Stewart on the G20 and the taxing issue of making big business pay

Professor Miranda Stewart has published a short article today in which she nicely sums up the G20 agenda for 2014: base erosion & profit shifting, thin capitalization and transparency/information exchange. She concludes with some of the challenges for reform:

The G20 ... says that fixing global tax regulation is key to fighting poverty. A 2012 UN General Assembly Resolution 66/191 calls on the international community to develop effective international company tax rules and to increase participation of developing countries in tax policy processes. But ... it is only recently that OECD member countries have begun to acknowledge that their own tax rules and harmful tax competition are making it more difficult for developing countries to raise adequate taxes. 

There may be some tensions in the G20 about how to reform our fundamental international tax principles for the future. The OECD BEPS project mostly aims to protect the residence basis of taxation for multinationals. This will help prevent corporate tax base erosion for rich, capital and intellectual property-exporting countries. Current OECD profit shifting rules, which emphasise the arm’s length transfer pricing principle, can be strengthened. But these current rules for allocation of the right to tax business profits between countries are under attack from capital importing countries who seek to protect and enhance source taxation of business activity.

India, South Africa, Brazil and China may benefit more from a “formulary apportionment” approach, which has also been called for by activist organisations such as Oxfam and Christian Aid. We might begin to see cracks in the G20 on these fundamental international tax principles in 2014.

A nice overview of what to look for from the G20 in 2014.

OECD public meeting on tax-base erosion project: US MNCs hope to 'participate'

Reuters reports that the OECD will have a "public meeting" in Paris on Nov 12-13, at which "companies will get to voice their concerns about the OECD's 'base erosion and profit shifting,' or BEPS, project":

The United States Council for International Business (USCIB), representing about 300 U.S. multinationals, has asked to participate at the hearing, said Carol Doran Klein, USCIB's tax counsel, on Monday.

And here comes a parade of lobbying that will be designed to protect all that is favorable to their clients in the status quo. These are the moments when I really appreciate the amount of transparency we have in US politics thanks to organizations like Open Secrets, the Sunlight Foundation and Muckrock:

A number of U.S. companies, including E. I. du Pont de Nemours and Co, (DD.N) and Starbucks Corp (SBUX.O), have raised questions about the BEPS project with members of Congress and the Obama administration, according to corporate lobbying disclosures filed earlier this year.

Remember "raising questions' is like "raising concerns": it doesn't mean the speaker has either a question or a concern; instead it means the speaker has an agenda. The Reuter's story continues:

Under existing international standards, the fees charged [on an inter-company basis] are supposed to be set using an "arm's length" approach, meaning one that replicates market-level values. In practice, fees are often skewed so that profits can be shifted into the low-tax country where the assets are located and out of higher tax countries. 

These practices are legal, but tax fairness activists and some less-developed countries are complaining about them.

Interesting subtext there. The story doesn't give any more detail about the public meeting but here is what the OECD says:

On 12-13 November a consultation, open to the public and press, will be held at the OECD in Paris. If you wish to attend, please contact TPConference@oecd.org.

Is not public and press redundant? No matter: the point is, this is part of the public consultation portion of the BEPS program.Here is a draft agenda in pdf, and it is fascinating in lineup of both topics and speakers--namely, only two are named right now and one of them has been a long time and trusted voice of business interests against corporate tax transparency, and purveyor of norm framing exercises at the OECD, namely, GE's Will Morris; the other is Michelle Levac, noted as one of the 50 biggest influences in tax by International Tax Review, owing to her role in leading Working Party 6 on transfer pricing. These two get bookend treatment, opening and closing the consultation. All the other speakers are TBD, so this is where the USCIB seeks to gain a foothold. Here is the outline so far:

