Global Justice Post-2015

The Global Justice Program at Yale University is currently hosting a conference exploring the post-2015 agenda for human rights and global justice. List of speakers and topics:

Day One: October 30 

Panel 1: Global Tax Fairness: Allison Christians, Manuel Montes, Erika Siu; Chair: Zorka Milin)  

Amartya Sen Prize Contest Ceremony 

Panel 2: Illicit financial flows, human rights and the post-2015 agenda - Discussion of Independent Expert’s Report: Juan Pablo Bohoslavsky, Nicholas Lusiani, Léonce Ndikumana, Esther Shubert; Chair: Tom Cardamon 

Panel 3: Addis, Post-2015, and future efforts against Illicit Financial Flows: Tom Cardamone, Steven Dean, Gail Hurley and Jakob Schwab; Chair: Laura Biron 

Day Two: October 31  

Statement of the Health Impact Fund (HIF) and mini-HIF, including discussion: Aidan Hollis, Thomas Pogge; Chair: Alex Sayegh  

Panel 4: Mini-HIF: Piloting the Health Impact Fund: Laura Biron, Aidan Hollis, Peter Maybarduk, Thomas Pogge, Jeffrey Sachs, Richard Wilder; Chair: Tendayi Bloom
Concluding Session on the Health Impact Fund  

Panel 5: Individual Deprivation Measure, Poverty Measurement: Sharon Bessell, Thomas Pogge, Scott Wisor; Chair: Yuan Yuan. 

Day Three: November 1  

Panel 6: Oslo Principles on Climate Change Obligations: Thomas Pogge, Jaap Spier, Kira Vinke; Chair: Shmulik Nili 

Panel 7: Sustainable Development Goals (Daniel Esty, Thomas Pogge, Jeffrey Sachs; Chair: Corinna Mieth.

I presented yesterday on the topic of "Global Tax Fairness." I discussed the connection between taxation and human rights, highlighting the challenges for the realization of rights and justice that are posed by tax competition and exploring whether and how systemic change is possible. I have a couple of works in progress on the topic and will post drafts when ready.

In the meantime, I'm experimenting with making my powerpoint presentations available online (along with other resources in the future). You can view a list here: see pull down menu entitled "resources". Comments and suggestions are welcome.

Reconsidering the Tax Treaty: Brooklyn Law Symposium

I'm very pleased to participate in Brooklyn Law School's annual international tax symposium today. This year's theme is Reconsidering the Tax Treaty: a timely topic given the OECD's release of the BEPS Reports, especially Action 6, and the US Treasury's release of proposed new Model Provisions.

My working paper looks at these developments, with a specific focus on the proposed "special tax regimes" and "subsequent changes in law" switch off clauses--in effect, two built-in mini-override provisions. Mine is truly a work in progress and not ready for distribution yet but here is the basic framework:

Seeing STRs: A New Vision for Tax Treaties?

The new US Model treaty contains several new provisions designed to address treaty abuses, in line with the ongoing OECD initiative to counter base erosion and profit shifting (BEPS). Among these are two dealing with foreign law. The first denies treaty withholding rates on interest, royalties, and other income to taxpayers eligible for “special tax regimes” (STRs) in the treaty partner country. The second completely switches off the treaty withholding rates for all recipients of passive income items in prescribed situations where the partner country reduces its tax rate below 15%. The STR provision is limited in scope to taxpayers who receive special deals, but the subsequent law provision partially terminates the treaty as to every taxpayer (ostensibly in both countries) even if they do not benefit from the targeted regime. Both provisions seem designed to enact a new central purpose for tax treaties, namely, as peer-monitoring devices to create a world in which cross border capital flows are subject to at least a single level of tax, at a minimum tax rate. This article examines the international precedents for the new provisions and their implications for international tax relations going forward. It concludes with a discussion about the role tax treaties can and should play in curtailing tax competition among nations.

As always I welcome comments; will post a draft when ready.

Mitchell. Murphy. Head to Head Nov 3 in Montreal: Corporate Tax on Trial

On Nov 3, there will be a big conference in Montreal on the topic of tax cooperation and competition with presentations by political, business, and academic leaders from around the world; program at the link and I'll post more info soon. A highlight of the day will be a formal debate between Dan Mitchell of the Cato Institute and Richard Murphy of Tax Research UK, on the topic of corporate taxation: continue it, change it, abolish it? These two titans will debate three resolutions:

1. First, be it resolved that: the current approach to corporate taxation is a necessary and appropriate means of raising tax revenue.
2. Second, be it resolved that: corporate taxation is fundamental to preserve personal taxation.
3. Third, be it resolved that: To the extent that governments tax corporate income, they should do so comprehensively, and not use tax incentives to favour selected types of investment or commerce.

It likely goes without saying that arguing on the “affirming side” of each resolution will be Richard Murphy; arguing on the “opposing side” of each resolution will be Dan Mitchell; the debaters are free to interpret the resolutions broadly and form their arguments accordingly. Evidence from all jurisdictions will be admissible. The debate will be moderated and judged by two eminent judges: Louise Otis (OECD Admin Tribunal & McGill Law) and Jay Rosengard (Harvard Kennedy School of Business). The emphasis will be on persuasive, clear and logical argumentation. This promises to be a lively debate. Registration information for the conference is here.

