Davos: cocktail party, soft law generator

Davos is about as lucrative as it gets in terms of international networking, hence FT's headline: Davos is no conspiracy – it is infotainment. The assessment:

The fact that the World Economic Forum has been going since 1971 and can pull 2,600 professionals away from their desks without knowing precisely why they come is quite an achievement. Any event that can charge SFr22,000 ($23,600) per seat – and up to SFr500,000 for membership – has things to teach rivals.

 But here is the part of interest for those listening for signs of soft law in global governance:

...“It allows bankers or people in business to meet and make deals they couldn’t legally do in their offices,” says Richard Saul Wurman, founder of the Ted conferences.

Not stated: this includes with politicians, policymakers, people who might be closely scrutinized if they meet you in their offices at home, but whose ear you can command at a cocktail party without public scrutiny.  I talked about this phenomenon in this paper, and noted the problems for democracy and accountability in governance when epistemic communities take their deliberations off-line, that is, out of the observable paths of governance and into international networks. In these networks, what these private and public elites are doing doesn't look like lawmaking--they are having cocktails, they are listening to speeches--yet ultimately translates into just that. That is the power and the puzzle of soft law, and we can see hints of it in the FT article:

...Davos is serious – its participants discuss weighty topics and review the state of the world. They hear from policy makers and economists what is going on, and what they think will happen (rightly or wrongly). “Davos is a factory where the conventional wisdom is manufactured,” says David Rothkopf, the author of Power Inc. 

...Third, it is a club. Entrance is tightly restricted and it plays to people’s vanity to be invited, or even permitted to join. ... people pay to be with other people they want to become peers with, or whom they admire. The currency of a club is its members. 

...Corporate membership, star guests, personal contact, intellectual stimulation and parties make a potent combination. The network effect is hard to break, even with reverses such as the anti-globalisation protests of the 1990s. Once a quorum of the elite signed up, Davos grew until everyone complained it was too big.

So, a network of elite normmakers and the elites who want to influence them. If you care about the rule of law and how legal principles and institutions develop through power and influence, you will pay close attention to Davos. However you must concentrate not on what you see but what you don't see.

Paper: Putting the Reign Back in Sovereign

I've just posted a draft of my paper, "Putting the Reign Back in Sovereign: Advice for the Second Obama Administration," which I presented at Pepperdine last week. Abstract:

In its first term, the Obama administration enacted two pieces of legislation, each designed to protect an increasingly vulnerable income tax base, and each of which had the potential to set a new and unprecedented course for no less than the regulation of the global economy by the nation-state. The first, the Foreign Account Tax Compliance Act (FATCA), sought to end global tax evasion through tax havens.  The second, a little-noticed two-page addendum to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), sought to end the contribution of American multinationals to corruption in governance by codifying the transparency principles of the global Extractive Industries Transparency Initiative (EITI).  Both of these reforms reasserted a role for the nation state in regulating people and resources. But neither has yet to fulfil its potential. First, each has raised difficult questions about what the state can and cannot do to enforce disclosure and compliance on a global basis; failing to answer these questions is impeding implementation and aggravating an already-flagging taxpayer morale. Second, neither is broad enough: FATCA should be truly reciprocal and EITI should expand beyond the extractive industries. By acknowledging and responding in a principled way to the obstacles that limit their effectiveness, a second Obama administration could take significant steps to bring each piece of legislation to its potential, while ensuring that its scope focuses on its intended target in each case. This article outlines how these proposals could be accomplished and makes the case that they should be attempted.

I would be happy to have comments.  And in case it is of interest, here is a link to my powerpoint from the presentation as well (I don't know how to embed that here); you can actually watch the entire conference video here (my presentation was second to last).

Note on Enforcing the Long Arm of the Tax Law

I came across this paper when I was doing some treaty research. It may be of interest: “But the Americans Made Me Do It!”: How United States v. UBS Makes The Case For Executive Exhaustion. No abstract, but here are some excerpts:

In 2008, the U.S. government launched an investigation into UBS AG (“UBS”) following the indictment and conviction of one of UBS’s senior bankers on charges of assisting a wealthy American with tax evasion. ...The United States filed a summons in federal court seeking information from UBS concerning the identities of ... unknown taxpayers. Swiss bank secrecy laws, however, explicitly forbade such disclosure. 