Programme  Public Consultation on Transfer Pricing Matters  12-13 November 2013  OECD Conference Centre  2 Rue André Pascal, Paris 16th, France  Tuesday 12 November  08:30-09:30 Registration   09:30-09:50 Opening remarks and Ground Rules    Speakers:
Michelle LEVAC, Chair of Working Party No. 6
William MORRIS, BIAC   09:50-11:15 I:  Implementing country-by-country reporting  The BEPS Action Plan directs the OECD to develop and implement a system of country-by-country reporting to tax authorities of high level MNE group financial information.  A large number of questions arise in connection with implementing such a system.  These include:  (i) what information should be reported; (ii) at what time should that information be reported; (iii) to whom should such information be reported; and (iv) how should such information be shared among relevant governments, taking into consideration concerns regarding non-cooperative governments, incomplete treaty information exchange obligations, and the need to protect confidential taxpayer information.
Speakers: to be announced
1.  Information to be reported
2.  Information to be reported
3. Mechanisms for reporting / to whom to report / information sharing   11:15-11:45 Refreshment Break      11:45-13:15 II:  White Paper on Transfer Pricing Documentation  The BEPS Action Plan calls for the OECD to develop rules on transfer pricing documentation.  To initiate that process, the OECD published a White Paper on transfer pricing documentation on 30 July 2013.  The White Paper raises a number of issues on which business has provided comments.  These include: (i) the implementation of a standardised two tier documentation system; (ii) the use and content of a global master file; (iii) mechanisms for limiting early reporting to information useful in risk assessment with subsequent opportunity for governments to obtain detailed information necessary for audit; (iv) the development of materiality standards; (v) implementing consistent documentation formats across countries; and (vi) mechanisms for minimising unnecessary compliance burdens.    Speakers: to be announced  1.  Two tier approach
2.  Contents of global master file
3. Establishing materiality standards  4. Mechanisms for simplifying compliance (1)
5. Mechanisms for simplifying compliance (2).   13:15-14:30 Lunch break      14:30-16:00 III:  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Definitional Issues And Comparability Factors  On 30 July 2013 the OECD published a Revised Discussion Draft on Intangibles.  In the RDD, the definitional section was changed in some respects.  In addition, a new section of the RDD addresses comparability factors including location savings, features of local markets, assembled workforce, and corporate synergies.   Discussion in the afternoon session will be devoted to definitional issues and to the new section on comparability factors.
Speakers: to be announced
1. RDD changes to the definition of intangibles
2. Usefulness of the term “marketing intangibles”
3. Treatment of goodwill and on-going concern value / Examples 16 and 18   16:00-16:30 Refreshment Break      16:30-18:00 IV:  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Definitional Issues And Comparability Factors  (Continued)    Speakers: to be announced
4.Treatment of location savings and local market features
5. Treatment of Assembled Workforce
6. Treatment of group synergies
7. The financing and guarantee examples / Examples 1 and 2     Wednesday 13 November     09:30-11:00 V.  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Section B Of The RDD Section B of the June 2012 Discussion Draft attracted numerous written comments and was the subject of much discussion at the last business consultation. It has been substantially redrafted.  The approach in the RDD is more transactional in nature, while still emphasising the primary importance of functions performed, assets used and risks assumed.  The morning discussion will focus on the changes to Section B and the related examples     Speakers: to be announced
1. The general approach of new section B.
2. Examples 1 – 3
3. The treatment of outsourcing arrangements
4. The treatment of important functions   11:00-11:30  Refreshment Break      11:30-13:15 VI:  REVISED DISCUSSION DRAFT ON TRANSFER PRICING ASPECTS OF INTANGIBLES – SECTION B    Speakers: to be announced
5. Examples 11 – 14 and footnote 5 on page 63.
6. Treatment of funding for intangible development
7. Guidance on the use of corporate trade names   13:15-14:30 Lunch      14:30-15:15 VII: Other Discussion Draft Topics    Speakers: to be announced
1. Treatment of valuation techniques
2. Guidance on transfer pricing methods
3. Options realistically available / Example 24   15:15-16:00 VIII: Transfer Pricing Aspects Of The Beps Action Plan
The BEPS Action Plan published in July will guide much of the OECD transfer pricing work in the next two years.  The Action Plan contains four substantive transfer pricing areas of work in Actions 4, 8, 9, and 10.   This discussion will provide business an early opportunity to comment on the transfer pricing aspects of the Action Plan and the approach that Working Party No. 6 should take to fulfilling its mandate under the Action Plan.    Speakers: to be announced
1. How should the BEPS Project approach the question of hard to value intangibles / particularly transfers of partially developed intangibles?
2. How should the BEPS Project approach questions of risk allocations that may give rise to separation of income from relevant economic activity?
3. What role should there be for approaches outside the arm's length principle in addressing BEPS issues?        16:00-16:30 Refreshment Break      16:30-17:30 IX:  TRANSFER PRICING ASPECTS OF THE BEPS ACTION PLAN (CONTINUED)    Speakers: to be announced
4. How should the BEPS project approach the topic of recharacterisation of transactions?
5. What should the BEPS project consider in connection with global value chains and profit split approaches?
6.  What should the BEPS work on financial transactions address?    CONCLUDING REMARKS   17:30-18:00 Speakers:
Michelle LEVAC, Chair of Working Party No. 6
William MORRIS, BIAC   18:00 ADJOURN

Perhaps there will be additional public consultation meetings, I do not know. As Lynne LaTulippe taught my tax policy class recently, the consultation process is an often overlooked and in general understudied aspect of norm diffusion and lawmaking. This is one of the many times I wish that I was geographically situated to attend these things. I will be very interested to see how the speaker lineup evolves and would be very grateful to hear about the discussion from anyone who attends.

TJN on the rule of law and the forthcoming OECD report on base-erosion

The OECD is expected to release its plan to implement its anti-base-erosion project this Friday, and the Tax Justice Network has issued a pre-emptive strike as it were, predicting that the OECD will do very little by way of fundamental reform. Instead, TJN predicts a patchwork of half-hearted measures that will be delivered through the toothless mechanism of non-binding recommendations, instead of a full-throated commitment to real change, which the TJN says would require endorsement of combined reporting & formulary apportionment for multinational companies. I am still not convinced combined reporting is a panacea, but I understand TJN's perspective that arms' length reporting probably isn't capable of delivering the result they seek with respect to taxing the profits of multinationals on a global basis. You can read TJN's whole report here.

But I wanted to note something that particularly struck me in this report, an issue that I worked through at length not too long ago and that has been bothering me for quite a while, and that is the recognition that for the international tax law system to work, we desperately need more transparency regarding what lawmakers actually do when it comes to international tax compliance. Here is what I said on the subject in an article called How Nations Share:

In the case of international income, it is [tax] disputes and their resolutions, and not the law on the books, that constitute the international tax regime. Yet it is all but impossible for citizens to observe exactly how, or how well, their governments navigate this aspect of economic globalization. [Tax treaties] provide only a design for allocating international income among nation states. It is the application of these agreements that determines how revenues are allocated in practice. This application has taken place over the years through hundreds of thousands of interpretive decisions, the vast majority of which are not accessible to the public. Instead, international tax disputes are mostly delegated to institutions that resolve issues in informal, “non-law” ways with minimal public access to the decision-making process and its outcomes. As a result, international tax law in practice features little or no “law.”

In the article, I explained that when actual decisions about the taxation of multinationals are made through processes that lack judicial oversight and feature no public access whatsoever, this creates a huge knowledge gap between the law as written (in legislation and in treaties among other documents) and the law in action (after the competent authorities make their decisions).

The OECD has exploited this gap to its own institutional advantage, by making itself a norm aggregator and filtering mechanism. It thus deliberately creates a non-legal alternative to direct access to legal decision-making. This is a major, even if not well-understood, impediment to the development of law in taxation that has serious consequences precisely because it shields from public scrutiny just how much base erosion is actually going on. We (the public) simply cannot know how big the base erosion problem really is because we cannot access the competent authority decisions that in fact allocate income internationally. The OECD presumably knows the answer but suits its own political and institutional purposes by publishing a highly-processed version of events in the form of reports, guidance, etc.

Because I view this as a major problem for the rule of law which is made ever more serious by being ignored as an issue altogether, I was very gratified to see TJN pick up on the theme and call for publication of competent authority decision-making:

Currently, the MAP [competent authority dispute resolution process] is very secretive, and decisions often involving hundreds of millions or even billions of dollars are not published. The secrecy of both MAP processes and APAs greatly increases the power of frequent actors in these processes, i.e. the international tax and accounting firms – to the great detriment of the system as a whole. Publication of both would be a great step towards a system which could both provide and more importantly be seen to deliver a fair international allocation of tax.

