Litigation over new US citizenship renunciation fee

The grassroots group that is challenging the validity of Canada's implementation of FATCA with respect to Canadian citizens and residents has released a letter to the U.S. State Department regarding the recent decision to increase the fee for renouncing U.S. citizenship--which is now $2,350. In 2009 the fee was zero. It was introduced in February 2010 (just before FATCA was enacted) and went into effect 6 months later, following Administrative Procedure Act requirements.

You can read the full letter here. In brief, the right to leave a country is not only a universally accepted human right, it is also enshrined in U.S. law. The letter challenges the fee in substance as an unlawful infringement of that right, and in process as a violation of the APA, as the State Department did not observe the procedural requirements for increasing the fee 500% even though it had done so in initially introducing it. Presumably, the group will commence litigation to enjoin the State Department from both legal violations.

Today at McGill Law: Patrick Turmel on The Reasons for Taxation

We continue the Spiegel Sohmer Tax Policy Colloquium at McGill Law today with a presentation by Patrick Turmel, Professor of Philosophy, Université de Laval, who will be discussing a paper he is co-authoring with David Robichaud, Professor of Philosophy, University of Ottawa.  The paper is called "The Reasons of Taxation. Efficiency, Freedom, Equality." Here is the abstract:

In Capital in the XXI century, Thomas Piketty argues for a series of controversial policy recommendations, such as a substantial increase in tax rates on higher incomes and a global tax on capital whose explicit aim is to halt the current spiral of inequality. Piketty’s main argument for these recommendations is not moral, but economic. Indeed, higher tax rates on top revenues and a progressive global tax on capital have not much to do with social justice or equality per se. According to Piketty, they are mostly needed in order to correct the market and maximize efficiency. But Piketty also put forth democratic reasons in favour of fighting inequalities, since they not only threaten the market, but also the very foundations of political freedom. These two types of reasons – reasons of efficiency and reasons of freedom - certainly go a long way to justify fighting the current dynamics of inequality and thus resisting the return of the Belle Époque’s patrimonial capitalism. But they remain somehow weak, when looked at from the perspective of most theories of social justice. They certainly don’t have much normative force when it comes to justifying important redistribution of wealth, as social justice seems to call for. At the very least, they fall short of creating a complete argument. The aim of this paper is to contribute to filling this gap by showing that alongside reasons of efficiency and freedom, a third type of reasons should play a central role in our understanding and justification of taxation, namely: reasons of equality. 

The presentation will again take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm. As always, the colloquium is open to all: students, faculty and the general public are welcome.

Daurer and Krever on Tax Treaties; one line summary: Them that's got shall have, them that's not shall lose

Veronika Daurer and Rick Krever recently posted Choosing between the UN and OECD Tax Policy Models: An African Case Study on SSRN, of interest. Here is the abstract:

This paper reports on a study of the tax treaty policy of a group of eleven East African countries. African tax treaties tend to follow one of two model treaties, an OECD model treaty that favours the interests of capital exporting nations and a United Nations model treaty that allows capital importing countries to retain more taxing rights. The study compares the policy outcomes in treaties signed by these countries with African nations, with relatively wealthy OECD countries, and with non-African countries that are not members of the OECD. It also compares selected outcomes in African–OECD treaties with those results in treaties between a group of Asian countries and OECD members to see whether African countries have been more or less successful at wringing preferences from wealthier nations. The study suggests the African countries studied have not been as successful in retaining taxing rights in treaties with OECD countries as have Asian countries. On the other hand, OECD countries are often more generous to African countries than are other African countries.

The paper notes that the data on the connection between tax treaties and foreign investment is still inconclusive, so we can't say that what countries lose in tax revenue given up in the treaty they gain somewhere else. The data being inconclusive is consistent with my research on this some years ago, and what I've kept up with since. Although the authors are very careful in their claims, the overall message is pretty clear: powerful nations systematically use their economic clout to gain advantage over less powerful nations in tax deals. Countries share the global tax base through tax treaties. The OECD model treaty overwhelmingly designs how they do so. So this is international tax relations as the OECD has crafted it, very carefully and deliberately, over the span of decades.

Here is Daurer & Krever's conclusion:

The jurisdictions reviewed in this study are found in the same part of Africa and have histories that share many features. The similarities in their backgrounds are not reflected in their networks of tax treaties with wide variations in the features of their treaties and sometimes significant differences in the extent to which they rely on OECD model treaty or UN model treaty precedents. 

