sharing tax information in the 21st century: big data ... 2019/issue...sharing tax information in...

canadian tax journal / revue fiscale canadienne (2019) 67:4, 1179 - 99https://doi.org/10.32721/ctj.2019.67.4.sym.cockfield

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Sharing Tax Information in the 21st Century: Big Data Flows and Taxpayers as Data Subjects

Arthur J. Cockfield*

P R É C I S

Au cours des 10 dernières années, les gouvernements ont entrepris plusieurs réformes pour échanger automatiquement entre eux des blocs de renseignements sur les contribuables (principalement par l’entremise de la Foreign Account Tax Compliance Act, la Norme commune de déclaration, et la déclaration pays par pays). Ce partage accru des renseignements fiscaux a été incité tant par les changements technologiques, y compris la numérisation, les mégadonnées, et l’analyse des données, que par les tendances politiques, y compris les efforts des gouvernements pour réduire l’évasion fiscale à l’étranger et l’évitement fiscal international abusif. Dans certains cas, cependant, les protections juridiques de la vie privée et des autres intérêts des contribuables ne sont pas assez solides pour faire face à ce nouveau cadre international de partage de renseignements. Sur le plan conceptuel, les contribuables devraient être considérés comme des « personnes visées » dont les droits sont protégés proactivement par les lois et les politiques de protection des données, y compris des pratiques d’information équitables. Un régime optimal, qui équilibrerait les intérêts des contribuables et ceux des administrations fiscales, devrait inclure une déclaration multilatérale des droits des contribuables, une retenue fiscale transfrontalière pouvant être imposée au lieu de l’échange de renseignements, et un registre financier mondial qui permettrait aux gouvernements d’identifier les propriétaires effectifs d’entreprises et d’entités juridiques.

A B S T R A C T

In the last 10 years, governments have initiated several reforms to automatically exchange bulk taxpayer information with other governments (mainly via the Foreign Account Tax Compliance Act, the common reporting standard, and country-by-country reporting). This enhanced sharing of tax information has been encouraged both by technological change, including digitization, big data, and data analytics; and by political trends, including governments’ efforts to reduce offshore tax evasion and aggressive international tax avoidance. In some cases, however, legal protections for taxpayer privacy and other interests are insufficiently robust for this emerging international

* FacultyofLaw,Queen’sUniversity,Kingston,Ontario(e-mail:[email protected]).

1180 n canadian tax journal / revue fiscale canadienne (2019) 67:4

sharing framework. Conceptually, taxpayers should be seen as “data subjects” whose rights are proactively protected by data protection laws and policies, including fair information practices. An optimal regime, which would balance the interests of taxpayers against those of tax authorities, should include a multilateral taxpayer bill of rights, a cross-border withholding tax that could be imposed in lieu of information exchange, and a global financial registry that would allow governments to identify the beneficial owners of business and legal entities.

KEYWORDS: TAX EVASION n TAX AVOIDANCE n TIEA

C O N T E N T S

Introduction 1180Context: The Push for Automatic Exchange of Information 1181

Technological Trends 1182Moving from Analogue to Digital Technologies 1182Big Data, Data Analytics, and Recent Technology Trends 1183

Political Trends 1184Tax Haven Data Leaks 1184The EOI Reforms and Privacy Protections 1186

Summary 1187Liberty and Privacy Interests 1187

Taxation and Liberty 1187Taxpayer Privacy 1189Confidentiality and Trade Secrets 1190Problems with the Existing Legal Framework 1191Summary 1193

Optimal Reforms 1194On the Need for Coordinated Responses 1194Multilateral Taxpayer Bill of Rights 1195Withholding Tax for Non-Cooperative States 1196Global Financial Registry 1197

Conclusion 1198

INTRO DUC TIO N

Inrecentyears,dataleaksfromtaxhavens,includingthePanamapapersandtheParadisepapers,havesuggestedthattheproblemofoffshoretaxevasionandaggres-siveinternationaltaxavoidance,alongwiththerelatedrevenuelosses,maybemoreseriousthanpreviouslysuspected.1Atthesametime,technologytrends—ongoingdigitizationandtheriseofbigdata,dataanalytics,andartificialintelligence(AI)—havefacilitatedgovernmenteffortstoshareandanalyze“bulk”taxpayerinformationacrossborders.Beginningwiththe2010passagebytheUSCongressoftheForeignAccountTaxComplianceAct(FATCA),governmentsareincreasinglyparticipatinginthebulktransfersoftaxandfinancialinformationacrossborders.Morerecently,

1 ArthurJ.Cockfield,“BigDataandTaxHavenSecrecy”(2016)18:8Florida Tax Review483-539.

sharing tax information in the 21st century n 1181

globalagreementscontemplatetheautomaticexchange—throughtheOrganisationforEconomicCo-operationandDevelopment/GroupofTwenty(OECD/G20)com-mon reporting standard (CRS) and country-by-country reporting (CBCR)—offinancialaccountinformationandofdetailedtaxandotherfinancial informationregardingamultinationalcompany’sactivitiesineverycountrywhereitoperates.Theseprocesses (sometimesreferredtoas the“exchangeof information”[EOI]),whichnowinvolvecross-borderbigdataflows,poseachallengetotraditionallegalprotectionsfortaxpayers’privacy,confidentiality,andotherrights.

Thepolicychallengeisimportant:taxandfinancialinformationisamongthemost sensitive andpersonal information that one can collect on individuals andbusiness entities such as corporations. Yet it remains unclear whether the legalframework that is emerging toprotect these taxpayer rights is sufficient. In thispaper,Iconnectseveralbroadtopicsinordertodemonstratethattaxpayersshouldbeviewedas“datasubjects”governedbyproactivedataprotectionlawsandpolicies(including fair informationpractices).Buildingon theviewsofTimEdgar,whoemphasizedthatgovernmentcoordinationcanimprovetheefficiencyofoutcomes,Ireviewsomewaysinwhichgovernmentscouldcooperatetocreateamoreeffect-iveregimeforthecross-borderexchangeoftaxinformation.2

Thispapercomprisesthreeparts.Inthefirstpart,whichfollowsthisintroduc-tion, Iprovidecontext,discussing the technologicalandpolitical trends thatareencouragingtheautomaticexchangeof“bigtaxdata.”Inthesecondpart,Idiscusstheneedtoprotecttaxpayers’liberty,privacy,andconfidentiality,andIshowhowthecurrentlegalregimegoverningtheseinterestssuffersfromanumberofdrawbacks,includingthe legalgapscreatedwhendifferentbilateralorregionalagreementsofferinconsistentand,attimes,inferiorlegalprotections.Inthepaper’slastsection,IreviewtheelementsthatwouldbeincludedinanoptimalregimeforpromotingefficientandfairEOI:amultilateraltaxpayerbillofrights,across-borderwithhold-ingtaxinlieuofinformationtransfer,andaglobalfinancialregistry.

CO NTE X T: THE PUSH FO R AUTOM ATIC E XCH A NGE O F INFO R M ATIO N

Taxpayersmay currentlybe increasing theiruseof taxhavens inorder to evadetaxes,launderdrugmoney,orfinanceterroristactivities.Accordingtosomeesti-mates, USresidentsareevadingbetween$40 and$100 billioneachyearthroughtheuse of tax havens.3 Awide range of estimates exist regarding the total amountsmaintainedintheworld’staxhavens;studiessuggestthatthesehavensmayholdbetween$5 and$38 trillioninundisclosedfinancialassets.4Acommonproblemforgovernmentsisthesignificantdifficultyofidentifyinghowmuchoftheirresidents’

2 SeeTimEdgar,“CorporateIncomeTaxCoordinationasaResponsetoInternationalTaxCompetitionandInternationalTaxArbitrage”(2003)51:3Canadian Tax Journal1079-1158.

3 Cockfield,supranote 1,at 494. 4 Ibid.


taxableincomeisgeneratedwithinforeigncountries.Toaddressthisproblem,gov-ernments enter into agreements to collect and share tax informationwith eachotherviaEOI.Inwhatfollows,IdescribehowtechnologicalandpoliticaltrendsareencouragingtheuseofautomaticEOIinordertocurbtherevenuelossesassociatedwithoffshoretaxevasionandaggressiveinternationaltaxavoidance.

