Preliminary Analysis of KPMG Transfer Pricing Study for OECD Digital Tax Proposal

A recent KPMG transfer pricing study posits fixed percentages for returns to marketing and distribution activities, a.k.a. Amounts B and C in OECD parlance. The study casts some light on the OECD's design for a new global tax allocation respecting the profits of certain digital economy firms. By extrapolating from Amounts B and C, the KPMG study helps draw a very rough estimate of what Amount A potentially looks like (granularity is impossible because, among other things, how much routine and non routine profit is attributable to factors other than Amounts A, B, and C cannot be determined in the abstract).

I've developed a formula (ppt available for download here) from the OECD Secretariat's Unified Approach, applying the fixed routine (10% and 20%) and market share (20%) numbers the OECD used by way of example in its Impact Analysis, and plugging in the KPMG percentages for Amounts B and C.

The KPMG Study provides a starting point to consider how firms are likely to approach Pillar One and how nations are likely to fare under the OECD Secretariat's approach, now endorsed by the Inclusive Framework. Briefly, the study is described as "a fact-based economic analysis using comparables data of the arm’s length returns to sales, marketing and distribution," prepared by KPMG under commission by Microsoft. It looks more like a standard transfer pricing report than an actual economic analysis, and it raises the usual pile of questions about assumptions and definitions but it is a starting point for understanding the scope of possible redistribution under Pillar One. Like the Study and the OECD Impact Analysis, I've made a bunch of simplifying assumptions and would benefit from comments and suggestions.

Designing Sustainable Tax Regimes: Workshop at McGill

We are concluding the fall tax policy colloquium at McGill next week with an interdisciplinary workshop to discuss ideas around the idea of sustainability in taxation. Here is the info:

Designing Sustainable Tax Systems

This workshop will bring together scholars and students in law, environmental management and engineering, political science, and economics to discuss what sustainability means and implies for taxation. Participants will discuss the broad idea of sustainability and its connection to consumer and investor behaviour; sustainability at the level of the firm, the society, the state, and the international community; the idea of triple bottom line accounting and the role of tax sustainability in CSR practices and ESG-certified investing; emerging ideas about sustainability in terms of taxpayer buy-in and administrability; and legal and institutional proposals to increase sustainability in taxation.

Agenda

11:00 Welcome

11:30 Richard Janda, Tracing and diminishing our environmental footprint 

12:15 Rita De la Feria, The Impact of Public Perceptions on VAT Rates Policy

13:00 Lunch

14:30 Benoit Timmermans & Wouter Achten, Using life cycle analysis to internalize environmental and social costs of production via VAT

15:15 Julien Tremblay-Gravel, Redistributing Taxing Rights Across Borders Under a DaVAT

16:00 Break

16:15 Allison Christians & Tarcisio Magalhaes, Blueprint for a Sustainable International Tax System

17:00 Closing remarks and reception

If you are in Montreal and would like to attend please contact me; space is limited but we will attempt to accommodate all those who are interested in attending.

Next Monday at McGill: Karie Davis-Nozemack, Applying Sustainability to Tax

Continuing the McGill tax policy colloquium next week will be Karie Davis-Nozemack, Associate Professor of Law & Ethics at Georgia Tech Scheller College of Business. Prof. Davis-Nozemack will discuss her forthcoming article with Kathryn Kisska-Schulze, which considers whether and how tax policy can support the quality of life, social justice and cohesion, diversity, democratic rights, broad participation, and social capital and individual capabilities that societies wish to sustain. The paper will be published in the Florida Tax Review and it follows Prof. Davis-Nozemack's earlier work with Robert Bird, Tax Avoidance as a Sustainability Problem, 151(4) J. Bus. Ethics 1009 (Sept. 2018), which examined tax avoidance in the context of corporate sustainability practices.

As always, the colloquium is supported by a grant made by the law firm Spiegel Sohmer, 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.

The talk and discussion will take place from 3-5 pm in New Chancellor Day Hall room 316; all are welcome to attend. The complete colloquium schedule is below and here.

Tomorrow at McGill: Karen Brown on Tax Policy for Sustainable Growth

Continuing the tax policy colloquium tomorrow will be Karen Brown, Theodore Rinehart Professor of Business Law at the George Washington University Law School, whose working paper is entitled Tax Policy: A Tool to Support Sustainable Growth. The paper examines the World Bank's "Human-Centered Business Model" which was developed by Marco Nicoli in a 2017 paper entitled
"The Human-Centered Business Model (HCBM): A Holistic Approach to a New Model for Doing Business." As Prof. Brown describes it, this project:

details a “common set of corporate goals covering economic, social, and environmental sustainability”  to create a coherent “business ecosystem.” Of a six-pronged approach , the fourth, known as the Fiscal Pillar, is designed to offer governments a menu of options allowing them to implement tax regimes that support efficiency and growth in their economies while providing incentives for enterprises to operate with attention to core principles as well as the considerable costs of doing business in a manner that disserves sustainable goals.

