Cross Border Discovery in

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1 ABA Section of Taxation 2013 May Meeting Court Practice and Procedure Committee Cross Border Discovery in International Tax Controversies Jonathan E. Strouse (Moderator) Holland & Knight Tom Kane Internal Revenue Service (P&A) Thomas Sawyer U.S. DOJ, Tax Division Alex Sadler Ivins, Phillips & Barker

2 Overview Topics we will cover Formal and informal methods for obtaining foreign based evidence Practical considerations and advice in seeking discovery from abroad EU data protection laws Our focus is on out bound discovery (i.e., obtaining information from foreign locations) in litigation. In bound discovery (i.e., foreign governments seeking information from US sources) is a different topic. We ll touch on IRS administrative tools, but that is not the focus of this panel. Third party discovery generally presents greater challenges than requests for foreign based information controlled by a party. 2

3 What Types of Information Are We Talking About? Any records or information located in a foreign jurisdiction that may be relevant to the correct determination of a taxpayer s US tax liability. Such as Tax returns and related return information Bank statements and business records Interviews with taxpayers and third parties Public records (i.e., company and land registry documents) 3

4 Knowing Your Country American style discovery vs. rest of the world Common law vs. civil law Treaties, agreements, etc. Limits on Hague Convention Dt Data protection ti laws Other restrictions on discovery Courts and judges Benefits of a local attorney 4

5 Informal Discovery Methods Voluntary requests and witness interviews can frequently be the fastest and cheapest method to obtain evidence. The Tax Court insists that the parties use informal efforts to obtain needed information for the preparation p of the case for trial. Branerton Corp. v. Commissioner, 61 T.C. 691 (1974). But, it is not always permitted in every jurisdiction. Be mindful of the forum state s rules (check State Department country flyers). Voluntary discovery may be ILLEGAL and subject you to prosecution. Voluntary discovery may require express authority from foreign government. Certain forms of voluntary discovery may be precluded. 5

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7 State Dept. Switzerland page 7

8 Formal Discovery Methods Formal discovery under the FRCP and Tax Court Rules Tax Court order per IRC 7456(b) Treaties and other agreements with foreign governments Tax treaties (EOI article) TIEAs (Tax Information Exchange Agreements) MLATs (Mutual Legal lassistance Treaties) Hague Evidence Convention Letters Rogatory Directly in foreign court as permitted by local law (e.g., UK Evidence Act) 8

9 FRCP and Tax Court Rules The formal discovery tools provided under the FRCP and Tax Court Rules (e.g., g interrogatories, depositions, etc.) may be used where the foreign evidence is in the possession, custody, or control of a party. Information is under a party s control when the party has the right, authority, or practical ability to obtain the materials sought on demand. See, e.g., Costa v. Kerzner Int l Resorts, Inc., 277 F.R.D. 468 (S.D. Fla. 2011) (compelling production of information held by Bahamian affiliates). The fact that documents are situated in a foreign country does not bar their discovery. Cooper Indus. v. British Aerospace, 102 F.R.D. 918, (S.D.N.Y. 1984). Whereforeign law imposes criminal orcivil penalties for producing information, the court must balance the interests of the respective jurisdictions. See, e.g., Dexia Credit Local v. Rogan, 231 F.R.D. 538 (N.D. Ill. 2004). 9

10 Tax Court Order Per IRC 7456(b) Upon motion of the Secretary and for good cause, the Tax Court may order a foreign taxpayer who has filed a petition to produce evidence. The order is limited to documents relevant to the proceedings and that are within the possession, custody, or control of the taxpayer, or within the control of another person who the taxpayer controls or by whomthe taxpayer is controlled. IRC 7456(b) is subject to the Powell requirements. Hong Kong and Shanghai Banking Corp. v. Commissioner, 85 TC T.C. 701 (1985). Failure to comply may result in sanctions including Full or partial striking of the petitioner s pleadings Full or partial dismissal of the proceeding Default judgment against the petitioner 10

