Racking Up the Money: RICO and the Revenue Rule

I am pretty sure the Revenue Rule will not survive the current era, so this paper by Kye Handy is of interest. Abstract:

The Revenue Rule, a common law rule from British court systems, prevents foreign countries from bringing claims in the United States to enforce or adjudicate tax claims that did not happen in the United States. The Supreme Court in Pasquantino v. United States held that Canada’s right to collect imported liquor taxes was not barred by the Revenue Rule. However, the 2nd Circuit in European Community v. RJR Nabisco Inc., ruled the European Union and Colombia could not recover lost tax money or enforcement costs from cigarette smuggling under RICO because of the Revenue Rule. The European Community petitioned the Supreme Court. After accepting the Community’s petition, the Court reversed and remanded the case back to the 2nd Circuit to be reheard in light of Pasquantino. The 2nd Circuit did not change its ruling citing Pasquantino as a criminal case brought by the U.S. government. With no distinction between criminal and civil RICO cases in current jurisdiction, this comment seeks to provide a solution to the split between the Second Circuit and the Supreme Court. This comment argues in favor of limitations being placed on the Revenue Rule so that it can never trump RICO claims in United States courts. In the alternative it argues if limitations cannot be placed upon the Revenue Rule then the only option is abolition. Lastly this comment provides that if limitations and abolition are not the answer, then foreign countries should appeal to the United States government to bring the RICO claims on their behalf.

And from the paper:

The Racketeering Influence and Corrupt Organizations Act (RICO) allows foreign countries to bring suit in America for illegal acts committed by American citizens. Unfortunately for these foreign countries, a common law rule denies them the remedies they seek. The Revenue Rule bars foreign RICO claims because of an almost 300 year old doctrine which states that “no country ever takes notice of the revenue laws of another.”

The author calls the rule an "injustice" and suggests it should be limited or abolished; I'd say that 300 years of history suggests there must be some good reason for the limitation, but I applaud the effort to make an argument: it is certainly more than we have seen in the context of FATCA even though it almost goes without saying that FATCA is itself, or at minimum portends, the end of the Revenue Rule as we know it. The comment gives a too-brief overview of the history but at least provides some useful sources; worth a read.

 

Netherlands Bank prohibited from discriminating against "US persons"

Here is an interesting development for FATCA: a case in which a small Dutch bank pre-emptively shuttered the accounts of 150 persons in order to avoid having to fulfill US FATCA information sharing requirements. Of course, as we well know, denying accounts to "US persons" does not exempt anyone or any entity from FATCA, but only saves the cost of annual information gathering and reporting. From the story:

BinckBank N.V. (h.o.d.n. Alex), een beleggingsbank, maakt verboden onderscheid op grond van nationaliteit door een man vanwege zijn Amerikaanse nationaliteit uit te sluiten van zijn dienstverlening.

Which very roughly translates to "BinckBank NV (DBA Alex), an investment bank, may not discriminate on grounds of nationality by denying services to a man with American citizenship."

From the case, again, very roughly translated:

A man with Dutch nationality lived most of his life in the Netherlands. He is a U.S. citizen because he was born in America. That makes him liable to tax in America, as a "U.S. person." The man has an investment account with Alex. ... Following an agreement between the Netherlands and the United States to exchange financial data, the Bank terminated the services of the man and all other (150) U.S. persons on 1 December 2013. In the course of 2014, [a law to implement an IGA with the United States was] submitted to parliament. The aim of the law is to ensure that U.S. persons who live outside of America file their tax returns with the IRS. As of July 1, 2014, Dutch financial institutions must provide information on U.S. persons to the IRS. Alex does not want to comply with the obligation to provide all transaction data by U.S. persons, because to do this, the bank must make significant adaptations to its administrative systems. Given its small number of U.S. person clients, this adaptation would impose disproportionate costs, with additional disclosure services producing a loss-making operation. According to the bank, the discrimination is not banned because it is based on a generally binding regulation. The bank also argues that the discrimination be allowed to continue, because the financial consequences are unacceptable. 

Verdict

The Board for the Protection of Human Rights ruled against BinckBank, finding that terminating service to the man constituted unlawful discrimination on grounds of nationality.

Reasoning

The bank states that U.S. persons can no longer hold accounts. The bank therefore denies its services to people with U.S. citizenship. This is direct discrimination on grounds of nationality. Direct discrimination is prohibited, unless the law makes an exception, such as in a generally binding regulation that compels a distinction. The Board considers that the bank does not oblige the agreement and the law envisaged does not allow for exclusion of individuals with U.S. citizenship. The bank has merely chosen for commercial reasons to deny service to Americans. The Board therefore dismisses the bank's statutory exception. The Board also considers that there is no reason to make the ban on the use of direct discrimination on grounds of nationality. This decision was made on the grounds of reasonableness and fairness.

My informal translator had a little trouble with the last paragraph; suggestions welcome.

From this we can see that small institutions are between a rock and a hard place, at least in the Netherlands and likely many other places as well, but only to the extent that foreign governments employ their human rights regimes to step in and protect Americans from the skewed incentives created by American law. I note that the Netherlands, along with most other IGA partner countries (but not Canada) has included an express provision forbidding discrimination, but this applies only to institutions that are not required to register because they are exempt:

Annex II: Non-Reporting Netherlands Financial Institutions And Products
II. Deemed-Compliant Financial Institutions.
A. Deemed-Compliant Financial Institutions
1. Financial Institutions with a Local Client Base
j) The Financial Institution must not have policies or practices that discriminate against opening or maintaining accounts for individuals who are Specified U.S. Persons and who are residents of the Netherlands.

I had assumed this meant that it would be ok for FIs that are required to comply with FATCA to turn away US customers, as appears to be a growing practice. Not so, if foreign governments can be relied upon to force their own institutions to bear the costs of lending assistance to the United States in perfecting its extraterritorial tax claims, under the mantle of protecting US persons' rights against discrimination in these foreign territories. 

I note that in this case the discrimination claim was mounted by the accountholder to preserve his right to banking services. I await the inevitable barrage of cases that surely must arise as individuals assert other discrimination-based claims in connection with the highly problematic U.S. tax regime.

As a not insignificant aside, it is worrying to me that here we have a foreign court explaining that the purpose of FATCA is "to ensure that U.S. persons who live outside of America file their tax returns with the IRS." I have seen absolutely no evidence that this is the case; I have seen absolutely nothing in any iteration of FATCA to suggest that the idea behind this legislation was to perfect US taxation on those living abroad with US status as citizens or otherwise. Rather, the aim of FATCA was to stop Swiss bankers selling tax evasion to Americans living in America. 

This may seem like an insignificant point but I believe it is important because one day we will look back and reflect upon what will surely turn out to have been a spectacular mistake: that FATCA induced governments around the world into a headlong rush into global automatic information exchange on the strength of an unexamined idea about which taxpayers belong to which countries. One day we are going to have that discussion, and it will need to be remembered that when the world jumped on the FATCA bandwagon, no official in any government apparently considered whether it was right, or good, or just, for the US to impose its income taxation on the basis of legal status. I think when that discussion finally takes place, that omission will be seen as fatal.

In Slovakia, Real Lottery Prize Goes to Tax Man

This is a novel idea, at least, new to me:

Over the last 10 years, Slovakia’s revenue from value-added taxes, a type of sales tax, has declined. But hiring auditors and pursuing individual merchants and service providers in court is expensive and slow. So last fall, the government decided to put a lottery in the mix.

The idea is to enlist average citizens to collect receipts from their purchases and register them with the government, creating a paper trail for transactions and forcing restaurant and shop owners to pay the sales taxes they owe. As Slovakians register their receipts for the lottery, a computer will also tell them if a merchant has issued a receipt with a fake tax identification number, so they can report suspected fraud. 

