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.

New Book: Looking through the Corporate Structure

Saurabh Jain has published Effectiveness of the Beneficial Ownership Test in Conduit Company Cases.  Abstract:

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.

US to OECD: target your anti-BEPS regime carefully

This is rich. The US wants the OECD to not go overboard on the BEPS thing.  From Tax Analysts [gated], Treasury International Tax Counsel Danielle Rolfes said that the Treasury wants to

"make sure that any suggested solutions are targeted at addressing the source of the problems and don't go beyond the scope of the BEPS project."

We are talking about a country that can't seem to distinguish between an au pair financing a trip to Europe and a billionaire stashing money in a series of hidden offshore accounts. Yet there's more:

...The BEPS project carries a risk of "scope creep," Rolfes said. ... "We want to stay mindful of what BEPS is and make sure that in trying to solve those problems we don't come up with solutions that are broader than necessary or that have other implications, particularly with respect to the allocation of taxing rights between two taxing jurisdictions," she said.

...While Treasury endorses the sense of urgency around the BEPS project and the feeling that the problems must be fixed, Rolfes said that U.S. officials intend to be thoughtful about how the rules should or should not be changed.  

I'm not sure what is meant by being thoughtful. Being thoughtful might mean thinking through what you need to change, how you mean to change it, how you avoid over-breadth and under-breadth at the same time, how much everyone has to spend in order to get the result you seek, and whether what you write as rules can be coherently implemented in practice.

Perhaps Rolfes is worried that if the OECD looks too closely at the allocation of taxing rights between two taxing jurisdictions, the world will see clearly that (1) the US is the most overreaching in this respect given that it taxes on the basis of citizenship and (2) the global North has long arranged the allocation to favor itself at the expense of the global South.  

Maybe it is just that Rolfes does not appreciate the finger pointing at US companies:

"It's not just U.S. companies that engage in BEPS. Moreover, all agree that the BEPS we are primarily concerned with is driven by tax planning that is perfectly legal."

Rolfes called some of the moralizing on this issue "ironic," though I think she means "hypocritical." It might not not sound right for the Treasury to use that word when talking about tax competition, so maybe this is carefully chosen rhetoric:

Rolfes [added]that while much of BEPS income lands in zero-tax jurisdictions, some of the elements of tax laws that enable BEPS are attributable to tax competition that's occurring between the same taxing jurisdictions that are trying to solve BEPS.

"This tax competition itself contributes to BEPS," she said.

She acknowledges that "many of the current international standards, such as those relating to transfer pricing and tax treaties, have been developed over many years by U.S. tax policymakers working with their counterparts in the OECD."  She says "We at Treasury are humbled ...And we want to make sure that any solutions we have are targeted to that problem and not to other problems."

Treasury economist Michael McDonald added that

The BEPS project should clearly undertake a cost-benefit analysis of the possible alternatives...clearly I think if the BEPS project is going to be successful, one has to weigh the benefits of the current [OECD] Transfer Pricing Guidelines, in addition to the costs."

Tax Analysts economist Martin A. Sullivan can't understand why the US is focused on the BEPS thing at all, since Dave Camp has a proposal for switching the U.S. to a territorial system:

"To me, that seems much more important than an OECD initiative. I don't understand how the two are going to work together. If Chairman Camp achieves his goal by the end of the year of putting the entire international tax system up for a vote, shouldn't that be our starting point?"

Rolfes responded that the BEPS project would still matter even if the US changed to territorial, since such a switch would not in any way make profit shifting less an issue. She also had some interesting things to say about participation and influence in tax policymaking via the OECD:

Treasury needs to be engaged in a significant tax policy initiative like BEPS, which would be undertaken by other countries with or without the U.S. ...Having a seat at the OECD table provides the United States the opportunity to be a part of the dialogue and to have an influence on how international tax rules are developed ... [and] other countries are not going to wait for the conclusion of the U.S. Congress's reform debate.

So the US sees the OECD as playing an important role, and one that could have negative impacts on US policymaking choices absent Treasury's involvement. And this exchange shows that at least some at the Treasury are capable of articulating at least a sense of understanding the concept of regulatory overbreadth. But you could interpret these statements as at best tepid support for the OECD's initiative, at worst a foreshadowing of resistance to come. The US torpedoed the OECD's efforts on harmful tax practices, only to come up with the much more expansive and awe-inspiring FATCA on its own. If the US torpedoes BEPS, what will be in store for the taxation of multinationals? It should be a fascinating ride.

