FATCA, Citizenship-Based Tax, and Taxpayer Rights

I recently sat down with Bob Goulder of Tax Analysts to talk about FATCA, citizenship-based taxation, renunciation, and taxpayer rights.

Senate Foreign Relations Committee Approves 8 Tax Treaties

Senator Rand Paul has been holding up tax treaties for several years but he apparently stepped away from the Foreign Relations Committee yesterday and eight slipped through. They will be considered by the full Senate which I assume will give consent to their ratification, since as far as I know Sen. Paul was the only opponent. From Reuters:

The U.S. Senate Foreign Relations Committee on Tuesday approved eight long-delayed international tax treaties, which had been held up for years because of one Republican senator's objections, despite support from companies that want consistency in rules for how to do international business. 

The treaties are with Switzerland, Luxembourg, Hungary, Chile, Spain, Poland and Japan and the international convention on mutual assistance on tax matters. 

U.S. Senator Rand Paul objected to the agreements for privacy reasons, saying they would allow more inter-governmental sharing of financial information on citizens, which U.S. officials deny. Although the Republican is a member of the committee, he was not at the meeting where the pacts were approved by unanimous voice vote. 

It was not yet certain when the treaties would be considered by the 100-member U.S. Senate, where they need a two-thirds vote to be ratified.

Please Give: Passionate Plea for IRS Funding from Former IRS Commissioners

The IRS faces constant funding pressure from Congress, despite becoming a victim of constant mission creep thanks to Congressional mandates (ACA and FATCA in particular). Over the years many have pled with Congress to stop underfunding the agency. The latest comes from seven former commissioners, who note that not least among the reasons to fund the IRS is the need to spend money on cyber security as the IRS fends off one million hacking attempts each week.

That's a lot of hacking because of course the payload is enormous. FATCA has surely expanded the payload significantly by developing an enormous database of personal information attached to bank account numbers and detailed account activity on a global scale. Even a small breach of security with respect to that vault will be disastrous for the taxpayers involved.

The commissioners also suggest that the IRS workload is going to increase due to BEPS. BEPS is expected to result in more treaty-based conflicts among jurisdictions, so I expect more competent authority hours will be needed. But it's likely also the case that country-by-country reporting requirements will add another enormous treasure trove of information to the database, further increasing the payload.

At minimum, Congress has simply got to fund security for this massively expanding taxpayer information database.

November 9, 2015

The Honorable Thad Cochran

Chairman

Committee on Appropriations

United States Senate

113 Dirksen Senate Office Building

Washington, D.C. 20510

The Honorable Harold Rogers

Chairman

U.S. House Committee on Appropriations

U.S. House of Representatives

2406 Rayburn House Office Building

Washington D.C. 20515

The Honorable Barbara A. Mikulski

Vice Chairwoman

Committee on Appropriations

United States Senate

503 Hart Senate Office Building

Washington, D.C. 20510

The Honorable Nita M. Lowey

Ranking Member

U.S. House Committee on Appropriations

U.S. House of Representatives

2365 Rayburn House Office Building

Washington, D.C. 20515 

Subject: IRS Appropriations for Fiscal Year 2016

Dear Chairman Cochran, Vice Chairwoman Mikulski, Chairman Rogers and Ranking Member Lowey: 

We are all former Commissioners of the Internal Revenue Service. Over the last fifty years we served during the administrations of Presidents John F. Kennedy, Lyndon B. Johnson, Ronald Reagan, George H.W. Bush, William J. Clinton, and George W. Bush.

We are writing to express our great concern about the proposed reductions by the House and Senate in appropriations for the Internal Revenue Service for the current fiscal year that will end on September 30, 2016. We understand that the Appropriations Committees in the House and Senate have proposed to reduce the FY 2015 IRS appropriation of $10.9 billion by $838 million and $470 million, respectively, for the current fiscal year. If Congress were to reduce the IRS appropriation for the current year, it would represent yet another reduction in the IRS appropriation. The appropriations reductions for the IRS over the last five years total $1.2 billion, more than a 17% cut from the IRS appropriation for 2010. None of us ever experienced, nor are we aware of, any IRS appropriations reductions of this magnitude over such a prolonged period of time. The impact on the IRS of these reductions is that the IRS has lost approximately 15,000 full-time employees through attrition over the last five years, with more losses likely in the current fiscal year unless Congress reverses the funding trend. These staffing reductions come at a time when the IRS workforce is aging, with nearly 52% of IRS employees now over the age of 50 and 24% already eligible to retire. Three years from now, 38% of IRS employees will be eligible to retire. This loss of IRS knowledge and experience is alarming, particularly in light of the fact that, out of a present workforce of about 85,000 employees, the IRS has only about 3,400 employees under the age of 30 and only 384 employees under the age of 25 due to hiring freezes for budgetary reasons at the IRS since 2010 and periodically from 2005 to 2010. Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.