TJN's worries about the repeat-player advantage gained by tax and accounting professionals are well-founded, but I think what is most clearly articulated here is that this is fundamentally a rule of law matter. Moreover, TJN puts this issue third in line in terms of reform priorities but I actually think it is much closer to being at the top of the heap in terms of structures that cause intractable problems for international taxation. I will be very interested to see how the continued pressure TJN has been able to place on OECD decision-making to date plays out on this particular issue.

Manal Corwin, now at KPMG, to discuss Reputational Risk Deriving from the Tax Transparency Movement

Fresh out of Treasury, Manal Corwin and some of her new/old colleagues will present a webcast next Tuesday on Tax Transparency and OECD Initiative on Base Erosion and Profit Shifting:

KPMG's Tax Governance Institute will host a webcast that addresses the implications of tax transparency and the potential impact of the OECD initiative on base erosion and profit shifting. Board and audit committee members, CFOs, tax directors and other business professionals interested in attending the program – one in a series of KPMG presentations on this timely topic – can register at: www.taxgovernanceinstitute.com.

The webcast will focus on "the debate over the shift of taxable business income out of the United States and high-tax jurisdictions around the world and into low or no-tax jurisdictions, and the resulting issue of tax base erosion." I'm not sure if debate is the right word there.  Is there a debate about these two phenomena existing as a factual matter? I think no.  Is there a debate about the appropriateness of such shifting and base erosion? I think decidedly yes.

Interestingly, however, KPMG suggests this is a debate about neither the existence nor the appropriateness of profit shifting and base erosion, but rather it is specifically about transparency, namely, the extent to which the public will gain a right to know about the existence and legal sanction of these practices:

The global debate on tax transparency has sparked both public interest and concerns among many companies, and the spotlight will grow brighter in coming weeks as the OECD prepares to deliver its coordinated action plan on base erosion and profit shifting and the European Commission moves forward with announced plans to address issues around tax fairness. With potentially significant changes in future tax obligations and reputational risks at stake, senior executives and board members at multinational companies should find this webcast, and those that will follow, especially useful as they formulate how their organizations should respond to the debate and possible outcomes.

[Emphasis mine.]  This statement is from Brett Weaver, who is described as "tax partner in KPMG's International Corporate Services practice and the firm's partner-in-charge of Tax Transparency" and a member of KPMG's "Tax Transparency Steering Committee," along with Corwin, who is described by KPMG as:

national leader of KPMG's International Corporate Services practice, principal-in-charge of International Tax Policy in the firm's Washington National Tax practice, and former deputy assistant secretary for Tax Policy for International Tax Affairs in the U.S. Treasury Department and U.S. delegate/vice chair to the OECD's Committee on Fiscal Affairs. 

The other participant on the webcast will be Philip Kermode, "director of the Directorate-General for Taxation and Customs Union of the European Commission".

It seems very clear to me that the "reputational risk" Weaver identifies is going to be something corporate tax managers and their legal & accounting advisers will be forced to price in going forward. The last paragraph illuminates this:

...the [KPMG] Tax Governance Institute ... provides opportunities for board members, corporate management, stakeholders, government representatives and others to share knowledge regarding the identification, oversight, management, and appropriate disclosure of tax risk.

I think it is safe to attribute the creation of reputational risk (or what some might call an internalizing of a cost that heretofore has been externalized thanks to strong corporate tax confidentiality laws), as well as any potential that may currently exist for systemic change to occur in the OECD's approach to the taxation of multinationals, to the international tax activist movement. As a result this should be a very informative webcast.

Corporate tax transparency: Australia's work in progress

Australia is working on transparency and information sharing, and is seeking feedback by April 24 (this Wednesday):

On 4 February 2013, the Assistant Treasurer announced the Government’s intention to improve the transparency of Australia’s business tax system and that the Government would consider the views of the community in assessing what changes are appropriate. 

The Government seeks your feedback and comments on the issues outlined in this discussion paper. As this paper provides details about how these proposals could be legislated, you may wish to comment on law design as well as policy design issues in your submission. It would assist the consultation process if those stakeholders who have any concerns with the proposals could provide practical examples in their submissions demonstrating the implications of these proposals and how any alternative approaches could operate.

Highlights from the discussion paper:

On 4 February 2013, the Assistant Treasurer announced the Government’s intention to improve the transparency of Australia’s business tax system with a view to introducing necessary legislation later this year. ... 

This paper outlines three proposals that could give effect to this announcement. ...These proposals could complement existing corporate disclosure requirements and enhance the administration and regulation of Australia’s tax system and capital markets. ...

• Transparency of tax payable by large and multinational businesses. 

– The objective of this proposal is to enable the public to better understand the corporate tax system and engage in tax policy debates, as well as to discourage aggressive tax minimisation practices by large corporate entities. 

• Publishing aggregate collections for each Commonwealth tax. 

– The objective of this proposal is to enable better public disclosure of aggregate tax revenue collections, even when the identity of particular entities could potentially be deduced. 

• Enhanced information sharing between Government agencies. 

– The objective of this proposal is to build on existing information sharing arrangements and enable greater information sharing between the Australian Taxation Office (ATO) and the Department of the Treasury with respect to foreign acquisition and investment decisions affecting Australia.

Australia's Treasury seeks to consider views from "the community"--not defined so no reason that can't mean the global community.  Address written submissions to: 

General Manager
Tax System Division
The Treasury
Langton Crescent
PARKES ACT 2600

TaxTransparency@treasury.gov.au

Thanks to Miranda Stewart for passing this along.

Public disclosure of global corporate tax info, coming soon in the US?