Taxcast: opening the black box on who makes global tax policy and how they do it

I'm pleased to have been part of the February 2013 Taxcast from Naomi Fowler and the Tax Justice Network  In this edition of the taxcast Naomi looks at current trends in transparency and taxing the digital economy and then delves into the question of global tax reform, asking whether we should expect real progress from the OECD, a rich country thinktank/inter-governmental organization/lobbyists network.

Readers here will not be surprised that I am critical of norm-making from the OECD, given its essential character as a forum for back-room dealmaking between business interests and government. NGOs have been trying to gain greater access, but it is a slow and arduous process, as we saw recently with an informed citizen trying to gain access to something the OECD advertised as a "public" meeting. In the taxcast Richard Murphy is cautiously optimistic that the pressures being brought to bear on the OECD will bear fruit--that governments are starting to see that they have to be responsive to constituents beyond the business community, and they will have to make real changes at some point.

I am less optimistic given the institutional structure in place but I am hopeful because at least the right questions are being asked: good policy is a product of good process, and the converse is also true.  That means that who is in the room is of vital importance when it comes to developing norms. If NGOs, watchdog groups and citizens are paying attention they will pester the OECD if it tries to develop global transparency standards on tax from inside its own black box.

Sheppard: OECD report on base erosion demonstrates OECD is not serious about base erosion

Lee Sheppard has a column today on the OECD's new-found vision for reversing course on the international regime of tax base erosion it created [gated]. She's not buying it. Highlights:

...the OECD Centre for Tax Policy and Administration has been adept at sweeping huge problems under the rug. It was long in the habit of denying the multinational tax avoidance problems that OECD guidance and the international consensus enabled. 

But the problems are now blindingly obvious, as leading investigative journalists have attached corporate names and faces to tax avoidance. The person on the street now knows that some household-name companies pay no corporate income tax anywhere in the solar system. And a new group of managers has come to the OECD, ready to at least admit to the problems. So with its newly issued report, "Addressing Base Erosion and Profit Shifting," the OECD promises to do something about the income shifting problem and meet its critics. 

The report contains some astonishing admissions against interest about the causes of the zero-tax results under the current international system. Putting the best face on it, the report is a baby step toward practical proposals -- which are supposed to be ready for the G-20 meeting in a mere four months! 

The report provides little in the way of proposals, and it leaves the reader worrying that the OECD will jump in front of the parade and carry on with its useless projects. 

Pressure Points 

The report identifies six pressure points in the international system, without ascribing blame. Here is the list, annotated with blame: 

• hybrid structures and instruments (U.S. check-the-box rules and European formalistic characterization rules); 
• treaty treatment of remote commerce (OECD model treaty); 
• tax treatment of related-party financial transactions (OECD model treaty); 
• transfer pricing, especially separation of income from relevant activity (OECD transfer pricing guidelines); 
• antiavoidance measures (American, British, and commonwealth courts); and 
• harmful preferential regimes (Vienna Convention on the Law of Treaties). 

Despite these admissions, the report is strangely solicitous of tender corporate feelings. The drafters appear to have inherited the OECD's long-standing fear of incurring the displeasure of the United States and its mighty multinationals. 

...The report makes the seemingly harmless statement that member countries have a common interest in stopping base erosion and establishing a level playing field. As the drafters understand, it is not at all clear that every OECD member is on board. The British are systematically dismantling their corporate tax base, and the Americans are being urged to follow. Those are the home countries of the most tax-aggressive multinationals. 

And ever mindful that its real constituency is multinational business, the OECD proposes to come up with its coordinated action plan in consultation with all the stakeholders! It was considerate of the OECD to include "civil society" among those to be consulted. The old order ignored nonbusiness groups. 

One could well ask why multinationals should be invited to this particular discussion -- not that they don't appear to have veto power over every OECD project. They have cast their votes already. They don't feel like paying corporate income taxes, thank you very much. What are they expected to do, apologize for stripping income out of every market country? 

... Maybe it's easier to blame globalization than to blame a highly discriminatory system that is a vestige of World War I. The international consensus was designed by the Europeans and Americans to minimize taxation of multinationals. 

...The report does not admit that a large part of the problem is the international consensus itself. Like a manager firing workers, the OECD blames globalization. 

...The report's suggested fixes are already being pursued by member governments: more government-to-government cooperation, more transparency, simplified transfer pricing guidelines, better documentation, antiabuse rules, and controlled foreign corporation rules. The report recognizes that some of these fixes are difficult to administer, leading only to counterproductive litigation against well-represented multinationals. 

