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.

Are multinational companies a public good? If not, why are taxpayers subsidizing their global marketing strategies?

The story is that the Canadian government recently set up food trucks in Mexico in order to promote "Canadian cuisine," which the National Post pictures as follows:

Above: poutine. Below: tourtière, both from Quebec.
(the article says only QC has any sort of cultural food identity. Sorry BC!)  

These national icons are being served from this truck:

Don't judge this book by its cover.

So, the Canadian government has gone to Mexico with a van decorated with fresh fruits...to sell gravy-and-cheese-slathered french fries and meat pie.

To be sure I'm not against either of these foods in principle (so long as the latter is served with maple syrup) and I'm not against Canadians...whether individual or corporate... setting up shop in Mexico to sell the hapless public yet more creative combinations of salt-sugar-fat. (Neither would I be opposed to Mexico imposing Pigouvian taxes on this activity, to compensate for the costly externalities visited upon the public health.)

But I very much object to taxpayers subsidizing the venture. I get that all countries try to promote their culture and in the process increase exports of their goods & services (or is it really the other way around). But as industrial policy goes, this has to be the bottom of the barrel.  If McCain Foods Inc cannot get the word out about its wonderful french fries, I simply cannot see how it becomes the  public's responsibility to provide it with free advertising. 

Last week we learned that corporate tax expenditures more or less equal corporate tax revenues raised in the US.  I haven't seen similar number crunching for Canada (working on it), but I expect for multinationals at least the story is very similar. If you then add these straight up subsidies, are we getting to a place where multinationals constitute a net drag on the fisc? If yes then we should be asking ourselves: when did we decide that multinational corporations are a public good that must be financially supported by other taxpayers? 

Is there anyone out there still clinging to the sense that a free market economy must mean something other than government subsidies for favored industries?

Add to summer reading list: Multinationals and Human Rights

John Ruggie has published Just Business: Multinational Corporations and Human Rights.  Abstract:

One of the most vexing human rights issues of our time has been how to protect the rights of individuals and communities worldwide in an age of globalization and multinational business. Indeed, from Indonesian sweatshops to oil-based violence in Nigeria, the challenges of regulating harmful corporate practices in some of the world's most difficult regions long seemed insurmountable. Human rights groups and businesses were locked in a stalemate, unable to find common ground. In 2005, the United Nations appointed John Gerard Ruggie to the modest task of clarifying the main issues. Six years later, he had accomplished much more than that. Ruggie had developed his now-famous "Guiding Principles on Business and Human Rights," which provided a road map for ensuring responsible global corporate practices. The principles were unanimously endorsed by the UN and embraced and implemented by other international bodies, businesses, governments, workers' organizations, and human rights groups, keying a revolution in corporate social responsibility. 

Just Business tells the powerful story of how these landmark "Ruggie Rules" came to exist. Ruggie demonstrates how, to solve a seemingly unsolvable problem, he had to abandon many widespread and long-held understandings about the relationships between businesses, governments, rights, and law, and develop fresh ways of viewing the issues. He also takes us through the journey of assembling the right type of team, of witnessing the severity of the problem firsthand, and of pressing through the many obstacles such a daunting endeavor faced.

Excellent timing, with all the world watching whether and how governments are going to increase transparency with respect to MNCs and their local and global dealings.

To understand why citizenship-based taxation is objectionable, consider the STEM Jobs Act of 2012

Victoria Ferauge explains in as clear a way as may be possible why it is important to understand what people mean when they talk about citizenship-based taxation, and why the US effort to impose it with the big stick of FATCA is so objectionable to Americans living in other countries (also known as "immigrants" in those countries). She makes a number of points but I wanted to highlight one here:

In the [dialectic on Americans living abroad, which equates expatriation with tax evasion] it seems not to have occurred to the American public or its lawmakers that the people they are trying to attract [through immigration policies aimed at high-skilled workers] are the product of other countries' investments in producing a well-educated populace. 

In light of that, consider what the Heritage Foundation says about the STEM Jobs Act of 2012:

American businesses are struggling to fill high-skilled employment opportunities. STEM jobs grew at over three times the pace of non-STEM jobs between 2000 and 2010 and are expected to grow almost twice as fast by 2018. Business groups have spent years urging Congress to reform the visa system in order to fill these empty positions.

Enhancing the ability of high-skilled workers to enter the U.S. would be an asset to the nation’s economy as well as its indebted government. 

In case the instrumentalist nature of our interest in immigrants is not clear, the point is we're going to make these foreign-born, foreign-raised, foreign-educated, now high-skilled, highly-paid workers a permanent part of the American taxpaying public, which can increasingly be defined as the American wage-earning public. One may be forgiven, perhaps, for juxtaposing this deep thirst for foreign talent against America's ongoing disinvestment in its own social infrastructure, including public education (also helped along by the Heritage Foundation).

