Monday at McGill: Mason on the Illegality of EU Digital Services Taxes

Ruth Mason, Class of 1957 Research Professor of Law, University of Virginia, will visit McGill next Monday to give a talk on her forthcoming work with Leopolda Parada on the compatibility of digital services taxes with EU law. In brief Mason and Parada posit that the focus of proposed EU digital services taxes on very large multinationals is intended to target US-based giants (Google, Amazon, etc) but in fact implicate EU treaty-based anti-discrimination provisions applicable to their EU-based subsidiaries. Here is the abstract:

This Article uses the example of company-size classifications to explore the role of disproportionate impact and legislative intent in judicial review of Member State laws for nationality discrimination. Our discussion of disproportionate impact is mostly descriptive—we explore how the Court has resolved questions of quantum and proof in the cases. Our discussion of intent is mostly normative—we argue, contrary to current doctrine, that courts should consider the legislature’s intentions as probative, but not dispositive, of discrimination. 

We chose company size for two reasons. First, discussion of company size as covert nationality discrimination is new to the literature. Second, Member States increasingly use company-size classifications in tax laws; Poland and Hungary recently used turnover (as opposed to net income) to determine tax rates; and Spain proposes to use turnover to establish liability for its new digital services tax. 

To illustrate how the Court of Justice might apply our approach to size discrimination, we consider whether the company-size thresholds in Spain’s and the EU’s recent proposals for a digital services tax constitute covert nationality discrimination. More generally, cooperative negotiations at the OECD towards reform that would appropriately tax the modern, digital economy must account for limitations imposed by EU law, and in particular its prohibition on nationality discrimination.

The tax policy colloquium at McGill is supported by a grant made by the law firm Spiegel Sohmer, Inc., for the purpose of fostering an academic community in which learning and scholarship may flourish. The land on which we gather is the traditional territory of the Kanien’keha:ka (Mohawk), a place which has long served as a site of meeting and exchange amongst nations. This fall the Colloquium explores a range of contemporary tax topics across three disciplines--law, economics, and philosophy. The complete colloquium schedule is below and more information is available here. The Colloquium is convened by Allison Christians, H. Heward Stikeman Chair in Taxation Law.

As always, the colloquium is free and open to all. Prof Mason will speak on Monday December 3 at 4-5:30pm, New Chancellor Day Hall, Room 102.

Apple may owe $8bn in back taxes after European commission ruling

I have been following the EU state aid cases with particular attention to Apple and its SEC disclosure involving its sweetheart deal in Ireland. A recent story in the Guardian suggests the amounts at stake could be significant, even if not by Apple's standards:

The European commission’s recent ruling against tax breaks for multinational corporations in Belgium strongly suggests that the tech behemoth could be subject to a hefty bill when the open investigation against its activities in Ireland concludes. 

...The commission found that Starbucks owed Dutch authorities upwards of $22m, and a ruling from Belgium this week determined that 35 companies across the EU owe the equivalent of $760m in back taxes. 

Apple has already said it would appeal against a ruling against the company; CEO Tim Cook called the investigation “political crap” in a recent 60 Minutes interview. “There is no truth behind it,” he said. “Apple pays every tax dollar we owe.” 

This is not the first time Apple has been investigated for its accounting practices in Ireland. Executives including Cook appeared before the US Senate in 2013 to testify about whether it had renegotiated Ireland’s 12.5% corporate tax rate down to 2%. The company denied any wrongdoing. Matt Larson, litigation analyst for Bloomberg Intelligence, calculates that the company would owe $8.02bn at that rate....

$8 billion sounds like a lot of money until considered in the reflection of its $200 Billion cash stash, which is being held offshore pending US international tax reform as openly advocated by Tim Cook.

Still, the figure is not nothing and it is pretty far off what Apple intimated to investors back in April of 2015:

As of March 28, 2015, the Company recorded gross unrecognized tax benefits of $4.6 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $844 million and $630 million of gross interest and penalties accrued as of March 28, 2015 and September 27, 2014, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact. 

That language was new in the April 2015 filing, but the latest Apple filing reverts to the more general message found in prior filings:

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. 

The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material. 

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition, operating results and cash flows could be adversely affected.

I continue to wonder whether there will be shareholder litigation (more than nuisance suits) in the event of a major clawback by the EU.

