High-Tax Nations Under Increasing Pressure

OECD_logo.svgThe Organization for Economic Co-operation and Development (OECD) was initially established to promote economic progress and world trade. It has now become a front organization committed to protecting the high-tax inefficient elements of the First World Economies from economic competition.

Twenty years ago the OECD took aim at “tax havens” that provide(d) tax-free and private banking for the wealthy businesses and individuals of the world. This effort has largely been successful by dishonestly painting “tax havens” as facilitators of drug cartels and terrorist organizations. As such the ability to freely move your money around the world has been severely curtailed, at least among the members of the OECD nations.

Now the OECD nations have taken it upon themselves to stamp out “tax competition” where ever it may be found. Tax competition is when one jurisdiction competes with another jurisdiction for business by lowering or simplifying the tax rate. For the high-tax rate nations who control the OECD this is a grave danger. They have already taxed their nations into economic stagnation with low growth rates and high unemployment. They have bought off restive populations with expensive social programs that provide cradle to grave security, but give little hope of jobs or economic advancement. Up and coming nations that try to attract industry by creating a lower and more efficient tax climate for business are real threats.

It remains to be seen how successful these efforts will be. Attacking the “tax havens” was a much easier project since most of them were small economically struggling Third World nations trying to us private banking, beneficial legal systems, and liberal financial service regulations to bootstrap themselves out of poverty. Such countries were relatively easy to intimidate into compliance. Even Switzerland was forced to dramatically adjust its age-old banking rules in order to comply with its neighbors.

However, the OECD seems to be having less success in the area of “tax competition”. In Europe, the heart of OECD darkness, countries are modernizing their tax codes in order to provide their own citizens and foreign businesses better opportunities to compete. Ireland, Latvia, Estonia, Hungary, etc. have all established lower flat rate tax systems that have increased the efficiency of the tax system making these countries more attractive for foreign investors. Russia has recently implemented a broad ranging tax reform that lowered the tax rate to a flat 12%. In most cases, as the tax rates go down and the tax codes are simplified, the tax receipts actually go up. Companies spend less money trying to avoid taxes, and instead invest their time and efforts in making more money which in turn creates more tax revenue.

Attacking impoverished Third World countries who tried to become “tax havens” is one thing. “Tax Competition” is a much harder concept to stamp out as is seen even among the OECD nations themselves.

The Attorney-Client Privilege

I usually write about Asset Protection, Tax Planning and Financial Privacy, so I thought I would discuss a somewhat related topic; the Attorney-Client Privilege. The Attorney-Client Privilege is a legal concept that protects certain communications between a client and an attorney and keeps those communications confidential. This privilege is “owned” by the client, and it protects the communications even if the client is only a prospective client.

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For a communication to be considered privileged (that is protected from disclosure) three (3) things must be established:

  1. The holder of the privilege is a client or a prospective client;
  2. The communication is made confidentially with a licensed attorney or subordinate; and
  3. The communication is made with the intent securing legal advice and/or representation.

This privilege is one of the most important concepts in Western legal studies. However, it is also one of the most misunderstood issues even among lawyers.

As with all rules, it is in the exceptions that we find the heart of the matter.

The communication must be with an attorney. There is no such thing as an Accountant-Client Privilege. If you describe a troubling situation regarding past tax returns with an attorney, the attorney will most likely be required to keep the communications confidential. Even upon subpoena the attorney would be required to refuse to answer questions. However, an accountant in the same situation may be required to report what the client said to the authorities as the accountant’s foremost duty is to the taxing authority.

A communication is only privileged if it was intended to be confidential. Speaking in front of 3rd parties destroys the privilege, so attorneys and clients should avoid those elevator conversations. No one wants to hear what you are saying anyway!

The communication is privileged, not the facts. So if you toss a bloody knife onto your attorney’s desk and ask, “What should I do if I just killed my wife with that knife?” the question is privileged as is the possible answer, but the fact that you had a bloody knife in your possession is not protected.

The privilege does not apply in the face of an ongoing or prospective criminal activity or conspiracy. Telling your attorney about your criminal activities in the past may be protected, but if you describe how you intend to continue with such activities the attorney may have a duty to the courts to inform the authorities. A very troubling situation to be in if you are an attorney. If the attorney is not careful he may be considered an accessory or even a co-conspirator to a crime if he fails to disclose the information, or he may be held in violation of his duty to the client if he discloses it inappropriately.

The privilege can also be waived by the client. Remember, the privilege is “owned” by the client. If the client chooses to disclose the content of the communication that is privileged, well it is not privileged anymore. Now this raises an interesting issue (at least to me): to what degree does a partial disclosure of privileged communications waive the remaining undisclosed communications? Under some rules partial disclosure by a client waives the entire privilege, and under other rules partial disclosure only serves as a narrow waiver regarding the exact facts that were disclosed. For instance, let us say that the client files a grievance/complaint against the lawyer. Obviously, the lawyer has the right to defend himself. In Texas, this waiver of privilege is limited to those communications that serve to defend the attorney’s interests, and does not serve to waive the privilege in regards to other forums. However, if the client discloses confidential communications in open court before the Federal Courts, this disclosure may result in a broad and universal waiver of ALL communications between the client and the attorney. OUCH!

The Attorney-Client Privilege is a powerful right that gives people the ability to speak candidly to their attorney even if they do not end up retaining the attorney. But it is not as simple as some believe, and it certainly does not cover everything you say to an attorney. As always, caution is the rule!