Technological Trends

Moving from Analogue to Digital TechnologiesDevelopmentsintechnology—inparticular,bigdata,dataanalytics,andartificialintelligence (AI)—haveprovidednewtoolstotaxauthorities,enablingthemtocol-lectandsharedetailedtaxandfinancialinformationatanunprecedentedscaleandspeed.Methodsof tax collectionhave evolved inparallelwith the technologicalchange; in the 1960s, paper-based analogue systems began evolving into digitalones.5Apprehensionsabouttheinteractionbetweentechnologyandtaxpayerpri-vacy have existed for some time. In the 1970s, concerns arose about the use ofelectronic records; in the 1980s, about themovement from analogue to digitalstorage; in the 1990s, about online returnfiling and software audits; and,morerecently,aboutthecollectionoftaxpayerinformationinordertotaxglobaldigitalgoodsandservices.

Onceconvertedintoadigitalformat,taxrecordssharethesameattributesasanyother“informationgood”;thefixedcostofamassingtheinformationinthefirstplacemaybehigh,butthemarginalcostofreplicatinganddistributingitapproach-eszero.6Atonetime,taxauthoritiesstoredtaxreturnsandotherpaperrecordsindustycabinetswheretheywereoftendifficulttoaccessandmailtootherdomesticagencies(letalonetoaforeigntaxauthority).Now,ataxauthoritycan,atvirtuallynocost, (1) designsoftwaretoautomaticallyaccessataxpayer’sdetailedpersonalinformation,(2) cross-indexthisinformationagainstothergovernmentandprivatesectorrecords,and(3) copyandtransmittheinformationacrossborders.

Thesedevelopmentshaveenabledgovernmentstoshareevergreateramountsoftaxinformationwitheachotherinordertohelpenforcetheirresidence-basedtaxregimes.This cross-border sharing began to gather real steam in the 1990s. In1997, forexample,under theUS InternalRevenueCode’s (IRC’s)qualified inter-mediaryprogram,7CanadaandtheUnitedStatesbeganexchangingbulktaxpayerdataregardinginterestincomeonbankdepositsearnedbyresidentsofeithercoun-try.Asdisclosedunderaccess-to-informationrequests,theCanadiangovernmenttransfersroughly1 millioninformationslipsandrecordstotheUnitedStateseach

5 ArthurCockfield,WalterHellerstein,andMarieLamensch,Taxing Global Digital Commerce, 2d ed.(TheNetherlands:WoltersKluwerLaw&Business,2019),at 515-518.

6 ArthurJ.Cockfield,“TheLawandEconomicsofDigitalTaxation:ChallengingTraditionalTaxLawsandPrinciples”(2002)56:12Bulletin for International Fiscal Documentation606-619.

7 InternalRevenueCodeof1986,asamended(hereinreferredtoas“IRC”).


year.8In2014,CanadaagreedtotransfertotheInternalRevenueService(IRS),viaFATCA(discussedbelow),bulktaxpayerdataon“USpersons”thathaveCanadianbankaccounts.Inthetwoyearsfollowingthisagreement,theamountoftransferredinformationgrewbyalmost100 percent(fromroughly150,000informationslipsandrecordstoroughly300,000informationslipsandrecords).

Big Data, Data Analytics, and Recent Technology TrendsMostrecently,thecombinationofthreerelatedtechnologydevelopmentshasen-abledgovernments tocontemplateexchangingandanalyzingtaxpayers’personalinformationatlevelspreviouslyunheardof.9Inthefirstdevelopment,governmentsincreasinglyamassbigdataconcerningtheirtaxpayers’activities.Threefeaturesaresometimesseenasdefiningbigdata:(1) thedatasetislargeanddiverse;(2) theinfor-mationisgeneratedona“flow”orongoingbasis(ratherthanasastaticdataset);and(3) thedataarecapableofbeingsubjectedtoanalytics.

Dataanalytics,thesecondtechnologicaldevelopment,involvesusingthecom-puteranalysisofbigdatatorevealpatternsorotherinformationthatisusefultogovernments(orotherparties).10Dataanalyticsprovidesinsightsbycombiningdatapointsinordertorevealnewinformationorconnectionsamongthesedatapointsthatwouldotherwisebeobscuretothehumanmind.

ThethirddevelopmentinvolvesAI,machinelearning,andblockchain.ByAI, I simplymeanverypowerfulcomputersthatarecapableofprocessingandstoring(includingviatheCloud)11largeamountsofdata.(Idonotmeansentientmachinesthatwillonedayoverthrow theirhumanmasters.)Machine learningallows taxauthoritiestocrafttheirownalgorithmsmoreeffectivelyinordertodetectrisksoftaxpayer non-compliance. (The software, by examining its own track recordofsuccessorfailure,willovertimeimproveitsabilitytodetectnon-compliance.)Adebateiscurrentlyunderwayconcerningtheimplicationsofsuchalgorithms,whichmayhavebiases(regardingraceandgender,forexample)builtintotheircoding.12 Blockchain,theothercomponentofthisdevelopment,providesadistributeddigitalledger,anditenablestheregistration,storing,andsharingofunprecedentedlylargeamountsof taxpayer information. It alsooffers thepossibility that taxpayers canregisterandverifytheaccuracyoftheirownstoredpersonaltaxinformation.

8 ArthurJ.Cockfield,“PolicyForum:ExaminingCanadianOffshoreTaxation”(2017)65:3Canadian Tax Journal651-680,at 674.

9 Cockfield,Hellerstein,andLamensch,supranote 5,atchapter 2.

10 KimberlyA.HouserandDebraSanders,“TheUseofBigDataAnalyticsbytheIRS:EfficientSolutionsortheEndofPrivacyasWeKnowIt?”(2017)19:4Vanderbilt Journal of Entertainment and Technology Law817-72.

11 OrlyMazur,“TaxingtheCloud”(2015)103:1California Law Review1-65.

12 FrankPasqualeandArthurJ.Cockfield,“BeyondInstrumentalism:ASubstantivePerspectiveonLaw,Technology,andtheDigitalPersona”[2018]no. 4Michigan State Law Review821-68.


Althoughitisclearthatbulktaxpayerinformationisincreasinglybeingexchangedacrossborders,itislessclearwhethertaxauthoritieshaveyetharnessedthetech-nologiesinvolvedinAI,machinelearning,andblockchain.Atthedomesticlevel,thereareevermoreexamplesofbigdataanddataanalyticsbeingused.Forinstance,anumberofUSstategovernmentsanalyzelargeamountsofdatainordertodeter-minewhethertaxpayershavefiledtaxreturnstogeneratefraudulentrefunds.Statetaxauthoritiescross-referenceataxpayer’srefundrequestagainst billionsofrecordsfrompublicandcommercialdatabasesinordertocatchthetaxcheats.In2010,forexample, theNewYorkDepartmentofTaxationandFinancedecreasedrevenuelossesby$1.2 billionthroughthisapproach.13Morerecently,theCanadaRevenueAgency (CRA)introducedabigdataprogramthatexaminesdatasourcesrelatedtoaCanadiantaxpayer’sglobalincomeinordertodeterminewhetherthetaxpayeriscomplyingwithtaxlaw.

AbarriertoenhancedEOIistheconcernthatnewtechnologies,whichenablethemassstorageandtransmissionofdetailedtaxpayerinformation,willviolatepri-vacylaws,policies,andinterests.

Political Trends

Inwhatfollows,Ibrieflyexaminehowtherevelationsfromtaxhavendataleaks,alongwithOECD andG20 reforms, have encouragedgovernments to adopt en-hancedcross-bordertaxinformationexchanges.

Tax Haven Data LeaksGovernmentsandnon-governmentalgroupshavelongworriedabouttheroleoftaxhavenswithintheinternationaltaxregime.Ontheonehand,governmentsseemtoembracethesetaxhavens:sometaxlawsexplicitlyencouragetheiruse.14 Simi-larly,thebusinesscommunitiesinmanycountrieshavelongadvocatedfortheuseoftaxhavensandotherlow-taxjurisdictionsinordertopromotethetaxcompeti-tivenessofresidentcompaniesrelativetocompaniesthatarebasedincountriesthatoffertaxbreakswhentheircompanies“goglobal.”Ontheotherhand,governmentsworry that the use of tax havensmay be leading to significant revenue losses.Moreover,taxhavenscanbeusedbycriminalstofacilitateglobalfinancialcrimessuchasoffshoretaxevasion,internationalmoneylaundering,and,potentially,terror-istfinancing.

