Thursday, 22 August 2013

Lavigne & VanRybroek on Language, Communication and Access to Justice

This recently posted article by Michele Lavigne and Gregory VanRybroek, entitled 'He Got in My Face so I Shot Him': How Defendants' Language Impairments Impair Attorney-Client Relationships, while not directly tax-related, presents a very interesting take on what it means to have meaningful access to justice, which is a major aspect of thinking about what it means to say we are governed by the rule of law. I am still more optimistic than PJ about this concept, but I have grave fears for the future of law in the face of the many severe procedural impairments we have been seeing of late. This paper outlines in a deep and rich way some of the fundamental components necessary to a just legal system, but it also just a very well written and fascinating account of the role of language and communication in expressing and implementing law. Abstract:
Language impairments -- deficits in language and the ability to use it -- occur at starkly elevated rates among adolescents and adults charged with and convicted of crimes. These impairments have serious ramifications for the quality of justice. In this article, we focus specifically on the effects of a client's language impairment on the attorney-client relationship, the constitutional realm that suffers most when a client lacks essential communication skills. The effects of language impairment can be seen in a client's ability to work with a lawyer in the first place, tell a story, comprehend legal information, and make a rational and informed decision. This article shows how these effects play themselves out within the attorney-client relationship, and the impact on the lawyer's ability to meet her constitutional and ethical obligations. We also propose concrete steps for improving the quality of communication within the attorney-client relationship. While attorneys will obviously shoulder much of the responsibility, judges and prosecutors are not exempt. A client's poor communication skills are not simply be "the lawyer's problem," but a matter of great concern for all stakeholders in the justice system.

Monday, 19 August 2013

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

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

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

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

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

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

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

Friday, 16 August 2013

Collected Scholarly Work by Ivor Richardson being posted to SSRN

The Victoria University of Wellington SSRN Legal Research Papers has begun to publish the collected scholarly work of the Right Honourable Sir Ivor Richardson, one of the leading tax judges of the late twentieth century. He already has 96 papers posted, and over the rest of 2013, fifty papers are planned, in about ten issues, with more to come in future years. This is a tremendous resource for anyone looking at historical or comparative trends in international and national tax policy development: the most recent issue of the working paper series includes some older articles which are as timely now as they were when first published, for example:

Inaugural Address, Victoria University of Wellington, 1967
This paper discusses the growing importance of income tax law, the corresponding increase in tax avoidance, and the different perspectives on tax avoidance. A brief history of income tax is given, and an analysis of the competing objectives of an income tax system, its inherent problems, and the possible solutions to these. There follows an explanation of what is meant by tax avoidance, the features of the New Zealand income tax system which create opportunities for tax avoidance, and the arguments against permitting this on a large scale. The paper then outlines the attitudes towards tax avoidance of the legislature, judiciary, revenue, and taxpayers, before concluding with an observation as to the increased interest which income tax law holds for both lawyers and teachers and students of law. 
2 Australian Tax Forum 3, 1985
IVOR RICHARDSON, Victoria University of Wellington - Faculty of Law
The subject raises two questions for consideration: the interpretation of tax legislation, and the characterisation of transactions for tax purposes. This paper briefly outlines the problems of drafting tax legislation, before describing the different judicial approaches to interpretation of tax legislation, including the scheme and purpose approach of New Zealand courts. In considering when the scheme and purpose of the legislation will necessitate re-characterisation of transactions for income tax purposes, there is a discussion of the business purpose requirement, and an analysis of the tax effect of the assignment of personal exertion income to a third party. Concerning the manner in which the character of a transaction is to be determined at law, the paper provides a discussion on form and substance, analysing the English ‘fiscal nullity’ approach and its reception in other jurisdictions, and concluding that such an approach must be firmly grounded in the scheme and purpose of the legislation.

Much more at Ivor Richardson's SSRN page, linked above. Thanks to Prof. John Prebble for alerting me to this info.

Tuesday, 13 August 2013

Latest IRS Statistics of Income on Individual Tax Returns

The IRS has issued its latest SOI reports, including the 2011 Individual Income Tax Returns (Publication 1304)These are always interesting. This year's data shows that 145 million individual income tax returns were filed in 2011, about 108M showing a taxable income amount, and 95M showing income tax, for total revenues of just over $1 trillion from the individual income tax. Some highlights:
  • salary or wage income: 119M returns, $6T
  • unemployment comp: 13M returns, $92B
  • social security benefits: 25M returns, $490B
  • foreign earned income (i.e. residents of other countries): 445K returns, $28B
  • gambling earnings: 1.9M returns, $26B
The IRS also issued 2010 Corporation Research Credit Tablesderived from Form 6765, Credit for Increasing Research Activities, and 2010 Corporation Depreciation Dataderived from Form 4562, Depreciation and Amortization.

Monday, 12 August 2013

How Starbucks Lost its Social License--And Paid £20 Million to Get it Back

I have a new column in Tax Notes International [gated] today, pdf available here, about Starbucks's £20 million promise to the UK after a firestorm of controversy erupted last year when it was revealed to have paid no taxes despite 14 years of franchise expansion in the country. 

UK Uncut's logo for Starbucks Protests
It is well accepted that corporations require various legal licenses to do business in a state. But Starbucks’ recent promise to pay more tax to the UK regardless of its legal obligation to do so confirms that businesses also need what corporate social responsibility experts call a “social license to operate”. Companies may now in effect be required to pay some indeterminable amount of tax in order to safeguard public approval of their ongoing operations. This suggests that even as the OECD moves forward on a project to salvage the international tax system from its tattered, century-old remains, the tax standards articulated by governments will no longer be enough to guarantee safe passage for multinationals. Instead, companies may have to deal with a much more volatile, and fickle, tax policy regime: one developed on the fly by public opinion.
As always, I welcome comments.

Tuesday, 6 August 2013

Caterpillar v Comm'r and the Rule of Law in International Tax

James P. Fuller has an interesting summary of the recently-filed Caterpillar case in his latest U.S. Tax Review [gated], in which he laments the competent authority breakdown and argues that the case would have been better off going to treaty-based arbitration, rather than to domestic judicial decision-making channels. I disagree with this conclusion because, given the structure of tax treaty arbitration today, it would--at best--provide a remedy for only one taxpayer at great cost, while the judicial route potentially creates rule of law upon which all can rely. If competent authority arbitration were instead to create a publicly viewable resolution, I could agree with Fuller because what is needed is (1) a multilateral solution to a multilateral problem and (2) a solution with precedent-making force.

