Next week at McGill: Van Apeldoorn on Taxation, Exploitation, and Human Rights

On December 6, Prof. Laurens van Apeldoorn of the University of Leiden will present a working paper at McGill, hosted by the Centre for Human Rights and Legal Pluralism at McGill Law and the Stikeman Chair in Tax Law (me). Here is the abstract:

Exploitation in global supply chains impacts prices that in turn bear on the allocation of corporate income tax revenue to jurisdictions where multinational enterprises transact. This presentation will develop a concept of exploitation based on the violation of the right to a living wage, put this in the context of discussions of transfer mispricing in multinational enterprises, and consider the economic dimension of the allocation of corporate income tax revenue in relation to public goods provisions in low-income countries where exploitation occurs.

Prof. Van Apeldoorn is currently visiting McGill’s Centre for Human Rights and Legal Pluralism as an O’Brien Fellow in Residence (Sept-Dec 2017). He is Assistant Professor of Philosophy and a member of the Centre for Political Philosophy at Leiden University, where his research broadly focuses on the nature and prospects of the sovereign state and more recently considers the principles of international taxation in relation to global justice. As some readers will no doubt be aware, Laurens' presentation connects to collaborative work he and I are undertaking that probes the meaning and significance of taxing income "where value is created," working paper forthcoming.

The talk will be held from 1pm to 12:30 with lunch being served beginning at 12:30, in Chancellor Day Hall, Stephen Scott Seminar Room (OCDH 16), 3644 rue Peel, Montreal, Quebec. This event is free and open to all.

Tax Sovereignty in the BEPS Era

Kluwer law has recently published Tax Sovereignty in the BEPS Era, a collection of contributions I co-edited with Sergio Rocha, in which we and a slate of authors from a range of countries explore the impact of the BEPS initiative on "tax sovereignty"--which I take to mean the autonomy that nations seek to exercise over tax policy. Here is the description:

Tax Sovereignty in the BEPS Era focuses on how national tax sovereignty has been impacted by recent developments in international taxation, notably following the OECD/G-20 Base Erosion and Profit Shifting (BEPS) Project. The power of a country to freely design its tax system is generally understood to be an integral feature of sovereignty. However, as an inevitable result of globalization and income mobility, one country’s exercise of tax sovereignty often overlaps, interferes with or even impedes that of another. In this collection of chapters, internationally respected practitioners and academics reveal how the OECD’s BEPS initiative, although a major step in the right direction, is insufficient in resolving the tax sovereignty paradox. Each contribution deals with different facets of a single topic: How tax sovereignty is shaped in a post-BEPS world.

And here is the table of contents:

Part I The Essential Paradox of Tax Sovereignty

• CH 1: BEPS and the Power to Tax, Allison Christians          
• CH 2: Tax Sovereignty and Digital Economy in Post-BEPS Times, Ramon Tomazela Santos & Sergio André Rocha
• CH 3: Justification and Implementation of the International Allocation of Taxing Rights: Can We Take One Thing at a Time?, Luís Eduardo Schoueri & Ricardo André Galendi Júnior
• CH 4: An Essay on BEPS, Sovereignty, and Taxation, Yariv Brauner

Part II    Challenge to the Foundational Principles of Source and Residence

• CH 5: Evaluating BEPS, Reuven S. Avi-Yonah & Haiyan Xu
• CH 6: Jurisdictional Excesses in BEPS’ Times: National Appropriation of an Enhanced Global Tax Basis, Guillermo O. Teijeiro
• CH 7: Taxing the Consumption of Digital Goods, Aleksandra Bal

Part III  Acceptance and Implementation of Consensus by Differently-Situated States

• CH 8: The Birth of a New International Tax Framework and the Role of Developing Countries, Natalia Quiñones
• CH 9: The Other Side of BEPS: “Imperial Taxation” and “International Tax Imperialism”, Sergio André Rocha
• CH 10: Country-by-Country Over-Reporting? National Sovereignty, International Tax Transparency, and the Inclusive Framework on BEPS, Romero J.S. Tavares
• CH 11; How Are We Doing with BEPS Recommendations in the EU?, Tomas Balco & Xeniya Yeroshenko      
• CH 12: U.S. Tax Sovereignty and the BEPS Project, Tracy A. Kaye 

And finally, here is a brief description:

The book unfolds in three parts. The first, The Essential Paradox of Tax Sovereignty, features four chapters.

• In chapter 1, Christians introduces the topic by demonstrating how BEPS arose from the paradox of tax sovereignty and analyzing why multilateral cooperation and soft law consensus became the preferred solutions to a loss of autonomy over national tax policy. The chapter concludes that without meaningful multilateralism in the development of global tax norms, the paradox of tax sovereignty will necessarily continue and worsen, preventing resolution of identified problems for the foreseeable future. 
• Tomazela &; Rocha pick up this thread in chapter 2, where they demonstrate that BEPS addresses the symptoms, but not the problems, of the sovereignty paradox. In their view, the central defining problem of this paradox is an ill-defined jurisdiction concept. The chapter demonstrates why tax policymakers need to change the conventional wisdom on sovereignty in order to incorporate new nexus connections due to the changing nature of trade and commerce. 
•  In chapter 3, Schoueri & Galendi further the inquiry by providing a detailed analysis of the interaction of contemporary cooperation efforts with the sovereignty of states in light of historical claims in economic allegiance, economic neutrality and now cooperation against abusive behaviour. 
• Brauner rounds out this first part in chapter 4, which establishes the evolution of the concept of tax sovereignty. The chapter proposes an instrumental role for sovereignty in the process of improving cooperation and coordination of tax policies among productive (non-tax haven) countries, to balance claims and serve as a safeguard against political (in this case international) chaos. Brauner concludes that such a change to the business of international tax law would ensure at least an opportunity for all participants to succeed on their own terms. 

 Part Two of the book, Challenge to the Foundational Principles of Source and Residence, takes an in depth look at why residence and source continue to be the two essential building blocks of tax sovereignty and the backbone of the international tax system, surviving BEPS but still subject to multiple challenges in theory and practice.