Friends with Tax Benefits: Apple's Cautionary Tale

Over the summer, I wrote a column on the ongoing EU state aid investigation into Ireland's tax practices involving Apple. The recent news that Ireland plans to cut its corporate tax rate again, dropping to just 6.5% for IP-driven companies, reminded me that I neglected to post this article, so here it is. Abstract:

Apple recently disclosed to shareholders a potentially material impairment to its earnings: an ongoing investigation by the European Commission into Ireland’s tax ruling practices. Ireland may be forced to retroactively impose additional taxes on Apple, going back as much as a decade (and possibly beyond), if the Commission decides that the Irish Tax Authority granted Apple a prohibited subsidy, referred to as “fiscal state aid,” in contravention of EU law. But the impact of this investigation may be felt well beyond Europe. Against the backdrop of the OECD’s project on base erosion and profit shifting, the Commission’s investigation about whether Ireland gave Apple unfair benefits is fundamentally an interrogation into what, if anything, governments can or should do to stop the strategic use of national tax systems to lure international trade and investment. The Commission’s inquiry into Apple is thus a cautionary tale for both tax planners and tax authorities, whose confidence in past practices must give way as traditional compromises and well-worn assumptions suddenly become subjects of intense renegotiation on the global stage.

Tax competition and cooperation continue to duke it out: BEPS is one battleground, state aid is another. If in policing internal practices, the EC finds that tax favours like Ireland's are anti-competitive as to other EU countries, then surely they are also anti-competitive as to the rest of the world. Even though the relevant treaty (TFEU) is unique and distinct, the principle that tax favours constitute state aid might open the door for disputes beyond the EU, for example in the context of other bilateral or multilateral trade agreements.

Side note: in writing this column, I compared the successive Apple disclosure statements to watch the language change in response to the EC inquiry, which unfolded as follows:

1st EC letter to Ireland: June 2013
Additional info request: October 2013
Additional info request: January 2014
EC letter informing Ireland of investigation: March 2014.

In the column I suggest we can trace this correspondence in Apple's tax disclosure. Because it was a brief discussion I didn't lay out the disclosure changes in full but here they are (through the time of the column; not updated since), interesting in terms of revealing management's decisions about what shareholders need to know in order to make informed investment choices. Perhaps unsurprisingly, Apple's share price appears immune to the news to date. It is hard to imagine the size a clawback would need to be in order to have a material impact.

10K Oct 2012, 10Q Jan 2013, 10Q Apr 2013 [identical provisions]

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions. Current economic and political conditions make tax rates in any jurisdiction, including the U.S., subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. The Company is also subject to the examination of its tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations.

10Q Jul 2013

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Current economic and political conditions make tax rates in any jurisdiction, including the U.S., subject to significant change.  The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.

10K Oct 2013, 10Q Jan 2014, 10Q Apr 2014: same as prior

10Q Jul 28 2014

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to take a final decision against Ireland, it could require changes to existing tax rulings that, in turn, could increase the Company’s taxes in the future. The European Commission could also require Ireland to recover from the Company past taxes reflective of the disallowed state aid.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.

10K Oct 2014: same as prior

10Q Jan 2015

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to take a final decision against Ireland, it could require changes to existing tax rulings that, in turn, could increase the Company’s taxes in the future. The European Commission could also Ireland to recover from the Company past taxes reflective of the disallowed state aid. The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows and financial condition could be adversely affected.

10-Q Apr 28 2015

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid.

As of March 28, 2015, the Company recorded gross unrecognized tax benefits of $4.6 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $844 million and $630 million of gross interest and penalties accrued as of March 28, 2015 and September 27, 2014, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows and financial condition could be adversely affected.

Lux Leaks: Revealing the Law, One Plain Brown Envelope at a Time

I recently published the above titled article, now available on SSRN here.  Abstract:

A group of journalists recently revealed “LuxLeaks”: a set of documents showing that Luxembourg’s tax authority has been systemically delivering secret deals to multinationals. In this column, I explain why LuxLeaks has revealed a feature, not a bug, in the international tax system. Governments around the world have intentionally placed much of international tax law outside of public view -- in letter rulings like Luxembourg’s, but also in other agency-level decision-making processes, notably in the context of tax treaty dispute resolution. The outcomes of these confidential processes are surely the world’s largest collection of the “real” law of international taxation. But law should not be something discovered through leaks to journalists. Lawmakers could alter this flawed status quo with greater disclosure. I conclude that they don’t appear to favor this approach, but they should.

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.

IBFD Seeking two Tax Research Fellows

This is a great opportunity and an interesting project: IBFD, a European publisher well known for its tax research and publishing, has two post-doctoral tax research fellowships available in Amsterdam, on Human Rights and Taxation and on Tax Treaty Related Issues. Each is a half-time position. Neither description says anything about the substance of the research, but simply notes:

The research activity will be carried out in the framework of the specific guidelines set by the Academic Chairman. Candidates applying for the position must be able to make themselves available to be at the IBFD headquarters in Amsterdam for 50% of the working days in the period of one year (reduced by holidays and other entitlements that may apply). The IBFD welcomes the application of professors and other candidates that have already positions in universities or research centres and that are enjoying sabbaticals, temporary or other leaves or that can organize their schedule in order to be present in the IBFD for the period mentioned above.