11 Treaties Competent / Central Authorities 11

12 Tax Treaties 12

13 Tax Information Exchange Agreements 13

14 Treaties and TIEAs IRS (for itself and on DOJ s behalf) can use these agreements to obtain documents or conduct interviews of foreign persons with information that may be relevant to an investigation or controversy. Administered by the EOI Program Manager in DC and the IRS Tax Attachés in London, Paris, Frankfurt, and Beijing, and the RSR in Plantation, Florida. Common treaty EOI provisions Information obtained via treaty is confidential Variance from local laws or practices not allowed Commercial and trade secrets protected. (See Rev. Proc for competent authority procedures.) Information obtained via treaty is covered by IRC

15 Mutual Legal Assistance Treaties 15

16 Hague Evidence Convention Source: Wikipedia 16

17 Hague Evidence Convention Establishes methods of cooperation for the taking of evidence abroad in civil or commercial matters. Provides for the taking of evidence (i) () by means of letters of request (Chapter I), and (ii) by diplomatic or consular agents and commissioners (Chapter II). A Contracting State may declare that it will not execute Letters of Request issued for the purpose of obtaining pre trial discovery of documents (e.g., g U.K.) K)(Article 23). 17

18 Hague Evidence Convention Letters of Request The evidence is obtained directly by the foreign authorities, not by the United States. Typically, theevidenceevidence will be compelled and obtained by a court or judicial authority. The parties may, or may not, be permitted to attend or to participate. The evidence may or may not be produced under oath or through transcribed testimony. 18

19 Hague Evidence Convention General Issues Requests should conform with convention s requirements Trial testimony v. U.S. style discovery Questions mustbe Narrowly crafted No open ended questions Issues in U.S. tax cases Civil or Commercial Public law v. private law and applicabilityofthe the Hague Evidence Convention Retain local lawyer to assist in preparing Letter of Request 19

20 Non exclusivity of Hague Evidence Convention Societe Nationale Industrielle Aerospatiale v. U.S. District Court for the Southern District of Iowa, 482 U.S. 522 (1987) Exclusivity U.S. courts supervise discovery U.S. respect for foreign state 20

21 Letters Rogatory If there eis no treaty, teaty,agreement, e or multilateral ut atea convention that requires assistance, your only formal avenue may be a Letter Rogatory. Letters rogatory vs. letters of request Letters Rogatory are the traditional procedure in which a court in one country requests a court in another country for assistance. Customarily transmitted via the diplomatic channel; execution may take a year or more. 21

22 Letters Rogatory Checklist Review country specific judicial assistance information at travel.state.gov. See suggested language at travel.state.gov. Consider whether foreign judge will understand the request. Secure the signature of a US judge. Obtain necessary authorizations specified in country specific information. If English is not the official language of the foreign country, obtain certified translations of the letters rogatory and supporting documents. Prepare the entire package in duplicate for transmittal to U.S. Department of State. Tips: Use simple, non technical English Avoid use of term discovery Use closed ended, specific questions; avoid all documents Retain local lawyer to assist in preparing Letter of Request 22

23 IRS Administrative Tools IRS summons under 7602 Summoned party must have minimum contacts with US, i.e., pursuing business in US. Summoned party must have custody and control of the information. The summons must be otherwise enforceable (Powell). Formal Document Request (FDR) per 982 The taxpayer must substantially comply or file a motion to quash within 90 days. A taxpayer that fails substantially comply is generally barred from admitting the evidence in a civil tax case. Specific request by US competent authority pursuant to EOI provision of an applicable tax treaty or TIEA 23

24 EU Data Protection Laws EU countries take the protection of personal data (e.g., name, address, , financial information, photo, social networking posts, etc.) very seriously. Currently EU member countries have their own laws to regulate the processing of personal data. The EU has proposed a General Data Protection Regulation imposing a strict data protection compliance regime with penalties up to 2% of global sales. Any request from the US for assistance on court discovery will be viewed by the receiving party as possibly being in great tension with the privacy laws of their home country. 24

25 Questions? 25