Per Fuller:
Caterpillar Inc. has petitioned the Tax Court for a redetermination of income tax deficiencies that resulted from the IRS's allocation of royalty income to it from its Belgium and French subsidiaries. 
While the case was only recently docketed and has not yet been decided, I thought it worth discussing the case as it results from a breakdown in the competent authority process. It is, of course, the very process that is designed to prevent the consequences faced by Caterpillar. There should be no need for the taxpayer to litigate in one country or the other when treaty relief is an available remedy and the countries involved can settle the issue between themselves. 
Following a 1990 reorganization that pushed management power, responsibility, and accountability to subsidiaries such as Caterpillar Belgium and Caterpillar France, the taxpayer entered into amended license agreements with those subsidiaries limiting the maximum royalty in any given year to each subsidiary's net income from the sale of Caterpillar products. Also, if the subsidiary suffered a post-effective-date net operating loss, it would pay no royalty for that year and could carry the loss forward as a negative adjustment to future years' income for purposes of the royalty calculation. 
... The IRS ... concluded that the relief-from-royalty provision in the Belgian and French license agreements did not comport with the arm's-length standard under section 482.
 Fuller points out that there are "several Tax Court cases that permitted related-party license agreement provisions" like Caterpillar's, and as to which the IRS subsequently acquiesced. He goes on to discuss Caterpillar's attempt to obtain competent authority relief, which failed because the French and Belgian tax authorities disagreed with the US position, and US Appeals simply went along with the IRS decision despite these other rulings that would suggest reconsidering the issue, for litigation hazard purposes at minimum:
The Belgian and French tax authorities, having a thorough knowledge of the local operations of the Caterpillar subsidiaries in their respective countries, looked at the same facts that were addressed by the IRS exam team and found that Caterpillar's royalty limitation provision required no adjustment. Caterpillar subsequently had the adjustment reviewed in an IRS Appeals office proceeding. The IRS Appeals officer simply accepted the IRS exam team's economist's report. appears from Caterpillar's Tax Court petition that the IRS exam team's economist simply used that agreement as grounds for asserting that such a relief-from-royalties' provision is inappropriate, and not at arm's length.
Fuller notes the dual-bureaucracy created by two simultaneous review procedures, i.e., competent authority and internal appeals, and concludes that binding arbitration of the competent authority procedure, rather than resort to the US judiciary, would have been the better approach:
If the two countries' competent authority negotiators cannot reach an agreement, then there should be some form of compelled arbitration to bring about an agreement. Otherwise, the taxpayer is stuck in the middle. A taxpayer should not have to litigate its case in one country or the other (or both) simply because the U.S. competent authority negotiators could not reach an agreement with the foreign country's competent authority negotiators. This is especially true in a situation such as that faced by Caterpillar: The Tax Court has already held that such provisions are appropriate in related-party license agreements.
I appreciate Fuller's argument about the taxpayer's bind, but as I have noted before, if the case went the way of binding arbitration, in the long run the issue could potentially never be settled, since the decision in arbitration would be completely confidential and therefore not accessible or applicable to other taxpayers. That makes international tax dispute resolution much more expensive than it has to be, all because the powers that be have prioritized absolute taxpayer confidentiality over the rule of law. I think that is a miserable trade-off as well as being an unnecessary one: as this case shows, the taxpayer is willing to sacrifice some measure of its own confidentiality in order to get resolution in domestic law, so it is not clear why international law should be so different. (The arguments for difference are weak--see my analysis in the link above.)

The competent authority route, which (by being duplicative as in this case) already increases costs for producing the rule of law, would only be exacerbated by arbitration, because Caterpillar's problem would be perfectly preserved for another day, another taxpayer, and another expensive litigation involving multiple parties and governments.

Therein lies the conundrum for international tax law in the current status quo: either we can get taxpayer-specific outcomes but no rule of law (arbitration) or we can get unilateral rule of law but no international resolution (domestic appeals). I am not sure which to prefer, since both are bad for international tax law.

Accordingly, I am glad to see the Caterpillar case go forward in a forum which is open to public view and that, if not settled in the interim, then becomes a part of the body of law, creating more certainty for taxpayers going forward. However, I am unhappy that the forum is unilateral and potentially preserves an unsolvable problem for the taxpayer if the Court agrees with the US position, since France and Belgium will not be consulted in the process and can be expected to continue to disagree with the IRS view of things.

As a result, I can only agree with Fuller that the better route would be bilateral/multilateral decision-making via arbitration if that decision-making is, like internal judicial decision-making, open and accessible to public view.

Wednesday, 24 July 2013

What the banks’ three-year war on Dodd-Frank looks like

A fascinating account from the Sunlight Foundation of the gutting of a regulatory initiative by the kind of methodical persistence that can only be sustained by special interest groups with much to be gained from weak regulation:
In the three years since President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act, federal regulators charged with implementing it have opened their doors to the biggest banks over and over again – 14 times as frequently as they have to representatives of consumer and pro-financial reform groups, a new Sunlight Foundation analysis finds. 
By most accounts, the banks’ besiege-the-regulators strategy has yielded rich rewards in sapping, slowing, and stymieing regulations intended to prevent another massive financial crisis. The emerging consensus is that Dodd-Frank implementation is limping, while the big banks are poised to return to being the most profitable industry in the U.S.
The website feature an interactive showing the number of meetings by sector over the three years; you can mouse over the dots to see their identities. Is it any surprise that the Giant Vampire Squid is at the top with a whopping 222 meetings, followed closely by JP Morgan with 207? Each of these giants independently dwarfs the entire "pro-reform" group, that tiny cluster of dots on the other end of the graph.

Here's a chart depicting meetings by sector over time:

From the discussion:
In the 152 weeks our data cover, we find 59 weeks in which regulators met with financial sector representatives at least once every single day (Monday through Friday), and 47 weeks in which they met with financial sector representatives at least four times. 
... By contrast, active pro-reform groups appeared in only 153 meetings logs – only about one meeting for every 14 regulators held with financial institutions and associations. Moreover, 24.2 percent of pro-reform group meetings took place on a single issue: the Consumer Financial Protection Bureau. 
...Law and lobbying firms, largely working in service of financial institutions, appeared in 707 meetings. Other, non-financial corporate interests, largely energy and agricultural companies, participated in 381 meetings. These companies are major purchasers of derivative contracts, which they use to hedge against price risk.
Imagine you're a regulator. 3,000 meetings with finance industry lobbyists, lawyers, and other corporate interests over three years, each one doing their best to explain why you should undermine the law as written in some tiny way. Would you not want to tear your hair out? Quit in despair? Or just give in to the soothing balm of lobbyist favor? What could possibly be left of the law after this barrage? Meanwhile the anti-regulation crowd has worked very diligently to kill Dodd-Frank's provisions in other ways, such as the lawsuit against the corporate tax transparency provisions sponsored by the American Petroleum Institute.

Sunlight catalogues the delays and dismantling of Dodd Frank that has been accomplished by all this lobbying and litigating and concludes:
...Collectively, the data offer a powerful testament to the oldest and still perhaps most effective technique in the lobbyist’s playbook: sheer persistence. As the Dodd-Frank law passes its third anniversary, lagging on deadlines, and increasingly defanged, the meetings log data offer a compelling reason why: the banks have overwhelmed the regulators. 
Lobbying pays, and it pays whether it is done before, during, or after legislation has been passed. This represents a major governance crisis with no redress anywhere to be found.

Taxcast on unilateral and multilateral approaches to the problem of base erosion

I contributed to this month's Tackle Tax Haven's podcast, together with the very interesting Krishen Mehta, formerly of PWC and now of Asia Initiatives where he works on tax policy issues. This month's topics included the OECD's report on the base erosion project and what countries can do unilaterally while they are waiting (potentially for a very long time) for multilateral change. Have a listen.