Application are due before 21 August 2014 to Recruitment at ibfd dot org.

European Commission Seeks Input on Tax Issues of Cross-Border Citizens

The European Commission is seeking consultation through 3 June 2014 on the problems faced by "cross-border citizens."  They desire input from "[a]ll stakeholders – citizens, EU countries, tax administrations, governmental and business organisations, tax practitioners and academics." Some background:

Individuals exercising cross-border activities within the EU are often confronted with different/ additional tax issues compared to individuals who are active only within a single EU country. The issues that can arise may include complex administrative procedures in one or both countries involved that make tax compliance difficult; language barriers; different interpretations of tax treaties by the EU countries involved; difficulties in accessing relevant tax information; and difficulties in identifying officials responsible in national tax administrations. The problems often stem from the fact that two or more EU countries may have the right to tax the income in a cross-border case. Even if procedures exist in theory to prevent double or multiple taxation, the application of those procedures may be very complicated in practice. 

Some EU countries have adopted measures to address these cross-border tax problems. ... 

Although these measures are good, more may need to be done and other countries may still need to take steps in this direction. 

The Commission services are launching this public consultation with a view to inviting all interested parties to contribute to the exercise of providing information on current problems and identifying good practices applied by some EU tax administrations that go some way towards addressing these problems. This will allow the Commission to come up with solutions such as to recommend that all EU countries adopt certain good practices.

You can find links for various types of submissions at the link above.

My favorite part: "Received contributions will be published on the Internet." Yes! Very frustrating when a public consultation ends in the deafening silence of black box decsion-making based on undisclosed inputs. By making this truly public, the EC is providing a data source for researchers that could lead to more creative thinking in the long run. Lessons about the impact of tax issues on intra-European activity from this consultation might help inform our thinking about the taxation of cross border citizens more generally.

EU Public Hearing on FATCA

Victoria Ferauge alerted me to the EU public hearing on FATCA coming up this Tuesday, 28 May from 3:30-5pm (Central European Std Time), which is 9:30 am Eastern Standard.  Victoria says:

Given my experience with the OECD, I wanted to be very sure this time around that "public" meant real people could attend. So I sent an email to MEP Sophie in't Veld (many thanks to Mark who passed along her email address).  This was her answer:
Dear Mrs Ferauge,
Thank you for your message. The meetings are public, so you can attend freely. The meeting will also be webstreamed via http://www.europarl.europa.eu/ep-live/en/committees/
With kind regards,
Sophie in 't Veld, MEP

It will be interesting to see how this goes and I very much look forward to Victoria's impressions.  By now FATCA's reach is beginning to be understood by a broader audience, but much (well-founded) fear and confusion remains due to the conflation of tax cheats hiding cash in complicated offshore schemes with Americans living abroad who are just trying to live their lives. I do hope that this public meeting will help clarify things.

France ups the ante for EU tax evasion

Cahuzac's denials and ultimate admission about hiding money offshore while serving as the anti-evasion officer-in-chief is very embarrassing for France, and so it should be no surprise to see the rhetoric heat up as new allegations surface about his attempts to move the money around in an ultimately futile attempt at subterfuge. From AFP:

J'ai dit quoi?

France said Sunday [ed: France is a country and cannot speak. It is not so difficult to write "French leaders said", and it is ever so much less distracting.]  it was looking to tighten Europe-wide measures against tax evasion as it scrambles to contain a fraud scandal that has rocked President Francois Hollande's government.

...Finance Minister Pierre Moscovici announced that France would seek to reinforce the exchange of banking information throughout Europe, based on a US ruling in place since 2010 that seeks to fight offshore tax evasion.

Well, the "rule" may have been in place but let us recall that it is not in fact yet in force...three years later, we're still working out the kinks over here, and there are many, many kinks.

More:

"I propose that there be an automatic exchange of information, a European FATCA," Moscovici said on Europe 1 radio.

Hollande's government has been shaken by the scandal, which erupted Tuesday after Cahuzac -- once in charge of tackling tax evasion -- admitted to investigators that he had a foreign account containing some 600,000 euros ($770,000). 

...Critics have been quick to round on Hollande and his ministers, accusing them of either trying to cover up the scandal or of mismanagement for having believed Cahuzac's denials.