A constructive suggestion is that intragroup financial transactions be subject to restrictions. This is a startling admission from the organization whose transfer pricing guidance has required recognition of nonsensical legal arrangements and self-serving intragroup contracts in all but the most drastic cases. 

...The report suggests that something be done about harmful preferential tax regimes. But the previous mangled effort was squelched by the United States two decades ago, and hypocritical to boot. European enablers were not included in the list of harmful regimes. The OECD gives itself credit for the Global Forum on Transparency, an effort to accommodate tax havens while signing a lot of unenforceable tax information sharing agreements. 

...The degree to which the OECD still acts like this is a real risk is shown by the report's suggestion that it should be easier for multinationals to get their money back in mutual agreement procedures. The real risk of collective action is, as always, veto by the United States, whose multinationals pioneered the techniques complained about in the report. 

...Having blessed restructuring to stripped-risk distributors and contract manufacturers as business motivated, the OECD now admits that it is a component of the base erosion problem. The restructuring nonsense recently added to chapter 9 of the transfer pricing guidelines hardly merits a mention in the base erosion report, which seriously undercuts that guidance. 

...If the OECD were serious, it would advise member governments to disallow deduction of payments by and to entities treated as tax nothings by the other government. Some governments treat hybrids the same way their home governments treat them. Either straightforward fix would claw back the benefits of the U.S. check-the-box rule. Essentially a check-the-box switchover clause, either approach would ensure that the income represented by the payment was taxed somewhere. 

...Several times, the report describes tax planning as reducing profits attributed to substantive operations while increasing the profits associated with legal constructs like intangibles holding companies. This is a huge admission for an organization whose own transfer pricing guidelines call for intragroup contracts to be respected except in drastic circumstances. 

...The report does not explain why affiliates with no assets and no activities should be respected in the first place -- only that the transfer pricing rules entitle them to very little income! Google had an APA approving its transfer of intangibles outside the United States. Google's Irish affiliate has 2,000 employees. The point of the arrangement was to keep intangibles income out of the United States and to siphon it out of Europe. 

What would the OECD do if it were serious about intangibles migration? It would be compelled to think about factor allocation of intangibles income to countries where they are exploited. ...

Oh so much more at the link. This is a lengthy and detailed criticism. I am with Lee that the OECD is not likely a true apostate when it comes to base erosion. I would like to be wrong but the institutional structure of tax policy norm-making being what it is, there is no reason for optimism. The OECD used to like referring to itself as the "market leader in international tax policy," as if tax policy was a commodity they were particularly adept at creating and selling. Recent developments show tax policy is a commodity all right, but the OECD understates its own market share: it holds 100%. It is a monopoly that created the regime it now professes to view as having failed to keep up with the times.

You can't call it base erosion when you've been operating the backhoe and preventing anyone from building a retaining wall for 50 years.

What an OECD "public briefing" teaches about the rule of law.

The ACA representative who attended the OECD public briefing on FATCA posted a comprehensive description here. The substance of the briefing is important of course and it is well explained in the post, but I note that we can also learn a little more about the OECD and about international tax lawmaking from this participation, and these are things worth noticing for anyone interested in how the rule of law develops in taxation.

• There were no other members of civil society present (non-government, non-business), and there were empty seats, even though Victoria was initially denied entry because space had to be reserved for business interests. So the OECD is still an epistemic community talking with itself. That is important in terms of framing public discourse about what matters and what doesn't for taxation, as well as what questions ought to be answered and what the answers ought to be.
• The issues are all cast as technical compliance ones, as if the politics and policies are all resolved. They are not, but casting things as merely technical in nature makes it easier to turn aspiration into law; it's a common modus operandi for tax regimes, and the OECD has used it consistently over its lifespan.
• Treaty competent authorities will be working out the technical details on how automatic information sharing is going to take place, including registering FFIs and sending info through the IRS portal.  So more and more international tax will get worked out through these obscure, opaque, non-law making diplomatic channels, and there will be less and less law to work with as a result.

These are notable phenomena in the context of simultaneous calls for transparency and accountability in governance, including from the OECD itself.