I was happy to see a rather lengthy discussion in Tax Analysts[gated] a little while ago, authored by Randall Jackson on the emerging US corporate tax transparency rules. These rules derive from a global movement to counter corruption, called the Extractive Industries Transparency Initiative (EITI). The US rules were enacted as a hasty and rather stealthy last-minute addendum to the Dodd-Frank Wall Street Reform Act of 2010, and have yet to be implemented, in part because of intense industry pressure. That pressure continues, especially from the American Petroleum Institute, even though that organization expresses support for EITI in principle. Jackson describes how the disclosure rules came about under Dodd-Frank, and what information is set to be disclosed when the first US companies begin making their disclosures thereunder (February 2014 at the earliest):

Dodd-Frank section 1504 amends the Securities Exchange Act of 1934 by adding a new section 13(q), "Disclosure of Payments by Resource Extraction Issuers," which requires country-by-country (and project-by-project) reporting of all payments, including taxes, made to all foreign governments and the U.S. federal government. (Analysis of Dodd-Frank .) 

The legislation requires companies engaged in the commercial development of oil, natural gas, or minerals that file a yearly report with the SEC to file an additional detailed annual report (new Form SD, which is separate from countries' 10-K annual report) listing all their payments, including taxes, fees (including license fees), royalties, production entitlements, bonuses, dividends, and payments for infrastructure improvements. Payments of at least $100,000 during the most recent fiscal year must be listed.

...Reports must be detailed and specific, listing payments to each foreign government, foreign subnational government, and the U.S. federal government. (Payments to subnational U.S. governments, such as state governments, need not be reported.) The reports will be publicly available online. 

More specifically, the reports must separately list each project and the types and totals of payments made in connection with each project; the types and totals of amounts paid to each government, including a separate list of the governments that received payments; the total payments by category; the currency in which the payments were made; the relevant financial period; and the business segment of the company that made the payment.

Jackson discusses the origin of the inclusion of the EITI addendum in Dodd-Frank (by means of an amendment by Senators Cardin & Lugar, whose prior attempt to pass EITI as a stand alone bill failed in 2009) and the subsequent industry pressure in some amount of detail. He includes a description of API's attempt to unwind the legislation via a legal challenge. API is arguing that the SEC failed to undertake a sufficient cost/benefit analysis of the rules, failed to study how the rules and costs would impact US companies doing business in other countries, and failed to create exemptions in cases where foreign law would prohibit the required disclosure. Jackson quotes the complaint: "the Commission did not even bother to determine how many countries had laws on the books prohibiting disclosure." He also quotes the SE's response:

[T]he SEC wrote that it had rejected commentators' suggestions to exempt firms operating in countries where the required disclosure is prohibited because the agency is skeptical that such prohibitions actually exist, and allowing exemptions would violate the spirit of the law. Furthermore, it said that allowing that kind of exemption could encourage foreign countries to pass anti-transparency laws or to interpret existing laws in a harsher fashion.

To which Cardin and Lugar responded:

"API wants to push us back to a time when the U.S. had few tools to add accountability and stability to the inherently unstable energy sector," Cardin said. "Congress and the SEC carefully crafted a reasonable and very manageable reporting requirement that will bring greater transparency to the oil, gas, and mineral sectors." 

"The U.S. economy and our values substantially benefit when our companies are working in oil-, gas-, and mineral-rich states," Lugar added. "But the benefits will not be realized if investments serve to entrench authoritarianism, corruption, and instability. With oil prices high and volatile, our economy needs more transparent markets, not less.

Cardin and Lugar, along with Senator Levin, have submitted an amicus curiae brief in support of the SEC, which Jackson quotes:

"Resource companies can believe whatever they wish and make any communication they wish about their payments to foreign governments, 'the resource curse,' or the benefits or costs of transparency; they have done so throughout this process. What resource companies may not do is impede the power of the legislative branch to require disclosure of objective information to fulfill compelling public policy objectives, including the strengthening of American national and energy security and investor protection."

It remains to be seen whether industry will be successful in pushing back the EITI regime; if not, we should start seeing the additional disclosure I believe by September of this year. So here is a question. How many multinational extractive industry companies are there in the world, and how many will be covered by the US EITI regime? In other words, if and when the US rules are in place, how many extractive industry companies will not have their information revealed through these disclosure rules by virtue of affiliation with US companies? Is it a few, many, or most? If anyone knows whether this is known or could be ascertained, I'd like to know.

Taxcast: opening the black box on who makes global tax policy and how they do it

I'm pleased to have been part of the February 2013 Taxcast from Naomi Fowler and the Tax Justice Network  In this edition of the taxcast Naomi looks at current trends in transparency and taxing the digital economy and then delves into the question of global tax reform, asking whether we should expect real progress from the OECD, a rich country thinktank/inter-governmental organization/lobbyists network.

Readers here will not be surprised that I am critical of norm-making from the OECD, given its essential character as a forum for back-room dealmaking between business interests and government. NGOs have been trying to gain greater access, but it is a slow and arduous process, as we saw recently with an informed citizen trying to gain access to something the OECD advertised as a "public" meeting. In the taxcast Richard Murphy is cautiously optimistic that the pressures being brought to bear on the OECD will bear fruit--that governments are starting to see that they have to be responsive to constituents beyond the business community, and they will have to make real changes at some point.

I am less optimistic given the institutional structure in place but I am hopeful because at least the right questions are being asked: good policy is a product of good process, and the converse is also true.  That means that who is in the room is of vital importance when it comes to developing norms. If NGOs, watchdog groups and citizens are paying attention they will pester the OECD if it tries to develop global transparency standards on tax from inside its own black box.

Obama admin taking the high road on FATCA reciprocity?

I have predicted that real FATCA reciprocity would not fly in the US once people began to understand what the details entailed, but I would like to be wrong about that, and I have argued that the best course forward for FATCA is real reciprocity coupled with adherence to residence-based taxation. Here's a sign from the Chicago Tribune that I could get at least one of my wishes:

Foreigners' accounts in U.S. banks eyed in tax crackdown

The Obama administration may soon ask Congress for the power to require more disclosure by U.S. banks of information about foreign clients' accounts to those clients' home governments, as part of a crackdown on tax evasion, sources said on Monday. 

In a move facing resistance from some in the U.S. banking industry, two tax industry sources said the administration was considering asking Congress in an upcoming White House budget proposal for the authority to require more disclosure from U.S. banks. 