Victoria's post thus seems to me to contain the contours for constructing the normative case for taxing humans. There is much to be done on this topic, but it seems clear that the practice of admitting immigrants at all, let alone actively seeking highly-skilled ones, demonstrates that inbound human mobility is a social good that states support; that inbound human mobility (perhaps especially of the high-skilled kind) may be the product of rather intense social investment by some other country; and that conversely taxing on the basis of citizenship regardless of residence is a means of preventing outbound human mobility and so runs strictly counter to the overall good of human mobility while also being hostile to the aims of other countries also seeking inbound labour.

The US has long objected to onerous fiscal controls on the capital it sends across borders, so it seems particularly difficult to understand the ongoing support for placing onerous fiscal controls on its outbound labour supply. Contextualize that observation within the story of the shift of taxation from capital to labour over the past 50 years, however, and a pragmatic explanation is easily ascertained. But pragmatism does not make the normative case. In fact, it violates the conventionally-understood major normative factors for assessing taxation--efficiency, administrability, and fairness--because it introduces an insurmountable amount of arbitrariness. This topic deserves much more thinking than has been allocated to it by tax policy observers, including myself.

There is much more at the link, please do go and read Victoria's whole post.

I do love these US Dept of State "Remarks to Global Business Conference"

I have no idea why these remarks ended up in a State Dept email distribution I got today, as they date back to a year ago, but they are fascinating anyway: a speech given by Thomas Nides, Deputy Secretary for Management and Resources, to something referred to only as "Global Business Conference." That's not very specific, but I think you'll agree the remarks tell us a lot about the audience and the speaker (and governance, and the revolving door between business and government, and the role of law and the rule of law, and the stories we tell ourselves about those things, and etc etc). Excerpts of note:

...as Deputy Secretary of State and as a recovering businessman myself, I am delighted to welcome so many of my friends from my past and present lives all in one room.  

...First, why do we, as diplomats, care about economics? The simple answer is that good diplomacy is good economics, and good economics is good for diplomacy.

A reminder: what's good for GM is good for America. 

America's global leadership and our economic strength at home are fundamentally a package deal, and we need to shore up both of them. We live in an era where the size of a country's economy is every bit as important to exercising global leadership as its size of its military.

Was that ever not the case? It takes big money to build a big army and supply it with big guns.

The reach of our corporations extend far beyond where even our most aggressive diplomats and development workers hope to go. And, closer to home, America's people are hungry for economic recovery. In a global economy, there's no such thing as a purely domestic recovery. That means the State Department, which manages our relationships around the world, is essential to exercising our economic influence, keeping America prosperous, and creating jobs here at home. 

Second, why did we invite you? Because we believe that building sustainable global growth and creating jobs at home is fundamentally a joint venture. The private sector innovates and allocates capital, and delivers remarkable products and services. And the government opens new markets and ensures the rules are fair. At a time when competition is fierce and jobs are still too far scarce, we in diplomacy and business have to bring our partnership to the next level. 

You innovate, we make things fair, everybody's happy, to a whole nother level indeed. So, who got invited, who is in the room? Why, it's "Business leaders from across American industry, from large companies to small ones ... as well as organizations working to promote American business and fair competition, including my old friend, Tom Donohue." Don't know who that is? Read Matt Stoller's take from several years ago, it's important. And with whom will these business leaders be networking in the halls between remarks lauding their innovation and sheer excellence in creating jobs in America? "Vice President Biden, Commerce Secretary Bryson, our Trade Ambassador Ron Kirk, and the heads of Ex-Im, TDA, and OPIC and Secretary Clinton." And yet there's more, so much more to come.

Which brings me to my third question: What do we, as the State Department, bring to the table? I would submit that the answer is: a huge amount. We are the face of the United States in over 190 countries and at 274 posts around the world. We fight for your rights.

I know you want to add "to party" and I think overall, you'd be right to add it there.

...Over the past 60 years, we have helped establish the rules and institutions to safeguard healthy economic competition and spur unprecedented global growth.

Yikes. Just, yikes. But then there is this absolute gem:

...We have over 1,000 State Department economic officers around the world who wake up each day and ask themselves how they can help American companies large and small compete, connect, and win. From bilateral trade and investment treaties to open skies agreements, we open markets for your companies. We advocate on behalf of U.S. companies exporting to just about every country in the world. We make it a priority to help American companies take part in the growth unfolding across the developing world.  

...And whenever we have seen barriers to open and free and fair and transparent competition, our embassies around the world push back. We push back against unfair barriers to investment. We push back to protect intellectual property, to protest discrimination against our companies, and to guarantee that all companies get a fair shake, whether the owners sit in corporate boardrooms or government ministries. When American businesses are not fairly treated, that's not just an economic issue; it's also a diplomatic issue. 

And let me be clear. We just don't seek a fair shake for American companies; we seek a fair shake for all companies. ... We know that when the competition is open and free and transparent and fair to all people, American companies have what it takes to compete. And we know the same values that help our companies will also help local entrepreneurs, foreign businesses, and ultimately everyone for one simple reason: They create economic growth that improves lives.

