Article 26 (Exchange of Information)

Paragraph 1

Paragraph 1 provides for the exchange of information between the competent authorities of the Contracting States. The information to be exchanged is that which is relevant to carrying out the provisions of the Convention or the domestic laws of the United States or Japan concerning taxes of every kind imposed by a Contracting State. Consistent with the U.S. Model, exchange of information applies with respect to all taxes imposed at the national level, and thus applies to a broader category of taxes than those referred to in Article 2 (Taxes Covered) or subparagraph (d) of paragraph 1 of Article (3) (General Definitions). This is confirmed by paragraph 5 of Article 26.

Exchange of information with respect to each Contracting State’s domestic tax law is authorized insofar as the taxation under domestic tax law is not contrary to the Convention. Thus, for example, information may be exchanged even if the transaction to which the information relates is a purely domestic transaction in the requesting Contracting State and, therefore, the exchange is not made to carry out the Convention. An example of such a case is provided in the OECD Commentary: a company resident in the United States and a company resident in Japan transact business between themselves through a third-country resident company. Neither Contracting State has a treaty with the third state. To enforce their internal laws with respect to transactions of their residents with the third-country company (since there is

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no relevant treaty in force), the Contracting States may exchange information regarding the prices that their residents paid in their transactions with the third-country resident.

Unlike the U.S. Model, but like the OECD Model, paragraph 1 does not include an illustrative list of matters to which information subject to the exchange of information may relate. The U.S. Model provides that the competent authorities shall exchange such information as is relevant for carrying out domestic laws of the Contracting States, “including information related to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to,” the relevant taxes. The omission of this illustrative language is not intended restrict the matters with respect to which information may be exchanged. Thus, the competent authorities may request and provide information for tax cases under examination or criminal investigation, in collection, on appeals, or under prosecution. This result is reinforced by paragraph 2, which provides that the information exchanged may be disclosed to persons or authorities “involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to,” the relevant taxes.

Paragraph 1 states that information exchange is not restricted by Article 1 (General Scope). Accordingly, information may be requested and provided under this article with respect to persons who are not residents of either Contracting State. For example, if a third-country resident has a permanent establishment in Japan, which engages in transactions with a U.S. enterprise, the United States could request information with respect to that permanent establishment, even though the third-country resident is not a resident of either Contracting State. Similarly, if a third-country resident maintains a bank account in Japan, and the Internal Revenue Service has reason to believe that funds in that account should have been reported for U.S. tax purposes but have not been so reported, information can be requested from Japan with respect to that person’s account, even though that person is not the taxpayer under examination.

Paragraph 1 also provides that the requesting Contracting State may specify the form in which information is to be provided so that the information can be usable in the judicial proceedings of the requesting Contracting State. In this regard, unlike the U.S. Model, paragraph 1 does not explicitly authorize the use of depositions of witnesses to obtain information under this article.

The article authorizes the competent authorities to exchange information on a routine basis, on request in relation to a specific case, or spontaneously. It is contemplated that the Contracting States will utilize this authority to engage in all of these forms of information exchange, as appropriate.

Paragraph 2

Paragraph 2 provides that any information exchanged will be treated as secret, subject to the same disclosure constraints as information obtained under the laws of the requesting Contracting State. Paragraph 2 further provides that information received may be disclosed only to persons, including courts and administrative bodies, involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of the of appeals in relation to, the taxes referred to in paragraph 1, or to supervisory bodies. The

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information received may be disclosed to such persons, authorities or supervisory bodies only to the extent necessary for them to perform their respective responsibilities, and such persons, authorities or supervisory bodies shall use the information only for purposes of discharging their responsibilities. Information received may be disclosed in public court proceedings or in judicial decisions.

Pursuant to paragraph 6 of the Notes, it is understood that the term “authorities . . . involved in the administration of” taxes includes authorities, such as the Office of Chief Counsel for the Internal Revenue Service, that provide legal advice to governmental entities that are directly involved in the activities described in paragraph 2 of Article 26. Paragraph 7 of the Notes sets out the understanding that the term “supervisory bodies” includes authorities that supervise the general administration of the government of a Contracting State. Thus, information may be disclosed to legislative bodies, such as the tax-writing committees of Congress and the General Accounting Office, engaged in the oversight of the activities described in paragraph 2 of Article 26. Information received by these bodies must be for use in the performance of their role in overseeing the administration of U.S. tax laws.

Paragraph 3

Paragraph 3 provides that the obligations undertaken in paragraphs 1 and 2 to exchange information do not require a Contracting State to carry out administrative measures that are at variance with the laws or administrative practice of either Contracting State. Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of either Contracting State, or to disclose trade secrets or other information, the disclosure of which would be contrary to public policy.

Thus, a requesting Contracting State may be denied information from the other Contracting State if the information would be obtained pursuant to procedures or measures that are broader than those available in the requesting Contracting State. However, each Contracting State has confirmed in paragraph 8 of the Notes its ability to obtain and exchange certain information under Article 26. The information that may be obtained and exchanged includes information held by financial institutions, nominees, or persons acting in an agency or fiduciary capacity (but does not include information relating to communications between a legal representative in its role as such and its client to the extent that the communications are protected under the domestic law of the requested Contracting State). In the case of the United States, the scope of the privilege for such confidential communications is coextensive with the attorneyclient privilege under U.S. law. The Contracting States may also obtain and exchange information relating to the ownership of legal persons.

While paragraph 3 states conditions under which a Contracting State is not obligated to comply with a request from the other Contracting State for information, the requested State is not precluded from providing such information, and may, at its discretion, do so subject to the limitations of its internal law.

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Paragraph 4

Paragraph 4 provides that, in order to effectuate the exchange of information as provided in paragraph 1, each Contracting State shall take necessary measures to ensure that its competent authority has sufficient powers under its domestic law to obtain information for the exchange of information regardless of whether that Contracting State may need such information for purposes of its own tax. This paragraph thus reaches the same result as the second sentence of paragraph 3 of Article 26 of the U.S. Model. The competent authority of the United States has the power to obtain information for the exchange of information pursuant to a tax treaty regardless of whether the United States has a domestic tax interest in such information. A change in the domestic law of Japan in 2003 has allowed Japan to agree to this paragraph by similarly providing the competent authority of Japan with the power to obtain information for the exchange of information pursuant to a tax treaty regardless of whether Japan has a domestic tax interest in such information.

Paragraph 5

As noted above in the discussion of paragraph 1, paragraph 5 confirms that Article 26 applies to taxes of every kind and description imposed by a Contracting State, and thus is not limited to the taxes referred to in Article 2 (Taxes Covered) or subparagraph (d) of paragraph 1 of Article (3) (General Definitions), insofar as the taxation thereunder is not contrary to the provisions of the Convention.

Treaty effective dates and termination in relation to exchange of information

A tax administration may seek information with respect to a year for which a treaty was in force after the treaty has been terminated. In such a case the ability of the other tax administration to act is limited. The treaty no longer provides authority for the tax administrations to exchange confidential information. They may only exchange information pursuant to domestic law.

The competent authority also may seek information under a treaty that is in force, but with respect to a year prior to the entry into force of the treaty. The scope of the competent authorities to address such a case is not constrained by the fact that a treaty was not in force when the transactions at issue occurred, and the competent authorities have available to them the full range of information exchange provisions afforded under this Article. Even though a prior treaty may have been in effect during the years in which the transaction at issue occurred, the exchange of information provisions of the current treaty apply.