These reductions in IRS appropriations are difficult to understand in light of the fact that, at the same time these reductions have occurred, the Congress repeatedly has passed major tax legislation to substantially increase the IRS workload. Most recently the Congress passed the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act, two major new programs, each of which significantly expands the IRS' tax administration burdens. The IRS personnel reductions come at a time when the IRS is stretched to the breaking point to cope with tax enforcement challenges attributable to global and domestic changes that are impacting our tax system. Increasingly, the United States is facing tax challenges as the result of efforts that are taking place in the international tax arena to deal with the tax non-compliance that is accompanying the continued globalization of business and investment activities. The most recent tax changes to address international tax non-compliance are proposed in the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting Report. Regardless of one's view of these proposed changes, it is clear that the IRS will be substantially impacted by changes and challenges of other countries who adopt them.

Additionally, increasing incidents of identity theft and refund fraud are being perpetrated against our tax system by large, sophisticated organized crime syndicates around the world. These criminals seek to file false returns and claim fraudulent refunds using personal taxpayer data obtained from sources outside the IRS. At the same time, many unlicensed, unregulated return preparers are preparing and filing fraudulent tax refund returns. Every time there is an information technology hacking event in the public or private sectors in which Social Security numbers are stolen, the likelihood exists for additional identity theft and refund fraud. The growing refund fraud challenge to our tax system is especially alarming to us because of the need, which is fundamental to our tax system, for the IRS to be able to assure taxpayers who are paying their fair share of taxes that other taxpayers are doing the same thing. To emphasize the seriousness of refund fraud, the Government Accountability Office earlier this year placed identity theft and refund fraud on its list of "high risk areas" in the federal government, a sure sign to each of us that the IRS should have more, not fewer, enforcement resources to deal with this threat to the integrity of our tax system,

To place the impact on our tax system of the Congressional IRS appropriations reductions over the last five years in its proper context, Congress almost annually over the last 25 years has passed legislation that has imposed additional burdens on IRS tax collection and administration under our revenue laws. During this time, the Congress also repeatedly added more and more socio-economic incentives to the tax code and called upon the IRS to administer these new socio-economic programs, including healthcare, retirement, social welfare, education, energy, housing, and economic stimulus programs, none of which is related to the principal job of the IRS to collect revenue. At the same time, Congress passed even more legislation to pay for these tax spending programs. The result is that almost 30 years after the 1986 Tax Reform Act, our tax laws are a mess. Our tax laws have become so difficult for taxpayers to understand that 80% of all individual taxpayers now use paid consultants or software to prepare their income tax returns. Because of insufficient IRS resources in FY 2015, an average of more than 60 percent of the taxpayers who called the IRS for assistance in preparing their returns during the last filing season were unable to reach an IRS assistor, even after many taxpayers had remained on the telephone for more than 30 minutes before they were automatically cut off because of the volume of calls, which the reduced numbers of IRS assistors were unable to handle. Equally serious are the cybersecurity threats illustrated by the problem that occurred earlier this year involving unauthorized attempts to access taxpayer information using the IRS' Get Transcript online application. Separately, the IRS continues to experience about one million attempts each week to hack into its main information technology systems. Although the IRS has so far successfully thwarted these attacks and its main systems remain secure, all of this astonishes us and emphasizes to each of us that the IRS taxpayer assistance and IRS information technology resources are severely underfunded, especially when compared to the increasing cybersecurity budgets of private sector companies.

It is clear to each of us that the IRS appropriations reductions over the last five years materially and adversely affect the ability of the IRS to assist taxpayers who are trying to comply with their tax obligations, as well as the ability of the IRS to detect and deter taxpayers who have not complied with their tax obligations. Recently, we understand that the IRS estimated a direct annual revenue loss to the Federal government in tax enforcement at $6 billion last year and $8 billion this year, due to such appropriations reductions. Historically, for every dollar invested in IRS tax enforcement, the United States received $4 or more in return, and we understand that continues to be true today.

The Congressional Budget Office in its June 2015 Long-Term Budget Outlook projected future fiscal challenges to the United States because of the large and increasing size of our national debt and rising future operating deficits attributable to an aging U.S. population and rising healthcare costs. It, therefore, is imperative that our tax system in the future operate at an optimal level in order to maximize the revenues the IRS collects. For that to happen, the IRS must be able to assist taxpayers who are trying to comply with their tax obligations, and at the same time be able to enforce the tax laws against those taxpayers who have not complied with their tax obligations. In short, because of our country's fiscal and other challenges, our tax system must work and work well to collect the taxes that are owed.

