Lavigne & VanRybroek on Language, Communication and Access to Justice

This recently posted article by Michele Lavigne and Gregory VanRybroek, entitled 'He Got in My Face so I Shot Him': How Defendants' Language Impairments Impair Attorney-Client Relationships, while not directly tax-related, presents a very interesting take on what it means to have meaningful access to justice, which is a major aspect of thinking about what it means to say we are governed by the rule of law. I am still more optimistic than PJ about this concept, but I have grave fears for the future of law in the face of the many severe procedural impairments we have been seeing of late. This paper outlines in a deep and rich way some of the fundamental components necessary to a just legal system, but it also just a very well written and fascinating account of the role of language and communication in expressing and implementing law. Abstract:

Language impairments -- deficits in language and the ability to use it -- occur at starkly elevated rates among adolescents and adults charged with and convicted of crimes. These impairments have serious ramifications for the quality of justice. In this article, we focus specifically on the effects of a client's language impairment on the attorney-client relationship, the constitutional realm that suffers most when a client lacks essential communication skills. The effects of language impairment can be seen in a client's ability to work with a lawyer in the first place, tell a story, comprehend legal information, and make a rational and informed decision. This article shows how these effects play themselves out within the attorney-client relationship, and the impact on the lawyer's ability to meet her constitutional and ethical obligations. We also propose concrete steps for improving the quality of communication within the attorney-client relationship. While attorneys will obviously shoulder much of the responsibility, judges and prosecutors are not exempt. A client's poor communication skills are not simply be "the lawyer's problem," but a matter of great concern for all stakeholders in the justice system.

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

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

Per Fuller:

Caterpillar Inc. has petitioned the Tax Court for a redetermination of income tax deficiencies that resulted from the IRS's allocation of royalty income to it from its Belgium and French subsidiaries. 

While the case was only recently docketed and has not yet been decided, I thought it worth discussing the case as it results from a breakdown in the competent authority process. It is, of course, the very process that is designed to prevent the consequences faced by Caterpillar. There should be no need for the taxpayer to litigate in one country or the other when treaty relief is an available remedy and the countries involved can settle the issue between themselves. 

Following a 1990 reorganization that pushed management power, responsibility, and accountability to subsidiaries such as Caterpillar Belgium and Caterpillar France, the taxpayer entered into amended license agreements with those subsidiaries limiting the maximum royalty in any given year to each subsidiary's net income from the sale of Caterpillar products. Also, if the subsidiary suffered a post-effective-date net operating loss, it would pay no royalty for that year and could carry the loss forward as a negative adjustment to future years' income for purposes of the royalty calculation. 

... The IRS ... concluded that the relief-from-royalty provision in the Belgian and French license agreements did not comport with the arm's-length standard under section 482.

 Fuller points out that there are "several Tax Court cases that permitted related-party license agreement provisions" like Caterpillar's, and as to which the IRS subsequently acquiesced. He goes on to discuss Caterpillar's attempt to obtain competent authority relief, which failed because the French and Belgian tax authorities disagreed with the US position, and US Appeals simply went along with the IRS decision despite these other rulings that would suggest reconsidering the issue, for litigation hazard purposes at minimum:

The Belgian and French tax authorities, having a thorough knowledge of the local operations of the Caterpillar subsidiaries in their respective countries, looked at the same facts that were addressed by the IRS exam team and found that Caterpillar's royalty limitation provision required no adjustment. Caterpillar subsequently had the adjustment reviewed in an IRS Appeals office proceeding. The IRS Appeals officer simply accepted the IRS exam team's economist's report. 

...it appears from Caterpillar's Tax Court petition that the IRS exam team's economist simply used that agreement as grounds for asserting that such a relief-from-royalties' provision is inappropriate, and not at arm's length.

Fuller notes the dual-bureaucracy created by two simultaneous review procedures, i.e., competent authority and internal appeals, and concludes that binding arbitration of the competent authority procedure, rather than resort to the US judiciary, would have been the better approach:

If the two countries' competent authority negotiators cannot reach an agreement, then there should be some form of compelled arbitration to bring about an agreement. Otherwise, the taxpayer is stuck in the middle. A taxpayer should not have to litigate its case in one country or the other (or both) simply because the U.S. competent authority negotiators could not reach an agreement with the foreign country's competent authority negotiators. This is especially true in a situation such as that faced by Caterpillar: The Tax Court has already held that such provisions are appropriate in related-party license agreements.