...Hollande has tried to contain the fall-out from the scandal, saying he was unaware of the account and announcing Wednesday that a new law would be submitted within weeks that will establish greater control over ministers' wealth. 

The law would also ban any elected representative found guilty of tax fraud or corruption from holding any form of public office.

Query whether there would be enough people left to run the world if every country made this same pledge.

Who is to blame for Starbucks-style tax dodging?

The answer is "government" if you believe the Telegraph, from an opinion by "Richard Emerton, Head of Board Practice at Korn/Ferry Whitehead Mann" (an executive recruiting firm). He's enthusiastic about tax competition: the kind that will keep European companies "competitive" on a "level playing field" by lowering their taxes on purpose, and he's keen to blame government alone for any failure of tax policy to date, e.g. the kind of failure that led to the public shaming of Starbucks and friends.

I agree with Emerton when he says stop blaming the companies (alone) for failing to pay taxes when this is the system that has been deliberately set up to meet them. But let us not forget that the rules have long been written collaboratively amongst government and business interests with virtually no civil society oversight. Once again, multinationals have the best tax system money can buy. Emerton does forget to mention that part, and goes too far in shifting the blame to government alone. Excerpts:

...The UK Government has done a good job in creating a tax system that encourages businesses to set up in Britain and the Chancellor has made it clear he wants international businesses to operate here. It is therefore important he does all he can to prevent European politics from perverting his well-intentioned efforts to look at the problem from an international perspective.  

What strikes me as counter-productive about the debates that have taken place over the likes of Starbucks and Google is the anti-business rhetoric from many politicians in the search for public approval. A degree of anger from the public may be understandable, but is it directed at the right targets? Korn/Ferry’s latest “Boardroom Pulse” survey of FTSE 100 chairmen suggests that business leaders think not.

Not sure what that survey asked, but let's assume it was something on the order of, "do you enjoy being publicly pilloried for doing your best to exploit every means of tax reduction your government generously makes available to you?" And the follow up question ought to have been (but probably was not) "Do you enjoy public scrutiny of your constant attempts to influence tax policy at every level of governance in order to achieve that generosity of spirit on the part of lawmakers?" To which the answer would no doubt have likewise been a resounding "business leaders think not." Emerton goes on:

While agreeing that the public has a right to be angry, many respondents felt that dissatisfaction should be directed towards the tax legislation and those in charge of it, rather than the companies observing it. Indeed, it is governments that have failed to modernise international tax legislation in decades, despite the wholesale changes that have taken place in the way businesses operate across borders. 

Oh, but Mr. Emerton, you failed to define a key term here: "those in charge of it." I mean, it's not like the companies that help write the law are shy about it. That is, after all, what organizations like the BIAC and the ICC are for, and if you don't know what the BIAC or ICC are, well, you're not trying hard enough to understand international tax. Look also for example at any number of marketing brochures by the likes of the big four. They are not hiding their influence, they are selling it as a product. Here's one by KPMG that I just happened to come across yesterday:

Our professionals have been directly involved in writing and reviewing the applicable Treasury regulations ... which govern tax-free separations."

You will come across this kind of claim all the time if you do any work at all in tax, so it is disingenuous at best to fail to mention industry influence as a major aspect of tax lawmaking at the national and international levels. But Mr. Emerton moves along quickly to make hay of the old adage that every one has a right to minimize their taxes and for company directors this has become a duty:

The chairmen we surveyed pointed out that company directors have a fiduciary duty to minimise tax bills, providing they are acting in an ethical manner and are not inviting legal risks.

That's a pretty vague provided, and a big weight to carry for fiduciary law. Emerton hammers it home:

Which raises a fundamental question stemming from the tax issue – should the primary duty of a company’s board and senior management be to its shareholders, or to the wider moral and social concerns of the public?

Notice this is assumed to be an either/or and not a both, and it's also committing the false dilemma fallacy. But having committed, we must have follow-through:

The chairmen we talked to were divided. Yes, business leaders have a duty to drive value for their shareholders. And yes, businesses also have a duty to act responsibly as members of wider society. It is the responsibility of the leaders of these businesses to strike a balance and most of them make significant efforts to do so. Inevitably, sometimes they get this balance wrong, but attacking them for trying to drive shareholder value while playing by the rules of the game will solve little. A better focus of our energies is to ensure that international tax laws are strengthened by the regulatory framework governing businesses, allowing them to focus on achieving long-term sustainable value for shareholders and for society. However, policymakers must ensure that this isn’t achieved at the expense of a level playing field for businesses across the world, not just one part of it.