Publicengagementwiththeissueofoffshoretaxevasionhasbeensparkedbyrecentdataleaksfromtaxhavens.15EarlierleaksfromLichtensteinandSwitzerland

13 JoAnneBourquardandCassandraKirsch,“BigData=BigBenefits”(2014)40:8State Legislatures32-34.

14 Forinstance,underCanadiantaxlaw,adouble-dipcross-borderfinancingstructure,withtheuseofafinancingaffiliatebasedinataxhaven,hasbeenenabledbyarecharacterizationprovisionwithinsubparagraph 95(2)(a)(ii)oftheIncomeTaxActsincethe1970s.

15 Cockfield,supranote 1.


involvedbankemployeeswhostoleaccountinformationandprovidedittoauthor-ities. Much larger data leaks ensued, involving millions of stolen documents.Beginningin2013,theInternationalConsortiumofInvestigativeJournalists(ICIJ),ajournalistorganizationbasedinWashington,DC,revealedaseriesofdataleaks,including (1) the 2013 leak of over 2.5 million documents from Cook Islands,Singapore,BVI,Caymans; (2) the2016“Panamapapers” leakofover11 milliondocuments;(3) the2016Bahamasleakofover1.5 milliondocuments;and(4) the2017Paradisepapersleak(Bermuda)ofover13.4 milliondocuments.16

In somecountries, these leaksheightenedpublic anxiety thatglobalfinancialopacity—thatis,theinabilityofgovernmentstoaccessinformationonthebehav-iouroftaxpayers—maybecontributingtoincomeinequalitybyallowingcriminalsandhigh-incometaxpayerstomoveandhidemoniesoffshore.17

Taxscholarshiprecognizestheimportanceofthelesstangibleculturalandsocialinfluencesinpromotingtaxpayercompliance.Theseinfluences,whicharesome-timesreferredto,collectively,as“taxpayermorale,”includewhetherataxpayerfeelspatriotictowardhisorhercountryandwhetherthetaxpayerthinksthatheorsheisgettingamoreorlessfairreturnonataxpayment.Thetaxpolicyconcern,withrespect tofinancialopacity, is that average taxpayerswillbecome less compliantovertimeiftheyfeelthatmultinationalcorporationsarenotpayingtheirfairshareoftaxesorthathigh-net-worthtaxpayersaregreatlyreducingtheirlegaltaxpay-mentsandgettingawaywithit.

Mostsensationally,therecentleakshaveprovidedevidenceofglobalfinancialcrimes,suchasoffshoretaxevasionandinternationalmoneylaundering.Theleakshave also highlighted how trillions of dollars flow from developing or middle-incomecountriestowealthier(mainlyOECD)states.Insomecases,thiscapitalflightiscontributingtohumanrightsviolations,asassetsorprofitsareshiftedoffshoreandordinarycitizensareleftwithfarfewerresources.

Theleakshavealsorevealeddetailsconcerninghowmultinationalfirmsengageinaggressivetaxplanning.Forinstance,LuxLeaksshowedhowtheLuxembourgiangovernmentprovidessuchfirmswithprivateadvancetaxrulingssothattheycanreduce theirglobal tax liabilities.18Google,Apple,andother largemultinationalfirmswereidentifiedintheleaksashavingdeployedcorporatesubsidiariesintaxhavensinorderto(legally)reducetheirglobaltaxliabilities.Inaddition,theleakshavegivenrisetoconcernsamongmultinationaltaxpayersthatadversemediacov-eragecouldharmacompany’sbrand,goodwill,andreputation,andpossiblyreduceitslong-termsharevalue.Thesetaxpayersincreasinglyassesstheriskthataggressive

16 Formoreinformationondataleaks,seeInternationalConsortiumofInvestigativeJournalists(www.icij.org).

17 ArthurJ.Cockfield,“ShapingInternationalTaxPolicyinChallengingTimes”(2018)54:2Stanford Journal of International Law223-40,at 236-37.

18 OmriMarian,“TheStateAdministrationofInternationalTaxAvoidance”(2017)7:1Harvard Business Law Review1-65.


internationaltaxplanningcouldattractnegativemediacoveragedowntheroadandleadtoreputationaldamage.

Perhapsmostimportantly,theleaksplacedpoliticalpressureongovernmentstotakestepstocurbareasofallegedabuse.Inparticular,theleaksencouragedglobalcooperationintheCRS(discussedbelow).

The EOI Reforms and Privacy ProtectionsInthissection,IbrieflyoutlinethreerecentEOI initiatives: FATCA,theCRS,andCBCR.

All US citizensandresidentsmustpayUS taxeson theirworldwide income.19 USpolicymakersworrythatmanyofthese individuals fail toreportthis income,resulting in revenue losses to the government of billions of dollars each year.20 Accordingly, the FATCA legislation was passed in 2010, with a view to raisingrevenues by taxing the undisclosed offshore income ofUS citizens and others.21 Manyforeigngovernmentscomplied,agreeingtoenterintoanintergovernmentalagreement (IGA)withtheUSgovernmenttoimplementFATCA:underthegeneralapproach,taxauthoritiesamassfinancialaccountinformationcollectedbybanks,andthentransferthisinformationtotheIRS.

PartlyasaresultofFATCA,theG20andOECDendorsedtheCRSastheglobalstandard.22Arelatedmultilateralagreementcontemplatestheautomaticsharingofbulk taxpayer informationacrossborders.23Under this approach, aparticipatingcountrysuchasSingaporeissupposedtopasslawsthatmandate(1) theautomaticcollectionbybanksofforeigninvestors’accountinformationand(2) thetransfer-enceofthisinformationtotheSingaporeangovernmentand,subsequently,tootherparticipatingcountries.

In2013, theOECDalsobegananambitiousplantocounterbaseerosionandprofitshifting(BEPS)bymultinationalfirms.BEPSreferstothemanyinternational

19 SeeIRCsection 61(a):“grossincomemeansallincomefromwhateversourcederived.”

20 MartinA.Sullivan,“USCitizensHideHundredsofBillionsinCaymanAccounts”(2004)103:8Tax Notes956-64.

21 Theinitiallegislation,entitledtheForeignAccountTaxComplianceAct(FATCA),wasnotenacted.SeeHRrepno. 3933,111th Cong.,1st sess.(2009).Thelegislationwassubsequentlypassedwithinalargeomnibuslegislativepackagethatwasmainlydirectedatjobcreation.SeeHiringIncentivesToRestoreEmploymentActof2010,Pub. L.no.111-147.TheprovisionstoimplementFATCAarenowcontainedinsections 1471to1474oftheIRC(Sup.2011).

22 SeeOrganisationforEconomicCo-operationandDevelopment,Standard for Automatic Exchange of Financial Information in Tax Matters(Paris:OECD,2014)(http://dx.doi.org/ 10.1787/9789264216525-en).Asecondeditionwasreleasedin2017.

23 Ibid.,at 215,annex 1.TheOECDagreement,inturn,isbasedonarticle 6ofanearliermultilateralagreement.SeeOrganisationforEconomicCo-operationandDevelopment,ConventiononMutualAdministrativeAssistanceinTaxMatters,signedatStrasbourgonJanuary 25,1988,asamendedbytheProtocolAmendingtheConventiononMutualAdministrativeAssistanceinTaxMatters,signedatParisonMay 27,2010.


tax-avoidanceplansthatfirmsadoptinordertolegallyreducetheirglobaltaxlia-bilities, often by shifting paper profits to tax havens. After two years of reformefforts,theOECDproduceditsfinalrecommendations,includingarecommendationthatallparticipatingcountriesadoptCBCR.24UnderCBCR,multinationalfirmsforthefirsttimeneedtodisclosetheirtaxandotherpaymentstotheirdomestictaxauthority and to the foreign tax authorities in every countrywhere thesefirmsoperate.25 CBCRappliesonlytoverylargemultinationalfirmswithannualconsoli-datedgrouprevenuesthatexceed€750 million(thatis,roughlyUS$850 million).UnliketheFATCAandCRSinitiatives,whichtrytorevealhiddenbankaccountsinordertocombatoffshoretaxevasion,CBCRaimstohelpgovernmentsidentifyrisksofaggressiveinternationaltaxavoidanceforpossibleauditing.

