The Boundaries of Tax Justice

I posted a draft of this paper on SSRN some time ago but neglected to post it here, so here it is. I argue that because governments chase wage-earners and consumers doggedly while selectively overlooking or ignoring other taxpayers, the imposition of income taxation as it is practised by states today is fundamentally unjust. Abstract:

The story of our time may be the awakening of society to an epidemic of global tax dodging by the world’s elites. Citizens, watchdog groups, and even government officials are puzzled, frustrated, and sometimes outraged by the phenomenon, wondering where the nation-state lost its way in regulating its people and its resources, and why it is standing by, apparently helplessly, as its tax base erodes while austerity measures undermine the welfare state. This paper demonstrates that the sequence of tax base erosion-austerity-welfare state erosion is a story about a crisis of tax justice. It does so by revisiting how Canada's historic Royal Commission on Taxation, in its search for guiding principles for tax reform, turned to tax justice as the central component for any tax system. It shows why nations have consistently failed to meet these guiding principles, instead taxing the easy-to-tax more or less comprehensively, the hard-to-tax more or less randomly, and the impossible-to-tax not at all. It demonstrates that the result is that no state today imposes taxation justly: instead, taxation as exercised around the world today is overwhelmingly characterized by arbitrariness and injustice. The paper concludes that if governments cannot or will not pursue justice in taxation, they have at minimum a duty to explain to society why this goal is no longer worthy of pursuit.

This paper includes a discussion of who should be considered a "taxpayer" by a state. I argue that citizenship-based taxation is unjust from both a human and statist perspective, and I therefore make the case for residence-based taxation. As always, comments are welcome.

Are multinational companies a public good? If not, why are taxpayers subsidizing their global marketing strategies?

The story is that the Canadian government recently set up food trucks in Mexico in order to promote "Canadian cuisine," which the National Post pictures as follows:

Above: poutine. Below: tourtière, both from Quebec.
(the article says only QC has any sort of cultural food identity. Sorry BC!)  

These national icons are being served from this truck:

Don't judge this book by its cover.

So, the Canadian government has gone to Mexico with a van decorated with fresh fruits...to sell gravy-and-cheese-slathered french fries and meat pie.

To be sure I'm not against either of these foods in principle (so long as the latter is served with maple syrup) and I'm not against Canadians...whether individual or corporate... setting up shop in Mexico to sell the hapless public yet more creative combinations of salt-sugar-fat. (Neither would I be opposed to Mexico imposing Pigouvian taxes on this activity, to compensate for the costly externalities visited upon the public health.)

But I very much object to taxpayers subsidizing the venture. I get that all countries try to promote their culture and in the process increase exports of their goods & services (or is it really the other way around). But as industrial policy goes, this has to be the bottom of the barrel.  If McCain Foods Inc cannot get the word out about its wonderful french fries, I simply cannot see how it becomes the  public's responsibility to provide it with free advertising. 

Last week we learned that corporate tax expenditures more or less equal corporate tax revenues raised in the US.  I haven't seen similar number crunching for Canada (working on it), but I expect for multinationals at least the story is very similar. If you then add these straight up subsidies, are we getting to a place where multinationals constitute a net drag on the fisc? If yes then we should be asking ourselves: when did we decide that multinational corporations are a public good that must be financially supported by other taxpayers? 

Is there anyone out there still clinging to the sense that a free market economy must mean something other than government subsidies for favored industries?

Add to summer reading list: Multinationals and Human Rights

John Ruggie has published Just Business: Multinational Corporations and Human Rights.  Abstract:

One of the most vexing human rights issues of our time has been how to protect the rights of individuals and communities worldwide in an age of globalization and multinational business. Indeed, from Indonesian sweatshops to oil-based violence in Nigeria, the challenges of regulating harmful corporate practices in some of the world's most difficult regions long seemed insurmountable. Human rights groups and businesses were locked in a stalemate, unable to find common ground. In 2005, the United Nations appointed John Gerard Ruggie to the modest task of clarifying the main issues. Six years later, he had accomplished much more than that. Ruggie had developed his now-famous "Guiding Principles on Business and Human Rights," which provided a road map for ensuring responsible global corporate practices. The principles were unanimously endorsed by the UN and embraced and implemented by other international bodies, businesses, governments, workers' organizations, and human rights groups, keying a revolution in corporate social responsibility. 

Just Business tells the powerful story of how these landmark "Ruggie Rules" came to exist. Ruggie demonstrates how, to solve a seemingly unsolvable problem, he had to abandon many widespread and long-held understandings about the relationships between businesses, governments, rights, and law, and develop fresh ways of viewing the issues. He also takes us through the journey of assembling the right type of team, of witnessing the severity of the problem firsthand, and of pressing through the many obstacles such a daunting endeavor faced.

Excellent timing, with all the world watching whether and how governments are going to increase transparency with respect to MNCs and their local and global dealings.

Thoughts on the "you first, no you first" provision in Norway's FATCA agreement with the US Treasury

Norway signed an IGA with the US Treasury on April 15.  I blacklined the Norway agreement against the Model 1 FATCA, (you can download the comparison here) and note that some of the regular features appear, including deemed-compliance status for pension funds and "local" banks* but want to address in this post what I'll call the "you first, no you first" provision in Article 4, paragraph 6.

Some FATCA watchers were surprised to see this paragraph, and I admit I had not noticed it before so I assumed it was new--until I blacklined it and found that no, that paragraph is in the Model 1 Agreement (however it is not in the IGAs with Mexico or the UK), and the Model language is identical to that in the Norway agreement.

In any event, having now read this Art. 4 paragraph 6 more closely, I notice there is actually a good bit of maneuvering going on here. Here is the language:

6. Coordination of Timing. 

Notwithstanding paragraphs 3 and 5 of Article 3:

a) Norway shall not be obligated to obtain and exchange information with respect to a calendar year that is prior to the calendar year with respect to which similar information is required to be reported to the IRS by participating FFIs pursuant to relevant U.S. Treasury regulations;
b) Norway shall not be obligated to begin exchanging information prior to the date by which participating FFIs are required to report similar information to the IRS under relevant U.S. Treasury regulations;
c) the United States shall not be obligated to obtain and exchange information with respect to a calendar year that is prior to the first calendar year with respect to which Norway is required to obtain and exchange information; and
d) the United States shall not be obligated to begin exchanging information prior to the date by which Norway is required to begin exchanging information.

This is actually not at all easy to read (on purpose? One always wonders).  But for sure this does not say, as some readers initially thought, that Norway can wait to give info to the IRS until the IRS begins to give info to Norway. In fact, it rather says quite the opposite. Nor, as I thought when I first read it, does it say that Norway need not exchange until Treasury begins to require equivalent information be reported on Norwegian account holders by US FIs to the IRS.

Instead, it says very simply that Norway need not exchange information with the IRS before the US Treasury regulations require FFIs to begin reporting to the IRS, and the IRS will not exchange info with Norway before Norway starts exchanging. All this use of negatives is confusing so let me try to put it in positive terms: it in effect says that Norway will start giving the IRS info once the IRS requires FFIs to begin reporting per the Treasury regs. Notice that Treasury makes no affirmative commitment on the part of the IRS to actually exchange thereafter--only that in any case it will not exchange before Norway does. It implies that it will be obligated to automatic exchange thereafter, but I am not sure even that is so clear.