For any purchase worth more than 1 euro, or about $1.38, Slovakians can enter their receipts in a monthly lottery to win €10,000, a car or a chance to be a contestant on the Slovakian version of “The Price Is Right.” 

Tax officials say the lottery is already having a big impact, and other European countries that are also struggling with the collection of value-added taxes have considered it — including Portugal, which started its own tax lottery on Thursday. In Slovakia, about 450,000 people have taken part, registering about 60 million receipts, officials said. 

As we well know, third party reporting is an excellent way to induce honesty in taxpayers. Winning a lottery is a long shot but its very existence promotes a certain culture to develop around the reporting of taxable sales. And the winners make for good tv.

Webcourse on Cayman Islands

Andrew Morriss presents a webcourse of interest, starting May 5. The objective:

"explore the rich history of the islands and talk to local experts about the institutional, legal, and regulatory frameworks, predicated on property rights and a rule of law, that led to this mass wealth creation and complete economic transformation in only 20 short years."

Professor Morriss wrote up his research with Tony Freyer on how the Caymans became an offshore financial center, which I posted and discussed briefly here. That paper pushed buttons and I am sure the webcourse will do the same, as the international taxation landscape is undergoing some serious growing pains of late and governments around the world are reconsidering the promises and perils of regulating behavior in a globally integrated economy.

From the NYT: Lessons for International Tax from Oregon's Role as Sales/Use Tax Haven

Today's NYT has an article entitled "Buyers Find Tax Break on Art: Let it Hang Awhile in Oregon." The artful dodge is accomplished via simple arbitrage between a source, an intermediary, and a residence jurisdiction, so the story gives a nice illustration of a phenomenon we see play out on the international stage every day, only we have generally been taught to associate tax avoidance arbitrage with the likes of GE, Google, Apple, etc. Here is the simple pattern:

1. The collector lives in state A (the residence state)--in this example, California. 
2. The collector buys an expensive work of art in state B (the source state), in this case, New York. As the source state, state B could extract a tax purely on the occurrence of the sale, but chooses not to, rather basing its sales tax on place of use. 
3. State A generally imposes use taxes on items purchased from outside the state and brought into the state (this is to treat external sales the same as internal ones, which would be subject to sales taxes). But there is an exception: if an item is "used" in another state first, it is not subject to the use tax when it finally makes its way to state A.
4. To avoid the use tax, the collector can't keep the item in state B because then state B's sales tax will apply.
5. In comes state C, with no sales or use tax, in this case, Oregon. State C is a safe haven. Collector parks the asset in state C long enough to satisfy the residence state's exemption. 
6. Hey presto, neither sales nor use tax. 

Nothing illegal has occurred, as the NYT is very quick to point out. But it is also clear that this is a story for a reason, and the reason suggested by the headline is this outcome produces unfairness. 

After all, these are rich people dodging around helpless tax states with the help of sophisticated tax planners. This seems worth examining further given the parallels to corporate social responsibility and international tax planning à la Caterpillar as we have seen recently in the news, and in light of the actions of some states to try to curb international tax planning ... and please do not let it escape notice that this list includes Oregon. 

Let's identify a few problems and a few solutions in the overall tax regime created by the conflicting rules in the three independent states as suggested above. The problems seem to be:

1. residents of state A will likely object that it is not fair for state A to tax sales occurring in the state and not sales occurring outside the state (violates horizontal equity).
2. some residents of state A will likely object that it is not smart to tax sales occurring in the state and not sales occurring outside the state (people will react accordingly and the sales tax base will disappear). 
3. on the other hand, some residents of state A will argue it is smart to do this because it means more people will buy nice things and ultimately bring them into the state C, causing other spillover benefits in the long run. (If so we should question why state A has a use tax at all.)
4. state A cannot control either state B or state C but unless strict capital or other regulatory controls are applied against state A's population, state A's rules necessarily interact with B and C.
5. residents of state B might object that it is not fair for state B to tax sales only if the assets purchased stay in the state and not if they leave the state (violates horizontal equity)
6. on the other hand residents of state B will likely view it as smart for state B to tax sales only if the assets purchased stay in the state and not if they leave the state, because then more sales will occur in state B and with those sales come jobs and other spillover benefits.
7. state C just doesn't tax these things and so would seem to be neutral, acting without fault in the arbitrage.
8. state C residents likely view this neutrality as smart because the state benefits by facilitating the arbitrage between states A and B, and it can be expected to defend this benefit.
9. but what is smart for either states B or C or both creates an unqualifiedly unfair situation in state A.

So much for the problems. Are there solutions?  Again the illustration is enlightening.

1. A, B, and C could get together and demand a federal regulation to stop the arbitrage amongst the states. They could, but they won't (cooperation fails).
2. State A could threaten states B and C to stop facilitating the arbitrage or else (coercion). But what, exactly, does state A want? Does it want to force state B to tax on the basis of source? Does it want state C to tax as the conduit? Either of those would produce fairness in that the individuals would pay tax somewhere, but in neither case would it be state A collecting the tax. Also, depending on state C's political, economic, and social power relative to state A, the strategy could yield results, or not; certainly if harsh tactics are used, state A will be resented by its neighbors, and for what? No revenue, but a globally fairer system that neither B nor C wanted.
3. State A could change its own law to repeal the first use rule, which would eliminate the benefit of the arbitrage. No more icing on the cake per the collector routing through Oregon. (when people say tax planning is icing on the cake as the person did in this article, I picture a tiny cake with a tower of icing. So much icing that by the time you eat it all, there isn't any room for cake. But I digress.)

Now does it not seem that state A has the most power to fix the situation if it chooses to change its own law to nullify the arbitrage? Is this not what Oregon and other states are doing vis à vis the foreign earnings of state-registered companies?

This is what I am talking about when I say that tax avoidance is as much a supply side as a demand side problem. We can blame states B and C all day long for facilitating tax avoidance. But State A often holds the power to solve the problem itself. If state A does not do that, then we should be looking at why state A does not do that rather than why state B or state C stand by and allow or encourage and benefit from the arbitrage. Are democratic decisions being made to ignore the fairness problem in order to achieve a solution some people in state A consider to be smart, and if they are doing so, who are those people who think this is smart and have the people in state A who do not think it is so smart been allowed access to lawmaking in the same manner and capacity of those who do think it is smart?

Note that in this case there is no discussion about the problem of information asymmetry--that is, we are not looking at state B or C hiding the fact of the sale from state A. That is a different problem which state A might not be able to solve on its own (actually I believe it could but that is another story). But in terms of legal tax avoidance, I think this story is a wonderful illustration of the argument I often make, for example here and here, about who we should be looking to when facilitating legal tax avoidance becomes the central defining characteristic of a tax regime created by the interaction of multiple jurisdictions.

Thanks, New York Times, for inadvertently covering international tax policy in a fun story with pictures and even a graphic.

Call for Papers: Tax Justice & Human Rights Symposium, McGill, June 2014

We invite paper proposals for a Tax Justice and Human Rights Research Collaboration Symposium, to be held at the McGill Faculty of Law, Montreal, Quebec, from Wednesday to Friday, 18-20 June 2014.

The symposium will explore the fundamental connections between taxation and human rights by providing a forum for collaboration among students/emerging scholars, academics, civil society organization representatives, tax justice advocacy groups, tax policy makers, and researchers from around the world. The symposium seeks especially to bring developing-world perspectives into the discourse and to foster scholarly work for dissemination both within and beyond the academic setting.

The plurality of experience, in terms of training, background, country of origin, and area of expertise, will ensure that discussions and activities at the conference will have real-world impact. Indeed, there is a need within the tax-policy world for more cross-pollination between academic researchers and on-the-ground decision-makers. The connections and networking that we envision will take place at this conference should allow for meaningful discussions for years to come.

Paper proposals must be between 300-500 words in length and should be accompanied by a short résumé.

Please submit your proposal to the conference convener Professor Allison Christians, at [allison dot christians at mcgill dot ca].

