Shachar & Baubock on Citizenship for Sale

Ayelet Shachar, who previously published The Birthright Lottery, a book about how citizenship is an inheritance that can make or break individuals' life chances, has edited a compilation of twelve short essays on the question of whether citizenship should be a commodity, together with Rainer Baubock. Here is the abstract:

On 12 November 2013 the Maltese Parliament decided to offer Maltese and European citizenship at the price of € 650,000, but implementation of the law has been postponed due to strong domestic and international critiques. On 23 December, the Maltese government announced significant amendments, including a higher total amount of € 1,150,000, part of which has to be invested in real estate and government bonds. Several other European states have adopted ‘golden passport’ programmes. Should citizenship be for sale? In November 2013 EUDO CITIZENSHIP invited Ayelet Shachar of the University of Toronto Law School to open a debate on these controversial policies. Twelve authors have contributed short commentaries, most of which refer to the initial law adopted by the Maltese Parliament. An executive summary by Rainer Bauböck provides an overview over the main questions raised in our forum. For further information on investor citizenship programmes see Jelena Dzankic’s EUDO CITIZENSHIP working paper on the topic and consult the news section of our observatory.

The issue of taxation is peripheral at best in most of these contributions. Yet for those interested in fundamental questions about belonging that are as yet unanswered in the tax policy literature, and specifically how FATCA and other automatic information exchange developments increase the possibility of citizenship-based taxation like never before, understanding whether and why citizenship should be a tie that binds a person to a state is fast becoming a critical issue.

Canadian Government Responds to FATCA Questions

Last October, Canadian MPs Ted Hsu and Scott Brison issued a set of questions to the Canadian government on FATCA (on which I consulted). Today I received two pdfs with the Government's answers to the questions, and I have put them in dropbox in order to share them:

Here are the government's answers to Ted Hsu's questions.

Here are the government's answers to Scott Brison's questions.

Most of the questions remain unanswered for one of two reasons: (1) FATCA is US law, not Canadian law, so no one in Canada is in charge of enforcing it, and therefore most agencies have little or no information and (2) Canada is negotiating with the US on an IGA and so nothing can be estimated about the scope, cost, implications, or consequences of FATCA in Canada unless and until such agreement is in place. (costs to the government in negotiating and internal briefing on the law "have been absorbed within existing resource levels.")

More review to come.

Citizenship-Based Taxation and Taxpayer Rights Don't Mix

In this brief analysis, Taxpayer Rights, On and Offshore: the 2013 Taxpayer Advocate's Report to Congress, I looked at the problem created when an under-resourced tax agency is charged with implementing an over-expansive tax jurisdiction. Abstract:

In the 2013 National Taxpayer Advocate's Report to Congress, two concerns take center stage: the need for greater protection of taxpayer rights, and the increasing pressure on the system created by the U.S. tax regime’s extraterritorial reach. Neither of these issues is new; indeed, the NTA has repeatedly attempted to raise awareness of each over several years. But the Report demonstrates that these two concerns are on a collision course, and impact looks imminent for 2014 as the US doubles down on long under-enforced jurisdictional claims over nonresidents with US nationality or legal status. The basic impracticality of finding and claiming nonresidents with US ties is compounded by the violation of internationally recognized tax jurisdiction norms, creating an unsustainable enforcement rift that directly challenges the voluntarism theme that Olsen views as key to the fiscal system as a whole.

Further in, I argued that the NTA Report illustrates that taxing people on the basis of their nationality or legal status rather than their actual residence poses a serious problem for tax administration and violates international norms.

As a practical matter, globally rounding people up based on one government's ideas about their legal status is quite obviously unenforceable without assistance from other governments. This assistance fundamentally conflicts with a universally recognized (and far more just) jurisdictional claim based on actual residence. It is one thing for the US to say to individuals: if you have status under our law you must follow all of our laws no matter where you are. It is another to say to other countries--and much less individuals in other countries--if people who live in your country have US status as we define it, you are harboring potential criminals and you must help us find them and enforce our claim over them even if your government also claims them and even if our claim conflicts with your government's own law.

Thus status-based taxation is no less a poaching of other countries’ internationally recognized jurisdictional claims over taxpayers than the kind of poaching FATCA was ostensibly designed to attack (namely, that of the US tax base by other countries via bank secrecy). The basic unenforceability of status-based taxation coupled with its poaching of other jurisdictional claims would make it a total non-starter were nations to get together and discuss a multilateral adoption of status-based taxation as a policy everyone could get behind.