Yeah!  That's how winning is done!  Don't forget to visit your mother.  Really, I just had no idea that the State Department had a pep squad of 1,000 "economic officers" [what is that? ah, negotiators of fair competition, economics knowledge helpful but not required] all over the world who woke up every day asking themselves those questions and then answering them. That really is remarkable.

Fourth and finally, what do we hope to accomplish here together? We want to hear from you. We want to know your concerns, where you see opportunities, where you see gaps in our work. We also want you to know that you can turn to us for support. 

...We at the State Department want to help create the conditions that will empower American businesses to get out there and take the risks that will drive a recovery around the world. ... The idea that business, on the one hand, and government, on the other hand, can simply operate in parallel worlds just doesn't cut it. We have to work together. That's what this conference is all about, and that's why I'm glad you're here. Thank you very much. (Applause.)

Then he introduces Ron Kirk. I always do enjoy a speech like this, even if I am a year late to the party. Number of times he used the word fair: 11.  The word compete or competition: 8. The word help: 8. The word jobs: 6. The word business: 17. The word lobby: 0.

US fights EU on data privacy law, says EU should respect US right to regulate

For the life of me I cannot understand the FT's headline, which reads "Brussels fights US data privacy push."  No, it's the US sending a team of lobbyists to fight against EU regulation--the penultimate sentence of the article even labels this "aggressive lobbying."

Why are the US lobby troops going into battle? Because the EU seeks to impose a fine of 2% of global annual revenues for any company, anywhere in the world, that violates the data rights accorded to EU citizens. US lobbyists and a sympathetic administration seem all too eager to push other countries to ease up on their regulatory burdens on US companies, so it is not surprising to see them in full force against the EU parliament here. But this effort is especially rich given that it comes at the very moment that the US is seeking to impose a fine of 30% on any company, anywhere in the word, that violates its own data sharing requirements. From the story:

Viviane Reding, EU commissioner for justice, said that the EU was determined to respond decisively to any attempts by US lobbyists – many working for large tech groups such as Google and Facebook – to curb the EU data protection law.

“Data protection is a fundamental right in Europe which is clearly enshrined in the Charter of Fundamental Rights. Whilst this may not be the case in other parts of the world, one thing is clear: if companies want to tap into the European market they have to apply European standards.” 

Ms Reding’s firm approach is likely to spark a diplomatic battle between Brussels and Washington, which has actively been trying to water down the EU’s tough new privacy legislation by handing US companies a de facto exemption from it. 

“Europe, the United States and other democracies around the world share many of the same values,” said William Kennard, US ambassador to the EU at a conference on European data protection and privacy. “We need to accept that each of these democracies has the right to choose whatever legal framework is suited best for them to defend and protect those values.”

Translation: respect our sovereign authority to write the laws we want to write to regulate our companies; don't use sanctions or threat of sanctions to force our companies to abide by your laws.  Or, do that to other countries, but give us an exemption because we're good guys that share your values.  Further:

US tech companies are trying to shield themselves from the legislation as they argue that it would be unfair for them to be subject to EU laws that are too stringent and could result in expensive administrative burdens and hefty fines for errant companies.

So here we have a US ambassador stating the cause for US companies that complain of the "unfairness" of stringent and expensive compliance costs backed by hefty penalties for noncompliance. The EU's position is, we are trying to protect our people wherever they go in the global market. The world is our jurisdiction to the extent it impacts the people we call "ours," and we aim to protect our people.

Are we not coming to a place where it is becoming obvious that global markets cannot peacefully co-exist with autonomous states?  Not one world government at all but instead an impenetrable mass of overlapping and conflicting regulatory states, a venn diagram of massive and chaotic proportions, and no possible way for anyone to comply with all of it.  Stock tip: invest in data compliance companies, they might be the most important drivers of the global economy in the near future.

Tax, Law and Development

Yariv Brauner and Miranda Stewart have posted their introductory chapter to Tax, Law and Development, a book to which I am contributing with a chapter on global tax activism.  Here is the abstract:

This book is the first collection of independent legal scholarship exploring the relationship between tax, law and the quest for human development. While acknowledging fully the challenge of tax competition in a global economy, this book rejects calls to end taxation of mobile capital even if this may be perceived to be a theoretical economic inevitability due to the difficulty of collection in an uncooperative environment. New approaches to economic development suggest we must abandon – or significantly downplay – the dominant normative approaches to tax policy, replacing these with contextualized, diverse, partial and incremental tax law reform approaches that take seriously the legal, social and political context. The innovative scholars who contribute to this book examine the role of law in national and international tax regimes across a range of topical tax issues, from the perspective of countries including China, Brazil, South Africa, India and the United States. Chapters discuss the reform of tax laws that are central to economic globalization, including tax incentives for foreign direct investment, their relationship with tax treaties and other international tax law, the problem of how to address fundamental equity concerns, and institutions of budgeting, tax law making and administration in a global era.

