Many taxpayers are familiar with information document requests where taxpayers are notified that taxing authorities are inquiring into certain transactions based on their receipt of the request. But today, many types of foreign tax information exchanges occur without the taxpayer’s knowledge. Moreover, tax administrations around the world are expanding tax information exchange programs. For example, on May 19, 2021, the European Union (“EU”) approved a measure to spend an additional € 270 million to improve national information exchange programs with a particular emphasis on upgrading information technology systems and financing joint audits.
Taxpayers should: 1) refresh themselves on the major types of tax information exchanges, 2) know how that information is used, and 3) be prepared that anything they provide to one tax administration could likely end up in the hands of another.
The specific exchange of information operates through the exchange of information provisions of tax treaties and tax information exchange agreements (“TIEAs”). Typically, the information requested relates to an examination, inquiry, or investigation of a taxpayer’s tax liability for a specified tax period. A taxpayer may be notified that a foreign tax administration is seeking information pursuant to a specific exchange request if the domestic authority requests new information from the taxpayer. But the taxpayer may also be kept unaware of these developments if the domestic tax administration can satisfy the request without contacting the taxpayer or if the domestic tax administration fails to notify the taxpayer that it is making the request on behalf of a treaty partner.
The spontaneous exchange of information also operates through tax treaties and TIEAs. It involves the transmission of information that has not been specifically requested, but based on the judgement of the forwarding administration has been deemed to be of potential interest to a foreign partner. The exchange typically involves information discovered during a tax examination, investigation, or other administrative procedure that suggests or establishes noncompliance with the tax laws of a foreign partner, or that is otherwise determined to be potentially useful to a foreign partner for tax purposes. There is no requirement for the IRS to notify U.S.-based taxpayers if it spontaneously exchanges taxpayer information. European tax administrations, in particular, are renown for exchanging taxpayer information in this manner.
Tax treaties and TIEAs commonly include provisions for the automatic exchange of information, by which the tax treaty or TIEA partners agree to exchange certain tax-related information on a regular and systematic basis, without the need for a specific request. The information exchanged under this program frequently includes Country-by-Country (CbC) reports, which provide aggregate tax-jurisdiction-wide information relating to the global allocation of income, taxes paid, and indicators of economic activity. Taxpayers will not know when exchanges occur under these programs, but they can track which countries currently have automatic exchange agreements in place. For example, as of July 2021, the United States has finalized about fifty such agreements to automatically exchange CbC reports.
These exchanges involve meetings between tax officials of two or more partner countries that do not involve specific taxpayer information. Industry-wide exchanges focus on trends, policies, and operating practices in a particular industry, economic sector or other areas of common interest. Some examples are oil & gas, offshore compliance initiatives, tax shelters, etc. Because no specific taxpayer information is exchanged, taxpayers are not notified.
Tax administrations continue to emphasize the importance of exchanging taxpayer information. Given the numerous ways that taxpayer information may be exchanged, taxpayers should be aware that anything they provide one taxing authority could likely end up in the hands of another. Similarly, taxpayers should be aware that even before an audit begins, the auditors may already have a significant amount of information that has been exchanged between tax authorities using these devices.