Part 1 - AL-Tax

International Taxation HandbookTo address this, countries may wish to have access to alternative sources of informationin the country of source, requiring the participation of the foreign taxauthority (and third parties such as commercial banks). Implementing full informationsharing and eliminating any existing creditable source tax yields an‘ideal’ tax system in the sense of being socially optimal, which is to be preferredover a pure source tax.10.2.2 Basic principles of information sharingGenerally, tax authorities of countries employ three ways to share case-specifictax information with each other. The most common form is information exchangeupon request, where a country passes information in response to a specificrequest related to a taxpayer. The second form concerns automatic exchange –typically being the largest in volume – which mainly pertains to informationabout routine, periodic payments, such as interest and dividends paid to nonresidents.The third type, spontaneous exchange of information, often occurs in thecourse of an audit when one tax authority uncovers details that it thinks may beof interest to its counterpart in the taxpayer’s country of residence. Noncasespecificinformation is also regularly exchanged between tax authorities. Forexample, tax authorities may – under the heading of administrative assistance –wish to share their auditing experiences in a particular sector.Most countries have laws that protect the confidentiality of information that taxauthorities have gathered about a particular taxpayer. As a result, a country cannotprovide information about a taxpayer to another country without a legal instrumentpermitting such disclosure. Information exchange has been carried out under threetypes of treaties: (i) Bilateral double-income taxation treaties, which include aninformation-sharing clause modeled after Article 26 of the OECD model tax convention;(ii) Bilateral information-sharing treaties such as those concluded between theUSA and various Caribbean jurisdictions; (iii) Multilateral mutual assistance orinformation-sharing treaties such as the Mutual Assistance directive. 8 Under thosetreaties, countries are expected to rely on their domestic sources before making aspecific request to a treaty partner. Such requests have to be precise; They shouldinclude details about the taxpayer in question, the fiscal year, the transaction(s)under scrutiny, and the relevance of the information being sought. All of theserequirements are designed to prevent countries from overburdening each other withdemands, and to ensure that taxpayer information is disclosed only when necessary.Tax authorities are typically not compensated for the ordinary costs of informationprovision, because information sharing is viewed as a matter of reciprocity.244