...At the heart of FATCA is a law requiring more disclosure by non-U.S. banks of information about Americans' accounts to the Internal Revenue Service, with the goal of exposing Americans' efforts to dodge U.S. taxes through secret offshore accounts. 

As Treasury has implemented FATCA, some countries - possibly including France, Germany and China - were said to be driving a hard bargain. They have been saying that if their banks have to tell the IRS about Americans' secret accounts, then U.S. banks should have to reciprocate by disclosing more information about the U.S. accounts of French, German and Chinese nationals. 

...China has been publicly dismissive of FATCA, but it is talking with U.S. officials behind the scenes, sources said.

...France and Germany "have been asking for something more like full reciprocity," said Jonathan Jackel, a lawyer with the law firm of Burt Staples & Maner LLP in Washington, D.C. 

The story says that "The IRS this year started disclosing to some foreign governments information about bank interest payments earned by their citizens with U.S. bank accounts."--but I am not sure that that is true, given that the only country currently on the list for automatic info sharing on portfolio interest is Canada-and Canada was already on that list anyway.


The story quotes Itai Grinberg, who has to be the foremost expert on the legislation and really ought to be listened to on the underlying principles:

"The United States should be moving toward full reciprocity," said Georgetown Law School Professor Itai Grinberg, a former Treasury official, adding it would be "deeply hypocritical" of the United States to ask for U.S. taxpayer information "without offering some kind of reciprocity."

Progress, perhaps. But this is America, so here comes a lawsuit:

The Texas Bankers Association is considering a lawsuit against the government to stop accountholder information sharing with Mexico, said Eric Sandberg, the group's president.

Why, what s the problem?  Well, you see, it's financial privacy.

"We are concerned with Latin American countries like Mexico," said Fran Mordi, senior tax counsel at the American Bankers Association. "In the past, U.S. banks didn't report interest payments to non-resident aliens ... IRS is now saying you have to report that."

Translate how you will. I think it's a clear illustration of the state at war with itself over how to gain the maximum advantage from a combination of cooperation and competition with other states on taxation. Information sharing is going to benefit the US more in terms of dollars in the economy if it is one-way street that catches US shirkers but doesn't prevent taking advantage of other countries' ignorance about the location of their own taxpayers' resources. I think the mercenary state will prevail in the end--cooperate in principle, defect in practice--but I am very much hoping to be wrong.

Corporate tax: why disclosure is the key to reform

Two columns of interest emerged today on the issue of corporate tax disclosure, plus another interesting public hearing in the UK, this time with the big four in the hot seat.  Put all of this together and we can see very clearly the intense connection between tax reform and public understanding of the status quo.  With the latter as to corporate tax being woefully inadequate and relevant information intentionally hidden from public view, the former can be neither informed nor meaningful.  The answer is corporate tax transparency, particularly for multinationals, i.e., on the order of country-by-country reporting for listed companies.  First, on the columns, both from the FT.

In this one, John Gapper says "Companies are complying with laws that governments could change if they wished," and then explains:

Starbucks’ supposed immoral act is not to pay UK corporation tax that it does not owe, and would not owe even if it did not license its brand from the Netherlands. It obeys both the letter and the spirit of global tax law, which governments could reform if they wished.

That's 100% correct. And if you think there is some "spirit" in the transfer pricing law that isn't being acknowledged, then you are forgetting that the transfer pricing rules were effectively written by the industry they are meant to police. So I think the spirit is pretty much being well given its due. Gapper also nicely illustrates what I call the mercenary tendency of the tax state in an economically integrated world: agree with whatever seems politically expedient in principle, defect in practice:

I look forward to Mr Cameron naming and shaming companies such as Google (also a target of British politicians) if they are drawn from Ireland to the UK by his tax arbitrage. 

...Governments must decide which regime is fair, and companies and individuals must comply. 

... most companies that place operations or intellectual property in low-tax countries – or even in tax havens such as Bermuda – are not breaching the spirit of global tax law. They comply with a structure established under the League of Nations in the 1920s. 

This allows – indeed, encourages – multinationals to split their operations among countries, paying taxes as if they were separate entities, in order to avoid double taxation. They have to make transactions at “arm’s length” – as they would deal with others. 

It worked for a long time but is under strain because of the growing value of brands, intellectual property and intangibles to global corporations. “Ideas are their biggest asset, and what generate profits, and it is far easier to shift intangibles than factories,” says Jeffrey Owens, of the Institute for Austrian and International Tax Law.

Well, this is mostly right, at least close enough for its purposes. However, I am just not sure what principles we should expect to emerge when reporters turn, as they too often do, to Mr. Owens, former director of the OECD's tax arm and the man who presided over the demise of the corporate tax on a global scale under the nurturing constancy of the OECD's business-driven tax policy making machine, a person moreover who has publicly called for governments to "avoid like hell" any taxes on corporations. He would seem to be the last person you would ask about how to make a corporate tax system function, again, unless we are talking about that movie.  Gapper concludes:

Politicians thus have the choice of indulging in easy rhetoric against companies that obey the laws they have passed or struggling to reform the tax regime for little reward, with lots of disruption. In their position, I might posture too.

If that's not an argument for greater public accountability of how transfer pricing works out in practice, I am not sure what is.

That brings me to the second column of the day from the FT which illustrates why the public ought to know more about how these regimes work in practice, this one by Bruce Bartlett in which he asks, can publicity curb corporate tax avoidance? He lays out the case nicely for the runaway corporate tax base and he concludes:

[L]ittle in the way of real economic activity, such as jobs or tangible investment, has shifted anywhere. All that has shifted is the tax base. 

...This makes the international tax regime a ripe target for reformers.

... With reports of low domestic taxes paid by large profitable corporations such as Starbucks in the UK, the time may also be ripe for an international agreement to curb tax shifting. The US has recently implemented a law called the Extractive Industries Transparency Initiative that requires companies to disclose their payments to governments from oil, gas and mining assets. Allison Christians of McGill University argues that the expansion of such information reporting to the transfer pricing of all multinationals is the first step towards capturing the revenue now lost to the shifting of business costs to high-tax jurisdictions and revenues to low-tax jurisdictions. 

