Point & Counterpoint: Ethical Issues in Cross-Border Taxation
INTRODUCTION: In the globalized economy and business environment of today, tax practitioners are regularly called upon to assist in planning transactions that cross national borders. And more and more frequently, therefore, U.S. tax practitioners must be familiar with foreign law. But what happens when a client proposes to take an action that might violate some rule of foreign law? Does the U.S. practitioner have an ethical obligation to investigate, or to offer advice concerning that rule? Should the U.S. lawyer be sanctioned for failing to prevent a fraudulent violation of the foreign law? And what practical guidance can we give to clients in this situation?
The contributors to this edition’s Point-Counterpoint offer some initial thoughts on a U.S. practitioner’s obligations, if any, to respect or follow foreign law. First, Joan Arnold of Pepper Hamilton LLP in Philadelphia, PA, suggests that attorneys have an ethical obligation to not engage in the fraudulent avoidance of foreign law and can be sanctioned in the U.S. for so doing. David Rosenbloom of Caplin & Drysdale, Chartered in Washington, DC, replies that foreign law is beyond the scope of a U.S. lawyer’s practice and that U.S. ethical principles may at any rate conflict with the rules of foreign law.
This is a potentially enormous topic, and our contributors make no pretense that they have exhaustively considered every issue. The NewsQuarterly’s editors hope, however, that the essays below will stimulate further analysis of this issue, whether near the water cooler, in the unchroom, or by written replies. — Chris Rizek
POINT: Ethical Obligations Extend to Foreign Law
The question to be addressed sounds so simple: What are the ethical constraints placed on a U.S. tax lawyer involved in a cross-border practice? More specifically, may a U.S. tax lawyer be sanctioned for activities that do not impact the U.S. fisc, but that are improper under the tax laws of another jurisdiction? For tax lawyers involved in multi-jurisdictional practices, this issue arises all the time, and their answers are all across the board. Often the bottom line is that the lawyers involved simply do not want to take on the reputational risk of being engaged in transactions that may be questionable under foreign law. But, that is by no means the approach of all lawyers, and it’s time to address it directly, under our rules of conduct.
The debate focuses on U.S. tax lawyers involved in transactions that implicate another country’s tax laws, as well as U.S. federal and (when we are being complete) U.S. state and local tax laws. But there’s an error in the question. The question presumes that there are “U.S.” lawyers. From an ethical perspective I think there is no such thing as a “U.S.” lawyer. There are Pennsylvania lawyers, District of Columbia lawyers, New York lawyers, etc., but there is no such thing as a “U.S.” lawyer. We are admitted to the bar and regulated by a particular state or the District of Columbia. Compare that to a lawyer admitted to the bar in France, or England. She is truly a French avocat, or a British barrister.
What’s the impact of this not-sostartling revelation on the question raised? It puts the review of the ethical rules in context. Some lawyers will take the position that because we are admitted state by a state, a lawyer’s ethical allegiance is to the substantive laws of that state. That is, some will say that if the activity doesn’t offend a law in the state of admission, it is not the basis for sanction by that jurisdiction. Perhaps that has some appeal when you are considering non-U.S. activities, but after reflection, I don’t see how it can be the right answer.
Would anyone claim that a Pennsylvania lawyer could not be sanctioned in Pennsylvania for assisting a client to commit fraudulent behavior in New York? Rule 1.2 of the Model Rules of Professional Conduct (2003) provides in part that a lawyer shall not assist a client in conduct the lawyer knows is fraudulent. It does not go on to say “in the state of admission,” and the commentary specifically notes that the obligation applies whether or not the defrauded party is a party to the transaction. So, for instance, a tax lawyer must not participate in a transaction to effectuate fraudulent avoidance of tax liability. That rule is not limited to “tax liability in the state of admission.” The case law and the actions of the various state disciplinary boards make it very clear that a Pennsylvania lawyer may be sanctioned in Pennsylvania for activities that occur in another state.
Moving the analysis up a notch, assume a lawyer subject to the Model Rules assists a client in the fraudulent avoidance of U.S. federal tax. As that would not be a violation of the laws of the state of admission, would that state be able to sanction the lawyer? As noted above, the commentary to the Model Rules clearly indicates that such sanctions are appropriate. The cases and rulings under the states I’ve reviewed would all take the same position, and impose sanctions.
What then is the difference if the lawyer’s activities assist in the fraudulent avoidance of a foreign country’s tax? If the state of admission can sanction for inappropriate activities with respect to another state’s taxes, or with respect to federal taxes, is there a difference when it comes to non-U.S. taxes? I cannot construct a rational basis for drawing such a distinction, and I think the lawyer’s state of admission has the right to impose sanctions for such behavior.
This position is informed by the outcome of a case in which a lawyer was disbarred for activities that involved foreign law. In The Matter of Application for the Discipline of Thomas K. Scallen, 260 N.W. 2d 834 (Minn. 1978). In Scallen, Mr. Scallen was a licensed Minnesota lawyer who was appealing his disbarment, which was imposed on the following facts. Mr. Scallen oversaw the production of a prospectus through which his company was going to issue debt in Canada. The prospectus was governed by Canadian securities rules. A court in Canada found Mr. Scallen guilty of knowingly making a false statement in the prospectus.
