Wednesday, November 28, 2012

Porisky strikes again!

You may recall the infamous Canadian tax protestors Russ Porisky and Elaine Gould, whose efforts have landed them in jail (blogged here earlier this year).  Their latest victims are a dentist and her (American) husband, who pleaded guilty this week to evading almost a million dollars in personal taxes and to helping numerous "students" (mostly dentists) do the same. The Ontario Superior Court Justice Colin McKinnon hearing the case said the “preposterous” tax scheme “shows remarkable hubris and contempt for the rule of law.” Dentists, you can't use these schemes to avoid paying your taxes. Learn from the masters: you have to set up a double Irish/Dutch sandwich for that.

Sunday, November 25, 2012

No tax avoidance cases brought to court by UK tax authority since 2004

From TJN: A member of the UK Public Accounts Committee that recently grilled Amazon, Google and Starbucks execs on tax avoidance asked a top UK revenue official how many multinationals had been taken to court for tax avoidance.  Answer:
"of the thousands of major corporation tax ruses set up since 2004, not a single one has been taken to a tribunal or court! All have been settled through "light touch" compromise agreements, often in breach of the department's official policy and at immense cost to taxpayers."
TJN responds:
There are three main ways to turn your country into a tax haven, from the perspective of corporate taxation. One, cut your tax rates. Two, create (and encourage) tricky tax loopholes. Three, don't enforce your tax laws, (and let them write your laws in the first place.) This latest revelation by the Eye - among other things, revealing how a senior tax official misled a public inquiry - just confirms the third, leg, if ever such confirmation were needed.

Obama's expressions about citizenship

Peter Spiro has thought a lot about citizenship, and it is interesting what he picks up on from Obama's speech in Burma:  the President has a view of citizenship that is out of an "old playbook," because the alternative, based in human rights, is so politically sensitive:
President Obama’s visit to Burma/Mynamar has centered the status of the country’s Muslim minority Rohingya community which has been denied Burmese citizenship notwithstanding their historical presence in the country. .... Obama’s speech today welcomed recent steps by the Burmese government “to address the issues of injustice and accountability, and humanitarian access and citizenship.” Obama then focused on citizenship at length: 
"Every nation struggles to define citizenship. ... But what we’ve learned in the United States is that there are certain principles that are universal... Only the people of this country ultimately can define your union, can define what it means to be a citizen of this country. ...Every human being within these borders is a part of your nation’s story, and you should embrace that." 
He concluded: “we have an expression in the United States that the most important office in a democracy is the office of citizen — not President, not Speaker, but citizen.” 
Spiro notes the territorial nature of Obama's view, which he says is
"not so surprising out of the super-strong American tradition of jus soli. That’s also consistent with an emerging international law perspective on these questions, which sees habitual residence as giving rise to a right of access to citizenship. The Rohingya situation in Burma is exceptional in rejecting this norm (the Bedoons in Kuwait and Nubians in Kenya are other examples). 
But Obama didn’t seem quite willing to turn to international law as the source of an obligation on this score. ”Only the people of this country ultimately can define your union, can define what it means to be a citizen of this country.” That’s out of the old playbook in which nationality is a matter ultimately of sovereign discretion. He was more in a “leading by example” posture than a tougher one under which Burma has no choice but to fall in line. Leave the latter argument to the human rights heavyweights.
This is an interesting discussion in its own right, but it has application to tax law & policy because issues about citizenship crop up time and time again in taxation, as we try to determine and justify national expressions of jurisdiction over the person, almost always--except in the case of the US--based on assertions about physical location that are almost if not wholly arbitrary, and increasingly pressured by globalization.  The US position, taxing its citizens wherever located, annoys and angers a lot of people (notably, americans living abroad).  But I have yet to identify principles that would explain the appropriateness of either the inclusion or exclusion of a person in the taxpayer category on the basis of citizenship.  Practice, history, assertions by government, yes, but principles?  No.

