Wednesday, February 10, 2016

Rocha on Balancing Rights and Power between State and Taxpayer

Sergio André Rocha recently posted a discussion on information, transparency, and the rights of taxpayer versus those of states, of interest. He argues that hard-fought rights needed to balance the unequal power between state and individual are being abandoned in the populist rush to protect the state against multinational tax dodging. Central to this argument is the claim that states are not hapless victims of ruthless tax managers and CEOs, rather they are the very architects of the system. He worries, I think, that suspending taxpayer rights to get at the big bad corporations will ultimately result in suspending rights for individuals, setting up the conditions for states to abuse their power. Here are a few excerpts (footnotes omitted):
There is no doubt that taxation is one of the areas where the balance between the legitimate exercise of Government power and the illegitimate violation of citizens’ rights is most challenging. 
...The transformation of the majority of modern States into Fiscal States – i.e., States that depend on tax collection to obtain the resources to fund all its activities – has changed the nature of the obligation to pay taxes. Some authors have begun to argue that there is a fundamental or constitutional obligation to pay taxes.
However, this line of thought, to which we subscribe, has been used to support an inversion of the whole structure of tax systems. Legal principles that are, at their core, protections of taxpayers against the State have been transformed into protections for the State against taxpayers. 
Let’s consider, for instance, the principle of transparency, which is at the center of modern constitutional, administrative, financial, and tax law. It is, first and foremost, a protection for the citizens against the State, establishing as a goal a state of affairs that guarantees full disclosure of a government’s actions to its citizens. 
The principle of transparency is not a one-way street. It also applies to citizens, requiring disclosure and combating opaque situations that prevent the due application of laws in general. Nevertheless, one should not forget: State and Government transparency come first. 
This maxim seems to have been forgotten by those now in charge of reshaping the international tax regime. 
...[OECD Director Pascal Saint-Amans recently] stated that, "Transparency, from my perspective, is transparency from the taxpayer to the Tax Administration, and maybe the other way around as well. ..."  
We should make no mistake: once legal principles have been mutilated and taxpayers’ rights overturned, effects will be felt by all taxpayers – individuals and legal entities alike. 
...Both the Global Forum’s and BEPS’ work share a common feature: they are aimed at optimizing States’ tax collection. The taxpayer – the citizen – is not in their focus. This is unacceptable. There is nothing more urgent than recovering the protagonist role of the taxpayer in taxation, where he rightfully belongs. This does not mean that their focus is completely misguided. It means that they need to find a way to achieve their rightful objectives without leaving taxpayers’ rights behind.
More at the link above; worth the read.

Monday, February 8, 2016

Parada: Legal Questions Surrounding FATCA-based Agreements in Europe

Leopoldo Parada has recently posted on SSRN an article published last summer in the World Tax Journal, entitled Intergovernmental Agreements and the Implementation of FATCA in Europe, of interest. Here is the abstract:
FATCA is a US domestic tax policy that requires Foreign Financial Institutions around the world to provide the IRS information regarding their US clients. Recognizing this extraterritorial characteristic and the troubles associated with it, the US Treasury Department developed the Intergovernmental Agreements (IGAs), which have served the double purpose of coordinating FATCA at an international level and influencing the new international standards on automatic exchange of information. Nevertheless, the IGAs are instruments that still need to be improved, at least in order to guarantee their successful implementation in Europe. The first part of this article explores the legal nature and the characteristic of the IGAs, concluding that they possess an asymmetriclegal nature that can lead to conflicts of interpretation. Likewise, it concludes that their contribution toward international transparency is incompatible with the existence of other instruments in Europe that seek the opposite goal of protecting bank secrecy, although it recognizes the importance of the most recent achievements at the European level in order to ensure a coherent and consistent system of automatic exchange of information. The second part of this article analyses three grey areas in the IGAs implementation process in Europe (i.e., “quoted Eurobonds” in the United Kingdom; group requests under the Switzerland-United States IGA, and the “coordination timing” provision of the IGA Model 1A), concluding that there is still work to be done in order for the IGAs to grant an acceptable level of reciprocity in practice.
I was not aware of this article when I wrote on a column last fall on this very same topic, in which I called the IGAs "Hybrid Tax Agreements" and pointed out the mess created by their unprecedented legal form as treaties to the rest of the world but administrative guidance in the United States. Parada's article goes further in the analysis and lays out a number of enduring difficulties. It seems to me that governments are simply ignoring these difficult issues as inconvenient barriers to desired outcomes and courts will face the same temptation. But I don't think these issues go away with time and gradual acceptance of FATCA as an institution. Instead, I think the issue will cause systemic problems going forward, both in terms of raising endless conflicts of law, and in terms of the precedent set for international tax relations by the failure of states to challenge US exceptionalism even as it tramples on law and legal process throughout the world.

