Foreign tax claims cannot usually be pursued in the US courts.

Under a longstanding “revenue rule,” the courts of one country usually refuse to enforce tax judgments on which another country may be trying to collect. Thus, for example, if a US company was found to owe back taxes in Brazil, the US courts would not help the Brazilian government collect on the judgment in the United States.

The US Supreme Court appeared earlier this year to chip away at the revenue rule in a case called Pasquaranto v. United States. The case involved a defendant accused of smuggling liquor into Canada to avoid liquor taxes. The defendant argued that he could not be charged in the United States with using the interstate telephone lines to defraud Canada of property, since the case was in substance an effort to enforce a Canadian tax statute. The US Supreme Court disagreed. It said that Canada had been defrauded of “property” — its right to collect liquor taxes — and the theft of property is a crime. It allowed the prosecution to continue. The key for foreign countries trying to catch tax evaders seemed to be to find grounds to charge there was a US crime.

The case caused nervousness in some quarters.

However, in mid-September, a US appeals court in New York drew the line. The European Union, various individual countries in Europe and Colombia have been trying to collect taxes from US tobacco companies that these governments charge the companies avoided by helping smuggle cigarettes across their borders. The countries brought a civil suit in the US courts charging that the companies violated a US racketeering statute called RICO. The RICO statute allows victims to sue directly without waiting for the US government to bring charges.

The appeals court said the case was nothing more than an effort to collect tax revenue, and it blocked the suit. The case is European Community v. RJR Nabisco.

Keith Martin