They conclude:

The variety of chapters presented in this book forcefully demonstrate the deep need and the wealth of opportunities for progress in this avenue of study of tax, law and development. The primarily economic and ‘one size fits all’ focus of tax policy to date has not been sufficiently matched by detailed legal, historical and contextual policy analysis that can fortify and enrich it, supporting the implementation of tax reforms within real world social and legal structures. A range of alternative approaches to development arise out of the critique presented by the authors in this book and surveyed in this Introduction. The chapters call for a direct acknowledgement of the challenges and contradictions of tax law reform for development, and emphasize patience, diversity, a trial-and-error approach, transparency, legitimacy or ‘ownership’ and constant feedback and evaluation in tax reform approaches. Although less apparently streamlined and ‘correct’, these alternative approaches to tax, law and development do not imply a loss of focus, even if they are slow, difficult to implement, and lack the appeal of promised panacea. Moreover, they often require careful coordination within and between countries that does not exist in the current international tax regime. This new approach does, however, promise some actual success. The goal of this book is unashamedly idealistic, to serve as the foundation that would jump-start further scholarship, and support real change in the global and national tax laws for economic development.

I'm looking forward to seeing the book in print.

Exit taxes and human mobility

An interesting article in Tax Analysts [gated] talks about exit taxes (taxes imposed on assets when a person or entity migrates to another nation) as an impediment to human mobility. I'd say yes, exit taxes do impede mobility, and whether and when they are justified is debatable and under-studied. But there's no universally recognized human right to mobility across national borders, as we well know. (There should be, of course, but that's a discussion for another day).

Instead, every country has high barriers to entry, some more onerous than others, and many have high barriers to exit, some more onerous than others. The US is high on both sides. Many people want to come in and are denied the chance; many others want to leave and can't escape the clutches. It's an odd world.

In any event, the Dutch exit tax has run into trouble becuase Europe has created a right to mobility within the EU zone, via the "freedom of establishment," under article 49 of the Treaty on the Functioning of the European Union (TFEU). The ECJ deemed the Dutch exit tax a violation of that freedom in Commission v. Netherlands (C-301/11), saying that while an exit tax may be justified to ensure a balanced allocation of taxing rights between member states, the Dutch obligation to immediately pay the exit tax was "disproportional." Tax Analysts explains:

Under Dutch tax law, when a taxpayer operating a business moves its place of management to another country, including another EU or European Economic Area member state, the taxpayer becomes subject to a tax assessment for the (deemed) capital gain upon exit. The tax is imposed on the unrealized profits (for example, goodwill, hidden reserves, and tax reserves) attributable to that business. 

The exit tax rules apply both to legal entities and to individuals that relocate their businesses' place of effective management from the Netherlands to another country. 

...As could be expected, in its January 31 decision, the ECJ referred to its previous decision in National Grid Indus. That case concerned Dutch exit tax imposed on a company that relocated its place of effective management from the Netherlands to the United Kingdom. The ECJ approved of the concept of exit taxes because of the need to ensure a balanced allocation of taxing rights between member states. However, a "balanced allocation measure" of this type must satisfy the proportionality test, and the ECJ found the immediate payment obligation disproportional. Because the cross-border relocation exposed the taxpayer to a cash flow disadvantage that would not have existed if the relocation had been domestic, the ECJ deemed the immediate taxation of the unrealized (foreign exchange) gains under some circumstances to be in violation of the TFEU principle of freedom of establishment. 

...This judgment comes as no surprise, as both the state secretary of finance (through the above policy statement) and the lower house of the Dutch parliament (through a draft bill) had already recognized this restriction in domestic law. On December 4, 2012, the lower house approved a bill of law concerning the deferral of exit tax. ... After the bill of law is approved by the upper house (which is expected in early 2013), the new rules will take effect retroactively from November 29, 2011 (the date of the ECJ decision in National Grid Indus). 

The Dutch parliament has drafted a bill to allow for deferral on a retroactive basis and the authors conclude that hopefully, a lesson has been learned. For those outside the EU zone, of course, there is no great comfort to be had but this is another interesting development on the connection between the state and the individual in a world featuring ever-increasing mobility.

Should you (virtually) go to Antigua to gamble or download?

What an odd story from Above the Law last week:

Antigua & Barbuda can now legally offer downloads of copyrighted U.S. works, and there's not a damn thing the U.S. can do about it. The decision marks the latest chapter in the long-running trade dispute between the U.S. and the tiny Caribbean nation over Antigua's internet gambling industry. The U.S. banned Antigua's internet casinos, Antigua took the U.S. to court through the WTO, and Antigua won — and has continued to win — consistently throughout the appeal process.

ATL describes WTO dispute resolution thusly:

"Because you pulled Sally's hair, she gets a free shot to kick your friend from school in the nuts. Justice!!!"

But what Antigua really wants is a deal:

"The economy of Antigua and Barbuda has been devastated by the United States government's long campaign to prevent American consumers from gambling online with offshore gaming operators," Harold Lovell, Antigua's finance minister, said in a statement. "We once again ask our fellow sovereign nation and WTO member, the United States of America, to act in accordance with the WTO's decisions in this matter, before we move forward with the implementation of the sanctions authorized this day by the WTO."