The Mexico IGA--the only agreement that is technically in force right now--should provide ample proof that the Treasury has not committed to actual automatic exchange of information with its IGA partners (regardless of para. 6), and certainly that the Treasury is not going to go first. On the contrary, Treasury has only said that it will begin requiring US banks to provide the IRS with information on IGA-country account holders, which could be exchanged with such IGA partners if Treasury determines that such sharing would be appropriate. According to the Treasury, "Even when [an info exchange] agreement exists, the IRS is not compelled to exchange information… if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate.”

No word on what those other factors might be, so read this as a broad grant of discretion to the Treasury, with no accountability required toward the IGA partner.

Mexico, it appears so far, has not yet been given the green light, so I can only assume that the status quo right now is Mexico dutifully turning over (on a monthly basis I believe) IGA-compliant information, while the IRS provides Mexico nothing in return. You might like to see what the American Banking Association thinks about this status quo. I think it is safe to say that the Florida and Texas Bankers Associations are determined to at minimum delay reciprocal automatic information exchange as long as possible, if they cannot eliminate it all together.

Now, if I have these facts incorrect and the IRS is actually exchanging information with Mexico under the IGA, I hope that someone will please correct me right away because this is tremendously important--as I have suggested before, the information Mexico could get from the IRS under such an arrangement could be explosive in terms of exposing the volume and direction of tax evasion as between these two countries (not that the public will get much or any information on these things--on the contrary we most likely will learn absolutely nothing, more's the pity).

One might say the USA won't similarly refuse to share information with Norway as such behavior smacks as bad faith, and countries have a positive duty to on the contrary act in good faith with respect to "international agreements". Moreover, it strains credulity to think that Treasury would start collecting information on Norwegian account holders from US banks, without actually planning to share it.

To that I would counter, presumably Norway knows exactly what it got in this deal: the same promises as have come before.

This is consistent with the rest of the IGA, which suffers from the same lack of reciprocity that in my view belies the character of these instruments as international agreements at all, even beyond their likely constitutional violation in the USA.  I recently wrote an article about the lack of reciprocity in the IGAs, why I think that is so problematic in terms of creating a perverse market advantage for the USA to facilitate tax evasion, and why there is not much reason for being optimistic that the necessary sea change will occur to make FATCA a viable multilateral regime with equal applicability to the world's largest destination for foreign capital. You can read that article here, and as alway I welcome feedback, especially to correct any of my misunderstandings.

To sum up, in my view the "you first, no you first" provision adds nothing in terms of greater reciprocity in the Norway IGA, while the same procedural and substantive defects we have already seen continue unabated.

* I also note a new conditionality to the local bank exception, in Annex I Part II.A.(e):

"provided thatNorway provides information on an automatic basis to the relevant Member State;"

This seems to mean that until Norway is actually exchanging info, its local banks will not be deemed compliant but will be withheld upon once the "you first" rule kicks in (i.e., once FFIs must begin reporting per Treasury regs).  

The local bank exception is a get-out-of-FATCA-free card for banks whose account holders--including US citizens--mostly live in the country. I've been told the provision is meant to help Americans living abroad whose local banks are dropping them in the (mistaken) hopes that this will relieve the FI of FATCA scrutiny. I have a lot of trouble with this local bank exception in terms of what the US appears to be trying to do with it, tempering citizenship-based taxation with an escape hatch that potentially encourages and even invited casual noncompliance, but that's a conversation for another day.

My intrigue with the new language in the Annex here is that I'm not sure why this condition applies only to local banks, and not other deemed compliant FIs. Those who think the FATCA regime is now deliberately aimed not at catching HNW Americans living in the USA and stashing cash offshore (few of whom hold large amounts of cash in accounts with their own names attached, as Lee Sheppard has repeatedly pointed out) but instead at imposing upon US citizens living abroad with their middle class wage earnings and their lack of effective representation in Washington, could have a field day with this provision. 

Canadian Tax Foundation conference: "Abusive Tax Planning"--May 1 in Montreal

The Canadian Tax Foundation will hold a lunchtime conference on May 1st in Montreal on The Fight Against Abusive Tax Planning at the Federal Level and the New Quebec Rules with respect to Non-Resident Trusts, with updates by the CRA and Revenu Québec. The event will be held from 12 to 2pm at the Center Sheraton, Salons 4 & 5, 1201 René-Levesque Blvd. West, Montréal. From an email alert: 

Mr. Dan Rivet, (Manager / GAAR and Inter-provincial Tax Avoidance Section at the CRA) will discuss the various types of abusive tax planning schemes that are currently being audited by the CRA and the success that the CRA has had in its fight against abusive tax planning both at the domestic and the international levels. 

Mrs. Agathe Simard (Director General – Direction principale de la lutte contre les PFA at Revenu Québec) will be discussing the new Québec measures that require the filing of tax returns by all non-resident trusts who hold immovable property in Québec.

En français, I expect--you can check out the program at the link above and register online.

Senate quietly easing restrictions on their own insider trading, to protect "national security"

I wish I could express surprise. I can, however, muster some dismay:

The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency. 

The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates. 

The House was expected to pass a similar bill on Friday.

MR posts links to the FT article, other sources, and says "Some officials suggested that transparency "could threaten national security," more detail on that here.  Here are some further interesting details."

Clearly, what we least need right now from our elected leaders is an assurance that we will know less and less about their business and financial dealings while they ostensibly serve in the public interest. For shame.

Canada Revenue seeks source data on tax evasion from the ICIJ to bring "appropriate action"; What role due process?

Tax authorities are embarrassed by the ICIJ leak and they want the source data before anything more embarrassing hits the front page news and/or to show they really are serious about cracking down on offshore tax evasion.  As a result I am not surprised to see the Canada Revenue Agency attempt to prise the data from the CBC:

...It is my understanding that a leak of large amounts of data potentially exposing cases of offshore aggressive tax avoidance and possibly tax evasion is the catalyst for these stories. I also understand that your organization may be in possession of some or all of this data. 

You will know that the Canada Revenue Agency has already been in touch with your organization to underscore the importance of this information to our continuing efforts on behalf of Canadians to combat offshore aggressive tax avoidance and evasion. 

I would expect that both the CBC and you, as its president and CEO, have an interest in ensuring that appropriate action is taken if individuals are not respecting their tax obligations. Taking action against individuals who are not respecting their tax obligations is in the best interest of the public and law abiding Canadians. The provision of the data that your organization has in its possession would allow the CRA to pursue cases where this is occurring without in any way infringing on your journalistic mandate. 

I again respectfully request that you provide to the Canada Revenue Agency all of the data the CBC received through its collaboration with the International Consortium of Investigative Journalists so that the Agency may review and take action according to its mandate. I understand that the CBC is reluctant to provide this data, citing concerns with journalistic independence and protecting sources. I can assure you that the Canada Revenue Agency has not asked for the source of the information and will treat any information you provide with strict confidentiality in the same manner it treats all taxpayer information it receives. 

I sincerely hope that you will respond positively to this request and agree to provide this information so that the CRA can carry out its responsibilities.

Lots of loaded language there but it's clear the CRA can't compel the CBC to hand over the data, and is appealing to the CBC's sense of responsibility to society to make sure that tax cheats are brought to justice.  Notice the CRA doesn't confine itself to the data that implicates Canadian taxpayers--they want "all the data." I wonder why they don't offer the temptation of the newly-authorized whistleblower rewards. But is it not the case that the CBC, and the ICIJ, have obtained this information illegally? And if so, what are the ramifications for bringing criminal action in Canada?