There is growing evidence that corporations are sensitive to the public outcry when they are caught avoiding taxation excessively. Starbucks, for example, recently agreed to pay more taxes in the UK than legally required to quell the controversy over its virtually nonexistent tax bill. The same shaming technique may have broader application to multinationals generally. 

As Justice Louis Brandeis of the US Supreme Court once put it, “publicity is justly recommended as the remedy for social and industrial diseases”.

First, thank you for the shout out, Mr. Bartlett! Second, this column demonstrates clearly the strong connection between tax reform and public understanding of the status quo, as I suggested above.  Tax reform is not going to come from the only party that has all the info it needs right now, namely, the IRS. Tax reform comes from public expression.  Right now, observers of tax policy need more information in order to offer meaningful reform proposals, and that information is being hidden because governments do not require it to be disclosed, plain and simple.  That is a matter of regulatory choice, and these columns show the choice is bad for policy analysis.

That then brings us to the UK's hearings today in which the public accounts committee taking on the big four accounting firms, trying to suss out what the letter and the spirit of the law is with respect to corporate tax on multinationals.  What emerges is the "perfectly legal" nature of all of this tax avoidance, again confirming the editorials by Gapper and Bartlett.  Here is the BBC's take on the hearings, worth reading in full.  Richard Murphy declares it a win for the PAC but the question is whether that translates to a win for those who do in fact pay taxes in the UK and elsewhere.

That question will be answered affirmatively if instead of killing EITI, which is currently apparently a high priority for many, we expand it to cover all listed companies.

Finance minister annoyed about transparency, on his way to Davos

Canada's Finance Minister Jim Flaherty is annoyed with having a Parliamentary budget watchdog that asked too many questions and sought too much budget transparency, going beyond the job description:

What the government wanted was “a sounding board, a testing board,” said Mr. Flaherty, before heading to Davos, Switzerland, on the weekend for the World Economic Forum.

That's rich!  Too much transparency is bad for politicians. Easier to do your thing in elite networks behind closed doors.  All that disclosure is going to ruin everything.

Human rights and tax secrets

Think those two don't go together? Prince Charles begs to differ:

Prince Charles has used the Human Rights Act and the Official Secrets Act to block revelations about his tax affairs – even though Her Majesty’s Revenue and Customs has said the disclosure would be in the public interest. 

The move follows a bid to uncover the secret arrangements which allow the Prince of Wales to avoid paying tax on the Duchy of Cornwall, his vast estates which generated £18 million profit last year. 

The test case centres on a request by an academic who has asked to see correspondence between the Duchy of Cornwall and HMRC. 

But the Government and the Duchy of Cornwall have refused to agree to the release of the documents because the disclosure would breach Charles’s right to privacy. They also say the information is protected by the Official Secrets Act. 

John Kirkhope, an expert on trusts law from Weston-super-Mare, Somerset, is trying to use the Freedom of Information Act to uncover how HMRC came to grant the Duchy a tax exemption which is estimated to have been worth millions of pounds over the past century.

The issue here is the right of the public to know what the treasury already knows.  A spokesman for Prince Charles said "The Duchy is not a company and is not therefore liable to pay corporation tax." That is completely irrelevant. What is being asked here is not whether tax has been levied and if not why not, but whether the public has a right to know whether tax is being levied, and if not, why not.  That is a transparency question, the kind that animates EITI& CBCR. Of course, neither of these regimes would extend to the Duchy, since its not a public corporation.

Relatedly, notice that the Prince's right to privacy is the invoked protection against the government's disclosure of his tax information to a third party, i.e., a party other than the government itself. That right is, of course, what any UK taxpayer that also has US status will have to forego in order to fulfill the UK's FATCA obligations. No official secrets act protection in that case--just the data privacy act, which the UK has said only requires UK financial institutions to inform (not obtain consent from) their customers whose information they will disclose to the US.

UK PAC vs Starbucks and HMRC: Driving recursive cycles of change in tax law?

An interesting real time example of the recursive cycle of lawmaking, as described e.g. here by Halliday and Carruthers, is unfolding in the ongoing drama of the UK Public Accounts Committee's hearings on tax avoidance by Google, Starbucks, and Amazon. Richard Murphy has posted a press release issued by the PAC today in which they hit a lot of core tax policy notes: what "fairness" requires in taxation, the duty of taxpayers to the state, the state's duty toward taxpayers as a group, the problem of taxpayer morale when perceptions of unfairness abound, the role of morality in taxation.

But it also draws a picture of contestation in both the domestic and the global lawmaking spheres, drawing in ideas about and challenges to the rule of law, standards, and norms, and involving legal and nonlegal actors. Halliday & Carruthers point to four mechanisms that drive the recursive cycle forward and lead to phases of legal change: the indeterminacy of law, contradictions, diagnostic struggles, and actor mismatch. The press release suggests we have all four of these drivers in play. Excerpts:

"Global companies with huge operations in the UK generating significant amounts of income are getting away with paying little or no corporation tax here. This is outrageous and an insult to British businesses and individuals who pay their fair share. 

...There is little credible information about what is going on. The evidence we took from large corporations was unconvincing and, in some cases, evasive. HMRC also lacked clarity when trying to explain its approach to enforcing the corporation tax regime. The inescapable conclusion is that multinationals are using structures and exploiting current tax legislation to move offshore profits that are clearly generated from economic activity in the UK. HMRC should be challenging this but its response so far to these big businesses and their aggressive tax planning has lacked determination and looks way too lenient. Policing the tax system must be at the heart of what HMRC does.

So we see the PAC taking on a role as a fiduciary for the people and claiming that the state revenue authority has failed in its own duty to act in that capacity: the result has been indeterminacy of law, contradictions and diagnostic struggles as per H&C.

The PAC calls for naming and shaming of "offenders" (difficult when all these companies claim full compliance with all applicable laws), and for transparency and fairness in the administration of the tax regime by HMRC, that "Government has a responsibility to assess and collect tax due from all taxpayers, without fear or favour," and that "[i]f companies do not pay their fair share of tax, other taxpayers have to pay more." As a result, the PAC says "[b]oth HMRC and corporate taxpayers are failing to meet the legitimate public expectations from the tax system."

