Foreign Taxes and Bankruptcy
In the Chapter 11 bankruptcy case In re: BearingPoint, Inc., et al., Chapter 11, Debtors, the bankruptcy court ruled that the Republic of Indonesia could not collect on taxes owed using the U.S. bankruptcy court. The Republic of Indonesia filed two proofs of claim in the BearingPoint bankruptcy, one for $389,000 and the other for $3.5 million. However the bankruptcy judge said that even if the debtor in the Chapter 11 bankruptcy owed the taxes, he could not collect on behalf of the foreign entity. Citing what's known as the Revenue Rule, the bankruptcy judge said that he could not enforce tax judgments of a foreign country in a U.S. bankruptcy court.
The Revenue Rule is a longstanding common law doctrine providing that courts of one sovereign will not enforce final tax judgments or unadjudicated tax claims of other sovereigns. It has been defended on several grounds, including respect for sovereignty, concern for judicial role and competence, and separation of powers. See Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 109 (2d Cir. 2001).
The bankruptcy judge also went on to emphasize that he was not refusing to collect the tax debt simply because it was Indonesia asking for payment, noting that the same rule has been enforced when dealing with taxes owed by debtors to Canada who have sought bankruptcy protection in the U.S. It's important to note that the bankruptcy judge does not discharge the debt simply because it is coming from the foreign state; but he also does not allow the foreign taxing authority to receive payments from the bankruptcy estate once a repayment plan has been established in the Chapter 11 bankruptcy.