Luring the rich: investor residence and citizenship packages

CBC ran a story yesterday on Canada allowing rich people to buy permanent residency status, which provoked some discussion on twitter about whether such a thing was something associated with secrecy jurisdiction (aka tax haven) behavior. I don't know what kind of behavior this is, but I think it is widespread and growing. It's all part of the complicated dance politicians around the world are doing: all trying to lure rich people and multinationals from everywhere else, in a relentless quest to keep impossible electoral promises about jobs and growth.

I've done some research on and off on these residence and citizenship purchase programs. My student Alexander Robinson got interested in the topic and put together a table last year; below are some of the basic numbers, more detail available on file. All the programs listed here are for residency unless citizenship is indicated. One important recent development that is missing in the table involves Puerto Rico, which I suggested a long time ago was poised to be the last, best tax haven for US citizens (while the U.S. will remain the world's last, best tax haven for everyone else in the world, but that is a different story). Janet Novack ran a story on PR yesterday, Puerto Rico Expands Tax Haven Deal For Americans To Its Own Emigrants. It seems policymakers understand PR's unique position in the world vis à vis US citizens, but so far it is having a limited luring effect.

Country	Type of Program	Cost
Antigua &Barbuda	National Development Fund (non-refundable)	USD 675,000.00
	Real-Estate	USD 1,080,000.00
	Business Investment (Sole Investor)	USD 4,000,000.00
	Business Investment (Two or more Investors)	USD 13,500,000.00
Australia	Significant Investor Program	AUD 5,000,000
Bulgaria	Investor (Full Investment)	BGN 1,000,000
	Investor (Financed Investment	BGN 180,000
	Investor (Fast Track Option)	BGN 2,000,000
Canada	Investment	CAD 800,000.00
	Investment - Quebec Investment	CAD 800,000.00
	Self-Employed Worker Program (Quebec)
	Quebec Entrepreneur Program
	Canadian Entrepreneur Program - (CDN Venture Fund)	CAD 200,000.00
	Canadian Self-Employed Program (Start Up - CDN Angel Investor)	CAD 750,000.00
China	Investor (1)	$2,000,000.00
	Investor (2)	$1,000,000.00
	Investor (3)	$500,000.00
	Investor (4)	$500,000.00
Cyprus	Direct Citizenship by Investment Program	EUR 200,000.00
Dominica	Package A:  Single Applicant (Non-Refundable)	USD 100,000.00
	Package B:  Family Application (Spouse, Non-Refundable)	USD 175,000.00
	Package C:  Family Application 2 (Spouse, 2 children, Non-Refundable	USD 200,000.00
	Package D:  Family Application Three	USD 250,000.00
Greece	Residency - Strategic Investments	EUR 250,000.00
	Residency - Property Purchase	EUR 250,000.00
Grenada	Approved Real Estate Project	USD 500,000.00
	Non-Refundable Donation	USD 200,000.00
Hong Kong	Capital Investment Program - Applications After 14 Oct 2010	HKD 10,000,000.00
	Capital Investment Program - Applications Before 14 Oct 2010	HKD 6,500,000.00
Ireland 5 Regimes	Investor - Government Bonds	EUR 2,000,000.00
	Investor - Job Producing Irish Companies	EUR 1,000,000.00
	Investor - Irish Publicly traded companies
	Investor - Government Bonds	EUR 2,000,000.00
	Investor - Venture Capital	EUR 1,000,000.00
	Investor - Blend (50% Property & 50% Securities)	EUR 1,000,000.00
	Investor - Endowment Funds	EUR 500,000.00
	Start-Up Entrepreneur Program	EUR 75,000.00
Latvia 4 Regimes	Investor - Equity Capital Investment	LVL 25,000.00
	Investor - Real Estate - (Regia area)	LVL 100,000.00
	Investor - Real Estate - (Other)	LVL 50,000.00
	Investor - Credit Institution	LVL 200,000.00
Malta	Investor	EUR 650,000.00
New Zealand	Investor Plus	NZD 10,000,000.00
	Investor	NZD 1,500,000.00
Panama	Macro Company Investment	USD 160,000.00
(Residency and Second Passport)	Mixed Fixed Deposit/Real-Estate	USD 300,000.00
	Economic Investment in Real Estate	USD 300,000.00
	Forest Investor	USD 80,000.00
	Fixed Term Deposit Real Estate	USD 300,000.00
Portugal	Property Investment	USD 500,000.00
	Financial Investment	1,000,000.00 €
	Creation of 10 Permanent Jobs
Saint-Kitts and Nevis	Citizenship by Investment	Real Estate Option
	SIDF Contribution	USD 250,000.00
Singapore	Global Investors Program - Option A	SGD 2,500,000.00
	Global Investors Program - Option B	SGD 2,500,000.00
Spain	Investment in Spanish Companies	EUR 1,000,000.00
	Deposit with Spanish Financial Entities	EUR 1,000,000.00
	Real-Estate Investment	EUR 500,000.00
	Business Project	Undefined
	Entrepreneur	Undefined
	Highly Qualified Professionals	Undefined Investment
	Other Category	Employees transferred to Spain within the same group of companies
Switzerland	Swiss Lump Sum Taxation	CHF 150,000.00
United States	Investor Visa (1) - EB 5	USD 1,000,000.00
	Investor Visa (2) - EB 5	USD 500,000.00
United Kingdom	Investor (type A)	£1,000,000.00
	Investor (type B)	net asset value of £2,000,000 plus loan £1,000,000 from a British Institution
	Exceptional Talent
	Entrepreneur	£ 50,000 of venture capital money

Engineers Without Borders Panel on "Illicit Financial Flows"

Tomorrow I will be participating on a panel on "Illicit Financial Flows" at the Engineers Without Borders 2015 National Conference, currently taking place in Montreal. The goal of the session is to discuss the nature and impact of so-called illicit financial flows in Canada, the United States, and the world's developing countries.

I have been asked to address the question "what promising policy instruments or reforms could potentially curb outflows of illicit finance?" The use of the term illicit in this context seems to be an attempt to elide the distinction between avoidance and evasion. Those familiar with my work know that I approach this terminology with caution because I think it is a mistake to conflate evasion and avoidance into a single category for purposes of advocating generalized policy reform. In a paper I published last year on Evasion, Avoidance, and Taxpayer Morality, I argued why I think the phenomenon of tax evasion is distinct from tax avoidance, each represents a different type of governance failure, and each requires a tailored response. But I certainly understand the instinct to see both tax avoidance and tax evasion as essentially drains on public resources that we'd like to imagine would otherwise be available for various socially useful projects.

I'll try to lay out the field as I see it in the time allotted. It is a big topic to cover in a limited time. I suppose I could just plug Martin Hearson's very good work on this subject. I am curious as to how Engineers Without Borders came to concern itself with this issue; the rest of the conference focuses on innovative, sustainable, and inclusive development.  I think it is another sign that tax justice advocacy groups, like the Tax Justice Network, are successfully inducing NGOs across a broad spectrum to view taxation as a human rights issue that permeates all facets of social and economic development.

Devereux & Vella on Corporate Tax System for the 21st Century

Michael P. Devereux and John Vella recently posted in SSRN their new paper entitled Are We Heading Towards a Corporate Tax System Fit for the 21st Century? Here is the abstract:

The most significant problems with the existing system for taxing the profit of multinational companies stem from two related sources. First, the underlying “1920s compromise” for allocating the rights to tax profit between countries is both inappropriate and increasingly hard to implement in a modern economic setting. Second, because the system is based on taxing mobile activities, it invites countries to compete with each other to attract economic activity and to favour “domestic” companies. The OECD Base Erosion and Profit Shifting (BEPS) initiative essentially seeks to close loopholes rather than to re-examine these fundamental problems. As a consequence, it is unlikely to generate a stable long-run tax system. We critically examine the principle guiding the OECD’s reform proposals in its BEPS initiative and outline some more fundamental alternative reforms.