Summary

Newinitiatives—mostprominentlyFATCA, CRS,andCBCR—contemplatetheex-changeofbulk(orbigdata)taxandfinancialinformationonanautomatedbasis.Theexchangesarefacilitatedbytechnologychangessuchasdataanalytics,AI,andblockchain,whichallowthecollection,analysis,anddisclosureofvastamountsofdetailed personal information. Moreover, global political cooperation has beenencouragedbyaseriesofdataleaksfromtaxhavens,whichhaveheightenedpublicanxiety that undue revenue losses are resulting from (legal but non-compliant)aggressiveinternationaltaxavoidanceand(criminal)offshoretaxevasion.Acorres-ponding worry is that these concerns, in an era of growing income inequalitywhereinmanypeoplebelievethatthesystemisriggedinfavourofthewealthyandpowerful,maydelegitimizedemocraticpractices.

LIBERT Y A ND PRI VAC Y INTERE S T S

Inwhatfollows,Ireviewconcernsabouttaxpayers’liberty,privacy,confidentiality,andotherinterests,andIprovideanoverviewofrelatedlegalprotections.Ialsoshowhowthelegalframeworkthatisemergingtoprotecttheseinterestsdoesnotprovidesufficientsafeguards.

Taxation and Liberty

Beforeproceedingtodiscussspecifictaxpayers’rights,suchasprivacy,letusstepbackandconsiderthebroaderlibertyintereststhatareatstakewhenagovernmentexercises itsmonopolyonthecoercivepowertoextractaportionofataxpayer’sincome or assets. Historically, tax developments helped define the relationship

24 ArthurJ.CockfieldandCarlMacArthur,“Country-by-CountryReportingandCommercialConfidentiality”(2015)63:3Canadian Tax Journal627-60.

25 DriesLesageandYusufKaçar,“TaxJusticeThroughCountry-by-CountryReporting:AnAnalysisoftheIdea’sPoliticalJourney,”inJeremyLeamanandAttiyaWaris,eds.,Tax Justice and the Political Economy of Global Capitalism, 1945 to the Present(NewYork:Berghahn,2013),262-82(http://hdl.handle.net/1854/LU-4214980).


betweenthestateandtheindividual.Insomecountries,thesedevelopmentspro-vided the basis for later claims regarding the need to protect taxpayer privacy,lawyer-clientconfidentiality,commercialandtradesecrecy,andotherinterests.

The relationshipbetween taxpolicy and the state is ancient,of course.Over2,000 yearsago,HerodotustracedtheinfluenceofAncientEgyptiantaxpoliciesonAncientGreece.IntheAnglo-Americancontext,thedevelopmentoftaxpolicyhasbeeninfluencedby(1) ahistoricalpatternofreactionagainsttaxationand(2) thenormsunderlyingthepoliticalphilosophyofliberalism,whichisthebasisofmoderndemocracies.

The year 1066, inwhich theNormans conqueredEngland and slew the lastAnglo-Saxonking,Harold II,markedaclearturningpointintheAngloworld.Thenewking,WilliamtheConqueror,immediatelyembarkedoncrueltaxpoliciesingoverninghisAnglo-Saxonsubjects.TheEnglishlordswererequired,forthefirsttime,torecordtheirnames,propertyholdings,propertyyields,andotherdetailsastaxrecordswithintheDomesday(“doomsday,” inmodernEnglish)Book,whichservedasafinaljudgmentoftaxliabilitiesfromwhichnoappealwasavailable.Fromthatpointon,taxinspectorswouldscrutinizealord’spropertyandfarmyieldstoensure that he was paying the appropriate amount of tax. These tax measuresthreatenedtostirrebellion,whichwasavertedonlybyWilliam’sdeathandbythelaws introducedbyhis youngerbrother,Henry I—inparticular, theprecedent-settingCharterofLiberties(1100)andGrantofTaxLibertiestoLondon(1133).26

SubsequentEnglishconflictsovertaxationsimilarlyresultedinnewtaxlawsthatprovidedforproceduralprotectionsagainstoppressivetaxationmeasures—perhapsthemost famous being the conflict between the country’s overtaxed barons andKingJohnthatledtothesigningoftheMagnaCartain1215.Overcenturies,thesetaxdebates influencedthedevelopmentofnormsregardingtaxation,suchastheviewof17th-centuryphilosopherJohnLockethatevery individual isentitledtokeepthefruitsofhisorherlabourandthattheonlyacceptableandmoralpoliticalsystemisoneinwhichthepeopleconsenttogovernmentregulationandthetaxationoftheirproperties.27Theprevalenceofsuchviews,alongwithtaxdisputesbetweenKingGeorge IIIandAmericancolonists,playedanimportantroleinthefoundingoftheUnitedStates,in1776,asthemodernworld’sfirstdemocracy(thoughonemust keep inmind that the franchisewas initially extendedonly towhite,malepropertyowners).

Asaresultofthesedevelopments,thestate’scoercivepowertotaxhasgenerallybeenconsideredanecessaryalbeitsensitivepoliticalelementofliberaldemocracies.Manydemocraciesnowhavearigorousruleoflaw,alongwithavarietyoftaxpayerprotections.Thetensionbetweenlibertyandtaxationismoreacuteinautocratic

26 ArthurJ.CockfieldandJonahMayles,“TheInfluenceofHistoricalTaxLawDevelopmentsonAnglo-AmericanLawandPolitics”(2015)5:1Columbia Journal of Tax Law40-68.

27 ArthurCockfield,“IncomeTaxesandIndividualLiberty:ALockeanPerspectiveonRadicalConsumptionTaxReform”(2001)46:1South Dakota Law Review8-71.


regimes,whose residentsoften transfermoniesoffshore toprotect themagainstimproper seizurebytheirhomegovernments.Suchclaimstolibertycallforlegalprotections,suchasawithholdingtaxinlieuofEOI,whentheclaimsaremadebyindividualswhoneedanonymousglobalinvestmentsinordertoprotectthesecurityoftheirownpersons(alongwiththesecurityoffamilymembers)againstarbitrarystateaction.Moreover,theLockean“naturalrights”viewlaterdevelopedintohumanrightsclaimstotheprotectionofanindividual’sprivacy,which,inturn,becamethefoundationforlaterclaimstotaxpayerprivacy—atopictowhichInowturn.

Taxpayer Privacy

Owing,inpart,tohistoricaldevelopmentsandtofearsabouttaxagentsbreakingintohomestoseizetaxpayments,taxpayerinformation(alongwithfinancialinfor-mation)hastraditionallybeenconsideredoneofthemostsensitiveareasofprivacy.28 Tax informationmay includedetailedpersonal informationaboutan individual’sidentityandbehaviour.(Forexample,taxreturninformationcanincludeinforma-tion about, among other things, an individual’s income, dependents, health anddisabilitystatus,andpoliticaldonations.)Inaddition,taxinformationaboutincomecangeneratesecurityconcerns (forexample, thechildrenof thewealthymaybekidnapped),publicenvy,andpoliticalreprisals.

Deploying the technological developments noted above, governments amassevergreateramountsofdetailedpersonal informationonindividuals inordertoprotectagainsttheriskofcriminaltaxevasionandnon-complianttaxavoidance.29 Tothesameend,theyalsocollectnon-taxpersonaldata.Forexample,theAustraliangovernmentcross-indexesataxpayer’sinsurancepremiumsagainsthisorherincomeinorder to analyze risks, and theGreekgovernmenthasflownhelicoptersoverpersonalresidencesinordertobetterassesstaxpayers’truewealth.Theseeffortsmaybeeffective,buttheygiverisetoincreasedprivacyconcerns.