 But FATCA is a big stick that is bypassing any such conversation, going straight to the technical problem of compliance and enforcement under the banner of stopping tax evasion. There might be no remedy in international law for tax jurisdictional overreach but that only confirms that it must be challenged from both within and without the nation engaging in the bad behavior.

Tax Competition: Not a Law of Nature but a Policy Decision

This was published this back in December but I neglected to post it here: "What the Baucus Plan Reveals About Tax Competition" is a brief (5 pages only!) analysis of US Senator Max Baucus' "Option Y" plan to reform the US corporate tax regime, by in effect imposing a global minimum corporate tax on US-based multinationals. I argue that the plan demonstrates that tax competition is not and has never been a law of nature operating outside of the control of individual governments, but instead it has always been the product of policy decisions that can be reversed by other policy decisions. Accordingly, political will is the reason why tax competition has become the overwhelming force that it is today.

I suggest that the Baucus plan demonstrates that the US has been a major force in creating the conditions for global tax competition and its language implies that the US could, should it chose to, act unilaterally to put a stop to the practice. As always, I welcome your comments.

Rick Mercer explains how the rest of the world sees FATCA in one hilarious minute

Must see for anyone who is, or was, or may be or might have been an American...

Ireland: Oasis for American multinationals, desert for Irish workers

From last Sunday's NY times, opinion write Fintan O'Toole discusses life in Ireland, after it first gorged on a panoply of tax reforms meant to lure in multinationals, and then starved under austerity under financial crisis. Of note:

...Ireland has two economies: a global one dominated by American high-tech companies, and a domestic one in which most Irish workers have to make their living. The first is indeed booming. Not least because of those low corporate taxes, large global corporations find Dublin convivial for reasons other than its pubs and night life. The sheer scale of Ireland’s dependence on this kind of investment for its exports can be judged by the fact that Irish gross domestic product took a serious hit in 2013 when Viagra (which is made by Pfizer in County Cork) went off patent in Europe. Broadly speaking, however, the global side of the Irish economy has remained robust. 

But home is where the heartache is: in the domestic economy outside the gated community of high-tech multinationals. Outside Dublin, property prices are still falling. Wages for most workers have dropped sharply. Unemployment remains very high at 12.8 percent — and that figure would be higher if not for emigration. There’s always been a simple way to measure how well Ireland is doing: Go to the ports and airports after the Christmas vacation and count the young people waving goodbye to their parents as they head off to the United States, Canada, Australia or Britain, where they have gone to find work and opportunity. 

...[People in Ireland] are not convinced that the cruel scale of the punishment was necessary or that the nasty medicine has, in fact, worked. 

Behind both of these propositions looms the great contradiction in the supposed success story of Irish austerity. It was austerity only for citizens. Running parallel to all the cuts in public spending and all the calls for fiscal responsibility has been a program of spending so lavish that it makes a drunken sailor look stingy. 

The converse proposition is that when it comes to contributing to the mechanisms of the state--rule of law, infrastructure, educated workforce, etc etc, which fully support those multinational gated communities--the state looks primarily to workers to do the bulk of the heavy lifting, in the form of personal income taxes (41% at the top) and consumption taxes (23% on most goods). But Ireland is not alone in this political decision.

The story of feasts for corporations, famine for workers is a familiar one, and the trade off is supposed to be the positive externalities corporations bring. In other words, the political tradeoff that politicians think they are making goes as follows: we can give up our tax on corporate income if that lures more corporations into our jurisdictions which then hire our workers, whom we can then tax on their incomes and then again on their consumption, to pay for luring in more corporations, in a virtuous cycle. O'Toole's column strongly suggests that the externalities are not anywhere near what was expected or would be needed to continue the virtuous cycle.

The problem for the state is that the owners of corporate capital have received their benefit up front, but when they do not produce their side of the equation in exchange, there is no way for government to demand a refund.

Thus we can add Ireland's story to the multiple examples that exist in various iterations of it around the world, including for example the constant intra- and inter-state fights to lure in manufacturers, filmmakers, and sports teams. Maybe governments should be thinking about adding a carve-back clause to the fiscal bargain that creates oases for bargain-seeking multinationals, which would disgorge untaxed profits when it is clear a party to a tax incentive-fueled deal is not bringing what they said they would or could.