Deadline for submissions: 30 April 2014. Successful applicants will be notified in early May 2014.

An initial 3-5 page sketch of the paper must be submitted by the end of May for circulation among panelists and feedback from the conference committee, but completed papers are not required; rather, we seek a readiness to collaborate and develop new heuristics for thinking about taxation and human rights. 

Conference fees for presenters will be covered by the conference organizers; travel and accommodation bursaries may be available to scholars and tax justice advocates from the Global South in connection with support from the Tax Justice Network, Canadians for Tax Fairness, Halifax Initiative, and other partners.

Please visit the Symposium's page on the Stikeman Chair in Tax Law website for more information. 

Avoidance, Evasion, and Taxpayer Morality

In light of the current sacrificing of Caterpillar on the altar of political posturing by lawmakers who are ultimately responsible for designing a global system that ensures US multinationals a world of tax-favorable opportunities, my latest SSRN post, Avoidance, Evasion and Taxpayer Morality appears à propos. It explores the difficult terrain we traverse when, confronted with the parade of household names apparently paying little or no taxes anywhere, we start talking about ethics and morality instead of law. Abstract:

In popular discourse, tax evasion by wealthy individuals is conflated with tax avoidance by multinational corporations to tell a single story about tax dodging and its negative impact on society. But conflating avoidance and evasion muddies the tax policy waters in important ways by turning legal obligations into moral ones. This Essay, prepared in connection with the Washington University School of Law colloquium on “Conceptualizing a New Institutional Framework for International Taxation,” makes the case for caution in using morality as a stop-gap measure to avoid drawing a regulated line between tax evasion and tax avoidance, while still meting out punishment within the undefined space between these two poles. It acknowledges the political gains derived from the rhetoric of morality but argues that the alternate view — that taxpayer behavior must ultimately be managed by law rather than social sanction — has the best chance of driving tax policy toward greater coherence in the long run because it makes the best case for more transparency in both lawmaking and the consequences of legislative decisions.

As always I welcome comments.

Proposed Legislation will Shine More Light on Lobbying, Self-Dealing in Congress

Last week, US Congressman Mike Quigley (D-IL) introduced the Transparency in Government Act of 2014, a bill "to amend the Ethics in Government Act of 1978, the Rules of the House of Representatives, the Lobbying Disclosure Act of 1995, and the Federal Funding Accountability and Transparency Act of 2006 to improve access to information in the legislative and executive branches of the Government, and for other purposes." I am always worried about those other purposes, because funny things tend to get slipped into law this way, but the bill is interesting.

Government Executive Oversight calls it "a grab-bag transparency bill" that would "use technology to boost public oversight of program spending, standardize agency reporting on use of the Freedom of Information Act, shed greater light on lobbying and add new requirements for judges to disclose financial investments," as ell as "toughen online disclosure requirements for lawmakers’ personal finances, office expenses, gift reports and foreign travel." All that sounds like it is worth doing.

I especially like the idea of putting completed FOIA requests online, but would like to see the law go even further: if it's FOIAble it ought to be automatically disclosed and available to the public, not have to wait for individuals to file applications. I realize that this presents administrative costs but FOIA is a constructed barrier that unnecessarily imposes costs on individuals to release information that is of public benefit. If a government is producing thousands of pages of ultimately public documents I don't see why the individual must be forced to compel publicity in the vast majority of cases; the opposite should be true.

The other main part of the bill is its attempt to make public officials more honest about their backroom dealings, including politicking and rule changing.

Finally it's about time for another attempt to stop Congress from inside trading after they "quietly" undid the 2012 Stop Trading on Congressional Knowledge (STOCK) Act which was meant to curb this behavior. Congress, it seems, was worried that transparency would expose members to identity theft. This is something that Congress worries about a lot when it comes to themselves but seems incapable of determining how to stop when it comes to those not in Congress.

It is nice to see at least one Congress person push for transparency and accountability in Congress, but given past experience there is unfortunately all too much room for doubt that any reforms will stick even if they pass. I always hope to be proven wrong in this skeptical view.

Scott Wilkie: Next Wednesday at McGill Law

I am very pleased to be hosting international tax guru Scott Wilkie at McGill Law next Wednesday, where he will deliver a talk on current topics in international taxation, more info here. The talk is scheduled to commence at 12:30 pm; members of the public are warmly welcomed.

Location: McGill Faculty of Law, 3644 Peel Street,
Old Chancellor Day Hall, Room 16.

Date and Time: Wednesday, 26 March, 12:30–14:00.

This event is free and open to the public.

Next Week at NYU: Tax and Corporate Social Responsibility Symposium

I'll be taking part in this symposium on corporate taxation next Tuesday at NYU. Here is the description:

Tuesday, March 25, 2014  |  9:00 AM - 12:00 PM
D'Agostino Hall, Lipton Hall 

This symposium will feature two panels, “Should Corporations Pay Tax?” and “Should Corporate Tax Returns Be Public?”   

Participants include Reuven Avi-Yonah (Michigan), Allison Christians (McGill), Peter Barnes (Duke), Michael Schler (Cravath), Joshua Blank (NYU), Helen Scott (NYU), David Kamin (NYU), and possibly others.   

The event will be co-hosted by the Graduate Tax Program and the NYU Journal of Law & Business.   

It will take place from 9:15 AM to 12:30 PM on March 25th in Lipton Hall, D’Agostino Hall at NYU Law School, located at 110 West Third Street.

Additional info here, including this description:

From the enactment of the corporate excise tax in 1909 to the present, the corporate tax in the United States has generated intense debate.  Topics at the center of this debate have ranged from the fundamental purpose of the tax to moral obligations of corporations to pay tax to tax transparency and accountability.  This half-day symposium will continue the discussion by addressing two questions:  Should corporations pay tax?  And should corporate tax returns be public?  Each panel will feature leading tax and corporate law scholars and distinguished practitioners.  Participation from the audience in the discussion will be encouraged.

My recent writing on these subject includes a short essay entitled "How Starbucks Lost its Social License — And Paid £20 Million to Get it Back" on Starbucks' tax-dodging related image problems in Europe, a book chapter entitled "Tax Activists and the Global Movement for Development Through Transparency," on the global corporate tax transparency movement, and an article article entitled "Drawing the Boundaries of Tax Justice" which analyzes the fundamental justice questions surrounding the taxation of corporations (as well as humans).

Is It Time for a Taxpayer Bill of Rights? Tax Analysts Conference: March 27

Tax Analysts is hosting a conference on March 27 in Washington DC that is of broad interest. The schedule includes National Taxpayer Advocate Nina E. Olson, as well as Christopher S. Rizek of Caplin & Drysdale and former Treasury Deputy and Acting Assistant Secretary for Tax Policy Alan J. Wilensky.

Chris Bergin of Tax Analysts & Forbes will be hosting and he has a number of articles on the problems of taxpayer rights and IRS accountability that should be read by everyone who cares about tax policy. Here are just a few:

• It's Not Just About Lois Lerner
• More Arrogance And Secrecy From The IRS
• Transparency: Worth Fighting For and Tax Analysts v. Internal Revenue Service 
• 'Your Voice At The IRS' Silenced

It should be noted that, of course, the IRS already does have a declaration of taxpayer rights. However, it is declaratory and not legal in nature, so apparently has no legal effect (though as far as I know, this has not been tested through litigation). The taxpayer advocate has been calling a legislated version for a long time, as I discuss here. 

Conference details:  

Thursday, March 27, 2014
9 - 11 a.m.  
Continental breakfast at 8:30 a.m.
The event is free and seating is limited.