OECD "public briefing" --update

***updated**

A development on the public briefing. After being turned away, Victoria Ferauge has now been given the green light to attend tomorrow's FATCA/TRACE briefing on behalf of American Citizens Abroad. I am very glad to see this resolution. It worries me when international bodies ostensibly working on behalf of society try to manage which sectors of society count when it comes to policymaking.  Access to meetings is the barest form of participation in such matters.  I look forward to hearing from Ms. Ferauge regarding what she hears and sees at the meeting, and am glad that she will be able to attend with only one day's notice.  (be sure to note if you are asked for your passport to gain entry).

----

Last Thursday I mentioned that the OECD had advertised a "public meeting" on their website about TRACE and FATCA, and I said:

...you can also attend in person for 100EUR if you are a financial institution, a practioner, or a journalist, according to the information.  Though it is not stated, I will simply assume that non-interested observers, such as academics, NGO reps, etc., are also warmly invited.  

I am sorry to have to report that this is apparently incorrect, at least, when one NGO (American Citizens Abroad) tried to send a rep, she was rebuffed because space is running out and "government and business have priority."

Frankly, this is outrageous.  The OECD has been a club for the revolving door crowd for far too long.  When I have criticized the absence of NGOs and other disinterested observers at the OECD I am told  they are represented by government. If that ever was the case, I think we can safely say it is not the case now. The OECD cannot simply isolate anyone who doesn't stand to benefit from government-big business collusion forever. Eventually it must lose its ability to state with a straight face that it works on behalf of the peoples of its member states.

Message to OECD therefore: do not call it a public meeting if it is not a public meeting, if it is only another forum for government bureaucrats and business leaders, call that what it is: an international lobbying session.

Now, if I am wrong and there is an NGO or any other disinterested, non-business person who is going to be allowed to go to this "public meeting" at which what is going to be discussed by bureaucrats and busienss leaders is how governments will be monitoring and taxing human taxpayers who constitute the peoples represented by the member states, then please, please someone let me know.

OECD public briefing on TRACE and FATCA: Feb 12

The OECD will hold a public meeting on TRACE and FATCA in Paris on February 12, with three IRS officials on hand to discuss FATCA and a senior tax guy at HSBC to update on the OECD's TRACE project.  Really? A senior tax guy at HSBC is going to tell us about how the OECD is going to prevent tax crimes and money laundering?  Wait, is this like that movie where they hired an accomplished thief to test the security system and explain everything that's wrong with it?  In any event, info:

The OECD and the Business and Industry Advisory Committee (BIAC) to the OECD will host a public briefing session on TRACE and FATCA at the OECD Conference Centre in Paris on 12 February. 

...Officials from the US Treasury and FATCA partner countries will give an update on the progress made on the intergovernmental agreements. 

You must send your questions in advance:

Participants will be given an opportunity to ask questions by completing the question form and sending it to the OECD Secretariat (icaevents@oecd.org) by Friday 8 February...

 But you can also attend in person for 100EUR if you are a financial institution, a practioner, or a journalist, according to the information.  Though it is not stated, I will simply assume that non-interested observers, such as academics, NGO reps, etc., are also warmly invited.  I am very sorry I won't be able to attend myself, but if anyone who reads this does plan to attend, I would dearly appreciate hearing from you.

OECD enters multinationals’ tax debate

That is the headline from the FT for a tiny little piece that says very little other than that the OECD "is tightening the rules on intellectual property to make it harder for multinationals to site their intellectual property, brands, trademarks and know-how in tax havens where there is no genuine business."  But it's a fascinating headline, isn't it, conveying the idea that this is new territory for the OECD.   No mention that it was the OECD that in effect created and continues to shape the whole international tax system as we know and love it today, tax havens and all.

FATCA & Multilateralism

I have suggested before that FATCA seems to me to be a bargaining chip to get other countries to negotiate on tax info exchange with the US.  The OECD seems to support this objective:

 The OECD welcomed today a new model international tax agreement designed to improve cross-border tax compliance and boost transparency.

Developed by the United States, France, Germany, Italy, Spain and the United Kingdom, the model allows the implementation of the Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments, reduces compliance costs for financial institutions and provides for reciprocity.   

...OECD Secretary-General Angel Gurría said:  “I warmly welcome the co-operative and multilateral approach on which the model agreement is based. We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest. We are happy to redouble our efforts in this area, working closely with interested countries and stakeholders to design global solutions to global problems to the benefit of governments and business around the world.” 

As a next step, the OECD will organise, in cooperation with the Business and Industry Advisory Committee to the OECD, a briefing session on the “Model Intergovernmental Agreement on Improving Tax Compliance and Implementing FATCA” at OECD headquarters in Paris in September 2012. The Organisation will then quickly advance to design common systems to reduce costs and increase benefits for governments and businesses alike. 