FATCA rising in Canadian Media

The Canadian media has increased its interest in FATCA over the past week or so, with a number of news stories, including television segments. Here are a couple of stories to which I contributed in which I may (or may not) have shed some light on what FATCA looks like from outside the United States:

• U.S. tax law called ridiculous 
• U.S. FATCA tax law catches 'accidental Americans' 
• How will the new U.S. tax law affect Canadians?
• U.S. FATCA tax law catches unsuspecting Canadians in its crosshairs

It is clear that the nerve touched by FATCA is citizenship- or status-based taxation, a concept that remains a mystery and a surprise to many outside America, especially in a country in which a vast majority of the population lives within striking distance of the border and there is a high level of interrelationship, both personal and business. I expect the pressure on status-based taxation to grow exponentially as FATCA actually begins to "smoke out" the world's non-resident Americans when it comes into effect later this year, and more stories like that of Carol Tapanila's family demonstrate the injustice created by legal regimes that apply to individuals based on their legal status alone.

US renunciations passed 3,000 in 2013; Number abandoning status likely much higher

The Canadian press seems to be taking increasing notice of US citizenship issues, probably because there are so many persons with US status living and working in Canada and as the US clamps down on its citizens across the globe, the effect is deeply felt here. Patrick Cain has covered these issues before and in his latest article he reviews the murkiness surrounding the renunciation number--it is not by any means a comprehensive view of the number of people shedding their US status:

The FBI data captures only part of the total number of ex-Americans. Some people “relinquish” U.S. citizenship – for example, by taking citizenship in another country while intending to lose U.S. citizenship, then asking the State Department to document the loss. Relinquishing is more attractive for several reasons, not least because it’s free – a renunciation costs $450 US.

As Cain points out, you can FOIA all you want, you won't get a full picture of the exit door. Cain compares this to the Canadian side of things:

Between 2008 and 2012, an average of 172 Canadians renounced their citizenship each year – typically because they want to run for office in a foreign country, join a foreign country’s military or become citizens of a country that doesn’t allow dual citizenship, Citizenship and Immigration spokesperson Mary Jago explained in an e-mail.

As to "wanting to run for office in a foreign country":  a likely rare but politically interesting sub-category. Canada is of course a much smaller country than the US so we can expect the number to be accordingly much more modest, still, here it is just about 5% of the documented US number, and therefore likely a tiny fraction of the whole US picture. I expect that picture to substantially expand again in 2014.

Dorfman on the Cost of US Citizenship Abroad

I missed this student's point of view on the Cost of United States Citizenship Abroad when it was posted early last month, and it is of interest. The student notes that the US is the only country* in the world to impose worldwide taxation on the basis of citizenship instead of residence, that "there are no philosophical grounds" for this position, and that the position creates unnecessary obstacles to human mobility that serve no policy purpose. Excerpts of note that I wish US lawmakers could understand as well as this student apparently does:

[T]his archaic policy is not only unjustified, but is frustrating and alienating expatriates across the globe. 

... In general, [US] citizens pay the difference between their domestic taxes and what they would have been taxed in the US – so, if a citizen’s domestic taxes are higher than what they would owe in the US, they pay no additional taxes. However, an exemption from additional taxes is not an exemption from the inconvenience, penalties, and hidden costs that come with filing US taxes abroad.

... the vast majority of expatriates are not living abroad to duck taxation – they have simply moved away for work, education, or family reasons and have not returned. 

Many non-resident citizens have inherited United States citizenship by birth, but have never actually resided there– they’ve received no services from the US government, yet must file American taxes every year or face severe penalties. 

...In attempting to punish tax dodgers, the US government is heaping financial penalties, stress, and even criminal charges upon the blameless.

...At its core, citizenship based taxation makes it harder for American citizens to live and thrive outside of the United States. This is a significant obstacle to the freedom of Americans to emigrate abroad in an increasingly globalized world. 

The United States has also implemented barriers to renouncing American citizenship. ...The Economist has dubbed these obstacles “America’s Berlin Wall”.  

 The author concludes:

It is no wonder that American expatriates frequently report feeling frustrated, harassed, and persecuted – the United States system has been built to punish them for merely residing outside of its borders. The United States needs to get with the times and abolish citizenship-based taxation. The policy is tremendously unfair and detrimental to Americans living abroad, and it serves to anger and alienate citizens, many of whom have a lot to contribute to the United States in terms of international experience and skills. It is ironic that a citizenship so widely desired has come to feel like a burden for so many.

Well said, but I am afraid it is falling on deaf ears in Congress where every move concerning the taxation of humans--in stark contrast to that of multinational companies--is moving in the direction of protectionism and penalty rather than export and free mobility.

* Eritrea also apparently taxes its citizens abroad at a rate of 2 (two!) %. For this it has been condemned  and sanctioned by the United Nations Security Council after then US Ambassador, now US National Security Adviser Susan Rice stated that the country was "funding its [war-related] activities through its diaspora tax." Rice added that "Eritrea must confirm through its actions that it was ready to re-emerge as a law-abiding State." One can but hope that such statements can be made only by someone who is blissfully unaware of the comparatively much more expansive--and punitive--US disapora tax.