This essentially frames multinationals as lawbreakers with HMRC in an accomplice role, whether intentionally or out of neglect. The PAC says "it will always be an unequal fight between HMRC and multinational companies," but calls on the revenue authority both to be more agressive in chasing MNCs and to do more to publicly explain why these companies pay so little. We can interpret this to mean that the PAC seeks to involve more public input into this cycle of legal change, i.e., introducing more actor mismatch.

 You can read the rest of the press release at the link above. Will be interesting to see what comes of it, whether the PAC succeeds in driving forward legal change and whether we will be able to identify a beginning and end of a particular recursive cycle of tax lawmaking (H&C say this is generally very difficult to do, since so many variables are involved in legal change). So far on the part of Starbucks, the result seems to be PR/damage control, in the form of public assertions of willingness to pay a bit more. That just underscores the effectively voluntary nature of international taxation when it comes to MNCs--Starbucks is negotiating with the state--and won't address any of the issues raised by the PAC, so the contestation should continue and may bring in more actors and more struggle.

Colbert's latest civics lesson

A little while ago, Stephen Colbert gave America another civics lesson on the the topic of campaign finance, as he decided what to do with all his unspent donation revenues (if you missed it, definitely watch it--here).  The show featured Colbert's lawyer Trevor Potter, who essentially suggested that Colbert could 'disappear' the money left in his current super PAC structure simply by adding another layer of secrecy. I confess, I watched the whole thing with incredulity. So I contacted Lloyd Mayer, who knows much about campaign finance law, election law, charities, etc. (you can read one of his many articles on the subject here), and who moreover worked as a legal associate at Potter's firm.  Lloyd had this to say in response:

I believe what is creating this "disappearing money" trick is an at least arguable disconnect between the federal election law rules for PACs and the federal tax rules for 501(c)(4)s.  Under federal election law, a PAC (including a SuperPAC, which is not an actual legal category) must report the name and address of the payee for any disbursement of more than $200, along with the purpose of the disbursement, the date of payment, and the amount.   

In this case, the payee would be the entity on the initial check - the first 501(c)(4) - reading this requirement literally.  Under federal tax law and principal-agent principles, however, the "agency letter" Trevor described would arguably render both the first and second 501(c)(4)s mere conduits for the funds and so those funds would not show up on their returns as either income or expenses because those funds are really those of the principal (the SuperPAC).   

My unresearched take is that this is an aggressive position, but probably defensible on audit. Note this trick works in part because PACs do not have to file IRS Form 990 or to make any other filings under federal tax law that would require reporting the disbursement using the tax rules (which presumably would require the ultimate recipient of the disbursement pursuant to the agency letter, not the payee listed on the SuperPAC's check).

Thank you Lloyd!  So it's not incredible to him, but then again, neither is it straightforward. Another legal scholar recently posted Campaign Finance Disclosure and the Information Tradeoff, with the following abstract:

Campaign finance law is in shambles, and American politics, by many accounts, is dominated by wealthy, shadowy interests. Reformers have rested their hopes on disclosure – mandated, public disclosure of what individuals, corporations, super PACs, and others spend on politics. Reformers argue, and the Supreme Court agrees, that disclosure provides valuable information to voters. Opponents, on the other hand, vilify disclosure for chilling speech and infringing speakers' First Amendment rights. Both positions – disclosure informs voters, disclosure chills speech – have become conventional wisdom.

This paper challenges that wisdom. First, it shows that disclosure does not necessarily inform voters. ... Second, the paper argues that disclosure does not necessarily chill speech. It can thaw it. By providing potential speakers with information about the positions and credibility of candidates, disclosure can prompt actors to speak when they otherwise would not. When disclosure thaws speech, there is no information tradeoff. Voters gain information in two ways – source revelation, more speech acts – and lose it in none. When disclosure thaws speech, it promotes exactly those First Amendment values it is thought to undermine.

I don't know whether disclosure would explain Colbert's disappearing money trick, and if it did, whether that would chill or thaw speech or which of those two options is preferable. But I like disclosure as a means of bringing to light what Lloyd describes as the unintended and possibly absurd consequences of ill-coordinated regulatory regimes. Perhaps disclosure would not create a means of achieving public accountability for those consequences. But I'm all for any sunlight that can be shed on the subject, even if it does come from the comedy channel.

Finnish Tax Research Project?

I am wondering if anyone is working on the corporate tax data published by Finland last month.  I can't read Finnish, so can't make anything of the charts or pdfs, but I assume someone somewhere is gleefully playing with this new data source--I think the first of its kind in all the world. If you're working on it, please contact me, I would really like to know about it.

Are WTO dispute settlements "Law"?

From Simon Lester, yet another reminder for those studying tax treaty arbitration that the issues are many and difficult. When basic questions of enforceability can't be answered in an area of the law where things are fairly well developed and are subject to ongoing extensive public vetting and debate, it serves as a warning of what lies ahead for international tax dispute resolution. From the post:

There is some famous scholarly debate on whether WTO dispute settlement rulings are binding.  Here's a media take on it, from the CBC news (in the context of the Ontario feed-in-tariff case):  The World Trade Organization appears to have upheld a [discrimination] complaint against the Province of Ontario's green energy program. ...reports Monday suggest the affected parties have been notified of the [WTO]'s decision to side with the complainants...The WTO ruling is non-binding, meaning Ontario could simply ignore it and not face any monetary punishment. But such a move would likely be met with the implementation of tariffs against any Ontario-made goods in Japan and the EU.

Simon thinks the word "binding" does not tell us much if retaliatory tariffs could be imposed in the event Ontario ignored the ruling. Instead, he says "the key question is how effective the enforcement mechanism is."

I'd agree-it's equivalent to the maxim that "tax administration is tax policy." In international tax there is no doubt that the question is not the substance of standards, rules, or even norms, but rather what countries actually do, and that happens daily through hundreds and maybe thousands of completely opaque diplomatic interactions (competent authority agreements). Adding arbitration to this mix adds yet another layer of administration and enforcement mechanisms and all the attendant problems that go along with them.