The increase in the collectionandcross-border sharingof taxpayers’bigdataraisesconcerns,includingconcernsthattransferredinformation(1) willnotbepro-tected to the extent provided by the lawof the transferring country; (2) may bemisusedforpoliticalpurposes,suchashelpingdomesticcompaniescompeteagainstforeigncompetitors;(3) maybemisusedtosanctiontaxpayersforpoliticalreasons,whichcouldleadtohumanrightsviolations;30(4)maybeillegallyaccessedoraltered

28 CynthiaBlum,“SharingBankDepositInformationwithOtherCountries:ShouldTaxComplianceorPrivacyClaimsPrevail?”(2004)6:6Florida Tax Review579-648.

29 ArthurJ.Cockfield,“HowCountriesShouldShareTaxInformation”(2017)50:5Vanderbilt Journal of Transnational Law1091-1132.

30 UnitedNations,GeneralAssembly,HumanRightsCouncil,“ReportoftheSpecialRapporteuronExtremePovertyandHumanRights,MagdalenaSepúlvedaCarmona,”22May 2014,Documentno.A/HRC/26/28;andInternationalBarAssociation’sHumanRightsInstituteTask Force, Tax Abuses, Poverty and Human Rights: A Report of the International Bar Association’s Human Rights Institute Task Force on Illicit Financial Flows, Poverty and Human Rights, Task Force rapporteur,LloydLipsett(London,UK:IBA,October 2013).


bythirdparties;and(5) maybeinaccurate,whichcouldleadtoforeigninvestiga-tionsthattargetinnocenttaxpayers.

Theseareseriousconcerns,ofcourse.Yetthenear-anonymitythatthecurrentglobalfinancialregimeaffordsglobalfinancialtransactionsandinvestmentsisprob-lematic.31Themainbeneficiariesofthislackoftransparencyarelargemultinationalcorporations,ultra-high-net-worthindividuals(typicallydefinedasindividualswithat least$50 million inassets), and individualsengaged inglobalfinancialcrimessuchasoffshoretaxevasion,internationalmoneylaundering,andterroristfinan-cing.Themainlosersareaveragecitizens,whosegovernmentssustainlossesintaxrevenuebecauseofaggressiveinternationaltaxavoidanceandoffshoretaxevasion.Thisstateofaffairs,inturn,encouragestheviewthattheglobalfinancialsystemisriggedinfavourofthewealthyandpowerful(asdiscussedabove).Situationswherecross-bordertaxlawsandfinancialprivacylawsareusedtofrustratetheinterestsofaveragecitizenscallforanuancedlegalanalysisofdistributivejusticeconcerns(asIhavediscussedelsewhere).32

Confidentiality and Trade Secrets

Theprivacyrightsofcorporatetaxpayershaveattractedlessattentionfromacadem-icsandpolicymakersthanhaveindividualtaxpayerrights.Thisispartlybecausesubstantive privacy rights are generally associated with individuals. The natureof theseprivacy rights arises from thepotential for intimateharm (forexample,kidnapping)createdbythedisclosureofanindividual’spersonalinformation.Suchconcernsarelessevidentinthecaseofcorporatetaxpayers.33

Notwithstandingtherelativelackofemphasisoncorporateprivacyrights,itisclear that taxpayer confidentiality and trade secrecy remain important and validprivacyconcernsformultinationalenterprises.34Underarticle 26(2)oftheOECD modeltaxtreaty,35taxauthoritiesmustmaintaintheconfidentialityoftaxinforma-tionthattheyreceive.Underthegeneralapproach,disclosureofsuchinformationislimitedtopersonsorauthoritiesinvolvedintheassessment,collection,enforce-ment,prosecution,anddeterminationofappeals.Pursuanttoparagraph 19.2oftheOECDcommentaryonarticle 26,atradeorbusinesssecretis“generallyunderstoodtomeanfactsandcircumstancesthatareofconsiderableeconomicimportanceand


32 Forsuchananalysis,seeCockfield,supranote 29.

33 JoshuaD.Blank,“ReconsideringCorporateTaxPrivacy”(2014)11:1New York University Journal of Law and Business31-121,at 40.

34 CockfieldandMacArthur,supranote 24.

35 OrganisationforEconomicCo-operationandDevelopment,Model Tax Convention on Income and on Capital: Full Version 2017(hereinreferredtoas“theOECDmodeltaxtreaty”)(Paris:OECD,2019)(https://doi.org/10.1787/g2g972ee-en).


thatcanbeexploitedpracticallyandtheunauthoriseduseofwhichmayleadtoser-iousdamage(e.g.,mayleadtoseverefinancialhardship).”36

The revelation of a commercial or trade secret could harm the ability of amultinational enterprise to compete effectively in themarketplace,which couldreducenationalandglobalwelfare.Forexample,ifafirmfearstherevelationofanimportantintellectualpropertyright,itmaybereluctanttotransferthisresourcevia a licensing agreementwith a related foreignaffiliate,which couldultimatelyinterferewiththeefficientallocationofresourcesthroughouttheglobaleconomy.Importantly,noneofthefinancialinformationmandatedbyCBCRwouldconstituteconfidentialinformation(forexample,tradesecrets,businesssecrets,orothersecrets)asdefinedbytheOECDwithinthecommentarytoitsmodeltaxtreaty.37

Problems with the Existing Legal Framework

A complex patchwork of domestic laws, constitutional protections, bilateral taxtreaties,andmultilateraltreatiesgovernsandprotectsprivacyandothertaxpayerinterests. First, governments pass domestic tax laws that prohibit unauthorizedaccess to,or transferof, taxpayer information.38Non-taxdomestic laws, suchascorporatelaws,oftenallowtheidentityofthetrue(orbeneficial)ownersofbusinessentitiestoremainhidden.

Second,certaincountries(suchasCanadaandtheUnitedStates)haveadditionalconstitutionalprotections(suchasprohibitionsagainstunreasonablegovernmentsearches,whichincludeinvestigationsoftaxpayerinformation).Inthiscontext,theSupremeCourtofCanadahasemphasizedtheimportanceofprotectingindividuals’personalinformation,repeatedlyrecognizingtherighttoprivacyasafundamentalhumanrightaimedatprotectingthedignity,autonomy,integrity,andsecurityofindividuals.39Inthebroadercontext,certainprovisionsoftheEuropeanUnion(EU)ConventiononHumanRightsoffersimilarhumanrightsprotectionsagainstgov-ernments’abusiveaccessto,use,ordisclosureoftaxinformation.40Suchprotections

36 Seeparagraph 19.2ofthecommentaryonarticle 26oftheOECDmodeltaxtreaty.

37 TheOECDhasexplicitlystatedthatanyinformationtransferredunderCBCRshouldensurethatthereisnopublicdisclosureof“confidentialinformation(tradesecrets,scientificsecrets,etc.)andothercommerciallysensitiveinformation.”SeeOrganisationforEconomicCo-operationandDevelopment,Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting(Paris:OECD,February 6,2015),atparagraph 44.

38 JinyanLi,“Taxpayers’RightsinCanada”(1997)7:1Revenue Law Journal89-137.Linotesthat,whileprivacyandconfidentialityrightswerebuiltintotaxsystems,suchastheCanadianone,atinception,inthe1980stherebegantobeincreasingrecognition—andincreasinglegalprotection—fortheserights.Seeibid.,at 89-90.

39 R v. Dyment,[1988]2SCR417;R v. O’Connor,[1995]4SCR41;andR v. Mills,[1999]3SCR668.

40 PhilipBakerandPasqualePistone,“BEPSAction16:TheTaxpayers’RighttoanEffectiveLegalRemedyUnderEuropeanLawinCross-BorderSituations”(2016)25:5-6EC Tax Review 335-45,describingtheimpactof“Europeanlaw,”includingtheEuropeanConventionon


arealsoprovidedbytheUnitedNations(UN),includinginrecentdocumentsthattrytoinhibittheprivacyharmscausedbygovernments’masssurveillanceofveryparticularpersonaldata(datathatdonotspecificallyreferencetaxmatters).41Theincreasedlinkagebetweenhumanrightsandtheprotectionoftaxpayerdatadem-onstratestheneedfordataprotectionlawsandpoliciestoprotectthetaxpayerasadatasubject(seebelow).