• In chapter 5, Avi-Yonah & Xu argue that BEPS simply cannot succeed in solving the sovereignty paradox because BEPS follows the flawed theory of the benefits principle in assigning the jurisdiction to tax. Avi-Yonah and Xu therefore make a compelling argument that for the international tax regime to flourish in the face of sovereign and autonomous states, countries must commit to full residence-based taxation of active income with a foreign tax credit granted for source-based taxation. 
• In chapter 6, Tejeiro continues the analysis of the fundamental jurisdictional building blocks, demonstrating that by resorting to legal fictions within BEPS and beyond it, states are attempting to enlarge the scope of their personal or economic nexus, or to grasp taxable events and bases beyond their proper reach under well-settled international law rules and principles. 
• Bal furthers the discussion in chapter 7, with an analysis of how digital commerce has upended traditional notions of source and residence. Bal advocates the consumer's usual residence as a good approximation of the place of actual consumption and therefore the best-justified place of taxation. 

Part Three of the book, Acceptance and Implementation by Differently-Situated States, considers tax sovereignty after BEPS from a range of perspectives. Chapters 8 through 10 focus on perspectives from lower income or developing countries, while chapters 11 and 12 review the landscape from the perspective of Europe and the United States, respectively.

• In chapter 8, Quinones explores how developing countries might take advantage of the new international tax architecture, developed for purposes of coordinating the BEPS action plans, to ensure that their voices are truly shaping the standards. She argues that the knowledge gap between developing and developed is getting narrower instead of wider, with major negative impacts expected for the international tax order. 
• Rocha continues this discussion in chapter 9, with a proposal: instead of simply accepting the BEPS Project’s recommendations and their reliance on historical decisions about what constitutes a country’s “fair share of tax”, developing countries should join in the formation of a Developing Countries’ International Tax Regime to focus discourse on the rightful limits of states’ taxing powers. 
• Furthering the theme of autonomous priority-setting, in chapter 10 Tavares focuses in on a key part of the BEPS consensus, exploring whether implementing the CBCR standard, without a deeper transfer pricing reform, should be viewed as a priority in every country. He further questions whether this particular initiative, even if important, is worthy of mobilization of the scarce resources of developing countries. Tavares concludes with an incisive review of the role of the inclusive framework in prioritizing some needs over others. 
• Balco & Yeroshenko then consider BEPS implementation from the very different perspective of the EU in chapter 11. The chapter demonstrates that even within the EU, BEPS implementation is not straightforward, as the interests of member states sometimes conflict and the basic notion of tax sovereignty remains fundamental even while tax coordination and harmonization across the EU expands. However, the authors note that the progress made in the last several years on key cooperation norms, which was largely inspired by BEPS, has been unprecedented. 
• Finally, Kaye provides a capstone to the book in chapter 12, where she makes the convincing case that although some in the United States saw the BEPS Project as a threat to US tax sovereignty, this project was in fact necessary in order for the United States to effectively wield its tax sovereignty. Kaye’s chapter thus ends the book with a clear picture of the ongoing paradox of tax sovereignty in the world after BEPS.

Some Recent Scholarship on Tax and Human Rights

I've posted on SSRN a new work in progress and two recently published works on the topic of taxation and human rights:

Human Rights at the Borders of Tax Sovereignty

Tax scholarship typically presumes the state’s power to tax and therefore rarely concerns itself with analyzing which relationships between a government and a potential taxpayer normatively justify taxation, and which do not. This paper presents the case for undertaking such an analysis as a matter of the state’s obligation to observe and protect fundamental human rights. It begins by examining existing frameworks for understanding how a taxpayer population is and ought to be defined. It then analyzes potential harms created by an improperly expansive taxpayer category, and those created by excluding from consideration those beyond the polity even if directly impacted by the tax regime. It concludes that a modified membership principle is a more acceptable framework for normative analysis of the jurisdiction to tax, even while acknowledging the overwhelming weight of existing perceptions about the bounds of the polity and the state-citizen relationship as significant barriers to acceptance.

Taxpayer Rights in Canada

Canada is one of many countries where taxpayer rights are becoming an increasingly common topic of discourse among policymakers, practitioners, and the public. Especially in light of recent developments regarding the global expansion of taxpayer information exchange, the role of taxpayer privacy and confidentiality rights have emerged as significant legal issues. This chapter surveys the contemporary theoretical, legal, and political landscape of taxpayer rights in Canada. Part I outlines the theoretical and legal sources from which taxpayers may be said to have rights. Part II examines Canada’s Taxpayer Bill of Rights and considers some of the historical, legal, and political issues that give rise to their core principles. Part III focuses in on the taxpayer’s right to privacy and confidentiality in the context of evolving global trends surrounding the use and exchange of taxpayer information. The Chapter concludes with some observations about where taxpayer rights may be headed in Canada.

Taxpayer Rights in the United States

Despite abundant sources of legal and quasi-legal protection against abuses of individual rights and freedoms, there are areas of contention regarding respect for taxpayer rights in the United States. This chapter lays out the framework of taxpayer rights and considers their meaning by considering a contemporary case, namely, the recent expansion of citizenship-based taxation through globally enforced financial asset reporting and information exchange. Part I outlines the theoretical and legal sources from which taxpayers may be said to have rights. Part II examines the US Taxpayer Bill of Rights and considers some of the historical, legal, and political issues that give rise to their core principles. Part III focuses in on the taxpayer’s right to be informed in the context of citizenship-based taxation in a globalized world. The Chapter concludes with some observations about where taxpayer rights may be headed in the United States.

Soft Tax Law & Multilateralism: Modifying treaties with anti-BEPS measures

As observers of global tax policy know, international tax issues are dealt with in bilateral treaties that more or less adhere to a 'model' tax treaty developed and periodically updated by the OECD (provisions in a rival UN Model are occasionally invoked, and the US has its own model with its own distinctions and idiosyncrasies). There are those who have long lamented the problem of having thousands of bilateral agreements that can't be easily or quickly updated when the OECD revises the model (thus curbing the impact of OECD soft law).