In my view the technical difficulties of taxing corporate income are dwarfed by the political ones. It is political will, not administrative ability, that makes GE/Google/Apple-style income tax payments in the low single digits a global reality.

The Mercedes Benz of state tax competition

State-to-state tax competition continues unabated: Georgia has successfully lured Mercedes Benz away from New Jersey, presumably with a very generous package of employer- and capital-friendly tax and other regulatory policies. Politicians everywhere run on jobs & growth. Tax competition is about seeking a temporary displacement to your jurisdiction at the expense of another. Temporary because you are only as good as your last tax break, zero is not the bottom, and excessive tax reductions are unsustainable.

SCC says the Income Tax Act is not so bad that it's void for vagueness; your results may vary

I write on occasion about tax protestors and their persistent tilting at windmills to defeat the income tax. I find them fascinating and a reminder that income taxation is a really difficult tax to administer. Taxpayers will do everything they can to avoid it, justifying their actions in myriad ways. A major difference between the tax protestors (who usually represent themselves) and tax planners (whose business it is to represent others) is that the latter are well-trained and sophisticated. When tax planners make ridiculous arguments about the applicability of income tax, they typically do so in highly technical and targeted ways, and they can sometimes confuse administrators and courts into believing them. Not generally so with protestors. My student Marc Roy points me to a recently decided Canadian Federal Court of Appeal decision of interest: Brown v. Canada.  Marc describes the case as follows:

The Federal Court of Appeal decided against a novel argument presented by self-represented taxpayer whose business losses the CRA had denied. In his appeal, Ian Brown raised, along with a more technical argument, an argument that the entire Income Tax Act is void as a constitutional matter “due to vague and convoluted interpretations in the [Act].”

His argument was essentially that the definitions in s. 248(1) of “business,” “employee,” “employment,” “person,” and “taxpayer,” are incomplete and render the Act unconstitutionally vague. These are inclusive definitions, a non-exhaustive style frequently used to define terms in the Act, which leaves room for the defined words to encompass things not explicitly contemplated in the statutory definition.

Unsurprisingly, the Court rejected Mr. Brown’s challenge to these terms and to the act as a whole, walking quickly through the approach to vagueness — a law is only unconstitutionally vague if it is so imprecise that it fails to provide sufficient guidance to legal debate. The court indicated that even if these terms were entirely undefined, there is sufficient meaning that their precise definitions could be, and beyond their inclusive definitions are, judicially determined according to their ordinary meanings in accordance with standard approaches to statutory interpretation.

This case nonetheless raises the question of access to justice for individual taxpayers. It is not unfair to note that the Income Tax Act and its interpretations are at times incredibly convoluted, and it may be impossible for an individual without legal training to accurately and confidently determine her tax liability without costly advice from tax professionals. As in criminal law, in tax ignorance of the law is no excuse — but ordinary persons’ meaningful access to this knowledge is increasingly illusory.

Thanks to Marc, for this succinct summary.

Report by UN Special Rapporteur on Tax and Human Rights

UN Special Rapporteur Magdalena Sepulveda Carmona recently posted this Report of the Special Rapporteur on Extreme Poverty and Human Rights; of interest. Here is the abstract:

In the present report, the Special Rapporteur on extreme poverty and human rights presents fiscal policy, and particularly taxation policies, as a major determinant in the enjoyment of human rights. Taxation is a key tool when tackling inequality and for generating the resources necessary for poverty reduction and the realization of human rights, and can also be used to foster stronger governance, accountability and participation in public affairs. She outlines relevant human rights obligations to guide and inform State revenue-raising practices, including the duty to use the maximum available resources for the realization of economic, social and cultural rights. She also analyses the questions of how the principles of non-discrimination and equality and the duty of international cooperation and assistance should inform taxation policies at the global and national levels. After assessing how revenue-raising policies and practices can be strengthened through a human rights-based approach, she makes recommendations for fiscal and tax policies that are grounded in human rights and can lead to poverty reduction, sustainable development and the realization of transformative rights.

Lux Leaks: Revealing the Law, One Plain Brown Envelope at a Time

I recently published the above titled article, now available on SSRN here.  Abstract:

A group of journalists recently revealed “LuxLeaks”: a set of documents showing that Luxembourg’s tax authority has been systemically delivering secret deals to multinationals. In this column, I explain why LuxLeaks has revealed a feature, not a bug, in the international tax system. Governments around the world have intentionally placed much of international tax law outside of public view -- in letter rulings like Luxembourg’s, but also in other agency-level decision-making processes, notably in the context of tax treaty dispute resolution. The outcomes of these confidential processes are surely the world’s largest collection of the “real” law of international taxation. But law should not be something discovered through leaks to journalists. Lawmakers could alter this flawed status quo with greater disclosure. I conclude that they don’t appear to favor this approach, but they should.

UPDATE: China does NOT follow US lead, taxing its global diaspora. (If they did, it would be a terrible idea).

This is an update of an earlier post. Earlier today I wrote that the NY times reported that China is embracing US-style citizenship-based taxation, by enforcing "a little-known and widely ignored regulation: Citizens and companies must pay domestic taxes on their entire worldwide incomes, not just on what they earn in China." The update is that this is entirely wrong, and that the NY Times just completely mangled this story by failing to understand the difference between defining income and defining residence (a distinction to which I alluded in my original post, below).

The reality is discussed at length by Eric over at Isaac Brock, who explains that "No, China does not have citizenship-based taxation." Eric's interpretation has been confirmed to me by a couple of people I know who are Chinese tax experts. So, I invite you to go there to read the full account, which I won't repeat here except to quote the takeaway, which is:

China as a country has many flaws and lacks many freedoms, but at least it uses the same basic system of taxation followed by nearly every democracy and dictatorship: a system which avoids placing unreasonable barriers in the way of the basic human right to leave a country.

Thanks to Eric and thanks to my colleagues who took the trouble to write me personally to correct the record. I hope that the Times acknowledges the errors and writes a new article on the subject to confirm that yes, the US is alone in its comprehensive treatment of non-residents as if resident solely on the basis of legal status as nationals.

In my earlier post I noted that last year when reviewing constitutional articulations of the taxing power, I noticed that China's constitution would suggest that its tax authority could have a global reach:

Article 56: It is the duty of citizens of the People's Republic of China to pay taxes in accordance with the law.

Accordingly, though it seems that China's constitution leaves open the possibility for China to follow the flawed US approach, it thankfully does not. The Times reported that the move would "[put] China on the same side as the United States in a global debate over whether taxation should be primarily national or global," and then says "On the other side of the issue are European nations, Japan, Australia and Canada, all of which tax people within their borders but exempt most expatriates and overseas subsidiaries from paying income taxes in their home countries."

This is not quite right. There is a global debate about taxing multinational companies on their worldwide (group) incomes, or not. However, there is no global debate about taxing individuals on the basis of their nationality. There is the United States, and then there is the rest of the world, with a very few and very limited number of exceptions (discussed below). If China were to align with the United States on this, it would be very big news not just for the global Chinese diaspora, but also for the ongoing OECD project on automatic exchange of information and for FATCA, because both regimes will struggle to implement the impossible demands of birthright tracing, which is necessary to enforce citizenship taxation.

The taxation of citizenship is about the definition of tax residence, rather than the definition of income.  Many or perhaps most developed countries tax all individual residents, regardless of nationality, on their worldwide incomes. This makes sense because taxation is the pooling of resources for shared expenditures, and nationality and citizenship are irrelevant to this project. It would be absurd to only require citizens and nationals to pay for health care, schools, roads, police, courts, financial systems, etc, when the population using all of these goods and services includes noncitizens and nonnationals. Likewise,  it is absurd to expect individuals to pay taxes in your country merely because your citizenship laws have conferred a legal status on them.