Friday, February 5, 2016

Documenting the spread of OECD norms: Country by Country Reporting Map

Here is a world map showing status of implementation of the OECD's Country by Country Reporting regime; clicking on the flags gives a brief country status report. I'm not really sure how informative it is in that it is not all that useful to read simply that CBCR is being implemented but the implementation date is "unknown" in various countries, especially when the little flag masks real controversy surrounding the country's intentions.  Also I am not sure what to make of all the blank space--do the map's curators think these other countries are irrelevant to the inquiry? Even so, if the idea is that the map will one day be covered in green flags, and that the world with green flags is remarkably different than today's world with mostly red and yellow ones, watching the map evolve will be a fascinating study in the power of soft law.

Thursday, February 4, 2016

Global Tax 50

I'm honoured to have a spot on the Global Tax 50 list this year--International Tax Review's list of people and organizations that have had a global impact or influence on tax. European Competition Commissioner Margrethe Vestager tops the list this year, a fitting choice given the importance of the fiscal state aid investigations to the pace and direction of global tax reform efforts.

Wednesday, February 3, 2016

EU Report: give fiscal state aid recoveries to tax competition victims; sanction the culprits

In an annual report to the European Parliament on EU Competition Policy, MEP Werner Langen has proposed that the fiscal state aid rules be changed so that other EU states receive any recoveries. Thus, if Ireland loses in its investigation by the EC, it will have to recover some billions from Apple as punishment, and Langen proposes that Ireland--the "culprit"--not be allowed to keep the money. The Report:
Calls on the Commission to modify the existing rules without delay, in order to allow the amounts recovered following an infringement of EU tax-related State aid rules to be returned to the Member States which have suffered from an erosion of their tax bases, or to the EU budget, and not to the Member State which granted the illegal tax-related State aid, as is currently the case, as this rule provides an additional incentive for tax dodging;
Even if the proposal goes nowhere, one can understand why the sentiment would arise. When I first started looking at the fiscal state aid investigations, this element struck me as counter-intuitive: where a state has foregone revenue in order to lure business in contravention of the antitrust rules in the TFEU, the punishment is then to collect the revenues foregone. The narrative thus is that the state successfully cheated its EU neighbours of an opportunity to attract foreign investment and the punishment is a cash windfall.

This looks more like a punishment if you think the collection of revenues by the state will cause the investment to flee to other jurisdictions because the targeted state is not competitive but for the state aid. That might not seem likely for Ireland, both because Ireland's general corporate tax rate is still lower than much of Europe even without the extra padding of the state aid, and because the successful luring of Apple arguably had its intended effect, creating spillover effects that gave Ireland a first-mover advantage which now extends its attractiveness beyond the favourable tax climate. In that case the MEP's position on the cash windfall is sympathetic.

Even if it is sympathetic, it is hard to imagine redistributing Apple's foregone tax revenue to other EU members, when it is at least debatable whether any of the recipients hold out clean hands. Tax competition is so ubiquitous, so multifaceted, every victim is a culprit, too.

In a potentially even more problematic move, the report "[c]alls on the Commission to consider the introduction of sanctions, either against the state or the company involved, for serious cases of illegal State aid". The array of issues involved in sorting out that kind of power structure is vast.