The paper examines the relevant goals and analyzes the prospects for achieving them using tax incentives (which the paper adjudges non-optimal) and varying tax burdens for sustainable and non sustainable business models (which the paper broadly endorses).

The paper notes that Marco Nicoli retired from the World Bank in 2018 but guides the HCBM project in his role as Advisor to the OECD’s Centre for Development in Paris. Surprising, then, that nowhere in the OECD's work on BEPS or its urgent progress on tax challenges arising from the digital economy is there any mention of coordination of these efforts with the sustainable development goals whether through the HCBM project or through the broader financing for development work on mobilizing domestic revenues. A missed opportunity since, as Prof. Brown notes:

Corporate taxes may be inappropriately low when measured by the value of operating in a vibrant and stable global economy sustained by adequate government expenditures.  Treating taxes as costs to shift onto others enables these companies to ignore the important role of taxation in the modern world. Yet a corporate goal of minimizing costs and maximizing profit above all else may operate to impair the effectiveness of governments in supplying the infrastructure and other goods and services necessary to support the basic needs of their residents. 

As editor and contributing author to "Taxation and Development - A Comparative Study", Prof. Brown is uniquely situated to talk about the incorporation (or lack thereof) of sustainability into taxation rubrics, and vice versa. It promises to be a good discussion.

As always, the colloquium is supported by a grant made by the law firm Spiegel Sohmer, 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.

The talk and discussion will take place from 3-5 pm in New Chancellor Day Hall room 316; all are welcome to attend. The complete colloquium schedule is below and here.

Tomorrow at McGill: Magalhaes on a New Global Tax Deal for the Digital Age

Tomorrow the McGill tax policy colloquium continues with a presentation by Tarcisio Magalhaes, who will discuss our co-authored paper, forthcoming in the Canadian Tax Journal. Here is the abstract:

The OECD is currently in the midst of a project intended to tackle the tax challenges arising from the digitalization of the economy. As laid out in Pillar 1 of its program of work released in May 2019, the goal seemed broadly to develop consensus on a new taxing right, to allow countries to tax multinationals even in the absence of traditional physical presence. Upon inspection, the plan seems to be about rebalancing taxing rights mostly among the relatively affluent OECD member states plus a few other key non-OECD states. Viewed from this perspective, the urgent effort to forge a new global tax deal for the digital age is destined to forestall a much-needed discussion on the broader distributive implications of the current global tax deal. This Article therefore critically examines the emerging tax bargain. Part I begins with a brief survey of some of the main factors that prompted the OECD to turn its attention to this topic. Part II considers the origins and development of nexus in the international tax regime, showing why this concept is amenable to broad expansion. Part III examines the range of reforms currently under consideration, arguing that the framing on digitalization misses a necessary connection to other pressing international policy programs that are also under development, most notably a global commitment to building institutions that support sustainable economic development. The Article concludes with a prediction that on its current trajectory, the program of work on digitalization is likely to produce a new global tax deal that looks much like the old global tax deal, with a relatively modest redistribution of taxing rights among a few key states, thus missing an opportunity for meaningful reform. 

The colloquium is supported by a grant made by the law firm Spiegel Sohmer, 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. The talk will take place in New Chancellor Day Hall room 316; all are welcome to attend. This fall the Colloquium theme is Designing Sustainable Tax Systems. The complete colloquium schedule is below and here.

[revised 4 Nov to include link to newly posted draft paper]

Today at McGill: Rebecca Kysar will Unravel Tax Treaties

The next instalment in this fall's tax policy colloquium at McGill will feature Rebecca Kysar, who will speak about her forthcoming paper, Unraveling the Tax Treaty, today at 3pm. Here is the abstract:

Coordination among nations over the taxation of international transactions rests on a network of some 2,000 bilateral double tax treaties. The double tax treaty is, in many ways, the roots of the international system of taxation. That system, however, is in upheaval in the face of globalization, technological advances, taxpayer abuse, and shifting political tides. In the academic literature, however, scrutiny of tax treaties is largely confined to the albeit important question of whether tax treaties are beneficial for developing countries. Surprisingly little consideration has been paid to whether developed countries, like the United States, should continue to sign tax treaties with one another, and no formal revenue or economic analyses of the treaties has been undertaken by the United States government. In fact, little evidence or theory exists to support entrance into tax treaties by the United States, and examination of investment flows indicates the treaties may even lose U.S. revenues. Problematically, the treaties also thwart reforms of the antiquated and broken international tax system. The trajectory of the recent U.S. tax legislation illustrates this phenomenon. 

Although tax treaties may have, at one time, served salutary purposes, modern circumstances call into question the relinquishment of taxing jurisdiction by source countries. I suggest that nations unravel the jurisdictional provisions from the treaties, abandoning or scaling them down, possibly through the new multilateral instrument. Rather than assessing antiquated notions of worldwide efficiency, the challenge for the international tax system going forward will be to attempt some degree of coordination while also imparting flexibility to advance national interests in setting revenue policy. This solution aims to thread that needle.  