The ICIJ received a hard drive in the mail containing millions of lines of personal financial data on individuals and companies that presumably were entitled to confidentiality under existing national laws--laws presumably similar to those that currently protect Canadians' financial data from being given out to unrelated third parties. Recall the CRA's “Declaration of Taxpayer Rights," which states that every Canadian:

“can expect [the CRA] to protect and manage the confidentiality of your personal and financial information ... Only employees who need your information to administer programs and legislation have access to your information. We also take other steps to protect your information and make sure it is kept confidential. For example, we follow government-wide and internal policies on the security of information and privacy.”  

The Declaration is simply an agency statement and lacks the force of law, but many of the rights it details, including the right to privacy and confidentiality, are “legislated” rights, that is, they are contained in the Charter, the Act, other statutes, or the common law.  Legislated rights do have the force of law so Canadians have mechanisms to seek redress in cases of breach of confidentiality or privacy by the CRA. Presumably, other countries have similar confidentiality rules and taxpayers have rights in those countries, too. Have these not been (and are they not being) violated by the sender of the hard drive, the ICIJ, the CBC, and the other journalists?  Of course, the CRA would be entitled to data on Canadian taxpayers from the taxpayers themselves and from relevant third parties under domestic law, but this is the major sticking point of the international tax system today: barring automatic information exchange from other governments, it is hard for the CRA to find money hidden offshore without resorting to extra-legal means of obtaining information.

So if we think the people exposed in the ICIJ leak have violated Canadian law, we must also recall that they have due process rights under that law. Would prosecution of Canadians using such illegally-obtained information pass internal due process requirements? I think the answer is probably yes, and I wonder if Canada might diverge from the US in the ability to use ill-gotten evidence in a criminal prosecution.

The reason I think that Canada could use the data as evidence in a criminal prosecution is that even though every Canadian "has the right to be secure against unreasonable search or seizure," and even though this Charter protection has been interpreted to require law enforcement authorities to seek prior judicial authorization for a proposed search and seizure if the target has a reasonable expectation of privacy with respect to the information sought, the case of Schreiber v. Canada says that the rights and freedoms enumerated in the Charter are guaranteed only against interference from actions taken by the federal or provincial governments of Canada.  Following the Schreiber decision, it seems that even tax information obtained illegally would be admissible against Canadians, so long as it wasn't the Canadian government that was responsible for the illegal action that exposed the behavior.  

In the United States, the result might be different. The cases of United States v. Wolf (1984) and U.S. v. Phillips (1979) suggest that information requested from another government by the IRS would be inadmissible as evidence against a U.S. citizen if it was seized by the foreign government in contravention of U.S. law (even if the seizure was allowed under foreign law).  Turning that around, I am not sure what happens if the IRS tries to use information that a private citizen produces in contravention of foreign law, but perhaps the cases suggest that if the information is produced in a manner that also violates US law, it could not be used as evidence in a criminal prosecution. If anyone reading this could shed more light on the subject, I'd be grateful for the insight.

Relatedly, I've been wondering what happens to the ICIJ, the CBC, etc. themselves, if they expose names and financial information about anyone that turns out not to be engaged in anything illegal? Maybe this seems improbable but it bears recalling that it is not illegal to own an account in another jurisdiction, including in the Cook Islands. What is illegal is failing to fulfill disclosure obligations under the laws of any jurisdiction that claims sovereign rights over you. That kind of information is perhaps not on the hard drive, so mistakes could be made in exposing people to public scrutiny who are not engaged in anything illegal. Thus the CRA makes the leap from data on a hard drive to evidence that Canadians are shirking their tax obligations, but it's certainly possible that not all the data points in that direction. That may be why the ICIJ has not made the source data public as Assange did--perhaps there is some sense that disclosure of all the data on the drive might not necessarily be "in the best interest of the public and law abiding" population, of Canada or otherwise.

In any event this story continues to unfold and as usual raises more questions than I can readily answer. I will be very interested to see how things proceed in terms of the CBC or the ICIJ releasing the source data to any tax authorities.

Bridge Over the River Detroit

Surprise--despite determined efforts to stop the process, the US has pushed through approval for the new Detroit-Windsor Bridge.  As you may know the new bridge is opposed by Matty Maroun, who controls much of the current cross-border traffic between these two cities via his ownership of the Ambassador Bridge. From the WSJ blog:

The Detroit-Windsor bridge would be the third international connections between the two cities, joining the 84-year-old Ambassador Bridge and the 83-year-old Detroit-Windsor Tunnel. Those two links are the busiest, and second-busiest, border crossings in North America, respectively, funneling tourists and trade between the two countries.

Canada agreed last year to provide as much as $550 million to build the new six-lane bridge, which would relieve congestion at the border. Under the deal, the private sector will cover the rest of the costs, sparing the already stretched Michigan taxpayers from having to pony up. 

The cross-border financing deal was a big issue and Maroun wanted to take the question to voters via a referendum with the help of some sympathetic funders, but apparently, he failed. Of course, there is the matter of staffing all the booths--that's going to be tough on the US side given sequester-driven cuts.

FATCA reciprocity in Obama 2014 Budget?

One line in the budget itself:

Provide for reciprocal reporting of
information in connection with the
implementation of FATCA ................... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... .

The blanks indicate that the measure is deemed to have no impact, positive or negative, on the deficit.

This explanation in the Analytical Perspectives:

Provide for reciprocal reporting of information in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA).—In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA provisions of the Hiring Incentives to Restore Employment Act of 2010 by reporting to the IRS information about U.S. accounts. Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS.  Requiring U.S. financial institutions to report similar information to the IRS with respect to nonresident accounts would facilitate such intergovernmental cooperation by enabling the IRS to reciprocate in appropriate circumstances by exchanging similar information with cooperative foreign governments to support their efforts to address tax evasion by their residents.  The proposal would provide the Secretary of the Treasury with authority to prescribe regulations that would require reporting of information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-U.S. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities. 

But nothing further from the Treasury in its own explanation of the budget.

So we will just have to wait and see, some more. Note that even this brief move forward highlights the aspiration involved in referring to any currently configured IGA as "reciprocal."

Upcoming conference on tax & philanthropy

Over at Philanthropy blog Lucy Bernholz alerts us to an upcoming conference in DC  (to be webcast) on "The Charitable Deduction in American Political Thought," in which participants will discuss the charitable deduction's "deepest dimensions as an expression of fundamental American political principles." And there is required reading:

• Alex Reid, "Renegotiating the Charitable Deduction," and
• Rob Reich's "Toward a Political Theory of Philanthropy"

Neither of which I've read so I had better get going. 

France ups the ante for EU tax evasion

Cahuzac's denials and ultimate admission about hiding money offshore while serving as the anti-evasion officer-in-chief is very embarrassing for France, and so it should be no surprise to see the rhetoric heat up as new allegations surface about his attempts to move the money around in an ultimately futile attempt at subterfuge. From AFP:

J'ai dit quoi?

France said Sunday [ed: France is a country and cannot speak. It is not so difficult to write "French leaders said", and it is ever so much less distracting.]  it was looking to tighten Europe-wide measures against tax evasion as it scrambles to contain a fraud scandal that has rocked President Francois Hollande's government.

...Finance Minister Pierre Moscovici announced that France would seek to reinforce the exchange of banking information throughout Europe, based on a US ruling in place since 2010 that seeks to fight offshore tax evasion.