New government in Canada; new fiscal policy

Canada's federal election unfolded last night with a decisive victory for the Liberal Party under the leadership of Justin Trudeau. Campaign promises include a much needed commitment to transparency, including budgetary "honesty" as outlined in the party's Fiscal Plan. Here are the main promises:

• cancel child benefit cheques for millionaires, increase child benefits for the middle class & below 
• increase the marginal tax rate on Canada’s 1%, cut taxes for the middle class
• review tax expenditures, target tax loopholes that particularly benefit Canada’s 1%. 
• be honest about the government of Canada’s fiscal position, base projections on Parliamentary Budget Officer report. 
• run modest deficits for three years, invest in growth for the middle class.
• offer a plan to balance the budget in 2019.

Here's the revenue picture: 

 

Hmm, I am not seeing any revenue from legalizing & taxing marjuana, suggest Canada take a page from Colorado on this point. I predict the revenue impact will be more than zero.

Will be fascinating to watch how the promises play out IRL.

Intergovernmental Agreements (IGAs) as Hybrid Tax Agreements

I recently published "Interpretation or Override? Introducing the Hybrid Tax Agreement." Here is the abstract:

In the effort to overcome foreign law impediments to the implementation of the Foreign Account Tax Compliance Act (FATCA), the U.S. Treasury introduced intergovernmental agreements (IGAs). IGAs are hybrid tax agreements: Treaties to most of the world, in the United States they instead constitute an executive interpretation of the underlying tax treaty. This introduces a great deal of interpretive uncertainty where the terms of IGAs and tax treaties conflict. Prompted by recent queries in the EU regarding the legal nature of the IGAs, this article explores a concrete example of the legal principles at stake by examining how the public policy rules for information sharing found in US tax treaties interact with the information exchange provisions found in the IGAs.

Further in, I explain that it is difficult to understand how as a matter of international law the IGA, as a document that purports to "interpret" the underlying tax treaty, in fact obviates some of the provisions of the treaty, but do so only for the party other than the United States. I conclude:

Process matters in law. It is what makes the rule of law function as a legitimate source of authority. It is ironic that even as the United States partners with its fellow OECD members to try to address the major challenges to international taxation posed by hybrid legal entities and hybrid financial instruments, Treasury has invented the hybrid tax agreement. Conflicts resulting from this invention are inevitable and I anticipate they will be costly. I believe that Treasury took a few shortcuts around established legal precedents on the road to implementing FATCA. I understand that this may be considered expedient in the effort to get FATCA to work. But in the long run the sacrifice renders a disservice to the rule of law. That sacrifice deserves careful reflection by all those affected.

I continue to be fascinated by the rapid developments in international taxation over the past several years, in terms of both substance and process/rule of law.

Friends with Tax Benefits: Apple's Cautionary Tale

Over the summer, I wrote a column on the ongoing EU state aid investigation into Ireland's tax practices involving Apple. The recent news that Ireland plans to cut its corporate tax rate again, dropping to just 6.5% for IP-driven companies, reminded me that I neglected to post this article, so here it is. Abstract:

Apple recently disclosed to shareholders a potentially material impairment to its earnings: an ongoing investigation by the European Commission into Ireland’s tax ruling practices. Ireland may be forced to retroactively impose additional taxes on Apple, going back as much as a decade (and possibly beyond), if the Commission decides that the Irish Tax Authority granted Apple a prohibited subsidy, referred to as “fiscal state aid,” in contravention of EU law. But the impact of this investigation may be felt well beyond Europe. Against the backdrop of the OECD’s project on base erosion and profit shifting, the Commission’s investigation about whether Ireland gave Apple unfair benefits is fundamentally an interrogation into what, if anything, governments can or should do to stop the strategic use of national tax systems to lure international trade and investment. The Commission’s inquiry into Apple is thus a cautionary tale for both tax planners and tax authorities, whose confidence in past practices must give way as traditional compromises and well-worn assumptions suddenly become subjects of intense renegotiation on the global stage.

Tax competition and cooperation continue to duke it out: BEPS is one battleground, state aid is another. If in policing internal practices, the EC finds that tax favours like Ireland's are anti-competitive as to other EU countries, then surely they are also anti-competitive as to the rest of the world. Even though the relevant treaty (TFEU) is unique and distinct, the principle that tax favours constitute state aid might open the door for disputes beyond the EU, for example in the context of other bilateral or multilateral trade agreements.

Side note: in writing this column, I compared the successive Apple disclosure statements to watch the language change in response to the EC inquiry, which unfolded as follows:

1st EC letter to Ireland: June 2013
Additional info request: October 2013
Additional info request: January 2014
EC letter informing Ireland of investigation: March 2014.

In the column I suggest we can trace this correspondence in Apple's tax disclosure. Because it was a brief discussion I didn't lay out the disclosure changes in full but here they are (through the time of the column; not updated since), interesting in terms of revealing management's decisions about what shareholders need to know in order to make informed investment choices. Perhaps unsurprisingly, Apple's share price appears immune to the news to date. It is hard to imagine the size a clawback would need to be in order to have a material impact.

10K Oct 2012, 10Q Jan 2013, 10Q Apr 2013 [identical provisions]

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions. Current economic and political conditions make tax rates in any jurisdiction, including the U.S., subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. The Company is also subject to the examination of its tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations.

10Q Jul 2013

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Current economic and political conditions make tax rates in any jurisdiction, including the U.S., subject to significant change.  The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.