As part of the base erosion and profit shifting (BEPS) initiative, the OECD is currently developing a
"Multilateral instrument on tax treaty measures to tackle BEPS" which would be used to 'modify' all existing tax treaties in force among signatory countries. The OECD says this mechanism (which it calls an 'innovative approach') 'would preserve the bilateral nature of tax treaties' even as it modified all existing bilateral treaties 'in a synchronized way'. The OECD says there are "limited precedents" for modifying bilateral treaties with a multilateral instrument.

But are there really any precedents at all? I couldn't think of any off-hand. A quick check with a few international law colleagues yielded few comparators. Tim Meyer suggested the EU harmonizing efforts on Bilateral Investment Treaties (BITs) as a candidate, albeit noting that this does not contemplate directly overriding existing BITs but requires EU members to change their bilateral arrangements to conform with EU investment policy.

Tim also made the interesting observation that"treaties that reference customary international law standards, such as BITs’ reference to the minimum standard of treatment" could be overridden in a somewhat similar fashion. He explained that "[i]f custom changed, such as through the promulgation of soft law documents or multilateral treaties, it would change the BITs that incorporate the customary standard. That isn’t exactly the same thing [as the new OECD multilateral instrument], but similar."

The OECD's work in developing "global consensus" has in the past led some to describe OECD standards as "soft law" and others to suggest that the OECD may be understood to articulate customary international tax law; moreover the OECD has itself now taken to describing its model as soft law (including in its 2014 report on the multilateral instrument). I have urged caution in defining OECD proclamations as soft law or customary law given the OECD's exclusive membership of mainly rich countries, which excludes all of the BRICs and most of the rest of the world, as I think the nomenclature lends an imprimatur of legitimacy to OECD proclamations that may not be deserved. But it seems clear that the BEPS action items, and the new global forum to "monitor compliance" with them, are intended to overcome the exclusivity problem while endowing OECD norms with ever-greater law-like effect (without offending the unicorn that is "tax sovereignty").

It seems likely to me that a multilateral agreement that modifies existing tax treaties is actually intended to ultimately replace those treaties, making small and incremental modifications until the underlying bilateral treaties become superfluous or extinct. Accordingly I view the OECD's multilateral 'modification' function to be an exercise in creeping harmonization as well as "ossification" (or maybe transformation) of soft law into hard law.

Adding together the other elements of BEPS, including the new global forum to compel national compliance with 'minimum standards' as they develop, I recently suggested that the OECD's tax folks are giving birth to a new global tax order complete with rules, audits, and reform processes. This is perhaps not the order envisioned by those who have in the past called for global tax coordination in a supranational body for the sake of pursuing global tax justice. If the OECD-based regime is not fully supranational yet, it is close, and it looks increasingly inevitable once it sets a multilateral agreement in place.

There are many fascinating threads of soft law and public international law are at work in these developments. I recently came across an article by Jung-Hong Kim on the topic, entitled A New Age of Multilateralism in International Taxation?, abstract:

 With the OECD/G20 BEPS project, the current international tax landscape is facing challenges and changes unprecedented for the past several decades. This paper looks at the development of bilateralism and multilateralism in the current international tax regime, takes stock of the BEPS works and analyzes the proposed Multilateral Instrument. Then, the paper discusses the emerging multilateral tax order in international taxation. 

Historically, bilateralism has been the constant trend of tax treaties, and later multilateral tax treaties have emerged in some regional areas. There being some deficiencies with bilateral treaties such as dilapidation, delay in entry into force and vulnerability to treaty shopping, the experience of multilateral tax treaties can help build a foundation for future development of a multilateral tax treaty to complement the bilateral tax treaty network. 

With a caveat that BEPS output is fluid at this stage, drawing on the various examples of existing non-tax multilateral treaties, the Multilateral Instrument will be a desirable and feasible tool to reflect the necessary changes resulting from BEPS project. For Korea whose tax treaties need a systematic upgrade after a noticeable growth in quantity, the negotiation on the Multilateral Instrument of the BEPS project will be a great opportunity to revisit the existing bilateral tax treaties and to make appropriate amendments with bilateral treaty partners in multilateral format. 

Beyond BEPS, supposing that the work on the Multilateral Instrument results in a multilateral convention, the inevitable question is the emergence of a multilateral tax order. In terms of feasibility of such a multilateral tax order, there are both positive and negative sides. The positive side is that the relative success of Global Forum on Tax Transparency can be a guidance on the post-BEPS multilateral tax order. On the other hand, the phenomenon of diminishing multilateral trade regime and bilateral investment treaty regime seem to be a negative evidence. Another point to consider is the appropriate forum to manage the multilateral tax order. For this, there are two competing organizations, i.e., the OECD CFA and UN tax committee, each of which having some limit to be developed into an intergovernmental forum. 

After all, the essential question will be how those major players such as the U.S., EU, China, India etc. could build a consensus by compromising on the institutional and substantive aspects of the multilateral tax order. For now, for the emerging multilateral tax order to proceed on a sound basis, the work of the BEPS project should bear substantive and meaningful fruits. 

This is a useful contribution to the discussion and I would like to see more analysis on the OECD's developments, especially from the perspective of nonOECD countries that are being drawn in as BEPS Associates. I would be interested to hear from readers with thoughts on the public international law foundations and precedents, particularly any comparator regimes that I should be thinking about.

Why is the OECD so afraid of formulary apportionment?

The OECD has been rolling out a very modest version of country-by-country reporting --only really, really big companies will have to report, the info must be kept strictly hidden from public view, the info mostly won't flow to the world's poorest jurisdictions--and now, from its Feb 6 report, I see that governments must use the info they obtain only to further arms' length transfer pricing, and not to try switching to formulary apportionment:

"Jurisdictions should not propose adjustments to the income of any taxpayer on the basis of an income allocation formula based on the data from the CbC Report"

Formulary apportionment must be a pretty effective way to tax multinationals at source, if the OECD is conditioning government-to-government data flows on not using it.