Well, the "rule" may have been in place but let us recall that it is not in fact yet in force...three years later, we're still working out the kinks over here, and there are many, many kinks.

More:

"I propose that there be an automatic exchange of information, a European FATCA," Moscovici said on Europe 1 radio.

Hollande's government has been shaken by the scandal, which erupted Tuesday after Cahuzac -- once in charge of tackling tax evasion -- admitted to investigators that he had a foreign account containing some 600,000 euros ($770,000). 

...Critics have been quick to round on Hollande and his ministers, accusing them of either trying to cover up the scandal or of mismanagement for having believed Cahuzac's denials.

...Hollande has tried to contain the fall-out from the scandal, saying he was unaware of the account and announcing Wednesday that a new law would be submitted within weeks that will establish greater control over ministers' wealth. 

The law would also ban any elected representative found guilty of tax fraud or corruption from holding any form of public office.

Query whether there would be enough people left to run the world if every country made this same pledge.

Kahng & Fellows: Undertaxed Business Owners and Overtaxed Workers

Lily Kahng & Mary Louise Fellows recently published Costly Mistakes: Undertaxed Business Owners and Overtaxed Workers, in which they take issue with traditional attempts to distinguish between outlays that constitute "investment", which may be used to reduce income (sooner or later) and those that constitute "consumption", which never get to be used to reduce income. Every tax professor must address this line-drawing issue in the first tax course and in my experience students are often frustrated by  number of clearly arbitrary designations. Typical example: why is it that a consultant's outlay for box seats to woo clients is an "investment" but my law school tuition is "consumption"?  Lily & Mary Louise's answer: because the powers that be have in general determined that businesses only make outlays for the pursuit of profit, while employees are equated with consumers, so their outlays must typically be considered personal. I am glad to see Lily & Mary Louise take on this line-drawing challenge, and I think they do a good job showing the normative failures that have been allowed to direct tax policy in this regard.

From the abstract:

This Article advocates fundamental changes in the federal income tax base by systematically challenging conventional understandings of consumption and investment. As signaled by its title, “Costly Mistakes,” this Article’s thesis has to do with the disparate treatment of expenditures incurred by business owners and workers. Where the current tax law treats a business owner’s expenditure as investment, the Article sometimes finds consumption and questions why the law should allow the expenditure to be deducted. Where the tax law treats a worker’s expenditure as consumption, the Article sometimes finds investment and questions why the law does not allow at least a partial deduction. 

...[T]he Article demonstrates that the deference the tax law traditionally has accorded business owners results in their undertaxation. Through an analysis of the tax law’s treatment of workers, it further shows how its structural and substantive rules treat workers primarily as consumers, rather than as producers, and why that results in their overtaxation. 

The Article then investigates the economic inefficiencies produced by the tax law’s generous treatment of business owners’ outlays and its unduly restrictive treatment of workers’ outlays. It goes on to suggest how to scrutinize and reform the tax treatment of workers and how to extend that approach to business owners with far-reaching implications. Finally, the Article relates the undertaxation of business owners and the overtaxation of workers to the broader social policy discussions concerning the high rate of unemployment in the private sector and the escalating deficits in the public sector. 

It concludes that the success of the U.S. economy in the twenty-first century requires the tax law to treat both business owners and workers as producers. It further concludes that the tax law’s continuing failure to acknowledge that business owners and workers are both consumers and producers undermines the goals of efficiency and fairness.

In addition to making the normative case against preserving the status quo on both efficiency and ability to pay grounds, the article walks through the major issue areas covered in an intro tax course, so this looks like a good candidate to add to any intro tax canon. 

To understand why citizenship-based taxation is objectionable, consider the STEM Jobs Act of 2012

Victoria Ferauge explains in as clear a way as may be possible why it is important to understand what people mean when they talk about citizenship-based taxation, and why the US effort to impose it with the big stick of FATCA is so objectionable to Americans living in other countries (also known as "immigrants" in those countries). She makes a number of points but I wanted to highlight one here:

In the [dialectic on Americans living abroad, which equates expatriation with tax evasion] it seems not to have occurred to the American public or its lawmakers that the people they are trying to attract [through immigration policies aimed at high-skilled workers] are the product of other countries' investments in producing a well-educated populace. 

In light of that, consider what the Heritage Foundation says about the STEM Jobs Act of 2012:

American businesses are struggling to fill high-skilled employment opportunities. STEM jobs grew at over three times the pace of non-STEM jobs between 2000 and 2010 and are expected to grow almost twice as fast by 2018. Business groups have spent years urging Congress to reform the visa system in order to fill these empty positions.

Enhancing the ability of high-skilled workers to enter the U.S. would be an asset to the nation’s economy as well as its indebted government. 

In case the instrumentalist nature of our interest in immigrants is not clear, the point is we're going to make these foreign-born, foreign-raised, foreign-educated, now high-skilled, highly-paid workers a permanent part of the American taxpaying public, which can increasingly be defined as the American wage-earning public. One may be forgiven, perhaps, for juxtaposing this deep thirst for foreign talent against America's ongoing disinvestment in its own social infrastructure, including public education (also helped along by the Heritage Foundation).

Victoria's post thus seems to me to contain the contours for constructing the normative case for taxing humans. There is much to be done on this topic, but it seems clear that the practice of admitting immigrants at all, let alone actively seeking highly-skilled ones, demonstrates that inbound human mobility is a social good that states support; that inbound human mobility (perhaps especially of the high-skilled kind) may be the product of rather intense social investment by some other country; and that conversely taxing on the basis of citizenship regardless of residence is a means of preventing outbound human mobility and so runs strictly counter to the overall good of human mobility while also being hostile to the aims of other countries also seeking inbound labour.

The US has long objected to onerous fiscal controls on the capital it sends across borders, so it seems particularly difficult to understand the ongoing support for placing onerous fiscal controls on its outbound labour supply. Contextualize that observation within the story of the shift of taxation from capital to labour over the past 50 years, however, and a pragmatic explanation is easily ascertained. But pragmatism does not make the normative case. In fact, it violates the conventionally-understood major normative factors for assessing taxation--efficiency, administrability, and fairness--because it introduces an insurmountable amount of arbitrariness. This topic deserves much more thinking than has been allocated to it by tax policy observers, including myself.

There is much more at the link, please do go and read Victoria's whole post.

US to OECD: target your anti-BEPS regime carefully

This is rich. The US wants the OECD to not go overboard on the BEPS thing.  From Tax Analysts [gated], Treasury International Tax Counsel Danielle Rolfes said that the Treasury wants to

"make sure that any suggested solutions are targeted at addressing the source of the problems and don't go beyond the scope of the BEPS project."

We are talking about a country that can't seem to distinguish between an au pair financing a trip to Europe and a billionaire stashing money in a series of hidden offshore accounts. Yet there's more:

...The BEPS project carries a risk of "scope creep," Rolfes said. ... "We want to stay mindful of what BEPS is and make sure that in trying to solve those problems we don't come up with solutions that are broader than necessary or that have other implications, particularly with respect to the allocation of taxing rights between two taxing jurisdictions," she said.

...While Treasury endorses the sense of urgency around the BEPS project and the feeling that the problems must be fixed, Rolfes said that U.S. officials intend to be thoughtful about how the rules should or should not be changed.  

I'm not sure what is meant by being thoughtful. Being thoughtful might mean thinking through what you need to change, how you mean to change it, how you avoid over-breadth and under-breadth at the same time, how much everyone has to spend in order to get the result you seek, and whether what you write as rules can be coherently implemented in practice.

