Cliff Fleming presenting tomorrow at McGill Law

The 4th Annual Tax Policy Colloquium at McGill Law continues tomorrow with a presentation by Professor Clifton J. Fleming on the topic of the proper taxation of multinationals. The paper, coauthored by Prof. Fleming and Prof. Robert Peroni, is not yet available online but it is entitled Formulary Apportionment in the U.S. International Income Tax System: Putting Lipstick on a Pig? and in it the authors argue that formulary apportionment and the current standard, arm's length transfer pricing, are just two shades of lipstick on the pig that is the US international tax system, with its twin features of deferral and cross-crediting. They conclude that formulary apportionment might be the less offensive shade, but in effect the whole discussion is a diversion from a broad reform that is sorely needed on the pig itself.

The McGill Tax Policy Colloquium features distinguished visiting academics and offers a forum for students, professors, and local practitioners to discuss issues of tax policy and theory, along with related issues of economics and social justice. Professor Fleming's talk is scheduled to commence at 2:30 pm tomorrow; members of the public are warmly welcomed.

Location: McGill Faculty of Law, 3644 Peel Street, New Chancellor Day Hall, Room 203.

Time: Monday, 30 September, 14:30–16:30.

How to Buy a US Ambassadorship, and How Much to Pay

The recent news about the newly appointed US ambassador to Canada, Bruce Heyman--described as "A veteran Goldman Sachs & Co. executive and major fundraiser" for President Obama--reminded me of a paper I read some time ago in which the authors showed that ambassadorships are bought by contributing to the political coffers of the winning presidential candidate. All too unfortunately, this comes as no surprise. The more contributed, the more likely the desired post is obtained.  The paper is "What Price the Court of St. James? Political Influences on Ambassadorial Postings of the United States," by Johannes Fedderke and Dennis Jett, and here's a sample of the menu it describes, from a Table called "The Price of Some Lucrative Postings Implied by the Model":

The paper notes the low-end cost is usually for bundlers, while high-end cost is usually for individual donors, and "the greater pay-off attaches to bundled rather than personal contributions." The Center for Public Integrity's story about Bruce Heyman affirms the authors' predictions. Notice in the table above that the low-end price for the ambassadorship to Canada, most associated with the bundlers, is $740,418. From the CPI story:

Chicago-based Bruce Heyman raised more than $750,000 for Obama’s committees since 2007, along with his wife, according to a Center for Public Integrity review of records.

From a National Post story on the appointment, Bruce Heyman looks to be happy about the outcome:

Related findings from the Fedderke and Jett paper, some of which also affirmed by the latest appointment:

• the probability of a political appointment to a posting rises in the attractiveness of the posting as a tourist destination, and as the hardship allowance associated with a posting declines
• appointees that have personal political connections receive more lucrative postings in per capita GDP, tourist volume and hardship allowance terms. They are also more likely to receive postings in Upper Middle Income countries and in the Caribbean, North and Central America. 
• The greater the personal or bundled campaign contributions to a presidential campaign, the more lucrative the posting the contributor can expect in terms of per capita GDP, tourist volumes, hardship allowances, and the more likely the posting will be in High Income countries and Western Europe, and the less likely it will be in Central and South Asia or Sub-Saharan Africa.

And then there is this interactive from the CPI (below is a capture but you can click the link to roll over each country and see the details):

Notice how the bundlers and political appointees versus the "career diplomats" correspond to the observations above by Fedderke and Jett, and if you review the interactive's details about each of the ambassadors you get further affirmation of Fedderke & Jett's predictions about the costs of obtaining these posts based on their model. Incidentally, from the paper the price of the Court of St. James was "between $650,000 and $2.3 million": according to CPI, that appointment has been confirmed to Matthew Winthrop Barzun, National Finance Chair for Obama's 2012 campaign, who raised at least $1.2 million for the President. Fun fact: the first ambassador to represent the US there was John Adams, who, along with four others to hold that post, later became President themselves, thus completing the cycle. No idea how much each paid to get there, though.