Thursday, 18 July 2013

Quebec's governance crisis continues: mayor who resigned under fraud charge gets $267K severance

There is something seriously broken in a governance system that produces this result, as reported by  the CBC:
The City of Montreal has confirmed that former mayor Michael Applebaum has received more than $267,000 in severance pay. 
Applebaum resigned from office after being arrested in June on 14 charges including fraud and conspiracy.
City spokesman Gonzalo Nunez said the law governing severance payouts does not take into account the reason for the end of time in office, except in the case of death.
Mr. Applebaum and Mr. Tremblay should both disgorge their severance pay of course, and while they are at it, why not all the pay they have ever received from the taxpayers of Quebec, in restitution for abuse of office. But that's not what the law requires. More evidence that we are experiencing a serious governance crisis in Quebec.

Wednesday, 17 July 2013

TJN on the rule of law and the forthcoming OECD report on base-erosion

The OECD is expected to release its plan to implement its anti-base-erosion project this Friday, and the Tax Justice Network has issued a pre-emptive strike as it were, predicting that the OECD will do very little by way of fundamental reform. Instead, TJN predicts a patchwork of half-hearted measures that will be delivered through the toothless mechanism of non-binding recommendations, instead of a full-throated commitment to real change, which the TJN says would require endorsement of combined reporting & formulary apportionment for multinational companies. I am still not convinced combined reporting is a panacea, but I understand TJN's perspective that arms' length reporting probably isn't capable of delivering the result they seek with respect to taxing the profits of multinationals on a global basis. You can read TJN's whole report here.

But I wanted to note something that particularly struck me in this report, an issue that I worked through at length not too long ago and that has been bothering me for quite a while, and that is the recognition that for the international tax law system to work, we desperately need more transparency regarding what lawmakers actually do when it comes to international tax compliance. Here is what I said on the subject in an article called How Nations Share:
In the case of international income, it is [tax] disputes and their resolutions, and not the law on the books, that constitute the international tax regime. Yet it is all but impossible for citizens to observe exactly how, or how well, their governments navigate this aspect of economic globalization. [Tax treaties] provide only a design for allocating international income among nation states. It is the application of these agreements that determines how revenues are allocated in practice. This application has taken place over the years through hundreds of thousands of interpretive decisions, the vast majority of which are not accessible to the public. Instead, international tax disputes are mostly delegated to institutions that resolve issues in informal, “non-law” ways with minimal public access to the decision-making process and its outcomes. As a result, international tax law in practice features little or no “law.”
In the article, I explained that when actual decisions about the taxation of multinationals are made through processes that lack judicial oversight and feature no public access whatsoever, this creates a huge knowledge gap between the law as written (in legislation and in treaties among other documents) and the law in action (after the competent authorities make their decisions).

The OECD has exploited this gap to its own institutional advantage, by making itself a norm aggregator and filtering mechanism. It thus deliberately creates a non-legal alternative to direct access to legal decision-making. This is a major, even if not well-understood, impediment to the development of law in taxation that has serious consequences precisely because it shields from public scrutiny just how much base erosion is actually going on. We (the public) simply cannot know how big the base erosion problem really is because we cannot access the competent authority decisions that in fact allocate income internationally. The OECD presumably knows the answer but suits its own political and institutional purposes by publishing a highly-processed version of events in the form of reports, guidance, etc.

Because I view this as a major problem for the rule of law which is made ever more serious by being ignored as an issue altogether, I was very gratified to see TJN pick up on the theme and call for publication of competent authority decision-making:
Currently, the MAP [competent authority dispute resolution process] is very secretive, and decisions often involving hundreds of millions or even billions of dollars are not published. The secrecy of both MAP processes and APAs greatly increases the power of frequent actors in these processes, i.e. the international tax and accounting firms – to the great detriment of the system as a whole. Publication of both would be a great step towards a system which could both provide and more importantly be seen to deliver a fair international allocation of tax.
TJN's worries about the repeat-player advantage gained by tax and accounting professionals are well-founded, but I think what is most clearly articulated here is that this is fundamentally a rule of law matter. Moreover, TJN puts this issue third in line in terms of reform priorities but I actually think it is much closer to being at the top of the heap in terms of structures that cause intractable problems for international taxation. I will be very interested to see how the continued pressure TJN has been able to place on OECD decision-making to date plays out on this particular issue.

Friday, 12 July 2013

FATCA delayed again, this time Treasury giving itself 6 months to get the house in order. Lesson: internationalizing a unilateral legal regime is really difficult.

Treasury issued a new Notice 2013-43 today, pushing the withholding deadline to July 1, 2014 (was January 1 2014), the portal opening to August 19, 2013 (was July 15), and the deadline to register as a FFI is now six months from when the portal opens, which I believe would be February 19, 2014 (was October 25, 2013) (but for some reason this date doesn't seem to be indicated in the Notice, instead it says "On or after January 1, 2014, each financial institution will be expected to finalize its registration information by logging into its account on the FATCA registration website, making any necessary additional changes, and submitting the information as final. Consistent with this 6-month extension, the IRS will not issue any GIINs in 2013. Instead it expects to begin issuing GIINs as registrations are finalized in 2014"). Accordingly, no GIINs will be issued in 2013, IRS "expects to begin issuing GIINs as registrations are finalized in 2014," with the first posting of the compliant FFI list by June 2, 2014.

All of this is going to require Treasury to amend the regulations and the model IGAs to adopt these rules, but taxpayers are advised they can rely on the Notice until that happens. Here is the explanation:
Comments have indicated that certain elements of the phased timeline for the implementation of FATCA present practical problems for both U.S. withholding agents and FFIs. In addition, while comments from FFIs overwhelmingly supported the development of IGAs as a solution to the legal conflicts that might otherwise impede compliance with FATCA and as a more effective and efficient way to implement cross-border tax information reporting, some comments noted that, in the short term, continued uncertainty about whether an IGA will be in effect in a particular jurisdiction hinders the ability of FFIs and withholding agents to complete due diligence and other implementation procedures. 
In consideration of these comments, and to allow for a more orderly implementation of FATCA, Treasury and the IRS intend to amend the final regulations to postpone by six months the start of FATCA withholding, and to make corresponding adjustments to various other time frames provided in the final regulations, as described in section III below.
There is also language about jurisdictions that have signed IGAs but have not yet ratified them according to their internal procedures for ratifying international agreements, in line with what the IRS agreed to in the Norway IGA, but notice that there are no hard deadlines here. Instead, FATCA partner jurisdictions get a "reasonable" period of time to get the IGAs through their respective legislative processes. I cannot see how a foreign jurisdiction would have any recourse to an unfavorable IRS determination that its internal ratification period is "unreasonable." I'd say that falls into a rather delicate area of diplomacy: I doubt the IRS will be eager to tell some other country its legislative procedures are too slow, sorry, you're off our whitelist. In any event:
A jurisdiction will be treated as having in effect an IGA if the jurisdiction is listed on the Treasury website as a jurisdiction that is treated as having an IGA in effect. In general, Treasury and the IRS intend to include on this list jurisdictions that have signed but have not yet brought into force an IGA. The list of jurisdictions that are treated as having an IGA in effect is available at the following address: 
A financial institution resident in a jurisdiction that is treated as having an IGA in effect will be permitted to register on the FATCA registration website as a registered deemed-compliant FFI (which would include all reporting Model 1 FFIs) or PFFI (which would include all reporting Model 2 FFIs), as applicable. In addition, a financial institution may designate a branch located in such jurisdiction as not a limited branch. 
A jurisdiction may be removed from the list of jurisdictions that are treated as having an IGA in effect if the jurisdiction fails to perform the steps necessary to bring the IGA into force within a reasonable period of time. If a jurisdiction is removed from the list, financial institutions that are residents of that jurisdiction, and branches that are located in that jurisdiction, will no longer be entitled to the status that would be provided under the IGA, and must update their status on the FATCA registration website accordingly. 
More details in the link to the Notice. I have some questions about the various exceptions and wheretofores, including a general sense of confusion about which of the various procedures and penalties starts when, but I'll save these thoughts for another day.