10K Oct 2013, 10Q Jan 2014, 10Q Apr 2014: same as prior

10Q Jul 28 2014

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to take a final decision against Ireland, it could require changes to existing tax rulings that, in turn, could increase the Company’s taxes in the future. The European Commission could also require Ireland to recover from the Company past taxes reflective of the disallowed state aid.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.

10K Oct 2014: same as prior

10Q Jan 2015

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to take a final decision against Ireland, it could require changes to existing tax rulings that, in turn, could increase the Company’s taxes in the future. The European Commission could also Ireland to recover from the Company past taxes reflective of the disallowed state aid. The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows and financial condition could be adversely affected.

10-Q Apr 28 2015

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid.

As of March 28, 2015, the Company recorded gross unrecognized tax benefits of $4.6 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $844 million and $630 million of gross interest and penalties accrued as of March 28, 2015 and September 27, 2014, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows and financial condition could be adversely affected.

Kadet on Profit Shifting: The Approach Everyone Forgets

Over the summer, Jeffery Kadet published an article of interest, Attacking Profit Shifting: The Approach Everyone Forgets, in which he argues that the IRS has the ability, as yet not exercised, to attack profit shifting by US-based MNCs using nothing more than the domestic "effectively connected income" rules. Here is the abstract:

In recent years the financial press has turned increasing attention to MNCs that shift income to low taxed jurisdictions overseas in order to avoid US taxation. What’s generally missing from these discussions is any serious focus on possible IRS attacks on these companies, most of which are CFCs. There’s little apparent concern by anyone that the IRS will try to disallow the profit-shifting structures that have moved so much taxable income out of the US and other countries and into low-taxed foreign jurisdictions. 

This is changing. Early this year Caterpillar Inc. in an SEC filing disclosed that the IRS had issued a Revenue Agent’s Report to currently tax certain income earned by one of its Swiss entities. Presumably this is income earned as a result of a certain restructuring conducted in the late 1990s and referred to as the Swiss Tax Strategy when examined in 2014 in hearings held by the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI). 

The IRS basis for its RAR, as disclosed by Caterpillar, is application of the ‘substance-over-form’ or ‘assignment-of-income’ judicial doctrines. This, however, is not the only approach that the IRS might have chosen to impose taxation on the shifted profits. 

Various Congressional hearing documents, the work of investigative journalists, and other sources (all publicly available) provide evidence that the businesses within some profit-shifting structures continue to be managed and substantially conducted from the U.S. and not from any business locations outside the U.S. Where this is the case, the IRS may have a strong case for imposing direct taxation on the effectively connected income (ECI) of these low-taxed foreign subsidiaries. 

Just the threat of imposing direct taxation may cause many MNCs to consider scaling back their profit shifting and for them and their outside auditors to start worrying about exposure on prior years. If the IRS were to sustain such direct taxation, it would mean: 

• The regular up-to-35% corporate tax, 

• The ‘branch profits tax’ applied at a flat 30% rate (unless lower by treaty), 

• A loss of deductions and credits for any tax year if the foreign corporation has not filed Form 1120-F for that year, and 

• An open statute of limitations on IRS assessment of tax for any tax year if the foreign corporation has never filed a US tax return on Form 1120-F for that year. 

The combined effect of the above is a 54.5% or higher effective tax rate (lower if tax treaty coverage reduces the 30% branch profits tax rate). 

Considering these terribly high effective tax rate percentages, where the IRS chooses to examine for possible ECI and develops a credible case, they can use the high effective tax rate as strong leverage to secure agreement for reversal of profit shifting structures. Such agreements would presumably see MNCs agreeing to current taxation within U.S. group members of the shifted profits that had originally been booked in low-taxed foreign subsidiaries. 

To demonstrate how significant ECI likely exists within many MNCs that have conducted profit-shifting planning, this article includes a number of realistic examples inspired by the above-mentioned publicly available information on MNC profit-shifting structures. 

Recognizing that it can sometimes be a challenge to apply the very old existing regulations to current business models, the article strongly encourages Treasury to prioritize the issuance of modernized income sourcing and ECI regulations that reflect the business models and structures now commonly used and that are often found in profit-shifting structures.

Cockfield: Big Data and Tax Haven Secrecy

Art Cockfield has posted a new paper on SSRN, Big Data and Tax Haven Secrecy, forthcoming Florida Tax Review. The article sets out research he did with the International Consortium of Investigative Journalists (ICIJ) and is of interest. Here is the abstract:

While there is now a significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries — so-called offshore service providers — actually do to facilitate offshore evasion, international money laundering and the financing of global terrorism. To provide insight into this secret world of tax havens, this Article relies on the author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. The Article deploys a transaction cost perspective to assist in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in non-democratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.

