In Client-Attorney Privilege: The Last Barrier to Tax Transparency, Siddesh Rao explores the tension between ongoing global efforts at tax transparency and disclosure and legal systems’ commitment to client-attorney privilege. In a world in which information vital to effective tax enforcement is frequently hidden from view, who should be compelled to provide that information and on what terms? The answers to these questions have large stakes. On the tax revenue side, the failure to enforce the tax laws meaningfully, especially against large and sophisticated taxpayers, may diminish both the fisc and public confidence in the tax system. Conversely, making information and transparency demands on legal advisors puts at risk fundamental principles in legal systems premised on a special relationship between attorneys and their clients. The balance between these two priorities faces increasing pressure as states have devoted more attention to transparency and disclosure while at the same time taxpayers have, according to various observers, strategically misused claims of privilege to shield their transactions, structures and assets from tax authorities.
To evaluate this tension and offer recommendations, Rao adopts a comparative perspective, considering applications across common law and civil law jurisdictions, exploring common contexts for privilege “abuse,” and detailing the effects of transparency-forcing regimes such as mandatory disclosure and anti-money laundering rules. Although we may often think about client-attorney privilege as an internal, domestic legal issue, the rise of this tension is indeed global, as Rao documents. It is a culmination of both individual state responses to tax enforcement challenges, and a globally expressed commitment to tax transparency and disclosure in a world in which much sophisticated tax planning is cross border.
Rao sets the stage with a quick review of the global rise over the past 25 years of transparency and disclosure as critical tools in tax enforcement. Post the 1998 OECD Harmful Tax Competition Report, attention shifted increasingly to transparency-based tools. Part of this drive in recent decades comes from greater public awareness of tax evasion, tax avoidance, and corporate tax practices triggered by a series of high profile leaks. Claims grounded in client-attorney privilege have begun to bump up against demands for transparency and disclosure. (As an aside, I could not resist thinking that unilateral substantive rule changes also could help larger and wealthier jurisdictions address tax avoidance and evasion, especially given substantive rules such as the U.S. check-the-box rules have been widely identified as contributing substantially to the capacity of global taxpayers to engage in tax avoidance.)
The tension that Rao investigates is ultimately more than a simple two-sided debate about tax enforcement v. client-attorney privilege. It is complicated by nuances across states, by the interplay of international agreements (tax and nontax), and by the complexity of the privilege itself. The paper tackles each of these in turn, drawing upon examples, cases, and regimes from countries across the globe. Although there is sufficient commonality in the understanding of the privilege across borders to warrant and benefit from a shared conversation, the differences do present both theoretical questions about what might be shared goals, and practical questions about possible responses to cross-border requests for information. The analysis displays an appreciation of the granular ways in which privilege can be misused (including claims of privilege for nonlegal documents and mixing transactional documents with legal ones in an effort to secure a blanket privilege for all). Rao’s analysis further benefits from insights and observations gleaned from a series of focus group meetings conducted under university sponsorship in which senior officials from governments (tax and financial intelligence units), bar associations, Big Four tax practices, and MNE compliance units discussed privilege’s scope and misuse patterns, along with barriers to investigation and remedial options. These observations and insights were further vetted in three broader international conferences. Brief summaries of the focus group meetings (conducted under Chatham House Rules) are included as an annex.
So what recommendations does Rao make for managing our competing goals of tax enforcement and privilege? I will save the details for your deeper read of this paper, but the key directions include efforts to counterbalance the asymmetry of information and resources between tax authorities and tax advisors (including more training, access to privilege law expertise, and technical capacity); more explicit balancing mechanisms within legal regimes (such as structured proportional analysis, independent review, and alternative compliance options); specific cross-border regimes (for example standardized procedures for privilege claims, mutual recognition arrangements, and joint investigations); adoption of technology-based solutions (introduction of automated privilege log systems and secure document review platforms); and engagement with the legal profession.
The last one struck me because it engages with a core tension I have been trying to resolve: the tension between the role of tax professionals in tax planning and but also in tax compliance. Long before tax professionals face any requests for information that place privilege in the cross-hairs, those very tax professionals often have been playing an active role in designing their taxpayer clients’ transactions, strategies and reporting positions—conduct that creates its own tensions between taxpayer’s rights to pay as little tax as possible and a tax advisor’s duty to the legal system and society. Clearly engagement with the profession will be important, but what are its limits?
I look forward to future work on the paper’s recommendations, perhaps with expanded use of focus groups and case studies to test options. As legal systems continue to craft a balance between protecting the tax system and protecting client-attorney privilege, how may changing state priorities shift the outcome? States previously motivated by whistleblowing and leaks to embrace transparency and disclosure may find themselves less committed as they identify new and more urgent priorities. For example, the European Union, which over recent years had pursued various tax transparency and disclosure regimes, has tempered some efforts and simultaneously announced a commitment to tax competitiveness and simplification. Ultimately, the balance we strike will reflect not just our problem-solving skills but our deeper values.