Third,bilateraltaxtreatiestypicallyprovideforaseriesofprotectionsforpri-vacy and commercial confidentiality (generally basedon article 26of theOECD modeltaxtreaty).Commercialandtradesecretsarethusprotectedbybothdomes-tic rules and tax treaty rules.Domestic tax lawsprovide for themaintenanceofconfidentialitywithrespecttoanynon-publictaxinformation,includingcommer-cial and trade secrets.Tax treatiesgenerally containaprovision that lets the taxauthorityofonecountryrequesttaxinformationfromthetaxauthorityofanothercountry,mainlytoassistwithaudits.Underthegeneralruleinarticle 26(3)(c)oftheOECDmodeltaxtreaty,agovernmentcandenyaninformationrequestonthebasisthattherequestviolatesthetaxpayer’srighttomaintaincommercialandtradesecrecy.IntheFATCAcontext,thebilateralIGAsbetweentheUnitedStatesandothercoun-triesofferadditionalprotections.

Fourth, multilateral agreements increasingly bind participating countries toprivacyprotections.Forexample,undertheCBCRreforms(discussedabove),gov-ernmentsmustagreetoprovideandenforcelegalprotectionsfortheconfidentialityofreportedinformationthatareequivalenttotheprotectionsprovidedunderanincometaxtreatyorotherEOI agreement.42Further,theautomatictransmissionofCBCR information is limited to those countries that satisfy these requirements.Regionalagreementsalsoexist,suchastheEUDirectiveonAdministrativeCoop-eration,whichwasextendedin2014toincludeautomaticEOIamongmemberstates.

AlthoughtheglobaltaxframeworkforEOI iscurrentlyevolving,anumberofobservershavesuggestedthatthisregimestillprovidesinsufficientlegalprotections

HumanRights;ClementEndresen,“TaxationandtheEuropeanConventionfortheProtectionofHumanRights:SubstantiveIssues”(2017)45:8/9Intertax508-26,discussinghowtheconventiondoesnotnormallyapplytosubstantivetaxissues—appropriately,giventhenationalsovereigntyconcerns.ButseeSommer v. Germany,no.73607/13(April 27,2017)(ECHR),holdingthattheGermangovernment’ssearchofalawyer’sfinancialinformationrecordsviolatedarticle 8oftheConvention.

41 UnitedNations,GeneralAssembly,“UniversalDeclarationofHumanRights,”resolution217A,December 10,1948.InDecember 2013,theUNGeneralAssemblyadoptedresolution68/167,whichexpressedconcernoverthenegativeimpactthatthesurveillanceandinterceptionofcommunicationsmayhaveonhumanrights.Whiletheresolutionfocusedonmasssurveillancetechniques,itwouldalsoapplytothepossiblemisuseofbulktaxinformationexchangedacrossborders.SeeUnitedNations,GeneralAssembly,“ResolutionAdoptedbytheGeneralAssemblyon18December 2013:68/167,theRighttoPrivacyintheDigitalAge,”documentno.A/RES/68/167,January 21,2014.

42 Seeparagraphs 14to19.9ofthecommentaryonarticle 26ofOECDmodeltaxtreaty.


fortaxpayerprivacyandotherrights.43First,elementsofthecurrentregime,suchas FATCA,donotoperateonareciprocalbasis;theprivacyprotectionsgoonlyoneway.Second, the existenceof somanydifferentdomestic andnow internationalagreementsgivesriseto“legalgaps,”whichoccurwhenparticularcountrieshavenotsignedontomeasurestoprotecttaxpayerinterestsinwaysthatarerequiredbytransferring countries. Third, the enforcement ofEOImeasures is significantlyuneven,whichcanleadtoconcernsthattransferredtaxinformationwillbeusedforimproper,illegal,orabusivepurposes.Fourth,manycountrieshavefinancialsecrecylawsthatmaskthetrueidentitiesofownersofcross-borderinvestmentsmadebywealthyorcriminaltaxpayers,leavinglesswell-resourcedtaxpayersatthemercyoftheunevenlegalregime.

Summary

Inthemodernworld,countries’taxsystemsareinextricablyinterwovenwithnor-mativeviewsofjusticeandoftheappropriaterelationshipbetweencitizenandstate.Inmanycountries,thegovernment’spowertotakeawayaportionofthefruitsofone’s labours (alongwithunearnedwealthaccumulatedviagiftsandbequests) isattenuatedby legalandconstitutionalprotections forprivacyrights,commercialconfidentiality,andtradesecrets.Individualswhoaredealingwithautocraticgov-ernments—livingincountrieswheretaxpayers’personalinformationismoreatriskofbeingimproperlyaccessed,used,anddisclosed—relyonthecurrentglobalenviron-mentoffiscalopacity toprotect their taxpayerrightswhentheytransfermoniesoffshore.Theproblemwiththisenvironmentisthatgovernmentsworldwide,includ-ingliberalonesinwhichtheruleoflawisrobust,generallyknowlittletonothingabouttheirresidents’foreign-basedassetsorincome.

To inhibit revenue losses associatedwith offshore tax evasion and aggressiveinternationaltaxavoidance,governmentshaveinitiatednewEOImeasuressuchasFATCA, CRS,andCBCR.Criticsoftheseinitiativesnotethatthelegalframeworkcurrentlyemergingtoprotecttaxpayerprivacyandotherrightssuffersfromanumberofdeficienciesthatcouldbeaddressedthroughbetterlawsandpolicies.Idiscusssuchlawsandpoliciesinthenextpartofthispaper.

43 Foracomprehensivereview,seeFilipDebelvaandIrmaMosquera,“PrivacyandConfidentialityinExchangeofInformationProcedures:SomeUncertainties,ManyIssues,butFewSolutions”(2017)45:5Intertax362-81,at 377,advocatingamultilateralagreementforprivacyandconfidentiality;andIrmaMosqueraet al.,The Rule of Law and the Effective Protection of Taxpayers’ Rights in Developing Countries,WUInternationalTaxationResearchPaper seriesno.2017-10(Vienna:ViennaUniversityofEconomicsandBusiness,2017).SeealsoBakerandPistone,supranote 40,discussinghowtherulesofcertainsurveyedcountriesdonotsufficientlyprotecttherighttoconfidentialityandprivacy;MenitaGiusyDe Flora,“ProtectionoftheTaxpayerintheInformationExchangeProcedure”(2017)45:6/7Intertax447-60,at 448-50and458,advocatingfor“aclearandcommonsetofrules”;NielsDiepvensandFilipDebelva,“TheEvolutionoftheExchangeofInformationinDirectTaxMatters:TheTaxpayer’sRightsUnderPressure”(2015)24:4EC Tax Review210-19.


O P TIM A L REFO R MS

Twodiscretebutrelatedelementsareinvolvedineffectivecross-borderexchangesoftaxandfinancialinformation.44First,thelegalregimeforsuchexchangesneedstobeefficient,inthesensethatitshouldpromotelowcostsfortaxpayercomplianceandlowcostsforadministrationbytaxauthorities.Second,theexchangeshouldbefair, in the sense that any information transferred is affordeda requisite levelofprotectionforprivacyandotherrights(normallyequivalenttothelegalprotectionssetoutinacountry’sdomesticlaw).Thetwoelements—efficiencyandfairness—arerelatedinthesensethatgovernmentswillbereluctanttoengagewithothercountries inexchangesofbigtaxdata(ortoimplementexistingagreementsinameaningfulway)unlesstheyhavelegalassurancesthattherightsoftheirtaxpayerswillnotbeviolated.Intheremainderofthispaper,buildingontheviewsofTimEdgar,Idiscusshowtoachieveanappropriatebalancebetweentaxpayers’privacyconcernsandtaxauthorities’needtoaccessforeign-basedtaxpayerinformation.