Taxation and Citizenship Workshop at U Michigan

This week at the University of Michigan Law School, Reuven Avi-Yonah and I are co-hosting an academic workshop on the topic of citizenship and taxation. Because it is a workshop, most of the papers are still in draft and won't be publicly available for some time. However, we will be doing a writeup of the proceedings and I'll post that when it is available, and of course I'll post when the symposium volume is published. Here are the speakers and topics:

• Reuven Avi-Yonah (Michigan) Constructive Unilateralism : US Leadership and International Taxation 
• Allison Christians (McGill) Uncle Sam Wants … Who? 
• Wei Cui (UBC) Residence and Source as Interconnected Concepts 
• Tessa Davis (South Carolina) Of Tax Crimes and “Bad” Citizens: How the Role of Tax Law in Making a Citizen Informs Tax Law and Policy 
• Jane Frecknall-Hughes (Hull) Tax and the citizen: the philosophical underpinnings 
• Christine Harlen (Leeds) Making America Exceptional: Perfectionist Civic Republicanism and the Taxation of Americans Abroad in the Progressive Era, 1890-1920 
• Michael Kirsch (Notre Dame) The Taxation (or Non-Taxation) of Citizens’ Foreign Income: Distilling the Competing Normative Arguments 
• Sagit Leviner (Ono) Citizenship Transcendent 
• Patrick Martin (Procopio) Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents, and Non-Citizens regardless of immigrant status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation 
• Ruth Mason (Virginia) Citizenship Taxation 
• Linneu Mello (Bichara) How the Brazilian Tax Authorities Control Information and What FATCA Has To Do With It 
• Henry Ordower (St. Louis) Is the Expatriation Tax Constitutional? Mark to Market and the Macomber Conundrum 
• Adam Rosenzweig (Washington St. Louis) Once a US Person, Always a US Person 
• Daniel Shaviro (NYU) Taxing Potential Community Members’ Foreign Source Income 
• Peter Spiro (Temple) Citizenship Overreach and the U.S. Tax Regime 
• Saul Templeton (Calgary) Bill C-51, FATCA, and the End of Taxpayer Privacy 
• Edward Zelinsky (Cardozo) The Problems of Defining Residence: The U.S. Experience

Student Panel

• Montano Cabezas (Georgetown) Reasons for Citizenship-Based Taxation? 
• Christine Kim (NYU) Considering “Citizenship Taxation” : In Defense of FATCA 
• Gene Magidenko (UMich) – A Defense of Citizenship Taxation 
• Gianluca Mazzoni (Brescia) The Interaction Between FATCA and Data Privacy 
• Miguel Nicolas (UParis) FATCA and International Law 

The range of topics and viewpoints represented is encouraging and I look forward to the discussion.

Today at McGill: Steven Dean on Taxing Social Enterprise

The Spiegel Sohmer Tax Policy Colloquium at McGill University continues today with a presentation by Steven Dean on “SE(c)(3): A Catalyst for Social Enterprise Crowdfunding.” This event is presented in conjunction with a collaborative project between the Stikeman Chair in Taxation and the Centre for Intellectual Property Policy at McGill Law on the topic of how regulation impacts innovation. In the paper, Prof. Dean proposes a novel tax regime that offers entrepreneurs and investors committed to combining financial returns and social good with a means of broadcasting that resolve and screening out "greenwashed" ventures.

This year's colloquium focuses on the fundamentals of corporate tax policy by critically examining issues in national and international tax policy. Today's talk will take place from 14:30-17:30pm in Room 202 of New Chancellor Day Hall, 3644 Peel Ave, Montreal. Students, faculty and the McGill community in Montreal are welcome to attend.

Latest Update in Canada FATCA IGA litigation

The Federal Court of Canada (Martineau J.) issued a decision in the Canadian FATCA IGA litigation on September 16, ruling against the plaintiffs by finding that the provisions of the IGA are duly enacted law, thus clearing the way for the Canadian tax authorities to furnish information to the United States. You can read the decision here.  Today, the Plaintiffs made a motion for an interlocutory injunction pending appeal of the decision.

Because of my role as an expert witness I will abstain from detailed comments other than to stand by my submissions, but I do note the overwhelming sense of judicial impotence expressed in the September 16 decision. The decision notes that the issues at stake involve injustice at the individual level as well as harsh dealings in terms of sovereign relations. As to the former, the legality of the regime is given as its justification, while the latter are deemed inappropriate matters for judicial intervention. Instead the plaintiffs are directed to seek redress for the personal effects of these circumstances though political and administrative channels.

In my view it was political malfunction in both the US and Canada that brought forth FATCA and then the FATCA IGA, and that FATCA as applied can be summed up in terms of administration as a case of continuous indifference to individuals who are wrongdoers in no real sense yet bear the brunt of severe punishments meant for others. If the judiciary is also not to blame and not to fix, then it seems there is no avenue to right the wrongs of FATCA anywhere. I hope that is not the case.

In any event, two days after the decision was released, the IRS announced another delay in FATCA, this time for Model 1 IGA countries. Model 1 IGA countries involve government-to-government sharing, as compared to Model 2, under which financial institutions directly report to the IRS pursuant to authority granted by their home governments. Canada has a Model 1 IGA so it could delay furnishing information to the United States if it notifies the IRS before September 30, 2015 "and provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible." There have been some efforts to compel the Canadian government to avail itself of this option (see, e.g., here and here), but I am not sure how to monitor the government's response.

More to come as events unfold.

Spiegel Sohmer Tax Policy Colloquium at McGill Law

McGill Law's annual Speigel Sohmer Tax Policy Colloquium kicks off today with a presentation by Roseanne Altshuler on the viability of a switch from worldwide to territorial corporate taxation in the United States. This year's colloquium will focus on the fundamentals of corporate tax policy by critically examining issues in national and international tax policy. Today's talk will take place from 14:30-17:30pm in Room 202 of New Chancellor Day Hall, 3644 Peel Ave, Montreal. Students, faculty and the McGill community in Montreal are welcome to attend.