I appreciate Fuller's argument about the taxpayer's bind, but as I have noted before, if the case went the way of binding arbitration, in the long run the issue could potentially never be settled, since the decision in arbitration would be completely confidential and therefore not accessible or applicable to other taxpayers. That makes international tax dispute resolution much more expensive than it has to be, all because the powers that be have prioritized absolute taxpayer confidentiality over the rule of law. I think that is a miserable trade-off as well as being an unnecessary one: as this case shows, the taxpayer is willing to sacrifice some measure of its own confidentiality in order to get resolution in domestic law, so it is not clear why international law should be so different. (The arguments for difference are weak--see my analysis in the link above.)

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

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

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

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

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

A fascinating account from the Sunlight Foundation of the gutting of a regulatory initiative by the kind of methodical persistence that can only be sustained by special interest groups with much to be gained from weak regulation:

In the three years since President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act, federal regulators charged with implementing it have opened their doors to the biggest banks over and over again – 14 times as frequently as they have to representatives of consumer and pro-financial reform groups, a new Sunlight Foundation analysis finds. 

By most accounts, the banks’ besiege-the-regulators strategy has yielded rich rewards in sapping, slowing, and stymieing regulations intended to prevent another massive financial crisis. The emerging consensus is that Dodd-Frank implementation is limping, while the big banks are poised to return to being the most profitable industry in the U.S.

The website feature an interactive showing the number of meetings by sector over the three years; you can mouse over the dots to see their identities. Is it any surprise that the Giant Vampire Squid is at the top with a whopping 222 meetings, followed closely by JP Morgan with 207? Each of these giants independently dwarfs the entire "pro-reform" group, that tiny cluster of dots on the other end of the graph.

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

From the discussion:

In the 152 weeks our data cover, we find 59 weeks in which regulators met with financial sector representatives at least once every single day (Monday through Friday), and 47 weeks in which they met with financial sector representatives at least four times. 

... By contrast, active pro-reform groups appeared in only 153 meetings logs – only about one meeting for every 14 regulators held with financial institutions and associations. Moreover, 24.2 percent of pro-reform group meetings took place on a single issue: the Consumer Financial Protection Bureau. 

...Law and lobbying firms, largely working in service of financial institutions, appeared in 707 meetings. Other, non-financial corporate interests, largely energy and agricultural companies, participated in 381 meetings. These companies are major purchasers of derivative contracts, which they use to hedge against price risk.

Imagine you're a regulator. 3,000 meetings with finance industry lobbyists, lawyers, and other corporate interests over three years, each one doing their best to explain why you should undermine the law as written in some tiny way. Would you not want to tear your hair out? Quit in despair? Or just give in to the soothing balm of lobbyist favor? What could possibly be left of the law after this barrage? Meanwhile the anti-regulation crowd has worked very diligently to kill Dodd-Frank's provisions in other ways, such as the lawsuit against the corporate tax transparency provisions sponsored by the American Petroleum Institute.

Sunlight catalogues the delays and dismantling of Dodd Frank that has been accomplished by all this lobbying and litigating and concludes:

...Collectively, the data offer a powerful testament to the oldest and still perhaps most effective technique in the lobbyist’s playbook: sheer persistence. As the Dodd-Frank law passes its third anniversary, lagging on deadlines, and increasingly defanged, the meetings log data offer a compelling reason why: the banks have overwhelmed the regulators. 

Lobbying pays, and it pays whether it is done before, during, or after legislation has been passed. This represents a major governance crisis with no redress anywhere to be found.

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

From the Canada Revenue Agency website: Harper Government launches new right to ensure Canadian taxpayers are treated fairly [french version here]
The new right says:

16. You have the right to lodge a service complaint and request a formal review without fear of reprisal.   

We know that to be trusted, effective, and efficient, we must conduct ourselves ethically and honestly, and the CRA strives to do so every day. Our employees are expected to act in accordance with the CRA Code of Ethics and Conduct and the Values and Ethics Code for the Public Sector. These codes are terms and conditions of employment and they reinforce our commitment to serve the public with integrity, professionalism, respect, and cooperation. This right means that if you lodge a service complaint and request a formal review of a CRA decision, you can be confident that the CRA will treat you impartially, and that you will receive the benefits, credits, and refunds to which you are entitled, and pay no more and no less than what is required by law. You should not fear reprisal. We are required to apply the law and relevant CRA guidelines and policies, which may include the charging of penalties, or requiring the payment of your debt. When CRA employees act in accordance with the law, these do not constitute acts of reprisal. If you feel that you have been subject to acts of reprisal, the CRA wants to hear from you. We take your concerns seriously. Tell us about them by completing section 3 – Reprisal Complaint on Form RC193, Service‑Related Complaint. We can assure you that we will address your complaint, and that we will send it directly to an investigation office located at CRA Headquarters. This will ensure that the investigation is conducted independently of the office associated with the complaint.

At a meeting with members of Certified General Accountants (CGA) Canada to discuss taxpayer fairness, Minister Gail Shea stated:

“Our Government is committed to ensuring that all Canadians are treated with fairness and respect by the Canada Revenue Agency. In our system of voluntary compliance, taxpayers must have confidence in the objectivity and fairness of CRA’s actions as a tax administrator. This new addition to the Taxpayer Bill of Rights will help reinforce public confidence in Canada’s tax system, and ensure that Canadians taxpayers feel free to speak up if they have a disagreement with the CRA.”

 Curiously, the CRA website adds the following:

Although there is no evidence that Canadians have been subject to reprisal by the CRA, in his work across the country, the Taxpayers’ Ombudsman heard that taxpayers would sometimes hesitate to lodge a complaint for fear of being treated differently afterward. To address this unwarranted fear and encourage Canadians to speak up if they have a disagreement with the CRA, the Ombudsman recommended that a new right be added to ensure Canadians are confident they will be treated fairly. 

The Taxpayer Bill of Rights is an agency statement that lacks the force of law, but many of its rights are legislated (via the Charter or otherwise). This new right aligns with observed attempts by tax agencies to present themselves as "service-oriented," that is, as if taxpayers were customers. It remains to be seen if and how taxpayers will avail themselves of this newly articulated right.

Why It Would Be Great if Congress Was Forced to Buy Their Own Health Insurance at Full Cost

From FDL, highlights:

Making Congress and their staffers pay the full cost of their insurance is fine with me because that is how the law will treat millions of middle class families. All members of Congress and most staffers will have salaries high enough they would not qualify for subsidies on the exchanges. If Congress is going to make regular people with similar salaries buy insurance out-of-pocket than that should be good enough for Congressional aides.

I also have no problem with the law forcing Congressional staffers to lose their relatively good insurance because that is a long term goal of the law for everyone. The excise tax on “Cadillac coverage” was designed to stop employers from providing good insurance, covering a large share of your premium, and/or getting them to drop offering coverage altogether.  What might happen to Congress is very similar to what Congress intended to happen to others. 

Finally, if Congress is worried their staffers can’t afford to buy insurance out-of-pocket they can just use the money Congress would have spent on their premium and raise their salaries by the corresponding amount. The financing of the law was based on the theory that a dollar in benefits is exactly the same as a dollar in salary. The theory, put forward by Obama’s economists, advisers and the Joint Tax Committee is that if you force companies to offer their employees worse insurance, they will increase their wages by an equal amount. This sounds like a perfect opportunity to put the theory to the test.

Have laws apply to lawmakers the same as it applies to the governed, have the law play out as it was designed, and put the underlying economic theory to the test: these seem like common sense ways to make sure that our democratic decision-making structure is working. Unfortunately we have ample evidence that this structure is working better for lawmakers (and lobbyists) all the time, and correspondingly worse for everyone else.  Congress exempting itself from things that won't personally benefit its members is not a new story, and in light of the brazen roll-back of the "Stop Trading on Congressional Knowledge Act" in order to make it easier for members to quietly line their pockets via insider trading, there is ample reason for pessimism.

Still, WAPO has a story about how Congress isn't really trying to exempt itself, just trying to fix some inadvertent writing in the code that caused some unintended consequence that only a few people understand enough to get upset about. A book could be written on that recurring theme.