Moral of the story: it's really, really difficult to get an international tax regime going on a unilateral basis. There is a story in this about the difference in making a unilateral rule first, and then repeatedly changing it to fix all the problems that inevitably arise, versus sitting around in international networks trying to make sure the rule will work first, before trying to implement it internationally. Empirical project for international law buffs!

Tuesday, 2 July 2013

Licensed to Kill?

The ongoing congressional push for tax reform continues to focus on tax breaks.  In a new twist, Senators Baucus and Hatch have asked their colleagues to provide a "pardon list" identifying those tax benefits worth sparing.

Two breaks that will appear nowhere on any pardon list are tax-free corporate reorganizations and international tax treaties.  That may sound encouragingis it possible that members of Congress will turn a deaf ear to the pleas of big corporations and powerful multinationals?but the truth offers little reason for optimism.

Those preferences, unlike charitable deductions and the exclusion for employer-provided health insurance, simply don't need a pardon.  Why not?  In effect, they have a license to kill.

Although—or, a cynic might suggest, because—both of these longstanding features of the tax law provide vast, open-ended benefits to the well-connected and influential, no uncomfortable questions ever get asked about the large sums of cash they deliver to taxpayers.  Their special status has decades-old roots in the design of what is known as the tax expenditure budget.  Not as comprehensive as it purports to be, that mechanism counts the cost of some tax breaks, but not all.  Those tax breaks not included on the tax expenditure budget escape all scrutiny during the budget process. 

Like Keyser Söze, and the devil before him, these tax breaks have managed to convince the world that they don't exist.  When Congress trains its big guns on tax breaks that benefit the old (like the additional standard deduction for elderly taxpayers) and the infirm (like the exclusion for workers compensation), don't forget the generous preferences they never mention.

New series of papers on why government can and should bring financial services into the tax base

The Victoria University of Wellington (Australia) has a new SSRN issue of interest, featuring a series of papers by Sybrand van Schalkwyk and the ever-prolific John Prebble, all on the topic of consumption tax and financial services. The first of these is the big picture:

"Value Added Tax and Financial Services" 
Asia-Pacific Tax Bulletin, Vol. 10, pp. 363-370, 2004
Victoria University of Wellington Legal Research Paper No. 29/2013
Value added tax (VAT) is a relatively modern development. Designers of VAT recognized from the outset that the way in which financial institutions are remunerated creates significant difficulty when the tax is applied to their services. Administrative difficulties relate to imposing invoice-based VAT on service fees charged as part of the margin between buy and sell rates. Theoretical reasons relate to arguments that financial services should not be taxed under a consumption tax because, it is argued, financial services are not consumed in the way in which goods and services are consumed. Because of these difficulties, most jurisdictions have opted to exempt financial services from VAT. However, the commonly accepted reasons to exempt financial services from VAT are not compelling, since financial services are no different in relevant respects from other services. Moreover, there are methods by which financial services could be brought within the VAT base. Furthermore, although exemption is the simplest way for a VAT to treat financial services, it causes significant distortions in the economy. 
This paper is of special interest to me because it confirms my own view that societies are increasingly accepting tax systems that intentionally tax the "easy-to-tax" most vigorously, the "hard-to-tax" much less vigorously and more randomly, and the "impossible-to-tax" not at all, and that these categories have been intentionally constructed from regulatory decision-making that renders various activities to a given category in systematic and purposeful ways.

There are fundamental justice issues at stake in these regulatory outcomes. If Prebble and van Schalkwyk are correct that exempting financial services from VAT is a policy choice that has been made on the basis of an unexamined theory that these flows are hard or impossible to tax which in turn has been decided because of a failure to institute measures that would make them easy (or at minimum easier) to tax, then the failure to include financial services within existing VAT systems is a grave source of injustice within that tax policy choice (that is, in addition to and apart from the question about whether consumption taxation is itself a violation of justice in the exercise of taxation by states).

The papers that follow focus on various ways to increase the coherency of the taxation of financial flows--what I would suggest is an effort to show us that financial flows could in fact be easier to tax, if not "easy-to-tax," given various regulatory reforms:
"Defining Interest-Bearing Instruments for the Purposes of Value Added Taxation"  
Asia-Pacific Tax Bulletin, Vol. 10, pp. 418-426, 2004Victoria University of Wellington Legal Research Paper No. 30/2013 
This is the second of a series of four articles on the taxation of financial services under a value added tax. The first article considered whether, from a theoretical viewpoint, financial services should be included under a value added tax. It concluded that the arguments in favour of treating financial services in the same manner as any other service outweighed the arguments against doing so.

This second article considers the definition of interest bearing financial instruments in some detail. It also considers the kinds of activities that qualify as financial services in relation to the instruments. The definition of financial services is important where a different type of treatment is applied to financial services. If financial services were taxed like any other service, then no definition would be needed. However, where, as in New Zealand, supplies of financial services can be exempted, the definition of financial services becomes very important. Alternatively, if some financial services are to be zero rated or taxed but not others, then it is necessary to have a global definition of financial services followed by individual definitions of the particular kinds of service that are to be brought within the tax base one way or the other. This article begins by considering interest-bearing instruments. 
"Imposing Value Added Tax on Interest-Bearing Instruments and Life Insurance" 
Asia-Pacific Tax Bulletin, Vol. 10, pp. 471-468, 2004
Victoria University of Wellington Legal Research Paper No. 31/2013
Exemption of financial services from Value Added Tax (VAT) is commonly accepted as being an anomaly in the New Zealand goods and services tax legislation. While exempting financial services from VAT is attractive to the legislature because it is a simple way of addressing the difficulties of applying VAT to financial services, it causes significant distortions, for instance tax cascading, which in turn causes price distortions. The application of VAT to interest-bearing financial instruments and life insurance is complicated by the way in which financial intermediaries charge for these services.

The first part of this article investigates how interest-bearing instruments can be taxed under VAT, and the second part how life insurance can be taxed under VAT. There are several options for the treatment of interest-bearing instruments. They can be exempted, zero-rated, or included in the tax base. In this last category, there are three possible methods of including interest-bearing instruments: the invoice, cash flow, and truncated tax flow systems. The last is recommended because policy makers have come to realize that the cash flow system cannot be applied without significant modification. 
"Imposing Value Added Tax on the Exchange of Currency" 
Asia-Pacific Tax Bulletin, Vol. 10, pp. 469-483, 2004
Victoria University of Wellington Legal Research Paper No. 32/2013

Exemption of financial services from Value Added Tax (VAT) is commonly accepted as being an anomaly in the New Zealand goods and services tax legislation. While exempting financial services from VAT is attractive to the legislature because it is a simple way of addressing the difficulties of applying VAT to financial services, it causes significant distortions, such as tax cascading, which in turn causes price distortions. The application of VAT to services that bring about the exchange of currency is one instance where financial services could be included in the VAT base. Services bringing about the exchange of currency are a species of financial service, but are inherently different from other financial services since they are relatively simpler than other financial services. Reasons advanced for exempting financial services in general do not necessarily apply to services bringing about the exchange of currency.
Bravo to the authors--this represents a lot of work and adds much to the discussion of how economically-integrated yet politically independent nations can approach the subject of taxation from the perspective that justice matters in policy decisions.