UBS was caught in a classic conflict-of-laws dilemma. On the one hand, UBS and its employees would face potential criminal sanctions if they violated Swiss bank secrecy laws to comply with a U.S. court order. On the other hand, UBS could decline to comply with a potential U.S. court order and face contempt of court....

...U.S. courts thus have a dilemma when the United States, through its executive agencies, wants parties to disclose foreign accounts for tax or other investigatory purposes but bank secrecy laws stand in the way of these investigations. While many courts have used balancing tests to solve this problem, they have found that U.S. law-enforcement interests trump the interests of foreign nations. This places a defendant financial institution in the position of either providing client data in violation of its home state’s laws to meet the demands of the United States or disregarding U.S. discovery orders to meet its home state’s legal requirements.  

... One of the factors for a court to weigh in the balancing formula is “the availability of alternative means of securing the [requested] information.” 

This Comment uses the recent tax investigation into UBS and its account holders as a case study to argue that the alternative means factor from the Third Restatement should be a mandatory step for Executive Branch agencies to exhaust before they can petition a court to compel disclosure of foreign discovery that would require the defending party to violate foreign law. 

This mandatory step, which this Comment terms executive exhaustion, is derived from the concept of administrative exhaustion, in which courts decline to hear cases until the moving party has exhausted all available administrative remedies. The application of executive exhaustion will prevent courts from having to engage in the Third Restatement’s balancing test. By avoiding the Third Restatement’s balancing test, a court can avoid placing parties in a catch- 22—following one state’s laws at the expense of violating those of another state.

And from the conclusion:

[F]ederal courts are aware of the various international interests at stake in certain high-profile litigation. .... Even after the United States, the Swiss government, and UBS came to an agreement regarding the transfer of data, the independent Swiss judiciary held that the UBS client data could not be transferred pursuant to the Treaty Request Agreement because the agreement was not actually a treaty—and thus not officially Swiss law.  If the Swiss government was unable to transfer data pursuant to an agreement it drafted and signed, how did the IRS and the DOJ realistically believe that UBS would be able to comply with a possible order compelling disclosure? An order compelling disclosure would have resulted in a full-blown diplomatic disaster, with the Swiss seizing UBS client data and the IRS and DOJ moving to have contempt-of-court sanctions imposed against UBS.   

In light of the powerful international interests at stake when it comes to an order compelling disclosure of information in violation of foreign law, it is imperative that Executive Branch agencies seek all alternative means before petitioning a court for disclosure. Federal courts should be the last resort for compelling disclosure when an Executive Branch agency seeks information from abroad that would require the violation of foreign law.

 You can read the full paper at the link.

Motomura on Birthright Citizenship & Legalization

Here is an interesting paper on citizenship as legal status, by Hiroshi Motomura: Making Legal: The Dream Act, Birthright Citizenship, and Broad-Scale Legalization.  Abstract:

Some of the most controversial topics in immigration and citizenship law involve granting lawful immigration status—or citizenship itself—to persons who might otherwise be in the United States unlawfully. In this Article, I examine arguments for and against three ways to confer lawful status: (1) the DREAM Act, which would grant status to many unauthorized migrants who were brought to the United States as children; (2) the Fourteenth Amendment to the Constitution, under which almost all children born on U.S. soil are U.S. citizens; and (3) broad-scale proposals to grant lawful immigration status to a substantial percentage of the current unauthorized population. I first explain how arguments both for and against the DREAM Act reflect some mix of fairness and pragmatism. Though birthright citizenship seems different from the DREAM Act, the arguments are similar. I next show that although children figure much more prominently in the DREAM Act and birthright citizenship, similar patterns of argument apply to broad–scale legalization, and the arguments in favor are just as strong. Finally, I explain that the "rule of law" is a highly malleable concept that provides no persuasive case against any of these ways to confer lawful immigration or citizenship status. Rule of law arguments in favor of conferring status are stronger than rule of law arguments against doing so.