As a result, the OECD's AEoI project envisions a global system to identify the tax residence of every individual that owns virtually any financial asset, anywhere in the world, so that governments can assess their residents' tax obligations. The US project on FATCA goes further, requiring the global system to identify the nationality of every individual that owns virtually any financial asset, anywhere in the world. It won't be easy to build the OECD's residence identification database, but it is perhaps possible, with the help of tax treaties that resolve dual-residence problems. On the other hand, if the whole world gets into the business of nationality identification, we are going to have problems. This involves tracing bloodlines and will quickly become extraordinarily complicated, if not impossible, as we have already seen with FATCA.

Every income tax system necessarily has extensive residence assignment rules, including the United States; it is just that the United States also includes nationality in its definition, while almost every other country does not. The United States does this even if such persons achieved US nationality through the accident of birth, even if they never stepped foot in the United States and have never used any US goods or services of any kind, even if they are also citizens and permanent residents of other countries from their birth, even if they have never has a social security number or a US passport, even if they do not know that that they are US nationals, and even though the claiming of persons as subjects by birth by a distant sovereign was the foundation for America's war for independence.

All other nation-states tax on the basis of residence, not nationality, with a few minor and limited exceptions. Here they are:

• Eritrea taxes nonresident citizens permanently, at a reduced flat rate of 2% of worldwide income. It does this to finance an ongoing war, and had been denounced by the United States and the UN for the practice.
• Finland treats nonresident citizens as tax resident for three years after the emigrate unless they demonstrate that they no longer have any ties to Finland. 
• France treats nonresident citizens as permanent tax residents if they move from France to Monaco, per a treaty between the two nations.
• Hungary treats nonresident citizens as permanent tax residents of Hungary, unless they also have another nationality or reside in a country which has a tax treaty with Hungary. 
• Italy treats nonresident citizens as permanent tax residents if they move to a blacklisted tax haven unless they demonstrate lack of ties to Italy. 
• Spain treats nonresident citizens as tax residents for five years following a move to a blacklisted tax haven.
• Turkey treats nonresident citizens as permanent tax residents if they work for the Turkish government or Turkish companies but exempts income that is taxed by the country where it is earned. 

Some countries used to but no longer practice citizenship-based taxation:

• Bulgaria used to treat nonresident citizens as permanent tax residents, but ended the practice with the adoption of a new income tax in 1998. 
• Mexico used to treat nonresident citizens as permanent tax residents, but ended the practice with the adoption of a new income tax law in 1981.
• Myanmar used to tax the foreign income of nonresident citizens at a flat rate of 10% but ended the practice in 2012. 
• The Philippines used to tax the foreign income of nonresident citizens at reduced rates of 1 to 3% but ended the practice with the adoption of a new tax law in 1998.
• The Soviet Union used to treat nonresident citizens as permanent tax residents, but after the country was dissolved in 1991, none of its successor states continued the practice. 
• Vietnam used to used to treat nonresident citizens as permanent tax residents but ended the practice in 2009. 

We can easily see how global AeOI might make it possible to reverse this trend. If China was to adopt citizenship taxation and exert the same pressure as the US has with FATCA to achieve it, two very important countries would be stretching the residence definition beyond the OECD's global AEoI database. Bearing the extra costs and burdens of these extra measures would surely convince other countries to consider following suit.

That's why I think this would be a terrible idea. Fundamentally, taxing on the basis of citizenship is wrong from a normative point of view. But it is also a terrible idea for practical reasons. First, it's invasive (to say the least) to make access to basic bank accounts contingent on tracing bloodlines. Second, doing so globally, including forcing the world's poorest countries to play along, is a huge waste of administration resources by everyone. Third, creating global asset databases for tax exchange purposes creates massive security issues that have not been assessed in light of the fact that this will be done on the basis of nationality rather than residence. Finally, and in the long run, taxing on the basis of citizenship effectively restricts labour mobility, serving a goal I have not heard explained by anyone.

In a world in which state's tax subjects include their globally dispersed diasporas, global asset information exchange will make it a duty of every state to sort its population for differential treatment according to the birthright laws of the other states. This has never been an agenda item on any of the discussions I have seen regarding tax information exchange. It should be.

Top Tax on Twitter

I was very pleased to be included on a list of the top tax feeds on twitter, recently compiled by Kelly Phillips (aka @TaxGirl). I follow many of those listed, especially in the IRS, government, and media categories. Many useful sources here.

Canada Revenue Agency accidentally sent a database full of confidential taxpayer info to the CBC

From the Toronto Star: CRA blames human error for disclosing confidential tax data to CBC

The Canada Revenue Agency confirmed late Tuesday that it has accidentally disclosed confidential taxpayer information to the CBC. 

The agency said the document was “accidentally released” through human error and acknowledges this “constitutes a serious breach of privacy.” 

CBC reported that the tax information contains data about hundreds of Canadians — many of them rich and famous — including their home addresses. 

...The CRA said in a release late Tuesday that when it became aware of the breach, officials immediately contacted the CBC to retrieve the documents. 

The agency said the CBC ”regrettably” chose to disclose names and a response from the network was not immediately available. 

However, in its story on the breach, CBC News made clear it was not disclosing much of the information it had. The network said it was "withholding most details from the list, apart from the names of some of the people cited, out of respect for privacy."

Oops, presumably.

Questions on the Canada-US FATCA Agreement

MP Ted Hsu has presented an order paper question (OPQ 816) on the topic of the unusual process surrounding Canada's adoption of an intergovernmental agreement on FATCA. I have noted many times the anomalies surrounding the US approach to these agreements, and in Canada's case these anomalies appear to have been compounded by odd and unexplained internal procedural decisions. I am working on a paper on this topic but it is slow going, not least because it is tremendously difficult to study Canadian treaty policy--it is vague, features unwritten rules that are apparently made to be broken, and written policies that lack any semblance of meaningful procedural limitations or parameters. If there is a rule of law here, I have yet to find it.

Mr. Hsu's inquiry follows on a statement made by Peter Van Loan, Government House Leader, in the House on Monday, April 28, 2014, that the government, "actually did" comply with its own treaty tabling policy, in response to a point of order raised by MP Marc Garneau back in April regarding the failure of the Government to table the IGA prior to ratification. Mr. Hsu seeks a number of details from the Government; I take it that answers are due on January 26, 2015. Some of the questions clearly illustrate that treaty-making in Canada is really quite a mysterious process. Here are a few of the OPQ highlights--just a small selection of the many detailed aspects of the question:

• was an exemption to the government’s Policy granted with respect to the Agreement;
• on what date was the Agreement ratified; 
• what steps and measures are in place to ensure that Parliament is informed of exceptions being granted to the Policy; 
• what does “urgent” mean in the context of the Policy; 
• did the Minister of Foreign Affairs “inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification” per the Policy; 
• is the Government House Leader always informed of exceptions and exemptions under the Policy and, if so, how; 
• is the House always informed of exceptions or exemptions under the Policy and, if so, how;
• if the Agreement could have been tabled earlier in Parliament [than it was], (i) why was it not, (ii) what decisions were made in this regard, (iii) who made these decisions, (iv) how, (v) on what basis?

All good questions and I, for one, would like to know the answers, not just for better understanding the meaning and implications of the IGA in terms of both its legal status and its substance, but also for understanding the treaty process in Canada more generally. It is a maddeningly opaque regime.