Money might not buy happiness, but it appears that it might well get you to a nice diplomatic post in a tourist destination.

Reuven Avi-Yonah presenting tomorrow at McGill Law

The 4th Annual Tax Policy Colloquium at McGill Law commences tomorrow with a presentation by Professor Reuven-Avi Yonah on the topic of the relative mobility of labor and capital and the implications for tax policy. The Colloquium features distinguished visiting academics and offers a forum for students, professors, and local practitioners to discuss issues of tax policy and theory, along with related issues of economics and social justice. Professor Avi-Yonah's talk is scheduled to commence at 2pm; members of the public are warmly welcomed.

Location: McGill Faculty of Law, 3644 Peel Street, New Chancellor Day Hall, Room 203.

Time: Monday, 23 September, 14:00–16:00.

Chasing expatriate corporations not going so well, but raising interesting questions of residence

Lee Sheppard has an update in Tax Notes [gated] on the US "anti-inversion" rules--designed to treat corporations that in effect expatriate by reincorporating offshore--as if they were still US persons in some cases.

Reporting on a recent meeting hosted by the International Tax Institute on "Corporate Inversions - Will They Ever End?  Is There A Solution?," and featuring John Merrick (Special Counsel to the Associate Chief Counsel (International)); Lew Steinberg (Managing Director - Head of Strategic Advisory, Credit Suisse Securities (USA) LLC); and Willard Taylor (Adjunct Professor, NYU Law School), Lee says the consensus is that:

The anti-inversion statute, section 7874, doesn't work very well at its stated goals, and Congress hasn't bothered to fix section 163(j), the ineffectual interest-stripping rule. And there's not a whole lot the IRS can do about it, except treat the departed corporations the same way it treats real foreign parents.

For the uninitiated, in an inversion a U.S.-based multinational company restructures its corporate group so that after the transaction the ultimate parent is foreign. After this flip, shareholders of the former U.S. parent company now hold stock of the foreign parent company. Everything else stays the same, e.g. business as usual at the operations level. Here is a nice explanation from Mayer Brown.

This kind of expatriation is susceptible to a charge of being done for tax dodging purposes only, and Congress doesn't like it. Accordingly Congress enacted 7874 to throw various obstacles in the way of inversion and, most drastically, to ignore the expatriating attempt all together--i.e., to treat the foreign parent company as a US person--if U.S. shareholders retain 80% ownership. Lee says:

[N]o one is silly enough to allow them to retain more than 80 percent, in which case the surviving corporation would be re-domesticated. So most recent deals fall in the 75 percent range of retained U.S. ownership, Steinberg explained. 

...In June 2012 the IRS issued new proposed ... and temporary regulations... [which] require that the expatriated corporation have at least 25 percent assets, employees, and income in its new country of residence. Merrick admitted that the 25 percent threshold is "a bit on the high side" and "inflexible." The IRS is open to constructive comments but will not return to the easier tests of the 2006 proposed regulations, he said.

Lee asks, "Is the third try a charm?" She says practitioners complain that "no company can possibly meet the 25 percent test, particularly the income/sales factor," but:

Merrick demurred. The statute is not designed to allow each U.S. multinational to flee to some other country, he explained. "Our view is that it requires a concentrated center of gravity," he said.

Interesting remark: a concentrated center of gravity seems like a qualitative, rather than quantitative, measure, more akin to a mind/management standard for corporate residence than the formalistic place of incorporation rule the US currently uses. Perhaps in time the US will adopt the mind & management rule either in addition to or to replace the current regime. If mind & management plays a replacement role instead of a supplementary one, that opens the door for also considering what individual residence looks like if one employs "a concentrated center of gravity"as the organizing principle. It seems that looks a lot more like the residency tests used by 99% of the rest of the world's countries.

