While the destination-based cash flow tax proposal has triggered a vigorous debate about currency valuation, revenue, and wealth effects, the potential effect on offshore tax enforcement has received less attention.
Scott Michel of Caplin & Drysdale, Chtd. said that any disruption to treaty information exchange would be a big deal. He said that the Swiss bank program is an example of the frustration that can come from information exchange issues. The "fraud and the like" standard for information exchange in the U.S.-Swiss tax treaty is much narrower than the standard in most other tax treaties to which the U.S. is a party, he said.
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Michel said that there were thousands of accounts at issue in the Swiss bank program that would have been difficult for DOJ to obtain information on using treaty requests under the "fraud and the like" standard. "The [Swiss] bank program would have been a completely different animal had the  protocol been ratified," he said. Further, under the standard information exchange provision in that protocol, the amount of information and investigative leads the DOJ would have received would have been an order of magnitude larger than the substantial amount of information it did receive under the Swiss bank program, he said.
"There is a strong case to be made that [the weaker information exchange provision] has hampered U.S. law enforcement . . . in a circumstance where there actually is a treaty in place," Michel said. "One can only imagine if the U.S. starts to take a different view of tax treaties, and information exchange under those treaties, how that might multiply itself around the world."
Michel said that a retreat from the international tax community spurred by anti-globalist sentiment could leave the U.S. without a seat at the table for the discussion of what should happen next.
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Excerpt taken from the article “Border Adjustment Treaty Damage Could Hinder Tax Enforcement” by Nathan J. Richman for Tax Notes.