The author channels every "we paid all the tax that is legally due" defense ever given in the face of public pressure against tax dodging. He also invokes the "level playing field" metaphor, which is always invoked for every destructive tax policy that was ever invented in response to every other destructive tax policy that was ever invented. So three cheers for tax industry rhetoric, bandied about in any tax policy dialogue to make sure no one thinks too hard about the systemic choices at issue here.

Score ten points to Mr. Emerton in pointing out that blame for tax dodging rests in a legal system that has been specifically designed to encourage it. But take away nine points for failing to mention the big part business plays in constantly perpetuating that kind of design. Then take away two more points for failing to mention that some things only look like dutiful tax minimization until the tax authority figures out what you are doing, and then they are clearly tax evasion. Cf Dow, Ernst & Young, and Jenkins & Gilchrist tax partners, and that's all in just one week.

That puts the column in the negative territory, which is right about where the author appears to think that the tax liabilities of fiduciary-duty-abiding corporate managers ought to keep their companies' tax burdens.

US fights EU on data privacy law, says EU should respect US right to regulate

For the life of me I cannot understand the FT's headline, which reads "Brussels fights US data privacy push."  No, it's the US sending a team of lobbyists to fight against EU regulation--the penultimate sentence of the article even labels this "aggressive lobbying."

Why are the US lobby troops going into battle? Because the EU seeks to impose a fine of 2% of global annual revenues for any company, anywhere in the world, that violates the data rights accorded to EU citizens. US lobbyists and a sympathetic administration seem all too eager to push other countries to ease up on their regulatory burdens on US companies, so it is not surprising to see them in full force against the EU parliament here. But this effort is especially rich given that it comes at the very moment that the US is seeking to impose a fine of 30% on any company, anywhere in the word, that violates its own data sharing requirements. From the story:

Viviane Reding, EU commissioner for justice, said that the EU was determined to respond decisively to any attempts by US lobbyists – many working for large tech groups such as Google and Facebook – to curb the EU data protection law.

“Data protection is a fundamental right in Europe which is clearly enshrined in the Charter of Fundamental Rights. Whilst this may not be the case in other parts of the world, one thing is clear: if companies want to tap into the European market they have to apply European standards.” 

Ms Reding’s firm approach is likely to spark a diplomatic battle between Brussels and Washington, which has actively been trying to water down the EU’s tough new privacy legislation by handing US companies a de facto exemption from it. 

“Europe, the United States and other democracies around the world share many of the same values,” said William Kennard, US ambassador to the EU at a conference on European data protection and privacy. “We need to accept that each of these democracies has the right to choose whatever legal framework is suited best for them to defend and protect those values.”

Translation: respect our sovereign authority to write the laws we want to write to regulate our companies; don't use sanctions or threat of sanctions to force our companies to abide by your laws.  Or, do that to other countries, but give us an exemption because we're good guys that share your values.  Further:

US tech companies are trying to shield themselves from the legislation as they argue that it would be unfair for them to be subject to EU laws that are too stringent and could result in expensive administrative burdens and hefty fines for errant companies.

So here we have a US ambassador stating the cause for US companies that complain of the "unfairness" of stringent and expensive compliance costs backed by hefty penalties for noncompliance. The EU's position is, we are trying to protect our people wherever they go in the global market. The world is our jurisdiction to the extent it impacts the people we call "ours," and we aim to protect our people.

Are we not coming to a place where it is becoming obvious that global markets cannot peacefully co-exist with autonomous states?  Not one world government at all but instead an impenetrable mass of overlapping and conflicting regulatory states, a venn diagram of massive and chaotic proportions, and no possible way for anyone to comply with all of it.  Stock tip: invest in data compliance companies, they might be the most important drivers of the global economy in the near future.

Germany rejects Swiss Rubik deal...again

Also from Tax Analysts [again, gated]:

The upper house of the German parliament (Bundesrat) has again voted to reject the agreement with Switzerland aimed at taxing the undeclared assets of German taxpayers. 

This was the Rubik deal: basically, Switzerland won't share any information on individual accounts but will collect withholding taxes and pay them over. Here's a short explanation with a horrid graphic. I haven't discussed the deals much here, but it's had lots of play over on TJN [shorter and more to the point here]--it's a pretty wacky deal, really. I mean, how do you keep anyone honest in terms of withholding and paying over the "right amount" of tax if you can't pry any info from them?  From Tax Analysts:

The agreement was similar to one reached between Switzerland and the United Kingdom. It called for a one-time charge on all undeclared assets held in Switzerland as well as an ongoing withholding tax on income earned in undeclared accounts. The agreement also would have allowed German tax authorities to make a limited number of information requests that would not require the level of detail expected for standard treaty requests. 