Leaving aside the concentrated center of gravity remark, the 25% test itself is an interesting turn toward formulary apportionment. There has been a lot of discussion in international circles about whether the current standard for allocating revenues among countries based on the arm's length transfer pricing standard, which involves a lot of shenanigans, could be profitably replaced with a more formulaic approach to revenue sharing.  As the two papers I linked to yesterday suggest, under formulary apportionment countries would look to assets, employees and sales revenues to devise a formula for allocation among countries. The OECD has in effect rejected even the discussion of formulary apportionment as a policy matter, but I have suggested that I do not think they can suppress this discussion much longer. If we have the US looking at these factors of income production for purposes of determining corporate residence, can formulary apportionment really be so far off the horizon?

Finally, noting that the ownership fraction seems to be the only factor the IRS wishes to consider in analyzing inversions at the moment, Lee states that the priority guidance in this area involves "regulations addressing dilution of shareholdings and manipulation of the ownership fraction. Future regulations will disregard certain shares of the new foreign corporation in determining the U.S. ownership fraction. The government had become aware of transactions designed to minimize U.S. ownership, such as issuance of 21 percent of the new foreign corporation to a friendly investor."

The obvious goal here is to continue to make it harder for US corporations to expatriate, on the theory that expatriation is highly suspect because tax avoidance is a main reason (and some believe the only reason) why a corporation would want to leave the US. This, I think, is consistent with the current US view toward expatriating individuals: their motives are also highly suspect, and so their exit may only be accomplished by means of complex and expensive administrative mechanisms. In the case of individuals, however, expatriation is a final act--once given up, US citizenship will be almost impossible to reacquire. Not so for corporations, at least, so far.

Recent Scholarship of Note on Normative and Practical Challenges in Corporate Taxation

Yariv Brauner recently posted "Whither Choice of Entity," in which he examines choice of entity and policy implications in support of the repeal of corporate taxation, or failing that, a redefining of corporate residence to move toward source-based taxation, preferably with formulary apportionment. He provides a comprehensive picture of the ongoing chaos created by entity classification and residence assignment rules. Brauner correctly mourns the lack of normative principles underlying the differential taxation of entities, which he attributes to the "unorganized thinking" that characterizes much of the discussion about how choice of entity rules impact people's business choices, and the general messiness of policy-making as it evolves haphazardly through lobbying and political posturing.  He concludes:

In light of the incredible variety of options beyond mere incorporation or non-incorporations, one must wonder why tax law uses corporate or private law as the baseline for the application of its rules. Most importantly, why do we attribute importance to the act of incorporation? ...[T]here is nothing particularly special about businesses that carry a piece of paper stating that they are incorporated. A legal response to that may not be very feasible. We do not have a satisfactory legal answer to the central question: why do we tax corporations separately when only humans bear the burden of such taxation.

...The most obvious lesson is that the potentially negative impact of the corporate income tax on our tax system goes beyond the complexity it imposes on our tax system, and even beyond its negative political implications. In that, it reinforces the conclusion that the first-best step in a reform must include the elimination of the corporate income tax as a firm-level tax, perhaps replacing it with a withholding mechanism to preserve the efficacy of corporations as revenue collecting devices, or with other proxy solutions, such as mark-to-market taxation of public corporations only. 

Another solution... may be to replace the current residence based taxation of entities that relies exclusively on corporate personhood with an alternative, more substantive tax regime. This could be an increasingly source-based rather than residence-based tax regime, yet such a reform faces several difficulties, including the need to retain residence as a primary determinant of taxation, the difficulty of identifying the source of income, the difficulty of asserting a fairness-based tax base division between source and residence once established, etc. A better solution would be to adopt formulary taxation that relies on agreement between competing jurisdictions rather than false pseudo-economic notions. 

Henry Ordower verifies Yariv's concerns and takes a related approach in Preserving the Corporate Tax Base Through TaxTransparency, in which he states:

When, where, and at what rate to tax the income of business entities are the fundamental questions for the corporate income tax. Answers to those questions should remain independent of the taxpayer’s choice of business form, because one may achieve identical revenue outcomes with entity opacity or transparency. When the answers to those questions vary with business form and tax system structure, opportunities to arbitrage those differences across national borders and diminish or avoid tax on the corporate in- come inevitably emerge.

