Adventures In Cross-Border Tax Collection: Revenue Rule vs. Cum-Ex Litigation

• Published date: 19 May 2022
• Subject Matter: Tax, Tax Treaties, Tax Authorities
• Law Firm: Ruchelman PLLC
• Author: Mr Stanley Ruchelman

Co-authored with Sunita Doobay, a partner at Blaney McMurtry LLP in Toronto

I. Introduction

The common law revenue rule is a judicial doctrine that prevents courts in one country from being used by a foreign government as a tool to collect lost tax revenue of any kind. As explained by one commentator:

The revenue rule, a common law doctrine with origins in the eighteenth century, is a battleground in the twenty-first century. . . . In its modern form the revenue rule generally allows courts to decline entertaining suits or enforcing foreign tax judgments or foreign revenue laws.¹

In a 2005 decision, the Supreme Court described the revenue rule in the following language:

Since the late 19th and early 20th century, courts have treated the common-law revenue rule as a corollary of the rule that, as Chief Justice Marshall put it, "[t]he Courts of no country execute the penal laws of another." . . . The rule against the enforcement of foreign penal statutes, in turn, tracked the common-law principle that crimes could only be prosecuted in the country in which they were committed. The basis for inferring the revenue rule from the rule against foreign penal enforcement was an analogy between foreign revenue laws and penal laws.² [Citations omitted.]

The revenue rule can be overridden by treaty, and when it has been, U.S. and Canadian tax authorities have collected the taxes due in the other country.

This report explores various ways in which the tax authorities and courts may or may not cooperate in reviewing cross-border transactions, with an emphasis on Canada-U.S. transactions. It covers:

• the general development of the revenue rule in the United Kingdom, the United States, Canada, and other common law countries;
• the validity of a conviction for violating U.S. wire fraud criminal statutes resulting from the placement of an interstate telephone call incident to smuggling liquor into Canada;
• the cum-ex litigation involving allegedly fraudulent dividend refund claims in cases brought by the Danish tax authority (SKAT) before courts in the United States and the United Kingdom;
• the applicable provisions of the Canada-U.S. income tax treaty allowing for assistance in collection of taxes and exchanges of information;
• the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters;
• cases in the United States challenging treatybased summonses issued at the request of a treaty partner;
• cases in Canada challenging the exchange of financial...