Federal / International Tax

Multinational Task Force

Reprinted with permission, Canadian Tax Highlights, Volume 12, Number 6, June, 2004

by Alice A. Joseffer

Canada, the United States, the United Kingdom, and Australia have established a multinational task force to combat abusive tax transactions. The Joint International Tax Shelter Information Centre (JITSIC) will supplement ongoing work of those countries' tax administrations under a memorandum of understanding signed in April 2004. Although each tax administration operates primarily within its own borders, many transactions that are perceived as abusive by tax authorities cross international borders, and many promoters operate globally. The IRS list of abusive transactions includes, for example, "lease-in, lease-out" transactions.

The JITSIC is intended to enable the four countries to identify and understand abusive tax schemes and those who promote them; to share expertise, best practices, and experience in tax administration to combat abusive tax schemes; to exchange information about specific abusive tax transactions and their promoters and investors, consistent with the countries' existing bilateral tax treaties; and to carry out their separate abusive-tax-transaction enforcement activities more effectively and efficiently. The JITSIC aims to deter the promotion of and investment in abusive tax schemes through a focus on information sharing. Existing treaties provide for exchange of information: for example, under the Canada-US treaty, both competent authorities must exchange information necessary to carry out the provisions of the treaty or the domestic laws of either country concerning taxes covered by the treaty. The JITSIC intends to coordinate "real time" exchanges of tax information consistent with bilateral tax treaties and to develop new Internet search and "other" techniques for early identification of promoters and investors involved in abusive tax schemes. The JITSIC participants also intend to identify emerging trends and patterns to anticipate new schemes and to improve their knowledge of techniques used to promote cross-border schemes.

The new agreement complements two US domestic agreements. In 2003, the IRS and 45 states, the District of Columbia, and New York City agreed to coordinate their efforts and share data on illegal schemes that evade both federal and state taxes. Because some transactions are designed to avoid state taxation only, tax agencies in 34 states and New York City signed a joint agreement to share information between themselves on abusive tax shelters and illegal transactions. The information-sharing agreements provide formal structures for jurisdictions to notify one another when they uncover a scheme, to share insight on compliance initiatives, and to suggest potentially significant directions for audit exploration. US practitioners have already seen the effects of this process--for example, in the coordination between the IRS and the New York State Tax Shelter Unit. California enacted its own tax shelter disclosure and penalty legislation, and New York has proposed similar rules.

Taxpayers with multinational operations must be up to date on compliance requirements and the scope of "abusive transactions." Taxpayers should assume that their transactions are transparent to the taxing authorities and be prepared to defend them globally.