The colloquium is supported by a grant made by the law firm Spiegel Sohmer, 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. The talk will take place in New Chancellor Day Hall room 316; all are welcome to attend.

This fall the Colloquium theme is Designing Sustainable Tax Systems. The complete colloquium schedule is below and here.

Monday at McGill: Eric Zolt presents "Tax Treaties and Developing Countries"

On Monday at McGill, Eric Zolt continues the fall tax policy colloquium with a presentation of his working paper entitled Tax Treaties and Developing Countries. Here is the intro:

Academics and others over the last 50 years have called for developing countries to hesitate or refrain from entering into bilateral tax treaties with developed countries. Tax treaties seek to facilitate cross-border transactions and investments by reducing tax barriers and providing greater certainty to foreign investors. But treaty provisions invariably result in countries yielding taxing rights. Since at least the 1920s, treaties have arguably provided greater taxing rights to the country where the investors reside (generally, capital-exporting developed countries) rather than the country where the economic activity takes place (often, capital-importing developing countries). Where capital flows are roughly equal between countries, rules that skew taxing rights towards residence-based taxation away from source-based taxation result in little or no revenue shifting. But where capital flows are less even, the tax revenue consequences may be substantial. 

Critics of tax treaties between developed and developing countries contend that developing countries give up tax revenue and receive little in return. But this common position rests on a questionable narrative. It assumes that tax treaties result in a transfer of revenue from developing to developed countries. For several reasons, tax revenue yielded by developing countries likely results in relatively little revenue gains by developed countries. In the current economic environment, tax treaties are less about distributive rules between countries and more about developed countries assisting their multinational entities in reducing their foreign tax liability and developing countries using tax treaties to attract foreign investment. 

Framed this way, tax treaties share much in common with traditional tax incentives (such as tax holidays and favorable depreciation provisions). Viewing tax treaties as tax incentives changes the focus from whether the treaty provisions are fair to developing countries to whether this type of incentive generates economic benefits that justify the revenue costs. 

For some, perhaps many, developing countries, tax treaties with developed countries make little economic sense. But for many other developing countries, this decision is more complex. It requires making country-specific and treaty-specific determinations of the revenue costs and economic benefits from entering into tax treaties with developed countries.

Viewing tax treaties as primarily incentive delivery mechanisms provides a reason for substantial scrutiny of their costs and benefits--a rarity given the often oblique if not thoroughly opaque nature of treaty adoption and ratification procedures across countries. The paper makes the case that evaluating the effectiveness of tax treaties involving developing countries is complex and specific to the particular countries and treaty terms, and that the main issue to be queried should not be the fair distribution of revenues between differently situated countries but rather the economic costs and benefits of reducing taxation as an incentive for inbound investment.

Zolt argues that "the stylized world where tax revenue yielded by source countries is picked up by residence countries is more fiction than fact," at least, in a world in which most primarily capital-exporting (rich) countries have primarily territorial rather than worldwide tax systems as is the case today. The examination of alternative approaches to cost benefit analysis in the latter part of the paper provides a useful reminder that isolating the economic impacts of any given tax policy position is difficult, no less so when the policy in question is packaged in the form of  tax treaty instead of a statute. Zolt nevertheless concludes that

Countries (both developed and developing) need to do the hard work of estimating the economic consequences of entering into tax treaties. This country-specific and treaty-specific cost-benefit exercise will be challenging and frustrating, given the many different assumptions that will influence the calculations. But these challenges are similar to those for estimating the costs and benefits of tax incentives and other types of tax expenditures. The exercise will also inform a country’s negotiating positions by highlighting those provisions (such as zero or low withholding taxes) that contribute to potential revenue losses. 

This paper is a timely contribution to the ongoing debate about how, and by which countries, cross-border income ought to be taxed, and I very much look forward to discussing it on Monday.

The colloquium is supported by a grant made by the law firm Spiegel Sohmer, 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 theme is Designing Sustainable Tax Systems. The complete colloquium schedule is below and here.

Monday at McGill: DeLaFeria presents Tax Fraud and Selective Enforcement

Tomorrow at McGill, Rita DeLaFeria will kick off the fall tax policy colloquium with a presentation of her work in progress entitled Tax Fraud and Selective Law Enforcement. Here is the abstract:

This article presents a new conceptual framework for research into tax fraud. Informed by research approaches from across tax law, public economics, criminology, criminal justice, economics of crime, and regulatory theory, it assesses the effectiveness, and the legitimacy, of current approaches to combating tax fraud, bringing new dimensions to previously identified trends in crime control. It argues that, whilst the last decade has witnessed significant intensification of measures that purportedly target tax fraud both within Europe and elsewhere, these measures display a fundamental misunderstanding of the phenomenon of tax fraud. 