Although it modified the discipline imposed, from disbarment to indefinite suspension, the Minnesota court upheld the right of the state to impose sanctions. It specifically noted that its disciplinary rule 1-102, which prohibits a lawyer from engaging in conduct involving dishonesty, fraud, deceit or misrepresentation, is not restricted by political or geographic boundaries. Rather, the disciplinary rules regulate the conduct of a Minnesota lawyer anywhere in the world.
Mr. Scallen also argued that because the commission of a foreign crime is not expressly mentioned in the disciplinary rules, he should not be disciplined under the general ethical duties established by disciplinary rule 1-102. The court summarily dispensed with this argument, noting that they were entirely unimpressed with it. Instead, the court pointed out that the ethical rules govern the activities of all lawyers who have chosen to avail themselves of a Minnesota license, and express an expectation that the lawyer will comport himself or herself in accordance with the principles and aspirations set forth in the rules. It is not necessary to list all of the things one may not do, said the court; it is enough that the action at issue involved conduct that was prohibited under the general rules.
The court’s finding in Scallen is consistent with the analysis I follow in reaching my conclusion: There is no rational basis for saying that a state may impose sanctions for actions in another state, or for violations that involve federal law, but not allow sanctions to be brought for violations that involve non-U.S. tax law. The clarity (at least to me) of my conclusion notwithstanding, I think it is just the tip of the iceberg. From here the question is, under what circumstances should the jurisdiction of admission exercise its right to sanction? Three questions immediately arise:
- What is a lawyer’s duty to investigate whether the client’s plan would result in a violation of non-U.S. tax law?
- What if the activity would not constitute fraudulent activity under U.S. tax rules, but might still be a technical violation of foreign law? A good example would involve foreign exchange violations, which are not U.S. issues since we have no foreign exchange rules.
- What if under the disciplinary rules applicable to lawyers in the non-U.S. jurisdiction, there is no prohibition against assisting a client in tax avoidance?
A thorough analysis of each one of those questions can easily fill volumes, and I’m about out of space, but I offer the following thoughts to prompt readers’ consideration of these questions:
A lawyer must provide competent representation, which requires the legal knowledge reasonably necessary for the representation. But a lawyer is allowed to limit the scope of representation if the limitation is reasonable and the client gives informed consent. At least under the Model Rules, a lawyer must know or reasonably should know that a client expects assistance in a fraudulent action before the lawyer can be sanctioned. So, if the client agrees that non-U.S. tax advice is beyond the scope of the U.S. tax lawyer’s responsibility, may the lawyer proceed, with the proverbial blinders on? What does “reasonably should know” mean? What if the lawyer is sufficiently experienced to know there is a problem, but is advised by the client that it’s not within the scope of the representation?
In the disciplinary proceeding in Scallen, the judge at the trial level noted that the facts leading to the conviction in Canada for filing a false prospectus would support a similar result under Minnesota law. Does this mean that if the facts and legal conclusions had been different, the lawyer could not be sanctioned? That seems contrary to the goals of the Model Rules, at least in this type of circumstance, and would dramatically complicate my conclusion.
The third question—What if a lawyer in a non-U.S. jurisdiction would not be subject to disciplinary sanctions in that jurisdiction, should the lawyer’s U.S. state of admission sanction?—raises the full panoply of similar issues that are being considered as we move to multijurisdictional practice in the United States. Consider the 2003 version of Model Rule 8.5. In choosing which ethical rules to apply, other than in litigation, should the rules of the jurisdiction in which the attorney’s conduct occurred govern, or should it be the rules of the jurisdiction in which the predominant effect of the conduct is realized that apply? Under this provision, if the predominant effect of the conduct is in country X, and country X would not impose sanctions on its lawyers for assisting in the work, then the lawyer’s state of admission would also not be allowed to impose sanctions. According to the commentary, this choice of law provision applies to lawyers in transnational practices unless international law, trustees, or other agreements between competent regulatory authorities in the affected jurisdiction provide otherwise.
Finally, I would add that my comments are restricted to the ethical sanction that may be imposed by a lawyer’s jurisdiction of admission. All tax lawyers are also subject to discipline under Circular 230, which contains Treasury’s standards for practice. I do not find anything in Circular 230 that addresses whether the Service may sanction a practitioner for activities that assist in the fraudulent avoidance of non-U.S. tax. I find that a bit curious, as U.S. tax rules have never shied away from addressing U.S. taxpayer behavior in non-U.S. jurisdictions (what immediately comes to mind is the foreign tax credit disallowance related to violations of the Foreign Corrupt Practices Act, and on a more subtle note the branch rule in foreign base company sales income in Subpart F). In my informal (i.e., nonattributed and non-binding) conversations with personnel in the Service’s Office of Practice, I confirmed that the focus in Circular 230 is practice before the Service and before U.S. courts; Circular 230 is not intended to provide sanctions for non-U.S. activities.
Counterpoint can be read in the pdf version.
Joan C. Arnold