U.S. Headed For Fiscal Cliff

The Onion gets it more right than not, in characteristic fashion:
Unless Democrats and Republicans can reach an agreement by Jan. 1, 2013, the United States will go over the so-called “fiscal cliff,” triggering automatic spending cuts and tax increases that many experts believe could plunge the nation back into recession. Here is what will happen if the government fails to act: 
  • National Park Service forced to cut Old Faithful eruptions down to once per week 
  • Total breakdown of effective government will turn large parts of the country into an unimaginably hellish libertarian paradise 
  • Severe cuts to education spending, if you can fathom that 
  • Pentagon will be forced to buy off-brand tanks instead of the more costly name-brand ones 
  • Historic bridges such as the Brooklyn and Golden Gate will be folded up and put away for safekeeping 
  • The American people’s faith in the ability of Congress to get things done will be damaged 
  • At stroke of midnight, every government office, place of work, center of commerce, and piece of infrastructure will simultaneously explode 
  • Someone will take care of it

Wednesday, November 21, 2012

Conference on Tax Transparency

Hello from Bergen, Norway, where I will be presenting a talk today on the "form and substance" aspects of tax planning and the connection to tax transparency, at the "Financial Secrecy, Society, and Vested Interests" conference hosted by Publish What You Pay Norway.  You can find the program at the link.  I'm scheduled to follow Jason Sharman, who has written a lot on financial secrecy and has highlighted the ease of setting up anonymous corporations, especially in the US.  It should be an interesting day. 

Saturday, November 17, 2012

Links this week

When pressed for time, sometimes I post links directly to the twitter feed for this blog (@taxpolblog).  In case they are of interest, this week, they were:

On global tax planning:

In the US:
From Montreal:
And from around the world:

Wednesday, November 14, 2012

Canada's tax evasion problem in need of resources & leadership

Senator Percy Downe has issued a call to the Harper government to put some money and some effort into curbing Canadians hiding their assets overseas to escape taxation:
Sen. Percy Downe said the vacancy [at the head of the CRA] gives Prime Minister Stephen Harper the opportunity to elevate the job to the “importance it deserves” — to provide the resources to crack down on Canadians who stash money in havens to avoid paying taxes. 
...“It’s either a resource problem or a leadership problem and this is an opportunity for the prime minister to identify it as a problem and correct it,” said Downe. “I don’t want to see someone parked there to manage the status quo …. It’s time to shake up the status quo.” 
Former CRA commissioner Michel Dorais said it's a question of resources:
“CRA is a big collection machine and the money collected is directly proportional to the money invested. The determination of where to put the effort is a combination of ministerial direction, priorities of its clients, direction from the board of management and management decisions of the CEO/commissioner. If one of those three components is weak, the whole thing can breakdown rapidly.”
But the Senator says it is a question of will, not resources, becuase more resources put in will yield more revenues out.  The story quotes a "former CRA executive" who said “wherever you look you’ll find money.” Info on offshore accounts not being fully pursued by the CRA is a case in point:
In 2007, the government was given a list of 106 Canadians with secret accounts worth more than $100 million in a bank in Liechtenstein. They were among a longer list of clients taken from the bank by a former employee and later acquired by the German government, which shared the information with countries whose citizens were on the list. 
By April, Downe said CRA had assessed only $16.5 million owing in back taxes, interest and penalties on the money hidden in Liechtenstein. Of that, they collected only about $5 million and “not one penny has been assessed in fines.” 
“By its own admission, since CRA received this information five and a half years ago, not one of these Canadians who have hidden their money abroad to avoid paying taxes in Canada has stood before a judge,” said Downe.
More at the link.

Tax Advice for the Second Obama Administration

Taxprof posted news today about a conference at Pepperdine scheduled for January in which I'll be participating with comments on U.S. international tax policy.  Lineup:

Introduction and Welcome
  • Deanell Tacha (Dean, Pepperdine)
  • Chris Bergin (President, Tax Analysts)
Keynote Address:  Michael Graetz (Columbia)
Occupy the Tax Code:  The Buffett Rule, the 1%, and the Fairness/Growth Divide
Moderator:       David Brunori (Tax Analysts)
Papers:            Dorothy Brown (Emory), Francine Lipman (UNLV), Kirk Stark (UCLA) (with Eric Zolt (UCLA))
Commentary:  David Miller (Cadwalader, New York), Bruce Bartlett (New York Times) 
Estate and Gift Tax
Moderator:       Paul Caron (Pepperdine)
Papers:            Ed McCaffery (USC), Grayson McCouch (San Diego), Jim Repetti (BC) (with Paul Caron (Pepperdine))
Commentary:  Joe Thorndike (Tax Analysts)
Luncheon Address:   David Cay Johnston (author/journalist)
Business/International Tax #1
Moderator:       Tom Bost (Pepperdine)
Papers:            Steve Bank (UCLA), Karen Burke (San Diego), Martin Sullivan (Tax Analysts)
Commentary:  Michael Schler (Cravath, New York)
Business/International Tax #2
Moderator:       Khrista McCarden (Pepperdine)
Papers:            Reuven Avi-Yonah (Michigan), Allison Christians (McGill), Susan Morse (UC-Hastings)
Commentary:  Robert Goulder (Tax Analysts)
Closing Remarks:  What Have We Learned Today?:   David Cay Johnston (author/journalist)

