Monday, June 27, 2016

Corporate Tax for the 21st Century

I'm in Oxford today for the Said Business School's annual summer conference, staying for the academic conference the remainder of the week. Here is today's program; see comments on twitter with #ct21

09:00-09:30
09:30-11:30
The need for reform, and current policy proposals
Michael Devereux, Oxford University Centre for Business Taxation
Welcome and introduction
Chair: John Vella, Oxford University Centre for Business Taxation
Michael Graetz, Columbia University and Yale University
The need for reform
Michael Devereux, Oxford University Centre for Business Taxation
Principles for reform
Wolfgang Schön, Max Planck Institute for Tax Law and Public Finance, Munich
Reforms on the current political agenda
Reuven Avi-Yonah, University of Michigan
Valeska Gronert, European Commission
Discussion
11:30-12:00Coffee
12:00-13:30
Residual Profit Allocation Proposal
Chair: Wolfgang Schön, Max Planck Institute for Tax Law and Public Finance, Munich
Paul Oosterhuis, Skadden Arps LLP
Michael Keen, International Monetary Fund
Jennifer Blouin, Wharton Business School, University of Pennsylvania
Steve Edge, Slaughter and May
Discussion
13:30-14:30Lunch
14:30-15:45
Destination Based Cash Flow Tax Proposal, and developing countries
Chair: Judith Freedman, University of Oxford
Michael Devereux, Oxford University Centre for Business Taxation
Rachel Griffith, Institute for Fiscal Studies and University of Manchester
Malcolm Gammie QC, One Essex Court
Discussion
15:45-16:15Coffee
16:15-17:30
Panel Discussion
Chair: Michael Devereux, Oxford University Centre for Business Taxation (Chair)
Ian Brimicombe, AstraZeneca Plc
Alex Cobham, Tax Justice Network
Michael Graetz, Columbia University and Yale University
Rt Hon Dame Margaret Hodge MBE MP, House of Commons
Vanessa Houlder, Financial Times
John Kay, Financial Times

Sunday, June 26, 2016

Tax Avoidance in a World of Aggressive Tax States

I finally got around to posting the presentation I made last month at the Journal of Tax Administration Conference on "The Changing Shape of Tax Avoidance." The paper upon which this presentation is based is still in progress, I'll post a draft soon. I would be very happy to have comments on the ideas I am developing in this project.

Wednesday, June 8, 2016

OECD seeking "technical" input from the public on "multilateral instrument" to modify tax treaties

The OECD recently released what it calls a "public discussion draft" in connection with its work on the multilateral instrument (MLI), and seeks public input until June 30. As I explained in a post a  few months ago, the MLI is be used to 'modify' all existing tax treaties in force among signatory countries to conform to BEPS standards and recommendations. However, the released document is not actually a discussion draft of the MLI--there are no terms to be reviewed. The drafting committee, which currently includes 96 members (OECD members and "BEPS Associates"), only met for the first time two weeks ago so this is decidedly not a draft of substantive provisions to be debated in the public discourse. No, that would be chaos and contrary to the plan:
"the draft text of the multilateral instrument is the subject of intergovernmental discussions in a confidential setting."
Instead it is in effect a crowdsourced, and very carefully framed, issue-spotting exercise. The document consists of three pages: page one is the BEPS narrative (why the OECD undertook this project and what has happened so far). Page two describes what BEPS changes will be covered in the MLI once drafted. Page three lays out three "technical issues" the OECD faces in drafting the MLI, and finally gives the call for input. The discussion is very brief and in OECD-passive-speak so it's almost comical to summarize but here are the three issues, as I understand them:
  1. the MLI must be able to modify existing treaties, and this will be done with "compatibility clauses."
  2. the MLI will be broadly worded so will require commentary and maybe explanatory notes for consistent interpretation
  3. the MLI will be in French and English but will interpret thousands of treaties written in different languages.
These are all very interesting international law issues and not technical tax law issues at all. They are also clear expressions of intent to cement the OECD's role as the principal curator of international tax norms. This is especially clear in respect of point 2, because consistent interpretation means that the OECD commentary and "guidance" must harden ("ossify") into more persuasive and ultimately binding legal authority. For a discussion of what that implies for the rule of law, see this old thing I wrote a long time ago.