Some have argued that the IRS can solve these problems by simply becoming more efficient. This argument ignores the reality that the IRS is already, by far, the most efficient tax collection agency among large countries in the world. The OECD recently released its bi-annual analysis of tax administration across the developed world and reported, based on 2013 statistics which don't reflect the most recent IRS budget cuts, that the amount the IRS spends to collect a dollar in taxes is approximately half the average amount spent by all OECD countries. Germany, France, England, Canada and Australia all spend as much as two to three times the amount the IRS does to collect a dollar of revenue.

In light of the foregoing, we fail to understand how it makes any logical sense to continue to reduce, rather than increase, the IRS budget for FY 2016 in order to optimize the IRS' ability to provide taxpayer service and to enforce the tax laws to increase revenue collections. To put it succinctly, we do not understand why anyone with present and projected debts and annual losses as large as those of the United States would refuse to pay for telephone assistance to people trying to fulfill their tax obligations, would turn their back on $8 billion annually in additional revenue, or would fail to make an investment that offers a return equal to at least four times the amount invested. For these reasons, we respectfully call upon each of you to support and work to accomplish the passage of an IRS appropriations request for FY 2016 that is substantially in excess of the appropriation for the IRS in FY 2015.

Mortimer M. Caplin (1961-64)

Sheldon S. Cohen (1965-69)

Lawrence B. Gibbs (1986-89)

Fred T. Goldberg, Jr. (1989-92)

Shirley D. Peterson (1992-93)

Margaret M. Richardson (1993-97)

Charles O. Rossotti (1997-2002)

Jinyan Li on China and BEPS

Jinyan Li of Osgoode Hall recently posted a paper of interest: China and BEPS: From Norm-Taker to Norm-Shaker. Here is the abstract:

 This article considers the implications for China of the G20/OECD Base Erosion and Profit Shifting (BEPS) initiative and the international implications of China's BEPS measures. More specifically, the article examines China's transfer pricing, anti-treaty shopping and general anti-avoidance rules. It suggests that China is transforming itself from a taker of international norms to a shaker of such norms.

Li notes that China is viewed as a victim of BEPS, that the phenomenon "highlights the unfairness in sharing the tax base between developed countries and developing countries," and that the OECD initiative is an opportunity for China to gain traction in global tax governance. From the conclusion:

China’s BEPS measures go beyond the scope of the BEPS initiative. ... China has high hopes on the outcomes of the BEPS initiative. At the same time, China appears to be realistic regarding what can be achieved at a global level. The BEPS initiative is not about redesigning the basic international tax rules and the system continues to be biased in favour of capital exporting countries (CEN), i.e. residence countries. The BEPS initiative is not designed to rethink the arm’s length principle to assign more value to productive activities and markets in both developing countries and developed countries. Instead, the BEPS initiative pursues the objective of attributing more profits to the jurisdiction where intangibles are generated, which are predominantly developed countries. 

China has a high stake in the future of the international tax system, as it is both a major recipient of foreign direct investment (FDI) and a major source of outbound FDI. The BEPS initiative marks the beginning of a process that involves China. It is uncertain if the G20 and OECD member countries will be able to agree on the recommendations of the BEPS initiative and introduce the necessary legislative changes to initiate the reforms. It is even more uncertain as to the effect of the BEPS initiative on developing countries, in spite of the efforts of the UN Subcommittee and the DWG. However, to the extent that BEPS is shaking up the international tax norm, China is surely an active norm-shaker.

Today at McGill: Dan Shaviro on Recent International Tax Policy Developments

The Spiegel Sohmer Tax Policy Colloquium at McGill continues today with a presentation by Daniel Shaviro, Wayne Perry Professor of Taxation at New York University School of Law, on his paper entitled The Crossroads Versus the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments. Here is the abstract:

U.S. international tax policy is at a crossroads, say those who urge the United States to adopt what common parlance would call a territorial system. They argue that one of the two ways forward they identify – trying to fortify the current U.S. system – would lead to ever-costlier outlier status for our tax system, and ever-declining competitiveness for U.S. multinationals. They therefore urge U.S. policymakers to embrace what they identify as the other way forward: conforming to global norms by adopting a territorial system. An alternative metaphor to that of the crossroads, more likely to appeal to proponents of addressing stateless income than to pro-territorialists, is that of the seesaw. Under this view, while policymakers in OECD countries may long have deliberately tolerated profit-shifting by multinationals – perhaps as an informal way of lowering effective tax rates for these often highly mobile taxpayers – at some point they became convinced that it had gone too far. Thus, proponents of restricting stateless income want to tip the balance somewhat (but not too far) back in the other direction. For example, they may want to ensure that each increment of a multinational’s global income will be subject to tax somewhere – but just once, rather than either zero times or twice, under what has been called the “single tax principle.” 