The Boundaries of Tax Justice

I posted a draft of this paper on SSRN some time ago but neglected to post it here, so here it is. I argue that because governments chase wage-earners and consumers doggedly while selectively overlooking or ignoring other taxpayers, the imposition of income taxation as it is practised by states today is fundamentally unjust. Abstract:

The story of our time may be the awakening of society to an epidemic of global tax dodging by the world’s elites. Citizens, watchdog groups, and even government officials are puzzled, frustrated, and sometimes outraged by the phenomenon, wondering where the nation-state lost its way in regulating its people and its resources, and why it is standing by, apparently helplessly, as its tax base erodes while austerity measures undermine the welfare state. This paper demonstrates that the sequence of tax base erosion-austerity-welfare state erosion is a story about a crisis of tax justice. It does so by revisiting how Canada's historic Royal Commission on Taxation, in its search for guiding principles for tax reform, turned to tax justice as the central component for any tax system. It shows why nations have consistently failed to meet these guiding principles, instead taxing the easy-to-tax more or less comprehensively, the hard-to-tax more or less randomly, and the impossible-to-tax not at all. It demonstrates that the result is that no state today imposes taxation justly: instead, taxation as exercised around the world today is overwhelmingly characterized by arbitrariness and injustice. The paper concludes that if governments cannot or will not pursue justice in taxation, they have at minimum a duty to explain to society why this goal is no longer worthy of pursuit.

This paper includes a discussion of who should be considered a "taxpayer" by a state. I argue that citizenship-based taxation is unjust from both a human and statist perspective, and I therefore make the case for residence-based taxation. As always, comments are welcome.

Senate quietly easing restrictions on their own insider trading, to protect "national security"

I wish I could express surprise. I can, however, muster some dismay:

The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency. 

The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates. 

The House was expected to pass a similar bill on Friday.

MR posts links to the FT article, other sources, and says "Some officials suggested that transparency "could threaten national security," more detail on that here.  Here are some further interesting details."

Clearly, what we least need right now from our elected leaders is an assurance that we will know less and less about their business and financial dealings while they ostensibly serve in the public interest. For shame.

Canada Revenue seeks source data on tax evasion from the ICIJ to bring "appropriate action"; What role due process?

Tax authorities are embarrassed by the ICIJ leak and they want the source data before anything more embarrassing hits the front page news and/or to show they really are serious about cracking down on offshore tax evasion.  As a result I am not surprised to see the Canada Revenue Agency attempt to prise the data from the CBC:

...It is my understanding that a leak of large amounts of data potentially exposing cases of offshore aggressive tax avoidance and possibly tax evasion is the catalyst for these stories. I also understand that your organization may be in possession of some or all of this data. 

You will know that the Canada Revenue Agency has already been in touch with your organization to underscore the importance of this information to our continuing efforts on behalf of Canadians to combat offshore aggressive tax avoidance and evasion. 

I would expect that both the CBC and you, as its president and CEO, have an interest in ensuring that appropriate action is taken if individuals are not respecting their tax obligations. Taking action against individuals who are not respecting their tax obligations is in the best interest of the public and law abiding Canadians. The provision of the data that your organization has in its possession would allow the CRA to pursue cases where this is occurring without in any way infringing on your journalistic mandate. 

I again respectfully request that you provide to the Canada Revenue Agency all of the data the CBC received through its collaboration with the International Consortium of Investigative Journalists so that the Agency may review and take action according to its mandate. I understand that the CBC is reluctant to provide this data, citing concerns with journalistic independence and protecting sources. I can assure you that the Canada Revenue Agency has not asked for the source of the information and will treat any information you provide with strict confidentiality in the same manner it treats all taxpayer information it receives. 

I sincerely hope that you will respond positively to this request and agree to provide this information so that the CRA can carry out its responsibilities.

Lots of loaded language there but it's clear the CRA can't compel the CBC to hand over the data, and is appealing to the CBC's sense of responsibility to society to make sure that tax cheats are brought to justice.  Notice the CRA doesn't confine itself to the data that implicates Canadian taxpayers--they want "all the data." I wonder why they don't offer the temptation of the newly-authorized whistleblower rewards. But is it not the case that the CBC, and the ICIJ, have obtained this information illegally? And if so, what are the ramifications for bringing criminal action in Canada?

The ICIJ received a hard drive in the mail containing millions of lines of personal financial data on individuals and companies that presumably were entitled to confidentiality under existing national laws--laws presumably similar to those that currently protect Canadians' financial data from being given out to unrelated third parties. Recall the CRA's “Declaration of Taxpayer Rights," which states that every Canadian:

“can expect [the CRA] to protect and manage the confidentiality of your personal and financial information ... Only employees who need your information to administer programs and legislation have access to your information. We also take other steps to protect your information and make sure it is kept confidential. For example, we follow government-wide and internal policies on the security of information and privacy.”  