A major irony in the model agreement is that it's not at all clear to me that the US can furnish what it requires to be furnished by other countries, from the get go:

The information to be obtained and exchanged is:

(a) In the case of [FATCA Partner], with respect to each U.S. Reportable Account of each Reporting [FATCA Partner] Financial Institution: 

(i) the name, address, and U.S. TIN of each Specified U.S. Person that is an Account Holder of such account and, in the case of a Non-U.S. Entity that, after application of the due diligence procedures set forth in Annex I, is identified as having one or more Controlling Persons that is a Specified U.S. Person, the name, address, and U.S. TIN (if any) of such entity and each such Specified U.S. Person;...

This will be hard for the US to do in the face of anonymous incorporation, nor do I understand how a multilateral agreement can work if it cannot ensure reciprocity.  Nevertheless, it now begins to come clear that FATCA looks like a unilateral attempt to accomplish that which is not being  accomplished multilaterally through the usual (OECD) channels, namely, automatic info exchange with the US.  Steven Dean disagrees, though, and says the multilateralism envisioned here won't lead to more information being shared.  I hope he will weigh in and give his insights on this.

Meanwhile, one of FATCA's architects recently defended it in "A Report from the Front Lines."  Using imagery like "the front lines" gives the general idea about the tone: this is war.  He takes on the sovereignty issue as follows:

[T]he United States also has the sovereign right to protect its tax base by implementing a FATCA regime, and that if a Swiss FI does not want to be part of the regime, it is free to either avoid the U.S. financial system or incur a 30 percent withholding tax. Said differently, if tax haven and bank secrecy jurisdictions want to build their banking system to cater to tax evaders, the United States and other countries should not be prevented from taking counteractions.

He concludes with this on multilateralism:

Nevertheless, the United States needs to continue aggressively pursuing FATCA, especially in the multilateral context. Obtaining significant progress toward a multilateral FATCA regime could provide many benefits:

• reducing discrimination against U.S. citizens living abroad; 
• providing relatively standard customer due diligence procedures; 
• reducing the number of investment options available to U.S. persons attempting to hide money overseas; and 
• eliminating the complex passthrough payment rules. 

...In summary, the U.S. government has made significant progress toward addressing the use of offshore accounts to evade U.S. tax, but the war is not yet won. Much work still needs to be done. In addition to implementing FATCA in the United States, Treasury and the IRS should be pursuing an agreement among major countries as to the proper level of customer due diligence, and, ultimately, a multilateral FATCA regime involving several major countries. A multilateral approach will provide many benefits.

It is left to the reader to wonder, what benefits, and to whom?

OECD on information

Here are two new OECD reports of interest: one on automatic information exchange (they are sort of for it) and the other on confidentiality of tax info (they are really for it).

Sheppard on transfer pricing: clumsy, sorry, and doomed

Lee Sheppard asks Is Transfer Pricing Worth Salvaging, and answers no: it is "the leading edge of what is wrong with international taxation."  She calls transfer pricing a "clumsy tool[] that affluent developed countries have used among themselves, to their collective detriment" and "a sorry vestige of a system that will be gone in 10 years."  She points to a series of factors that will kill transfer pricing as a going concern: resistance from the BRICs, Europe's move to combined reporting with formulary apportionment, social justice activists' increased scrutiny of and scorn for high profile tax dodging, and various prior failures of tax policy that have already allowed multinationals to exit from the tax system on a global basis.  She concludes:

Booking income from an intangible in a tax haven is not a fit subject for tax competition. Tax competition for foreign direct investment is honest competition. Tax competition for booking income is not. Poor little Ireland is still poor, despite the billions of dollars of multinationals’ income booked there. It was only booked there. It sloshed through Ireland on the way to somewhere else, and did not pave the dirt roads on its way out.

HT: TJN, which is hosting a copy of the column on their website.

About that $21-32 Trillion Hidden Offshore

TJN published a report [pdf] earlier this month showing that $21 to $32 trillion is likely hidden offshore.  The OECD scoffed at the number, suggesting that is somehow means that there are thousands of hidden billionaires running around that no one knows anything about:

[Pascal] Saint-Amans [head of the OECD's tax division] suggested the TJN estimates might be overstated. "I was wondering where the equivalent of 450 Bill Gates are hiding from everyone. It looks like the equivalent 20,000 unknown billionaires in the world or 200,000 people with net worth of 100 million," he said. 