Here is the colloquium line-up for the fall:

Monday, September 28: Rosanne Altshuler

Rosanne Altshuler is Dean of Social and Behavioral Science and a Professor of Economics at Rutgers University. She was the Chair of the Department of Economics at Rutgers from 2011 to 2015. She has written widely on federal tax policy, including her most recent article “Lessons the United States Can Learn from Other Countries’ Territorial Systems for Taxing Income of Multinational Corporations.”

Monday, October 5: Steven Dean

Steven Dean is a Professor at Brooklyn Law School and a specialist in tax law. His research addresses a range of tax and budgetary issues, including unconventional solutions to problems such as tax havens, regulatory complexity and tax shelters. His recent article, “Tax Deregulation,” considered the surprising implications of enhancing taxpayer autonomy.

Monday, November 2: Richard Murphy

Richard Murphy is a chartered accountant and economist. He is the founder of the Tax Justice Network and the director of Tax Research LLP, which undertakes work on tax policy, advocacy and research. Mr. Murphy is the co-author of several publications on tax policy, including his most recent book, “Over Here and Undertaxed: Multinationals, Tax Avoidance and You.”

Tuesday, November 10: Daniel N. Shaviro

Daniel Shaviro is a Professor of Taxation at the New York University School of Law. Professor Shaviro has written several books examining tax policy, budget policy and entitlements issues. His most recent book, “Fixing US International Taxation,” offers an analytical framework for international tax policy that sidesteps the standard worldwide taxation vs. territorial taxation framework.

Monday, November 23: Kim Brooks

Kim Brooks is Dean and Weldon Professor of Law at the Schulich School of Law, Dalhousie University. Dean Brooks’ research focuses on corporate and international tax law and policy. She focuses on using a discrete area of tax law to understand a larger tax concept, and using the tax system to promote international economic justice. Dean Brooks has written widely on tax treaties and international taxation, including her recent chapter, “The Troubling Role of Tax Treaties” in the volume 51 of “Tax Design Issues Worldwide: A Series on International Taxation.”

Monday, November 30: Albert Baker

Albert Baker is the Global Leader in Tax Policy at Deloitte & Touche LLP, where he specializes in international tax, including mergers and acquisitions, corporate financing and corporate reorganizations. His recent research focuses on base erosion & profit shifting, a project to address concerns that current international tax frameworks result in double non-taxation, or stateless income, or reducing the tax base in high tax countries.

The Spiegel Sohmer Tax Policy Colloquium has been made possible by a generous grant from the law firm Spiegel Sohmer, Inc., Montreal, for the purpose of fostering an academic community in which learning and scholarship may flourish. I am delighted to welcome these distinguished guests and look forward to today's discussion.

Update on the Canadian FATCA Litigation

As readers may be aware, two Canadian citizens filed a lawsuit last year against the Attorney General and the Minister of National Revenue in the Federal Court of Canada (Federal Court File T-1736-14). Over the past two days in Vancouver, the parties have presented their arguments in a summary trial in front of the Hon. Luc Martineau. The summary trial involves arguments on the parties' affidavits and cross-examinations undertaken prior to the hearings--no live witnesses.

In broad strokes the suit seeks to prevent the Canadian Revenue Agency from furnishing to the US Internal Revenue Service the personal and financial account information of Canadian citizens pursuant to the FATCA IGA signed by Canada and enacted into law last year. This is not a charter-based (constitutional) challenge, rather it is a challenge that certain provisions of the IGA are unlawful based on the Canada-US Tax Treaty Act  (which in effect ratifies the US Canada Tax Treaty) and the Income Tax Act. Thus it is not about fundamental rights and freedoms at this stage, but about an interpretation of relevant laws, including the existing tax treaty.

The litigants are being funded by a grassroots group that organized itself for this purpose, called the Alliance for the Defence of Canadian Sovereignty/L'Alliance Pour la Défense de la Souveraineté Canadienne (ADCS). ADCS has many of the court filings available here and here and here, and one of the group's organizers has blogged about the proceedings here and here.  While the lawsuit made the news when it was filed, e.g. here and here among several others, I am seeing virtually no press coverage at this stage, except for one brief article here. That is a shame and I hope that journalists will renew their interest in this issue.

Long-time readers will be aware that I made a submission to the Department of Finance concerning many of the legal issues surrounding the adoption of the IGA, that I understand FATCA to be a tax treaty override that is not cured by the IGAs, and that I understand the IGAs to lack validity as legal instruments under US law. In connection with this litigation, I wrote two "expert reports" and was cross examined for purposes of the summary trial; the reports and transcript are part of the court record and mostly available at the links above, but I will also make the reports available on request. If and when additional information about the summary trial becomes available I will update this post.

In global tax governance, institutions matter.

José Antonio Ocampo posted a plea for institutional reform in tax policymaking today,  in which he decries the jealous guarding of tax policy exclusivity by OECD countries, especially the US and the UK. At the recent Financing for Development conference, developing countries called for a greater role for the UN in global tax governance but the OECD countries balked. Ocampo writes:

The OECD, whose members are essentially the world’s 34 richest countries, certainly has the capacity to set international standards on taxation. Yet the domination of a select group of countries over tax norms has meant that, in reality, the global governance architecture for taxation has not kept pace with globalization. 

