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Tax Treaties at Standstill in Senate Over Privacy Issues

Approving tax treaties with other nations used to be relatively routine business on Capitol Hill, but that’s no longer the case.

Kentucky Republican Rand Paul has been blocking tax treaties on the Senate floor over privacy concerns, bringing the process to a standstill and throwing a wrench into one of the Obama administration’s initiatives aimed at bringing in tax revenue without actually raising taxes.

Seemingly arcane and largely procedural agreements on the handling of taxation issues across borders, the treaties are one prong in President Barack Obama’s efforts to rein in tax avoidance, but Paul’s blockade has defied both Treasury Department officials and business advocates who want them ratified.

Paul’s efforts come amid greater debates in tax circles on the nature of international taxation and whether separate agreements, such as those the United States has struck with several countries, may be obsolete when the flows of money and information move rapidly around the world.

That’s not the case Paul is making, however, as he rises to block unanimous consent requests for ratification of the administration’s deals. Instead, Paul has held up pending tax treaties for three years on privacy concerns.

“The vast majority of Americans are law abiding,” Paul said on the Senate floor last week, as Democrats sought approval of an agreement with Chile. “I also don’t think we should agree to a standard that might allow bulk collection of data on everyone who lives overseas.”

The Senate Foreign Relations Committee approved five proposed income tax treaties and protocols — agreements with Chile, Luxembourg, Switzerland and Hungary and a protocol to amend a multilateral convention signed in March 2010. The measures were first approved by the committee in 2011, but have been stalled ever since.

Paul’s objection last week blocked Sen. Robert Menendez, D-N.J., when he asked for unanimous consent to ratify the treaty with Chile, which would be just the second tax treaty between the United States and a South American country.

“This will allow our country to support our companies and provide a level playing field for international investment here in the United States,” Menendez said.

Paul said he does not oppose tax agreements in general, but he feels the administration had broken from past protocols and put no constraints on the search for tax cheats. “The treaties in the past had a standard that said that you had to be committing tax fraud or that had you to be engaged in fraudulent activity, the same way every American here expects that the government’s not going to look at your bank account unless they have gone to a judge with evidence that you are cheating on your taxes,” he said.

The new treaties, he said, don’t demand any evidence before a search of records is launched. “I think there should be some evidence presented. The new standard is they can look at any of your records that may be relevant. This is a much lower standard, and I think it will be injurious to the vast majority if not the overwhelming majority of Americans who are actually innocent but just happen to be living abroad,” Paul said.

Compliance in Question

The Obama administration has, in the meantime, found ways around the Senate ratification process altogether. Treasury has negotiated more than 50 “intergovernmental agreements” to share financial and tax information with other countries in its implementation of a 2010 law to curb tax evasion.

The agreements reached under the Foreign Account Tax Compliance Act (PL 111-147) strike some as thinly disguised treaties.

Rep. Bill Posey, R-Fla., a member of the House Financial Services Committee, wrote a letter to Treasury Secretary Jacob J. Lew in July calling for a FATCA enforcement moratorium. Posey questioned the Treasury’s authority to enter into such intergovernmental agreements without the Senate’s advice and consent and suggested the terms of the agreements could ultimately hurt the U.S. economy.

Paul introduced a bill (S 887) that would repeal parts of FATCA last May, saying the law “violates important privacy protections,” and Republicans made its repeal an official part of their platform in January.

Names Are Sought

Justice Department officials, meanwhile, say ratifying the pending treaties would make their work chasing tax evaders much easier.

Following a guilty plea by Swiss banking giant Credit Suisse on tax evasion charges, the Justice Department said it will seek account-holder information from the bank through the treaty process. Officials at Treasury and Justice say ratifying the 2009 protocol, sent to the Senate in 2011, is critical to the effort.

Under the current treaty, U.S. officials must establish evidence of “fraud or the like” in order to obtain information, while the pending treaty would lower the bar.

“Under the protocol, it’s a relevance standard. And under the protocol, it’s a relevant standard to any tax enforcement. So it would give us information both on the civil and criminal side. The protocol would enhance our ability to get information,” Kathryn Keneally, then-assistant attorney general for Justice’s Tax Division, told the Senate Permanent Subcommittee on Investigations in February.

During that hearing, subcommittee Chairman Carl Levin, D-Mich., said the pending protocol had only “slightly better criteria than the old treaty.” He said he wants to see it ratified, but noted it would hardly be a panacea in the struggle to get account information from the often-reluctant Swiss.

“Don’t tell us the treaty is going to get us what we want. It won’t,” he told Justice Department officials.

“It’s also got some holes in it. It doesn’t get us to the names before 2009. Those are the major names that Credit Suisse has. The major number of names, or at least half of the names, are the before-2009 names. They’re not covered by this new protocol,” Levin said.

After a settlement with Swiss bank UBS in 2009, U.S. officials sought some 20,000 names of U.S. account holders through the treaty process but only emerged with 4,700.

But tax treaties may have little meaning in the global information age, according to Michael Keen, deputy director of the International Monetary Fund’s fiscal affairs department.

“The empirical evidence that it does anything for investment is pretty weak,” Keen said this month at the Organisation for Economic Co-operation and Development’s international tax conference.

But Will Morris, the director of global tax policy at General Electric International and a business adviser to the OECD, wasn’t so sure.

“The anecdotal evidence is that they are critical [to decisions about] making investments,” Morris said.

The OECD is working to create new cross-border tax rules as corporations find ways to limit their taxes by exploiting gaps between different countries’ tax systems. Anti-abuse rules for treaties are a part of that effort.