Richard Murphy responded by breaking down the likely composition further:

1. [Tier One:] “Oligarch/ politburo/ dictator/ oil sheiks class: Top 100 in the world: 40% of their $4.2 trillion of total financial wealth offshore: average total financial wealth is $42 billion.
2. Tier two: “ordinary billionaires: ”  2900 in the world: 33% of their $4.33 trillion of  total financial wealth is offshore, with an average of $1.5 billion each.
3. Tier three: “ultra high net worth:”  117000 that keep 25% of their $6.8 trillion of total wealth offshore, with an average of $58.1 million each.
4. Tier Four: 9.86 mm  people that keep 20% of their $61.8 trillion of financial wealth offshore, with an average net financial wealth of $6.3 mm
[5.] Tier Five: 59.8 mm people that keep an average of 6% of their $63.4 trillion of financial wealth offshore, with an average net worth of $1.06 mm

Murphy adds " that this much wealth is offshore is not just plausible – it only requires us to make modest assumptions about the proportions of various known types of portfolio that actually exist to think that such level of offshore holding is likely."  He acknowledges in the comments that of course any attempted measure of that which is completely hidden can be nothing more than an estimate.  Of course, governments and banks around the world certainly have the info, and confirmation could be obtained if disclosure was compelled.  But the OECD has not taken the high road on this.  Instead it has supported the veneer of transparency over the systemic support of an international architecture of obscurity.  

OECD praises itself via G20 re: progress on tax evasion

The OECD says the G20 reports that "steady progress is being made towards tackling tax evasion more effectively."

I have called the G20 a syndicator of OECD tax views, since the G20 lacks an independent infrastructure in which to form its own positions on tax policy, so when the OECD points to the G20 pointing to success on an OECD initiative, I interpret that as the OECD praising itself.

In this case the praise is out of step with the general sense I have about where things are with tax evasion today.  I don't think there is much evidence at all that the OECD is making progress.  The evidence seems to suggest rather that the best that can be said is that some counties that were viewed as extremely tax-evasion friendly a few years ago may be less so today.  But on the other hand other countries seem to be picking up the slack.  That doesn't seem like progress, that seems like something about deck chairs and a big luxury liner.  Certainly there are no fewer dollars in tax havens, a point that seems to work squarely against any notion of progress against tax evasion.

The OECD says "The Global Forum reports that more than 800 cross-border exchange of information agreements have now been signed," and 35 countries have signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  What can one possibly make of the attempt to use signed agreements as evidence of progress?  It is a very formalistic way of thinking about things.  "The law exists" is not going to convince anyone that people are in fact following the law, whatever the law may be.  Signing an agreement is not exchanging information.  And I am not even sure that exchanging information is evidence of making progress on tax evasion.  The right information has to be exchanged.  It has to be exchanged in a usable way.  And the information recipient has to have the will and the means to use the information for that purpose.   The commentary I read from non-OECD sources suggests that information is not being exchanged regularly and sufficiently to suggest progress is being made.  Nor do other tools in the anti-evasion toolkit seem to come to the rescue: the OECD itself seems a bit stymied on arm's length transfer pricing, another of its prized weapons against tax evasion.

It is the case that only the competent authorities would know for sure what information they are exchanging under tax treaties and whether they are able to use this information to combat tax evasion.  The competent authorities do not publish any kind of information on this particular data point.  Maybe steady progress is being made.  It would be good to have evidence that it was.  But no amount of prying seems to be opening the door to public access.  We could know so much more about whether progress was being made if we could get some transparency on what the competent authorities do.  But there is a lot of resistance to this form of transparency.

The flawed, insensible, unworkable arm's length standard

TJN will host a conference on transfer pricing in Helsinki, June 13-15 2012, to analyse the OECD Transfer Pricing Guidelines and suggest alternatives.  Info here together with a new paper by David Spencer on the subject, "Transfer Pricing: Will the OECD Adjust to Reality?"  Spencer is understandably critical of the OECD arm's length standard:

[An] OECD Staff  Report [published on Oct. 20 2011] defended the OECD’s arm’s length principle described in the OECD’s Transfer  Pricing Guidelines for Multinational Enterprises and TaxAdministrations of July 2010 (“OECD Guidelines”), in particular for developing countries.  ... The OECD Staff Report ... begins by quoting the OECD Guidelines (paragraphs 1.14-15), that “the arm’s length principle is sound in theory .... The main weakness of the OECD Guidelines is that there is no such “sound theoretical basis.” According to Michael Durst, who from 1994 to 1997 served as Director of the U.S. Internal Revenue Service’s Advanced Pricing Agreement (APA) Program, there is “a gaping conceptual hole at the heart” of the OECD Guidelines....