The Monterrey Consensus reached in 2002 included a call to enhance “the voice and participation of developing countries in international economic decision-making and norms-setting.” But although the OECD invites some developing countries to participate in its discussions to establish norms, it offers them no decision-making power. The OECD is thus a weak surrogate for a globally representative intergovernmental forum.

I understand that it is costly and complicated to develop institutions that allow for meaningful participation by all people affected by transnational tax policy norms.  But the international tax system is a resource allocation machine that has significant impacts on people's life chances across all populations. I fail to see what principles of justice support a world in which a small and privileged group of people make decisions of both process and substance that directly impact, and yet purposefully and systemically exclude, the majority of the world's population. The substance of norms, rules, and standards may matter in global tax governance, but ultimately institutions matter even more.

Uber deemed an employer, not a partner, to driver in California

So says the California Labor Commission according to this story from Reuters, and I would guess other jurisdictions will follow. But Uber responds that:

"Reuters' original headline was not accurate. The California Labor Commission's ruling is non-binding and applies to a single driver. Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver 'performed services as an independent contractor, and not as a bona fide employee.' Five other states have also come to the same conclusion. It's important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control. The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies."

I would guess it is precisely the definition of "complete flexibility and control" that will be at issue going forward. I think Uber is an employer of its drivers for tax law purposes and that its drivers do not have anything like complete flexibility or control in substance.

Updated: Gotcha! Yet another obscure asset reporting form for US persons

UPDATE: as of sometime this afternoon (depending on your time zone), the BEA has updated its website to extend the filing deadline to June 30 for all new filers. Moreover, it appears that the BEA definition of US Persons is generally limited to persons resident in the United States (with specific exceptions, see comment from Andrew below). As I mention in the comments, I am a bit wary about drawing conclusions of law from instructions to forms but I do think that the instructions at least form the basis for reliance that most physically non-resident US citizens should not be required to fill out the BE-10.  The sudden deadline extension nevertheless suggests that a number of people have been caught by surprise by the new reporting obligation, so that my main point about educating one's regulatory target is still apposite. I have revised this post accordingly.

It seems that in the United States, the asset reporting forms and non-filing penalties just keep on coming, and yet the will to inform individuals about their obligations--especially those who live outside of the United States and do not receive client alerts from big US law firms or big 4 accounting firms--remains curiously absent.  The Bureau of Economic Analysis does a survey of "US Direct Investment Abroad" every five years. In past years, if you were required to file, the BEA contacted you.

Not any more; now you are just supposed to know that the BEA exists and has its own reporting requirements, and that if you are a US person (which includes individuals), you are supposed to go and file a report to them, separate and distinct from all of of your other tax and financial asset reporting requirements. I do not know what the definition of US Person is for BEA purposes, and whether it includes US citizens and other persons, regardless of their residence--looking into that now. The definition of US Person for BEA purposes appears to diverge from that for tax purposes, such that in most cases reporting is required by those physically resident in the United States.

BEA reporting is subject to a civil penalty of $2,500 to $25,000 for nonfiling, plus $10,000, or a year in jail, or both, if the nonfiling was wilful. I am not sure who is responsible for collecting this fine but if it is the IRS (as is the case for FBAR), then I wonder why the Service doesn't bother to tell taxpayers about the form and its deadline anywhere at all on the IRS website.

A BE-10 form must be filed by any US Person that directly or indirectly held 10% or more of the voting securities ("US Reporter") of any non-U.S. business enterprise (a “Foreign Affiliate”). There are no de minimis exceptions: no matter how small your nonUS corporation might be (or have been-you must file for the year even if the corporation ceases to exist), you must report or face the penalty. US Reporters must file Form BE-10A for themselves and may have to file additional BE-10 forms for their corporations.

The deadline is tomorrow: May 29 now June 30. There is an extension available but it requires filing a request prior to the due date. Prepare for a delay in accessing that form right now--the BEA server appears to be overloaded. Possibly a request to extend filed today (if that is even possible from outside the United States) would be granted, I am not sure.

The BEA is a valuable source of information necessary for policy research, and I do not in any way object to the general need to collect information on US companies. What I object to is that again and again, US regulators seems to forget that "US Persons" includes a massive population of individuals who live permanently outside of the territory, who cannot realistically be expected to simply "know" about all the forms they are supposed to report, and who are dramatically underserved by the US agencies that continue to produce these requirements. US Persons are now potentially subject to three overlapping and duplicative reporting regimes, each with its own quirky forms, convoluted instructions, inconsistent deadlines, and heavy penalties: the IRS, the Financial Crimes Enforcement Network, and now, every five years, the BEA, all with little to no effort to educate the population each agency expects to be fully compliant.

I do wish that US lawmakers would understand that when they enact complex regulatory regimes with hefty penalties, they have a responsibility to educate the targets of that regulation. I am not talking about large, multinational conglomerates or high net worth individuals with teams of legal counsel. They are protected: their counsel's job is to keep up to date on all regulatory compliance regimes, inform their clientele, and and make money off compliance fees. I am not worried about them. I am talking about the human beings who just happen to live and work in other countries. If they have small businesses, they may well have non-US corporations in those countries where they live and work.  Regulatory agencies that seek to regulate these individuals have a responsibility to inform that is global in scope. It seems to me obviously unjust to suddenly impose complex requirements, with attendant penalties, on a whole new population without making any effort to educate them that this is the new order of things. Today's last-minute deadline extension seems to acknowledge this basic issue.