Using VAT as a case study, it is argued that these measures concentrate upon combating the revenue costs of fraud rather than the fraud itself. Whilst measures deployed to combat revenue costs and those deployed to combat the tax fraud often coincide, this is not always the case. In cases where they do not coincide, prevalence is consistently given to enforcement measures that address revenue costs, rather than combatting the fraud itself, even where the effect is to aggravate other costs of tax fraud. It is argued that a concentration solely upon the revenue costs of fraud can no longer be regarded as either deterrent or punishment, but merely as a compensatory mechanism for the lost revenue. 

These developments in anti-tax fraud policy demonstrate a significant shift –one that appears to be motivated by a mixture of endogenous and exogenous factors– from tax fraud suppression to tax fraud management. The article concludes that this shift not only undermines tax equity and overall tax compliance, but may also lead to selective tax enforcement, thus representing a significant risk to the rule of law.

The colloquium is supported by a grant made by the law firm Spiegel Sohmer, 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 theme is Designing Sustainable Tax Systems. The complete colloquium schedule is below and here.

Fall 2019 Tax Policy Colloquium at McGill Law: Designing Sustainable Tax Systems

My fall tax policy course will incorporate a colloquium on current issues of national and international tax policy. The theme of this year’s colloquium is Designing Sustainable Tax Systems. 

The distinguished speakers who will contribute to this year’s colloquium include:

• Sep 30:  Rita De La Feria, Professor and Chair in Tax Law, University of Leeds.
• Oct 7: Eric Zolt, Michael H. Schill Distinguished Professor of Law, UCLA
• Oct 28:  Rebecca Kysar, Professor of Law, Fordham University School of Law
• Nov 4:  Tarcisio Magalhaes, Post-doctoral researcher, McGill Faculty of Law
• Nov 11:  Karen Brown, Theodore Rinehart Professor of Business Law, George Washington School of Law
• Nov. 18:  Karie Davis-Nozemack, Associate Professor, Georgia Tech Scheller College of Business.

All talks will take place from 15h-17h at the McGill Faculty of Law, 3644 Rue Peel, Room 316. All are welcome to attend.

The colloquium is made possible by a grant from Spiegel Sohmer. 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. 

[post updated to correct schedule]

Krings et al on tax levels, scalar dumping, and democratic preferences

Professors Amy Krings, Dana Kornberg, and Erin Lane recently published Organizing Under Austerity: How Residents’ Concerns Became the Flint Water Crisis, Critical Sociology 45 (4-5), pp. 583-597 [gated]. The article examines the politics of austerity, of interest to tax researchers for lots of reasons but perhaps especially for the expression it gives to the connection between tax levels and democratic preferences through the phenomenon of scalar dumping. Here is the abstract:

What might it take for politically marginalized residents to challenge cuts in public spending that threaten to harm their health and wellbeing? Specifically, how did residents of Flint, Michigan contribute to the decision of an austerity regime, which was not accountable to them, to spend millions to switch to a safe water source? Relying on evidence from key interviews and newspaper accounts, we examine the influence and limitations of residents and grassroots groups during the 18-month period between April 2014 and October 2015 when the city drew its water from the Flint River. We find that citizen complaints alone were not sufficiently able to convince city officials or national media of widespread illness caused by the water. However, their efforts resulted in partnerships with researchers whose evidence bolstered their claims, thus inspiring a large contribution from a local foundation to support the switch to a clean water source. Thus, before the crisis gained national media attention, and despite significant constraints, residents’ sustained organization—coupled with scientific evidence that credentialed local claims—motivated the return to the Detroit water system. The Flint case suggests that residents seeking redress under severe austerity conditions may require partnerships with external scientific elites.

As to scalar dumping, the paper explains that:

A central feature of neoliberal governance in the United States has been the production of austerity conditions in cities. Jamie Peck (2012) has described how urban austerity regimes emerge through processes of scalar dumping, whereby financial responsibility for public goods is passed down from national to state and local governments. The logical priority that scalar dumping sets in motion is clear: cash-strapped cities must either raise revenue through taxes, fees, or service costs for public goods or they must cut spending. Scalar dumping disproportionately strains cities like Flint, which have already suffered severely because of deindustrialization, residential abandonment, aging infrastructure, high poverty rates, and racial segregation. Thus, although a city’s municipal budget is shaped by a range of economic factors beyond the control of city leaders, financial hardships tend to be borne by residents. 

When cities fail to be self-sufficient, officials may employ legal tools such as emergency management laws to label budget shortfalls as financial “emergencies.” This characterization can provide justification for punitive intervention—including democratic curtailment coupled with cuts to public services—by higher levels of government (state, national, or international). Thus, austerity is indeed a “politically imposed condition”. Additionally, by characterizing the city as experiencing a fiscal emergency, policies that entail additional public spending are removed from contention and effectively blocked from the political agenda. And by focusing on the short-term alleviation of fiscal problems, longer-term structural problems—such as the loss of revenue due to a declining tax base, decreases in state revenue sharing, and growing unemployment—are cast outside the sphere of public debate. [internal citations omitted]

The authors explain that “social action is necessary to counter the dangerous effects of austerity policies,” but note that “the possibilities for democratic influence have been severely curtailed. Additionally, as environmental regulatory rules are relaxed, 'the operating principle is that toxic chemicals are presumed innocent of harming human health unless proven guilty.'” They conclude by noting that the emergency management system that led to Flint's water crisis remains in place, and quote Clare McClintock of the Democracy Defense League that “This is a new model of governance that is dangerous and unacceptable. And it’s spreading to a town near you.”