The extent to which jurisdictions choose to forgo taxing rights may depend on relative bargaining powers vis-à-vis treaty partners or domestic ideology regarding possible direct economic benefits from increased investment or indirect consequential benefits from enhanced relationships that might follow a retreat from taxing rights. As a general rule, larger and more economically advanced economies tend to retain more taxing rights in treaties than smaller, less advanced economies. Considered as a group, these African countries appear not to have been as successful as Asian countries in retaining taxing rights. Regional countries may find it beneficial to review each other’s treaty policies and consider whether the revenue costs of less reliance on the UN model and more reliance on the OECD model might outweigh the perceived investment or ancillary benefits that they hope will flow from the transfer of taxing rights to capital exporting nations. 

Regional countries might also wish to look at why OECD countries are often more generous in agreeing to greater retention of taxing rights by African countries than neighbouring African nations. 

The Importance of Corporation Tax Policy in the Location Choices of Multinational Firms

The Irish Department of Finance released this report yesterday in connection with its 2015 budget. The report considers data on newly established multinational subsidiaries across 26 European countries from 2005 to 2012. Here are a few key points from the executive summary:

• We find a consistent negative effect of the corporate tax rate on the probability of a country being chosen as a location by multinationals. 

• We find a highly significant, albeit modest sized, effect of allowing for non-linearity in the effect of the tax structure. In other words, a change in the tax rate will have a larger effect if the starting point is a low rate of tax compared to if the same size change is applied to a higher tax rate.

• We find large variations in the sensitivity to tax rates across sectors. For manufacturing firms, the effect is similar to the baseline but for service firms the effect is noticeably smaller. Services firms may be more likely to make location decisions based on the need to be close to their identified customer base and this reduces their sensitivity to tax rates. 

• When comparing the effect of taxation to other important factors, we find that taxation is the largest single determinant of the location decision. 

• Financial sector firms are most sensitive to changes in corporation tax rates, with an estimated marginal effect more than double those of the other sectors. This is likely to be a reflection of the more footloose nature of these firms, and has important implications for the potential effect of a tax change in Ireland, given the weight of the financial sector in foreign investment in this country. Firms with higher assets sizes appear more responsive to corporation taxation in their location decision. 

• Combining all effects of tax and country characteristics, Ireland had a 3.1% probability of being chosen as a location for the newly established subsidiaries over the period investigated. For context, Irish GDP is 1.4% of the EU-26 total, so this demonstrates the attractiveness of the country as a destination for foreign investment well in excess of its size. 

• If the Irish tax rate had been 15% over the period in our sample, the number of new foreign affiliates entering the country would have been 22 % lower. 

• If the tax rate had been 22.5% (the sample average), the number of new foreign affiliates would have been 50 % lower. 

The idea that Ireland will really give up its favorable tax regimes under external pressure just seems implausible as a result. I know, Ireland is going to repeal the residence rule that gave rise to the double Irish. But there's always the double dutch not to mention an alarming proliferating of patent boxes so that means Ireland will have to come up with something else. If the US, the UK, the Netherlands, etc. aren't going to give up their goodie bags, it is difficult to see Ireland doing so.

BEPS Monitoring Group Scorecard

The BEPS Monitoring Group, a consortium of tax justice folks who are watching the OECD as it works through its ambitious reconfiguration of the global tax consensus, released a report today, of interest. The indefatigable Sol Picciotto is the lead author. From the announcement:

Our overall evaluation is that while significant progress has been made, there have been some unhappy compromises, some obstacles encountered, and much remains to be done. Also, fundamental problems still remain. The OECD alone is not the appropriate body to revise global rules, and its approach has been to patch up the existing rules. Effective reforms will not be possible without reconsidering some of the foundations of the system designed 80 years ago. Today’s globalized economy requires a more global approach to apportionment of the tax base of multinationals. Changes in the rules should be geared towards treating multinationals as unitary enterprises which would reflect their economic reality.

I agree with Sol that the OECD is not the appropriate body to revise global rules, and this is because revising the global rules really requires revisiting the basic framework. If the framework is fundamentally flawed, which I believe it is, then going back to the same architect again and again for yet another renovation project appears to be folly. But the OECD has worked hard to make itself into a tax policy monopoly, so this is a predictable result. On this point, Sol says:

A project led by the OECD even with participation of other G20 countries is still an unsatisfactory way to agree global tax rules, and the underlying problem still remains that the Action Plan aims to patch up existing rules rather than re-examine their foundation. 

The views of states not directly involved in the process, especially the poorer developing countries which are more dependent on corporate tax revenues, need to be taken into account much more directly, and we will carefully scrutinize the OECD proposals to address this which are promised.