Point 1 raises the issue that seems to me most difficult in terms of the transition to complete OECD domination of global tax policy: I am still not sure how the MLI is supposed to work on top of a network of individualized and distinct bilateral agreements among sovereign nations. The OECD says "If undertaken on a treaty-by-treaty basis, the sheer number of treaties in effect would make such a process very lengthy." Indeed it would but as a matter of law in many countries, revising an existing international agreement requires another international agreement that is ratified in the same manner as the original, which appears to require the signatories to come to a meeting of the minds as to the terms that govern their unique relationship. The OECD says that distinguished experts have carefully considered the public international law questions at hand. But I haven't seen any study and I don't quite understand how you get a coherent international tax law regime in anything like a "quick" process. The OECD's implied answer in point 1 only raises another question for me: what is a compatibility clause? Is this a well-understood mechanism in play in other areas of international law? Can I get a precedent somewhere to anticipate where we are going with this?

Further, is the MLI going to be a matchmaking exercise in practice? If country A agrees to revisions 1 through 6 as to countries B and C, but only revision 5 as to country D, and country B agrees to revisions 1-3 for countries A and D but only 5 and 6 for C, and countries C and D agree in principle but never ratify anything, then what, exactly, are the agreements between and among these countries?

I am also not sure what the agreement matrix looks like when there are multiple standards for several of the BEPS items.  Notably the "prevent treaty shopping" minimum standard provides multiple choices for defending treaties against "abuse": a principal purpose test, a limitation on benefits provision, an anti-conduit provision, or some combination. May each of countries A, B, C, and D choose a different combination vis a vis each of the others? It is difficult to see convergence. At the panel I attended in Montreal a couple of weeks ago this was a topic of vigorous discussion. The more I think about this, the increasingly uncertain I become regarding how this is going to work out in practice.

Any thoughts on these observations are welcome as I develop my thinking on these issues. And if you are submitting comments, please note:
 Comments and input should be submitted by 30 June 2016 at the latest, and should be sent by email to multilateralinstrument@oecd.org in Word format (in order to facilitate their distribution to government officials). Please note that all comments received will be made publicly available. ... Persons and organisations who submit comments on this document are invited to indicate whether they wish to speak in support of their comments at a public consultation meeting that is scheduled to be held in Paris at the OECD Conference Centre on 7 July 2016 beginning at 10.00 am.






Call for expressions of interest: Moot court on international taxation of digital services

I will be presiding over a moot at the annual conference of the International Fiscal Association this fall in Madrid. The topic as described below is vague, but suffice to say that recent news stories are driving (ahem) the topic forward. The moot is now open to expressions of interest by prospective participants who meet the eligibility requirements described below. Here is the info:


Young IFA Network Moot Court – Madrid, September 28, 2016
Expressions of Interest due June 15, 2016

All members of the Young IFA Network are invited to submit an expression of interest as a moot court speaker at the YIN Moot Court during the 70th Congress of the International Fiscal Association in Madrid, Spain.

YIN at IFA
During recent Congresses in Amsterdam, Kyoto, Brussels, Vancouver, Rome, Paris, Boston, Copenhagen, Mumbai and Basel, the Young IFA Network (YIN) organised a Moot Court.

YIN Moot Court Format
The YIN Moot Court will be held at the Conference Venue on Wednesday, September 28, 2016 from 3:15 pm to 4:45 pm. An acting Tax Judge (Allison Christians, Canada) will preside over a hypothetical tax case relating to digital services to be argued by young tax academics or professionals, one side representing the Tax Authorities and the other side representing the Taxpayer. At the end of the arguments, the acting Tax Judge will render her judgment on the tax case. The fact pattern for the case, the legal issues involved, and a summary of the case will be made available to the delegates before the start of the Moot Court.

Expression of Interest for Speakers at the Moot Court
YIN members that are interested in being one of the speakers at the Moot Court are asked to express their interest to Sanjay Iyer (sanjay@iyerpractice.com) on or before June 15, 2016 along with a brief profile/CV that shall assist the Committee in the selection of the speaker.
Eligibility requirements:
1.     YIN Member of an IFA branch
2.     40 years of age or below
3.     Registered for the 2016 Congress in Madrid, Spain.         

Thursday, May 26, 2016

What does it mean to implement BEPS?

Today I took part in a panel discussing the topic of "Life After BEPS," at which I laid out the three categories of BEPS commitments in three slides. These categories are "minimum standards" (there are four), "recommendations" (there are several) and "best practices" (there are many). These are defined terms in BEPS world but it is already fascinating that there is some category blurring going on in the discourse surrounding implementation. I'm interested in that blurring because of course we are in the midst of a major cycle of law- and norm-making in international tax, and "what countries actually agreed upon" is really going to matter pretty soon, as the difference between convergence and divergence depends on a meeting of the minds at the level of rulemaking. This will play out through conflict and resolution at the domestic and international level in the form of both hard law (multilateral and bilateral agreements and domestic law changes) and soft law (OECD models, guidelines, and peer monitoring). In case they are of interest, I thought I would post my three slides here.