The Virtuous and Vicious Cycles of Tax Law and Development

Last week, the World Bank released a Conference Report detailing the inaugural meeting of the platform for collaboration on tax, which took place in February 2018 under the theme of Taxation and the Sustainable Development Goals. The conference report outlines four "pathways" of connection between tax and sustainable development:

1. taxes generate the funds that finance government activities in support of the SDGs;
2. taxation affects equity and economic growth;
3. taxes influence people’s behavior and choices, with implications for health outcomes, gender equity, and the environment; and,
4. fair and equitable taxation promotes taxpayer trust in government and strengthens social contracts that underpin development.

I don't disagree with these but in my view the international tax system is pretty much in perfect conflict with the sustainable development goals because of the way it allocates profit across jurisdictions. My paper on value creation with Laurens van Apeldoorn explored this and I continue to explore it, will have a new paper soon detailing what I consider a major part of the mischief and my proposed response. As part of that paper I diagram the virtuous and vicious cycles of tax and development, as follows:

And then I diagram what turns a virtuous into a vicious cycle as follows:

Every system experiences fissures, but where there is extreme lack of development, fissures seem to dominate and perpetuate a vicious cycle instead of contributing to a virtuous one. I think these visuals generally track with the messages from the conference report but in my view the connection between tax and development goes well beyond revenue collection, so we need to think well beyond tax evasion and tax avoidance when we are thinking about how to align these broad international systems and goals.

That said, the report labels me as presenting "the most radical suggestion" at that conference. I found the video online and excerpted my part; what I said doesn't sound all that radical to me, one year later:

More on this to come soon.

More Info + Better Analytics = Less Tax Evasion: Guest Post by Gaute Solheim

There is little doubt that information is key to effective taxation, and that modern data collection systems are making tax administrators' (and in some ways, honest taxpayers') lives much easier.  I am personally wary of governments (or anyone) amassing all of the data gathering and analytic tools they might like, because I am concerned that life in the panopticon will not be tolerable for lots of reasons. My tolerance for leakage in taxpayer compliance to forestall the complete surveillance of all human activity by government may be higher or lower than others; I am not sure. But the following guest post by Gaute Solheim of the Norwegian Tax Administration gives a nice summary of the tax administrator's more optimistic view. Cross posted from the Surly Subgroup.

Do You Really Need More Information?

By Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration 

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

In a previous post, I explained with reference to the Cui 2017 paper on Third Party Information Reporting (TPIR) why I expect good quality TPIR, based on a primitive analysis of the human factor in corporate filings. When I started rereading Cui’s paper, I only read a few lines before a chapter heading from the CIA textbook “The Psychology of Intelligence Analysis” popped into my mind: Do you really need more information? That book contains a full chapter (starting on page 51) on how more information sometimes contributed nothing to the quality of the analysis, but was of immense help for the confidence of the analyst.

I will below make my argument for why the answer should be “yes” when it concerns the TPIR data mentioned by Cui in the paper, but it is a qualified yes. TPIR is a bit like cooking. Fantastic raw materials will not end up as gourmet meals on their own. You need a talented and skilled chef and a kitchen with the right tools, as well.

Having spent some time on capacity-building with less developed tax administrations than the Norwegian, I agree with Cui that establishing a TPIR machinery should not be the first priority in these countries. However, TPIR being the wrong starting point for some developing countries is not an argument for abstaining from it in Norway and other jurisdictions with better-resourced administrations. I will below state my case for why I find TPIR useful based on my observations working for the Norwegian Tax Administration (NTA) (which may of course differ from the opinions of the NTA itself).

My knowledge of U.S. or Canadian use of TPIR is limited, but there is a very fascinating story told in a paper by Keith Fogg about the work of the IRS agent Joe West. It is a story starting with an audit in the late eighties continuing into the nineties and ending with the IRS getting a summons for credit card information linking US taxpayers to bank accounts in the Caribbean. That information eliminated credit cards as an easy means of taxpayer access to evaded funds.

Norway was quick to copy and paste the IRS methodology. First as specific requested information. Then, a few years later, TPIR routines were in place, giving us digitally all the credit card transactions from financial institutions. The information was used in a large audit project identifying Norwegians with undeclared financial wealth in other jurisdictions. It did not take long before it was common knowledge among taxpayers that this modus operandi did not fly anymore. The value of this TPIR as a tool to uncover hidden wealth and income in foreign jurisdictions diminished quickly, as measured in volume of reassessments.