Today at McGill: Dietsch on Catching Capital

Peter Dietsch, Professor of Philosophy at the Université de Montreal, joins us today as the final speaker in the Spiegel Sohmer Tax Policy Colloquium at McGill. His presentation will focus on the opening chapters of his forthcoming book, entitled "Catching Capital." Here is the abstract:

 When individuals stash away their wealth in offshore bank accounts and multinational corporations shift their profits or their actual production to low-tax jurisdictions, this undermines the fiscal autonomy of political communities and contributes to rising inequalities in income and wealth. These practices are fuelled by tax competition, with countries strategically designing fiscal policy to attract capital from abroad. 

Building on a careful analysis of the ethical challenges raised by a world of tax competition, the book puts forward a normative and institutional framework to regulate the practice. In short, individuals and corporations should pay tax in the jurisdictions of which they are members, where this membership can come in degrees. Moreover, the strategic tax setting of states should be limited in important ways. An International Tax Organisation (ITO) should be created to enforce the principles of tax justice. 

The author defends this call for reform against two important objections. First, Dietsch refutes the suggestion that regulating tax competition will harm economic efficiency. Second, he argues that regulation of this sort, rather than representing a constraint on national sovereignty, in fact turns out to be a requirement of sovereignty in a global economy. The book closes with a series of reflections on the obligations that the beneficiaries of tax competition have towards the losers both prior to any institutional reform and in its aftermath.

The presentation will again take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm. As always, the colloquium is open to all: students, faculty and the general public are welcome.

Today at McGill Law: Martin O'Neill on Corporations, Tax, and Social Justice

Martin O'Neill, Senior Lecturer in Politics at the University of York, joins us as today's speaker in the Spiegel Sohmer Tax Policy Colloquium at McGill. He'll present a work in progress that he has entitled "Corporations, Conventionalism, Taxation and Social Justice." Here is an abstract:

A failure to take seriously the conventionality of corporations has led to an unimaginative view of corporate taxation as being structurally analogous to the taxation of individuals. There are, in fact, many disanalogies between the two: corporate profit should not be treated as analogous to individual income; low-profit corporations should not be treated advantageously by a tax system in the same way as it should treat low-income individuals; and, most significantly, corporations are not owed the same level of care and determinacy as individuals with regard to the tax rules that they face. Breaking the perceived link between individual taxation and corporate taxation makes room for a reassessment of the structure and purpose of corporate taxation. 

Taking a step back from issues focussed narrowly on taxation, as such, there is a general need to integrate normative issues regarding corporations into our understanding of the proper configuration of the basic structure of a democratic society. In our current non-ideal circumstances, the corporations we actually have are corrosive of the possibility of social justice. In part, this is because we’ve been blinded by a certain picture of corporations as ‘natural’ economic entities, and have been too timid and unimaginative in the ways in which we subject corporations to political regulation and constraint. A robust conventionalism would allow us to reverse the usual order of justification: from seeing corporations as placing constraints on government policy, to seeing corporations as conventional economic units that should be embedded in an institutional and regulatory structure that delivers social justice. 

This gestalt switch opens up wide vistas for public policy innovation. Thus, this is an area in which applied political philosophy has an important home. First, conceptually, it opens up policy spaces which are easy to ignore when one is in the grip of an earlier picture. Secondly, in order to make sense of theories of liberal egalitarian justice, we need a better idea of their institutional setting, and this means moving beyond (or at least supplementing) overly schematic debates about the relative significance of government agencies and individual behaviour. We also need to think about how the basic structure of society should be organized so as to marshal its most significant economic institutions in directions which are conducive to the pursuit of social justice within a democratic society.

The presentation will again take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm. As always, the colloquium is open to all: students, faculty and the general public are welcome.

On Paperwork and Punishment: It's Time to Fix FBAR

I published this last month but neglected to post it: my latest column in Tax Notes International takes a look at the foreign bank account report, or FBAR. Feel free to download it, early and often, right here. Here is the abstract:

The Foreign Bank Account Report, or FBAR, is part of a regime designed to stop terrorists, money-launderers, and tax evaders. Unfortunately, its increasingly draconian requirements and consequences now apply to millions of innocent bystanders who are collateral damage in the ongoing battle against financial crime. Their inclusion in the FBAR regime is a massive waste of both government and taxpayer resources, effectively criminalizing activities that are wholly unconnected to financial crime, and perversely discouraging compliance. All of this is unnecessary because as the administrator of FBAR, Treasury can immediately fix the problems. The difficulty is that FBAR is still relatively obscure to those not caught in its grasp, and the extent of the damage it is doing to U.S. taxpayers and to the integrity of the tax system is thus under-appreciated. This damage is real, but it can be reversed by re-focusing FBAR where Congress intended: on likely criminal activity. In short, this Essay demonstrates that the FBAR regime is broken and it is time for Treasury to fix it.

As always, I welcome comments.

Canadian government unveils Re-election Tax Credit

The Canadian government announced a new package of "family" tax cuts/credits last week, with an income splitting scheme and modifications to child care benefits and expense deductions. These are, of course, really just re-election tax credits--announced at what the CBC describes as a "campaign-style event." Earlier this year, at the Tax Justice & Human Rights Symposium I hosted at McGill, Jonathan Rhys Kesselman explained the distributional impacts of the type of cuts announced by the government. He had to embargo his presentation so it's unfortunately not among those now viewable at the McGill Tax channel, but fortunately his paper is now available [pdf here], and the Vancouver Sun has a story: Detailed analysis exposes more income-splitting flaws.

Kesselman's main arguments are:

• restricting the measure to couples with children is inconsistent with the purported fairness rationale of taxing couples at the same rates as singles
• families with the greatest need will get no benefits at all
• families don't have to demonstrate or undertake any actual child care obligations in order to get the benefits
• the policy will decrease the after-tax value of a family's second earner (because earnings are effectively taxed at the higher-earner's marginal rate) 

He ends by suggesting a number of alternative ways the government could spend money to support families in need without introducing these distortions.

It does feel frustrating that everywhere one looks, politicians just seem have no shame about trying to buy their next elections, and populations seem all too willing to be bought so long as you tell them it's for the "hard working" among us. The question is, whom does the Harper government define as hard-working? With this announcement, the message is: you are only a hard-working family, and therefore deserving of tax cuts, if you

• have a child under 18;
• with two parents;
• one of whom earns a lot;
• and who earns a lot more than the other.

If this doesn't describe your family, then it seems you are not working hard enough.

Litigation over new US citizenship renunciation fee

The grassroots group that is challenging the validity of Canada's implementation of FATCA with respect to Canadian citizens and residents has released a letter to the U.S. State Department regarding the recent decision to increase the fee for renouncing U.S. citizenship--which is now $2,350. In 2009 the fee was zero. It was introduced in February 2010 (just before FATCA was enacted) and went into effect 6 months later, following Administrative Procedure Act requirements.

You can read the full letter here. In brief, the right to leave a country is not only a universally accepted human right, it is also enshrined in U.S. law. The letter challenges the fee in substance as an unlawful infringement of that right, and in process as a violation of the APA, as the State Department did not observe the procedural requirements for increasing the fee 500% even though it had done so in initially introducing it. Presumably, the group will commence litigation to enjoin the State Department from both legal violations.