Tuesday, May 17, 2016

Kill Switches in the New US Model Tax Treaty

I posted previously on the new US Model, which was released in February of this year; I've now posted my article, co-written with McGill PhD student Alex Ezenagu, on the "kill switch" provisions in the new model. These provisions are found in the new articles and definitions involving special tax regimes and subsequent law changes, which would allow countries to switch on and off specified treaty benefits if their treaty partners get too aggressive in the ongoing race to the bottom on tax.

Here is the abstract:
The new US model income tax treaty contains an unusual addition: mechanisms for the parties to unilaterally override the negotiated treaty rates in specified circumstances. Previewed last year in proposed form—a first for Treasury—these new mechanisms work as kill-switches, partially terminating the treaty as to one or both treaty partners. The idea is to forestall a more problematic outcome, such as an enduring breach of one of the parties’ expectations, or the opposite, a complete termination of all the treaty terms in the face of such a breach. Yet embedding a kill-switch in a treaty creates distinct legal, procedural, and political pressures in the tax-treaty relationship that implicate treaty negotiation, ratification, interpretation, and dispute resolution. Kill-switches also communicate a defensive tenor in the tax treaty relationships among many countries. This Article analyzes the new kill-switch provisions and concludes that their introduction in the U.S. Model reflects the steady deterioration of tax treaties from essentially diplomatic documents premised on the good faith of the parties to detailed contracts drafted in anticipation of the opposite.
It has long been assumed that tax treaties are uncontroversially technical agreements that no one outside of tax circles cares about or pays attention to--including, it seems, all too many lawmakers tasked with adopting these agreements into law. But with the US Treasury and the EU competition commissioner trading barbs over the fence about what seems right or fair when it comes to global tax competition and coordination, this assumption might be changing. The consensus built up over decades by OECD nations is under stress as the pressure for coherence in the international tax realm increases. Treasury released these provisions in draft from last fall, expressly in order to influence the OECD's work on BEPS. Now that the provisions are in the model, it remains to be seen how they will play out as BEPS, currently at a mid-cycle of norm making, moves from the articulation of principles to the implementation phase. This article doesn't provide answers or predictions about the future but it examines one aspect of the ongoing contestation and tries to situate it in historical and contemporary terms.

Monday, May 16, 2016

Tax Coop 2016: "Winning the Tax Wars" May 23-24

Tax Coop and the World Bank are hosting a conference on tax competition and cooperation to be held in Washington DC on May 23-24. As last year, I've constructed the debate, which this year will be livestreamed on May 23 at 16:15 EST.  I'll post the link when I have that information. At last year's conference, Dan Mitchell (Cato) and Richard Murphy (TJN) put corporate taxation on trial, debating the continuing viability of this tax in the face of technological innovation and economic globalization. This year's debaters are Alison Holder of ActionAid and Veronique de Rugy of the Mercatus Center at George Mason University.

They will debate the following:


This question will be explored through a series of three resolutions, as follows:
  1. First, be it resolved that: tax competition harms developing countries by reducing their capability to raise fiscal revenue to finance physical and social infrastructure needed for economic growth and social inclusion.
  2. Second, be it resolved that: tax competition increases developing countries’ reliance on foreign aid, making them more vulnerable to aid volatility. 
  3. Third, be it resolved that: tax competition aggravates existing income disparities between developed and developing countries.
Arguing the “affirming side” of each resolution will be Alison Holder of ActionAid. Arguing the “opposing side” of each resolution will be Veronique de Rugy of the Mercatus Center at George Mason University. Evidence from all jurisdictions will be admissible. The emphasis will be on persuasive, clear, and logical argumentation. The debate will proceed in four rounds and will be moderated and judged by Louise Otis of McGill University and Jay Rosengard of Harvard University. Last year's debate was definitely a highlight of the conference and I look forward to hosting Ms. Holder and Ms. DeRugy for this year's event. 

The full conference program features a slate of distinguished speakers from around the world and across public, private, and academic sectors.  Registration is free; additional program and speaker information available here and you can follow @taxCoop on twitter for updates and links. 







Wednesday, May 11, 2016

Citizenship-based Taxation and FATCA

I am occasionally asked for a list of the things I've written or presented about FATCA and citizenship-based taxation, and decided I may as well post it here. I have a newer article on the adoption of the IGA in Canada, will post that soon and add to this list.