Ronald Reagan Building
Polaris Suite
1300 Pennsylvania Ave. NW
Washington, DC 20004

Cockfield on Taxpayer Privacy and FATCA

Professor Art Cockfield has two upcoming talks of note, on the topic of "The Privacy Implications of the Foreign Account Tax Compliance Act (FATCA)". The first talk will be held on Friday 21 March starting at 3:15pm at the University of Toronto (Faculty Club) as part of the CCLA 'Pathways 2 Privacy' conference. The second one will be held on Sunday, March 30 starting at 10 am at Glendon College, York University, as part of the 19th Annual International Studies Symposium. Professor Cockfield's remarks will be based on the Finance Department submission he and I co-authored, which you can find here.

Tomorrow at McGill Law: Panel on Distributive and Labour Justice

Catherine Lu of McGill and Pablo Gilabert of Concordia will be presenting on the topic of global principles of distributive and labour justice tomorrow at 12:30 pm as part of McGill Law's Speaker Series on Economic Justice, sponsored by the Centre for Human Rights and Legal Pluralism. I will be moderating the discussion. This event is free and open to all, details:

Date: 14 March 2014
Time: 12:30-14:30
Location: Room 609 New Chancellor Day Hall
3644 rue Peel
Montreal Quebec Canada , H3A 1W9

I have started reading Catherine Lu's 2006 book, Just and Unjust Interventions in International Law: Public and Private. In it, she argues that the concept of state-to state intervention as a moral problem rests on an image of sovereignty as privacy, and therefore uses the same imagery of intrusion that we see in the domestic privacy context as a basic element. The domestic case against government intrusion into private affairs of individuals and social groups (family) involves balancing between curbing domestic abuse and government intruding too deeply into family lives.  Lu argues that the same principles animate the question of legitimacy in intervention, making similar normative claims to privacy accorded to families in the domestic realm. Lu thus argues that:

The concept of intervention .. assumes some distinction between private and public domains. In the Westphalian model of interstate relations, the posited sovereignty of states functions like privacy to give states a right to be free from interference by outside parties --especially other states, as well as non citizens, nongovernmental organizations, and even the international community -- in their own internal affairs."

The public/private argument is an interesting and I think controversial position that adds to a discourse about sovereignty that we see being challenged all the time in taxation, including (especially of late) in taxation. Consider the OECD's project on BEPS, the US imposition of FATCA on the rest of the world, the rise of global tax justice activism, the addition of taxation to the corporate social responsibility discourse, and the UN tax group's attempt to change the conversation on transfer pricing. There are many other examples in recent and not so recent history.

It will be interesting to discuss the pressures involved in the area of labour. I have viewed it as essentially necessary for states to trap labour in order to extract enough revenues to pay for the state (in the form of taxation or otherwise). It is clear that governments have come to rely on labour as their primary resource of such revenues over the past century, so cannot let labour move as capital does, footloose and free of obligation.

Video & Audio Resources on Political Theory, Inequality, Finance, and Governance

Russell Haggar, a Sociology and of Government and Politics teacher in the UK, has put together a a visually alarming but very useful "Compendium of Video and Audio Materials for Advanced Level Government and Politics and Sociology Students and for the General Reader," with sections on Political Theory, Welfare and Inequality, Labor Politics, the Financial Crisis, and others. Here is but a sample of what you will find:

• Stephanie Flanders’ three part series for the BBC: Masters of Money: John Maynard Keynes: Friedrich Hayek: Karl Marx 
• Laurie Taylor : Thinking Allowed on Capitalism with Ha-Joon Chang and David Harvey
• Who Owns the World? by Noam Chomsky
• Why Equality Is better for everyone [Video on The Spirit Level from The Equalities Trust]
• Gordon Brown and the Financial Crisis [Andrew Rawnsley for Channel 4]
• RBS : Inside the Bank that ran out of money  
• Meltdown: The Global Financial Collapse (four part series)
• 3 Part BBC Series by Michael Cockerell on The Great Offices of State, with part 3 entitled The Secret Treasury

Many, many more resources at the link.

This Sunday at McGill: Info Session on FATCA

This Sunday there will be a Foreign Account Tax Information Act (FATCA) Information Session at the Faculty of Law at McGill, featuring John Richardson from Toronto and Andrew Grossman from London (UK); each has extensive experience with U.S. taxation issues. The session will be geared toward those with US status and the speakers will discuss issues of disclosure, compliance, and other obligations raised by this legislation.

This event is free and open to the public. Please note that it is St. Patricks' Day so attendees are advised to plan their travel arrangements accordingly. Details:

16 Mar 2014 

12:00 to16:00

Location: Chancellor Day Hall, Maxwell Cohen Moot Court (NCDH 100)

3644 rue Peel Montreal Quebec Canada, H3A 1W9

Christians & Cockfield: Submission to Finance Dept on FATCA in Canada

I have just posted on SSRN a submission to the Canadian Finance Department co-authored by myself and Professor Arthur Cockfield of Queen's University. Here is the abstract:

The United States enacted a tax reform in 2010 known as the Foreign Account Tax Compliance Act (FATCA), which will impose an extensive third-party monitoring and disclosure regime on financial institutions around the world in an effort to “smoke out” American tax cheats and expose their undeclared foreign assets to the U.S. Internal Revenue Service (IRS). The flow of information from Canadian financial institutions directly to the IRS that is required by FATCA would violate a number of laws in Canada. Accordingly, the United States has requested changes to these laws. The Canadian government now seeks to accommodate these requests in the form of an “intergovernmental agreement” (IGA) with the United States, which will be enacted into law as the Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act (the Implementation Act) pursuant to a proposal released for comment by the Department of Finance. The Department of Finance invited public comments on these documents. We examined the proposed Implementation Act and the IGA and we find that they raise a number of serious issues ranging from likely constitutional violations to violations of international law. We submit these comments in the hope that they will help lawmakers and the public understand that FATCA, while intended to catch tax evaders, is poised instead to impose serious and unjustified harms on people who live around the world as non-resident U.S. citizens and green card holders, as well as their family members and business associates.

I know that some of my good friends and colleagues view FATCA as a net positive step toward a much-needed global automatic information sharing regime, and some have not understood my reasons for caution. I hope that this submission will help explain some of these reasons.

I want to add that in my view, the Department of Finance unnecessarily inhibited public debate on the impact of the proposed legislation by setting an arbitrarily short period for comments. The agreement itself is complex and must be analyzed in the context of the underlying U.S. law and regulations as well as the more than twenty agreements the U.S. has signed to implement FATCA with other countries. In the little more than one month’s time that the Department of Finance allotted for public comment, these thousands of pages of applicable law and regulations have been augmented by several hundred new pages of guidance from the United States tax authorities, and will be further augmented when the Canada Revenue Agency (CRA) publicly releases its own guidance for Canadian financial institutions.

In restricting the time for Canadian tax practitioners and policy observers to review this lengthy, complex, and fundamentally global regime, the Department of Finance has deprived itself of the opportunity to receive more meaningful and thorough consideration of the many policy and practical issues involved in implementing FATCA in Canada. I hope that the Finance Department will extend its time to receive comments, especially if and when further guidance is issued.

Alain Deneault--Paradis fiscaux: La Filière Canadienne/Tax Havens: The Canadian Connection

Alain Deneault, auteur de Noir Canada: Pillage, corruption et criminalité en Afrique, lance son nouveau livre, Paradis fiscaux : La filière Canadienne [Montreal Book Launch]:

* La première séance sur les liens historiques entre le Canada et les paradis fiscaux, à l'Upop.