Today at McGill Law: Patrick Turmel on The Reasons for Taxation

We continue the Spiegel Sohmer Tax Policy Colloquium at McGill Law today with a presentation by Patrick Turmel, Professor of Philosophy, Université de Laval, who will be discussing a paper he is co-authoring with David Robichaud, Professor of Philosophy, University of Ottawa.  The paper is called "The Reasons of Taxation. Efficiency, Freedom, Equality." Here is the abstract:

In Capital in the XXI century, Thomas Piketty argues for a series of controversial policy recommendations, such as a substantial increase in tax rates on higher incomes and a global tax on capital whose explicit aim is to halt the current spiral of inequality. Piketty’s main argument for these recommendations is not moral, but economic. Indeed, higher tax rates on top revenues and a progressive global tax on capital have not much to do with social justice or equality per se. According to Piketty, they are mostly needed in order to correct the market and maximize efficiency. But Piketty also put forth democratic reasons in favour of fighting inequalities, since they not only threaten the market, but also the very foundations of political freedom. These two types of reasons – reasons of efficiency and reasons of freedom - certainly go a long way to justify fighting the current dynamics of inequality and thus resisting the return of the Belle Époque’s patrimonial capitalism. But they remain somehow weak, when looked at from the perspective of most theories of social justice. They certainly don’t have much normative force when it comes to justifying important redistribution of wealth, as social justice seems to call for. At the very least, they fall short of creating a complete argument. The aim of this paper is to contribute to filling this gap by showing that alongside reasons of efficiency and freedom, a third type of reasons should play a central role in our understanding and justification of taxation, namely: reasons of equality. 

The presentation will again take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm. As always, the colloquium is open to all: students, faculty and the general public are welcome.

Daurer and Krever on Tax Treaties; one line summary: Them that's got shall have, them that's not shall lose

Veronika Daurer and Rick Krever recently posted Choosing between the UN and OECD Tax Policy Models: An African Case Study on SSRN, of interest. Here is the abstract:

This paper reports on a study of the tax treaty policy of a group of eleven East African countries. African tax treaties tend to follow one of two model treaties, an OECD model treaty that favours the interests of capital exporting nations and a United Nations model treaty that allows capital importing countries to retain more taxing rights. The study compares the policy outcomes in treaties signed by these countries with African nations, with relatively wealthy OECD countries, and with non-African countries that are not members of the OECD. It also compares selected outcomes in African–OECD treaties with those results in treaties between a group of Asian countries and OECD members to see whether African countries have been more or less successful at wringing preferences from wealthier nations. The study suggests the African countries studied have not been as successful in retaining taxing rights in treaties with OECD countries as have Asian countries. On the other hand, OECD countries are often more generous to African countries than are other African countries.

The paper notes that the data on the connection between tax treaties and foreign investment is still inconclusive, so we can't say that what countries lose in tax revenue given up in the treaty they gain somewhere else. The data being inconclusive is consistent with my research on this some years ago, and what I've kept up with since. Although the authors are very careful in their claims, the overall message is pretty clear: powerful nations systematically use their economic clout to gain advantage over less powerful nations in tax deals. Countries share the global tax base through tax treaties. The OECD model treaty overwhelmingly designs how they do so. So this is international tax relations as the OECD has crafted it, very carefully and deliberately, over the span of decades.

Here is Daurer & Krever's conclusion:

The jurisdictions reviewed in this study are found in the same part of Africa and have histories that share many features. The similarities in their backgrounds are not reflected in their networks of tax treaties with wide variations in the features of their treaties and sometimes significant differences in the extent to which they rely on OECD model treaty or UN model treaty precedents. 

The extent to which jurisdictions choose to forgo taxing rights may depend on relative bargaining powers vis-à-vis treaty partners or domestic ideology regarding possible direct economic benefits from increased investment or indirect consequential benefits from enhanced relationships that might follow a retreat from taxing rights. As a general rule, larger and more economically advanced economies tend to retain more taxing rights in treaties than smaller, less advanced economies. Considered as a group, these African countries appear not to have been as successful as Asian countries in retaining taxing rights. Regional countries may find it beneficial to review each other’s treaty policies and consider whether the revenue costs of less reliance on the UN model and more reliance on the OECD model might outweigh the perceived investment or ancillary benefits that they hope will flow from the transfer of taxing rights to capital exporting nations. 

Regional countries might also wish to look at why OECD countries are often more generous in agreeing to greater retention of taxing rights by African countries than neighbouring African nations. 

The Importance of Corporation Tax Policy in the Location Choices of Multinational Firms

The Irish Department of Finance released this report yesterday in connection with its 2015 budget. The report considers data on newly established multinational subsidiaries across 26 European countries from 2005 to 2012. Here are a few key points from the executive summary:

• We find a consistent negative effect of the corporate tax rate on the probability of a country being chosen as a location by multinationals. 

• We find a highly significant, albeit modest sized, effect of allowing for non-linearity in the effect of the tax structure. In other words, a change in the tax rate will have a larger effect if the starting point is a low rate of tax compared to if the same size change is applied to a higher tax rate.

• We find large variations in the sensitivity to tax rates across sectors. For manufacturing firms, the effect is similar to the baseline but for service firms the effect is noticeably smaller. Services firms may be more likely to make location decisions based on the need to be close to their identified customer base and this reduces their sensitivity to tax rates. 

• When comparing the effect of taxation to other important factors, we find that taxation is the largest single determinant of the location decision. 

• Financial sector firms are most sensitive to changes in corporation tax rates, with an estimated marginal effect more than double those of the other sectors. This is likely to be a reflection of the more footloose nature of these firms, and has important implications for the potential effect of a tax change in Ireland, given the weight of the financial sector in foreign investment in this country. Firms with higher assets sizes appear more responsive to corporation taxation in their location decision. 

• Combining all effects of tax and country characteristics, Ireland had a 3.1% probability of being chosen as a location for the newly established subsidiaries over the period investigated. For context, Irish GDP is 1.4% of the EU-26 total, so this demonstrates the attractiveness of the country as a destination for foreign investment well in excess of its size. 

• If the Irish tax rate had been 15% over the period in our sample, the number of new foreign affiliates entering the country would have been 22 % lower. 

• If the tax rate had been 22.5% (the sample average), the number of new foreign affiliates would have been 50 % lower. 

The idea that Ireland will really give up its favorable tax regimes under external pressure just seems implausible as a result. I know, Ireland is going to repeal the residence rule that gave rise to the double Irish. But there's always the double dutch not to mention an alarming proliferating of patent boxes so that means Ireland will have to come up with something else. If the US, the UK, the Netherlands, etc. aren't going to give up their goodie bags, it is difficult to see Ireland doing so.

BEPS Monitoring Group Scorecard

The BEPS Monitoring Group, a consortium of tax justice folks who are watching the OECD as it works through its ambitious reconfiguration of the global tax consensus, released a report today, of interest. The indefatigable Sol Picciotto is the lead author. From the announcement:

Our overall evaluation is that while significant progress has been made, there have been some unhappy compromises, some obstacles encountered, and much remains to be done. Also, fundamental problems still remain. The OECD alone is not the appropriate body to revise global rules, and its approach has been to patch up the existing rules. Effective reforms will not be possible without reconsidering some of the foundations of the system designed 80 years ago. Today’s globalized economy requires a more global approach to apportionment of the tax base of multinationals. Changes in the rules should be geared towards treating multinationals as unitary enterprises which would reflect their economic reality.

I agree with Sol that the OECD is not the appropriate body to revise global rules, and this is because revising the global rules really requires revisiting the basic framework. If the framework is fundamentally flawed, which I believe it is, then going back to the same architect again and again for yet another renovation project appears to be folly. But the OECD has worked hard to make itself into a tax policy monopoly, so this is a predictable result. On this point, Sol says:

A project led by the OECD even with participation of other G20 countries is still an unsatisfactory way to agree global tax rules, and the underlying problem still remains that the Action Plan aims to patch up existing rules rather than re-examine their foundation. 

The views of states not directly involved in the process, especially the poorer developing countries which are more dependent on corporate tax revenues, need to be taken into account much more directly, and we will carefully scrutinize the OECD proposals to address this which are promised.

He observes that so far, the OECD appears unwilling to consider any revisit of the underlying international tax principles, namely, the residence-source split, even though we can clearly see that this split isn't doing the work it needs to do to allocate the global tax base (especially when it comes to the corporate income tax).