On the personal impact of CBT/FATCA:


Providing Legal Analysis of FATCA and the IGAs:
Videos and Podcasts:






Tuesday, May 10, 2016

Tax competition redux: the Kansas-Missouri tug-of-war

Image result for tug of war
Although I dislike the use of quasi-military imagery to describe tax competition, I think "tug-of-war" is more commonly used than "rope-pulling contest" and this is, I think, a good image to describe the phenomenon. This Planet Money podcast brilliantly captures the rope-pulling contest that characterizes tax competition among US states, which is a version of the same game playing out among the nations of the world. It should not escape attention that the taxes at stake in this story are those on property, but the two states are also involved in a race to the bottom on corporate tax--Kansas was featured in a prior Planet Money podcast (The Kansas Experiment) because its Governor is a true believer in a Laffer curve that tips at single-digits. 

The ending to this story is only surprising to those not paying attention to tax competition. Like any good rope-pulling contest, it ends with most of the people laying in the mud or on each other, and a short-lived victory for the last ones standing since there is always someone else willing to pick up the rope and tug again.





Thursday, May 5, 2016

Azémar and Dharmapala on Tax Sparing and Foreign Aid

Céline Azémar  and Dhammika Dharmapala recently posted "Tax Sparing, FDI, and Foreign Aid: Evidence from Territorial Tax Reforms," of interest. Tax sparing refers to the intentional exemption of income from tax by two countries working cooperatively. The idea of tax sparing is to ensure that tax incentives granted to investors by source countries are not “cancelled out” by income taxation in the residence country. This is typically accomplished by ensuring that the residence country gives credit for the amount of tax that would have normally been paid to the source country, instead of a reduced (or eliminated) amount that was actually paid according to an incentive scheme. In other words, tax sparing is treaty-based double nontaxation.

Here is an example of tax sparing from Article 21 of the 1993 tax treaty between Indonesia and the United Kingdom,:
For the purposes of paragraph (1) of this Article, the term “Indonesian tax payable” shall be deemed to include any amount which would have been payable as Indonesian tax for any year but for an exemption or reduction of tax granted for the year….”    
In this type of provision, an amount of tax would be credited by the taxpayer’s home country (presumably the UK) in accordance with the standard double tax relief provisions of the treaty even though not ultimately paid to the source country (presumably Indonesia).

If the residence country does not tax foreign income (i.e., is an exemption or territorial system as the UK is now), tax sparing would be pointless since the incentive in the source country accomplishes the desired result of nontaxation unilaterally. Yet this paper finds a surprising result: tax sparing increases FDI even after a treaty partner switches to a territorial system.

Here is the abstract:
The governments of many developing countries seek to attract inbound foreign direct investment (FDI) through the use of tax incentives for multinational corporations (MNCs). The effectiveness of these tax incentives depends crucially on MNCs' residence country tax regime, especially where the residence country imposes worldwide taxation on foreign income. Tax sparing provisions are included in many bilateral tax treaties to prevent host country tax incentives being nullified by residence country taxation. 
We analyse the impact of tax sparing provisions using panel data on bilateral FDI stocks from 23 OECD countries in 113 developing and transition economies over the period 2002-2012, coding tax sparing provisions in all bilateral tax treaties among these countries. We find that tax sparing agreements are associated with 30 percent to 123 percent higher FDI. The estimated effect is concentrated in the year that tax sparing comes into force and the subsequent years, with no effects in prior years, and is thus consistent with a causal interpretation. 
Four countries - Norway in 2004, and the U.K., Japan, and New Zealand in 2009 - enacted tax reforms that moved them from worldwide to territorial taxation, potentially changing the value of their preexisting tax sparing agreements. However, there is no detectable effect of these reforms on bilateral FDI in tax sparing countries, relative to nonsparing countries. 
These results are consistent with tax sparing being an important determinant of FDI in developing countries for MNCs from both worldwide and territorial home countries. We also find that these territorial reforms are associated with increases in certain forms of bilateral foreign aid from residence countries to sparing countries, relative to nonsparing countries. This suggests that tax sparing and foreign aid may function as substitutes.
The link to foreign aid is intriguing: it looks like compensation for the loss of a benefit. The OECD's Action Plans to counter BEPS are specifically designed to eliminate benefits like those created by tax sparing provisions. Is BEPS the end of tax sparing? If so, will BEPS also result in increased foreign aid?


Wednesday, May 4, 2016

This Friday in London: Conference on The Changing Shape of Tax Avoidance

This Friday, I'll be in London participating in a conference on tax avoidance and evasion, hosted by the Journal of Tax Administration. Here is the program:

11.00 – 11.15 Welcome and Introduction

11.15 – 11.50 Matthew Rablen: Optimal Income Tax Enforcement in the Presence of Tax Avoidance

11.50 – 12.25 Maya Forstater: Can Stopping ‘Tax Dodging’ by Multinational Enterprises Close the Gap in Development Finance?