Perhaps Rolfes is worried that if the OECD looks too closely at the allocation of taxing rights between two taxing jurisdictions, the world will see clearly that (1) the US is the most overreaching in this respect given that it taxes on the basis of citizenship and (2) the global North has long arranged the allocation to favor itself at the expense of the global South.  

Maybe it is just that Rolfes does not appreciate the finger pointing at US companies:

"It's not just U.S. companies that engage in BEPS. Moreover, all agree that the BEPS we are primarily concerned with is driven by tax planning that is perfectly legal."

Rolfes called some of the moralizing on this issue "ironic," though I think she means "hypocritical." It might not not sound right for the Treasury to use that word when talking about tax competition, so maybe this is carefully chosen rhetoric:

Rolfes [added]that while much of BEPS income lands in zero-tax jurisdictions, some of the elements of tax laws that enable BEPS are attributable to tax competition that's occurring between the same taxing jurisdictions that are trying to solve BEPS.

"This tax competition itself contributes to BEPS," she said.

She acknowledges that "many of the current international standards, such as those relating to transfer pricing and tax treaties, have been developed over many years by U.S. tax policymakers working with their counterparts in the OECD."  She says "We at Treasury are humbled ...And we want to make sure that any solutions we have are targeted to that problem and not to other problems."

Treasury economist Michael McDonald added that

The BEPS project should clearly undertake a cost-benefit analysis of the possible alternatives...clearly I think if the BEPS project is going to be successful, one has to weigh the benefits of the current [OECD] Transfer Pricing Guidelines, in addition to the costs."

Tax Analysts economist Martin A. Sullivan can't understand why the US is focused on the BEPS thing at all, since Dave Camp has a proposal for switching the U.S. to a territorial system:

"To me, that seems much more important than an OECD initiative. I don't understand how the two are going to work together. If Chairman Camp achieves his goal by the end of the year of putting the entire international tax system up for a vote, shouldn't that be our starting point?"

Rolfes responded that the BEPS project would still matter even if the US changed to territorial, since such a switch would not in any way make profit shifting less an issue. She also had some interesting things to say about participation and influence in tax policymaking via the OECD:

Treasury needs to be engaged in a significant tax policy initiative like BEPS, which would be undertaken by other countries with or without the U.S. ...Having a seat at the OECD table provides the United States the opportunity to be a part of the dialogue and to have an influence on how international tax rules are developed ... [and] other countries are not going to wait for the conclusion of the U.S. Congress's reform debate.

So the US sees the OECD as playing an important role, and one that could have negative impacts on US policymaking choices absent Treasury's involvement. And this exchange shows that at least some at the Treasury are capable of articulating at least a sense of understanding the concept of regulatory overbreadth. But you could interpret these statements as at best tepid support for the OECD's initiative, at worst a foreshadowing of resistance to come. The US torpedoed the OECD's efforts on harmful tax practices, only to come up with the much more expansive and awe-inspiring FATCA on its own. If the US torpedoes BEPS, what will be in store for the taxation of multinationals? It should be a fascinating ride.

How to Make America a Global Tax Haven

Isn't it astonishing that at the very moment the USA is twisting arms the world over ostensibly to crack down on tax havens and the erosion of the tax base they help perpetuate, Bloomberg could run this headline without irony or shame, and we can get a brand new quote from yet another American lawmaker about the virtues of making the US a tax haven. This time it's not Paul Ryan who wants to "make America a tax shelter" but his friend Devin Nunes, who says the US ought to abandon corporate income tax, and substitute for it a cash flow consumption tax, in order to "make the U.S. the largest tax haven in human history."

You just cannot make these things up. You remember Nunes, I hope--yes, that's him, the co-chair of the international working group on tax reform convened by Camp & Levin. Yes, that Levin, the one that wrote FATCA, the legislation that is supposed to stop Americans from cheating on their taxes by using other countries as tax havens.

Of course you can say that in substance the two are very different--Levin's focus is to stop Americans hiding cash overseas in foreign bank accounts, while Nunes just wants to let corporations pay less tax on the income they earn in the US. And a cash flow consumption tax might not be evil. But using the tax haven and tax shelter rhetoric as a marketing strategy is objectionable. Either you think tax havens and tax shelters are an abuse of the rule of law, in which case you shouldn't try to turn your country into one, or you think they're just dandy in which case you shouldn't try to shut everyone other country down  to capture the market for yourself.

Journal Issue: Mobile Money in Developing Countries

Recently the Washington Journal on Law Technology & the Arts issued a symposium issue entitled "Mobile Money Symposium 2013." Description:

This special issue of the Washington Journal of Law, Technology & Arts contains papers contributed to a conference held at the University of Washington School of Law on April 20, 2012. The conference, entitled Mobile Money in Developing Countries: Financial Inclusion and Financial Integrity, was organized by the University of Washington School of Law with the support of the Linden Rhoads Dean’s Innovation Fund, Deakin University School of Law, Australia, and the United Nations Commission on International Trade Law (UNCITRAL).

All of the papers are available for download. They are:

• The 2012 Revised FATF Recommendations: Assessing and Mitigating Mobile Money Integrity Risks within the New Standards Framework by Louis de Koker; 
• Governance of Global Mobile Money Networks: The Role of Technical Standards by Jane K. Winn; 
• Privacy and Security Concerns Associated with Mobile Money Applications in Africa by Andrew Harris, Seymour Goodman, and Patrick Traynor; 
• The Role of UNCITRAL Texts in Promoting a Harmonized Legal Framework for Cross-Border Mobile Payments by Luca G. Castellani; 
• Mobile Money as an Engine of Financial Inclusion and Lynchpin of Financial Integrity by Claire Alexandre and Lynn Chang Eisenhart; 
• The Role of Anti-Money Laundering Law in Mobile Money Systems in Developing Countries by Emery S. Kobor; 
• M-Payments in Brazil: Notes on How Country Background May Determine Timing and Design of Regulatory Model by Gilberto Martins de Almeida; 
• Safaricom and M-PESA in Kenya: Financial Inclusion and Financial Integrity by Mercy W. Buku and Michael W. Meredith; 
• Mobile Money, Financial Inclusion and Financial Integrity: The South African Case by Vivienne A. Lawack-Davids; 
• Reporting of Suspicious Activity by Mobile Money Service Providers in Accordance with International Standards: How Does it Impact on Financial Inclusion? by Miriam Goldby; and 
• Mobile Payments In The U.S.: How Disintermediation May Affect Delivery of Payment Functions, Financial Inclusion and Anti-Money Laundering Issues by Erin F. Fonté.

The one on Safaricom looks like a fascinating case study:

The recent and widespread availability of affordable mobile phone technology in developing countries has paved the way for the development of a number of mobile money and electronic remittance services. One of the most successful of these services is Safaricom’s M-PESA program, launched in the East African nation of Kenya in March 2007. Since then, the program has successfully enrolled 15.2 million users, transferred more than US$1.4 trillion in electronic funds, and contributed significantly to poverty alleviation and financial inclusion efforts in rural Kenya. This Article seeks to trace the development of M-PESA in Kenya, provide a snapshot of the Kenyan implementation of and experience with the program, and consider the role that services like M-PESA might play in national and international anti-money laundering and counter-terrorist financing efforts. 

Interesting throughout.