My view is that everyone who will be affected by the global tax consensus has a right to be involved in the conversation, while the OECD's basic exclusionary nature ensures that only those who happen to live in rich countries will have any representation. The UN Tax Committee is an obvious alternative policy space. Sol says: "Instead of trying to usurp the UN, the OECD should support an
upgrading of the UN Tax Committee. All states should have full rights of participation in the negotiation of the proposed multilateral convention, which should  not be limited to rubber-stamping the outputs of the OECD BEPS project." That sounds right to me.

But it's hard, messy, probably dreary and frustrating work that will involve a lot of time and effort, and in the meantime...what? As I said in my talk last week, we all know that in international tax, as in most other regulatory areas, powerful states don't have to wait, they can simply do what they want.  But can is not ought.  I think the OECD should keep working on BEPS but everyone ought to be working equally diligently toward comprehensive multilateralism even as the OECD puts together this latest patch, so that the next step in international tax relations is not another recall of the same architect, with the same blueprint.

Sol's report has a clear mission: get the OECD to take formulary apportionment seriously, as the "clear lodestar" to all the BEPS efforts. Maybe so; the naysayers have their points. But for me the strongest part of this scorecard is its observation that the process matters, that we need to keep talking about participation in governance and thinking about who is making the decisions about which voices will be heard.

Today at McGill Law: Joseph Heath on Taxation as Collective Consumption

Professor Joseph Heath, Professor of Philosophy, University of Toronto, joins us today as the second speaker in the McGill University Speigel Sohmer Tax Policy Colloquium. Professor Heath is drawing from his book, Filthy Lucre: Economics for People Who Hate Capitalism, (released in the US as "Economics without Illusions: Debunking the Myths of Modern Capitalism"), where he writes about viewing taxation as a "club good":

Individuals express a surprisingly pervasive error that I refer to as the “government as consumer” fallacy. The picture underlying this fallacy is relatively straightforward. Government services, such as health care, education, national defense, and so on, “cost” us as a society. We are able to pay for them only because of all the wealth that we generate in the private sector, which we transfer to the government in the form of taxes. A government that taxes the economy too heavily stands accused of “killing the goose that lays the golden eggs” by disrupting the mechanism that generates the wealth that it itself relies upon in order to provides its services. Thus the government gets treated as a consumer of wealth, while the private sector is regarded as a producer. This is totally confused. The state in fact produces exactly the same amount of wealth as the market, which is to say, it produces none at all. People produce wealth, and people consume wealth. Institutions, such as the state or the market, neither produce nor consume anything. They simply constitute mechanisms through which people coordinate their production and consumption of wealth.

Heath has also pointed us to Todd Sandler's work on "Buchanan clubs."

 The presentation will take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm.

As always, the colloquium is open to all: students, faculty and the general public are welcome.

Peers complain banks treat them 'like pariahs'

From the BBC: "Members of the House of Lords have complained they are treated like "deposed dictators or political pariahs" when they try to open bank accounts."

More:

Peers said they were falling foul of money-laundering regulations because banks classed them as high-risk "politically exposed persons". 

This makes them, and their relatives, subject to extra due diligence checks. 

Treasury Minister Lord Deighton said banks were acting "disproportionately". 

He said UK parliamentarians were not currently classed as politically dependent persons, which are restricted to members of foreign governments, but added that new global standards "will require that they are treated as such".

 I know a few people who can relate to this feeling.

Fixing Global Tax Disorder: Multilateralism vs. U.S.-Led Effort

Tax Analysts has a write-up [gated] of the international panel from last week's conference on Reforming Entity Taxation, in Boston. Excerpts:

"What we have now is a mess," Robert Peroni, a professor at the University of Texas School of Law, said October 10, referring to the international tax system. 

... A discussion of how to go about cleaning up that mess pitted multilateralism against a U.S.-first approach. Panelists appeared to share the realpolitik view that whatever course is followed, dominant actors have called the shots for decades and will probably continue to do so. 

According to Allison Christians of McGill University Faculty of Law, the problems addressed by the conference's panel on international taxation are not much different from those faced by four academics more than 90 years ago when asked by the League of Nations to study the question of how to share the world's income tax base. Christians said the crucial issue now is the failure to tax income as opposed to double taxation, which worried policymakers then. 

"If you gave international tax a grade over 90 years, it would be an F," Christians said. 

"We will not take fairness seriously on the international stage." 

Christians said that powerful countries too often end up calling the shots, much to the detriment of a fair and orderly international tax system. "When we turn to power, we sacrifice both efficiency and equity . . . and administrability as well," she said. 

Christians was especially critical of the U.S. for using the Foreign Account Tax Compliance Act to expose underpayment of U.S. personal income taxes while cautioning that the OECD's base erosion and profit-shifting initiative could negatively affect U.S. multinationals. 

"FATCA leverages U.S. control over the global financial system, thereby forcing the populations and governments of poorer countries to direct precious tax administration and regulatory compliance resources toward the enforcement of the U.S. tax system over their own," Christians said. "Yet the U.S. has not used this same leverage to respond to base erosion. U.S. lawmakers have not seen as great a good in stopping tax avoidance by U.S.-based corporations as they have in stopping tax evasion by U.S. individuals." 

...While advocating multilateralism, Christians admitted that there is a significant risk in changing course that could prove detrimental to U.S. interests. She said that it might be in the best interest of the U.S. to act while it still has policy flexibility to shape a future international tax regime in which it might not play as dominant a role.
"Someday there might be a global power shift," Christians said. "We might wish we built a structure when we had a chance." [I believe i said an "appropriate" governance structure"] 

Christians' co-panelists placed less emphasis on multilateralism. ... Peroni said that what the world needs now is a "real worldwide" income tax regime rather than a territorial system. "Territorial undermines fair allocation of burden, and should only be enacted if its efficiency and simplification benefits outweigh its costs in terms of fairness," he said. 

Peroni said competitiveness should be defined not in terms of improving the after-tax profits of already successful U.S. multinationals, but in terms of citizens' living standards. He stressed the importance of fairness -- both actual and perceived -- in any reforms to the federal income tax and warned that simplification would probably be given short shrift. 

"Significant simplification in the international corporate tax area may be difficult to achieve because the transactions involved are often inherently quite complex and, therefore, the tax rules dealing with such transactions are likely to have a certain degree of unavoidable complexity," Peroni said. 

Peroni said that calls for formulary apportionment of international income could result in U.S. multinationals moving operations and jobs to low-tax foreign countries.

...Martin Sullivan of Tax Analysts said that U.S. moves to curb tax shelters by stressing  economic substance can often have a similar effect. "It is so ingrained that deals without economic substance have to be bad," Sullivan said. Comparing the paper companies often set up in Bermuda with real operations established in low-tax Ireland, Sullivan wondered why Ireland is considered better from a U.S. point of view. "Would it be better if there were 40,000 factories in Bermuda?" he asked.  

... The panelists weren't optimistic about the prospects for international tax reform. Peroni said "no sensible president" would push for reform during his or her first term. "If a president is not reelected, this could go on forever," he said. "You might be able to do a few antiabuse provisions . . . but that's a Band-Aid on the problem," Peroni said.
Christians emphasized the central role and responsibility of the U.S. should the world opt for a multilateral approach. "With great power comes great responsibility," she said.

Will media scrutiny for tax dodging ultimately create director liability to shareholders?

It's been a busy couple of weeks in Europe for some of America's biggest multinationals.

Google’s tax setup challenged by France

European commission to probe Amazon’s tax status in Luxembourg

Europeans Accuse Ireland of Giving Apple Illegal Tax Break

I'm working on an article in which I argue that the scrutiny over tax avoidance is creating material financial risk for multinationals, such that existing national securities disclosure laws will ultimately require increased disclosure to shareholders about public companies' tax planning strategies and their associated risks. To date, share prices have not seemed to reflect any market worry about the anti-tax avoidance activity governments have proclaimed so far. But if these stories about probes turn into stories about assessed fines and other clawbacks (as opposed to Starbucks'-style faux-repentance gifts), my level of confidence in my prediction will vastly increase.