Social Democratic Party lawmakers have long objected to the agreement, saying it was too lenient and that tax evaders should not be allowed to remain anonymous.

I take it that the deal was little more than an end run around the European Savings Directive. Certainly with Switzerland talking FATCA with the US it's hard to imagine any country in Europe settling for Rubik's weak tea.

Exit taxes and human mobility

An interesting article in Tax Analysts [gated] talks about exit taxes (taxes imposed on assets when a person or entity migrates to another nation) as an impediment to human mobility. I'd say yes, exit taxes do impede mobility, and whether and when they are justified is debatable and under-studied. But there's no universally recognized human right to mobility across national borders, as we well know. (There should be, of course, but that's a discussion for another day).

Instead, every country has high barriers to entry, some more onerous than others, and many have high barriers to exit, some more onerous than others. The US is high on both sides. Many people want to come in and are denied the chance; many others want to leave and can't escape the clutches. It's an odd world.

In any event, the Dutch exit tax has run into trouble becuase Europe has created a right to mobility within the EU zone, via the "freedom of establishment," under article 49 of the Treaty on the Functioning of the European Union (TFEU). The ECJ deemed the Dutch exit tax a violation of that freedom in Commission v. Netherlands (C-301/11), saying that while an exit tax may be justified to ensure a balanced allocation of taxing rights between member states, the Dutch obligation to immediately pay the exit tax was "disproportional." Tax Analysts explains:

Under Dutch tax law, when a taxpayer operating a business moves its place of management to another country, including another EU or European Economic Area member state, the taxpayer becomes subject to a tax assessment for the (deemed) capital gain upon exit. The tax is imposed on the unrealized profits (for example, goodwill, hidden reserves, and tax reserves) attributable to that business. 

The exit tax rules apply both to legal entities and to individuals that relocate their businesses' place of effective management from the Netherlands to another country. 

...As could be expected, in its January 31 decision, the ECJ referred to its previous decision in National Grid Indus. That case concerned Dutch exit tax imposed on a company that relocated its place of effective management from the Netherlands to the United Kingdom. The ECJ approved of the concept of exit taxes because of the need to ensure a balanced allocation of taxing rights between member states. However, a "balanced allocation measure" of this type must satisfy the proportionality test, and the ECJ found the immediate payment obligation disproportional. Because the cross-border relocation exposed the taxpayer to a cash flow disadvantage that would not have existed if the relocation had been domestic, the ECJ deemed the immediate taxation of the unrealized (foreign exchange) gains under some circumstances to be in violation of the TFEU principle of freedom of establishment. 

...This judgment comes as no surprise, as both the state secretary of finance (through the above policy statement) and the lower house of the Dutch parliament (through a draft bill) had already recognized this restriction in domestic law. On December 4, 2012, the lower house approved a bill of law concerning the deferral of exit tax. ... After the bill of law is approved by the upper house (which is expected in early 2013), the new rules will take effect retroactively from November 29, 2011 (the date of the ECJ decision in National Grid Indus). 

The Dutch parliament has drafted a bill to allow for deferral on a retroactive basis and the authors conclude that hopefully, a lesson has been learned. For those outside the EU zone, of course, there is no great comfort to be had but this is another interesting development on the connection between the state and the individual in a world featuring ever-increasing mobility.

FATCA will/will not work: discuss

TJN ran two stories recently on FATCA's impact on tax competition. Which is right?

Story #1 says Austria and Luxembourg "may be forced to abandon banking secrecy because, in agreeing to implement FATCA with the US:

"EU member states could impose [automatic information exchange] on these two recalcitrant jurisdictions by invoking the 'most favoured nation' clause, explains Pascal Saint-Amans of the OECD."

 EU Directive 2011/16/EU contains a most favoured nation clause: if a Member State provides wider cooperation to a third country than that provided for under the directive it may not refuse such wider cooperation to another Member State that requests it on its own behalf."

So if these countries provide automatic information exchange to the U.S., then they are not allowed to refuse it to other E.U. member states.

TJN says thanks to FATCA, "the all-important amendments to the EU Savings Tax Directive are therefore likely to be passed this year, and Swiss efforts to torpedo this transparency initiative will have failed." Conclusion: FATCA will turn into its ultimately goal, a global tracing system under which no one can hide behind bank secrecy to evade their taxes, what some like to call GATCA.

Story #2 says Hong Kong is set to grab all the tax haven business:

Hong Kong just became an even better place for company directors who value secrecy. The Chinese territory, already ranked fourth in a list of 71 "secrecy jurisdictions" by the Tax Justice Network, has proposed new laws making it harder to identify the directors of non-public companies.