Friday, 28 June 2013

Manal Corwin, now at KPMG, to discuss Reputational Risk Deriving from the Tax Transparency Movement

Fresh out of Treasury, Manal Corwin and some of her new/old colleagues will present a webcast next Tuesday on Tax Transparency and OECD Initiative on Base Erosion and Profit Shifting:
KPMG's Tax Governance Institute will host a webcast that addresses the implications of tax transparency and the potential impact of the OECD initiative on base erosion and profit shifting. Board and audit committee members, CFOs, tax directors and other business professionals interested in attending the program – one in a series of KPMG presentations on this timely topic – can register at:
The webcast will focus on "the debate over the shift of taxable business income out of the United States and high-tax jurisdictions around the world and into low or no-tax jurisdictions, and the resulting issue of tax base erosion." I'm not sure if debate is the right word there.  Is there a debate about these two phenomena existing as a factual matter? I think no.  Is there a debate about the appropriateness of such shifting and base erosion? I think decidedly yes.

Interestingly, however, KPMG suggests this is a debate about neither the existence nor the appropriateness of profit shifting and base erosion, but rather it is specifically about transparency, namely, the extent to which the public will gain a right to know about the existence and legal sanction of these practices:
The global debate on tax transparency has sparked both public interest and concerns among many companies, and the spotlight will grow brighter in coming weeks as the OECD prepares to deliver its coordinated action plan on base erosion and profit shifting and the European Commission moves forward with announced plans to address issues around tax fairness. With potentially significant changes in future tax obligations and reputational risks at stake, senior executives and board members at multinational companies should find this webcast, and those that will follow, especially useful as they formulate how their organizations should respond to the debate and possible outcomes.
[Emphasis mine.]  This statement is from Brett Weaver, who is described as "tax partner in KPMG's International Corporate Services practice and the firm's partner-in-charge of Tax Transparency" and a member of KPMG's "Tax Transparency Steering Committee," along with Corwin, who is described by KPMG as:
national leader of KPMG's International Corporate Services practice, principal-in-charge of International Tax Policy in the firm's Washington National Tax practice, and former deputy assistant secretary for Tax Policy for International Tax Affairs in the U.S. Treasury Department and U.S. delegate/vice chair to the OECD's Committee on Fiscal Affairs. 
The other participant on the webcast will be Philip Kermode, "director of the Directorate-General for Taxation and Customs Union of the European Commission".

It seems very clear to me that the "reputational risk" Weaver identifies is going to be something corporate tax managers and their legal & accounting advisers will be forced to price in going forward. The last paragraph illuminates this:
...the [KPMG] Tax Governance Institute ... provides opportunities for board members, corporate management, stakeholders, government representatives and others to share knowledge regarding the identification, oversight, management, and appropriate disclosure of tax risk.
I think it is safe to attribute the creation of reputational risk (or what some might call an internalizing of a cost that heretofore has been externalized thanks to strong corporate tax confidentiality laws), as well as any potential that may currently exist for systemic change to occur in the OECD's approach to the taxation of multinationals, to the international tax activist movement. As a result this should be a very informative webcast.

Thursday, 27 June 2013

New Taxpayer Right in Canada: No Reprisals for "Service" Complaints

From the Canada Revenue Agency website: Harper Government launches new right to ensure Canadian taxpayers are treated fairly [french version here]
The new right says:
16. You have the right to lodge a service complaint and request a formal review without fear of reprisal.   
We know that to be trusted, effective, and efficient, we must conduct ourselves ethically and honestly, and the CRA strives to do so every day. Our employees are expected to act in accordance with the CRA Code of Ethics and Conduct and the Values and Ethics Code for the Public Sector. These codes are terms and conditions of employment and they reinforce our commitment to serve the public with integrity, professionalism, respect, and cooperation. This right means that if you lodge a service complaint and request a formal review of a CRA decision, you can be confident that the CRA will treat you impartially, and that you will receive the benefits, credits, and refunds to which you are entitled, and pay no more and no less than what is required by law. You should not fear reprisal. We are required to apply the law and relevant CRA guidelines and policies, which may include the charging of penalties, or requiring the payment of your debt. When CRA employees act in accordance with the law, these do not constitute acts of reprisal. If you feel that you have been subject to acts of reprisal, the CRA wants to hear from you. We take your concerns seriously. Tell us about them by completing section 3 – Reprisal Complaint on Form RC193, Service‑Related Complaint. We can assure you that we will address your complaint, and that we will send it directly to an investigation office located at CRA Headquarters. This will ensure that the investigation is conducted independently of the office associated with the complaint.
At a meeting with members of Certified General Accountants (CGA) Canada to discuss taxpayer fairness, Minister Gail Shea stated:
“Our Government is committed to ensuring that all Canadians are treated with fairness and respect by the Canada Revenue Agency. In our system of voluntary compliance, taxpayers must have confidence in the objectivity and fairness of CRA’s actions as a tax administrator. This new addition to the Taxpayer Bill of Rights will help reinforce public confidence in Canada’s tax system, and ensure that Canadians taxpayers feel free to speak up if they have a disagreement with the CRA.”
 Curiously, the CRA website adds the following:
Although there is no evidence that Canadians have been subject to reprisal by the CRA, in his work across the country, the Taxpayers’ Ombudsman heard that taxpayers would sometimes hesitate to lodge a complaint for fear of being treated differently afterward. To address this unwarranted fear and encourage Canadians to speak up if they have a disagreement with the CRA, the Ombudsman recommended that a new right be added to ensure Canadians are confident they will be treated fairly. 
The Taxpayer Bill of Rights is an agency statement that lacks the force of law, but many of its rights are legislated (via the Charter or otherwise). This new right aligns with observed attempts by tax agencies to present themselves as "service-oriented," that is, as if taxpayers were customers. It remains to be seen if and how taxpayers will avail themselves of this newly articulated right.

Monday, 17 June 2013

Periodic Table of FATCA Acronyms

Cute and useful. Acronym overload is a common feature of just about all tax law it seems, and FATCA provides no respite, as this chart demonstrates:

At the link, you can click on any of the elements to get an explanation and links for further information.

McGill Law Journal Podcast on Tax Avoidance

I recently sat down with David Groves of the McGill Law Journal to talk about tax justice as part of the Journal's podcast series. From the MLJ website:
Tax Avoidance, Tax Evasion, and Tax Justice with Professor Allison Christians
Apple, Google, Starbucks: Some of the biggest corporations on the planet are paying virtually no tax on the profits they make. We sat down with Professor Allison Christians, H. Heward Stikeman Chair in Tax Law, to discuss fairness and justice in taxes. 
You can listen to the podcast here.

Thursday, 6 June 2013

Webcast of McGill Roundtable on Tax Justice-now online

Last week the McGill Faculty of Law hosted a public roundtable on Tax Justice featuring John Christensen, James Henry, Diana Gibson, and Frédéric Zalac. If you missed the live webcast, you can now view the archived version online here.

Tuesday, 28 May 2013

Apple's simple design interface most certainly does not extend to its tax department.