Saturday, November 10, 2012

The Tax Dodger Ledger, Updated

Here is the Guardian with a "roll call of corporate rogues who are milking" the UK, naming (I've re-ordered alphabetically, and added links):

Amazon--"paid just £30m in tax over the past four years despite generating more than £3.1bn in sales"
Apple--"avoided over £550m in tax on more than £2bn worth of underlying profits in Britain"
Asda--"payments it has made to US parent Walmart has cut its UK tax bill by £250m"
eBay--"channels payments through Luxembourg and Switzerland to avoid paying nearly £50m in tax in Britain"
Facebook--"paid just £30m in tax over the past four years despite generating more than £3.1bn in sales"
Google--"paid just £30m in tax over the past four years despite generating more than £3.1bn in sales"
Ikea--"siphoning off profits abroad in the form of royalty payments to a sister company"
Starbucks--"no corporation tax in Britain for the last three years"
Vodafone--paid no tax in the UK last year, and proud of it.

As I've said before, this is all part of the global system--a feature, not a bug.  It's not a coincidence that these same countries would be listed on a US-based ledger (well, not Asda).  So if a person wanted to avoid supporting tax avoiders with their post-tax wages, they would have to work very hard to do that.  

Canada negotiating on FATCA

Possible advancement on the FATCA front?  From Davies Ward:
The Canadian Department of Finance announced on November 8th that negotiations are being held between Canada and the United States on an agreement to improve cross-border tax compliance through enhanced information exchange under the Canada-United States Tax Convention. The changes would support the provisions of the United States Foreign Account Tax Compliance Act (FATCA). 
The announcement is welcome news to Canadian financial institutions and investment funds. They have been waiting to see whether they will be required to enter into individual agreements with the U.S. Internal Revenue Service to avoid becoming subject to the onerous new withholding taxes FATCA will impose on non-participating financial institutions. ...
The announcement does not include any details ... The talks appear to be in their early stages, as is evident from the fact that Canada is not mentioned at all in a separate announcement released by the U.S. Treasury Department on the same date. 
No details, early stages, who knows what will happen.  I am not sure why we are still in early stages when we apparently had the same news six months ago and nothing seems to have moved since then; then again, I can't find the Nov 8th 'announcement' of which DWVP speaks, so I am working in the dark here.  Here, however, is the US Treasury's press release.  It says:

The U.S. Department of the Treasury today announced that it is engaged with more than 50 countries and jurisdictions around the world to improve international tax compliance and implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). 
 ...The Treasury Department has already concluded a bilateral agreement with the United Kingdom.  Additional jurisdictions with which Treasury is in the process of finalizing an intergovernmental agreement and with which Treasury hopes to conclude negotiations by year end include: France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway.
So either DWVP missed the mention of Canada or the US added it in later.  If the latter, that's also very interesting.  Davies Ward has this cute little picture to denote what negotiating with the US on FATCA looks like, but somehow I feel like this might not  capture the mood, quite, so I added a caption to help it along:

Its possible the lady on the right plans to turn that finger-bang on
her smiley-faced compatriot if things don't go well here.
Recall that the Finance Minister has been very vocal in his opposition to FATCA.  About a year ago, KPMG reported:
... Jim Flaherty has sent a letter to several major U.S. newspapers expressing Canada's concerns about the far-reaching implications of the extraterritorial U.S. Foreign Account Tax Compliance Act (FATCA) and the "nerve-wracking" effect that the Foreign Bank Account Report (FBAR) reporting rules has on Canadians. The letter, dated September 16, 2011, criticizes the broadness of the U.S. rules that would essentially cause Canadian banks to become "extensions" of the Internal Revenue Service (IRS). Flaherty also notes that the rules raise privacy concerns for Canadians who may not be aware that they needed to file U.S. tax returns. 
It is unclear what effect this Canadian political pressure may have on the U.S. administration of the reporting requirements and penalty regime that apply to Canadian residents. ...
Not much effect, I think-- it looks like the US will plow ahead and if you want an agreement you'll have to go knocking and then likely have to give something up to get it.  As I have said before, in the case of Canada, which already shares tax information on an automatic basis with the US, I am not sure what sorts of concessions the US means to extract here.  It is possible that the concessions could be unrelated to tax--it could be anything, really, bringing FATCA agreements fully into the category of the age-old practice of using unilateral regulation as little more than a means for diplomatic strong-arming.  