Treaty Termination and the Separation of Powers

Here is a new paper that is not directly on a tax topic, but does touch on the treaty power, which occasionally comes up in tax policy discussion and therefore may be of interest.  Kristen Eichensehr, Treaty Termination and the Separation of Powers:

The President, Congress, and the courts have long disagreed about who has the power to terminate treaties. Presidents have claimed the power to terminate treaties unilaterally, while Congress and particularly the Senate have argued that because the political branches share the power to make treaties, they should also share the power to terminate them. Unilateral presidential treaty terminations have prompted lawsuits by congressmen and private parties, Senate hearings and reports, and a divided academic literature. Meanwhile, the courts have deemed treaty termination to be a nonjusticiable political question.
This article reframes the debate over treaty termination by looking to treaty formation and analogizing to the Supreme Court's precedents on the Appointments Clause and removal power. The Appointments Clause uses the same "by and with the advice and consent of the Senate" language as the Treaty Clause and is found in the same sentence of the Constitution. Proponents of presidential power have relied on the Supreme Court's Appointments Clause jurisprudence to argue that Congress cannot limit the President's termination power. This article agrees that the oft-proposed requirement of Senate consent prior to treaty termination would be unconstitutional by analogy to the Appointments Clause. However, the Appointments Clause analogy points toward a new solution to the termination debate — namely, that the Senate could impose a "for-cause" restriction on the President's termination power. In particular, this article proposes a "for-cause" limitation implemented via a reservation, understanding, or declaration at the time of a treaty's ratification.
Recognizing the constitutionality of a "for-cause" termination reservation alters the terms of the ongoing debate about the interchangeability of congressional-executive agreements and Article II treaties. Both proponents and opponents of interchangeability have noted that the President's ability to terminate Article II treaties unilaterally makes treaties unreliable as compared to congressional-executive agreements, which cannot be terminated absent action by both Congress and the President. A "for-cause" termination reservation would increase the reliability of Article II treaties and so would shift the comparative utility of congressional-executive agreements and Article II treaties.

Larded by Lobbyists: More from the Fiscal Cliff

From the NYT today, Fiscal Footnote: Big Senate Gift to Drug Maker:

A provision buried in the fiscal bill passed earlier this month gives Amgen, the world's largest biotechnology firm, more time to sell a lucrative kidney dialysis drug without price restraints.

No big surprise, we already knew the bill was larded with giveaways, but the NYT provides a nice look into the flawed process, which all starts with a small army of lobbyists. Read the whole thing.

Why FATCA is a Tax Treaty Override

I've been asked to explain comments I made in a recent talk about FATCA, when I said that this regime constitutes a tax treaty override, and that I don't think that IGAs are a valid fix as a matter of law. Here is my reasoning. I will use the US-Canada tax treaty as an example, but the override applies to all US tax treaties currently in force.

This is a lengthy post so let me preface with the executive summary, after which I will provide more detail:

• US and Canada have an existing tax treaty that imposes specific rates for investment income earned by Canadian residents from US sources.
• FATCA places a new condition on receiving those rates.
• This restricts the benefits of the treaty, which is treated as a treaty override by the terms of the treaty itself.
• The treaty provides that the remedy for such an override is a change to the terms of the treaty.
• the IGAs do not change the terms of the treaty but purport to interpret it to allow a different new condition (which condition is itself an override of the domestic FATCA statute) to take effect immediately. 

And now for the detail.

Canada and the US have a tax treaty in force in which each government agrees to impose specified tax rates on domestic-income received by investors in the other country. For example, a Canadian person (individual or entity) that invests in the stock of a US corporation and receives dividends on that stock would be subject to a maximum rate of 15% US withholding tax on that dividend under the treaty (see Art. 10); for royalties, the maximum rate would be 10%, and for interest and most capital gains, no tax would be withheld by the US (see Art. 11 and 13(4)).  In most cases, a tax treaty overrides domestic statutory law that would impose a higher source-based tax rate on payments made to foreign persons.  Accordingly, the statutory US rate on a Canadian resident receiving passive income from US sources would be 30% (with several exceptions, see s. 871). The agreement undertaken in tax treaties is that the US will not impose that statutory rate on payments to Canadian residents, but will restrict its tax to 15% (dividends), 10% (royalties), or even 0 (most interest and capital gains).

Every tax treaty also includes information exchange provisions under which each country agrees to "exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which this Convention applies insofar as the taxation thereunder is not contrary to this Convention." In the Canada-US treaty that is Article 27.

Although this is not critical to the override argument, it is worth noting that the various provisions of the treaty are not conditional on each other; that is, Canadian residents are entitled to the specified tax rate even if, for example, the countries get into a tangle over their information exchange efforts.