Tax professionals, administrators, academics, economists, and business participants may and often do disagree on whether a corporation’s (or other business entity’s) income from the operation of its business should be taxable to the corporation itself or taxable to its owners. Opinions also may diverge on whether to tax investment income differently from income from the operation of a business. Despite those disagreements, as long as there is to be an income tax, all will agree that the choice of one business form over another should not result in income from business operations escaping income tax completely.

Similarly, income should be subject to tax primarily where the taxpayer produces income from the operation of a business. Taxing income where the taxpayer’s principal office or seat of management happens to be makes sense only under a system that taxes residents and citizens on their worldwide incomes (a global model of taxation like the United States has) and then only secondarily to the place of income production in order to prevent taxpayers from gaining an advantage by placing their income in low-tax jurisdictions. 

...[A] wholly transparent income tax system would improve existing corporate tax systems and establish tax neutrality between entities currently subject to the corporate income tax and those that are not. Full transparency is consistent with international treaty obligations and simultaneously eliminates many international tax arbitrage opportunities. Business needs rather than tax benefits would drive choice of business form. If accompanied by a robust system of international apportionment of business income, a fully transparent corporate income tax would eliminate most income allocation arbitrage as well as tax system structure arbitrage opportunities.

Read them both to get a good sense of the history, evolution, and ongoing challenges facing corporate income taxation.

Russell Brand on governance as theatre and why MNCs get all the tax breaks

Russell Brand got invited to the GQ awards, made a joke about Hugo Boss' history serving Nazi troops, and then got ejected. I would never have heard or cared about this except that then Russell Brand decided to write about the experience in the Guardian, and his comments ended up as an indictment of the relationship between elites and government with a nod to the problem of multinational influence on tax policy. Excerpts:

We witness that there is a relationship between government, media and industry that is evident even at this most spurious and superficial level. These three institutions support one another. We know that however cool a media outlet may purport to be, their primary loyalty is to their corporate backers. We know also that you cannot criticise the corporate backers openly without censorship and subsequent manipulation of this information.

Now I'm aware that this was really no big deal; I'm not saying I'm an estuary Che Guevara, it was a daft joke, by a daft comic at a daft event. It makes me wonder though how the relationships and power dynamics I witnessed on this relatively inconsequential context are replicated on a more significant scale. 

For example, if you can't criticise Hugo Boss at the GQ awards because they own the event do you think it is significant that energy companies donate to the Tory party? Will that affect government policy? Will the relationships that "politician of the year" Boris Johnson has with City bankers – he took many more meetings with them than public servants in his first term as mayor – influence the way he runs our capital? 

Is it any wonder that Amazon, Vodafone and Starbucks avoid paying tax when they enjoy such cosy relationships with members of our government? 

Ought we be concerned that our rights to protest are being continually eroded under the guise of enhancing our safety? Is there a relationship between proposed fracking in the UK, new laws that prohibit protest and the relationships between energy companies and our government? 

From the shallows of celebrity comings and goings, an all-too rare glimpse of perspective on the society we have built for ourselves.

Razin on Tax and Migration Competition

Assaf Razin and Efraim Sadka have a new paper up on NBER called Migration into the Welfare State, in which they survey the literature on the tax burden of migration and work with available migration and tax policy data to make some assertions about how taxation impacts inward and outward migration.  From the abstract in the paper:

We develop a stylised EU-type model of rich capital-abundant (and productive) countries and poor capital-scarce countries in order to explain a key feature of tax policies and inter- and intra-migration flows. We examine how this model can explain the differences in the tax rates and the generosity of the welfare state, on the one hand, and migration flows, on the other hand, between rich and poor countries, within a union and from the rest of the world. An upward-slopping supply of migrants from outside the union and the relatively low endowment of capital of these migrants gives rise to a fiscal externality.