Thursday, November 8, 2012

What if marijuana survives gross basis taxation? Will there be pie?

Taxprof has this today:
Forbes: Voters Say Yes to Marijuana, IRS Says No, by Robert Wood
A total of 18 states and the District of Columbia have legalized medical marijuana. Massachusetts just came on line after the November 6, 2012 vote. Colorado and Washington just went further to legalize recreational use too. 
But can a legal dispensary operate like a “legitimate” business? Amazingly, they can’t and are still labeled as drug traffickers. ... no matter how “legal” the states make it the IRS is federal and that means trouble. American businesses pay tax on their net not their gross income and business expenses are as American as apple pie. But Section 280E of the tax code denies deductions for any business trafficking in controlled substances. This black letter rule to stop drug dealer tax deductions also covers medical marijuana since federal law still classifies it as a controlled substance.
So the obvious question is, if it comes to pass that marijuana businesses can survive and even thrive under gross-basis taxation what will we then say about the taxation of business income more generally?

I'll even put it in multiple choice format for you.

(a) it turns out deductions for business expenses are not, after all, as American as apple pie.
(b) business deductions are still as American as apple pie, but not as American as ganja consumption.
(c) business deductions are as American as apple pie, but not necessary to the continued production of optimal amounts of apple pie once Americans get their hands on the dino koosh
(d) what does any of this have to do with pie?  I thought we were supposed to eat Cheetos.
(e) all of the above

Monday, November 5, 2012

Tremblay: I fought the corruption but the corruption won

As expected, the mayor of Montreal has resigned under the pressure of the ongoing investigation into widespread corruption through all levels of Quebec's government.  The transcript of his resignation speech is here.  He continues to deny any personal wrongdoing, and claims he is the victim of "unbearable injustice."   That's an all-too familiar refrain, I am sorry to say, and shouldn't elicit much sympathy at this stage.  There is an awful lot of self-pity in this transcript.  Excerpts:

Was I sceptical? Yes. Did I ask questions? Yes. Was I vigilant? Yes. But unfortunately, it was only after the facts that I was given documents, files and internal memos, dating from 2004, 2006 and 2009. 
When I finally received the information, I asked the public servants and the councillors why I had not been informed about this, especially when the individuals in charge had done nothing. 
The trust I had on some, was inevitably betrayed; I assume the full responsibility. 
However, every time, as soon as I was informed of irregularities, collusion and corruption, I took action. The information was immediately given to the appropriate authorities. I shall produce the proofs at the right time and the right place. 
...I fervently hope that one day there will be recognition about the fact that I fought - often alone - this system of collusion and corruption as the Charbonneau Commission is revealing it had existed since at least 1988. 
...As for the allegations of collusion and corruption, I would have expected a more attentive and more urgent hearing from the government, especially when dealing with the obligation to award contracts to the lowest bidders. 
In politics, it seems that perception matters more than the truth. Especially when this perception is manipulated by multiple factors, not to say agendas, and when we're not given a chance to reveal the truth or, when it is stated, no one believes it. 
...I now must suffer an unbearable injustice. I never thought my life could be subjected to such a fury in a society of Law and Justice. But, one day, justice will prevail. Under these circumstances, I cannot help any more. The success of our city is much more important than my personal interest. 
...To those who relied and trusted me all these years, I want you to know that I have never betrayed you.

The sheer number of "I"s in the transcript is just too telling--I tried, I was duped, I was deceived, I am shocked, shocked at the allegations and the shoddy investigations and the lack of a chance to defend myself.  Certainly this story is not over.