Lee Sheppard has an article today on Apple's tax tricks [gated] where she works through Apple's multinational structure & planning detailes as outlined in the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI) report. You should read the whole article, but here are some of its key concepts:
We're ... not easily shocked by transfer pricing practices that the U.S. government accepts, for better or worse. ...But Apple's planning ... is a special case . We're talking gross worldwide revenues the size of the California state budget, and no tax being paid anywhere on a huge chunk of profits. What is truly surprising about the Apple case is its brazenness. PSI concluded that Apple's self-serving intercompany contracts had no effect on its business practices.
...Nearly two-thirds of Apple's revenue comes from foreign sales. According to the PSI report, this foreign income is routed through Ireland and may be taxed nowhere, not even in Ireland. ... 
Apple Operations International (AOI), Apple's Irish-registered holding company, acts as an internal finance company. ... AOI claims tax residence nowhere.
Apple Sales International (ASI), an Irish principal company that manages Apple's supply chain and sales to Europe and Asia, is a subsidiary of Apple Operations Europe (AOE), which is a subsidiary of AOI and has employees and operations. ASI has 250 employees and deals with Apple's third-party Chinese manufacturers. 
ASI claims no tax residence anywhere ... [emphases added].
When I heard these statements--more than once--in the hearings, I wondered why on earth the Senator who was asking at the questions at the time didn't stop right there and say hold on, are you telling us that these companies exist, we are supposed to treat each as a separate taxpayer and respect its independence from the parent company for tax purposes, and accept at the same time that each resides for tax purposes in no country anywhere?

Let's be clear: humans never get away with these kinds of arguments. You might be resident in many places but I think it is very hard to claim that you are resident nowhere--governments always seem to find some reason and some way to claim you. But somehow the Senator didn't challenge this troubling statement.

If the challenge had come, we might have heard a not-so-simple design explanation from Apple, such as that the subsidiaries are incorporated in Ireland, which would make them Irish residents for US tax purposes, but for Irish tax purposes each is resident in Bermuda, while for Bermuda purposes each is resident in Ireland or at least not resident in Bermuda; either way, certainly neither is resident in the United States even though both are clearly controlled from California.

Simple, clean, one button design interface Apple's corporate structure is not.  Funny how Steve Jobs' vision was, and now Tim Cook's vision is, so different for the tax department. Yet this basic structure is, I must hasten to repeat, perfectly, unequivocally legal, understood and accepted and in many ways even facilitated by governments all over the world including and perhaps especially the United States with its deferral regime.  But that doesn't mean the whole structure is similarly straightforward from a legal compliance perspective. More from Lee:
Apple conducts all of its research and development in the United States. Apple Inc., the U.S. parent, has a cost-sharing agreement with AOE and ASI, which pay 60 percent of the cost of this research. Apple's intellectual property is in the United States with the U.S. parent, Apple Inc. Apple told PSI that it divides R&D costs according to worldwide sales revenues.
This arrangement, Lee tells us, dates back to a more permissive time in cost sharing regulatory history and would probably be protected from today's more stringent requirements. Lee observes:
...AOI has no employees; its American board members, who are Apple executives, hold their meetings in California, often without the participation of the lone Irish director. Apple's tax director told PSI that he believed AOI is not managed and controlled in Ireland. Apple told PSI that AOI has not paid income tax to any government for the past five years.
...Ireland takes the position that it is a legitimate low-tax country that only permits the 12.5 percent rate for income from trade, an ancient English concept that appears to require a ruling. Yet Apple told PSI that Ireland permitted an income calculation that enabled Apple subsidiaries to pay Irish corporate income tax at a rate of 2 percent or less. 
Lee wonders if this puts Ireland in a troublesome place vis a vis EU law which prohibits burying state aid within generally applicable tax laws, especially since Ireland is already getting some heat for changing its laws "to accommodate the numerous U.S. multinationals that use it to shelter European sales income." She then works through US domestic tax law and the US-Ireland treaty to show that AOI could very well be viewed as being taxable in the US, yet its income probably wouldn't be subject to tax in any event given the rather complex, internally inconsistent, but overall taxpayer friendly rules of subpart F and its ancillaries.

All in all Lee runs through of some of the more arcane complexities of the US international tax rules in this article, and makes a pretty persuasive case for viewing the system as hopelessly absurd in the extreme.  Tim Cook says he wants to change that, that he's all for a simpler, cleaner interface for the tax code. But remember that very often when someone says they want simplicity, what they really just want is to be able to pay (even) less tax.

Saturday, 25 May 2013

New Book: Looking through the Corporate Structure

Since the introduction of the term “beneficial owner” to the OECD Model Tax Convention in 1977, courts and the OECD have struggled to interpret the term, and to use it as a test for deciding conduit company cases. 
If applied in a formal legalistic sense, the beneficial ownership test has no effect on conduit companies because companies are legal persons that, in law, own both their assets and their income beneficially. By contrast, in a substantive sense, a company can never own anything because economically a company is no more than a matrix of arrangements that represents individuals who act through it.
Faced with these opposing considerations, courts and the OECD have adopted surrogate tests for the beneficial ownership test. These tests, however, were originally meant to counter different kinds of tax planning strategies. They did not indicate the presence of beneficial ownership. Therefore, they are inappropriate for determining the correct tax treatment of passive income derived by conduit companies. 
This book examines the conflict between the general policy of double tax treaties embodied in the beneficial ownership requirement and the concept of corporations. The work highlights the shortcomings of surrogate tests with the help of analyses of reported conduit company cases. It offers an alternative approach for interpreting and applying the beneficial ownership test. It contains a critique of the work of the OECD Committee on Fiscal Affairs before the insertion of the term, and suggests appropriate amendments to relevant parts of the official Commentary on the OECD Model Tax Convention.

John Prebble alerted me to this book and he says:
The book is particularly timely because it addresses one of  the principal means by which multinational companies siphon profits to low-tax jurisdictions. One apparently obvious way to address the conduit company problem is for states to re-draft and to renegotiate their tax treaties. But that is easier said than done, and usually very time-consuming.
Until there can be wholesale re-drafting of treaties, the book argues persuasively that within current legal frameworks it is not only possible but legally correct for tax administrations and courts to interpret beneficial ownership provisions in tax treaties purposively. The result would be to thwart the use of stepping-stone strategies that shift profits from high-tax countries in Europe, Asia, and the Americas to low-tax jurisdictions.
The book adopts a comparative approach, analysing reported cases from a number of jurisdictions, comparing judgments that have interpreted treaties purposively with formalistic reasoning that creates loopholes that states never intended.
I agree, this is a particularly timely topic. It's technically and conceptually difficult, and it is difficult to solve as a matter of law as well.  The book is available at the link above, and at a 20% discount until May 31 using promotional code EBOT_2013.

EU Public Hearing on FATCA

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

Given my experience with the OECD, I wanted to be very sure this time around that "public" meant real people could attend. So I sent an email to MEP Sophie in't Veld (many thanks to Mark who passed along her email address).  This was her answer:
Dear Mrs Ferauge,
Thank you for your message. The meetings are public, so you can attend freely. The meeting will also be webstreamed via
With kind regards,
Sophie in 't Veld, MEP
It will be interesting to see how this goes and I very much look forward to Victoria's impressions.  By now FATCA's reach is beginning to be understood by a broader audience, but much (well-founded) fear and confusion remains due to the conflation of tax cheats hiding cash in complicated offshore schemes with Americans living abroad who are just trying to live their lives. I do hope that this public meeting will help clarify things.