...Michael Durst has in effect implied that the OECD’s arm’s-length standard exists precisely because it is unenforceable and that is why business lobbyists, in the United States and other countries, have supported it so energetically.

Spencer then documents a litany of criticisms of arm's length by such notables as Martin Sullivan ("The arm’s length method is seriously flawed in both theory and practice"), Reuven Avi-Yonah and Ilan Benshalom (arm's length's "central assumption defies reality, and it is not surprising that a system of
“arm’s length” pricing cannot yield sensible results"), David Rosenbloom ("the arm’s-length system as it operates today [is] fundamentally unworkable"), Stephen Shay ("there is evidence of substantial income shifting through transfer pricing"), and so on.  In conclusion, Spencer asks:

[W]hy should the OECD, a club of 34 rich countries, representing only 18  percent of the number UN member countries, and with a declining share of world trade and investment, be the arbiter, the rule maker, of such a “consistent global transfer  pricing system?” Why should the OECD try to impose its transfer pricing rules on major  developing countries such as Brazil, China and India, and other developing countries?

Professor Mike McIntyre, a vigilant observer of the follies of arm's length and a champion for the viable alternative of combined reporting with formulary apportionment, also responded to the OECD's Oct. 20 report, here, and will present at the TJN conference. He says:

[T]he arm’s-length system promoted by the OECD, after years of tinkering and major reforms has worked poorly or not at all for both developed and developing countries. The great sign of the general failure of the arm’s-length system is that it has permitted multinational enterprises to divert uncounted billions of dollars annually to tax havens.

Prof. McIntyre addresses the various critiques of CR/FA by those who support arm's length (such as the oft-made claim that CR requires a common tax base--no more true than for arm's length), and concludes:

If the goal is simply to eliminate double taxation, then the OECD can claim success. That goal, however, is rather unambitious. A far more worthy goal would be to make multinational enterprises report something close to the income they actually earn in each country in which they operate. The OECD’s arm’s-length approach does not come close to achieving that goal...In contrast, a combined reporting system with formulary apportionment is designed specifically to achieve that goal.

...The arm’s-length method simply is not working, and 50 years of tinkering and major revisions have revealed that it cannot be made to work.  ... Combined reporting remains the best hope of the world for moving past the failed system based on the arm’s-length principle to a system that actually apportions income exclusively to the countries where meaningful economic activity occurs.

It should be an interesting conference.

Tax Inspectors Without Borders

OECD wants "to help developing countries bolster their domestic revenues by making their tax systems fairer and more effective."   This comes out of The OECD’s Task Force on Tax and Development:

OECD will  establish an independent foundation, to be up and running by the end of 2013, that will provide international auditing expertise and advice to help developing countries better address tax base erosion, including tax evasion and avoidance. The initiative was championed by Oupa Magashula, Commissioner General of the South Africa Revenue Service, Nhlanhla Nene, South Africa’s Deputy Finance Minister and Pascal Saint-Amans, Director the OECD’s Centre for Tax Policy and Administration.

It will be interesting to see the composition of this foundation.

Tax Treaty Interpretation: the ambulatory approach

This student note asks whether, if courts draw on OECD guidance to interpret actual tax treaties, they should consult the latest guidance regardless of the date the treaty was signed.  He concludes they should.  I'm not convinced.  Some of my reluctance to be convinced draws from my hesitancy about the use of the OECD commentaries as guidance at all; the rest because I cannot see how the parties to a treaty could possibly prospectively bind themselves to some future interpretation, but especially one that is not made by either of the treaty signatories in respect of the actual treaty they signed.

The former point is a threshhold issue--since I worry about the incremental ossification of OECD commentary via uncritical acquiescence to its murky status as law, I wish that the topic would be discussed at length in any writing about tax treaty interpretation, and I feel uneasy when this difficult question is sidestepped in pursuit of the finer point about which of such guidance should be used when.  It really is a tough threshhold, and perhaps for good reason the student chose to step past it in order to get to his main question of whether a static or ambulatory approach is appropriate.

