A country's revenue laws reflect its political sovereignty and create property rights that affect relationships. Hence, sovereign states will not enforce the revenue laws of foreign countries and domestic courts will not exercise jurisdiction beyond their national boundaries. This rule, known as the "revenue rule", is long standing in the common law.1

A judgment based on a tax debt is normally not enforceable in a foreign jurisdiction. Thus, the Canada Revenue Agency ("CRA") cannot enforce collection against a non-resident with no assets in Canada, unless it issues a Requirement to Pay to a Canadian resident that owes or will owe money to the non-resident.2

Rationale of the Rule

The rule derives from eighteenth-century English court decisions seeking to protect British trade from the oppressiveness of foreign customs. In Boucher v. Lawson, 95 Eng. Rep. 53 (K.B. 1734) (Lord Hardwicke, C.J.), the court acknowledged that its concerns with promoting British trade led it to uphold a transaction that violated Portuguese export laws. Chief Justice Lord Hardwicke stated that to do otherwise "would cut off all benefit of such trade from this kingdom, which would be of very bad consequence to the principal and most beneficial branches of our trade." The rule is part of Canadian law, United States common law, international law, and the national law of other common law jurisdictions. The revenue rule respects sovereignty, concern for judicial role and competence, and separation of powers. Lord Denning explained the rationale in Attorney General of New Zealand v. Ortiz, [1984] A.C. 1 (H.L.) as follows:

"The class of laws which will be enforced are those laws which are an exercise by the sovereign government of its sovereign authority over property within its territory or over its subjects wherever they may be. But other laws will not be enforced. By international law every sovereign state has no sovereignty beyond its own frontiers. The courts of other countries will not allow it to go beyond the bounds. They will not enforce any of its laws which purport to exercise sovereignty beyond the limits of its authority."

See also: Judge Learned Hand's rationale for the rule:3

"[A] court will not recognize those [liabilities] arising in a foreign state if they run counter to the 'settled public policy' of its own. Thus, a scrutiny of the liability is necessarily always in reserve, and the possibility that it will be found not to accord with the policy of the domestic state. . . . No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper."

Lord Keith of Avonholm, having approved of the judgment of Kingsmill Moore J. in the High Court of Eire in Peter Buchanan Ld. & Macharg v. McVey, reported as a note in [1955] A.C. 516, suggested two explanations for the rule:

"One explanation of the rule thus illustrated may be thought to be that enforcement of a claim for taxes is but an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one State within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties."

A second explanation is that scrutiny of a tax judgement would require analysis of the policy underlying the tax, which would imply review of the policies of a sovereign jurisdiction.

"This would require the court to rule on the provisions for the public order of another State, which may commit "the domestic State to a position which would seriously embarrass its neighbour. No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper."

Application of the Rule

i. The United Kingdom

The House of Lords applied the rule in Government of India, Ministry of Finance (Revenue Division) v. Taylor4 . At page 504, Viscount Simonds adopted the following from In re Visser, The Queen of Holland v. Drukker:5

"My own opinion is that there is a well-recognized rule, which has been enforced for at least 200 years or thereabouts, under which these courts will not collect the taxes of foreign States for the benefit of the sovereigns of those foreign States; and this is one of those actions which these courts will not entertain."

See also: Government of India v. Taylor, [1955] A. C. 491, 508 (H.L.), denying claim of Indian government for unpaid taxes against company in liquidation in Britain because British courts would not enforce Indian revenue laws, stating "we proceed upon the assumption that there is a rule of the common law that our courts will not regard the revenue laws of other countries: it is sometimes, not happily perhaps, called a rule of private international law: is at least a rule which is enforced with the knowledge that in foreign countries the same rule is observed".

ii. The United States

The United States limits extraterritorial collection assistance based on preserving its sovereignty, security, and public policy. For example, Article 26, paragraph 4 of its Model Income Tax Convention, (September 20, 1996) provides:

This paragraph shall not impose upon either of the Contracting States the obligation to carry out administrative measures that would be contrary to its sovereignty, security, or public policy.