Stewart on the G20 and the taxing issue of making big business pay

Professor Miranda Stewart has published a short article today in which she nicely sums up the G20 agenda for 2014: base erosion & profit shifting, thin capitalization and transparency/information exchange. She concludes with some of the challenges for reform:

The G20 ... says that fixing global tax regulation is key to fighting poverty. A 2012 UN General Assembly Resolution 66/191 calls on the international community to develop effective international company tax rules and to increase participation of developing countries in tax policy processes. But ... it is only recently that OECD member countries have begun to acknowledge that their own tax rules and harmful tax competition are making it more difficult for developing countries to raise adequate taxes. 

There may be some tensions in the G20 about how to reform our fundamental international tax principles for the future. The OECD BEPS project mostly aims to protect the residence basis of taxation for multinationals. This will help prevent corporate tax base erosion for rich, capital and intellectual property-exporting countries. Current OECD profit shifting rules, which emphasise the arm’s length transfer pricing principle, can be strengthened. But these current rules for allocation of the right to tax business profits between countries are under attack from capital importing countries who seek to protect and enhance source taxation of business activity.

India, South Africa, Brazil and China may benefit more from a “formulary apportionment” approach, which has also been called for by activist organisations such as Oxfam and Christian Aid. We might begin to see cracks in the G20 on these fundamental international tax principles in 2014.

A nice overview of what to look for from the G20 in 2014.

Cockfield on governance and the international tax regime

Art Cockfield has published his article, The Limits of the International Tax Regime as a Commitment Projector, which examines how governments use and abuse the pluralistic nature of the international tax law regime to achieve their goals. He presented this as a paper in draft form last year at McGill and it is highly recommended reading. Here is the abstract:

As explained by Ronald Coase, transaction costs are the costs associated with discerning a price on a given exchange. This article conceptualizes the international tax regime as a political and legal system striving to address transaction cost challenges, and claims it has an uneven record. On the one hand, the international tax regime lowers transaction costs and hence promotes global economic growth. It does this by facilitating credible government commitments to ensure that the same cross-border profits are not taxed twice by two countries. Multinational firms are thus protected against the risk that their cross-border activities will be unduly deterred by taxation, which encourages more global economic activities.On the other hand, governments are unable to offer credible commitments that they can effectively address other important international tax policy concerns. First, despite ongoing reform efforts governments are not able to offer reasonably reliable promises that they will inhibit aggressive international tax planning that dilutes revenues in countries like the United States. Second, the international tax regime affords governments opportunities to develop their own policy solutions (such as the 2010 U.S. anti-tax evasion initiative to create a global tax information reporting system through the Foreign Account Tax Compliance Act) and thus governments can renege on earlier promises to abide by traditional international tax norms.

The article includes a tremendously interesting section on "Breaking Commitments through Unilateralism," in which Prof. Cockfield discusses the US adoption of FATCA and how this legislation violated international tax norms as well as circumvented longstanding international commitments under existing treaties. Prof. Cockfield is optimistic that despite its faults, FATCA could help lead the world to global automatic information sharing. I am very much less optimistic because of the grave imbalance of resources and the high transaction costs he describes, and because I view the intergovernmental agreements that purport to commit the US to greater information exchange as aspirational at best.

In the conclusion, Cockfield sums up the current status quo of global tax governance:

The fact that the ITR [International Tax Regime] evolved as a largely noncooperative government game is understandable given the desire on behalf of governments to preserve political control over their tax systems. Nevertheless, by eschewing its traditional reliance on limited bilateral and multilateral cooperation, the recent U.S. initiative through FATCA to create a global tax reporting system to address tax evasion concerns — a system that operates in contravention of the formal and informal rules of the ITR — shows another limit of the ITR as a projector of reasonably reliable commitments. In a noncooperative game without any binding multilateral rules, governments may be tempted to break their promises to follow international tax norms in order to pursue their own domestic policy goals. 

...The analysis in this article has shown how, depending on how the context affects the ability of governments to exchange credible commitments, the ITR lowers or raises transaction costs. Thus, it disagrees with the tentative claim that, in the long run, international taxation will find its most transaction-cost-efficient governance structure. This conclusion is consistent with the view of North that, unconstrained by market forces, “the political market has been, and continues to be, one in which the actors have an imperfect understanding of the issues affecting them and equally in which the high costs of transacting prevent the achievement of efficient solutions.”