FATCA's effect is to impose a new condition on the treaty-based withholding tax rate. That is, under FATCA, the only way for resident Canadian institutions to continue to get the treaty rate (of 0, 10, or 15%, depending on the type of income in question) is to fulfill FATCA information gathering and reporting requirements. If they do not fulfill these requirements, they will not be eligible for the treaty rate, but rather they will be subject to a 30% withholding rate on all "withholdable payments"--an expansive concept of US-source income items which you can read in the statute.

FATCA is thus a new condition on the treaty rate, a condition that is not by any stretch included or even contemplated in the treaty.  Indeed, how could FATCA be contemplated by any treaty that came into force prior to 2010, as FATCA did not exist as law before then.  This is not to say that no conditions can be placed on the access of Canadian residents to treaty rates. There are many existing conditions for treaty benefits--see particularly the limitation on benefits clause (Art 29A), which are quite expansive and form a major part of any treaty negotiation with the US.  But it is to say that FATCA's particular condition is not in the treaty.

Therefore FATCA overrides the existing treaty by unilaterally denying the treaty rate to Canadian residents who would otherwise qualify therefore under the existing, duly negotiated, treaty provisions currently in force.

Now let us look at Art 29(7), which tells us how the countries are supposed to deal with potential tax treaty overrides that arise when one country enacts a domestic law that conflicts with the treaty in effect:

"Where domestic legislation enacted by a Contracting State unilaterally removes or significantly limits any material benefit otherwise provided by the Convention, the appropriate authorities shall promptly consult for the purpose of considering an appropriate change to the Convention."

Thus the remedy to a law that would restrict or remove a material benefit--namely, a specified tax rate on a payment of US-source income to a Canadian investor--is a change to the convention.

A change to an existing convention is undertaken in a protocol. A protocol is in legal terms nothing less than a new treaty that overrides specific provisions of the existing treaty to reflect the parties' later agreement. That is, to change a treaty, each government must agree to the change via a new treaty, which each government must ratify under its internal treaty-making processes.

This therefore suggests that the proposed intergovernmental agreements (IGAs) are not a valid means to get FATCA to work as a matter of law. This is because the US is not treating IGAs as treaties at all; it is treating them as interpretations of the existing treaty, specifically, the information exchange provision.  You can read this setup in the preamble to these agreements. This position seems plainly incorrect, but the subject of the legal status of the IGAs is its own complicated analysis, and I will post more on that subject very soon.

I will note, however, that the IGAs further muddy the interpretive waters since what they do is in fact override the terms of the FATCA statute, by switching the reporting relationship from Canadian resident institutions to a government-to-government relationship. Some have argued that they do not override but merely use Treasury's mandate to define exemptions to FATCA. Perhaps, but Treasury was not given any mandate by Congress to encase those exemptions in international agreements. Moreover, it seems a real stretch to assert that the IGAs simply interpret existing information exchange provisions, especially when it is clear that many or most countries will have to enact domestic legislation to fulfill the new reporting requirements. The valid way forward for Treasury would have been to create straightforward conditional exemptions: exempt countries from FATCA provided those countries enacted laws according to Treasury specifications. That would still be an extra-territorial reach, perhaps, but there are precedents for the mechanism (such as what was done to shut down bearer bonds--thank you to Michael Schler for reminding me of that example, and I know that there are others as well). But, importantly, this established way forward would not solve the tax treaty override problem. Therein may lie a main reason for going the IGA route, even though it is not a clearly valid resolution.

What is clear at this stage is that FATCA overrides the existing tax treaty by significantly limiting a material benefit thereunder, and the only valid way to fix that override is to change the treaty itself, by entering into a new protocol. We can see that the US and Canada have a lot of experience with protocols: protocols to the current tax treaty were signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007. One of those was to fix another infamous US tax treaty override: the branch profits tax. In short, it doesn't seem to have been that big deal in the past to agree to changes to the treaty terms by the normal treaty-making process, even when the issue was unilateral override, which is typically seen as a bit of bad faith in international relations. That raises the question why this particular change is not being marshaled through the same process.  I will leave it to the reader to speculate for now, and will have more on this later as well.