In 1994, Hugh Ault wrote a brief comment trying to reconcile the use of OECD commentaries with the Vienna Convention; he rejected the ambulatory approach on grounds that later OECD commentary could completely reverse prior understandings of the meaning of the model convention, so could not reflect the parties intentions as the Vienna convention would require.  This 2008 brief from one treaty signatory in a tax treaty dispute cites Hugh Ault's argument to completely reject the ambulatory approach; similarly this article [pdf] by Esperanza Buitrago Díaz discusses a series of cases that reject the approach with respect to Spain's treaties with the Netherlands and Costa Rica.

It seems to me NatWest got it right, and the ambulatory approach is really hard to defend.  But I applaud the student for giving it a go--not an easy topic of law for a first stab at scholarship.

Taxes on Labor Increasing

No great surprise, just confirmation of a continuing trend as taxes continue their shift from capital (free to cross borders) to labor (more trapped).  The OECD has released its latest report on the taxation of wages, and it reports:

The average tax and social security burden on employment incomes increased in 26 out of 34 OECD countries in 2011 according to the new OECD Taxing Wages publication. Tax payers in Ireland, Luxembourg, Portugal and the Slovak Republic were among those hit with the largest increases. Those in New Zealand and the United States saw their tax burden fall. In Hungary, the average single worker without children was faced with the largest increase in the tax wedge, but for families with children, it fell.

here is a chart:

You can look at the data here.

US: leading the OECD in low-wage workers

John Schmitt has a new paper entitled "Low Wage Lessons" [pdf] in which he says ": The United States is a Poor Model for Combating Low-wage Work," as illustrated by this chart:

"The United States has the highest share of low-wage work in the OECD countries analyzed here.  Moreover, the incidence of low-wage work in the United States has been rising for at least three decades, from just over 20 percent in 1979 to just under 30 percent in 2010."

Schmitt thinks the reason is the minimum wage level is too low and the EITC isn't structured properly.  He says "the EITC and minimum wage in the United States have been set too low to limit the
incidence of low pay, and the minimum wage has been set too low to prevent employers from
reaping windfalls from the eligibility structure of the EITC."  He continues with the observation that the low wages themselves are "among the least of the problems facing low wage workers':

"U.S. labor law offers workers remarkably few protections. U.S. workers, for example, have the lowest level of employment security in the OECD and no legal right to paid vacations, paid sick days, or paid parental leave.  The low level of union coverage in the United States means that contractual obligations generally don’t make up for the lack of legal guarantees. 

In the absence of legal or contractual rights, low-wage workers are the least likely to have access to core benefits. ... probably the most critical problem facing low-wage workers is the lack of access  to health care.  Rho and Schmitt estimate that in 2008, more than half (54 percent) of workers in the bottom wage quintile did not have employer-provided health insurance and more than one-third (37 percent) had no health insurance of any kind, private or public. 

The 37 percent non-coverage rate for the bottom quintile of wage earners in 2008 was up from 15 percent in 1979.

Tim Taylor comments: 

"Define 'low-wage jobs' as those that involve earning two-thirds or less of the median hourly wage: that is, those earning less than about $10/hour. As Schmitt notes: 'If low-wage work were a short-term state that helped connect labor-market entrants or re-entrants to longer-term, well-paid employment, high shares of low-wage work would be less of a social concern. Indeed, if low-wage work facilitated transitions from unemployment to well-paid jobs, countries might want to encourage the creation of a low-wage sector to improve workers’ welfare in the long term.' On the other side, if low-wage jobs are a near-permanent state of affairs for a substantial group of workers, or if such jobs even send a negative signal to potential future employers that this worker is going to have low productivity, then the prevalence of low-wage jobs may be of real policy concern."

In other words, he's saying that if low wage work is a stepping stone to a better future, then no worries, but in the U.S., it's generally not.  This ties in to ideas about social mobility in the US, ideas that are enduring yet mostly not borne out by the evidence; ideas that seem to explain the tendency of lower wage workers to vote against their economic self-interest in the U.S.

Taylor concludes "If we wish to build a society and an economy on rewarding work, it is a harsh fact of U.S. labor markets that such a reward is currently not apparent for many."

OECD vs. UN and the making of soft tax law

TJN recently ran a guest post on the UN's attempt to build an institutional rival to the OECD for international tax policy.  The UN's work is currently confined to a committee, and the G77 would like it "upgraded to an intergovernmental entity."  The OECD and the EU oppose.  The post gives an interesting account of the issues and interests at stake.