Warning: Do not use for tax evasion

Collection of TPIR is not without costs, and after some years, the extra revenue from reassessments probably did not cover the total cost of the collection of this dataset. One could then conclude that this was a big heap of worthless gigabytes. To me that would be flawed logic, like concluding that a fence is pointless if you never find anyone on the wrong side of it. TPIR done right is to a large extent automated audits. Taxpayers knowing that they will be selected for audit on specific issues are inclined to stay compliant or shift to another, more cumbersome, modus operandi like diamonds in a toothpaste tube (see here and here). The toothpaste modus operandi had a shorter life span than the credit card scheme, and then we got FATCA and CRS.

Calculating the value of TPIR as a mental fence keeping more taxpayers inside the compliance triangle would be a hard nut to crack. I will not even try, but I would be surprised if it was insignificant. The story starting with IRS agent Joe West auditing Dorchester Industries and owner Frank Wheaton Jr. in the eighties, and ending in Norway with a lot of TPIR data with few reassessments illustrates a life cycle. It started with tax authorities going out and collecting specific third-party information needed for cracking cases with serious tax evasion; it was later streamlined as part of the TPIR system; and it ended up as mental fences for tax compliance. Today, that specific TPIR has other analytical uses for the NTA as well.

Almost all the numbers needed for producing a correct tax return for the majority of personal taxpayers in Norway already exist digitally on some third party computer somewhere. The number of sources is much smaller than the number of taxpayers. Having a system of distributing digital numbers from a small number of sources to everyone, having everyone manually punch the same numbers into different kinds of software on their home computers, and then collect all these numbers—with all their typing mistakes—does not make sense to me. It did not make sense in 2010, either. For most Norwegian taxpayers, it has not made sense the last two decades.

The main use of TPIR in Norway today is to prepopulate individuals’ tax returns, which are then made available for the taxpayer for correction and amendments. All of this ensures that we may handle millions of tax returns untouched by humans, including auditing every single entry in most of them. The NTA can do this by relying on recycling of existing data established by the business sector as part of its recording of business transactions. Businesses do it on computers with software designed to handle these exchanges of information. It means that, as a taxpayer, I may go skiing this weekend instead of sitting indoors punching numbers into some tax program on a sunny winter weekend. I love it both as a taxpayer and from nine to five as a tax auditor.

A new deduction wanted by the Norwegian government illustrates why TPIR is the way to go. The government wants personal expenses for toll roads to be deductible from income. There is a logic behind that, but that’s not my focus. The public toll roads are 100% digital and all payments are linked to an identified person. To avoid double deductions, the gross toll road payment must be reduced by the amount each individual has reclaimed from his employer or deducted as business expenses. A large part of these toll payments sits as digital information on the servers of the employers.

The NTA’s way of thinking is that TPIR is our friend. The payments on cars registered to non-business people may be reported as TPIR from a few toll road operators. The correction for reclaimed or already deducted payments may be one more item in the existing TPIR filing from employers on each employee. We do not know at this stage what percentage of all the tax returns we may prepopulate with the correct deduction by using TPIR, but we are aiming very high. Designing the compliance program for this deduction without TPIR is not a tempting alternative.

Establishing the infrastructure needed for TPIR of a specific set of data is the main cost. The exchange itself is comparably very low cost if the software doing the job is well designed and integrated in the data systems of the reporting entities. Ask any tax manager, and they will tell you that tax auditors asking for information that the Enterprise Resource Planning (ERP) software (which manages business processes and accounting) is already programmed to produce is a small burden compared to collecting ad hoc sets of data that the ERP is not programmed to report.

We could do targeted audits, waiting three to five years and launch an identical audit program, collecting the same dataset ad hoc, and then spend a lot of resources on sorting out all the mistakes and non-compliance uncovered by the audits. It does not make sense in 2019 to operate like this. It is much more cost efficient to do the work needed to design the software and needed infrastructure that ensures that there will be a steady flow of good quality TPIR.

Within the OECD, there is a program called SAF-T, Standard Audit File for Tax. The core of this is that businesses must run their accounting on software designed for exchange of data in a standard digital format. When this is implemented, my guess is that we will see a new drop in cost per gigabyte TPIR, and it will certainly reduce the taxpayer’s cost of handing over data in response to ad hoc requests. Portugal is at the forefront of using SAF-T, with ten years of experience, generating gigabytes of TPIR monthly on VAT transactions and much more (see here and here).

The constant expansion of what tax administrations receive as TPIR should also influence the more rational taxpayers. They now know that you never know what the next dataset will be. Would you engage in a toothpaste scheme if you knew that FATCA was two years away? What tax administration veil of ignorance will be the next to fall with the help of TPIR? It gets harder and harder for the taxpayer to rationalize away the risk of future exposure of presently hidden activity.

I will restate that TPIR is a superb ingredient in the hands of a skilled chef in a well-equipped kitchen, but add that you really need a close partnership with your suppliers to make it happen without prohibitive costs.