I have two multi-part questions and two asides.

1. just as a factual matter, can people currently download US-copyrighted works from Antigua with impunity? That is, would that not be a breach of copyright on the part of the downloader, even if it is not for the download-facilitator? Obviously i have no understanding of copyright law.
2. can a nation state, as a matter of power/capacity, prevent its people (however it defines them) from gambling offshore via the internet?  And if it can, why shouldn't it?  This is a loaded question.

No sugar industry sans big gov

From Tim Carney: 

Last fiscal year, Americans paid about 69.9 cents per pound of refined sugar. The world price was less than 27.8 cents. 

Why is that? Why, industrial policy/central planning of course: state-provided infrastructure, subsidies, import quotas, tariffs, etc. But according to the beneficiaries of all of this central planning, it's not all the planning.  It's global competition from mercenary states that don't have things like...wait for it....labor and environmental protections!

"Go down to Brazil," [anti-NAFTA sugar farmer James Dickson] says. "Check out the working conditions." Brazil's labor costs are much lower, and so are its environmental regulations. "They do stuff to their sugar we would never do."

Carney says not so fast, there's plenty of that to go around:

The federal government also made it possible for the industry to get cheap labor from the Bahamas and Jamaica. Through the British West Indies program, which was created during the Great Depression, "the United States government played a direct role in negotiating employment contracts for offshore laborers," explained Everglades historian David McCally. Uncle Sam even paid to ferry cane-cutters from the islands to Florida. 

The guest-worker program put in place exploitative pay levels and work rules. For its part, Florida helped the industry by making it difficult or even illegal for cane cutters to quit. One farmer, lobbying the USDA against allowing Puerto Rican cutters, explained his reason: "Labor transported from the Bahama Islands can be deported and sent home, if it does not work, which cannot be done in the instance of labor from domestic United States or Puerto Rico." 

All of this was the subject of a little known film called H2 Worker by Stephanie Black (who also produced Life and Debt, a must-see for anyone interested in development economics) which you should watch if you haven't yet, even though it is admittedly quite slow in parts.

Carney concludes:

Florida sugar cane is an industry literally built on big government, and growers know it will wither in a free market.

Not literally. But otherwise true enough.

International tax as revealed in SEC filings

I've written before about how opaque international taxation is because most of the law is worked out in ways that are not made visible to the public, namely through non-judicial review of transfer pricing and related disputes among nations.  I've argued for both corporate tax disclosure and publication of competent authority agreements as a remedy to much of this opacity. Tax Analysts' Transfer Pricing Roundup [gated] offers a fascinating window onto this world:

Transfer Pricing Roundup summarizes significant tax disputes that publicly listed firms have disclosed to regulatory authorities. The regular monitoring of these disclosures sheds light on the friction points within the U.S. system of transfer pricing enforcement. Many of the disputes profiled here involve adjustments resulting from controversial cost-sharing arrangements.

Some of the highlights:

• Accenture PLC, a global management consulting, technology services, and outsourcing company, reported its unrecognized tax benefits could decrease by $637k or increase by $208k depending on how things go with some settlements, lapses of statutes of limitations [read: if they were going to catch us with our fingers in a cooky jar, it's about to be too late] and other adjustments relating mostly to transfer pricing matters 
• Amazon is disputing transfer pricing adjustments in the US that would result in additional tax of $1.5 billion, and in France to the tune of $250 million. 
• Amazon also recorded reserves for tax contingencies of $336M for 2012 and $266M for 2011, to cover transfer pricing, state income tax, and research and development credit positions.
• Cooper Cos. Inc., a medical device company, has $29.5M in "unrecognized tax benefit," $5M of which relate to transfer pricing and other issues "that could significantly change in the next 12 months because of expiring statutes [see above] in unnamed jurisdictions." 
• Dell continues an ongoing battle with the IRS over transfer pricing adjustments dating back to 2004-2006. Dell reports that "An unfavorable outcome in this matter could have a material effect on the company's operations, financial position, and cash flows."
• Microsoft is also involved in a protracted battle with the IRS over transfer pricing involving 2004 to 2006, which could have a "significant impact" on the company's financial statements if it is not resolved in Microsoft's favor. Microsoft does not expect resolution any time soon: must be some thorny issue to work out there. Microsoft's tax contingencies and liabilities are huge: $7.7B and $7.6B as of December 31, 2012, and June 30, 2012, respectively.

Much, much more at the link. Most of these are pharma and software companies--i.e., lots of IP that has been moved offshore and is busy stripping income out of high-tax countries with variations on the dutch sandwich, which looks a little something like this:

Now with Less Fiber!

My feeling is that it is a real shame that most or all of these cases will get settled and eventually quietly erased from balance sheets with little or no explanation and therefore no advancement in the development of international tax law whatsoever, despite all of the resources that will have been sunk into the cause by the private sector and government alike. What a shame.