The picture I am drawing from the OECD's guidelines for CBC is very troubling. If I understand this correctly, the OECD wants info to flow from all jurisdictions to the ultimate parent jurisdiction, which will then dispense info to other jurisdictions provided they have tax information exchange agreements (TIEAs) with the parent jurisdiction, and provided they keep the secrets and don't use the information to switch to formulary apportionment, even if that is a better system for them than arm's length transfer pricing.

Since most multinationals are based in OECD countries, it starts to really matter which jurisdictions have TIEAs with these countries. Indeed, these TIEAs are starting to be the world's answer to everything tax cooperation-related. This means that a country without TIEAs is very quickly finding itself out in the cold when it comes to the brave new world of tax transparency being built by the USA and the OECD.

Just taking a quick zoom in to this world, it should be noted that the United States, home to many of the world's biggest and most profitable multinationals, has very few tax agreements with countries in Sub-Saharan Africa. It is not necessarily that these countries do not want tax agreements with the United States. Many of them have requested tax agreements for many years. But only the US decides who has a tax agreement with the US.

What does this mean for a country in Sub-Saharan Africa that is the destination for a US multinational's direct investment dollars? I am afraid it means that most will continue to struggle to impose income taxes on these multinationals. They will in effect be forced to continue using arm's length transfer pricing even if it is too expensive for them to administer effectively, and even if they would prefer to use formulary apportionment. Meanwhile, they will be forced to set up complex financial asset monitoring and reporting systems to ensure they are not locked out of the global financial system by the US via FATCA or the OECD via the common reporting standard.

Yet even after doing all of that, without the requisite tax agreements in place, these countries seem increasingly likely to receive no tax information from the US or the OECD. That leaves them virtually powerless to stop tax evasion by their own residents, who may freely continue to hide their financial assets in the United States and elsewhere. It also leaves them at a serious disadvantage in addressing complex tax avoidance by US and other OECD-based multinationals.

So much for that quaint notion of "tax sovereignty" the US and the OECD are always so worried about. And so much, I think, for the notion that developing countries have an effective voice in OECD decision-making. The OECD has been very clear that it did not want to even discuss formulary apportionment, even as it purported to review the fundamental international tax structure in its BEPS project. With this latest guidance, it seems the OECD is intent on building a framework that will eliminate any possibility for future discussion for formulary apportionment, as well.

Luring the rich: investor residence and citizenship packages

CBC ran a story yesterday on Canada allowing rich people to buy permanent residency status, which provoked some discussion on twitter about whether such a thing was something associated with secrecy jurisdiction (aka tax haven) behavior. I don't know what kind of behavior this is, but I think it is widespread and growing. It's all part of the complicated dance politicians around the world are doing: all trying to lure rich people and multinationals from everywhere else, in a relentless quest to keep impossible electoral promises about jobs and growth.

I've done some research on and off on these residence and citizenship purchase programs. My student Alexander Robinson got interested in the topic and put together a table last year; below are some of the basic numbers, more detail available on file. All the programs listed here are for residency unless citizenship is indicated. One important recent development that is missing in the table involves Puerto Rico, which I suggested a long time ago was poised to be the last, best tax haven for US citizens (while the U.S. will remain the world's last, best tax haven for everyone else in the world, but that is a different story). Janet Novack ran a story on PR yesterday, Puerto Rico Expands Tax Haven Deal For Americans To Its Own Emigrants. It seems policymakers understand PR's unique position in the world vis à vis US citizens, but so far it is having a limited luring effect.

Country	Type of Program	Cost
Antigua &Barbuda	National Development Fund (non-refundable)	USD 675,000.00
	Real-Estate	USD 1,080,000.00
	Business Investment (Sole Investor)	USD 4,000,000.00
	Business Investment (Two or more Investors)	USD 13,500,000.00
Australia	Significant Investor Program	AUD 5,000,000
Bulgaria	Investor (Full Investment)	BGN 1,000,000
	Investor (Financed Investment	BGN 180,000
	Investor (Fast Track Option)	BGN 2,000,000
Canada	Investment	CAD 800,000.00
	Investment - Quebec Investment	CAD 800,000.00
	Self-Employed Worker Program (Quebec)
	Quebec Entrepreneur Program
	Canadian Entrepreneur Program - (CDN Venture Fund)	CAD 200,000.00
	Canadian Self-Employed Program (Start Up - CDN Angel Investor)	CAD 750,000.00
China	Investor (1)	$2,000,000.00
	Investor (2)	$1,000,000.00
	Investor (3)	$500,000.00
	Investor (4)	$500,000.00
Cyprus	Direct Citizenship by Investment Program	EUR 200,000.00
Dominica	Package A:  Single Applicant (Non-Refundable)	USD 100,000.00
	Package B:  Family Application (Spouse, Non-Refundable)	USD 175,000.00
	Package C:  Family Application 2 (Spouse, 2 children, Non-Refundable	USD 200,000.00
	Package D:  Family Application Three	USD 250,000.00
Greece	Residency - Strategic Investments	EUR 250,000.00
	Residency - Property Purchase	EUR 250,000.00
Grenada	Approved Real Estate Project	USD 500,000.00
	Non-Refundable Donation	USD 200,000.00
Hong Kong	Capital Investment Program - Applications After 14 Oct 2010	HKD 10,000,000.00
	Capital Investment Program - Applications Before 14 Oct 2010	HKD 6,500,000.00
Ireland 5 Regimes	Investor - Government Bonds	EUR 2,000,000.00
	Investor - Job Producing Irish Companies	EUR 1,000,000.00
	Investor - Irish Publicly traded companies
	Investor - Government Bonds	EUR 2,000,000.00
	Investor - Venture Capital	EUR 1,000,000.00
	Investor - Blend (50% Property & 50% Securities)	EUR 1,000,000.00
	Investor - Endowment Funds	EUR 500,000.00
	Start-Up Entrepreneur Program	EUR 75,000.00
Latvia 4 Regimes	Investor - Equity Capital Investment	LVL 25,000.00
	Investor - Real Estate - (Regia area)	LVL 100,000.00
	Investor - Real Estate - (Other)	LVL 50,000.00
	Investor - Credit Institution	LVL 200,000.00
Malta	Investor	EUR 650,000.00
New Zealand	Investor Plus	NZD 10,000,000.00
	Investor	NZD 1,500,000.00
Panama	Macro Company Investment	USD 160,000.00
(Residency and Second Passport)	Mixed Fixed Deposit/Real-Estate	USD 300,000.00
	Economic Investment in Real Estate	USD 300,000.00
	Forest Investor	USD 80,000.00
	Fixed Term Deposit Real Estate	USD 300,000.00
Portugal	Property Investment	USD 500,000.00
	Financial Investment	1,000,000.00 €
	Creation of 10 Permanent Jobs
Saint-Kitts and Nevis	Citizenship by Investment	Real Estate Option
	SIDF Contribution	USD 250,000.00
Singapore	Global Investors Program - Option A	SGD 2,500,000.00
	Global Investors Program - Option B	SGD 2,500,000.00
Spain	Investment in Spanish Companies	EUR 1,000,000.00
	Deposit with Spanish Financial Entities	EUR 1,000,000.00
	Real-Estate Investment	EUR 500,000.00
	Business Project	Undefined
	Entrepreneur	Undefined
	Highly Qualified Professionals	Undefined Investment
	Other Category	Employees transferred to Spain within the same group of companies
Switzerland	Swiss Lump Sum Taxation	CHF 150,000.00
United States	Investor Visa (1) - EB 5	USD 1,000,000.00
	Investor Visa (2) - EB 5	USD 500,000.00
United Kingdom	Investor (type A)	£1,000,000.00
	Investor (type B)	net asset value of £2,000,000 plus loan £1,000,000 from a British Institution
	Exceptional Talent
	Entrepreneur	£ 50,000 of venture capital money

