From tax treaties to terror

Tax treaties are for most people rather boring things.

Yet since the 1998 OECD denunciation of so-called “harmful tax competition,” tax treaties have morphed into a global agenda which is becoming rather terrifying in its potential consequences.

To understand how this has come about, you have to remember that most large countries levy income tax upon their residents – and citizens in the case of the USA – on the basis of the resident’s worldwide income.

There is no real need to do this. From an economic point of view, there are only three things you can tax – land, labor or capital, and only one of them cannot run away, die out or wear out.

The optimal tax regime is therefore a purely territorial tax based on taxing land values, comprehending both site values and resource rents. Such a purely territorial tax regime renders tax treaties unnecessary.

Unfortunately, most politicians and Treasuries like to avoid dealing with local vested real estate interests and prefer to pander to the idea that they will make the system “fair” by taxing rich taxpayers on their offshore incomes.

Hence, there has been an aggressive OECD-led campaign to rip up standard norms of international law and basic sovereignty, such as the rule that no country enforces another’s taxes. The object has been to force, shame, intimidate or bribe small offshore financial centers into becoming assistant tax informers or collectors for the large OECD countries. Sovereign countries or self-governing jurisdictions have been forced into signing tax information exchange agreements (TIEAs) of no use or benefit to themselves but designed to assist larger OECD countries enforce their residence-based income tax systems.

By the way “residence-based” is a misnomer. Often, large countries assert claims to tax income accruing in offshore centers well before it ever becomes the income of their residents.

Be that as it may, many offshore jurisdictions have, willy-nilly, succumbed to the pressure and signed tax information exchange agreements – better described as tax information handover arrangements – which oblige them to provide information upon request to foreign powers about the financial affairs of resident taxpayers of those powers, including those locals with whom those taxpayers have been dealing.

When one thinks about this, it is really rather extraordinary. Offshore centers have submitted to becoming informants on not only the financial affairs of foreign taxpayers but also their own citizens. This has already led to citizens and residents of offshore jurisdictions being threatened or charged with criminal conspiracy by foreign countries – for doing what was quite legal in their own home jurisdictions. However, there was one saving grace. At least, offshore countries were not obliged to hand over information without some scrutiny of the apparent bona fides of the information request.

However, things are about to take a quantum leap. OECD countries, spurred on by the U.S. Foreign Account Tax Compliance Act (FATCA), are demanding that all countries, including offshore financial centers, join in automatic data exchange (read “handover”) of all financial account information of all non-residents in any jurisdiction.

What does this mean?

It means the U.S. government, for example, will get all the financial assets and income of all U.S. residents or citizens in every country from Andorra to Vietnam and beyond. Likewise, it means China and Russia will automatically get records all the financial assets and income of all their citizens held anywhere else in the world and so on. All this will be processed according to a common information standard developed by the OECD.

Note that no government receiving this information is required to:
1.    provide immunities to foreign nationals involved in any transactions supplied;
2.    provide indemnities for any damage which may be caused by loss or misuse of information supplied;
3.    seek any form of judicial order to invade the private business affairs of foreign businesses.

Offshore centers and every other country will even be sending information on the private financial affairs of their own citizens to foreign countries if those citizens live elsewhere.

For example, in the case of Australia, the government is proposing to send the private financial details of around 1 million expatriate Australian citizens to governments all over the world – supposedly to help them enforce “residence”-based taxation.
Pause for a minute. The first duty of a sovereign is to protect his people. Allegiance is a two-way street. We pay taxes for protection, not be handed over to foreign rulers.

No one has asked what will be the liability and responsibility of a government when that information handed over is stolen or leaked and we start seeing identity theft, fraud and kidnapping of children of expatriates (British, American, European, Australian and others) whose financial data has fallen into criminal hands. You only have to look at the Russian mafia’s money laundering through the Bank of New York some years ago to realize this scenario is not fanciful and that no country, including the United States, can be trusted to protect confidential financial information of millions of people.

Yet, as things currently stand, there will be no redress for any taxpayer or other person adversely affected by leaks of such information. After the Snowden revelations and cases of large-scale data theft from banks, does anyone seriously believe governments can be trusted to protect information about the private financial affairs of people?

It therefore seems reasonable for people to demand, as a matter of urgency, that automatic data handover be rejected in any tax treaty and that, where information is sought, the other government should be asked:
1.    to provide the supplying government with enforceable immunities to protect its own officials and citizens
2.    to provide enforceable indemnities for any person adversely affected by theft or release or wrongful use of any data supplied; and
3.    show prima facie cause in a judicial forum as to why the information is reasonably required.

We are now seeing a war of terror upon taxpayers where they cannot be secure about their lives or physical safety as they contemplate the horrible thought that their private financial affairs will end up, via automatic data handover, falling into the hands of criminals, such as kidnappers and extortionists.
Governments embracing the OECD and FATCA automatic data exchange push are suddenly making the world a very unsafe place for millions of their own peoples and their families.

Unless tight legal controls and remedies are used to rein in rampant tax bureaucracies and automatic data handover, it is obvious that hundreds of thousands, even millions, of affluent people in Western countries will be forced to seek the assistance of lawyers to create anonymous wealth-holding structures, not to avoid tax, but merely to secure the privacy and security as basic human rights to which they should be entitled as a matter of course.


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Terence M. Dwyer CTA

Terence M. Dwyer CTA
Dwyer Lawyers, Australia

t: + 61 (02) 6247 8184
e: [email protected]


Dwyer Lawyers

Because we have worked over the years on a range of policy and legislative changes, including drafting, Dwyer Lawyers brings to the practice of estate, superannuation, tax and business planning a range of experience and expertise which helps inform our advice. Often, there is more than one way to achieve your ultimate wealth planning objectives and it helps, in looking at alternative legal strategies, to take into account the trend of policy and legislation (which in turn may influence the way the Courts handle previous precedents).  We practise in all areas related to clients’ needs to grow and protect their family’s wealth and provide for their well-being.

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t: + 61 (02) 6247 8184
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