TJN says in response: "Tax havens. As we have said - this is where real power in the world increasingly lies. And the race to the bottom on secrecy continues apace."

If FATCA will shut Austria and Luxembourg as tax havens, why not Hong Kong?

The IGAs don't, I think, really explain things: in the absence of IGAs, FATCA is supposed to apply directly to all foreign financial institutions.  So it is the IGAs that would change the scene on the EU directive.  These agreements, let's be fair, really don't have a single thing to do with the FATCA statute from a legal perspective.  In other words, no one in the world needs FATCA to order into an agreement on automatic information exchange, countries could have (and in some cases have already--US, Canada) agreed on automatic info exchange years, decades, and even a century ago (which in fact they also did, see some of US early agreements).  FATCA is just a very big stick that is forcing Luxembourg and Austria to so agree, thus apparently opening themselves up to similar agreements throughout the EU.  Score one for dreams of multilateralism, but only among rich countries.

But Hong Kong, poised to take over, shows why FATCA can't get us to GATCA, i.e., there will be no worldwide information exchange, and the world is still safe for tax cheats. The reason for this lies in s S. 1471(f), which reads:

Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—

(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing...

(3) any foreign central bank of issue...

Translation seems to be: no big stick on payments that go to state-owned financial institutions.  That, I take it, describes China's entire financial system, including Hong Kong and Singapore.  Tell me if I am wrong about this, because I truly want to know.  If I am right, then FATCA moves tax havens around on the board but doesn't actually end the gravy train for tax cheats.

If that in turn is true, then the application of onerous compliance and filing issues on americans living in high tax countries to try to hunt down tax cheats who will not even be there seems particularly troublesome.

US to Europe: our airlines won't obey your tax laws

The EU is trying to take the high road on pollution, but the US insists on the low road:

The Senate unanimously passed a bill on Saturday that would shield U.S. airlines from paying for their carbon emissions on European flights, pressuring the European Union to back down from applying its emissions law to foreign carriers.

...Republican Senator John Thune, a sponsor of the measure, said it sent a "strong message" to the EU that it cannot impose taxes on the United States. 

The aviation industry is happy of course; as the EU was already considering backing down, "to avert a trade war with major economic powers such as China and the United States, allowing time to forge a global agreement on climate charges for the aviation industry."  But that's waiting for Godot: "attempts to address this problem on a global basis have been festering for more than 15 years in ICAO and the United States is at the centre of the problem," according to Transport & Environment, an NGO based in Brussels.

In the meantime, I'm not sure I understand how the U.S. can simply declare that its airline industry can ignore the law in Europe.

Tax transparency: EU development

Richard Murphy points to a press release from Global Witness regarding developments in country-by-country reporting for the extractive industries in the EU:

Global Witness welcome today's European Parliamentary committee vote requiring that EU oil, gas, mining and timber companies publish their payments to governments to help deter corruption.  

The vote brings Europe one step closer to shining a light on payments worth billions of Euros by extractive companies to governments, which have previously remained secret, enabling corrupt government officials to siphon off or misappropriate natural resource revenues.

...The text also contains thresholds for payments that align with similar US 'sunshine' rules for US listed extractives companies set at the end of August.

...a final version of the directive goes to all MEPs for a European Parliamentary vote later in the year.

Arlene McCarthy MEP, the Parliament Rapporteur on the Transparency law, said after the vote in the legal affairs committee: "With this vote we now have a strong negotiating mandate to force the Member States and Commission to accept the Parliament's amendments, putting us on track to create strong global transparency standards, with equivalent rules in the EU and the US." 

More at the link.  

US continues campaign against EU airline tax

The US will host a meeting in order to "pil[e] further pressure on the EU to back down and the international community to find a global solution..." to greenhouse gas emissions.  From Reuters.  "Finding a global solution" is of course a euphemism for "doing nothing."  That's because of course the EU tax is a step toward a global solution, and it would be effectively global if the US adopted it.  Instead, the plan here is to gather officials from similarly opposing countries including India and China--a "coalition of the unwilling"--to agree to retaliatory measures against the EU.  Behind every diplomatic effort is a lobbyist:

Airlines will not have to pay for the permits until next year, and are pressing their governments to agree on a global deal before then.   

Russ Bailey, a senior attorney for the Air Line Pilots Association, a U.S. lobby group, said time is running out for EU ETS opponents to come up with a viable alternative. 

"There is a sense of urgency because airlines have to start paying next April. We hope there will be a resolution that becomes clear enough before then," he told Reuters Point Carbon."  