Advice for the 2d Obama Administration

Live webcast today: Pepperdine/Tax Analysts Symposium: Tax Advice for the Second Obama Administration

Lineup:

Introduction and Welcome

• Deanell Tacha (Dean, Pepperdine)
• Chris Bergin (President, Tax Analysts)

Keynote Address:  Michael Graetz (Columbia)

Occupy the Tax Code:  The Buffett Rule, the 1%, and the Fairness/Growth Divide

Moderator:      David Brunori (Tax Analysts)

Papers:           Dorothy Brown (Emory), The 535 Report: A Pathway to Fundamental Tax Reform
                         Francine Lipman (UNLV), Access to Tax InJustice
                         Kirk Stark (UCLA) (with Eric Zolt (UCLA)), Tax Reform and the American Middle Class

Commentary:  Bruce Bartlett (New York Times), David Miller (Cadwalader, New York)

Estate and Gift Tax

Moderator:      Paul Caron (Pepperdine)

Papers:           Ed McCaffery (USC), Distracted from Distraction by Distraction: Reimagining Estate Tax Reform
                         Grayson McCouch (San Diego), Who Killed the Rule Against Perpetuities?
                         Jim Repetti (BC) (with Paul Caron (Pepperdine)), Occupy the Tax Code: Using the Estate Tax to Reduce Inequality

Commentary:  Joe Thorndike (Tax Analysts)

Luncheon Address:   David Cay Johnston (author/journalist)

Business/International Tax #1

Moderator:     Tom Bost (Pepperdine)

Papers:          Steve Bank (UCLA), The Globalization of Corporate Tax Reform
                         Karen Burke (San Diego), Passthrough Entities: The Missing Link in Business Tax Reform 
                         Martin Sullivan (Tax Analysts)

Commentary:  Michael Schler (Cravath, New York)

Business/International Tax #2

Moderator:     Khrista McCarden (Pepperdine)

Papers:          Reuven Avi-Yonah (Michigan), Corporate and International Tax Reform: Proposals for the Second Obama Administration
                        Allison Christians (McGill), Putting the Reign Back in Sovereign: Advice for the Second Obama Administration
                        Susan Morse (UC-Hastings), The Transfer Pricing Regs Need a Good Edit

Commentary:  Robert Goulder (Tax Analysts)

Closing Remarks:  What Have We Learned Today?:   David Cay Johnston (author/journalist)

Here they are--FATCA final regs

All 500 pages.  No time to comment on these now, as I'll be talking about FATCA in Malibu tomorrow.

Manx tax strategy

Interesting: Isle of Man announces it will keep its 0/10 corporate tax rate and pretty much the rest of its tax system as is, but wil cooperate with the US on FATCA and the EU on its codes of conduct, and might join the mutual administrative assistance in tax matters agreement, and even "consider working with other countries and multilateral organisations on the development of co-operation systems similar to FATCA." I think that last one is in regards to the UK, but it could be broader in scope.

At the same time, the Isle of Man will

"maintain competitive  personal income tax rates  as one of the features making the Island an attractive place to live and work; and

maintain a competitive business tax system in the Isle of Man to support economic development;"

among other aspirations. I think they are in a tough spot, with the US and the UK focused on chasing individual tax cheats and corporate tax avoiders (respectively, perhaps) through their banks. By way of background, the tax strategy says:

The Isle of Man‟s taxation policies have played an important part in our economic success. 

...The key principles of fiscal sovereignty, economic stability and adherence to international standards which underpinned the original taxation strategy remain just as relevant today. 

I'm not sure what anyone means by fiscal sovereignty anymore. Then again, I never really did think it was a real thing.

US-Mexico IGA on FATCA: in force as of Jan 1 2013

Mexico is following the US lead in treating the IGA as a competent authority agreement that merely interprets and clarifies the existing tax treaty between the two countries and therefore does not need to be subjected to internal ratification or implementation processes. From a Baker & McKenzie client alert posted at Tax Analysts today:

Upon a number of consultations with the relevant tax authorities, we have concluded that no need exists for the United States and Mexico FATCA Intergovernmental Agreement to be published in the Mexican Federal Official Gazette in order for it to be effective. The Intergovernmental Agreement has become effective as of January 1st, 2013 as stated therein.  