Corruption laid bare by Global Witness: A Manual for Stealing Your State's Resources for Personal Gain

Global Witness issued this must-watch video this week, which demonstrates how leaders steal from their own people with the help of lawyers and bankers. The crime itself is bad enough, but the blasé demeanour of these perpetrators is truly offensive. They must have done this a lot in order to view the proposed transactions in such a banal and relaxed way. Though one woman clutches a pillow quite closely as she calmly explains how to take care of the details. Is she nervous about her illicit behaviour, or just eager to close the deal?

This exposes a number of rotten practices, few of which I would guess are unique to Malaysia. Instead, what I think we are seeing here is a manual:

How to steal your state's resources for personal gain, in 8 easy steps.

Step 1: get control over state land allocation and resource extraction licensing by becoming a state authority.
Step 2: open a series of accounts in trust or corporate form, in places will hide your identity and assets from other state authorities, for example, in "the new Switzerland."
Step 3: have the state sell land at nominal prices to your family members and/or companies you control.
Step 4: when buyers inquire at your state offices about making land leases or purchases, direct them to your family members.
Step 5: have your family members and lawyers explain to the buyer that the purchase will require two purchase contracts plus a side arrangement for licensing rights.
Step 6: write the first purchase contract for a nominal price to legally transfer the property locally but generate minimal (or no) profit.
Step 7: write the second purchase contract to direct the remaining purchase price to be paid directly to one of the offshore accounts.
Step 8: have the buyer write the side arrangement fee directly to one of the offshore accounts.

Query: how do you make sure your buyer actually pays you the second purchase price? That is, if the first contract documents the sale, what stops the buyer exercising ownership rights if he double crosses you on the offshore bank contract? The woman in the video says no problem, this has "been done." How has it been done? Are we talking about hiring thugs to break kneecaps? I've heard of similar triangular contractual arrangements in other equally criminal schemes, and I always wonder about how that aspect works out. Honor among thieves?

Can States Shame Each Other into Good Behaviour?

Interesting new paper by Sandeep Gopalan & Roslyn Fuller, Enforcing International Law: States, IOs, and Courts as Shaming Reference Groups. From the abstract:

We seek to answer the question as to whether international law imposes meaningful constraints on state behaviour. Unabated drone strikes by the dominant superpower in foreign territories, an ineffective United Nations, and persistent disregard for international law obligations suggest that the sceptics have won the debate about whether international law is law and whether it affects state behaviour. We argue that such a conclusion would be in error because it grossly underestimates the complex ways in which IL affects state behaviour. ... We show that IL is enforced by states, courts, and international organizations by the imposition of shame sanctions on offenders and that these sanctions affect state behaviour in the same ways that traditional coercive sanctions do. In doing the above, we also develop the concept of a shaming reference group.

I'm in general a skeptic, viewing the tripartite failures highlighted in this abstract as overwhelming evidence that in the international community, might makes right, full stop. The tenth anniversary of America's unprovoked war on Iraq, which is now clearly characterized as a strategy to gain control over its oil resources that was planned far in advance of 9/11, seems too ample evidence backing the skeptical view. But I'm willing to engage that social pressure might have some amount of impact on state behaviour in some cases. At least, I am willing to believe that states will work hard to appear to be good citizens in the international legal order, and that this might cause some leaders to make decisions differently than they might absent shaming in the international community. But I remain at heart a skeptic so I will continue to believe that in practice states will use any power they have to achieve their ends at the expense of other states (much as leaders will do the same at the expense of their own people if they can get away with it).

This skepticism is reinforced by the part in the paper that talks about how shaming is undertaken and shows that the resources of the "shamer" come to bear in important ways on who and what gets shamed:

States are likely to be the principal enforcers of shame sanctions. ... States make evaluative opinions about other states all the time. Some have the resources to make elaborate justifications and provide evidence for those opinions in a legal manner. One example is the United States State Department’s annual human rights reports. These have come in for harsh criticism as being partisan. ...partisanship is a major problem for shaming. The US has also been accused of hypocrisy. 

Attacks based on the lack of neutrality and credibility to engage in shaming are severely debilitating, and do suggest that neutrality, or a perception thereof, is important if shaming sanctions are to work. This is not to say that shaming by individual states should be ignored altogether. Some states will be persuaded by the US State Department’s reports, and it must ultimately fall to a process of democratic debate to determine if the state being shamed is indeed deserving of punishment. There is nothing stopping Iran and Venezuela from issuing shaming reports of their own. If members of the international community believe these reports are the products of serious investigation and research, they will be credible. On the other hand, if they are merely propaganda, they are likely to be ignored. 

This suggests major cognitive bias problems if shaming is to be a regime for uncovering egregious offenders, at least, if we seek any sort of even-handed regime. If we don't worry about that problem, I think we're back to might makes right, and shaming just becomes another resource for wielding power to act in self-interest, while simultaneously shielding the shamer from reciprocal pressure.

It also suggests the major role of geo-politics in the name and shame game. In a footnote to the above paragraph, the authors highlight a particularly disturbing example:

...William Schulz, executive director of Amnesty International USA, remarked on the occasion of the release of the State Department’s annual human rights report: “The content of this report has little correspondence with the administration’s foreign policy; indeed, the U.S. is increasingly guilty of a ‘sincerity gap,’ overlooking abuses by allies and justifying action against foes by post-facto references to human rights. In response, many foreign governments will choose to blunt criticism of their abuses by increasing cooperation with the U.S. war on terror rather than by improving human rights.” 

This is a frightening and ultimately very discouraging status quo. It suggests that when we talk about shaming the result will not necessarily be better behaviour, but rather behaviour aimed at currying the favor of those who decide whom to shame. It worries me if that is the best we can do to guard against states doing terrible things to each other and state leaders dong terrible things to their people.

Rosenbloom on proven incentives to get offshore cash back home

David Rosenbloom has a great letter to the editor in Tax Notes today [gated], excerpts:

Recent press reports describe a large increase in January tax receipts as taxpayers shifted substantial amounts of income forward into 2012 in order to avoid the higher taxes anticipated for 2013. 

...We have been told, again and again, that there must be lower tax rates on accumulated foreign earnings in order to provide an appropriate incentive for U.S. multinational companies to repatriate the enormous sums they hold offshore.  

...It turns out that incentives can be created just as well by raising taxes as by lowering them. 

Who knew?

Nice. Empirical evidence that to get cash repatriated, the trick is to raise taxes with enough lead time for companies to move thing around. Best part: this process is totally repeatable next year.

Montreal “Mafia Row” Rizzuto house has buy offer

Every penny from this sale ought to go to the City of Montreal. It's not much, but it might cover a few weeks worth of corruption maybe.

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.

How Much Water?

Water comes up on occasion as a topic related to taxation and society because of its character as a public good and a private commodity. A reader sent this infographic of interest, click on it to see a bigger version. Interesting advice on the bottom: to save water, drink beer (instead of milk). Or drink water, instead of everything else. It's so strange to me that it take more water to make instant potatoes, which are dehydrated potatoes, than to make the actual potatoes. I assume the same logic applies to things like powdered milk, detergents, etc.

Anti-austerity Protestors in Portugal: "Screw the troika, we want our lives back"

Austerity is spreading across the globe like a bad virus, despite the vehement opposition of the general population. In Portugal, thousands of demonstrators have held marches across the country in protest. From Al Jazeera:

Tens of thousands of people filled a Lisbon boulevard during Saturday's protests and headed to the finance ministry carrying placards saying "Screw the troika, we want our lives back". 