12.25 – 13.00 Allison Christians: Tax Avoidance in a World of Aggressive Tax States

13.00 – 13.45 Lunch

13.45 – 14.15 Federica Bardini: The “Ius Commune Europeum” on Tax Avoidance

14.15 - 14.45 Shu-Chien Chen: The Common Pattern of the “Tax Avoidance Concept” in the EU and USA

14.45 – 15.00 Discussion

15.00 – 15.20 Break

15.20 – 15.55 David Duff: Tax Avoidance – Causes, Consequences and Responses

15.55 – 16.30 David Quentin: Tax Risk Mining and Corporate Responsibility for Human Rights

The venue for this conference is Friends House, 173 – 177 Euston Road, London.

Here is the abstract for my presentation:
Tax Avoidance in a World of Aggressive Tax States 
Media coverage of tax “dodging” by high profile elites and multinational companies leads the public to believe that tax avoidance happens when individuals act to thwart the efforts of the state. Confined to the domestic arena this may be an apt description, and a problem anti-avoidance regimes are designed to solve. But on an international scale, tax avoidance is not a one-person show. Instead, it involves interactions among four types of actors: individuals, home states, host states, and intermediary states. International tax avoidance persists largely because home, host, and intermediary states intentionally use their tax systems to lure investment away from other jurisdictions that impose higher tax burdens, and individuals do their best to exploit available opportunities to the fullest. In deciding whether and how law should be used to prevent international tax avoidance, the goals and interests of each of the four actors must be examined.



Kadet and Koontz: Are US MNCs profit shifting their way to "accidental partnership" status?

Jeffery Kadet and David Koontz have posted a new paper on SSRN entitled Profit-Shifting Structures and Unexpected Partnership Status, in which they argue that the way US-based MNCs share profits and risks with their global subsidiaries might actually result in their being in partnership with these companies for tax purposes, thus triggering interesting potential US tax consequences for the whole group.  Here is the abstract:
Many U.S.- and foreign-based MNCs that have implemented carefully researched tax strategies to reduce their income taxes are coming under increased scrutiny. Most MNC tax strategies involve businesses they conduct worldwide, but which are managed from the U.S. These strategies have several factors in common: 
(i) Companies established in tax havens or otherwise structured to attract little if any tax;
(ii) Intercompany agreements placing commercial risk and intangibles in such companies, thereby shifting profits to such companies;
(iii) Conduct of centralized activities and functions in the U.S. (in addition to group senior management), which are integral to and which critically benefit all MNC group members conducting that line of business (examples of such activities include product development, product sourcing, management of contract manufacturing process, management and control of internet platforms, etc.); and
(iv) No significant changes made to their business operations when tax strategies were implemented, meaning potentially that these structures lack economic substance.
This article suggests that in their haste to create these profit-shifting structures, the MNCs and their advisors may have overlooked two important weapons in the IRS’s arsenal to attack profit-shifting strategies. 
First, because of the centralized activities and functions within the U.S. that are integral to the business conducted by various group members (including both U.S. and foreign group members), an MNC may inadvertently create through its actions and intercompany contracts a partnership that is recognized solely for U.S. tax purposes. Once such a partnership exists for tax purposes, the various group members become its partners and the partnership conducts the applicable worldwide line of business. 
Secondly, because the partnership conducts a portion of its activities through U.S. offices and other facilities, the foreign group member partners are treated by statute as being engaged in a trade or business in the U.S. This makes them subject to U.S. taxation on their share of effectively connected income (ECI) earned by the partnership. U.S. taxation will be imposed at effective rates of 54.5% or higher. (The effective rate could be 38.25% or higher if a tax treaty applies.) 
In the absence of a partnership, whether a foreign group member is engaged in a U.S. trade or business is a factual determination that may be difficult for the IRS to establish. However, to their collective detriment, MNCs whose factual situations support the existence of a partnership that conducts such a U.S. trade or business have made it a slam-dunk for the IRS to conclude that the foreign group member partner is so engaged. The U.S. tax rules are clear – if a foreign corporation is a partner in a partnership engaged in a U.S. trade or business, then that partner will be so engaged. All MNCs with this general fact pattern and their auditors should re-examine existing profit shifting structures to determine if they could withstand an IRS charge asserting both the existence of a partnership and taxable ECI.
An interesting perspective and worth a read.