The Intergovernmental Agreement merely constitutes an accord between the two countries as to the actual implementation of the exchange of information in connection with taxes already covered in other Conventions – i.e., the Convention on Mutual Administrative Assistance in Tax Matters the US-Mexico Double Tax Treaty, and the US-Mexico Tax Information Exchange Agreement, all of which are in effect and authorize the exchange of information for tax purposes on an automatic basis. This Intergovernmental Agreement sets the framework for the coordination of the Competent Authority of each country in their efforts to improve international tax compliance.

I confess, I still don't see it. How can an agreement to implement a law passed in the US in 2010 "interpret" an existing treaty that predates it, especially when the law in question would override the treaty? A possible explanation is that Mexico's internal financial reporting rules already require financial institutions with the specific information being asked by the US, and that this is just a matter of turning over an existing data stream on an automatic basis. But how can that be--is it likely that Mexican financial institutions already as all of their clients for indicia of US person status? And that it imposes withholding taxes on US-source payments in excess of treaty rates in cases of noncomplianee? Not likely, and obviously not, respectively.

I note that Mexico does seem to have much more info flow between its financial institutions and its tax authority--so much so that it wants to provide the US with monthly average balances of accounts held by US persons, because its banks have monthly info requirements to the Mexican tax authority, you can read about that here.

Legalize it, and Tax it

"The true effect of marijuana use ... could be zero.”

So this is not your brain on weed. But this might be.

Legalize it, and tax it, already; why not an earmarked tax in support of the arts. Bonus: increased consumption tax revenues.

IMF Admits More Mistakes

Doesn't the title sum it up nicely.  From Delusional Economics, by way of NC:

[T]he latest research from the IMF and statements from their chief economist ... appears to suggest that they simply didn't know what they were doing.

Consider it a mea culpa submerged in a deep pool of calculus and regression analysis: The International Monetary Fund's top economist today acknowledged that the fund blew its forecasts for Greece and other European economies because it did not fully understand how government austerity efforts would undermine economic growth.
The new and highly technical paper looks again at the issue of fiscal multipliers – the impact that a rise or fall in government spending or tax collection has on a country's economic output.
….
"Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation," Blanchard and co-author Daniel Leigh, a fund economist, wrote in the paper.
That somewhat dry conclusion sums up what amounts to a tempest in econometric circles. The fund has been accused of intentionally underestimating the effects of austerity in Greece to make its programs palatable, at least on paper; fund officials have argued that it was its European partners, particularly Germany, who insisted on deeper, faster cuts. The evolving research on multipliers may have helped shift the tone of the debate in countries like Spain and Portugal, where a slower pace of deficit control has been advocated.

...the IMF teams appear to have taken non-dynamic estimates of the outcomes of their programs under the assumption that even the most radical cuts to the government sector would always deliver a net economic positive.

See that?  They just assumed that tax cuts always lead to economic growth.  Even though their own research told them the assumption was false.

That assumption may be presiding over the unwinding of society on a global basis. It's certainly delivering a lot of pain and suffering along the way.

Avoid Paying Taxes The Warren Buffett Way

The Buffet rule, read it and weep edition:

[One] reason why we hold Berkshire is because of Buffett's uncanny ability to mitigate Berkshire's tax expenses, particularly Berkshire's cash tax payments. We are aware that this is not to be talked about in polite company especially because Buffett has been pounding the table for higher statutory tax rates. … 

We think that Warren Buffett said it best when he said if you can eliminate the government as a (39.6%-46%) business partner, the business will be far more valuable.

How about just eliminating government all together?  How will Berkshire do in the state of nature, do we think. Would roaming marauder business partners cost less?

FATCA will/will not work: discuss

TJN ran two stories recently on FATCA's impact on tax competition. Which is right?

Story #1 says Austria and Luxembourg "may be forced to abandon banking secrecy because, in agreeing to implement FATCA with the US:

"EU member states could impose [automatic information exchange] on these two recalcitrant jurisdictions by invoking the 'most favoured nation' clause, explains Pascal Saint-Amans of the OECD."

 EU Directive 2011/16/EU contains a most favoured nation clause: if a Member State provides wider cooperation to a third country than that provided for under the directive it may not refuse such wider cooperation to another Member State that requests it on its own behalf."

So if these countries provide automatic information exchange to the U.S., then they are not allowed to refuse it to other E.U. member states.