On a side note, the report contains a long list of tax harmonization goals, and it includes an interesting call for the EC to get in on the multilateral exchange of tax rulings, which, via the OECD BEPS initiative, are to be automatically shared among countries under conditions of confidentiality, including restrictions as to their use for non-tax purposes. The report "Emphasises that the Commission must, as a matter of course, have access to data exchanged between tax authorities which are relevant in the context of competition law." I am not sure whether sharing tax rulings with the EC would be compatible with the OECD confidentiality framework.

A very provocative report that signals a growing amount of frustration with ongoing tax competition, and an increasing desire of some to use the fiscal state aid rules to stop it. Will be interesting to see where this takes the field.



Tuesday, January 26, 2016

Tax justice and human rights: call for essays on litigation strategies

I received the following notice by email, of interest:
Oxfam and the Tax Justice Network are joining together to launch a tax justice and human rights essay competition for legal students and professionals. With tax justice rising up the human rights agenda, we want to hear your ideas on how human rights law can be used in the fight against tax dodging.

Tax justice is a human rights issue

International tax dodging by multinational corporations and wealthy elites costs countries both rich and poor billions of dollars a year in lost revenues. This is undermining vital public services where they are most needed and further driving inequality at a time when the richest 62 people in the world have as much wealth as half the world's population.  Overall, substantial damage is done to human rights through the use of tax havens, the opacity of corporate accounting, the manipulation of trade prices and the disguising of beneficial ownership. But national and international fora may provide scope for redress.

What we want

We're inviting 3,500-word complaints to identify the plaintiffs, defendants, remedies sought, and arguments that are considered enforceable in an existing legal forum. We seek complaints that could form the basis of effective  advice to developing countries, or to groups of citizens in countries at any income level who have suffered, and want to know how they could best use law to protect their or their people's human rights in the face of tax injustice.
I have a few thoughts on this and I really look forward to seeing the results of the competition.

Saturday, January 23, 2016

Apple's private meeting to lobby the European commissioner in state aid investigation

The FT reports that Tim Cook took it upon himself to go and visit the European commissioner Margrethe Vestager, "to lobby the EU’s antitrust chief weeks before she is set to rule on a landmark case that could force the California-based technology company to pay billions in underpaid taxes to Ireland." Really? Let's see, this is a private meeting with a person who is in charge of deciding whether your company benefited from a scheme to violate an agreement among EU members on trade practices within the internal market.

Pretty clearly the Commissioner should have flatly refused such access. I don't know what the rules are for private parties to attempt to influence a sitting Commissioner in the midst of a procedure laid out in an international treaty that directly impacts one's pecuniary interests. Apple is not a party to a case; rather it is a beneficiary of something Ireland did, and that it the action being investigated. But Apple has had a chance to make its statements and explanations according to a process. According to the EC, the formal investigation procedure accords an opportunity for input from all those that may be affected by its investigation:
The Commission is obliged to open a formal investigation under Article 108(2) TFEU where it has serious doubts about the aid's compatibility with EU State aid rules, or where it faces procedural difficulties in obtaining the necessary information. 
The decision to initiate this procedure is sent to the relevant Member State. It summarises the factual and legal bases for the investigation and includes the Commission's preliminary assessment, outlining any doubts as to the measure's compatibility with EU state aid rules. The decision is published in the EU's Official Journal, and Member States and interested third parties have one month from the date of publication to submit comments. The Member State concerned is in turn invited to comment on observations submitted by interested parties.
I have not seen comments submitted by Apple according to this procedure. It seems to me that the private meeting has an appearance of impropriety. First, it was private so it does not form part of a record of information reviewed in the course of the investigation. Neither party has given any public comment regarding what was discussed. Having a private meeting deprived Ireland of its role in responding to observations submitted by interested parties, as described above. The conversation took place for the specific purpose of influencing a decision. The conversation raises the question of whether others have also private meetings, also trying to influence the commissioner beyond the procedures laid out for investigations.

I note that "All decisions and procedural conduct of the Commission are subject to review by the General Court and ultimately by the ECJ." The Commissioner will not likely seek review of its own decision. I do not know whether other member states could seek such a review. It seems most likely that Ireland could seek a review, which it would only do if the decision was unfavorable. If that were to happen, would Tim Cook also have private meetings with the judges of the ECJ?