Friday, 24 May 2013

Tax Justice Roundtable & Research Symposium--McGill Faculty of Law

Next week the McGill Faculty of Law will be hosting a roundtable and research symposium on Tax Justice.

The roundtable will be held on Wednesday May 29 at 7:30 and will be preceded by a 5-7 cocktail, both at the McGill Faculty of Law.  John Christensen, James Henry, Diana Gibson, and Frédéric Zalac will each present their ideas on what it means to talk about justice in taxation. The roundtable is free, open to the public, and will be live webcast here.

The research symposium will be held the following day, Thursday, May 30, beginning at 9:30 am at the McGill Faculty of Law. The idea of the symposium is to bring together academics, researchers, and other interested parties to talk about what research has been done, is currently being done, and needs to be done in order to further the cause of seeking justice in taxation.  You can view the preliminary program here. All are welcome, registration is required.

More info at the links above.

Tuesday, 21 May 2013

Employee Mobility & Assignments Abroad-Conference at McGill Law-May 29

The Canadian Tax Foundation will host a conference at McGIll Law next Wednesday on the (timely!) topic of taxing workers when they go abroad. Eminent McGill law grad and former McGill chancellor Richard Pound will deliver the lunchtime address. Info below and on the CTF website.

EmployeeMobility - Assignments Abroad 
Wednesday, May 29, 2013 
8:45 a.m.  –  4:45 p.m.
Followed by a cocktail reception sponsored by Stikeman Elliott 
McGill University, Faculty of Law
3660 Peel Street (library entrance)

This year, the theme for the Canadian Tax Foundation’s annual Journée d’études fiscales, is employee foreign assignments. Speakers at this conference will be discussing the various taxation considerations which arise, both from the perspective of the employee and of the employer, when Canadians choose to temporarily or permanently move their place of work abroad. Various aspects of taxation will be analyzed during the course of the day by experts in the field.

Click here for program & registration info.

After the cocktail, stick around for a Roundtable on Tax Justice, info here and more to come soon.

Opinion analysis--PPL Corp

My write-up of the PPL Corp decision handed down yesterday is now posted over at SCOTUSblog.

Apple in front of the Senate

Apple's on the hot seat and you can still catch it on C-SPAN or follow along with what's happened so far via the WSJ here.

US Supreme Court OKs UK windfall tax for credit: The PPL Case

The PPL decision was released yesterday and taxprof posted initial thoughts from Reuven Avi Yonah and myself. I'm not convinced as Prof. Avi-Yonah is that the decision is correct, but I am interested in a few of the interpretive advances presented in the case. My comments:

The Supreme Court unanimously decided in favor of the taxpayer with respect to the creditability of a foreign tax in PPL Corp & Subsidiaries v. Commissioner, released yesterday. In an opinion authored by Justice Thomas with a concurrence from Justice Sotomayor, the Court held that PPL Corp., a US company that owned a large interest in a UK energy company, is allowed to credit against its US income tax an amount paid as a “windfall tax” to the UK government in 1997. The ruling reverses the judgment of the Court of Appeals for the Third Circuit, siding instead with the Tax Court and the Court of Appeals for the Fifth Circuit in Entergy Corp. & Affiliated Subsidiaries v. Commissioner, 683 F. 3d 233.

 The case settles a circuit split but it leaves unresolved interpretive issues concerning Reg § 1.901-2(a)(1), which defines when a foreign tax is creditable for US purposes. The most discussed interpretive issue will likely be that involving the role of “outliers” in determining the predominant character of a tax, which Paul Clement focused on in his oral argument on behalf of PPL Corp. and which amici argued on both sides.

The outlier issue is fairly simple to understand but, despite receiving direct attention in the decision in this case, is perhaps not wholly resolved. The issue turns on what the regulations mean when they say that “a tax either is or is not an income tax, in its entirety, for all persons subject to the tax.” 

According to a tax professors’ amici brief led by Prof. Anne Alstott, this language means that no one taxpayer can be dismissed as an outlier: that a tax can only be an income tax if it acts as an income tax with respect to every taxpayer. But according to the taxpayer, and now according to the Supreme Court, some “outliers” can apparently be ignored so long as, for the most part, the tax acts like an income tax with respect to most taxpayers. At oral argument, Justice Kagan appeared to strongly disagree with this position, as discussed here, but she contributed no written opinion in the case. Justice Sotomayor also appeared disinclined to this position at oral argument, and her concurring opinion in the PPL decision leaves plenty of room for speculation as to how the Government might try to distinguish a future case from PPL.

 But even though it will likely be the most discussed feature of the case, the outlier issue is not the only interpretive gloss to emerge here. Justice Thomas also introduced a small but potentially interesting twist on the habitual presentation of the last clause of the “predominant character” rule; namely, the part that requires the foreign tax to be an income tax “in the US sense.”

Justice Thomas explains in the decision that this clause means that “foreign tax creditability depends on whether the tax, if enacted in the US, would be an income, war profits, or excess profits tax” [emphasis added]. These italicized words present what might be viewed as a hardly noteworthy deviation from past jurisprudence, which generally seems to simply repeat verbatim the regulatory language before going on to discuss the longstanding doctrine starting with Biddle v. Commissioner, as Justice Thomas does in the present decision.

Thus, it is quite possible that the slight reworking of the language is completely immaterial. One could well argue that there is no meaningful difference between a tax that is an income tax “in the US sense” and one that would be an income tax “if enacted in the US.” But we in tax know how much can turn on a single word in a statute or a regulation, and even in a single punctuation mark. Perhaps it does not strain credulity too much to take this new language seriously as a gloss, and query what it might mean.

 Justice Thomas looks at the tax in question and effectively asks, would it look like an income tax if it were enacted in the US? It is not too far of a leap to go from asking that question to asking whether, if Congress enacted a tax like this, it could survive constitutional challenge as an allowable tax under the 16th amendment, whether it is a direct tax or an indirect tax, and what the constitutional implications of that decision might turn on, and so on, down the rabbit hole of constitutional parameters and permissions on taxation in America. We can well imagine that many tax law professors and perhaps many practitioners as well could choose to have a lot of fun with the UK windfall tax if Congress tried to enact it as an income tax. Thus it is at least arguable that Justice Thomas’ suggestion that the tax would have to be an income tax if it were enacted in the US might ultimately prove to be a more, rather than less, strict analysis than that traditionally accorded to the “US sense” language.

Thus a small and perhaps insignificant interpretive step it may be, but fortunes have been made and lost on less distinction, as we in the tax community are all too aware.

I will have more extensive opinion recap on SCOTUSblog some time later in the day today.

Thursday, 16 May 2013

Model Charter of Taxpayer Rights

A consortium of tax advisors has prepared a "Model taxpayer charter to promote greater fairness in taxation across the world".  They have sent copies of this model charter to "Ministers and Deputy Ministers of Finance and Revenue of the countries who participated in the survey alongside the institutions of the European Union, the OECD, the United Nations Fiscal Affairs Committee, the World Bank, the IMF, and other interested stakeholders."

I feel like an interested stakeholder, but it appears that the draft is only available....for sale on amazon....specifically, That's one very strange way to try to make global tax policy.