He observes that so far, the OECD appears unwilling to consider any revisit of the underlying international tax principles, namely, the residence-source split, even though we can clearly see that this split isn't doing the work it needs to do to allocate the global tax base (especially when it comes to the corporate income tax).

My view is that everyone who will be affected by the global tax consensus has a right to be involved in the conversation, while the OECD's basic exclusionary nature ensures that only those who happen to live in rich countries will have any representation. The UN Tax Committee is an obvious alternative policy space. Sol says: "Instead of trying to usurp the UN, the OECD should support an
upgrading of the UN Tax Committee. All states should have full rights of participation in the negotiation of the proposed multilateral convention, which should  not be limited to rubber-stamping the outputs of the OECD BEPS project." That sounds right to me.

But it's hard, messy, probably dreary and frustrating work that will involve a lot of time and effort, and in the meantime...what? As I said in my talk last week, we all know that in international tax, as in most other regulatory areas, powerful states don't have to wait, they can simply do what they want.  But can is not ought.  I think the OECD should keep working on BEPS but everyone ought to be working equally diligently toward comprehensive multilateralism even as the OECD puts together this latest patch, so that the next step in international tax relations is not another recall of the same architect, with the same blueprint.

Sol's report has a clear mission: get the OECD to take formulary apportionment seriously, as the "clear lodestar" to all the BEPS efforts. Maybe so; the naysayers have their points. But for me the strongest part of this scorecard is its observation that the process matters, that we need to keep talking about participation in governance and thinking about who is making the decisions about which voices will be heard.

Today at McGill Law: Joseph Heath on Taxation as Collective Consumption

Professor Joseph Heath, Professor of Philosophy, University of Toronto, joins us today as the second speaker in the McGill University Speigel Sohmer Tax Policy Colloquium. Professor Heath is drawing from his book, Filthy Lucre: Economics for People Who Hate Capitalism, (released in the US as "Economics without Illusions: Debunking the Myths of Modern Capitalism"), where he writes about viewing taxation as a "club good":

Individuals express a surprisingly pervasive error that I refer to as the “government as consumer” fallacy. The picture underlying this fallacy is relatively straightforward. Government services, such as health care, education, national defense, and so on, “cost” us as a society. We are able to pay for them only because of all the wealth that we generate in the private sector, which we transfer to the government in the form of taxes. A government that taxes the economy too heavily stands accused of “killing the goose that lays the golden eggs” by disrupting the mechanism that generates the wealth that it itself relies upon in order to provides its services. Thus the government gets treated as a consumer of wealth, while the private sector is regarded as a producer. This is totally confused. The state in fact produces exactly the same amount of wealth as the market, which is to say, it produces none at all. People produce wealth, and people consume wealth. Institutions, such as the state or the market, neither produce nor consume anything. They simply constitute mechanisms through which people coordinate their production and consumption of wealth.

Heath has also pointed us to Todd Sandler's work on "Buchanan clubs."

 The presentation will take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm.

As always, the colloquium is open to all: students, faculty and the general public are welcome.

Peers complain banks treat them 'like pariahs'

From the BBC: "Members of the House of Lords have complained they are treated like "deposed dictators or political pariahs" when they try to open bank accounts."

More:

Peers said they were falling foul of money-laundering regulations because banks classed them as high-risk "politically exposed persons". 

This makes them, and their relatives, subject to extra due diligence checks. 

Treasury Minister Lord Deighton said banks were acting "disproportionately". 

He said UK parliamentarians were not currently classed as politically dependent persons, which are restricted to members of foreign governments, but added that new global standards "will require that they are treated as such".

 I know a few people who can relate to this feeling.

Fixing Global Tax Disorder: Multilateralism vs. U.S.-Led Effort

Tax Analysts has a write-up [gated] of the international panel from last week's conference on Reforming Entity Taxation, in Boston. Excerpts:

"What we have now is a mess," Robert Peroni, a professor at the University of Texas School of Law, said October 10, referring to the international tax system. 

... A discussion of how to go about cleaning up that mess pitted multilateralism against a U.S.-first approach. Panelists appeared to share the realpolitik view that whatever course is followed, dominant actors have called the shots for decades and will probably continue to do so. 

According to Allison Christians of McGill University Faculty of Law, the problems addressed by the conference's panel on international taxation are not much different from those faced by four academics more than 90 years ago when asked by the League of Nations to study the question of how to share the world's income tax base. Christians said the crucial issue now is the failure to tax income as opposed to double taxation, which worried policymakers then. 