Here is the only reason why Ted Cruz's citizenship is interesting.

It is not whether he's natural born and therefore eligible for the presidency. It is that Ted Cruz has suggested that he did not even realize he might be a Canadian citizen until the Dallas Morning News suggested it to him and asked a few experts on Canadian citizenship law to confirm that Canada, like the US, like many, many countries, confers birthright citizenship on people born in the territory whether they request it, or want it, or not.

This is interesting because this is all happening during America's ongoing roundup of every person on the planet who may be a US citizen because they were born in the US or by birthright through their lineage, for the purpose of imposing draconian penalties for failure to file tax returns and asset information reports under the US citizenship-based tax regime. This is the only tax regime in the world that treats lineage alone as a justification to impose worldwide taxation. Ted Cruz's expressed thoughtlessness about his own dual citizenship, coupled with his breezy intention to simply get rid of the unwanted extra citizenship, beautifully illustrates the major problem with citizenship-based taxation and why no other country on the planet would try to enforce such a system.

The US is right now imposing enormous penalties and unleashing general chaos on people living in other countries with US citizenship, both by newly enforcing long-ignored rules and by layering on top of these rules a new and more draconian layer of enforcement. The chaos comes in the form of fear-inducing, devilishly complicated and duplicative paperwork, and penalties, most of all penalties, and it is being piled on to millions of people around the world, many of whom, like Cruz, are very possibly only beginning to understanding that citizenship status is mostly conferred upon rather than chosen by individuals.

Ted Cruz should consider himself very lucky, because the citizenship he claims he didn't realize he had doesn't carry any punishment for his failure to recognize it. Moreover renouncing, if he really intends to follow through on that promise, will be relatively simple, cheap, and painless other than the cost to his US political career, if any.

Not so if he had lived his life in Canada with his current apparent dual status. US citizens abroad now understand that discovering ties to the US means discovering a world of obligations and consequences flowing from citizenship that you were expected to know and obey. Ignorance of the law being no excuse, the punishments range from the merely ridiculous--many times any tax that would have ever been due--to the infuriating: life savings wiped out and many future tax savings sponsored by your home government, such as in education or health savings plans, treated as offshore trusts and therefore confiscated by the US. Moreover there is no ready escape hatch for the newly discovered and unwanted US citizenship: five years of full tax reporting compliance must be documented, appointments must be made with officials, fees must be remitted, interviews must be conducted, and in some cases exit taxes must be paid. If some in Congress get their way, renunciation could even mean life-time banishment from the US someday soon.

In the grand scheme of things Ted Cruz's citizenship is a non-story. But for what it illustrates about citizenship-based taxation, it could be the story of the century.

How a tax haven is born

Can $1.1 billion buy you a country?  Some investors want to try it, by buying Belle Island, currently a Detroit park, and turning it into a tax haven.  Here's the plan:

Looks like Manhattan. The idea:

The 982-acre island would then be developed into a U.S. commonwealth or city-state of 35,000 people with its own laws, customs and currency.

Come on now. There is a whole city there, it's called Detroit, it's full of buildings and infrastructure that are underused, just waiting for investment.  You don't want to invest in that, though, because that would entail accountability to others and-gasp--paying taxes (well, maybe--after incentives and subsidies, maybe not). It's so much easier to make profits if you don't have to pay taxes or observe other regulatory standards such as those protecting worker's rights, the environment, etc. What you want is a regulatory haven that is conveniently located to your clients, that isn't tainted with the tax haven moniker, and that won't be caught up in any global anti-tax evasion net.  Offshore, but in your own backyard, and not treated like the rest of offshore (otherwise what is the point).  A US commonwealth or city-state just about does the trick...ingenious!

Have any doubts that this is about building a tax haven?  Just read to the end of the article:

Here's the scenario for the Commonwealth of Belle Isle that Lockwood and others want to see: Private investors buy the island from a near-bankrupt Detroit for $1 billion. It then would secede from Michigan to become a semi-independent commonwealth like Puerto Rico and the Northern Mariana Islands. 

