax on their worldwide income are not in the same circumstances with respect to U.S. taxation as citizens of Canada who are not U.S. residents.
The State Department, the Treasury Department, and the Senate know exactly what they are doing when they use these treaties to buffalo other countries into accepting the extraterritorial asset reporting with heart-stopping fines that the Homeland imposes on the American diaspora in the name of “horizontal equity”, and they have known for decades. They know that what they are doing would be regarded as discriminatory if they did not make sure the letter of the law went directly against the spirit of the section headings. You take the risk on yourself and your family if you accept their pleas of good-faith ignorance and claims that you should just sit tight while they make all efforts to fix the situation.