 Date : Mercredi, 5 mars 2014, 17h
Location: Salle des Boiseries, UQAM Pavillon Judith-Jasmin - Salle des Boiseries
405, rue Sainte-Catherine Est Salle J-2805

Revue de Presse


Voici une vidéo de Deneault, où il discute du livre:

J'ai lu le livre et j'aimerais fournir le commentaire suivant:

C’est avec enthousiasme et plaisir que je recommande le livre d’Alain Deneault, Paradis fiscaux : La filière canadienne. Cet ouvrage aborde une question importante et très actuelle, celle de la concurrence que se livrent les États sur le plan de la fiscalité pour séduire le capital et privilégier certaines industries. Ce faisant, ils imposent au reste de la société des coûts dont on ne mesure pas l’ampleur. 
Deneault dépeint habilement le portrait de ce régime mondial en mettant l'accent sur les acteurs canadiens qui ont facilité sa mise en place. En tant que professeure et chercheuse dans le domaine du droit fiscal, je considère que ce livre est une ressource indispensable; il offre une riche mise en contexte culturelle, sociale et historique dont on a grandement besoin pour comprendre comment la concurrence fiscale est devenue le phénomène mondial qu’on connaît aujourd’hui.

I read the book and was happy to provide the following comment:

I am happy to enthusiastically recommend Tax Havens: The Canadian Connection, by Alain Deneault. The book deals with the timely and important topic of how governments engage in tax competition in order to lure in capital and privilege certain industries, at an unmeasured cost to the rest of the society. Deneault deftly weaves a narrative about tax competition by focusing in on the unique roles Canadian players have had in enabling and facilitating this global landscape. As a tax law professor and scholar, I view this work as an indispensable resource, providing a rich cultural, social, and historical context that is surely needed for understanding how tax competition developed into the global phenomenon it is today.  

Apple not solely focused on Shareholder value

Business Insider reports on a recent Apple shareholder meeting, during which a representative from a decidedly far right thinktank asked Tim Cook "to commit on the spot to only making moves that were profitable for the company," to which Cook replied

"When we work on making our devices accessible by the blind, I don't consider the bloody ROI." He said that the same thing [applies] about environmental issues, worker safety, and other areas where Apple is a leader.

This is an interesting comment on the role of corporate social responsibility in shaping how CEOs talk about their management practices. One area where Apple is a leader is in its tax dodging capacity, though perhaps its leadership in this respect is less well known than that associated with its contract manufacturing practices. If those activities are not ROI-focused, it is difficult to know why they form such an integral part of Apple's global business strategy. I continue to look for signs that the aggressive tax planning is becoming anathema to Apple's polished CSR image, but none have yet emerged.

FATCA in Canada-constitutional challenge mounting

A group of Canadians has put together a campaign to explore the constitutional violations posed by FATCA in Canada. Some of these issues were raised by pre-eminent constitutional scholar Peter Hogg, in this letter to Finance. Others arise because of the adoption of the intergovernmental agreement (IGA), which bypasses data protection laws and lacks even the minor anti-discrimination clause seen in other IGAs.

I've been asked if these issues are serious. I think they are. The issue FATCA raises for me is not so much sovereignty--though I perfectly understand the instinct on that front--but rather it is the problem of serious mismatch between the goals targeted and what will be attained by FATCA when law on the books meets law in practice. The constitutional challenge is a signal that something is seriously awry with FATCA. As with most activism, this effort demonstrates that a not-small number of people are experiencing some not-small violation of fundamental principles, and in light of government failure to respond, are forming grassroots responses in an effort to achieve a remedy.

Let's have a look at why this might be so.

The goals of FATCA are clear and the law writes a clear narrative that is palatable to the public: we must stop tax evasion. Who would possibly speak out against that goal? I don't know too many people that would.

However, the law in practice is a completely different story, with a normative dimension unique to the United States. This dimension has, as far as I can see, been completely ignored by lawmakers both in America and internationally. It involves the attempt by the United States to impose taxation of persons based on their legal status instead of their actual inclusion in American society.

I know that this s difficult to understand conceptually. An example might help.

A was born in Illinois to a Swedish mother and an American father. The family moved to Sweden when A was 6 months old, and she spent her whole life in Sweden, working there, paying taxes there, using the schools and the health care system there, and getting married to a fellow Swede. A is a US national, and therefore subject to US taxation as if A had done all of those things in America. A has always been subject to US taxation, and FATCA doesn't change that in the slightest. But A never paid any attention to US law or politics, decisions of the US Supreme Court, or Congressional hearings. Why would she? She is a resident of Sweden paying high taxes and living her life. A has bank accounts at her neighbourhood bank, and tax-deferred savings account sponsored by her government.

In the eye of FATCA, A is an offshore tax evader.

Since she is an evader, she must be monitored to ensure she is caught and brought to justice, and further that she goes forward in full compliance with all US tax laws. Since she cannot be trusted to come forward, her bank must disclose her personal and financial information, and that of her spouse (guilty by association), to the IRS. Since the bank has no incentive to do that, it must be threatened with sanctions if it fails to do so. Since banks don't want to work under that threat, Sweden must be compelled to step in and facilitate the data transfer.

As I have said often, this is an extraterritorial jurisdictional claim that requires the help of other countries. Getting help is not a choice, it is a necessity. One country simply cannot assert its jurisdiction over people who live in another country, without that other country's help. American scholars know this, and they say America should ask for the help it needs. The problem that we have seen FATCA reveal is that this help necessarily involves America's needs trumping domestic laws that apply to targeted persons in the country of their residence.

I do not think America should be demanding help from other countries in taxing the residents of those countries. America needs to learn to tax its own residents, like every other country must do. If the world's biggest economy cannot figure out how to make its own people pay for their own public goods, it is difficult to see why other countries should be enlisted to help it along.

This is why the mismatch between the law on the books and the law in practice is so troubling in the case of FATCA. Looking past the use of legal status instead of residence as a jurisdictional claim, a regime that requires financial institutions to report nonresident accounts to these account holder's home countries is absolutely necessary to protect the income tax base from widespread tax evasion facilitated by foreign bank secrecy laws.  Of that there is simply no doubt. To the extent FATCA can do that, it is to be applauded and most of all extended globally because this is a global issue. I explain and advance this argument here. 

Most countries cannot act alone in instituting this necessary regulatory structure, since foreign financial institutions would simply shun a given market rather than comply. This is the potentially positive side of what makes the United States different from most, maybe all, other countries. This also explains why the OECD is very very quickly trying to ride the coattails of FATCA (before it is too late and the US changes its mind about being part of a global data exchange system, as it has before), by gearing up to create a global FATCA, or call it a GATCA. 

GATCA is FATCA minus two key aspects: the normatively unjustifiable legal-status based tax, and most of the economic sanctions. The UK has done something similar with those same parameters with respect to a selected list of countries. (The OECD's GATCA is also fully reciprocal, but that deficiency in FATCA is another issue). These differences make a GATCA supportable exactly where FATCA is not (both systems have other major flaws but we can leave those aside for the big picture here).

FATCA's enforcement of legal-status based taxation renders it normatively unjustifiable. It violates the residence principle, which Reuven Avi-Yonah has gone so far as to call an international customary law. It is also of course completely unworkable on a global scale: imagine if other countries decided to learn from the US example and started smoking out their own disapora to enforce their own FATCA regimes. It is unimaginable that if the OECD countries got together and seriously debated status-based taxation, they would agree on a global standard to enforce it for all countries. The common reporting standard GATCA they have devised, which is so obviously based fundamentally on the residence principle, shows that the OECD recognizes that enforcing status-based taxation is not and should not be a goal of any project to counter tax evasion.

Yet no conversation is being had about the outlier, whose demands will make enforcement of GATCA more extensive and more expensive for every other country.

Residence based taxation is not perfect by any means but it is the least worst alternative if governments want to continue to use personal income taxes in a world in which individuals are to be allowed the freedom to move. FATCA deserves to fail to the extent it ignores this reality. A constitutional challenge will at minimum open a desperately needed political conversation about why this is so.

