If a U.S. person commits tax fraud under the laws of a foreign county, can the foreign country’s tax collector use the U.S. court system to collect from the U.S. person? This is an international tax law issue. The court recently addressed this in In re SKAT Tax Refund Scheme Litigation, No. 18-md-2865 (LAK) (S.D.N.Y. 2019).
Facts & Procedural History
The plaintiff is the Customs and Tax Administration of the Kingdom of Denmark (“SKAT”). This is Denmark’s equivalent of the IRS.
The defendants were U.S. pensions and related parties.
SKAT alleged that the defendants filed false tax refund claims totaling $2 billion. The tax refunds relate to the Denmark withholding taxes. Denmark’s tax laws require withholding on dividends distributed to shareholders.
The U.S.-Denmark tax treaty provides that dividends distributed from Denmark companies to shareholders who are U.S. pensions, which are not subject to tax in the U.S., are able to recoup the withholding by filing refund claims.
SKAT alleged that the U.S. pensions did not own Denmark pensions and did not receive dividends therefrom, but filed tax refund claims nonetheless.
Enforcing Foreign Tax Laws
The defendants argued that the court did not have jurisdiction as the lawsuit was to enforce foreign tax laws.
The courts in the U.S. generally do enforce foreign court judgments. There is an exception for foreign court judgments for taxes. This is referred to as the “revenue rule.”
Critics of the revenue rule argue that it lets foreigners who have assets in the U.S. avoid having the tax authorities from their home countries from collecting from their assets in the U.S.
But does the revenue rule bar a foreign tax collector from using the U.S. courts to collect monies from U.S. parties who conspired to defraud it? The court said, “no.”
The Substance of the Claim
The court looked at the substance of the claim. The claim here was not for the recovery of foreign taxes. The claim was for damages allegedly caused by the defendant’s tax fraud:
These actions plainly do not seek direct enforcement of Danish tax law. The defendants’ attempt to frame them as seeking to recover lost tax revenue — when the only reason the money was lost is because the defendants in effect allegedly stole it, and the only reason it supposedly concerns tax revenue is because the defendants’ alleged victim was the Danish tax authority — is too clever by half. The defendants’ brief admits as much when it drastically mischaracterizes the nature of the plaintiff’s claims in an effort to bring them within the revenue rule. They characterize the claims as seeking to recover for “harms suffered as a result of the evasion of a foreign sovereign’s tax laws,” when in fact the plaintiff has not alleged a single instance of tax evasion — it alleges fraud, pure and simple. Defendants’ mischaracterization betrays their knowledge that tax evasion is a crucial ingredient in cases barred by the revenue rule in this circuit.41 Indeed, each case they cite and discuss in support of their position involves an underlying scheme of tax evasion.
Thus, the substance of the claim was recovery for a theft–not a collection of tax.
This case helps clarify the role of the revenue rule. The revenue rule is not a bar to suit just because a foreign government is a plaintiff. Foreign tax collectors can use the U.S. courts to recover stolen monies, but not to collect foreign taxes.
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