Under the plan, it would become an economic and social laboratory where government is limited in scope and taxation is far different than the current U.S. system. 

There is no personal or corporate income tax. Much of the tax base would be provided by a different property tax — one based on the value of the land and not the value of the property. 

It would take $300,000 to become a "Belle Islander," though 20 percent of citizenships would be open for striving immigrants, starving artists and up-and-coming entrepreneurs who don't meet the financial requirement. 

I called the Honduras charter city little more than a glorified gated community; this is clearly the same. An economic and social laboratory?  Hardly--add it to a long list of contenders.  The story says "City officials are likely to reject the plan." Too bad, because it would be fun to watch the US open its own tax haven even as it tries to shut down all the others.

What's FBAR got to do, got to do with it

Everything, I am guessing. Tina will give up her US citizenship now that she has attained Swiss citizenship.  Reason given: to "clarify her situation." John Nolte says "She's 73 years-old, her longtime partner lives overseas, and as far as I know she's not in any way making a political statement." He seems a bit puzzled about her decision to give up her status, and he welcomes her back anytime.

Well said. So why is she giving up her citizenship?  Short of making a political statement, I can think of only one good reason: America's newfound vigor for enforcing citizenship-based taxation, and all of the surveillance and form-filling that entails.  Just consider that giving up citizenship is not a simple matter of mailing in your passport. It can be a complex and time- and resource-consuming process which involves enhanced scrutiny and fees for those with high net worth, who are viewed as attempting to flee the tax jurisdiction.

The US has always had citizenship based taxation on the books, but it wasn't truly enforced until FBAR came under IRS authority and FATCA emerged as its enforcement mechanism in 2010.  Now those who have not been compliant will be "rooted out" (former IRS Commissioner Shulman's description of FATCA) with ongoing monitoring, and hefty fines for failure to file. Those who have been compliant will go on to face a regime that is increasingly byzantine, with new forms and requirement seemingly being piled on all the time, in a situation that is becoming very lucrative for tax return preparers and the compliance industry in general--just google FATCA compliance officer job posting and you will get the idea.  Of course, the regime is meant to catch Americans hiding their cash offshore: a laudable goal especially in light of so many high profile cases, many prominently featuring Switzerland.

So the question is whether Tina Turner is an "American" and if she, with her Swiss bank accounts, is "hiding offshore." This raises a series of unanswered questions about the relationship between the individual and the state, none of which, I think, are easily answered. These include, to which country does Tina belong, if she has dual citizenship?  Is this a first come, first served world, so she belongs to the US in perpetuity, based on her birth in Tennessee, no matter where she lives out her life?  Can she choose to belong to another country, or only if she is willing to pay the cost of her continued US status in the form of ongoing compliance with US tax law?  Is Tina going to be allowed to leave the US jurisdiction only on the condition that she renounces any right to come back?  What financial restrictions should a state place on people--especially wealthy ones--who want to move to other jurisdictions?

As long as Tina holds on to her citizenship, even if she is a dual citizen living in another country, the answer to the first question is that she is now and will ever be American. And as long as she has any accounts anywhere in the world outside of the US, the answer to the second is "guilty unless proven innocent on an annual basis." None of the other questions are answerable in law: all are a matter of opinion and, more than anything else, geo-political power.

I am sure that Tina's expatriation will be viewed by many as a response to the high US tax rate, or a betrayal of her US roots, or both. But it is likely neither.  As a Swiss citizen resident in Switzerland, Tina's worldwide income is subject to income tax (federal, cantonal, and municipal), wealth taxes, VAT, etc., and we can only speculate about how much tax she may be asked to pay in the US after credits, exemptions etc. as a US citizen living abroad.  It could very well be zero or close to zero.  So it is seems more likely this is about the hassle of filing a thicket of tax forms, year after year, despite owing little or no tax to the US, and stiff penalties for even "non-willful" infractions, including mistakes.  And it could be about having to do all of that because Americans living abroad are viewed as likely criminals because they have offshore bank accounts.  

If Tina has been tax compliant all these years, she may just be exhausted with the effort; if not, she may see many reasons to cut ties by going the drastic step of irrevocable renouncement.

I would very much like to know if there is some other reason to give up her US citizenship. "Clarifying" one's situation seems just abstract enough to cover the hassle of dealing with US tax compliance.

Motomura on Birthright Citizenship & Legalization

Here is an interesting paper on citizenship as legal status, by Hiroshi Motomura: Making Legal: The Dream Act, Birthright Citizenship, and Broad-Scale Legalization.  Abstract:

Some of the most controversial topics in immigration and citizenship law involve granting lawful immigration status—or citizenship itself—to persons who might otherwise be in the United States unlawfully. In this Article, I examine arguments for and against three ways to confer lawful status: (1) the DREAM Act, which would grant status to many unauthorized migrants who were brought to the United States as children; (2) the Fourteenth Amendment to the Constitution, under which almost all children born on U.S. soil are U.S. citizens; and (3) broad-scale proposals to grant lawful immigration status to a substantial percentage of the current unauthorized population. I first explain how arguments both for and against the DREAM Act reflect some mix of fairness and pragmatism. Though birthright citizenship seems different from the DREAM Act, the arguments are similar. I next show that although children figure much more prominently in the DREAM Act and birthright citizenship, similar patterns of argument apply to broad–scale legalization, and the arguments in favor are just as strong. Finally, I explain that the "rule of law" is a highly malleable concept that provides no persuasive case against any of these ways to confer lawful immigration or citizenship status. Rule of law arguments in favor of conferring status are stronger than rule of law arguments against doing so.

Manx tax strategy

Interesting: Isle of Man announces it will keep its 0/10 corporate tax rate and pretty much the rest of its tax system as is, but wil cooperate with the US on FATCA and the EU on its codes of conduct, and might join the mutual administrative assistance in tax matters agreement, and even "consider working with other countries and multilateral organisations on the development of co-operation systems similar to FATCA." I think that last one is in regards to the UK, but it could be broader in scope.