OECD's Plan for Global Tax Info Exchange: Could be Deja Vu All Over Again

The OECD has released its "Common Reporting Standard," a.k.a. a global "Standard for Automatic Exchange of Financial Account Information." The plan more or less tracks the so-called "intergovernmental agreements" (IGAs) that the US Treasury is using to try to get the Foreign Account Tax Compliance Act working. But the OECD's model for the world differs in two critical respects:

1. it is based on the global standard of residence-based taxation
2. it would require reciprocity

One obvious question is whether the US would sign on to this standard, since it represents a major reduction of the massive expansion of the US taxpayer base contemplated by FATCA. If not, can one really envision a world in which everyone shares data reciprocally except the United States, which not only does not share data reciprocally but also places the most expansive demands on everyone else? (For those not following along, the US claims people based on their legal status in the US as well as their actual residence, in contravention of the global norm reflected in the OECD standard, which rejects the former claim in favor of the latter. In terms of reciprocity, what the US calls reciprocal with respect to data sharing is so far reciprocal in name only).

A related issue that already exists under FATCA and will be expanded exponentially under the OECD plan is that reciprocity means every government bears the cost of incorporating expansive financial surveillance (in the case of the US, far beyond that required for all other countries) yet as the Tax Justice Network points out, this formal equality in fact introduces substantive inequality and potentially great harm to poorer countries.

Readers of my prior work (on soft law, on the OECD's norm-creating role, and on its grappling with the issue of sovereignty) will know that I am cautious about the premise of accepting proclamations of the OECD about "global" tax norms.

In the case of residence-based taxation, however, this is not an OECD-created norm but one that dates to the very beginnings of modern income taxation and while flawed is the best available structure if more than one country in the world is going to have an income tax and people are going to be allowed to leave their countries freely if they so choose. Relax either of those assumptions and legal status-based taxation might become technically feasible, though it would still be fundamentally unjust. Neither is the reciprocity norm an OECD invention: instead, its roots trace back to post-Westphalian fundamental international legal principles.

The OECD's forging ahead with a plan that more or less relies heavily on US acceptance is eerily reminiscent of the last OECD attempt to curb tax evasion, via the harmful tax practices initiative. The US first supporting and then completely reversing course eviscerated that effort, thus cementing the status quo we witness today.

US exceptionalism with respect to who should be considered its residents and what it can be compelled to share with other countries cannot help but perpetuate a grave reciprocity imbalance that will only be exacerbated if the US does not sign up to the OECD standard, and the OECD accepts a carve-out to accommodate it.

Given that efforts toward a repeal of FATCA and an ongoing legal challenge to data reporting by US banks are currently unfolding in the US, the OECD's report comes at an interesting juncture in the process of picking up where the harmful tax practices project left off. It could unfortunately foreshadow a repeat of the events that unfolded in that project circa 2001. Or, more optimistically, it could be that the OECD report is a means of giving the US a reason and the political cover to bring its antiquated status-based tax regime up to date with the global residence-based standard, and its one-sided view of the value of data sharing in line with how the rest of the world views things. That would make global automatic data exchange of offshore financial accounts a much more clearly positive development overall, leaving room to focus on solving the other outstanding issues. Only time will tell which way this will unfold.

Canada-US Agreement Reached on FATCA Data Sharing

Things have been exciting the past few days as a long-expected agreement on FATCA between Canada and the US was announced and Canada's Department of Finance released a flurry of accompanying materials. The US Treasury has now added Canada to the list of jurisdictions deemed to have an agreement in effect. I will have more analysis soon but just wanted to provide some of the most useful links to get things up to speed.

First, here is the text of the intergovernmental agreement--it is not a signed copy unfortunately, which leaves a couple of technical questions unanswered for now.  Here is the Press Release from the United States. Here is the Press Release from Canada, and here are explanatory notes to the agreement, a "backgrounder", and an FAQ,

Canada's Department of Finance has also produced a draft legislative proposal that would implement the agreement into Canadian law. This includes text for a new section on Enhanced International Information Reporting in the Income Tax Act. Assuming that the agreement is considered to be a treaty, Parliament needs to be officially notified that an agreement has been signed and 21 sitting days must pass before legislation is introduced to implement the agreement into Canadian law, which would take us to roughly March 27.

During Thursday's Parliamentary proceedings, MP Murray Rankin offered some pointed questions on the pact and the implications for the financial privacy of Canadians, but I am afraid the answers may actually sow confusion, more on that later.

Comments on the legislative proposal can be submitted to the Department of Finance at IGA-AIG@fin.gc.ca or to the address below. The closing date for comments is March 10, 2014.

Tax Policy Branch: Department of Finance
140 O’Connor Street Ottawa, ON K1A 0G5

The media, mostly Canadian at first, has taken notice of the agreement and many are commenting on the privacy concerns as well as the reciprocity and scope of the deal:

• Patrick Cain explains the agreement and its implications;
• James Fitz-Morris explains how the pact takes some heat off Canadian banks but leaves several problems unresolved;
• Louise Egan and Patrick Temple-West discuss the agreement and challenges that remain;
• Robert Wood discusses the shrewdness of using the CRA to bypass privacy protections;
• Windsor Star Editorial discusses enduring privacy concerns;
• Theresa Tedesco at the Financial Post comments on the scope of FATCA and what reciprocity really means.

More to come as things unfold in the coming weeks.

Brian Arnold talks about BEPS: Next Monday at McGill Law

I am very pleased to be hosting internationally renowned tax expert Brian Arnold at McGill Law next Monday, where he will deliver a talk on the OECD's ongoing initiative with respect to Base Erosion and Profit Shipping ("BEPS"). The talk is scheduled to commence at 12 pm; members of the public are warmly welcomed. 

Location: McGill Faculty of Law, 3644 Peel Street, New Chancellor Day Hall, Room 202.

Date and Time: Monday, 10 February, 12:00–13:30.

Shachar & Baubock on Citizenship for Sale

Ayelet Shachar, who previously published The Birthright Lottery, a book about how citizenship is an inheritance that can make or break individuals' life chances, has edited a compilation of twelve short essays on the question of whether citizenship should be a commodity, together with Rainer Baubock. Here is the abstract:

On 12 November 2013 the Maltese Parliament decided to offer Maltese and European citizenship at the price of € 650,000, but implementation of the law has been postponed due to strong domestic and international critiques. On 23 December, the Maltese government announced significant amendments, including a higher total amount of € 1,150,000, part of which has to be invested in real estate and government bonds. Several other European states have adopted ‘golden passport’ programmes. Should citizenship be for sale? In November 2013 EUDO CITIZENSHIP invited Ayelet Shachar of the University of Toronto Law School to open a debate on these controversial policies. Twelve authors have contributed short commentaries, most of which refer to the initial law adopted by the Maltese Parliament. An executive summary by Rainer Bauböck provides an overview over the main questions raised in our forum. For further information on investor citizenship programmes see Jelena Dzankic’s EUDO CITIZENSHIP working paper on the topic and consult the news section of our observatory.

The issue of taxation is peripheral at best in most of these contributions. Yet for those interested in fundamental questions about belonging that are as yet unanswered in the tax policy literature, and specifically how FATCA and other automatic information exchange developments increase the possibility of citizenship-based taxation like never before, understanding whether and why citizenship should be a tie that binds a person to a state is fast becoming a critical issue.

Canadian Government Responds to FATCA Questions

Last October, Canadian MPs Ted Hsu and Scott Brison issued a set of questions to the Canadian government on FATCA (on which I consulted). Today I received two pdfs with the Government's answers to the questions, and I have put them in dropbox in order to share them:

Here are the government's answers to Ted Hsu's questions.

Here are the government's answers to Scott Brison's questions.

Most of the questions remain unanswered for one of two reasons: (1) FATCA is US law, not Canadian law, so no one in Canada is in charge of enforcing it, and therefore most agencies have little or no information and (2) Canada is negotiating with the US on an IGA and so nothing can be estimated about the scope, cost, implications, or consequences of FATCA in Canada unless and until such agreement is in place. (costs to the government in negotiating and internal briefing on the law "have been absorbed within existing resource levels.")

More review to come.

