Bruce Zagaris provides a highly useful summary of the administration and tax treaty issues bearing on U.S. taxation of foreign source income in developing countries. In U.S. Tax Treatment of Foreign Source Income Earned in Developing Countries: Administration and Tax Treaty Issues,1 Zagaris focuses on, but does not limit his analysis to, the various means available to the U.S. government to obtain information for litigating criminal and civil tax cases. Zagaris also addresses the current status of provisions aimed at obtaining assistance in the collection of taxes and in the use of extradition in tax matters. He concludes by calling for improved protection for taxpayer rights and for incentives to induce developing countries to cooperate with U.S. goals in these areas.
Zagaris' Article is all the more useful and interesting because it deals with subjects that are seldom brought together in one place for review. These subjects often escape the attention of tax experts, except to the extent they may be called upon to apply some specific rule or rules in particular factual and legal circumstances. Zagaris' approach offers a broad, general description of international tax administration in which individual developments are situated and can be assessed. For all of this, we should be grateful.
As a designated commentator on Zagaris' Article, however, I believe I am obliged to adopt an objective, even critical, eye, with a view to identifying points that could usefully be added, amplified, or rounded out in the picture he has painted for us. It is with that obligation in mind that I now address the features of the Article that seem to be most worthy of comment. There are three points that I would make: (1) the Article does not deal with important developments affecting tax information exchange agreements and, in particular, the implications of a basic change in legal standard set forth in the Model Convention on Exchange of Information drafted by the Organisation for Economic Co-Operation and Development (OECD); (2) the Article does not offer concrete suggestions as to what the United States should do in the important areas of tax administration it describes; and (3) while situating individual developments in a broad framework, the Article does not explore the context in which one should approach the entire subject.
I. CRITIQUE OF CONTENT
A. Developments Affecting Tax Information Exchange Agreements
One can certainly excuse Zagaris for failing to deal with the OECD Model Convention on Exchange of Documentation as such, for the OECD is an organization comprised of developed countries. In contrast, both this Symposium2 and Zagaris' Article focus on the developing world. Most of the Article deals only with developing countries of the Caribbean and Latin America, but perhaps it is largely within that geographical vicinity that relevant activity has taken place in recent years. Most of the remaining activity has concerned, in one way or another, Switzerland and Luxembourg, countries that are hardly developing nations and whose absence here is understandable.
The problem is not the absence of developed countries in Article but, rather, the fact that the OECD potentially changes the rules of the game for everyone. The Model Exchange of Information Agreement (OECD Model Agreement)3 requires that a request for information depend on the ability of the requesting State, and not the requested State, to obtain the information. This is a change of great significance because, under the former standard, the requested State could refuse to supply information on the ground that its domestic laws did not allow the information to be obtained or supplied to domestic tax authorities.4 In domestic jurisdictions having strong laws in force that impede tax authorities from obtaining information, the "requested State" test gave rise to a complete defense even when there was a tax treaty or an information exchange agreement in place. …