"If you gave international tax a grade over 90 years, it would be an F," Christians said. 

"We will not take fairness seriously on the international stage." 

Christians said that powerful countries too often end up calling the shots, much to the detriment of a fair and orderly international tax system. "When we turn to power, we sacrifice both efficiency and equity . . . and administrability as well," she said. 

Christians was especially critical of the U.S. for using the Foreign Account Tax Compliance Act to expose underpayment of U.S. personal income taxes while cautioning that the OECD's base erosion and profit-shifting initiative could negatively affect U.S. multinationals. 

"FATCA leverages U.S. control over the global financial system, thereby forcing the populations and governments of poorer countries to direct precious tax administration and regulatory compliance resources toward the enforcement of the U.S. tax system over their own," Christians said. "Yet the U.S. has not used this same leverage to respond to base erosion. U.S. lawmakers have not seen as great a good in stopping tax avoidance by U.S.-based corporations as they have in stopping tax evasion by U.S. individuals." 

...While advocating multilateralism, Christians admitted that there is a significant risk in changing course that could prove detrimental to U.S. interests. She said that it might be in the best interest of the U.S. to act while it still has policy flexibility to shape a future international tax regime in which it might not play as dominant a role.
"Someday there might be a global power shift," Christians said. "We might wish we built a structure when we had a chance." [I believe i said an "appropriate" governance structure"] 

Christians' co-panelists placed less emphasis on multilateralism. ... Peroni said that what the world needs now is a "real worldwide" income tax regime rather than a territorial system. "Territorial undermines fair allocation of burden, and should only be enacted if its efficiency and simplification benefits outweigh its costs in terms of fairness," he said. 

Peroni said competitiveness should be defined not in terms of improving the after-tax profits of already successful U.S. multinationals, but in terms of citizens' living standards. He stressed the importance of fairness -- both actual and perceived -- in any reforms to the federal income tax and warned that simplification would probably be given short shrift. 

"Significant simplification in the international corporate tax area may be difficult to achieve because the transactions involved are often inherently quite complex and, therefore, the tax rules dealing with such transactions are likely to have a certain degree of unavoidable complexity," Peroni said. 

Peroni said that calls for formulary apportionment of international income could result in U.S. multinationals moving operations and jobs to low-tax foreign countries.

...Martin Sullivan of Tax Analysts said that U.S. moves to curb tax shelters by stressing  economic substance can often have a similar effect. "It is so ingrained that deals without economic substance have to be bad," Sullivan said. Comparing the paper companies often set up in Bermuda with real operations established in low-tax Ireland, Sullivan wondered why Ireland is considered better from a U.S. point of view. "Would it be better if there were 40,000 factories in Bermuda?" he asked.  

... The panelists weren't optimistic about the prospects for international tax reform. Peroni said "no sensible president" would push for reform during his or her first term. "If a president is not reelected, this could go on forever," he said. "You might be able to do a few antiabuse provisions . . . but that's a Band-Aid on the problem," Peroni said.
Christians emphasized the central role and responsibility of the U.S. should the world opt for a multilateral approach. "With great power comes great responsibility," she said.

Will media scrutiny for tax dodging ultimately create director liability to shareholders?

It's been a busy couple of weeks in Europe for some of America's biggest multinationals.

Google’s tax setup challenged by France

European commission to probe Amazon’s tax status in Luxembourg

Europeans Accuse Ireland of Giving Apple Illegal Tax Break

I'm working on an article in which I argue that the scrutiny over tax avoidance is creating material financial risk for multinationals, such that existing national securities disclosure laws will ultimately require increased disclosure to shareholders about public companies' tax planning strategies and their associated risks. To date, share prices have not seemed to reflect any market worry about the anti-tax avoidance activity governments have proclaimed so far. But if these stories about probes turn into stories about assessed fines and other clawbacks (as opposed to Starbucks'-style faux-repentance gifts), my level of confidence in my prediction will vastly increase.