Yes, we really need more information.

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.

Today at McGill Law: Singer on Remission Orders

Today at McGill Law, Prof. Sam Singer of Thompson Rivers University will present his work in progress, entitled "Evaluating Canadian Tax Remission Orders: A Debt Relief Vehicle for Taxpayers," as part of the annual Spiegel Sohmer Tax Policy Colloquium at McGill Law.

Here is the abstract:

Remission orders, although rare, serve important functions in the Canadian tax system. This paper draws from a comprehensive study of federal tax remission orders issued between 1998 and 2017. It presents general findings about remission orders in that time period, including the number of remission orders issued, their reported costs, and the number of remission order applications. The paper identifies the five most common categories of reasons cited for granting remission orders. It then applies tax policy analysis to assess the two most frequent reasons for granting remission orders: to provide debt relief for financial hardship and/or extenuating circumstances, and to provide remedies for government errors and delays. This study also highlights concerns about the federal tax remission system, and provides recommendations for improving its fairness, transparency, and accountability.

For those not familiar with the practice of remission in tax, this is a regime under which the taxpayer can ask the tax authority to forgive their tax debts, manly due to hardship or extenuating circumstances. This was a new concept to me when I came to McGill in 2012 and learned about a rather generous remission order granted to Blackberry in what I assumed to be a last-ditch effort in the nature of industrial policy and national protectionism--but Prof. Singer's paper makes clear that the remission order is not only (or even primarily) for massive multinational companies. I am bothered by the idea that the tax authority has a more or less obscure power to forgive the tax debts of some taxpayers under unclear circumstances and using criteria that are not transparent or reviewable. This seems to me to be a tool which could create great distrust in the tax system, in terms of both procedural fairness for taxpayers who don't know about or get remission orders but also in terms of the opacity behind which some officials appear to have a tool to help selected individuals at their will. I look forward to the discussion of Prof. Singer's paper and the implications of this research for the big questions of tax governance.

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 will explore 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. As always, the colloquium is free and open to all.

The Colloquium is convened by Allison Christians, H. Heward Stikeman Chair in Taxation Law.

2018 Tax Policy Colloquium at Mcgill Law

I'm very happy to announce the 2018 McGill Tax Policy Colloquium, which will take an interdisciplinary approach to tax policy analysis. The colloquium is made possible by a grant from Spiegel Sohmer. 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. The distinguished speakers who will contribute to this year’s colloquium include:

• Oct 22: Sam Singer, Assistant Professor, Faculty of Law, Thompson Rivers University. Prof. Singer's research focuses on tax dispute resolution, the policy rationales underlying tax measures, and the regulation of charities and charitable giving.
• Nov 12: Lindsay Tedds, Scientific Director of Fiscal and Economic Policy and Associate Professor, Department of Economics, University of Calgary. Dr. Tedds’ research focuses on tax policy and she has done extensive work with the Government of Canada in the areas of public economics and policy implementation.
• Nov 19: Laurens van Apeldoorn, Assistant Professor of Philosophy, Leiden University. Prof. Van Apeldoorn’s research examines the nature and prospects of the sovereign state, with a special focus on the normative aspects of international taxation rules in relation to the global justice.
• Nov 26: Frances Woolley, Full Professor, Department of Economics, Carleton University and President, Canadian Economics Association. Prof. Wooley’s expertise and research focus on economics of the family, gender and intra-house inequality, taxation and benefits for and of families, and feminist economics. 
• Dec 3: Ruth Mason, Full Professor, School of Law, University of Virginia. Prof. Mason’s research focuses on international, comparative, and state taxation. Her work on tax non-discrimination laws’ effect on cross-border commerce has been cited extensively, including by the U.S. Supreme Court.

As always, colloquium presentations are open to all, and I will post more information closer to each date.

Introduction to Tax Policy Theory

Every year I make this primer, an Introduction to Tax Policy Theory, available to my tax policy students (and otherwise send it whenever I'm asked for an overview look at tax policy basics), so I decided to post it on SSRN. It is not a published piece but may be some day. Here is the description:

Taxation involves the compulsory transfer of resources among members of society. Tax policy is concerned with how societies carry out taxation. That is a technical and legal question, but it is inescapably a political, social, and cultural one as well. To study tax policy is to engage simultaneously with the existential philosophical foundations of taxation: why and how societies tax. This introduction to tax policy theory presents an overview of tax policy discourse. The goal is to outline a working framework for reflection and analysis to examine the ways in which current assumptions and approaches require further development.  

Part I asks why we tax, and posits state-building, internal management, and negotiated expansion as three broad goals. Part II asks how we should tax, and examines the conventional frameworks of equity, efficiency, and administrative capacity as the three guiding principles for most tax policy analysis. Part III concludes.

And here is the brief TOC:

I.          Why Do We Tax?        

A.         State Building

B.         Internal Management

C.         Negotiated Expansion

II.         Normative Foundations          

A.         Equity

B.         Economic Efficiency

C.         Administrative Capacity

III.        Conclusion

Input as to what is missing is welcome; this is a work in progress. 