At the same time, the Isle of Man will

"maintain competitive  personal income tax rates  as one of the features making the Island an attractive place to live and work; and

maintain a competitive business tax system in the Isle of Man to support economic development;"

among other aspirations. I think they are in a tough spot, with the US and the UK focused on chasing individual tax cheats and corporate tax avoiders (respectively, perhaps) through their banks. By way of background, the tax strategy says:

The Isle of Man‟s taxation policies have played an important part in our economic success. 

...The key principles of fiscal sovereignty, economic stability and adherence to international standards which underpinned the original taxation strategy remain just as relevant today. 

I'm not sure what anyone means by fiscal sovereignty anymore. Then again, I never really did think it was a real thing.

New Issue: International Studies Review

ILR posted the latest issue of International Studies Review, which has several articles of interest:

• Richard J. Harknett & Hasan B. Yalcin, The Struggle for Autonomy: A Realist Structural Theory of International Relations
• Frank Grundig, Jon Hovi, Arild Underdal & Stine Aakre, Self-Enforcing Peace and Environmental Agreements: Toward Scholarly Cross-Fertilization?
• Monika Bauhr & Naghmeh Nasiritousi, How Do International Organizations Promote Quality of Government? Contestation, Integration, and the Limits of IO Power
• Peter Wilson, The English School Meets the Chicago School: The Case for a Grounded Theory of International Institutions
• Johan Hellman, The Occurrence of Mediation: A Critical Evaluation of the Current Debate

Scholarship on Global Citizenship

International Law Reports posts the latest issue of Global Society, a special issue on the topic of Cosmopolitanism and Global Citizenship--of interest especially to anyone thinking about citizenship-based taxation (perhaps especially in a post-FATCA world--you can see what's occupying my thoughts these days).  Contents at the link.  Good vacation reading, especially if you're travelling across a border to visit family.

Precedents for selling sovereignty

This is an interesting take on the Honduran charter cities (which I view as just a super-charged gated community or free zone), finding historical precedents in the longstanding and uncontroversial tradition of sales by states of parts of their territorial jurisdiction:

The first point is that international legal precedent affords us an abundance of examples in which states freely exchange sovereignty over territories for money. Most Americans will have heard of the Louisiana and the Alaska Purchases, of course, but there are also less well-known cases: Woodrow Wilson’s purchase of sovereignty over the Danish West Indies in 1917, for instance. Europeans may recall cases closer to home. Here one thinks of Prussia’s purchases of sovereignty over Lauenburg and Jade Bay. Last, but not least, there is Asia, where, among other cases, Britain recently concluded its ninety-nine-year lease for sovereignty over the New Territories and Kowloon extension in Hong Kong.

...The Honduran debate grows still more interesting when one considers its theoretical relevance to today’s highly indebted states. Should people, or rather their elected representatives, be able to treat parts of their state’s territory as assets in transactions?... Statesmen have often answered in the affirmative during the twentieth century; indeed, on occasion they have alienated their own territory as a path towards fiscal salvation ... without the direct majority consent of the people affected by the transfer. Nonetheless, all the transactions have been held to be perfectly valid in international law.

The author gives some more contemporary examples: one scholar has suggested that Greece could reduce its debt by selling jurisdiction over some of its islands; US "Special Operations Command" (I have no idea what that is) recently opined that jurisdiction was “a commodity driven by market-like forces” that will go to the “state, organization, corporation, tribe, gang, etc. that can best meet individual security, economic, and demographic interests.” He forgot to add, at the lowest cost, naturally. He concludes that there is plenty of precedent for states to buy jurisdiction and sovereign rights from the recognized “owners.” He concludes:

Whatever the orientation of Honduras and its court system in the twenty-first century, these precedents attest to the existence of a marketplace open to all. 

Thinking about statehood as a commodity with owners that can auction it off--disturbing, especially because what then are the humans. In particular, what then are the humans in the designated for-sale zone. Spoils of war capitalism?

IGA flurry shows US is locking down on FATCA

A recent flurry of signed IGAs and press releases on ongoing negotiations suggests the US is acting tremendously quickly and even brazenly on FATCA. Almost as if they are trying to get this all nailed down before anyone outside the US government has time to study it and think it through. This is absurd, considering the enormity of what FATCA is trying to do--an enormity that is acknowledged in the IGAs themselves merely as "issues"--issues involving taxpayers' inability to comply with US law because it would involve breaking the law in their own country. The hubris is breathtaking. But it is virtually invisible as a policy matter because it is all wrapped up in the idea that we are cracking down on the world's tax cheats, and who could be against that?

The speed and intensity on FATCA is troubling though, when we consider the lock-in nature of the agreements in terms of future flexibility on the part of the US. To see what I mean by this, let's take a look at the IGA Mexico signed on November 19.  I blacklined it against the US Model 1A (reciprocal) IGA: it reads as virtually identical. Interesting, as the agreement with Mexico has apparently been two years in the making and the model IGA came out this past July. I find it amazing that the model was apparently so easy to write and these IGAs so easy to conclude--Denmark signed one just four days earlier. Contrast that to the US model double tax agreement, which was written some three decades after its first double tax conventions appeared (and which only gets updated every six years or so) and the average five year span it typically takes to get a new tax convention negotiated and signed. In terms of Treasury resources, it looks like a lot more time is spent on FATCA these days than on new tax treaty protocols, multilateral information sharing standards, or perhaps anything else.

The first thing the parity between the model and the actual agreement with Mexico suggests is that the terms of agreement on FATCA are absolutely non-negotiable.  This is a put up or shut up, my way or the highway moment: sign our template or face sanctions in the form of draconian and even unprecedented (such as in the treatment of gross sales proceeds) gross basis withholding. That's hard enough on its own but it is also bad news for other countries that might see themselves in a position to drive a hard bargain with the US.  It is bad news not only because it looks like the US will not deviate from its chosen path right now, but also because, perversely, the US has included a "most favored nation" clause in the FATCA agreements--something almost unheard of in double tax agreements, because it makes a better deal for one a better deal for all.  The language is in article 7 of the model, and it reads virtually identically in the US-Mexico agreement, the UK agreement, and the Denmark agreement (signed Nov 15 2012).

