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.