Taxing Income Where Value is Created: draft and powerpoint

I have posted a draft of a work in progress, Taxing Income Where Value is Created, which is co-authored by Laurens van Apeldoorn (Leiden University). Here is the abstract:

Subscribing to the core idea that income should be taxed where value is created, the international community has devised a set of tax base protecting rules to counter a world in which highly profitable multinational companies like Apple, Google, and Amazon pay very little in taxation. But these rules rely on assumptions about value that tend to allocate most revenues from international trade and commerce to rich countries while, whether intentionally or not, depriving poorer countries of their proper share. This article argues that a rigorous examination of what we mean by value would prompt changes in this allocation. To demonstrate with a concrete example, the article examines wages paid to workers in low income countries and reveals a clear and well-documented gap between market price and fair market value resulting from labor exploitation. It then demonstrates how to apply this knowledge to existing international tax rule sets to reallocate profits to align more closely to the value-based ideal. If accepted in principle, the proposed approach could be expanded beyond wages to consider other areas in which prices do not align with value creation. Ultimately this could provide a more detailed template to reallocate multinational revenues in a way that does not inappropriately benefit richer countries at the expense of poorer ones.

My powerpoint presentation of the paper is available in PPT here and in PDF here. I have used various versions of this powerpoint in presenting this paper a couple of times now, with (hopefully) some improvements in each presentation.

As depicted in one of my slides, I have encountered a perplexing mix of reactions to the ideas presented in this paper. Feedback ranges from "will make administration and compliance impossible for tax authorities and taxpayers alike" to "won't change anything, profit shifters gonna profit shift" to "great idea; doesn't go far enough." I wonder if a competent authority faced with a price adjusted per our proposal would see it as a position reasonable and consistent with the ALTP as we do, and whether it actually matters to the competent authority whether it is reasonable or consistent or not (I will admit that I am skeptical that competent authorities work out disputes among themselves on the merits: see this paper for why).

This is still a work in progress and comments are welcome.

Today at McGill: Brooks on Comparative Tax Law: Development of the Discipline

Today at McGill, Professor Kim Brooks will present her current work in progress as the final speaker of the 2017 tax policy colloquium at McGill Law. Here is the abstract:

The new millennium has inspired renewed interest in comparative law generally and comparative tax law in particular, with practitioners and scholars rapidly building the literature that defines the modern field. Despite the increase in authors undertaking comparative tax work, however, the contours of the theoretical and methodological debates lack definition; despite several leading articles that call on scholars to actively engage with each other on matters of approach, most scholars continue to “write alone”; and despite the increasing availability of thoughtful comparative law textbooks and monographs, tax scholars do not connect their work with debates in comparative law generally.

In this paper, I provide a foundation for future comparative tax law research. Part 1 reviews the major debates and theoretical directions in comparative law scholarship, focusing on the recent work in the field. Part 2 offers an intellectual history of comparative tax law scholarship, identifying the major contributors to the discipline of comparative tax law and conceptualizing the field’s development in five stages. Finally, Part 3 generates a taxonomy of modern comparative tax law research based on its
underlying purpose, explores how that work connects to the comparative law field, and identifies approaches to comparative tax law method, in the light of the work to date, that best advance tax knowledge.

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, in celebration of the centennial anniversary of the introduction of federal income taxation in Canada, the Colloquium focuses on the historical significance and development, as well as the most recent challenges, of the modern tax system in Canada and around the world. 

The Colloquium is convened by Allison Christians, H. Heward Stikeman Chair in Taxation Law. 

Prof. Brooks' talk will take place from 2:35-5:35pm in the newly renovated Chancellor Day Hall Room 101, 3644 Peel Ave, Montreal. All are welcome to attend.

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.

Today at McGill: Mehrotra on value added taxation

Today, Ajay Mehrotra, Northwestern University and the American Bar Foundation, will present "The VAT Laggard: A Comparative History of U.S. Resistance to the Value-Added Tax, as part of the annual Spiegel Sohmer Tax Policy Colloquium at McGill Law. This is a fascinating topic as the United States considers major tax reform without explicitly embracing VAT as much of the rest of the world has done. Prof. Mehrotra's new project will explore the U.S. position in light of how Canada, Japan, and other jurisdictions were able to overcome historical resistance to a national VAT by adopting a Goods and Services Tax (GST).

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, in celebration of the centennial anniversary of the introduction of federal income taxation in Canada, the Colloquium focuses on the historical significance and development, as well as the most recent challenges, of the modern tax system in Canada and around the world. The complete colloquium schedule is here.

The Colloquium is convened by Allison Christians, H. Heward Stikeman Chair in Taxation Law. 

Ajay Mehrotra's talk will take place from 2:35-5:35pm in New Chancellor Day Hall Room 101, 3644 Peel Ave, Montreal. All are welcome to attend.