Activists seek Canada Tax Gap Estimate

There is a movement afoot to get Canada to get on the "Tax Gap" bandwagon, and make an estimate about how much is lost in tax revenues to tax evasion. As far as I know only the US and the UK even try to estimate this, and the UK's estimate has been criticised as laughably low, while the US estimate is hampered by shoddy data. Still, it's an exercise worth undertaking I think. If the government won't do it, do we have some enterprising accountants or economists willing to give it a go in Canada?

Tax transparency in Canada-report

I recently posted my Canadian National Report prepared for the Vienna University of Economics and Business, Conference on tax secrecy and transparency, Rust, Austria, July, 2012.  From the abstract:

The aim of the project is to assess how different countries regard the treatment of tax information and tax secrecy. Topics include the collection of data, the sharing of information domestically and internationally, interaction of tax rules with related regulatory rules, and access to taxpayer information by the public. This report discusses Canada's relatively low profile in the global market for offshore financial services. Overall, Canada’s tax regime attempts to strike a balance between protecting taxpayer rights to privacy and confidentiality, and ensuring that the government has sufficient information about taxpayers in order to enforce its own laws, as well as to cooperate with efforts by other countries to enforce their tax laws in respect of their residents who invest in Canada.

 I invite you to download the paper from SSRN here. (link fixed, i think)

Tax transparency: EU development

Richard Murphy points to a press release from Global Witness regarding developments in country-by-country reporting for the extractive industries in the EU:

Global Witness welcome today's European Parliamentary committee vote requiring that EU oil, gas, mining and timber companies publish their payments to governments to help deter corruption.  

The vote brings Europe one step closer to shining a light on payments worth billions of Euros by extractive companies to governments, which have previously remained secret, enabling corrupt government officials to siphon off or misappropriate natural resource revenues.

...The text also contains thresholds for payments that align with similar US 'sunshine' rules for US listed extractives companies set at the end of August.

...a final version of the directive goes to all MEPs for a European Parliamentary vote later in the year.

Arlene McCarthy MEP, the Parliament Rapporteur on the Transparency law, said after the vote in the legal affairs committee: "With this vote we now have a strong negotiating mandate to force the Member States and Commission to accept the Parliament's amendments, putting us on track to create strong global transparency standards, with equivalent rules in the EU and the US." 

More at the link.  

The ultimate gated community is just a free zone with a new name

MR cautions not to "equate charter cities with extraterritoriality": a charter city works either "because a dominant hegemon — perhaps at a distance — supports the external system of law" or because "the external system of law serves up some new and especially tasty rents to domestic interest groups."  Either way, the charter city is not sovereign, rather some established sovereign is exerting control.  So a charter city is really just a free zone: another experiment in relaxing regulation that Honduras has already tried (along with many many countries, yes, including the U.S.), this one just has a name that taps into some emotional sentiment having to do with freedom and choice and entrepreneurialism.  If Honduras just called this another free zone project, perhaps few would take notice or wonder about it.

As this is just a new name for an old idea, it should not be surprising how quickly we see the familiar accountability/transparency issues pile up.  MR points to the Guardian, which reports:

Plans to create a neo-liberal start-up city in Honduras with its own laws, tax rules and police force suffered a setback on Friday when the economic guru who inspired the project said he has been unable to act as its guarantor and watchdog. 

...days after the deal was announced, Romer said he had not been given the powers and information necessary to fulfil his role as chairman of the transparency commission, which is meant to ensure governance of the new development zones.

Romer said he and four other international figures were appointed by presidential decree to the commission, which has wide-ranging powers to appoint and fire governors, nominate judges and hire auditors in the proposed new zones. But the five will issue a statement distancing themselves from this week's announcement and calling into question the legality of their appointment, which they say has not been published in the official gazette as required by Honduran law, ostensibly because of a challenge in the constitutional court.

Free zones have been around for a long time, they have been studied extensively, and they don't have a great track record, most especially when they lack major up front governance policy planning.  Calling the project a charter city won't avoid these difficult problems.

As an aside, I notice that the Guardian puts a price tag on the deal: a business consortium called NKG is paying $14 million for its city.  Who is NKG?  Not the Northern Kite Group or the Neumann Kaffee Group, I suspect.

 

 

Corporate Tax Transparency: U.S. Update

A step forward in the global tax transparency effort: the U.S. SEC has finally approved rules for implementing the extractive industries transparency provisions of Dodd Frank s. 1504.  The rules were due, by statute, more than a year ago.  Industry lobbying against their issuance was fierce but, perhaps spurred by Oxfam's lawsuit compelling the SEC to stop its foot-dragging, the agency has finally produced.  Here is the announcement from the SEC.  A number of stories call this a big day for transparency and a big step by the US, from the New York Times, Global Witness, the Financial Integrity Task Force, the Brookings Institute.

Of course, as Brookings notes, the devil will be in the details, a.k.a., the implementation.  From their report:

Tomorrow those details will be in the hands of the SEC and will determine whether ‘effective transparency’ is attained or continues to remain elusive. Namely the SEC will determine whether the information that needs to be disclosed by companies is sufficiently detailed, relevant and accessible, enabling effective monitoring and analysis by civil society, investors and government reformists.

Given the content of the 2-year-old Dodd-Frank legislation, the SEC has no choice but to mandate disclosure. However, effective disclosure is by no means guaranteed as the SEC could issue weak rules, rendering disclosure ineffective. Thanks to Dodd-Frank legislation mandating transparency, the main danger is no longer wholesale ‘transparency evasion’ by many companies, but the more nuanced risk of enabling ‘transparency elusion’ (or ‘transparency avoidance’) by companies that wish to skirt detailed disclosure, thereby masking possible misdeeds.

Similarly, from the NYT:

Oil experts said it was difficult to know how onerous the payment disclosure rule would be since it was not yet known how the S.E.C. would define some of the requirements. Kevin Book, an analyst at ClearView Energy Partners, said in a research note that the ruling could “impose very real competitive challenges for U.S. companies,” particularly if “compliance leads to disclosure of previously secret terms of concessions, leases and production-sharing agreements.”

More on this to come.