The cost to Canadians of pension splitting

We had a lively discussion over Lisa Philipp's paper today, during which a question arose regarding the cost of pension splitting to the budget, i.e., how much does pension splitting cost as a matter of tax expenditure analysis?  Note for non-Canadian readers, the pension splitting issue is as follows: Canada has individual filing only, no joint filing.  But for various reasons, in 2007 Canada introduced what amounts to joint filing with respect to private pension income, i.e., one spouse can deduct and the other include up to half of an annual pension income stream (some restrictions apply)--this is not for a federal pension income but strictly for income generated from private retirement savings.  A ready answer to the TEA question was not immediately found, but I've since had a look at the Tax Expenditures and Evaluations 2011 Report, found the data and made this handy chart:

So we can see that pension income splitting created a $840 million hole in the budget in 2007 and it has increased since then to about $925 million.   In class someone pointed out that pension splitting rule incidentally increased the value of a related tax benefit, namely the pension income credit, i.e., the amount of pension income a taxpayer is allowed tax-free (currently $2,000).  Sure enough the TEA report explains in fn 39: "The introduction of pension income splitting in 2007 increases the number of individuals claiming the Pension Income Credit and thus increases the value of this tax expenditure (i.e. spouses who previously did not have pension income)".  Putting the two pension benefits together yields this:

So we can see the cost of the credit increased by about $110 million in 2007, dropped a bit in 2009 and by 2011 was again about $100 million higher than it was in 2006.  It therefore seems plausible to attribute about $100 million of the credit's cost to the pension splitting rule, bringing the total TEA cost of the latter to about a billion per year.

That is about 0.4% of the total annual budget (which is currently about $245 billion) or about 4% of the annual budgetary deficit (currently about $26 billion).  Not huge perhaps, but not to be dismissed as nothing, either, especially when we know there is scant policy here: this is a straight up tax giveaway for Canadians with private pensions, i.e., higher income retirees.  Political pandering?  A quick scan of the TEA list shows it is in the league, TEA cost-wise, of the working income tax benefit and the medical expense tax benefit.  I am now very curious how many Canadians share the pension splitting benefit, both alone and in comparison to other tax expenditures.  I don't know how to find that though, so will leave the discussion right here.

OECD enters multinationals’ tax debate

That is the headline from the FT for a tiny little piece that says very little other than that the OECD "is tightening the rules on intellectual property to make it harder for multinationals to site their intellectual property, brands, trademarks and know-how in tax havens where there is no genuine business."  But it's a fascinating headline, isn't it, conveying the idea that this is new territory for the OECD.   No mention that it was the OECD that in effect created and continues to shape the whole international tax system as we know and love it today, tax havens and all.

Sub-primal scream therapy

Let's get the week started off right.

"See, if you blame your parents, you see it's not your default."
"I just want this to end, I just want some, some..." "Foreclosure?"  "Augh!"

Sunday, November 4, 2012

Monday: Lisa Philipps on Income Splitting at McGill

Professor Lisa Philipps will be at McGill this Monday, where she will present a paper as part of our Tax Policy Colloquium Series.  Her paper, entitled Income Splitting and Gender Equality: The Case for Incentivizing Intra-household Wealth Transfers, is a chapter in Challenging Gender Inequality in Tax Policy Making: Comparative Perspectives (Kim Brooks, Asa Gunnarsson, Lisa Philipps, Maria Wersig, eds., Oxford: Hart Publishing Inc, 2011).

It opens as follows:
In this chapter, I examine the problem of income splitting under an individual tax unit and Canadian legal developments that have expanded the scope for such tax planning by spouses. Income splitting poses a dilemma for tax policy analysts concerned with gender equality because, left unchecked, it opens a back door to joint taxation, with its troubling impact on labour-market incentives for secondary earners, who are mainly women. Yet ignoring intra-familial transfers in order to prevent income splitting may disrespect women's individual agency over property to which they hold legal title, and it may close off a potential source of economic power for those who do the bulk of the unpaid work in a household. This tax policy dilemma engages fundamental, normative debates about the meaning of gender equality and whether it is possible to enhance women's access to markets while also valuing and compensating their unpaid contributions. 

The Colloquium is open to all.  If you will be in Montreal tomorrow, I invite you to join us at 11:35 am at the McGill Law Faculty, Chancellor Day Hall Room 202, 3644 Peel Street.

Friday, November 2, 2012

Montreal budget standoff: what a governance crisis looks like

Mayors of montreal's island suburbs are refusing to endorse Montreal Mayor GĂ©rald Tremblay's 2013 municipal budget and the budget-approval process, due to " the deteriorating climate at Montreal city hall" according to the Gazette.

Radio Canada yesterday seemed to frame this pushback as a response to the increasing public mistrust of government in the midst of the Charbonneau commission that is finding corruption rampant all the way up the feeding chain of Quebec political office. It was in French so I may not have perfectly understood the report, but I would think that yes, when you're finding out daily just how high the cost of corruption is and that apparently all of your elected officials are interested in having their cut, when those same officials come round asking for tax dollars you don't feel so keen.