Citizenship-Based Taxation and Taxpayer Rights Don't Mix

In this brief analysis, Taxpayer Rights, On and Offshore: the 2013 Taxpayer Advocate's Report to Congress, I looked at the problem created when an under-resourced tax agency is charged with implementing an over-expansive tax jurisdiction. Abstract:

In the 2013 National Taxpayer Advocate's Report to Congress, two concerns take center stage: the need for greater protection of taxpayer rights, and the increasing pressure on the system created by the U.S. tax regime’s extraterritorial reach. Neither of these issues is new; indeed, the NTA has repeatedly attempted to raise awareness of each over several years. But the Report demonstrates that these two concerns are on a collision course, and impact looks imminent for 2014 as the US doubles down on long under-enforced jurisdictional claims over nonresidents with US nationality or legal status. The basic impracticality of finding and claiming nonresidents with US ties is compounded by the violation of internationally recognized tax jurisdiction norms, creating an unsustainable enforcement rift that directly challenges the voluntarism theme that Olsen views as key to the fiscal system as a whole.

Further in, I argued that the NTA Report illustrates that taxing people on the basis of their nationality or legal status rather than their actual residence poses a serious problem for tax administration and violates international norms.

As a practical matter, globally rounding people up based on one government's ideas about their legal status is quite obviously unenforceable without assistance from other governments. This assistance fundamentally conflicts with a universally recognized (and far more just) jurisdictional claim based on actual residence. It is one thing for the US to say to individuals: if you have status under our law you must follow all of our laws no matter where you are. It is another to say to other countries--and much less individuals in other countries--if people who live in your country have US status as we define it, you are harboring potential criminals and you must help us find them and enforce our claim over them even if your government also claims them and even if our claim conflicts with your government's own law.

Thus status-based taxation is no less a poaching of other countries’ internationally recognized jurisdictional claims over taxpayers than the kind of poaching FATCA was ostensibly designed to attack (namely, that of the US tax base by other countries via bank secrecy). The basic unenforceability of status-based taxation coupled with its poaching of other jurisdictional claims would make it a total non-starter were nations to get together and discuss a multilateral adoption of status-based taxation as a policy everyone could get behind.

 But FATCA is a big stick that is bypassing any such conversation, going straight to the technical problem of compliance and enforcement under the banner of stopping tax evasion. There might be no remedy in international law for tax jurisdictional overreach but that only confirms that it must be challenged from both within and without the nation engaging in the bad behavior.

Tax Competition: Not a Law of Nature but a Policy Decision

This was published this back in December but I neglected to post it here: "What the Baucus Plan Reveals About Tax Competition" is a brief (5 pages only!) analysis of US Senator Max Baucus' "Option Y" plan to reform the US corporate tax regime, by in effect imposing a global minimum corporate tax on US-based multinationals. I argue that the plan demonstrates that tax competition is not and has never been a law of nature operating outside of the control of individual governments, but instead it has always been the product of policy decisions that can be reversed by other policy decisions. Accordingly, political will is the reason why tax competition has become the overwhelming force that it is today.

I suggest that the Baucus plan demonstrates that the US has been a major force in creating the conditions for global tax competition and its language implies that the US could, should it chose to, act unilaterally to put a stop to the practice. As always, I welcome your comments.

Rick Mercer explains how the rest of the world sees FATCA in one hilarious minute

Must see for anyone who is, or was, or may be or might have been an American...

Ireland: Oasis for American multinationals, desert for Irish workers

From last Sunday's NY times, opinion write Fintan O'Toole discusses life in Ireland, after it first gorged on a panoply of tax reforms meant to lure in multinationals, and then starved under austerity under financial crisis. Of note:

...Ireland has two economies: a global one dominated by American high-tech companies, and a domestic one in which most Irish workers have to make their living. The first is indeed booming. Not least because of those low corporate taxes, large global corporations find Dublin convivial for reasons other than its pubs and night life. The sheer scale of Ireland’s dependence on this kind of investment for its exports can be judged by the fact that Irish gross domestic product took a serious hit in 2013 when Viagra (which is made by Pfizer in County Cork) went off patent in Europe. Broadly speaking, however, the global side of the Irish economy has remained robust. 

But home is where the heartache is: in the domestic economy outside the gated community of high-tech multinationals. Outside Dublin, property prices are still falling. Wages for most workers have dropped sharply. Unemployment remains very high at 12.8 percent — and that figure would be higher if not for emigration. There’s always been a simple way to measure how well Ireland is doing: Go to the ports and airports after the Christmas vacation and count the young people waving goodbye to their parents as they head off to the United States, Canada, Australia or Britain, where they have gone to find work and opportunity. 

...[People in Ireland] are not convinced that the cruel scale of the punishment was necessary or that the nasty medicine has, in fact, worked. 

Behind both of these propositions looms the great contradiction in the supposed success story of Irish austerity. It was austerity only for citizens. Running parallel to all the cuts in public spending and all the calls for fiscal responsibility has been a program of spending so lavish that it makes a drunken sailor look stingy. 

The converse proposition is that when it comes to contributing to the mechanisms of the state--rule of law, infrastructure, educated workforce, etc etc, which fully support those multinational gated communities--the state looks primarily to workers to do the bulk of the heavy lifting, in the form of personal income taxes (41% at the top) and consumption taxes (23% on most goods). But Ireland is not alone in this political decision.

The story of feasts for corporations, famine for workers is a familiar one, and the trade off is supposed to be the positive externalities corporations bring. In other words, the political tradeoff that politicians think they are making goes as follows: we can give up our tax on corporate income if that lures more corporations into our jurisdictions which then hire our workers, whom we can then tax on their incomes and then again on their consumption, to pay for luring in more corporations, in a virtuous cycle. O'Toole's column strongly suggests that the externalities are not anywhere near what was expected or would be needed to continue the virtuous cycle.

The problem for the state is that the owners of corporate capital have received their benefit up front, but when they do not produce their side of the equation in exchange, there is no way for government to demand a refund.

Thus we can add Ireland's story to the multiple examples that exist in various iterations of it around the world, including for example the constant intra- and inter-state fights to lure in manufacturers, filmmakers, and sports teams. Maybe governments should be thinking about adding a carve-back clause to the fiscal bargain that creates oases for bargain-seeking multinationals, which would disgorge untaxed profits when it is clear a party to a tax incentive-fueled deal is not bringing what they said they would or could.

FATCA rising in Canadian Media

The Canadian media has increased its interest in FATCA over the past week or so, with a number of news stories, including television segments. Here are a couple of stories to which I contributed in which I may (or may not) have shed some light on what FATCA looks like from outside the United States:

• U.S. tax law called ridiculous 
• U.S. FATCA tax law catches 'accidental Americans' 
• How will the new U.S. tax law affect Canadians?
• U.S. FATCA tax law catches unsuspecting Canadians in its crosshairs

It is clear that the nerve touched by FATCA is citizenship- or status-based taxation, a concept that remains a mystery and a surprise to many outside America, especially in a country in which a vast majority of the population lives within striking distance of the border and there is a high level of interrelationship, both personal and business. I expect the pressure on status-based taxation to grow exponentially as FATCA actually begins to "smoke out" the world's non-resident Americans when it comes into effect later this year, and more stories like that of Carol Tapanila's family demonstrate the injustice created by legal regimes that apply to individuals based on their legal status alone.

US renunciations passed 3,000 in 2013; Number abandoning status likely much higher

The Canadian press seems to be taking increasing notice of US citizenship issues, probably because there are so many persons with US status living and working in Canada and as the US clamps down on its citizens across the globe, the effect is deeply felt here. Patrick Cain has covered these issues before and in his latest article he reviews the murkiness surrounding the renunciation number--it is not by any means a comprehensive view of the number of people shedding their US status:

The FBI data captures only part of the total number of ex-Americans. Some people “relinquish” U.S. citizenship – for example, by taking citizenship in another country while intending to lose U.S. citizenship, then asking the State Department to document the loss. Relinquishing is more attractive for several reasons, not least because it’s free – a renunciation costs $450 US.