In my 2014 book Fixing U.S. International Taxation, I tried to offer a better analytical framework for international tax policy than either of the above. The concepts that I hoped to sideline or even banish included not only the single tax principle, along with the “worldwide versus territorial” framework – which I disparaged as conflating multiple margins, even leaving aside countries’ hybridity in practice – but also normative reliance on the whole rancid “alphabet soup” of single-margin neutrality benchmarks such as capital export neutrality (CEN), capital import neutrality (CIN), and capital ownership neutrality (CON). A number of important things have happened in international tax policy since Fixing went to press. For example: (1) The United States has faced a rising tide of corporate inversions, in which foreign companies acquire U.S. companies, at least partly with the aim of lessening the sting of residence-based U.S. rules. (2) The OECD’s BEPS project has been steaming forward, although its long-term prospects, with respect both to ongoing multilateral cooperation and results on the ground, remain uncertain. (3) The U.K. government has announced plans for enacting the so-called “Google tax,” controversially aimed at profit-shifting by multinationals, and in particular those that by non-U.K. companies. (4) A number of leading U.S. policymakers have issued ambitious international tax reform proposals, in several instances offering novel approaches that vary from current practice both in the United States and elsewhere. 

This paper offers a brief review of how the main principles I advanced in Fixing, as proposed substitutes for the standard “worldwide versus territorial” framework, relate to, and may help us in evaluating, these recent developments.

This year's colloquium focuses on the fundamentals of corporate tax policy by critically examining issues in national and international tax policy; more information about the colloquium here. Today's talk will take place from 13:30-16:30 in Room 312 of New Chancellor Day Hall, 3644 Peel Ave, Montreal. Students, faculty and the McGill community in Montreal are welcome to attend.

Tax Cooperation and Competition Conference tomorrow in Montreal

Tax Coop Montreal will be taking place tomorrow at the Musee des Beaux Arts in Montreal. It promises to be an action-packed day. Here is the conference program:

8:30-9:00 Welcome and Registration
9:00 - 09:10 Opening Remarks
9:10 - 10:15 COMPETITION AND TAXATION: A LOOK AT THE LANDSCAPE: Katharina Becker,  Allison Christians,  Peter Dietsch and Lyne Latulippe
10:15 - 10:40 TAX COMPETITION AMID ASYMMETRICAL INFORMATION: Elise J. Bean
10:40 Break11:00 - 11:40 COMPETING WHEN YOUR COMPETITORS DON’T PAY TAX. INSIDERS’ VIEW: Steven Adams,  Tasso Lagios and Natalie St-Pierre
11:40 - 12:30 FROM GLOBAL TO LOCAL TAX COMPETITION: WHEN TAX COMPETITION HITS CLOSE TO HOME: Governor Sam Brownback,  Blanca Moreno-Dodson and Paul Waldie
12:30 Lunch14:00 - 14:35 THE OECD’S BEPS PROJECT UPDATE: Pascal Saint-Amans
14:35 - 15:10  IT’S LEGAL, BUT IS IT MORAL? TAX MORALITY AND ITS LIMITS: Brian J. Arnold,  Alison Holder and Jean-Pierre Vidal
15:10 - 16:00 OPINION LEADERS WHO HAVE MADE A DIFFERENCE: Brigitte Alepin,  Margaret Hodge and Lee Sheppard
16:00 Break16:30 - 17:45 CORPORATE TAX ON TRIAL: Dan Mitchell and Richard Murphy go head to head: Moderated by  Louise Otis and Jay K. Rosengard.
17:45 - 20:00 Closing Cocktail: Toward Tax Coop 2016

Today at McGill Law: Richard Murphy on the Fair Tax Mark

The Spiegel Sohmer Tax Policy Colloquium at McGill University continues today with a presentation by Richard Murphy of Tax Research LLP and the Tax Justice Network, on the Fair Tax Mark. This event is presented in conjunction with a collaborative project between the Stikeman Chair in Taxation and the Centre for Intellectual Property Policy at McGill Law on the topic of how regulation impacts innovation.

The Fair Tax Mark is a self-regulation project that seeks to intervene in the ongoing relationship between corporations, society, and the state. Like other certifications such as Fair Trade, the Fair Tax Mark is a voluntary program intended to project an image of openness, honesty and trustworthiness in tax matters to consumers and investors. The Mark is about paying taxes, but it is also about dramatically increasing transparency about how multinationals undertake tax planning as a business strategy. This places the payment of tax and the attendant planning and scheming squarely within the realm of corporate social responsibility. The Mark suggests that demonstrating some level of compliance with NGO expectations about global tax justice is becoming a cost of doing business, thus comprising a (or contributing to an existing) social license to operate.

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