Presumption against Extraterritoriality: Win for foreign insurers in Validus Reinsurance case

Tim Todd had an article in Forbes yesterday on the Court of Appeals grant of summary judgment in Validus Reinsurance Ltd. v. United States, decided May 26. This was a de novo review; the district court had granted summary judgment for Validus in 2014 (Mem. Op. Feb 5, 2014), and the government appealed on grounds that the district court had "adopted an overly narrow interpretation." From the Court of Appeals decision:

Because both parties offer plausible interpretations, we conclude that the text of the
statute is ambiguous with respect to its application to wholly foreign retrocessions [a type of insurance product at issue in the case]. The ambiguity is resolved upon applying the presumption against extraterritoriality because there is no clear indication by Congress that it intended the excise tax to apply to premiums on wholly foreign retrocessions. Accordingly, we affirm the grant of summary judgment, albeit on narrower grounds, on Validus’s refund claims. 

Tim explains the jargon in the case so I won't repeat that here, but his point of note is that:

Generally, courts presume that legislation operates only within the territorial jurisdiction of the United States. Thus, unless Congress expresses an “affirmative intention,” statutes have no extraterritorial effect. 

Here, the retrocessions were extraterritorial: wholly foreign parties issued policies that were “negotiated, executed, and performed outside of the United States.” And, the court noted, the “government has identified no clear indication by Congress that it intended the excise tax to apply to wholly foreign retrocessions, and we have found none.”

This is an interesting area of law that I have not studied enough but would like to. I note that the Appeals Court observed that "At first glance, the plain text of section 4371 appears to extend the reach of the IRS Commissioner to any casualty and life insurance policy issued by a foreign insurer anywhere in the world," but that read in conjunction with its definitions clauses, the scope is more modest. The court engages in a step by step statutory analysis (always fun) and ends up engaging in a fairly detailed discussion of what it means to "cover" something. Having hauled out a few dictionaries, the Court decides that the language is ambiguous, hence the need to turn to the general presumption against extra-territoriality.

In the context of a globally networked financial system, it is sometimes hard to tell the difference between something that is territorial and something that is extra-territorial in scope and reach. Here, the government had argued that the necessary nexus to the United States lay in the the underlying risks ultimately being insured--that is, "indirect" risk coverage. It seems that was one bridge too far for the DC Circuit.

Fei, Hines, Horwitz on PILOTs as Property Taxes for Nonprofits

Interesting new paper on PILOTs: "payments in lieu of taxes" that some municipalities request of otherwise tax-exempt orgs. At a recent talk I did at Notre Dame on the topic of taxation and human rights, I explored the dual "social contribution" budgets that highly visible/profitable multinationals often have in impoverished places--the tax budget (that ends up appearing quite small in many cases) and the Corporate Social Responsibility or "CSR" budget (the fees some companies pay to build infrastructure or schools or provide basic services as a matter of "good corporate citizenship"). I brought up Starbucks' dealings with HMRC in response to charges of tax dodging as a rarely-seen tax-like-but-not-quite-tax arising in a developed country, and wondered aloud whether we ought to consider this kind of CSR outlay as in the nature of a tax, or not. One of the audience members suggested that the Starbucks payment or a CSR budget seems analogous to PILOTs, so it's worth taking a look at them. Good idea. I'll add this paper to the reading list. Here's the abstract:

Nonprofit charitable organizations are exempt from most taxes, including local property taxes, but U.S. cities and towns increasingly request that nonprofits make payments in lieu of taxes (known as PILOTs). Strictly speaking, PILOTs are voluntary, though nonprofits may feel pressure to make them, particularly in high-tax communities. Evidence from Massachusetts indicates that PILOT rates, measured as ratios of PILOTs to the value of local tax-exempt property, are higher in towns with higher property tax rates: a one percent higher property tax rate is associated with a 0.2 percent higher PILOT rate. PILOTs appear to discourage nonprofit activity: a one percent higher PILOT rate is associated with 0.8 percent reduced real property ownership by local nonprofits, 0.2 percent reduced total assets, and 0.2 percent lower revenues of local nonprofits. These patterns are consistent with voluntary PILOTs acting in a manner similar to low-rate, compulsory real estate taxes.

Upcoming event on Delivering Tax Benefits through the Tax System

On April 24, the American Tax Policy Institute is live-streaming an all-day conference "Delivering Benefits to Low-Income Taxpayers through the Tax System."  The conference is organized by Les Book, Villanova University School of Law and Deena Ackerman, U.S. Department of Treasury.  

You can view the program and also register to attend the conference in person here.  

Beginning at 8:45 a.m. (EST) on April 24, you can view the livestream conference webcast. 

I will be presenting on panel 4, "The International Approach to Delivering Benefits Through the Tax System." 

One focus of this panel is a comparative approach to the delivery of benefits (US/UK/Australia), but I plan to focus on the international implications of the US approach to delivering benefits through the tax code from the perspective of a specific group of “end users” whose financial situations would make them eligible for benefits delivery but who are nevertheless systematically denied these benefits. 

