In
Legal Advice Issued by Associate Chief Counsel 2016-004, the IRS has given its opinion on
the exact moment when information that it provides to and receives from foreign
tax administrations via the Organization for Economic Cooperation and
Development's Common Transmission System becomes protected under the Code's
confidentiality rules. Legal Advice Issued by Associate Chief Counsel 2016-004.
In
light of recent global developments in the areas of transparency and exchange
of
information,
and recognizing that automatic exchanges of information between tax administrations
will likely increase over the coming years, the OECD is developing a
common
system for transmissions of data between governments.
The projected increase
in the number of automatic exchanges of information is due, in large part, to the
OECD’s “Standard for Automatic Exchange of Financial Account Information in Tax Matters”
(a/k/a, “Common Reporting Standard” or “CRS”), which provides for automatic exchanges
of financial account information, and the output of Action Plan 13 of the OECD’s
Base Erosion and Profit Shifting (BEPS) Project, which calls for automatic exchanges
of “country-by-country” reports.
The development of a common solution for the
transmission of data in the form of the CTS was viewed by the OECD as well as member
jurisdictions of the FTA as an efficient and economically beneficial way to accommodate
the global needs in the area of automatic exchange of information.
We
have been asked to opine on the moment during the exchange of information via the
CTS when information becomes protected under the various sources of statutory and
tax convention protection from disclosure.
Returns,
return information, and tax convention information are categories of information
related to taxes that are generally protected from disclosure under Internal Revenue
Code sections 6103 and 6105. Data transmitted via the CTS will fall within one
or more of these categories. In addition, the language of the United States’
bilateral and
multilateral tax conventions, tax information exchange agreements, as well as intergovernmental
agreements concerning the implementation of FATCA all contain provisions
concerning the obligation to protect covered information from disclosure.
Briefly,
information that will be transmitted by the IRS to foreign tax administrations (outbound
transmissions) through the CTS is return information under section 6103 in
the
hands of the IRS, so throughout the exchange process should be protected as required
by section 6103. Furthermore, that information becomes treaty-protected information
in the hands of the foreign country when the information is exchanged pursuant
to a tax convention or other international agreement on taxes.
In
the case of information provided to the IRS by foreign tax administrations
(inbound transmissions)
through the CTS, the moment when legal protection arises is less certain.
While there are two moments when legal protection could arise in an inbound transmission
(i.e., the moment information is uploaded to the CTS by the foreign tax authority,
and the moment when the United States downloads the information from the CTS),
we believe the most likely moment is when the United States downloads the information
from CTS.
There
is no direct authority regarding the precise moment legal protection arises. However,
close reading of the various statutory and tax convention language, as well as related
court decisions seem to indicate that protection will not arise until the
information is
actually held by the IRS.
As
discussed in this advice, the CTS is different from the International Data
Exchange Service
(IDES), which is a system funded, designed, and managed by the IRS. In a prior
memorandum, we concluded that information transmitted via IDES by a foreign jurisdiction
to the United States would most likely be treated as gaining section 6103protection
upon upload to IDES. The CTS is not a U.S.-designed system. The OECD, and
not the IRS, will negotiate the agreement with the CTS vendor; and the costs associated
with the development and operation of the CTS will be borne by all users globally
and not just by the IRS.
Therefore, our view is that with regard to information transmitted
to the IRS through the CTS, section 6103 protection arises when the information
is downloaded by the IRS. It is our understanding that if the IRS adopts the CTS,
as a matter of convenience to the IRS, the IRS will continue to use IDES as a regional
router in order to facilitate exchanges of information via the CTS. Therefore, with
regard to inbound transmissions to the IRS, section 6103 protection arises when the
information is uploaded from the CTS to IDES.
Furthermore,
we believe section 6105 and treaty protections are likely to follow the conclusion
under section 6103. In other words, with regard to inbound transmissions to
the
IRS, the protection under section 6105 and tax conventions arise, not when the
data
is
uploaded to the CTS by the foreign tax administration, but only when the data
is uploaded
to IDES from the CTS.
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