Dawn of the Delta: Taming International Derivatives Tax Abuse

I recently contributed to the Columbia Tax Journal's Tax Matters Series, on Congress' attempt to constrain a particular form of international tax avoidance. The constraint in question is a fairly technical provision found in 871(m), which was enacted as part of the 2010 HIRE Act (also the source of the Foreign Account Tax Compliance Act). You can find my overview at the link above, where I explain what section 871(m) was intended to achieve (it is an anti-abuse rule to stop people avoiding dividend withholding taxes) and how Treasury sought to achieve it with a test (called the delta test), and observe that this test has prompted criticism for being too broad, capturing more transactions than intended. I asked the practitioners to address the mischief of the over-breadth and what could be done to overcome this but still achieve the legislative aims. The practitioners responded as follows:

Section 871(M) and Delta: When Should a Dividend Equivalent be Treated like a Dividend?
By Mike Farber

Taxation Without Authorization: The Proposed “Dividend Equivalent” Withholding Regulations Under Section 871(m)
By Linda Z. Swartz, Shlomo Boehm, and Jason Schwartz

The Most Recent Proposed Regulations Under Section 871(M): The Perfect is the Enemy of the Good
By Andrew Walker Read DOC or PDF

Enjoy.

Reforming Entity Taxation

Boston College is hosting a conference on Reforming Entity Taxation this Friday; I'll be on the international panel where I'll be giving a paper I've entitled "Who's Got the Power: Dividing the Global Income Tax Base." My theme: reforming entity taxation is purely about the political will of powerful states, perhaps especially the US. It is often repeated that with great power comes great responsibility. I argue that powerful nations have fallen far short on living up to the latter. I take a look back at how the League of Nations started the inquiry into how nations ought to share the global income tax base but ended up answering the question with power instead of principles, and how today's mix of FATCA, BEPS and the Baucus plan demonstrates that we are still doing the same thing today. I'll post a draft soon. Here is the lineup for Friday:

Keynote Speaker: Lee Sheppard (Contributing Editor, Tax Analysts)                            

Reforming Entity Taxation: Corporations

Mirit Eyal-Cohen (Alabama)
Deborah Schenk (NYU)
Dan Shaviro (NYU)
Brian Galle (Boston College) Commentator
Jeremy Scott (Editor in Chief of News, Tax Analysts) Moderator

Reforming Entity Taxation: Partnerships

Karen Burke (Florida)
Andrea Monroe (Temple)
Gregg Polsky (North Carolina)
James Repetti (Boston College) Commentator
Amy Elliott (Contributing Editor, Tax Notes) Moderator

Reforming Entity Taxation: International

Allison Christians (McGill)
Robert Peroni (Texas)
Martin Sullivan (Tax Analysts)
Diane Ring (Boston College) Commentator
Sam Young (Editor Worldwide Tax Daily) Moderator

Destination: Silicon Valley North

I took part in the latest McGill Law Journal Podcast, this time to talk about tax incentives and innovation. Have a listen.

Tomorrow at McGill Law: Apple's Tax Planning, through a Philosopher's Lens

Tomorrow at McGill: Wayne Norman, Mike & Ruth Mackowski Professor of Ethics at Duke University, will be here to present the inaugural lecture of the McGill University Spiegel Sohmer Tax Policy Colloquium. He will be talking about how we ought to think about the social pressures coming to bear on multinational tax avoidance, with a special focus on Apple. His presentation is entitled "Corporate Tax and Beyond-Compliance Norms."

Using the media's recent coverage of Apple's tax avoidance strategies as a case study, Professor Norman will discuss how we ought to understand and rationalize corporate social responsibility and self-regulation norms emerging around the taxation of multinationals, and whether these rationalizations are, or should be, different than the rationalization of corporate tax regulation. He will draw upon his previous work on business ethics, including "Business Ethics as Self-Regulation: Why principles that ground regulations should be used to ground beyond-compliance norms as well," and he points us to a 2012 NY Times article by Louise Story, As Companies Seek Tax Deals, Governments Pay High Price.

The topic is obviously timely. If you've been watching the news, you know that it has recently been revealed that Apple and governments get along very, very well when it comes to taxes. In Europe, Apple's side deals with Ireland have come under scrutiny as a possible form of state aid, against EU law; in the United States, Apple has faced lawmakers' bark but no bite. Here is some recent media coverage, most from the Guardian:

• How Apple's Cork HQ became the centre of a bitter global war over corporate tax avoidance 
• Ireland defends tax dealings with Apple: Dublin denies EU commission claims that it helped iPhone maker obtain billions of euros in illegal state aid
• Tough talk on tax means nothing if every country does different things: Obama and Osborne have been quick to promise an end to avoidance. But this is best achieved through collective action
• Apple Tax Probe Details Set to Be Revealed by EU Watchdog (Bloomberg)

I have been saying for some time that even after a century of study, we have yet to articulate a principled way to allocate the global income tax base, and we ought to ask philosophers for help. I am pleased that Professor Norman will engage on the topic.

The presentation will take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm.

As always, the colloquium is open to all: students, faculty and the general public are welcome.