The jargon-heavy style of this abstract continues through the paper and I cannot say that I really understand some of the arguments. Razin and Sadka seem to conclude that under conditions of tax competition (for example, involving migration from countries outside of the EU), rich countries let in too many immigrants, offer them too many social benefits, and levy too high a tax on capital (which immigrants don't typically pay) to pay for it all, while coordination fixes things (although confusingly the papers seems to suggest that coordination brings down capital gains taxes but intensifies migration flows, so I am not sure). Unfortunately this paper requires too much deciphering and parsing work by the reader (an all-too-common phenomenon with academic papers) and at this time of year there is little hope for that.

A plea to academic authors who write papers on tax topics especially (and a reminder to myself when I look at my own writing): readers need a clear and succinct summary, written in plain, jargon-free language, to help them summon the desire and the mental energy to work through a paper. The more complex and data-filled the paper, the more a return to Zinsser is to be recommended.

GAO to IRS: issue guidance on Bitcoin to safeguard tax compliance

Not too long ago, the US Government Accountability Office issued a report entitled "Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks," saying that the extent of tax evasion is unknown but might not be extensive if only virtual currencies stay in a "closed" system, as illustrated by this handy chart:

There you have it. Despite the chart (I'm pretty sure that horse left the barn a long time ago), the report is worth reading to get a sense of the direction of regulatory thinking.

McGill Tax Policy Colloquium 2013

This fall marks the fourth installment of the McGill University Faculty of Law Tax Policy Colloquium.  This year’s colloquium features a number of distinguished invited speakers who will contribute a rich variety of scholarly works in progress on cutting edge topics involving national and international tax law and policy.  If you will be in Montreal on any of these dates, I invite you to join the tax policy class to hear presentations by this illustrious group.  All presentations begin at 2:35 in New Chancellor Day Hall, Room 203, at the Faculty of Law, 3644 Rue Peel, Montreal, Quebec.

September 23: Reuven Avi-Yonah (University of Michigan Law School)

·         Professor Avi-Yonah is the Irwin I. Cohn Professor of Law and director of the International Tax LL.M. Program at the University of Michigan Law School, and specializes in corporate and international taxation. He has served as a consultant to the US Treasury Department and the Organisation for Economic Co-operation and Development (OECD) on tax competition, and is a member of the steering group for the OECD’s International Network for Tax Research.

September 30: J. Clifton Fleming (BYU J. Reuben Clark Law School)

·         Professor Fleming is the Ernest L. Wilkinson Chair and professor of law at BYU’s J. Reuben Clark Law School where he teaches courses on US and international tax law, European Union law, and public international law. Previously, he has been the Fulbright Distinguished Chair at the Vienna University of Economics and Business, the Fulbright visiting professor of law at the University of Nairobi, and the Professor-in-Residence for the IRS Chief Counsel’s Office.

October 7: Lyne Latulippe (Département de fiscalité Université de Sherbrooke)

·         Professor Latulippe currently teaches in the tax department at the University of Sherbrooke and was previously on the faculty at UQAM. She researches and publishes on topics of comparative and international taxation, international tax cooperation, and tax policy.

October 28: Sagit Leviner (SUNY Buffalo Law School & Ono Academic College Faculty of Law)

·         Professor Leviner is on faculty at SUNY Buffalo Law School and is also affiliated with Ono Academic College Faculty of Law in Israel. Her research explores the coming together of normative and pragmatic aspects of tax policy design, particularly with respect to tax enforcement, behavioral attributes of taxation, and the tax burden distribution.

November 11: Shirley Tillotson (Dalhousie University)

·         Professor Tillotson is a member of the history department at Dalhousie University. Her research and publications focus on the cultural history of taxation in Canada, the evolution of the welfare state, and how gender, class, and social norms affect personal finance.

November 25: Diane Ring (Boston College Law School)

·         Diane M. Ring is a Professor of Law at Boston College Law School, where she researches and writes primarily in the field of international taxation, corporate taxation, and the taxation of financial instruments. Her recent work addresses issues including cross-border tax arbitrage, advance pricing agreements, and international tax relations.