As Cain points out, you can FOIA all you want, you won't get a full picture of the exit door. Cain compares this to the Canadian side of things:

Between 2008 and 2012, an average of 172 Canadians renounced their citizenship each year – typically because they want to run for office in a foreign country, join a foreign country’s military or become citizens of a country that doesn’t allow dual citizenship, Citizenship and Immigration spokesperson Mary Jago explained in an e-mail.

As to "wanting to run for office in a foreign country":  a likely rare but politically interesting sub-category. Canada is of course a much smaller country than the US so we can expect the number to be accordingly much more modest, still, here it is just about 5% of the documented US number, and therefore likely a tiny fraction of the whole US picture. I expect that picture to substantially expand again in 2014.

Dorfman on the Cost of US Citizenship Abroad

I missed this student's point of view on the Cost of United States Citizenship Abroad when it was posted early last month, and it is of interest. The student notes that the US is the only country* in the world to impose worldwide taxation on the basis of citizenship instead of residence, that "there are no philosophical grounds" for this position, and that the position creates unnecessary obstacles to human mobility that serve no policy purpose. Excerpts of note that I wish US lawmakers could understand as well as this student apparently does:

[T]his archaic policy is not only unjustified, but is frustrating and alienating expatriates across the globe. 

... In general, [US] citizens pay the difference between their domestic taxes and what they would have been taxed in the US – so, if a citizen’s domestic taxes are higher than what they would owe in the US, they pay no additional taxes. However, an exemption from additional taxes is not an exemption from the inconvenience, penalties, and hidden costs that come with filing US taxes abroad.

... the vast majority of expatriates are not living abroad to duck taxation – they have simply moved away for work, education, or family reasons and have not returned. 

Many non-resident citizens have inherited United States citizenship by birth, but have never actually resided there– they’ve received no services from the US government, yet must file American taxes every year or face severe penalties. 

...In attempting to punish tax dodgers, the US government is heaping financial penalties, stress, and even criminal charges upon the blameless.

...At its core, citizenship based taxation makes it harder for American citizens to live and thrive outside of the United States. This is a significant obstacle to the freedom of Americans to emigrate abroad in an increasingly globalized world. 

The United States has also implemented barriers to renouncing American citizenship. ...The Economist has dubbed these obstacles “America’s Berlin Wall”.  

 The author concludes:

It is no wonder that American expatriates frequently report feeling frustrated, harassed, and persecuted – the United States system has been built to punish them for merely residing outside of its borders. The United States needs to get with the times and abolish citizenship-based taxation. The policy is tremendously unfair and detrimental to Americans living abroad, and it serves to anger and alienate citizens, many of whom have a lot to contribute to the United States in terms of international experience and skills. It is ironic that a citizenship so widely desired has come to feel like a burden for so many.

Well said, but I am afraid it is falling on deaf ears in Congress where every move concerning the taxation of humans--in stark contrast to that of multinational companies--is moving in the direction of protectionism and penalty rather than export and free mobility.

* Eritrea also apparently taxes its citizens abroad at a rate of 2 (two!) %. For this it has been condemned  and sanctioned by the United Nations Security Council after then US Ambassador, now US National Security Adviser Susan Rice stated that the country was "funding its [war-related] activities through its diaspora tax." Rice added that "Eritrea must confirm through its actions that it was ready to re-emerge as a law-abiding State." One can but hope that such statements can be made only by someone who is blissfully unaware of the comparatively much more expansive--and punitive--US disapora tax.

Stewart on the G20 and the taxing issue of making big business pay

Professor Miranda Stewart has published a short article today in which she nicely sums up the G20 agenda for 2014: base erosion & profit shifting, thin capitalization and transparency/information exchange. She concludes with some of the challenges for reform:

The G20 ... says that fixing global tax regulation is key to fighting poverty. A 2012 UN General Assembly Resolution 66/191 calls on the international community to develop effective international company tax rules and to increase participation of developing countries in tax policy processes. But ... it is only recently that OECD member countries have begun to acknowledge that their own tax rules and harmful tax competition are making it more difficult for developing countries to raise adequate taxes. 

There may be some tensions in the G20 about how to reform our fundamental international tax principles for the future. The OECD BEPS project mostly aims to protect the residence basis of taxation for multinationals. This will help prevent corporate tax base erosion for rich, capital and intellectual property-exporting countries. Current OECD profit shifting rules, which emphasise the arm’s length transfer pricing principle, can be strengthened. But these current rules for allocation of the right to tax business profits between countries are under attack from capital importing countries who seek to protect and enhance source taxation of business activity.

India, South Africa, Brazil and China may benefit more from a “formulary apportionment” approach, which has also been called for by activist organisations such as Oxfam and Christian Aid. We might begin to see cracks in the G20 on these fundamental international tax principles in 2014.

A nice overview of what to look for from the G20 in 2014.

Cockfield on governance and the international tax regime

Art Cockfield has published his article, The Limits of the International Tax Regime as a Commitment Projector, which examines how governments use and abuse the pluralistic nature of the international tax law regime to achieve their goals. He presented this as a paper in draft form last year at McGill and it is highly recommended reading. Here is the abstract:

As explained by Ronald Coase, transaction costs are the costs associated with discerning a price on a given exchange. This article conceptualizes the international tax regime as a political and legal system striving to address transaction cost challenges, and claims it has an uneven record. On the one hand, the international tax regime lowers transaction costs and hence promotes global economic growth. It does this by facilitating credible government commitments to ensure that the same cross-border profits are not taxed twice by two countries. Multinational firms are thus protected against the risk that their cross-border activities will be unduly deterred by taxation, which encourages more global economic activities.On the other hand, governments are unable to offer credible commitments that they can effectively address other important international tax policy concerns. First, despite ongoing reform efforts governments are not able to offer reasonably reliable promises that they will inhibit aggressive international tax planning that dilutes revenues in countries like the United States. Second, the international tax regime affords governments opportunities to develop their own policy solutions (such as the 2010 U.S. anti-tax evasion initiative to create a global tax information reporting system through the Foreign Account Tax Compliance Act) and thus governments can renege on earlier promises to abide by traditional international tax norms.

The article includes a tremendously interesting section on "Breaking Commitments through Unilateralism," in which Prof. Cockfield discusses the US adoption of FATCA and how this legislation violated international tax norms as well as circumvented longstanding international commitments under existing treaties. Prof. Cockfield is optimistic that despite its faults, FATCA could help lead the world to global automatic information sharing. I am very much less optimistic because of the grave imbalance of resources and the high transaction costs he describes, and because I view the intergovernmental agreements that purport to commit the US to greater information exchange as aspirational at best.

In the conclusion, Cockfield sums up the current status quo of global tax governance:

The fact that the ITR [International Tax Regime] evolved as a largely noncooperative government game is understandable given the desire on behalf of governments to preserve political control over their tax systems. Nevertheless, by eschewing its traditional reliance on limited bilateral and multilateral cooperation, the recent U.S. initiative through FATCA to create a global tax reporting system to address tax evasion concerns — a system that operates in contravention of the formal and informal rules of the ITR — shows another limit of the ITR as a projector of reasonably reliable commitments. In a noncooperative game without any binding multilateral rules, governments may be tempted to break their promises to follow international tax norms in order to pursue their own domestic policy goals. 

...The analysis in this article has shown how, depending on how the context affects the ability of governments to exchange credible commitments, the ITR lowers or raises transaction costs. Thus, it disagrees with the tentative claim that, in the long run, international taxation will find its most transaction-cost-efficient governance structure. This conclusion is consistent with the view of North that, unconstrained by market forces, “the political market has been, and continues to be, one in which the actors have an imperfect understanding of the issues affecting them and equally in which the high costs of transacting prevent the achievement of efficient solutions.”