I doubt that Bailey has in mind a resolution that every country will adopt the EU system, even though that would be crystal clear as far as resolutions go.  The global deal sought here is reversion to the status quo, of that there can be little doubt.  

Austerity vs the Social Contract

Yves Smith has a post on how austerity is being used to destroy the social contract:

Greece has been told to reduce health care from its current 10% of GDP to below 6%. Imagine what would happen if the US were told to cut its medical expenditures by over 40% in a one or two year period. And if the IMF boot were put on the US neck, and we were told to get medical spending down to 6% of GDP, we'd need to reduce it by 2/3.

In a Real News Network interview, Rob Johnson of the Roosevelt Institute describes further how the EuroCrisis has become a tool to break the social contract:

More discussion and a lot of commentary at the link.

US pressure on EU tax

Will the EU airline emissions tax prevail, or will it fall under pressure from the US?   Opinio juris points us to this story:

(Reuters) – Senate lawmakers and the Obama administration on Wednesday stiffened their opposition to a European law that targets emissions from commercial jetliners and applied new pressure on Brussels and the United Nations to resolve global concerns. 

...The issue is especially important to the United States, whose airlines have a mature and lucrative transatlantic business. American Airlines, United Airlines and Delta Air Lines are looking to grow international travel.

The tax is described as a fee for permits to fly to and from EU airports.  That's not a tax at all really.  It's a toll charge.  Don't want to pay the toll?  Don't fly to or from Europe.  Why are toll charges for roads, or consumption taxes for that matter, perfectly uncontroversial but toll charges for flying a cardinal sin?  The answer is plainly that the airline industry wants to continue externalizing the costs of pollution on the public and the EU tax makes that harder for them to do, so the answer is to seek help from US government to stop that happening.  I call it a clear breach of the government's fiduciary to duty to the polity at large to help industry accomplish this goal (I've been reading Evan Fox-Decent).

Ku says: "The ECJ has held that the EU tax does not violate international treaties or customary law.  This seems plausible to me, but I wonder if the political pushback the EU is getting will ultimately force it to back off.  I'm betting yes."

I would like to think the EU can resist the pressure, but I fear that Ku is making the correct bet.  US industry lobbyists are very well funded and organized and have proved time and time again their ability to get US lawmakers to exert pressure on other countries to change their laws to suit US business interests.  In the case of India's controversial post-Vodafone tax reform, the lobbyists might not have been successful in preventing passage of the law, but they might have prevailed anyway if the law has little effect in practice as this story suggests.  The game theorists out there can comment on the strategy behind pushing forward with a formal law under the assumption that enforcement will be nil.  Sounds like Dodd-Frank, and it seems like an all-too common strategy for politicians, especially in tax, maybe in other regulatory areas involving lots of complexity and trickery.

One additional aspect of the Reuters story is that Transportation Secretary Ray LaHood is calling the EU an outlier, acting alone and unilaterally, and that the US needs to see "real signs of flexibility from the EU."  No mention of why they should be entitled to hold such expectations, why the EU should not be allowed to govern itself.  But a threat if "real signs of flexibility" are not seen:  "The administration has threatened unspecified action if a compromise is not reached, but LaHood said no decision had been made on possible steps.  He said discussions within the administration, however, are centered on the possibility of the United States filing a formal complaint to the United Nations."

After trying to stop the UN from doing something it doesn't like, the US might like the UN to help it stop the EU from doing something else it doesn't like.  I thought the US wanted out of the UN: it's a threat to freedom, it's neither wise nor neutral, etc.  There's a song for this kind of relationship.

EU fin trans tax

The EU proposes an FTT of 0.1% for shares and bonds and 0.01% for derivatives, after a couple of years of debate:

Parliament has been calling for a financial transaction tax for close to two years and the Commission tabled a legislative proposal for one late in 2011.  The latest Eurobarometer survey shows that 66% of Europeans favour such a tax.

It's designed to slow down speculative trading of course and includes this compliance measure:

The resolution also raises the stakes to make evading the FTT potentially far more expensive than paying it. Taking the UK stamp duty approach, the text links payment of the FTT to the acquisition of legal ownership rights. This means that if the buyer of a security did not pay the FTT, he or she would not be legally certain of owning that security.  As FTT rates would be low, this risk is expected to far outweigh any potential financial gain from evasion.

Like buying a car, you can't get a license plate unless you pay your sales taxes; here, no tax, no title.  But compliance is complicated, is it not, by existing rules that allow for confidentiality of ownership and chains of ownership through trusts etc outside the jurisdiction?  I'm not sure the stamp duty method can cope with this.