On the Need for Coordinated Responses

Whenshouldgovernmentscooperateforthepurposesofinternationaltaxpolicy?TimEdgarexaminedthisissueinavarietyofcontexts.Inparticular,a2003articlebyEdgartitled“CorporateIncomeTaxCoordinationasaResponsetoInternationalTaxCompetition and InternationalTaxArbitrage” focused on optimal forms ofcooperation,includinglimitedcoordinationamonggovernments,asaresponsetovexingchallengesposedbytaxcompetitionandtaxarbitrage.45Elaboratingonhisseminalcontributionto the taxationoffinancial instruments,46Edgarnoted thatcompetitionandarbitrageposesimilarproblems:bothchallengescanbedefinedintermsofthe identification,bytaxpayers,of theperfectornear-perfectsubstitut-abilityofalower-taxedtransactionforahigher-taxedtransaction.

Forbothcompetitionandarbitrage,accordingtoEdgar,taxpayersseekoutthemostlenienttaxsystem—theonethatprovidesforreducedlevelsoftaxationforagiventaxbase.Inessence,Edgarclaimedthatsomelimitedcoordinationamonggovernmentswith respect to tax base issues could inhibit the harmful effects of

44 Foramoredetaileddiscussion,seeArthurJ.Cockfield,“ProtectingTaxpayerPrivacyUnderEnhancedCross-BorderTaxInformationExchange:TowardaMultilateralTaxpayerBillofRights”(2010)42:2UBC Law Review419-71,at 428-37.

45 Edgar,supranote 2.IpreviouslyreliedontheseviewsinusinggametheorytomodelNAFTA.SeeArthurJ.Cockfield,NAFTA Tax Law and Policy: Resolving the Clash Between Economic and Sovereignty Interests(Toronto:UniversityofTorontoPress,2005),at 166-74.IntheNorthAmericancontext,coordinationversusfull-blownharmonizationmaybethepreferredroute,becauselargereconomies,suchastheUSone,gainadisproportionateshareinpay-offsderivedthroughcooperativebehaviour.Seeibid.,at 171-72.

46 Edgar,supranote 2,at 1083.Edgar’sworkonthetaxationoffinancialinstrumentsfocusedtoalargeextentontransactionsubstitutability.TimEdgar,The Income Tax Treatment of Financial Instruments: Theory and Practice,CanadianTaxPaperno. 105(Toronto:CanadianTaxFoundation,2000),at 29-35.


competition.47Thatis,byagreeingtoremovetaxincentivesassociatedwithdifferenttaxbases,governmentscouldcooperateinremovingtaxincentivesforthemigra-tionofcapitaland(toalesserextent)oflabour.

Similarly,governmentsshouldcoordinateintheexchangeoftaxinformationinordertoidentifyhowtaxpayersareengagedintaxplanningthatinvolvesseekingoutregimesthatenablethesubstitutionofalower-taxedtransactionforahigher-taxed transaction. CBCR would appear to be a straightforward response to thischallenge.Foraffectedtaxpayers, thisnewregimewouldallowtaxauthoritiestobetterunderstandwhethertaxpaymentsinforeigncountrieshavedrivenaggres-siveinternationaltaxplanning.Thistypeoftaxreportinghelpstaxauthoritiesmeetthechallengeofinformationasymmetry,wherebythetaxpayerknowsexactlywhatsortsoftaxpaymentsitmakesaroundtheworldwhereasthetaxauthoritygener-allyknowsonlywhatitistoldbythetaxpayer.Thecross-borderexchangeoftaxinformation isoftena startingpoint for thekindof taxcoordination thatEdgarenvisions.

Thesituationdifferswithrespecttocriminalbehaviour.Inasense,criminaltaxevaderssubstituteamorelenientlyregulatedcountryfortheirresidencecountry,wheretheyhavecommittedacrime.Acriminalwhoshiftsmoniesoutofhisorhercountryforthepurposesoftaxevasionwillbesubjecttothesametaxburdennomatterwhattheforeigntaxbaseorratemaybe(assumingthathisorheractivityisdiscoveredandataxliabilityisassessedbytheresidencecountry).Approximatingtaxbaseswillnotdiscouragesuchactivity(although,intheory,theharmonizationoftaxratesacrossallnationscouldremovesomeoftheincentivestoshiftillegalincomeabroad);criminalslaundertheirmoniesinzero-taxjurisdictionssothattheseeminglylegitimatemonieswillnotbesubjecttotax.Whatisrequiredisasystemofgovernmentcoordinationtohelpferretoutthecriminals.

Thefollowingdiscussionprovidesanoverviewofsuchasystem,wherebygov-ernmentscooperatetoinhibitresidentcriminalsfromidentifyingcountriesmorelenientlyregulatedthantheirownandshiftingtheircapitaltothem.AsperEdgar,the system focuseson limitinggovernments’ coordination to thegreatest extentpossible in order to promote political feasibility.However,Edgar himselfmightprotestthatthesystemIpropose,unlikehisownprescriptions,requiresanunreal-isticlevelofpoliticalcooperation.

Multilateral Taxpayer Bill of Rights

Ashasbeendiscussedindetailelsewhere,48governmentsshouldconsideradoptingabroad,multilateraltaxpayerbillofrightsthatwouldprovideassurancestopar-ticipatingcountriesthatanytaxorfinancialinformationthattheytransferwillbe

47 Edgar,supranote 2,at 1157-58.Theformofcoordination,accordingtoEdgar,shoulddifferforcompetitionandarbitragedespitetheirconceptualsimilarities.Seeibid.

48 SeeCockfield,supranote 44;PhilipBakerandAnne-MiekeGroenhagen,The Protection of Taxpayers Rights—An International Codification,editor,GrahamMather(London:European


accordedsomeminimumleveloflegalprotection.Suchaglobalagreementwouldaddresstheconcernsnotedabove,suchasthelegalgapsthatresultfromtheapplica-tionofinconsistentbilateralandregionallegalprotections.

Thisglobalagreementcouldalsoimplementdataprotectionlawsandpoliciesinrecognitionofthefactthat,giventhecurrenttechnologicalandpoliticaltrends(setoutabove)andgiventhecriticalroleoftaxpayerlibertyandprivacyinthecontextofhumanrights,ataxpayertodayisincreasinglyviewedasadatasubject.Accord-ingly, theagreementcouldemphasizewidelyaccepted fair informationpractices(includingrequirements inrespectofnotice,consent,access, thespecificationofcollection purpose, and the accuracy and security of data) that would seek toproactively protect the interests of data subjects. These practices were initiallydevelopedbytheOECDin1980,andtheyarereflectedin(1) theEU’sGeneralDataProtectionRegulation, (2) theprivacy lawsof countries suchasCanada (via thePersonalInformationProtectionandElectronicDocumentsAct),49and(3) thead-ministrativeguidelinesofnationssuchastheUnitedStates(viatheFederalTradeCommission’sdataprivacyguidelines).

These fair information practices are used to smooth over conflicts that arisefromtheinteractionofdifferentnationalprivacylawswhenpersonalinformationistransferredacrossborders.Thesepracticeswererecentlyusedinthe2016EU-US PrivacyShield,whichisdesignedtoprotecttheprivacyrightsofindividualswhentheirpersonaldataaretransferredfromEuropeancompaniestoUS ones.50GiventhechangesintechnologyandtheenhancedEOIefforts,buildingfairinformationpracticesintoaninternationalagreementwouldmeanthattaxpayers—specifically,those individualswho are subjected topersonal information collection techniquesfrombusinessesandotherentities—wouldbetreatedinthesamewayasdatasubjects.

Withholding Tax for Non-Cooperative States

Asbrieflydiscussedabove,across-borderwithholdingtaxonglobal investmentscouldhelptaxauthoritiesenforcetheirtaxlawsandprotectthelibertyandprivacyinterestsoftaxpayerswhoresideinautocraticregimes.

PolicyForum,2001);Adrian J.Sawyer,“AComparisonofNewZealandTaxpayers’RightswithSelectedCivilLawandCommonLawCountries—HaveNewZealandTaxpayersBeen‘Short-Changed’?”(1999)32:5Vanderbilt Journal of Transnational Law1345-1400.