Corporate tax: why disclosure is the key to reform

Two columns of interest emerged today on the issue of corporate tax disclosure, plus another interesting public hearing in the UK, this time with the big four in the hot seat.  Put all of this together and we can see very clearly the intense connection between tax reform and public understanding of the status quo.  With the latter as to corporate tax being woefully inadequate and relevant information intentionally hidden from public view, the former can be neither informed nor meaningful.  The answer is corporate tax transparency, particularly for multinationals, i.e., on the order of country-by-country reporting for listed companies.  First, on the columns, both from the FT.

In this one, John Gapper says "Companies are complying with laws that governments could change if they wished," and then explains:

Starbucks’ supposed immoral act is not to pay UK corporation tax that it does not owe, and would not owe even if it did not license its brand from the Netherlands. It obeys both the letter and the spirit of global tax law, which governments could reform if they wished.

That's 100% correct. And if you think there is some "spirit" in the transfer pricing law that isn't being acknowledged, then you are forgetting that the transfer pricing rules were effectively written by the industry they are meant to police. So I think the spirit is pretty much being well given its due. Gapper also nicely illustrates what I call the mercenary tendency of the tax state in an economically integrated world: agree with whatever seems politically expedient in principle, defect in practice:

I look forward to Mr Cameron naming and shaming companies such as Google (also a target of British politicians) if they are drawn from Ireland to the UK by his tax arbitrage. 

...Governments must decide which regime is fair, and companies and individuals must comply. 

... most companies that place operations or intellectual property in low-tax countries – or even in tax havens such as Bermuda – are not breaching the spirit of global tax law. They comply with a structure established under the League of Nations in the 1920s. 

This allows – indeed, encourages – multinationals to split their operations among countries, paying taxes as if they were separate entities, in order to avoid double taxation. They have to make transactions at “arm’s length” – as they would deal with others. 

It worked for a long time but is under strain because of the growing value of brands, intellectual property and intangibles to global corporations. “Ideas are their biggest asset, and what generate profits, and it is far easier to shift intangibles than factories,” says Jeffrey Owens, of the Institute for Austrian and International Tax Law.

Well, this is mostly right, at least close enough for its purposes. However, I am just not sure what principles we should expect to emerge when reporters turn, as they too often do, to Mr. Owens, former director of the OECD's tax arm and the man who presided over the demise of the corporate tax on a global scale under the nurturing constancy of the OECD's business-driven tax policy making machine, a person moreover who has publicly called for governments to "avoid like hell" any taxes on corporations. He would seem to be the last person you would ask about how to make a corporate tax system function, again, unless we are talking about that movie.  Gapper concludes:

Politicians thus have the choice of indulging in easy rhetoric against companies that obey the laws they have passed or struggling to reform the tax regime for little reward, with lots of disruption. In their position, I might posture too.

If that's not an argument for greater public accountability of how transfer pricing works out in practice, I am not sure what is.

That brings me to the second column of the day from the FT which illustrates why the public ought to know more about how these regimes work in practice, this one by Bruce Bartlett in which he asks, can publicity curb corporate tax avoidance? He lays out the case nicely for the runaway corporate tax base and he concludes:

[L]ittle in the way of real economic activity, such as jobs or tangible investment, has shifted anywhere. All that has shifted is the tax base. 

...This makes the international tax regime a ripe target for reformers.

... With reports of low domestic taxes paid by large profitable corporations such as Starbucks in the UK, the time may also be ripe for an international agreement to curb tax shifting. The US has recently implemented a law called the Extractive Industries Transparency Initiative that requires companies to disclose their payments to governments from oil, gas and mining assets. Allison Christians of McGill University argues that the expansion of such information reporting to the transfer pricing of all multinationals is the first step towards capturing the revenue now lost to the shifting of business costs to high-tax jurisdictions and revenues to low-tax jurisdictions. 

There is growing evidence that corporations are sensitive to the public outcry when they are caught avoiding taxation excessively. Starbucks, for example, recently agreed to pay more taxes in the UK than legally required to quell the controversy over its virtually nonexistent tax bill. The same shaming technique may have broader application to multinationals generally. 

As Justice Louis Brandeis of the US Supreme Court once put it, “publicity is justly recommended as the remedy for social and industrial diseases”.

First, thank you for the shout out, Mr. Bartlett! Second, this column demonstrates clearly the strong connection between tax reform and public understanding of the status quo, as I suggested above.  Tax reform is not going to come from the only party that has all the info it needs right now, namely, the IRS. Tax reform comes from public expression.  Right now, observers of tax policy need more information in order to offer meaningful reform proposals, and that information is being hidden because governments do not require it to be disclosed, plain and simple.  That is a matter of regulatory choice, and these columns show the choice is bad for policy analysis.