The troika is a reference to the European Commission, the International Monetary Fund and the European Central Bank, the lenders behind the country's financial bailout. 

Many protesters were singing a 40-year-old song linked to a 1974 popular uprising known as the Carnation Revolution. 

Portugal is expected to suffer a third straight year of recession in 2013, with a two percent contraction. The overall jobless rate has grown to a record 17.6 percent. The marches were powered mostly by young people among whom unemployment is close to 40 percent.

 ...After several years of tax increases and welfare cuts, austerity is poised to deepen as the government looks for another $5.2bn to cut over the next two years. The national health service, education, pensioners and government workers are likely to be the hardest hit. The government is locked into debt-cutting measures in return for the $102bn financial rescue set up in 2011.  

More tax hikes and spending cuts are on the way for Portugal: when it comes to the IMF, you must pay your debts regardless of the consequences. That was always the IMF way of course, but when austerity plus regressive taxation was being imposed on impoverished countries with disastrous social and economic results, the global North didn't seem too bothered by it. One protestor in Lisbon is quoted as saying, "This government has left the people on bread and water, selling off state assets for peanuts to pay back debts that were contracted by corrupt politicians to benefit bankers." That scenario is lifted straight out of the IMF's playbook throughout Africa in the 1990s.

Treaty angle on PPL, the US foreign tax credit case

David Cameron has a fresh take on the PPL case which is worth a read, in yesterday's Tax Notes [gated]. He's wondering why no one has raised the US-UK tax treaty, which he thinks would resolve the creditability issue with ease.  He says:

... Because neither PPL nor Entergy raised the treaty issue, the Tax Court, the Third Circuit, and the Fifth Circuit relied solely on the requirements of section 901 and the regulations that define a creditable tax. The complete lack of any reference to the U.K.-U.S. tax treaty is extremely curious because the treaty provided more than adequate grounds to conclude that the windfall tax was creditable under U.S. law. 

...The [applicable] U.K.-U.S. tax treaty identified specific existing taxes imposed by the United Kingdom and designated them as income taxes for which a credit would be available (covered taxes).  

Importantly, covered taxes may well include foreign taxes that would not qualify as income taxes under domestic law.... 

...[T]he language describing the indirect credit under article 23(1) does not specifically refer to an "income tax" but only to a "tax paid to the United Kingdom by that corporation with respect to the profits out of which such dividends are paid." 

... The failure of the taxpayers in PPL and Entergy to raise the treaty issue is all the more curious given the IRS's recognition in a coordinated issue paper that the windfall tax involved a treaty issue.[The IRS claimed that the Windfall Tax would not be creditable because it was a one-time levy imposed on appreciation in value, but the] IRS's analysis of the treaty issue is not ... convincing. 

... The Supreme Court need not decide whether a formalistic or substantive analysis applies under section 901 because the U.K.-U.S. tax treaty provides an alternative argument -- a definition of an income tax at least as broad as that under section 901 and the application of a substantive analysis to determine if a tax satisfies that definition -- to conclude that the windfall tax is creditable based on the Tax Court's findings. 

...By ignoring the existence of the U.K.-U.S. tax treaty, the parties and the lower courts in PPL have overlooked a significant aspect of the case. The Supreme Court should not repeat their mistake.

I agree with David that the treaty argument should have been made, even though I am less convinced than he is that on substance the "windfall tax" is really even a tax at all--I think it looks like a purchase price adjustment. But that was also not an argument brought up by anyone at trial, instead the IRS conceded that the "tax" was in fact a tax. Having done so, the treaty does seem to present the more permissive regime.

But a big part of this story is David's puzzlement about the treaty being overlooked by all the parties and all the judges, despite the IRS having previously articulated a treaty-based position on the very tax in question. Can it be that the parties just assumed the treaty did not apply, or if it did apply, did not provide a different result? Can it be that they all made those assumptions without undergoing a close analysis, without doing any research?

If so David is suggesting that a big mistake has potentially been made, and if the Supreme Court rules against the taxpayer in PPL, it may have been a quite costly mistake. That's bad for the taxpayer and bad form on the part of the lawyers, but intriguingly, it also suggests that even in a top fight litigation situation like this, it is possible that the tax law experts on both sides overlooked an applicable legal regime, most likely because the regime in question involved international law rather than a statute in the tax code.

That is a fascinating observation for those of us who like to think about the rule of law as the product not of legal texts by themselves but of their dynamic implementation in practice. If a legal text exists but is ignored by the legal system, can it really be said to be law at all? David is suggesting that the US-UK treaty is a tree falling in a forest, unheard by anyone. Usually I am worried that people will imagine that they hear trees falling in forests when there are no trees at all--that is, I worry about non-legal assertions being treated as equivalent to law (for example, OECD guidelines). David's article suggests that the opposite may have happened in this case.

IRS brushes aside the constitution to make way for FATCA

In a Tax Notes International article [gated] today, Lee Sheppard discusses remarks about FATCA by Jesse Eggert, Treasury associate international tax counsel, at a March 1 IFA meeting. The most troubling aspect for me comes in the last part, when Sheppard describes a Q&A over the intergovernmental agreements and the IRS rep casually dismisses any constraints on the Treasury's attempt to bind the US with these documents as a matter of international law. There are two main questions here and both answers strike me as deeply problematic. First, there is this:

Can there be an IGA with a country that has no treaty or tax information exchange agreement? Yes, Eggert responded. It would have to be a Model II or nonreciprocal Model I . Amendments would have to be made to add information protections and assistance provisions.

With respect, this does not accord with what we have been given to understand so far about these IGAs. One need only read the preambles to the IGA models and signed agreements and consider the treaty power briefly to see that there is a very large legal difficulty here. As I have said before (and have a feeling I will be saying repeatedly), the Executive Branch cannot simply bind the US to any agreement it wants to without doing violence to a constitutional process that has been expressly laid out and subject to decades of analysis and debate by the country's most preeminent legal minds.

This is why the IRS has been very quietly implying that the IGAs interpret existing treaties. I don't agree on the merits that this could possibly be true, but the IRS needs it to be true because if it is not true, the only alternative is that the IGAs are sole executive agreements entered into by the executive branch with no congressional oversight whatsoever. That puts them on the most precarious legal ground in terms of foreign policy power in the US, and by this statement Eggert pushes them closer in that direction.

Second, there is this:

Does Treasury have authority to make IGAs? Eggert argued that IGAs are within Treasury's statutory authority to make FATCA regulations (section 1471(b)). Treasury and IGA signatories are discussing how to make domestic implementing laws consistent.

Again with all due respect, this just simply is not true as a matter of US law. The executive branch does not have the power to authorize itself to enter into treaties without congressional oversight. It is the constitution that provides the treaty power, and Congress is expressly involved. Congress could have granted the executive specific authority in this case, as it has done in other cases, but it clearly did not do so here. It is not clear what Eggert means by "making domestic implementing laws consistent." Maybe that refers to the domestic laws of treaty partner countries, which will have to change their data privacy laws to accomodate the information sought by the IRS. If so, that has nothing to do with the US. From what we have seen so far, it seems clear that the IRS is treating the IGAs as operational once the other country so indicates it is operational from their perspective (cf Mexico).