If anyone knows anything about this project, I would like to hear more about it.

Tuesday, 7 May 2013

Call for Papers on Securities Litigation-of interest to those working on corporate tax transparency.

Securities regulations are near and dear to the hearts of tax practitioners and accountants who must deal with tax disclosures required in SEC filings.  Perhaps these regs have been less central to the work of tax law academics, but those of us following the extractive industries transparency initiative in particular (since it is already law) and country-by-country reporting more generally may soon find ourselves immersed in SEC compliance and litigation research. This upcoming workshop in Chicago could be a good opportunity to make some progress--paper submissions are due May 31:
The University of Illinois College of Law and the University of Richmond School of Law invite submissions for the First Annual Workshop for Corporate & Securities Litigation.  This workshop will be held on Friday, November 8, 2013, in Chicago, Illinois. 
OVERVIEW: This annual workshop will bring together scholars focused on corporate and securities litigation to present their works-in-progress.  Papers addressing any aspect of corporate and securities litigation or enforcement are eligible.  Appropriate topics include, but are not limited to, securities litigation, fiduciary duty litigation, or comparative approaches to business litigation.  We welcome scholars working in a variety of methodologies, including empirical analysis, law and economics, law and sociology, and traditional doctrinal analysis. 
Authors whose papers are selected will be invited to present their work at a workshop hosted by the University of Illinois College of Law in Chicago, Illinois, on Friday November 8, 2013. Local costs (lodging and workshop meals) will be covered.  Participants are asked to pay for their own travel expenses.
The workshop is designed to maximize discussion and feedback. All participants will have read the selected papers.  The author will provide a brief introduction to the paper, but the majority of the individual sessions will be devoted to collective discussion of the paper involved. 
SUBMISSION PROCEDURE: If you are interested in participating, please send an abstract of the paper you would like to present to Jessica Erickson at  not later than Friday, May 31, 2013.  Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified by Friday, June 28. 
QUESTIONS: Any questions concerning the workshop should be directed to the organizers—Professor Verity Winship ( and Professor Jessica Erickson (

Monday, 6 May 2013

How To Chart Good

Having seen all too many charts that have been labored over in vain by students, academics, and practitioners alike, this resonates.

Irony: it's often difficult to communicate with charts, yet this one does a beautiful job.

Sunday, 5 May 2013

Correcting the record 5 ways on the stories about Sen. Paul blocking "FATCA Treaties"

Just to clarify a few matters, now that I see the Hill has picked up on this idea that somehow Senator Rand Paul is blocking something the folks at Global Financial Integrity are calling "FATCA implementation treaties":

1) There is no such thing as a FATCA implementation treaty.  There are things called "intergovernmental agreements" (IGAs) which the US has been signing with some countries, which override FATCA, making the unilateral statute less onerous than it otherwise would be.  Anyone who is "pro" anti-evasion legislation (is there anyone who isn't?) can be wildly enthusiastic about FATCA, more or less enthusiastic about IGAs (perhaps less since they tend to water FATCA down), and basically uninterested in double tax conventions, which do almost nothing to combat tax evasion. Conversely, anyone who doesn't like FATCA can be enthusiastic about IGAs because they water down FATCA and leave more room for non-compliance, and wildly enthusiastic about double tax treaties, since they do nothing, FATCA-wise.

2)  Double tax conventions are not needed to implement FATCA.  FATCA is a domestic US statute which needs no implementing anything of any kind. It is already the law, it is already in force, and it is already in action.  So let us put to rest any notion that any international agreement could have any impact on the implementation of FATCA. FATCA is going to be difficult to enforce, no question about that. But it is existing law.  Its administrative and above all political difficulties are what have led Treasury--after FATCA was already law--to start thinking about asking for help.

3) Double tax conventions are not needed to implement IGAs.  The IGAs are Treasury's way of reducing the administrative and political burden Congress created for it with FATCA. An IGA would override the FATCA statute to make life easier for both the Treasury and foreign banks. But the IGAs are most certainly not treaties, in fact, just what exactly they are is muddled indeed.  Treasury has suggested that to the extent the US undertakes anything in these IGAs (which is precious little, at best), they are "interpretive" in nature that is, they interpret existing tax treaties. Hence perhaps some confusion: if you want an IGA which involves the US giving you anything back, Treasury is suggesting you may need a treaty for the IGA to "interpret." To be sure, the idea that IGAs are interpretive in nature is a stretch: IGAs are really just sole executive agreements. Treasury is not seeking any kind of congressional approval for them. Therefore no one in congress-Sen Paul or otherwise-can block them by holding up any kind of international agreement. The only way to block an IGA would be through a direct challenge to their legitimacy given that they violate the treaty power, which is supposed to be shared with the senate. Perversely, perhaps, if the IGAs were legitimate treaties, they could be blocked by Sen. Rand. But they are not, so they cannot be.

4) Switzerland already has a double tax treaty with the USA so even if the Switzerland IGA was the kind that theoretically needs a DTT to "interpret" (namely, a Model 1-style), the treaty needed is already in place, with language on information sharing ready to be "interpreted" by an IGA. However, Switzerland has not signed a Model 1 IGA with the US, it has signed a so-called "Model 2" IGA, which is non-reciprocal and binds the US to virtually no action whatsoever. It is for this reason, perhaps, that Treasury has already claimed that Model 2 agreements do not even need a treaty to interpret: that is, the Treasury has suggested that even non-treaty countries can get a Model 2 IGA.  So you never need a treaty with Switzerland to implement the proposed IGA.  Blocking the Swiss treaty may do a lot of things, but stopping the FATCA IGA is most certainly not one of them

5) Hungary and Luxembourg also already have DTTs in place. They are both old (Hungary-1979, Lux-1962) but each has info exchange language (Hungary-art 23, Lux art 28) so Treasury could again "interpret" these with an IGA, again by the logic that the IGAs are interpretive in nature. Of course, there is no IGA yet for Hungary that I know of, and Luxembourg is still mulling things over. If either goes with model 1, fine, DTT already in place. If they go with model 2, see above re Switzerland. Therefore there is no blocking of FATCA, an no blocking of FATCA IGAs, with respect to either of these countries, either.

Summary: IGAs are wholly unconnected to DTTs. The mistaken connection being made between these two completely unrelated legal instruments is understandable: it has been borne of Treasury's attempt to cast the IGAs as interpretive in nature, which at best is an ad hoc attempt to fix a legal impossibility of congress' own creation, without actually explaining their legal pedigree.  But DTTS are in no way necessary to the implementation of FATCA.

Friday, 3 May 2013

Call for Papers: Annual Conference of the Canadian Council of International Law

The organizers of the CCIL's 2013 annual conference have issued a call for papers:

CCIL 42nd  Annual Conference: Call for Papers
Contemporary Actors and their Actions: A New Look at the Formation of International Law
November 14-16, 2013 - Ottawa, Ontario

The Canadian Council on International Law invites paper proposals or summaries of proposed presentations from faculty members, doctoral level graduate students in law and related disciplines, and practitioners, on topics dealing with the theme of its 42nd Annual Conference: “Contemporary Actors and their Actions: A New Look at the Formation of International Law”.

Paper proposals or summaries of proposed presentations in English or French should be no longer than a single page in length and should include a biographical statement or curriculum vitae.  Proposals are due June 3, 2013 and should be sent to

Great topic. More info at the link.