Dawn of the Delta: Taming International Derivatives Tax Abuse

I recently contributed to the Columbia Tax Journal's Tax Matters Series, on Congress' attempt to constrain a particular form of international tax avoidance. The constraint in question is a fairly technical provision found in 871(m), which was enacted as part of the 2010 HIRE Act (also the source of the Foreign Account Tax Compliance Act). You can find my overview at the link above, where I explain what section 871(m) was intended to achieve (it is an anti-abuse rule to stop people avoiding dividend withholding taxes) and how Treasury sought to achieve it with a test (called the delta test), and observe that this test has prompted criticism for being too broad, capturing more transactions than intended. I asked the practitioners to address the mischief of the over-breadth and what could be done to overcome this but still achieve the legislative aims. The practitioners responded as follows:

Section 871(M) and Delta: When Should a Dividend Equivalent be Treated like a Dividend?
By Mike Farber

Taxation Without Authorization: The Proposed “Dividend Equivalent” Withholding Regulations Under Section 871(m)
By Linda Z. Swartz, Shlomo Boehm, and Jason Schwartz

The Most Recent Proposed Regulations Under Section 871(M): The Perfect is the Enemy of the Good
By Andrew Walker Read DOC or PDF

Enjoy.

Reforming Entity Taxation

Boston College is hosting a conference on Reforming Entity Taxation this Friday; I'll be on the international panel where I'll be giving a paper I've entitled "Who's Got the Power: Dividing the Global Income Tax Base." My theme: reforming entity taxation is purely about the political will of powerful states, perhaps especially the US. It is often repeated that with great power comes great responsibility. I argue that powerful nations have fallen far short on living up to the latter. I take a look back at how the League of Nations started the inquiry into how nations ought to share the global income tax base but ended up answering the question with power instead of principles, and how today's mix of FATCA, BEPS and the Baucus plan demonstrates that we are still doing the same thing today. I'll post a draft soon. Here is the lineup for Friday:

Keynote Speaker: Lee Sheppard (Contributing Editor, Tax Analysts)                            

Reforming Entity Taxation: Corporations

Mirit Eyal-Cohen (Alabama)
Deborah Schenk (NYU)
Dan Shaviro (NYU)
Brian Galle (Boston College) Commentator
Jeremy Scott (Editor in Chief of News, Tax Analysts) Moderator

Reforming Entity Taxation: Partnerships

Karen Burke (Florida)
Andrea Monroe (Temple)
Gregg Polsky (North Carolina)
James Repetti (Boston College) Commentator
Amy Elliott (Contributing Editor, Tax Notes) Moderator

Reforming Entity Taxation: International

Allison Christians (McGill)
Robert Peroni (Texas)
Martin Sullivan (Tax Analysts)
Diane Ring (Boston College) Commentator
Sam Young (Editor Worldwide Tax Daily) Moderator

Destination: Silicon Valley North

I took part in the latest McGill Law Journal Podcast, this time to talk about tax incentives and innovation. Have a listen.

Tomorrow at McGill Law: Apple's Tax Planning, through a Philosopher's Lens

Tomorrow at McGill: Wayne Norman, Mike & Ruth Mackowski Professor of Ethics at Duke University, will be here to present the inaugural lecture of the McGill University Spiegel Sohmer Tax Policy Colloquium. He will be talking about how we ought to think about the social pressures coming to bear on multinational tax avoidance, with a special focus on Apple. His presentation is entitled "Corporate Tax and Beyond-Compliance Norms."

Using the media's recent coverage of Apple's tax avoidance strategies as a case study, Professor Norman will discuss how we ought to understand and rationalize corporate social responsibility and self-regulation norms emerging around the taxation of multinationals, and whether these rationalizations are, or should be, different than the rationalization of corporate tax regulation. He will draw upon his previous work on business ethics, including "Business Ethics as Self-Regulation: Why principles that ground regulations should be used to ground beyond-compliance norms as well," and he points us to a 2012 NY Times article by Louise Story, As Companies Seek Tax Deals, Governments Pay High Price.

The topic is obviously timely. If you've been watching the news, you know that it has recently been revealed that Apple and governments get along very, very well when it comes to taxes. In Europe, Apple's side deals with Ireland have come under scrutiny as a possible form of state aid, against EU law; in the United States, Apple has faced lawmakers' bark but no bite. Here is some recent media coverage, most from the Guardian:

• How Apple's Cork HQ became the centre of a bitter global war over corporate tax avoidance 
• Ireland defends tax dealings with Apple: Dublin denies EU commission claims that it helped iPhone maker obtain billions of euros in illegal state aid
• Tough talk on tax means nothing if every country does different things: Obama and Osborne have been quick to promise an end to avoidance. But this is best achieved through collective action
• Apple Tax Probe Details Set to Be Revealed by EU Watchdog (Bloomberg)

I have been saying for some time that even after a century of study, we have yet to articulate a principled way to allocate the global income tax base, and we ought to ask philosophers for help. I am pleased that Professor Norman will engage on the topic.

The presentation will take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm.

As always, the colloquium is open to all: students, faculty and the general public are welcome.

Leaving money on the table to avoid extra paperwork

Economist Youssef C. Benzarti has recently posted an article on SSRN, How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs, in which he that "taxpayers forego $800 on average to avoid the cost of itemizing."

Can this really be true? It is hard to imagine given that for resident filers, at least, plenty of cheap tax help is available all around, and itemizing is merely a question of gathering receipts and punching in numbers (If the sample includes a lot of US persons permanently living abroad who don't understand their US tax filing obligations, I could understand the choice to bear higher taxes out of a fear of getting things wrong). It's not like most people are sitting around their kitchen tables calculating things out themselves; but even if they are, it's not really THAT hard, is it? In any event, here is the abstract, worth a closer read. If the analysis is correct, it bolsters the case for worrying about complexity as a second level of tax that is allocated without regard for ability to pay.

I use a quasi-experimental design to estimate the burden of complying with the tax code. Employing a sample of US income tax returns, I observe the preferences of taxpayers over itemizing deductions or claiming the standard deduction. Treated taxpayers forego $800 on average to avoid the cost of itemizing. A revealed preference argument implies that itemizing deductions is as painful as working more than 17 hours at one’s regular job. The amount of foregone benefits is larger for richer households, consistent with the fact that the value of time increases with income. I explore two explanations of the magnitude of the estimates. First, it could be due to an extreme aversion to filing taxes. Such aversion implies that itemizing deductions imposes an aggregate compliance cost of 0.24% of GDP and an extrapolation to filing federal taxes implies that the overall cost of compliance is 1.55% of GDP. Second, if taxpayers are time-inconsistent the revealed preference argument fails, introducing a wedge between foregone benefits and compliance costs. Being present-biased leads taxpayers to forego large benefits even when compliance costs are relatively small. I provide evidence of taxpayers being present-biased. Both explanations - whether driven by preferences or mistakes - suggest that the burden imposed on society by tax compliance is significantly larger than previously estimated. I discuss policy implications of the result.

This Fall at McGill: Colloquium on Tax Philosophy

I am pleased to announce that the annual McGill tax policy colloquium is now being generously supported by the law firm Spiegel Sohmer, Inc., under a grant established for the purpose of fostering an academic community in which learning and scholarship may flourish.

This fall, in its inaugural instalment, the Spiegel Sohmer Tax Policy Colloquium will return to tax policy fundamentals by critically examining the goals of taxation from a law and philosophy perspective.

