| ||U.S. Cross-Border Discovery in International Tax Proceedings: An overview from a European Comparative Law Perspective |
Alexander F. Peter .*
*Senior Associate, Norton Rose, Frankfurt, Germany; Rheinische Friedrich-Wilhelms-Universität Bonn, Ph.D. in Law 1998; Georgetown University Law Center, LL.M. in Taxation 2004.
In the mid-1980s, the Service determined that a significant portion of collectible tax deficiencies resided in the largest cases, many of which involved important international tax issues. The Service also recognized that if it were to compete successfully in litigation involving complex international tax issues, more resources would have to be devoted to every stage of the process, beginning with the audit stage and extending through administrative appeals and trial. Tax Court litigation in large cases is therefore becoming more similar to other big-case litigation, such as antitrust or securities class action suits. Procedural matters have taken on greater importance, discovery has become sweeping, and formal discovery techniques, such as admissions, interrogatories, and depositions, are used more frequently.1 In these complex cases, the need for sweeping discovery and the expanded use of discovery techniques has created unique tensions between the Service, the taxpayer, and countries involved in the dispute. As a result, the Service needs information it often can only obtain through the help of third parties or the taxpayer. The Service’s interest in obtaining this information is at odds with the taxpayer’s interest in limiting the Service in its search for data. Moreover, extensive cross-border discovery may create friction with the jurisdictions of other countries (mostly Japan and countries in Europe) that are not so amenable to U.S. discovery. These countries sometimes penalize the provision of information in the discovery process. This phenomenon has been called a “European-American Justice Conflict.”2 But why, and what does that mean for tax disputes? This article addresses these issues, focusing mainly on (pre-trial) discovery in cross-border civil tax litigation. Part II of this article will discuss the different forums available for tax disputes within the U.S., and will highlight questions a taxpayer should consider prior to deciding upon the appropriate forum for a dispute. Part III will analyze the scope of discovery and the various tax discovery techniques, defenses, and objections against them utilized at the federal level. In Part IV, the scope of discovery and discovery devices used in an international context will be examined followed by a comparison of the extent and techniques of discovery employed by the Service to information gathering in Germany, the largest jurisdiction in Europe. Lastly, this article will conclude with some remarks about the foreseeable future for cross-border (tax) discovery. However, state3 or criminal4 tax law discovery and litigation and discovery in the U.S. by foreign litigants in proceedings outside the U.S.5 are beyond the scope of this article.
1 See Joel V. Williamson et al., Litigation of Transfer Pricing Cases and Tax-advantaged Transactions, 598 PLI/Tax 1027, 1045 (2003); John E. McDermott, Jr. & Adam J. Safer, How to Use Expert Testimony in International Tax Cases, 6 J. INT’L TAX’N 25, 26 (Jan. 1995).
2 See, e.g., Burkhard Hess, Transatlantischer Rechtsverkehr heute: Von der Kooperation zum Konflikt?, JZ 923 (2003).
3Only a handful of states have separate tax tribunals at all, although the taxpayer can expect at least an administrative adjudication process based on an—in its forms nevertheless varying—adoption of the Federal Rules of Civil Procedure. See Elizabeth Buroker Coffin, The Case for a State Tax Court, 8 Stat. & Loc. Tax Law. 63, 73, 79 (2003).
4 See James P. Springer, Obtaining Evidence Abroad For U.S. Criminal Tax Cases, not published, Article for a ABA Conference in 2001, downloadable in Westlaw under N01CTFB ABA-LGLED B-1.
5 See Gregory P. Joseph, Civil Practice and Litigation Techniques in Federal and State Court— International Discovery, SK042 ALI-ABA 75 (2004); compare Laurence Shore, The U.S. Supreme Court Broadens Evidence-Gathering Assistance to Foreign Tribunals, DAJV-NL 117 (2004) with the recent decision of the U.S. Supreme Court in Intel Corp. v. Advanced Micor Devices, Inc., 524 U.S. 241 (2004); see also James N. Benedict, Issues in Transnational Litigation, SE82 ALI-ABA 99, 118 – 119 (2000); Kevin M. McDonald & Christoph F. Wetzler, Discover the Opportunities – US