However, the United States has several tax treaties with foreign countries that provide for information exchange and, sometimes, limited collection assistance. Paragraph 1 of Article XXVI-A of the U.S.- Canada Tax Convention, for example, provides for limited assistance between the respective tax authorities of the states in collecting a "revenue claim". The 1995 Protocol requires that a state seeking collection assistance certify that the revenue claim has been "finally determined."

A claim is finally determined when the applicant State has the right under its internal law to collect the revenue claim and all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted. Thus, the treaty does not abrogate the rule that courts of one nation should not adjudicate the unresolved tax claims of another.

In United States v. Boots, 80 F.3d 580 (1st Cir.), cert. denied, 519 U.S. 905, 136 L. Ed. 2d 188, 117 S. Ct. 263 (1996), the First Circuit dismissed an indictment for a cross-border smuggling scheme designed to avoid Canadian taxes. (at page 587: "For our courts effectively to pass on [foreign revenue] laws raises issues of foreign relations which are assigned to and better handled by the legislative and executive branches of government."), and at 587-88 ("Of particular concern is the principle of non-interference by the federal courts in the legislative and executive branches' exercise of their foreign policymaking powers.").6

Similarly, in Peter Buchanan L.D. v. McVey, [1955] A.C. 516, 529 (Ir. H. Ct. 1950), aff'd, [1955] A.C. 530 (Ir. S.C. 1951), relied on by the United States Supreme Court in Sabbatino, 376 U.S. at 437-38, the Irish High Court noted that courts had traditionally exercised the right to reject foreign law that conflicted with the public policy or morality of the domestic court, and stated:

"Modern history [is not] without examples of revenue laws used for purposes which would not only affront the strongest feelings of neighbouring communities but would run counter to their political aims and vital interests. . . . So long as these possibilities exist it would be equally unwise for the courts to permit the enforcement of the revenue claims of foreign States or to attempt to discriminate between those claims which they would and those which they would not enforce. Safety lies only in universal rejection."

Click here to continue reading. . .

Footnotes

1. See, for example, Holman v. Johnson, 98 Eng. Rep. 1120, 1121 (K.B. 1775) (Lord Mansfield) ("For no country ever takes notice of the revenue laws of another."); Planche v. Fletcher, 99 Eng. Rep. 164, 165 (K.B. 1779) (Lord Mansfield) ("One nation does not take notice of the revenue laws of another.").

2. United States v. Harden, [1963] C.T.C. 450 (SCC); R.J. Reynolds Tobacco (2001), 268 F.3d 103 (US Court of Appeals, 2nd Circuit.

3. Moore v. Mitchell, 30 F.2d 600, 604 (2d Cir. 1929) (L. Hand, J., concurring)

4. [1955] A.C. 491.

5. [1928] Ch. 877 at 884.

6. See, generally: Aetna Ins. Co. v. Robertson, 127 Miss. 440, 90 So. 120, 126 (Miss. 1921) (Ethridge, J., dissenting)("It is a familiar principle of law that one state or country will not aid another state or country in giving effect to judgments enforcing its penal laws, or in collecting its revenues."); Henry v. Sargeant, 13 N.H. 321 (1843) (collecting cases that support the principle that penal and revenue laws are "strictly local" and are not enforced by foreign states); State of Colorado v. Harbeck, 232 N.Y. 71, 85, 133 N.E. 357 (1921) ("The rule [of "private international law"] is universally recognized that the revenue laws of one state have no force in another."); Williams & Humbert Ltd. v. W&H Trade Marks (Jersey) Ltd., 1986 1 All E.R. 129, 133-34 (H.L.) (Although the "revenue laws may in the future be modified by international convention or by the laws of the European Economic Community[,] . . . at present the international rule with regard to the non-enforcement of revenue and penal laws is absolute."); Peter Buchanan L.D. v. McVey, [1955] A.C. 516, 524-28 (Ir. H. Ct. 1950) (surveying application of the revenue rule by United Kingdom courts), aff'd, [1955] A.C. 530 (Ir. S.C. 1951);

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.