The Colloquium will therefore be convened jointly by myself and Daniel Weinstock, who is the James McGill Professor in the Faculty of Law and Director of the McGill Institute for Health and Social Policy.  His research explores the governance of certain types of liberal democracies, and the effects of religious and cultural diversity from an ethical perspective on the political and ethical philosophy of public policy.

Each talk takes place in the Seminar Room, Institute for Health and Social Policy, 1130 Pine Ave, from 14:35 to 17:35.  These events are free and open to everyone. We welcome students, faculty and the general public to attend. Here is the line-up:

Monday, October 6: Wayne Norman, Mike and Ruth Mackowski Professor of Ethics, Kenan Institute for Ethics and Department of Philosophy, Duke University. His work focuses on business ethics and his published work includes numerous books and journal articles, as well as contributions to “Ethics for Adversaries: How to Play Fair When You’re Playing to Win.”

Monday, October 20: Joseph Heath, Professor in the Department of Philosophy and the School of Public Policy and Governance at the University of Toronto; Director of the University of Toronto Centre for Ethics. He has published work very widely including the recent book "Enlightenment 2.0: Restoring Sanity to Our Politics, Our Economy, and Our Lives."

Monday, October 27: Patrick Turmel, Professor in the Department of Philosophy, Laval University. His work focuses on ethics and political institutions, particularly cities. His publications include co-authorship of a book titled “La Juste Part: Repenser les Inégalités, la Richesse et la Fabrication des Grille-Pains.”

Monday, November 11: Martin O’Neill, Senior Lecturer in Moral and Political Philosophy, Department of Politics, University of York, U.K. His research examines global and intergenerational justice. Among his many publications, Professor O’Neill’s most recent book is “Property-Owning Democracy: Rawls and Beyond.”

Monday, November 17: Peter Dietsch, Professor, Department of Philosophy, Université de Montréal. He works on questions of distributive justice with particular emphasis on the application of philosophical theories through social instruments including the tax system. His work is widely published, including a recent article titled “Tax Competition and Global Background Justice” in The Journal of Political Philosophy. He is also working on a book on tax competition entitled “Catching Capital”.

I am looking forward to hearing what these pre-eminent philosophers can tell us about the state of contemporary tax policy theory. Over the course of the semester it is my hope that we can develop a framework for thinking about tax policy that responds to the world in which we find ourselves today, with all of its promises and challenges for democracy, economy, and identity.

The power to tax

The start of a new semester means the return to fundamentals in taxation for me, which always begins with a discussion of the power to tax. Yesterday I asked my students: could Queen Elizabeth say hey Canadians, I notice you still have my face on your dollar and you've got a nice surplus shaping up; over here in England it's all austerity and program cuts. Mind helping out a bit? General consensus: she might as a legal matter be able to tax Canadians to help the Brits out, but she won't. Hmmm. During the discussion a student informed me that Canadians pay more for monarchical services than the Brits do. Well, sharing is caring.

Relatedly and on a more scholarly note, a recent twitter conversation brought me to a chapter in a book on socio-legal tax research (thanks to Martin Hearson for starting that conversation and Judith Freedman for making this recommendation). The book is called Taxation: a Fieldwork Research Handbook, edited by Lynne Oats, and the chapter I had my eye on today is entitled Tea Parties, Tax, and Power, by Rebecca Boden. Boden writes:

History...points to a longstanding power relationship between rulers and those they rule that is articulated through tax regimes. States, whether feudal or modern, need money to operate, to pursue their various programmes, from war to welfare, As citizens may be unwilling to relinquish their money voluntarily, the state must have powers to require payment, with sanctions for non-compliance. By the same token, this power is held in balance in democracies by the principle of consent, exercised through representation. Ultimately, taxpayers give their consent to be dominated and have their money taken away from them.

This contingent nature of the state's powers in taxation - taxation by "consent"- chimes with Foucault's notion that power can never be absolute (Foucault 1977). No, Foucault argues, is power only hierarchical or structural, rather it works in a capillary fashion. As such, the analysis of such power relationships is central to the critical tax project - only by viewing tax structures, policies, and practice through the prism of power relationships that change them can we understand how and why they are constituted and what their effects are likely to be.

There is much more in the chapter to reflect upon, but I found this intro intriguing. In my view a lot of mischief takes place in the subtle--maybe you missed it--transition from the use of the word "citizen" to the use of the word "taxpayer." This is a transition all too many scholars make without even noticing it, yet it masks a world of ideology and assumption that frame and define how we think about tax today.

The power to define the taxpayer permeates contemporary tax policy discussion. The question of who can tax whom is one that could or should involve theory but while the scholars talk it over, reality plays out in economic might. In an intro to tax policy principles that I recently prepared for my tax policy course, I wrote:

Perhaps because taxation has been so connected to state-building, most scholars closely associate the act of taxation with the state. Some even go so far as to argue that taxation is a fundamental right belonging to the state as sovereign, often citing Thomas Hobbes for the proposition that “[t]hese are the rights which make the essence of sovereignty … the power of raising money”. None have offered theoretical grounds for the claim that states are in fact holders of rights, however.

We observe throughout history that states exercise powers (mostly through military and economic might), and only declare rights for themselves upon successful domination (such as in constitutions and charters). This observation leads to the likelihood that taxation is not anyone’s right but rather it is a constructed reality, coming about solely by and through human experience. This would explain why so much has to be done to both justify as a matter of theory - and entrench as a matter of custom - the state’s authority to tax.

We don't have to work too hard to think of a few examples where defining the taxpayer is an exercise in claiming authority, which fundamentally depends on power. FATCA is an obvious one; anti-inversions, BEPS, and the OECD common reporting standard are less obviously but equally so.

With FATCA, the US is using its sheer economic clout to get the whole world involved in chasing what it deems to be "US persons" for their tax tribute, without any discussion about whether the state's unilateral conferring of citizenship constitutes consent to (permanent and worldwide) taxation. Indeed, it continues to erect ever-higher barriers to shedding that status, without a single policy discussion at any level of government about the merits of this action. Those who think not can be expected to resist per Foucault, or, if it suits your taste better, Locke:

[People] therefore in society having property, they have such a right to the goods, which by the law of the community are their's, that no body hath a right to take their substance or any part of it from them, without their own consent: without this they have no property at all; for I have truly no property in that, which another can by right take from me, when he pleases, against my consent.

At the OECD, the common reporting standard, ostensibly modeled on FATCA but in fundamental principles not at all like FATCA, is all about making sure the "right" government gets the info it needs to exert its power over "its" taxpayers. Same idea: a state claims the authority to tax people that live within its territory, but other states have the power to thwart that exercise. (Different in fundamentals than FATCA for two reasons: (1) finding implied consent to tax is a given for residents of a state and (2) the OECD is not currently suggesting countries use economic sanctions to force others to cooperate).

The anti-inversion and BEPs issues are similarly about exerting power over a "taxpayer." Despite bemoaning their apparent helplessness in preventing corporate US persons becoming corporate non-US persons, US lawmakers clearly claim the authority to intervene and they likely have the power, too. But, this involves erecting higher and higher walls to keep the "taxpayers" inside. Internationally, discussions about the global problem of multinational tax dodging focus on the failure of the state to tax corporate persons that come in to the jurisdiction to do business. At the OECD, the BEPS project is very much about who belongs to who, so we can decide what belongs to who. Source and residence as tax concepts have always been about power and they have always been explained with ideas about authority and consent.

Globally, discussions about both corporate and personal income taxation are being forced to focus more and more on unanswered questions about the power to tax, and the issues of authority and consent that are raised when power is exerted and when it is resisted. The full Boden chapter is thus definitely recommended reading and I'm working my way through the rest of the book, which looks promising in several respects. More to come on this subject.