TJN says thanks to FATCA, "the all-important amendments to the EU Savings Tax Directive are therefore likely to be passed this year, and Swiss efforts to torpedo this transparency initiative will have failed." Conclusion: FATCA will turn into its ultimately goal, a global tracing system under which no one can hide behind bank secrecy to evade their taxes, what some like to call GATCA.

Story #2 says Hong Kong is set to grab all the tax haven business:

Hong Kong just became an even better place for company directors who value secrecy. The Chinese territory, already ranked fourth in a list of 71 "secrecy jurisdictions" by the Tax Justice Network, has proposed new laws making it harder to identify the directors of non-public companies.

TJN says in response: "Tax havens. As we have said - this is where real power in the world increasingly lies. And the race to the bottom on secrecy continues apace."

If FATCA will shut Austria and Luxembourg as tax havens, why not Hong Kong?

The IGAs don't, I think, really explain things: in the absence of IGAs, FATCA is supposed to apply directly to all foreign financial institutions.  So it is the IGAs that would change the scene on the EU directive.  These agreements, let's be fair, really don't have a single thing to do with the FATCA statute from a legal perspective.  In other words, no one in the world needs FATCA to order into an agreement on automatic information exchange, countries could have (and in some cases have already--US, Canada) agreed on automatic info exchange years, decades, and even a century ago (which in fact they also did, see some of US early agreements).  FATCA is just a very big stick that is forcing Luxembourg and Austria to so agree, thus apparently opening themselves up to similar agreements throughout the EU.  Score one for dreams of multilateralism, but only among rich countries.

But Hong Kong, poised to take over, shows why FATCA can't get us to GATCA, i.e., there will be no worldwide information exchange, and the world is still safe for tax cheats. The reason for this lies in s S. 1471(f), which reads:

Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—

(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing...

(3) any foreign central bank of issue...

Translation seems to be: no big stick on payments that go to state-owned financial institutions.  That, I take it, describes China's entire financial system, including Hong Kong and Singapore.  Tell me if I am wrong about this, because I truly want to know.  If I am right, then FATCA moves tax havens around on the board but doesn't actually end the gravy train for tax cheats.

If that in turn is true, then the application of onerous compliance and filing issues on americans living in high tax countries to try to hunt down tax cheats who will not even be there seems particularly troublesome.

Lobbying pays: the skewed impact of the fiscal cliff deal, in one striking chart

From Citizens for Tax Justice:

In 2013, the richest one percent of Americans will receive 18 percent of the tax cuts while ...[t]he bottom three-fifths ... will receive 18 percent of the tax cuts. In other words, the richest one percent of Americans will receive the same share of the tax cuts as the poorest 60 percent of Americans:

 

Note that it is hard to give tax breaks to the poorest, since they aren't much in the tax net to begin with. But what explains the middle? CTJ notes that the deal made permanent 85% of the Bush income tax cuts and 95% of the estate tax cuts, which we already know were skewed toward the wealthy and have presided over the largest widening of the income gap in US history since the gilded age. That is destroying the middle--there aren't so many people in that category any more.  And the ones still in the category have much less to work with:

Why did the fiscal cliff turn into welfare for the 1%? We know the answer, it's always the same. Incidentally Matt Stoller wrote a follow up piece arguing that if we understand how lobbying corrupts policymaking in the US, we can work against it.  But I am not optimistic.

Lobbying is policy in the US. That is how governance works. There are good aspects and bad aspects to the ability of the public to influence lawmakers in a democracy; the issue is what happens to democracy when you have to pay enormous sums to play. It seems that one thing that happens for sure is that elected officials become "utterly unresponsive to the policy preferences of millions of low-income citizens.” Major social imbalance is the result when, as Nancy Folbre says:

Our most affluent citizens now have less to gain from cooperation with the rest of us than they once had. They can effectively threaten to opt out and invest elsewhere. They can also invest vast resources in lobbying and electioneering.

I am still puzzled as to how on earth the NY Times managed to get their headline so wrong. Yves Smith calls it a big lie, and I would have to concur.

Corporations are people my friend, carpool lane edition

California man says he can drive in carpool lane with corporation papers

He waved his corporation papers at the officer, he told NBCBayArea.com, saying that corporations are people under California law. 

Frieman doesn't actually support this notion. For more than 10 years, Frieman says he had been trying to get pulled over to get ticketed and to take his argument to court -- to challenge a judge to determine that corporations and people are not the same.