I should hope not.

Monday, January 18, 2016

Uncle Sam Wants...Who? At UBC Law This Week

This week I will be in Vancouver to present a paper at the UBC Allard School of Law. The paper, "Uncle Sam Wants...Who? A Global Perspective on Citizenship Taxation," is now available in draft form on SSRN. Here is the abstract:
Across the globe, banks are flagging accounts with indicia indicating their owners may be “US Persons,” making it possible for the United States to enforce its taxation of nonresident citizens extraterritorially for the first time in history. The indicia method constitutes a mining expedition for US citizens carried out by foreign banks and governments. Establishing a tax jurisdiction in this manner is unprecedented and has significant practical and normative consequences. In the case of so-called “accidental Americans,” it violates one of the most fundamental and universally- acknowledged tenets of taxpayer rights, namely, the right to be informed about what the law requires. Third party indicia-searching should be universally rejected as a means of identifying a taxpayer population. Instead, the United States itself is responsible for cataloguing, informing, and educating its global population of taxpayers. Those who don’t belong in the system should be allowed to opt out without cost.
I welcome comments on this work in progress.

Apple may owe $8bn in back taxes after European commission ruling

I have been following the EU state aid cases with particular attention to Apple and its SEC disclosure involving its sweetheart deal in Ireland. A recent story in the Guardian suggests the amounts at stake could be significant, even if not by Apple's standards:
The European commission’s recent ruling against tax breaks for multinational corporations in Belgium strongly suggests that the tech behemoth could be subject to a hefty bill when the open investigation against its activities in Ireland concludes. 
...The commission found that Starbucks owed Dutch authorities upwards of $22m, and a ruling from Belgium this week determined that 35 companies across the EU owe the equivalent of $760m in back taxes. 
Apple has already said it would appeal against a ruling against the company; CEO Tim Cook called the investigation “political crap” in a recent 60 Minutes interview. “There is no truth behind it,” he said. “Apple pays every tax dollar we owe.” 
This is not the first time Apple has been investigated for its accounting practices in Ireland. Executives including Cook appeared before the US Senate in 2013 to testify about whether it had renegotiated Ireland’s 12.5% corporate tax rate down to 2%. The company denied any wrongdoing. Matt Larson, litigation analyst for Bloomberg Intelligence, calculates that the company would owe $8.02bn at that rate....
$8 billion sounds like a lot of money until considered in the reflection of its $200 Billion cash stash, which is being held offshore pending US international tax reform as openly advocated by Tim Cook.

Still, the figure is not nothing and it is pretty far off what Apple intimated to investors back in April of 2015:
As of March 28, 2015, the Company recorded gross unrecognized tax benefits of $4.6 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $844 million and $630 million of gross interest and penalties accrued as of March 28, 2015 and September 27, 2014, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact. 
That language was new in the April 2015 filing, but the latest Apple filing reverts to the more general message found in prior filings:
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. 
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material. 
The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition, operating results and cash flows could be adversely affected.
I continue to wonder whether there will be shareholder litigation (more than nuisance suits) in the event of a major clawback by the EU.

Monday, December 14, 2015

Update to Canada's FATCA litigation

The grassroots group responsible for launching the FATCA-based litigation in Canada has issued a public call for witnesses. They are looking for "a Canadian who has been somehow harmed by this FATCA legislation, are interested in helping out by becoming a Witness in our lawsuit, and are willing to have your affidavit statements and name go public." The group is up front about the risks involved in coming forward: being a witness is to expose oneself to public scrutiny, some of which is decidedly hostile, as well as of course the risk of ruinous consequences deriving from US tax rules as they apply to noncompliant nonresident persons' lives.

Tuesday, December 8, 2015

Understanding the Accidental American: Tina's Story

Tax Analysts has published my talk on taxpayer rights and citizenship-based taxation as enforced via FATCA, which I gave in November at the International Conference on Taxpayer Rights in Washington DC, organized by National Taxpayer Advocate Nina Olson. Tax Analysts' content is normally gated but they have made this column available on their free site.