That then brings us to the UK's hearings today in which the public accounts committee taking on the big four accounting firms, trying to suss out what the letter and the spirit of the law is with respect to corporate tax on multinationals.  What emerges is the "perfectly legal" nature of all of this tax avoidance, again confirming the editorials by Gapper and Bartlett.  Here is the BBC's take on the hearings, worth reading in full.  Richard Murphy declares it a win for the PAC but the question is whether that translates to a win for those who do in fact pay taxes in the UK and elsewhere.

That question will be answered affirmatively if instead of killing EITI, which is currently apparently a high priority for many, we expand it to cover all listed companies.

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

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

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

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

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

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

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

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

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

Paper: Putting the Reign Back in Sovereign

I've just posted a draft of my paper, "Putting the Reign Back in Sovereign: Advice for the Second Obama Administration," which I presented at Pepperdine last week. Abstract:

In its first term, the Obama administration enacted two pieces of legislation, each designed to protect an increasingly vulnerable income tax base, and each of which had the potential to set a new and unprecedented course for no less than the regulation of the global economy by the nation-state. The first, the Foreign Account Tax Compliance Act (FATCA), sought to end global tax evasion through tax havens.  The second, a little-noticed two-page addendum to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), sought to end the contribution of American multinationals to corruption in governance by codifying the transparency principles of the global Extractive Industries Transparency Initiative (EITI).  Both of these reforms reasserted a role for the nation state in regulating people and resources. But neither has yet to fulfil its potential. First, each has raised difficult questions about what the state can and cannot do to enforce disclosure and compliance on a global basis; failing to answer these questions is impeding implementation and aggravating an already-flagging taxpayer morale. Second, neither is broad enough: FATCA should be truly reciprocal and EITI should expand beyond the extractive industries. By acknowledging and responding in a principled way to the obstacles that limit their effectiveness, a second Obama administration could take significant steps to bring each piece of legislation to its potential, while ensuring that its scope focuses on its intended target in each case. This article outlines how these proposals could be accomplished and makes the case that they should be attempted.

I would be happy to have comments.  And in case it is of interest, here is a link to my powerpoint from the presentation as well (I don't know how to embed that here); you can actually watch the entire conference video here (my presentation was second to last).

FATCA will/will not work: discuss

TJN ran two stories recently on FATCA's impact on tax competition. Which is right?

Story #1 says Austria and Luxembourg "may be forced to abandon banking secrecy because, in agreeing to implement FATCA with the US:

"EU member states could impose [automatic information exchange] on these two recalcitrant jurisdictions by invoking the 'most favoured nation' clause, explains Pascal Saint-Amans of the OECD."

 EU Directive 2011/16/EU contains a most favoured nation clause: if a Member State provides wider cooperation to a third country than that provided for under the directive it may not refuse such wider cooperation to another Member State that requests it on its own behalf."

So if these countries provide automatic information exchange to the U.S., then they are not allowed to refuse it to other E.U. member states.

TJN says thanks to FATCA, "the all-important amendments to the EU Savings Tax Directive are therefore likely to be passed this year, and Swiss efforts to torpedo this transparency initiative will have failed." Conclusion: FATCA will turn into its ultimately goal, a global tracing system under which no one can hide behind bank secrecy to evade their taxes, what some like to call GATCA.

Story #2 says Hong Kong is set to grab all the tax haven business:

Hong Kong just became an even better place for company directors who value secrecy. The Chinese territory, already ranked fourth in a list of 71 "secrecy jurisdictions" by the Tax Justice Network, has proposed new laws making it harder to identify the directors of non-public companies.

TJN says in response: "Tax havens. As we have said - this is where real power in the world increasingly lies. And the race to the bottom on secrecy continues apace."

If FATCA will shut Austria and Luxembourg as tax havens, why not Hong Kong?

The IGAs don't, I think, really explain things: in the absence of IGAs, FATCA is supposed to apply directly to all foreign financial institutions.  So it is the IGAs that would change the scene on the EU directive.  These agreements, let's be fair, really don't have a single thing to do with the FATCA statute from a legal perspective.  In other words, no one in the world needs FATCA to order into an agreement on automatic information exchange, countries could have (and in some cases have already--US, Canada) agreed on automatic info exchange years, decades, and even a century ago (which in fact they also did, see some of US early agreements).  FATCA is just a very big stick that is forcing Luxembourg and Austria to so agree, thus apparently opening themselves up to similar agreements throughout the EU.  Score one for dreams of multilateralism, but only among rich countries.

But Hong Kong, poised to take over, shows why FATCA can't get us to GATCA, i.e., there will be no worldwide information exchange, and the world is still safe for tax cheats. The reason for this lies in s S. 1471(f), which reads:

Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—

(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing...

(3) any foreign central bank of issue...

Translation seems to be: no big stick on payments that go to state-owned financial institutions.  That, I take it, describes China's entire financial system, including Hong Kong and Singapore.  Tell me if I am wrong about this, because I truly want to know.  If I am right, then FATCA moves tax havens around on the board but doesn't actually end the gravy train for tax cheats.