Arguing that the authority is implied within Congress' mandate to Treasury to issue regulations under 1471 is blowing a hole through the treaty power. It argues that Congress empowers the Executive Branch with treaty making authority with each and every directive to enact regulations. It makes a farce of the congressional executive agreement process that has been begrudgingly accepted as authentic by most constitutional scholars today. And never mind the old standard, the Article II treaty power. By this logic if the President wants an international agreement--any international agreement of any kind--he never needs to consult the Senate again, he can simply find some reference by the Congress directing his regulators to regulate. If Eggert is right in this assessment, it is not a stretch to see this as the beginning of the end of the Article II treaty ratification process in the United States. In other words if this works, then it's anything goes when it comes to the Executive Branch overriding domestic law with an international agreement.

Finally, I note that one other Q&A Sheppard mentions is also intriguing, though on the surface it seemed uncontroversial:

Existing IGAs will be interpreted to say that countries may choose the definition of an item in the final regulations which came later in time. Treasury will not amend IGAs wholesale when regulations change, Eggert explained.

This may seem benign--it provides flexibility despite the apparently rigid parameters of the documents (which are treaties, after all, and not so easy to just unilaterally alter at whim). But this is in fact very interesting as a legal matter because it quietly moves the world a little closer to yet another US tradition that many people in other countries find odd if not outright incompatible with international law, namely, the treatment of treaties as equal in legal status to other laws, including statutes and case law, so that treaties can be overridden at any time by a new statute or judicial decision. But it goes a further step to include regulations within that overriding scope--where they might not so clearly belong even under US law.

In other words, the IRS is saying that not only does the "last in time" rule apply to IGAs (as they would to any US international agreement), but we'll apply the last in time rule to other countries too (even if under their own laws the treaty would override later-enacted domestic laws); moreover the last-in-time rule is now extended to treasury regulations (a unilateral law that will be used to "interpret" a bilateral agreement, yet another controversial treaty interpretation position), and finally we are going to make it the treaty partner's choice to pick among the regimes to get the best result (which treats treaty partners not as negotiators in a bilateral agreement but rather in the same way as taxpayers subject to an elective regime).

It is getting progressively more difficult to keep up with the sheer volume of violations of laws and norms being undertaken by the IRS in order to get FATCA to work. It is rather disheartening (in the sense of being a scholar who studies legal process as though it matters) to realize that to many or most people involved in this project, all of these violations are just technicalities and semantics getting in the way of a result everyone wants.

Who is to blame for Starbucks-style tax dodging?

The answer is "government" if you believe the Telegraph, from an opinion by "Richard Emerton, Head of Board Practice at Korn/Ferry Whitehead Mann" (an executive recruiting firm). He's enthusiastic about tax competition: the kind that will keep European companies "competitive" on a "level playing field" by lowering their taxes on purpose, and he's keen to blame government alone for any failure of tax policy to date, e.g. the kind of failure that led to the public shaming of Starbucks and friends.

I agree with Emerton when he says stop blaming the companies (alone) for failing to pay taxes when this is the system that has been deliberately set up to meet them. But let us not forget that the rules have long been written collaboratively amongst government and business interests with virtually no civil society oversight. Once again, multinationals have the best tax system money can buy. Emerton does forget to mention that part, and goes too far in shifting the blame to government alone. Excerpts:

...The UK Government has done a good job in creating a tax system that encourages businesses to set up in Britain and the Chancellor has made it clear he wants international businesses to operate here. It is therefore important he does all he can to prevent European politics from perverting his well-intentioned efforts to look at the problem from an international perspective.  

What strikes me as counter-productive about the debates that have taken place over the likes of Starbucks and Google is the anti-business rhetoric from many politicians in the search for public approval. A degree of anger from the public may be understandable, but is it directed at the right targets? Korn/Ferry’s latest “Boardroom Pulse” survey of FTSE 100 chairmen suggests that business leaders think not.

Not sure what that survey asked, but let's assume it was something on the order of, "do you enjoy being publicly pilloried for doing your best to exploit every means of tax reduction your government generously makes available to you?" And the follow up question ought to have been (but probably was not) "Do you enjoy public scrutiny of your constant attempts to influence tax policy at every level of governance in order to achieve that generosity of spirit on the part of lawmakers?" To which the answer would no doubt have likewise been a resounding "business leaders think not." Emerton goes on:

While agreeing that the public has a right to be angry, many respondents felt that dissatisfaction should be directed towards the tax legislation and those in charge of it, rather than the companies observing it. Indeed, it is governments that have failed to modernise international tax legislation in decades, despite the wholesale changes that have taken place in the way businesses operate across borders. 

Oh, but Mr. Emerton, you failed to define a key term here: "those in charge of it." I mean, it's not like the companies that help write the law are shy about it. That is, after all, what organizations like the BIAC and the ICC are for, and if you don't know what the BIAC or ICC are, well, you're not trying hard enough to understand international tax. Look also for example at any number of marketing brochures by the likes of the big four. They are not hiding their influence, they are selling it as a product. Here's one by KPMG that I just happened to come across yesterday:

Our professionals have been directly involved in writing and reviewing the applicable Treasury regulations ... which govern tax-free separations."

You will come across this kind of claim all the time if you do any work at all in tax, so it is disingenuous at best to fail to mention industry influence as a major aspect of tax lawmaking at the national and international levels. But Mr. Emerton moves along quickly to make hay of the old adage that every one has a right to minimize their taxes and for company directors this has become a duty:

The chairmen we surveyed pointed out that company directors have a fiduciary duty to minimise tax bills, providing they are acting in an ethical manner and are not inviting legal risks.

That's a pretty vague provided, and a big weight to carry for fiduciary law. Emerton hammers it home:

Which raises a fundamental question stemming from the tax issue – should the primary duty of a company’s board and senior management be to its shareholders, or to the wider moral and social concerns of the public?

Notice this is assumed to be an either/or and not a both, and it's also committing the false dilemma fallacy. But having committed, we must have follow-through:

The chairmen we talked to were divided. Yes, business leaders have a duty to drive value for their shareholders. And yes, businesses also have a duty to act responsibly as members of wider society. It is the responsibility of the leaders of these businesses to strike a balance and most of them make significant efforts to do so. Inevitably, sometimes they get this balance wrong, but attacking them for trying to drive shareholder value while playing by the rules of the game will solve little. A better focus of our energies is to ensure that international tax laws are strengthened by the regulatory framework governing businesses, allowing them to focus on achieving long-term sustainable value for shareholders and for society. However, policymakers must ensure that this isn’t achieved at the expense of a level playing field for businesses across the world, not just one part of it.

The author channels every "we paid all the tax that is legally due" defense ever given in the face of public pressure against tax dodging. He also invokes the "level playing field" metaphor, which is always invoked for every destructive tax policy that was ever invented in response to every other destructive tax policy that was ever invented. So three cheers for tax industry rhetoric, bandied about in any tax policy dialogue to make sure no one thinks too hard about the systemic choices at issue here.

Score ten points to Mr. Emerton in pointing out that blame for tax dodging rests in a legal system that has been specifically designed to encourage it. But take away nine points for failing to mention the big part business plays in constantly perpetuating that kind of design. Then take away two more points for failing to mention that some things only look like dutiful tax minimization until the tax authority figures out what you are doing, and then they are clearly tax evasion. Cf Dow, Ernst & Young, and Jenkins & Gilchrist tax partners, and that's all in just one week.

That puts the column in the negative territory, which is right about where the author appears to think that the tax liabilities of fiduciary-duty-abiding corporate managers ought to keep their companies' tax burdens.