But the first question for the judge will not be whether corporations are people, but whether incorporation documents are corporations.

Did he in fact have a corporation in the car with him? Corporations are ethereal creatures, to be sure. You cannot pin them down with a seat belt. So I'll predict he loses on that technicality. Oh, the irony.

But even if he managed to win (by losing on the grounds he has proposed), I am not sure what that would give him by way of victory--I imagine he's thinking about the symbolic value of the public rejection of the notion of personhood. I imagine that would have been much more satisfying to him if he could have got the citation prior to November 6. But corporations and their propensity to shenanigans are certainly under increased scrutiny in civil society, so I'm not surprised to see this story gaining traction.

AIG PR Blitz “Thanks” Taxpayers For Bailouts

Something went horribly wrong in AIG's public relations department:

what is the message here from AIG?
“I needed money so I stole your car, robbed a liquor store, and now I am giving you your car back and I left a portion of the liquor store loot…”

And I'm proud of that. Thank you, America!

The PR dept didn't completely fail though: they were smart enough to disable the comments section:

India revives tax on Vodafone

The headline reads "Government revives Rs 14,000 crore tax demand on Vodafone; company may go for arbitration." Crore = $10 million, so that's 140 billion rupees, which converts to about USD $2.6 billion, up a bit from the original $2.5 billion sought by India's tax authority last year, to account for "delayed payment".

The report says "The company could initiate arbitration before international tribunals under the India-Netherlands Bilateral Investment Protection Agreement"--but this was already done early last year, in anticipation of the reassertion of the tax.  In connection with its filing, Vodafone stated:

"The dispute arises from the retrospective tax legislation proposed by the Indian government which, if enacted, would have serious consequences for a wide range of Indian and international businesses, as well as direct and negative consequences for Vodafone."

I wondered at the time about the oddity that Vodafone could draw India into a dispute resolution with the Netherlands in respect of a law that is not yet passed, but noted that apparently once invoked, the BIT automatically provides for dispute resolution.

The latest is merely an assertion by the Indian tax authority, so it remains to be seen whether Vodafone will seek another victory from the Indian courts (challenging the reassessment) or from the BIT (challenging the retroactive law as a breach of fair & equitable treatment to foreign investors).

Current status of US tax treaties, with FATCA IGA update

Latest US tax treaty update is available here, with a new section covering the developments on FATCA IGAs. I'm still not convinced they should be included in such a list, since from the US perspective these appear to be nothing more than competent authority agreements, presumably entered into under the CA's authority "to clarify or interpret" existing treaty & TIEA provisions.  Certainly, it seems that no internal legislative procedure will be undertaken to get these in force in the US--they await only the internal ratification by FATCA partners.

I have seen absolutely nothing offered by the IRS or Treasury that explains the character of these agreements, so I am deducing that they are being considered CA agreements from what I've seen so far.  But I'll admit the evidence is conflicting and confusing: for example, the IGA with the UK was apparently signed by a non-Treasury embassy official, and not the CA, so how could it be a CA agreement?

Fortunately, at some point the mystery will be solvable: I'll be able to confirm the legal status of the IGAs as soon as the first one enters into force, by checking to see if it lands in the pages of the US treaties and international agreements series. If it does not (as I suspect), then the IGAs really belong only in a list of competent authority agreements, where they will be treated not as treaties or international agreements per se but merely as interpretations of existing treaties. That will be interesting because it really stretches the boundaries of how I think we've understood up until now the competent authority's ability to stray beyond the text of the treaty. Of course, even if they do not end up in the TIAS I can certainly understand why Connery et al included them in their regular tax treaty update, because they sure look like treaties, don't they.

If I am wrong, though, and the IGAs do land in the treaties and international agreements series, then things get even more interesting.  We will be witnessing an unprecedented first in the history of US treaty making: the introduction of sole executive agreements on tax, not pre-authorized by congress, not expressly authorized by any existing treaty, and serving to override existing statutory tax law without any congressional oversight at all. Intriguing to say the least.

Of course, none of this has any bearing on the legal force of the IGAs from an international perspective. In the eyes of the world, these are just like any other international agreement. But in terms of those who think about the treaty making power in the US, I would think this would be a very interesting and controversial development.