49 SC2000,c.5,asamended.

50 Underthisagreement,theUnitedStatesprovidedtheEUwithbindingassurancesthattheUSgovernmentauthorities’accessingoftransferredpersonalinformationfornationalsecuritypurposeswillbesubjecttoclearlimitations,safeguards,andoversightmechanisms.Inaddition,EUcitizensareofferedamechanismbywhichtoseekredressiftheirrightsappeartobeviolated,andanannualjointreviewwillmonitortheimplementationofthecommitments.SeeEuropeanCommission,GuidetotheEU-U.S.PrivacyShield9-19(2016).SeeEuropeanCommission,“EuropeanCommissionLaunchesEU-U.S.PrivacyShield:StrongerProtectionforTransatlanticDataFlows,”Press Release,July 12,2016(https://europa.eu/rapid/ press-release_IP-16-2461_en.htm).


Achallengetobeaddressed,asthenewEOIinitiativesgainsteam,isthatcertaincountriesareeitherrefusingtoparticipateintheinitiativesorsigningontothembutnotcooperatingintheirimplementationinameaningfulway.AsAvi-Yonahhasdiscussed, as long as there is onenon-participatingornon-cooperating country,undisclosedinvestmentmoniescanflowtothisoutlier.51Avi-Yonah’sproposedsolu-tionresemblesthenow-defunctEUSavingsDirectiveinthatitprescribes(1) theautomaticexchangeofinformationaboutnon-residentportfoliointerestpayments;or(2) thatifEOIdoesnotoccur,thecountrywheretheinvestmenttakesplacetaxestheinterestandsendsthebulkoftheresultingtaxrevenuestotheresidencecoun-try.52Accordingly, thisEOImeasure ensures tax payment viawithholding tax orprovidesthegovernmentwithanothersourceoffinancialinformationtocomparewiththetaxpayer’sfilings.Elsewhere,buildingontheseviews,Ihaveoutlinedhowtaxauthoritiescoulduseonlinetechnologies—an“extranet”sharedbyparticipatingcountries—inordertoimposesuchawithholdingtax.53

Aswellaspromotingenforcement,thismeasurewouldservetoprotecttaxpay-ers’libertyandprivacyinterests.Taxpayersthatresideincountrieswithautocraticgovernmentsandweakrulesoflaw,orthatdealwithsuchgovernments,maynottrustthesegovernmentstoprotecttheirprivacyandotherrights.Suchtaxpayerscouldchooseacountrywithanon-participatingornon-cooperativegovernmentasthe base for their global investments, such that their cross-border investmentswouldbesubjecttothewithholdingtax.

Global Financial Registry

AmajorchallengetotheEOIinitiativesisthatgovernmentsoftencannotidentifytheultimate(orbeneficial)ownersofcross-borderinvestmentsbecausecorporatelawsprovideownershipanonymity(bypermittingbusinessentitiestoowninvest-mentswithoutdisclosingthetrueownersoftheseentities).Toaddressthisproblem,academics and governments have discussed the need for financial registries thatmandatethedisclosureofthebeneficialownersofbusinessentities(suchascorpor-ations)andoflegalentities(suchastrustsandfoundations).54

Afullysearchablepublicfinancialregistry,whichsomegovernmentsandcom-mentatorsespouse,wouldbehighlyproblematicbecause itwouldintrudeexces-sivelyon taxpayerprivacy rights andcould inhibitglobal capitalflows, reducing

51 ReuvenS.Avi-Yonah,“Globalization,TaxCompetition,andtheFiscalCrisisoftheWelfareState”(2000)113:7Harvard Law Review1573-1676,at 1667-69.

52 EuropeanUnion,CouncilDirective2003/48/ECof3June 2003onTaxationofSavingsIncomeintheFormofInterestPayments.TheEUabandonedthisapproachtojointheCommonReportingStandardinitiative.

53 ArthurJ.Cockfield,“TransformingtheInternetintoaTaxableForum:ACaseStudyinE-CommerceTaxation”(2001)85:5Minnesota Law Review,1171-1266,at 1235-63.

54 GabrielZucman,“TaxingAcrossBorders:TrackingPersonalWealthandCorporateProfits”(2014)28:4Journal of Economic Perspectives121-48(http://dx.doi.org/10.1257/jep.28.4.121).


overall economic growth.55 However, a global financial registry that would beaccessibleonlybygovernmenttaxauthoritiesmightbepoliticallyfeasible.Sucharegistrywouldhelpgovernmentinvestigatorsbyaddressingoneofthemaindis-advantagesfacinggovernmentswithrespecttoinformation—namely,theirinabil-itytoidentifythebeneficialownersofcross-borderinvestments.Inaddition,theregistrywouldhelpgovernmentsdeterminewhethertheirresidentfirmshadpaidtaxonworldwideincome.

Governmentsmightconsiderthegovernment-to-governmentexchangeofen-tity and ownership information if they were provided with sufficient privacysafeguards,includingamultilateraltaxpayerbillofrights.Still,non-participatingornon-cooperativestateswouldpresumablydevelopnewbusinessorlegalentitiesthatwouldnotbecoveredbythenewdisclosureobligations.Inaddition,theentityandownershipinformationisoftenrecordedbyoffshoreserviceproviders,andthegov-ernmentsoftaxhavencountriesdonotcurrentlyhaveaccesstothisinformation.56 Problematically,governmentssuchasCanadaandtheUnitedStatesmaintain“on-shore”financialsecrecylawsthatmasktheidentitiesofbeneficialowners(although,in the last twoyears, reforms toCanadian federal andprovincial corporate lawshavereducedshareholders’abilitytoliehidden).Further,manylow-incomecoun-trieslackthehumanandtechnologicalresourcesneededfortheeffectivecollection,use,anddisclosureoftaxinformationwithinanEOI regime.

Finally,theglobalregistrywillnotcoverthenon-participatingornon-cooperativestatesdiscussedaboveinconnectionwiththewithholdingtax(suchcountrieswillpresumablynotsignon).Inlieuofdisclosureunderaglobalregistry,apaymentmadebysomeonelivinginanon-cooperativestatetosomeonelivinginapartici-patingstatewillbesubjecttothewithholdingtax.Therewouldneedtobeawaytoidentifythejurisdictionofthebeneficialownerofthepayment,sothatthiscountrycouldenjoytherevenuesassociatedwiththewithholdingtax.

CO NCLUSIO N

Inrecentyears,academicshavebegunamorecarefulstudyofautomaticcross-borderEOI. EOIisbeingdrivenbytechnologydevelopments(forexample,thetransitionfromanaloguesystemstodigitalsystems,bigdata,dataanalytics,andAI)andbypoliticaldevelopments(forexample,taxhavendataleaksandtheOECD/G20BEPS reforms).Inparticular,FATCA,theCRS,andCBCRallcontemplateautomaticcross-borderexchangesofbulktaxandfinancialinformation.Underthisregime,taxpayers’rightsandinterestsareprotectedbyacomplexpatchworkofdomesticlaw,consti-tutionalprotections,bilateraltaxtreaties,and,increasingly,multilateralagreements.

Despitethesemeasures,concernsareongoingabouttheEOIinitiativesthatin-volvecross-borderbigdataflows.Theseconcernsrelatetoproblemssuchaslackofreciprocity,legalgaps,unevenenforcement,thelackofadministrativeresourcesfor




themeaningfulimplementationoftheinitiatives,andtheongoingimpactofoffshoreandonshorefinancialsecrecylaws.Inaddition,theeffectivecross-bordersharingoftaxinformationwillbeinhibitedtotheextentthattheexchangesarenotperceivedtobefairbecauseofinsufficientprotectionsfortaxpayerprivacy.

Amultilateraltaxpayerbillofrightscouldsetoutwidelyacceptedfairinforma-tionpracticesandpromotelegalcertaintyaswellastheeffectiveimplementationandenforcementofEOImeasures.Itcouldbeaccompaniedbyaglobalfinancialregistry,accessibleonlybygovernments,thatwouldallowtaxauthoritiestodiscerntherealidentitiesoftaxpayers.Tofurtherprotectthelibertyandprivacyoftaxpayers(andtoaccountforthefactthatsomestateswillnotcooperateintheregime),theproposedregimecouldprovideforawithholdingtaxinlieuofEOI—analternativethatwouldprotect theconcernsof taxpayerswhoreside incountrieswithauto-craticgovernments,orwhohavetodealwithsuchgovernments.