This group is the globally dispersed population of “US persons” who are deemed to be permanently resident in the United States for tax compliance and financial reporting purposes but are not so deemed for purposes of benefits delivered through the tax code, notably, the earned income tax credit. 

The premise I am studying: The inclusion of all US persons in the tax base regardless of domicile, juxtaposed with the blanket denial of eligibility for income support based solely on domicile, reveals the manifest injustice of citizenship-based taxation. I'll examine three inter-related rights-based claims in support of this premise. First, dispersed geographically and without a unified voice in Congress, the diaspora is inevitably denied effective civil and political rights in the design of the US tax system. Second, subject to the most complex aspects of the U.S. tax code regardless of any activity in the United States, and facing extraordinary compliance costs and disclosure risks even for nil returns, this group is effectively denied the administrative rights articulated in the taxpayer bill of rights. Finally, this group is systematically denied income support accorded to similarly situated taxpayers, in contravention of any normative policy. 

These are ideas in progress, so I really look forward to having the opportunity to work through them a little further by participating in this event.

Kadet on Transfer pricing vs Formulary Apportionment: How About the Profit Split Method?

Jeff Kadet has a new article at Tax Analysts [gated] entitled Expansion of the Profit-Split Method: The Wave of the Future, in which he discusses the so-called transactional profit split method of transfer pricing, which could be quite a lot more like formulary apportionment than it is like transfer pricing. Recall that the OECD really does not want countries to switch to formulary apportionment, even if that might end up being more effective at producing revenue at less administrative cost. But the profit split method might offer a way out, with a little tweaking. Here is the abstract:

Recognizing the reality that multinational corporations are centrally managed and not groups of entities that operate independently of one another, the OECD base erosion and profit-shifting project is considering expanded use of the profit-split method. This article provides background on why expanded use of the profit-split method is sorely needed. In particular, resource-constrained tax authorities in many countries are unable to administer or intelligently analyze and contest transfer pricing results presented by multinational groups. Most importantly, this article suggests a simplified profit-split approach using set concrete and objective allocation keys for commonly used business models that should be welcomed by multinational groups and tax authorities alike.

And here are a few excerpts:

December 2014 saw the OECD issuing several base erosion and profit-shifting discussion drafts, one of which was titled "BEPS Action 10: Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains" .... 

Despite all the continuing rhetoric about how arm's-length pricing and the separate entity principle are sacrosanct, there are compelling reasons why the OECD BEPS project has focused on the possible expanded use of the profit-split method, a method that clearly flies in the face of these icons. ... 

[A] combination of factors has strongly motivated the highly successful tax structures that have significantly lowered the effective tax rates of multinational corporations (MNCs) and eroded the tax bases of many countries. The existence of these factors means that some of the transfer pricing methods are a part of the problem; they are not a part of a solution. These factors include ... [t]he Separate Entity Principle ... Fragmentation ... Respect of Related-Party Contracts ... The Arm's-Length Standard... the Inability to Effectively Audit MNC Transfer Pricing ... [and other issues].

...Paragraph 2.108 of the OECD transfer pricing guidelines gives a concise statement of what the profit-split method is. It states:

The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate . . .) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the "combined profits"). . . . It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. 

Additional guidance in the existing guidelines (paragraphs 2.132ff) makes clear that the criteria or allocation keys on which the combined profits are split should be "independent of transfer pricing policy formulation." Hence, these criteria and allocation keys "should be based on objective data (e.g. sales to independent parties), not on data relating to the remuneration of controlled transactions (e.g. sales to associated enterprises)." Paragraph 2.135 makes this objective basis clear by stating: 

In practice, allocation keys based on assets/capital (operating assets, fixed assets, intangible assets, capital employed) or costs (relative spending and/or investment in key areas such as research and development, engineering, marketing) are often used. Other allocation keys based for instance on incremental sales, headcounts (number of individuals involved in the key functions that generate value to the transaction), time spent by a certain group of employees if there is a strong correlation between the time spent and the creation of the combined profits, number of servers, data storage, floor area of retail points, etc. may be appropriate depending on the facts and circumstances of the transactions. 

Further discussion in the guidelines provides various approaches to splitting the combined profits among the relevant group members. While these approaches are not detailed here, the point is that the approaches that were set out and discussed require a facts and circumstances case-by-case analysis before they can be implemented.

Kadet suggests that this facts & circumstances approach should be shelved in favour of developing a detailed set of objective allocation keys tailored specific types of business, and that for these businesses, the profit split method ought to be presumptive.  In other words, profit split is another word for apportionment; some types of businesses are so integrated that apportionment is the best way to allocate profits to the right jurisdiction; what is needed is a formulaic approach that tax administrations can administer. He notes:

The application of such rules should result in a reduction in complex BEPS-motivated structures since all combined profits will be spread among the group members that actually conduct activities with little or none left within low-taxed group members that do not conduct economic activity and thereby contribute little if anything to value creation. In sum, a simplified and standardized approach for each common business model will provide significant benefits as well as give results that are fair to MNCs and all relevant governments.

 He then goes on to provide a couple of examples taken from the DD10, one involving an internet service provider and the other featuring a manufacturer of R&D-intensive products. In the former, allocation keys include location of customers and workers; in the latter, they include location of customers and key workers (weighted at 25% each) and location of manufacturing operations (weighted at 50%). This is a fairly detailed discussion and well worth reading in full. I'll be interested to see how this idea develops.