If that in turn is true, then the application of onerous compliance and filing issues on americans living in high tax countries to try to hunt down tax cheats who will not even be there seems particularly troublesome.

Cost to poor countries of illicit Cash flow: $859B

TJN posts this report from Global Financial Integrity, showing that

Crime, corruption, and tax evasion cost the developing world $858.8 billion in 2010

... the biggest exporters of illicit financial flows over the decade are:

• China,  $274 billion average ($2.74 trillion cumulative)
• Mexico, $47.6 billion avg. ($476 billion cum.)
• Malaysia, $28.5 billion avg. ($285 billion cum.)
• Saudi Arabia, $21.0 billion avg.  ($210 billion cum.)
• Russia, $15.2 billion avg. ($152 billion cum.)

Table 2 of the report's appendix has a complete list. This demonstrates why information gathering and exchange has got to be global and, contrary to how it's going right now, should probably start with the world's wealthiest countries imposing their gathering, reporting, and sharing regime on their own financial institutions vis a vis the rest of the world, rather than working to protect their own bases first and foremost.  This is a time for leadership by example.

Scholarship on Global Citizenship

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

Obama's expressions about citizenship

Peter Spiro has thought a lot about citizenship, and it is interesting what he picks up on from Obama's speech in Burma:  the President has a view of citizenship that is out of an "old playbook," because the alternative, based in human rights, is so politically sensitive:

President Obama’s visit to Burma/Mynamar has centered the status of the country’s Muslim minority Rohingya community which has been denied Burmese citizenship notwithstanding their historical presence in the country. .... Obama’s speech today welcomed recent steps by the Burmese government “to address the issues of injustice and accountability, and humanitarian access and citizenship.” Obama then focused on citizenship at length: 

"Every nation struggles to define citizenship. ... But what we’ve learned in the United States is that there are certain principles that are universal... Only the people of this country ultimately can define your union, can define what it means to be a citizen of this country. ...Every human being within these borders is a part of your nation’s story, and you should embrace that." 

He concluded: “we have an expression in the United States that the most important office in a democracy is the office of citizen — not President, not Speaker, but citizen.” 

Spiro notes the territorial nature of Obama's view, which he says is

"not so surprising out of the super-strong American tradition of jus soli. That’s also consistent with an emerging international law perspective on these questions, which sees habitual residence as giving rise to a right of access to citizenship. The Rohingya situation in Burma is exceptional in rejecting this norm (the Bedoons in Kuwait and Nubians in Kenya are other examples). 

But Obama didn’t seem quite willing to turn to international law as the source of an obligation on this score. ”Only the people of this country ultimately can define your union, can define what it means to be a citizen of this country.” That’s out of the old playbook in which nationality is a matter ultimately of sovereign discretion. He was more in a “leading by example” posture than a tougher one under which Burma has no choice but to fall in line. Leave the latter argument to the human rights heavyweights.

This is an interesting discussion in its own right, but it has application to tax law & policy because issues about citizenship crop up time and time again in taxation, as we try to determine and justify national expressions of jurisdiction over the person, almost always--except in the case of the US--based on assertions about physical location that are almost if not wholly arbitrary, and increasingly pressured by globalization.  The US position, taxing its citizens wherever located, annoys and angers a lot of people (notably, americans living abroad).  But I have yet to identify principles that would explain the appropriateness of either the inclusion or exclusion of a person in the taxpayer category on the basis of citizenship.  Practice, history, assertions by government, yes, but principles?  No.

Missing billions: capital flight from Africa

TJN reports on a paper by Léonce Ndikumana and James K. Boyce, Capital Flight from Sub-Saharan African Countries: Updated Estimates, 1970 - 2010

Here is the abstract:

"The performance of Sub-Saharan African economies over the past decade has inspired optimism on the region's prospects. But the region still faces major development challenges, and it is now clear that the majority of its countries will not achieve key millennium development goals.

A key constraint to SSA's growth and development is the shortage of financing. At the same time, the sub-region is a source of large-scale capital flight, which escalated during last decade even as the region experienced growth acceleration. The group of 33 SSA countries covered by this report has lost a total of $814 billion dollars from 1970 to 2010. Boyce and Ndikumana compare this to the level of development aid and foreign direct investment received by these countries. Assuming that flight capital could have earned the modest interest rate measured by the short-term U.S. Treasury Bill rate, they find that the accumulated stock of capital flight far exceeds the external liabilities of this group of countries, making the region a "net creditor" to the rest of the world.

This report provides updated estimates of capital flight for 33 SSA countries from 1970 to 2010. It describes the methodology used to estimate capital flight and highlights important methodological differences with other existing studies. The report presents key results on capital flight both in absolute terms and in comparison to other capital flows, especially debt, aid, and foreign direct investment, as well as in relation to the size of the economy (as percentage of GDP and in per capita terms). The report stresses the urgency of efforts to stem capital flight and repatriate stolen assets as a part of the broader goals of scaling up development financing, combating corruption, and improving transparency in the global financial system."

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.