Consistency in the Application of FATCA to Partner Jurisdictions 

1. [FATCA Partner] shall be granted the benefit of any more favorable terms under Article 4 or Annex I of this Agreement relating to the application of FATCA to [FATCA Partner]  Financial Institutions afforded to another Partner Jurisdiction ....   

2. The United States shall notify [FATCA Partner] of any such more favorable terms and shall apply such more favorable terms automatically under this Agreement as if they were specified in this Agreement and effective as of the date of the entry into force of the agreement incorporating the more favorable terms.  

The implication is that the US is tying its own hands against the possibility of making any different deal for any other country.  Now why on earth would they do that? 

Purely, I think, to drive home the unilateral message. Information sharing is no longer going to be multilateral, engaged in through international dialogue and consensus. Information is a commodity, the US can apparently afford to extract it on a unilateral basis and without regard to "issues" like other countries' domestic laws, and there will be no spoils for any other country that can't or won't submit to the US standard, even if they themselves are victims of the US' own bank secrecy & notorious apathy when it comes to things like anonymous incorporation. 

None of this is to say that bank secrecy is good, that information should not be shared among countries. This is not an apology for tax havenry.  I do think information has to be shared if we are to keep taxpayers honest the world over. But it is to say that a unilateral battering ram is not the right answer. The problem of global misconduct by wealthy taxpayers is not solved by the US strong arming to get information that serves itself alone.

If you'd like to see the blackline I ran, you can download it here. Careful readers will note that in the agreement with Mexico, some periods are followed by two spaces (old school) while others are followed by one (new school), and these are different from the US Model.  So someone somewhere is paying attention to these important details as the US rips through a century long tradition of multilateral information sharing to build its own private empire of information gathering. That's good to know. 

The ultimate gated community is just a free zone with a new name

MR cautions not to "equate charter cities with extraterritoriality": a charter city works either "because a dominant hegemon — perhaps at a distance — supports the external system of law" or because "the external system of law serves up some new and especially tasty rents to domestic interest groups."  Either way, the charter city is not sovereign, rather some established sovereign is exerting control.  So a charter city is really just a free zone: another experiment in relaxing regulation that Honduras has already tried (along with many many countries, yes, including the U.S.), this one just has a name that taps into some emotional sentiment having to do with freedom and choice and entrepreneurialism.  If Honduras just called this another free zone project, perhaps few would take notice or wonder about it.

As this is just a new name for an old idea, it should not be surprising how quickly we see the familiar accountability/transparency issues pile up.  MR points to the Guardian, which reports:

Plans to create a neo-liberal start-up city in Honduras with its own laws, tax rules and police force suffered a setback on Friday when the economic guru who inspired the project said he has been unable to act as its guarantor and watchdog. 

...days after the deal was announced, Romer said he had not been given the powers and information necessary to fulfil his role as chairman of the transparency commission, which is meant to ensure governance of the new development zones.

Romer said he and four other international figures were appointed by presidential decree to the commission, which has wide-ranging powers to appoint and fire governors, nominate judges and hire auditors in the proposed new zones. But the five will issue a statement distancing themselves from this week's announcement and calling into question the legality of their appointment, which they say has not been published in the official gazette as required by Honduran law, ostensibly because of a challenge in the constitutional court.

Free zones have been around for a long time, they have been studied extensively, and they don't have a great track record, most especially when they lack major up front governance policy planning.  Calling the project a charter city won't avoid these difficult problems.

As an aside, I notice that the Guardian puts a price tag on the deal: a business consortium called NKG is paying $14 million for its city.  Who is NKG?  Not the Northern Kite Group or the Neumann Kaffee Group, I suspect.

 

 

The Ultimate Gated Community

Disappointing that AP saw no need to report on what it costs to buy your own private city.  It couldn't be nothing ... could it?  I would like to see the memorandum.  Does it read like a contract?  Like a treaty?

Taming FATCA

For US persons living abroad, living their lives means having foreign bank accounts.  Regimes like FATCA and FBAR are particularly harsh for these persons, many or perhaps most of whom are either dual citizens themselves or are in families with dual and multiple citizenships.  While it seems clear to me that the US can impose its sovereign jurisdiction with regimes like FATCA and FBAR, it's less clear to me that it should do so, especially with a one-size-fits-all approach that appears to treat everyone with a foreign bank account as a potential tax criminal.  The question is whether and how these regimes can be tamed so that they fulfill the core mission--catching tax cheats--without becoming a Team America: World Tax Police, bypassing bilateral and multilateral cooperation among governments in order to impose draconian US rules on individuals and financial institutions across the globe.  


In my latest Tax Notes International column, "Could a Same-Country Exception Help Focus FATCA and FBAR?" [pdf], I discuss some of the political and practical issues of relaxing the reporting rules for Americans living abroad with respect to accounts they hold in their country of residence.  This is not a comprehensive technical proposal but rather a broad look at the pragmatic and political reasons why the US really ought to back off on exercising its tax sovereignty when it comes to its citizens living abroad. I argue that FATCA and FBAR are either a rather nasty piece of arm-twisting, a bit of bad faith in
the U.S. diplomatic relations department, or, worse, they are signaling a loss of faith in the pursuit of cooperation through diplomacy.  I suggest that carving out an exception for US persons who are using bank accounts to live their lives as residents and often dual citizens abroad could provide a means of backing away from either of these destructive positions.

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.

Law's reach across sovereign territory

A story on the long arm of the law, and it's not even about FATCA:

"Because today’s threats do not recognise national boundaries, our responses must also transcend borders,” Ms Napolitano told her hosts in a speech overly dominated by assurances the US would respect the privacy of Australian citizens.