This paper discusses the procedural, administrative, and tax treaty issues of the U.S. tax treatment of foreign source income earned in developing countries. Historically the United States has wanted its tax policy to be neutral to transnational investment.1 The recent focus of U.S. tax treaty of foreign source income earned in developing countries has been on closing loopholes on deferral, tax fraud, and evasion by U.S. persons using low tax and secrecy jurisdictions, and devising ways to provide incentives for certain types of U.S. exports.
United States tax treaty policy has been comparatively inflexible. As a result, the United States has had difficulty in concluding treaties with some important developing countries, such as Brazil and Argentina, even though these countries have large tax treaty programs of their own. Since the 1980s, the United States has developed a tax information exchange program with developing countries, especially in the Americas. The United States designed the program to supplement the effort of the U.S. Internal Revenue Service (IRS) to enforce its income tax laws and enhance its compliance. The paper takes the position that the inflexible approach of the United States towards developing countries and the emphasis on "sticks," or punishment of governments that do not change their policies and laws to conform with U.S. tax enforcement demands, in lieu of "carrots" or incentives is adversely impacting the environment in which foreign jurisdictions must implement the new tax enforcement cooperation.
This Article discusses the U.S. tax information exchange program, its legislative framework, and selected tax information exchange agreements (TIEAs). First, it outlines the United States' use of coercive means to obtain information because they provide alternative means of obtaining information and enforcing U.S. taxes over foreign source income. Second, the Article briefly analyzes mutual assistance in criminal law treaties and letters rogatory, which also provide means of obtaining tax information in a form that will be admissible in evidence. Third, the Article discusses mechanisms that are becoming more in vogue to obtain assistance in the collection of taxes. Fourth, the Article examines the use of extradition for tax matters. Finally, the Article concludes by considering the need for improved privacy and human rights protection in international evidence gathering in exchange of information as well as the need for incentives for developing countries, whose cooperation the United States would like to continue in a robust form. In addition, at the end this paper discusses two potential ways to tighten U.S. administration and procedure by focusing on the "sailing permit" and the operation of certain possessions' provisions.
II. TAX INFORMATION EXCHANGE PROGRAM
A. Introduction and Background
The United States pioneered its TIEA program in the 1980s as part of the Caribbean Basin Economic Recovery Act (CBERA).2 The United States now has TIEAs in effect with the following countries: Barbados, Bermuda, Costa Rica, Dominica, the Dominican Republic, Grenada, Guernsey, Guyana, Honduras, Jamaica, Jersey, the Isle of Man, Marshall Islands, Mexico, Peru, St. Lucia, and Trinidad and Tobago. On July 18, 2001, at a hearing of the U.S. Senate Permanent Investigative Subcommittee, Treasury Secretary Paul O'Neill promised the subcommittee Chairman Carl Levin that within one year the U.S. government would conclude tax information exchange agreements with at least one-half of the so called tax havens of the Organization for Economic Cooperation and Development (OECD) harmful tax competition initiative.3 Secretary O'Neill's promise, although obviously naively hyperbolic, underscores the increasing importance of this instrument. Since Secretary O'Neill's announcement, the United States has announced the signing of additional TIEAs with Antigua and Barbuda, the Bahamas, the Cayman Islands, Guernsey, the Isle of Man, and Jersey,4 although none of these are yet in force. …