The Declaration is simply an agency statement and lacks the force of law, but many of the rights it details, including the right to privacy and confidentiality, are “legislated” rights, that is, they are contained in the Charter, the Act, other statutes, or the common law.  Legislated rights do have the force of law so Canadians have mechanisms to seek redress in cases of breach of confidentiality or privacy by the CRA. Presumably, other countries have similar confidentiality rules and taxpayers have rights in those countries, too. Have these not been (and are they not being) violated by the sender of the hard drive, the ICIJ, the CBC, and the other journalists?  Of course, the CRA would be entitled to data on Canadian taxpayers from the taxpayers themselves and from relevant third parties under domestic law, but this is the major sticking point of the international tax system today: barring automatic information exchange from other governments, it is hard for the CRA to find money hidden offshore without resorting to extra-legal means of obtaining information.

So if we think the people exposed in the ICIJ leak have violated Canadian law, we must also recall that they have due process rights under that law. Would prosecution of Canadians using such illegally-obtained information pass internal due process requirements? I think the answer is probably yes, and I wonder if Canada might diverge from the US in the ability to use ill-gotten evidence in a criminal prosecution.

The reason I think that Canada could use the data as evidence in a criminal prosecution is that even though every Canadian "has the right to be secure against unreasonable search or seizure," and even though this Charter protection has been interpreted to require law enforcement authorities to seek prior judicial authorization for a proposed search and seizure if the target has a reasonable expectation of privacy with respect to the information sought, the case of Schreiber v. Canada says that the rights and freedoms enumerated in the Charter are guaranteed only against interference from actions taken by the federal or provincial governments of Canada.  Following the Schreiber decision, it seems that even tax information obtained illegally would be admissible against Canadians, so long as it wasn't the Canadian government that was responsible for the illegal action that exposed the behavior.  

In the United States, the result might be different. The cases of United States v. Wolf (1984) and U.S. v. Phillips (1979) suggest that information requested from another government by the IRS would be inadmissible as evidence against a U.S. citizen if it was seized by the foreign government in contravention of U.S. law (even if the seizure was allowed under foreign law).  Turning that around, I am not sure what happens if the IRS tries to use information that a private citizen produces in contravention of foreign law, but perhaps the cases suggest that if the information is produced in a manner that also violates US law, it could not be used as evidence in a criminal prosecution. If anyone reading this could shed more light on the subject, I'd be grateful for the insight.

Relatedly, I've been wondering what happens to the ICIJ, the CBC, etc. themselves, if they expose names and financial information about anyone that turns out not to be engaged in anything illegal? Maybe this seems improbable but it bears recalling that it is not illegal to own an account in another jurisdiction, including in the Cook Islands. What is illegal is failing to fulfill disclosure obligations under the laws of any jurisdiction that claims sovereign rights over you. That kind of information is perhaps not on the hard drive, so mistakes could be made in exposing people to public scrutiny who are not engaged in anything illegal. Thus the CRA makes the leap from data on a hard drive to evidence that Canadians are shirking their tax obligations, but it's certainly possible that not all the data points in that direction. That may be why the ICIJ has not made the source data public as Assange did--perhaps there is some sense that disclosure of all the data on the drive might not necessarily be "in the best interest of the public and law abiding" population, of Canada or otherwise.

In any event this story continues to unfold and as usual raises more questions than I can readily answer. I will be very interested to see how things proceed in terms of the CBC or the ICIJ releasing the source data to any tax authorities.

Corruption laid bare by Global Witness: A Manual for Stealing Your State's Resources for Personal Gain

Global Witness issued this must-watch video this week, which demonstrates how leaders steal from their own people with the help of lawyers and bankers. The crime itself is bad enough, but the blasé demeanour of these perpetrators is truly offensive. They must have done this a lot in order to view the proposed transactions in such a banal and relaxed way. Though one woman clutches a pillow quite closely as she calmly explains how to take care of the details. Is she nervous about her illicit behaviour, or just eager to close the deal?

This exposes a number of rotten practices, few of which I would guess are unique to Malaysia. Instead, what I think we are seeing here is a manual:

How to steal your state's resources for personal gain, in 8 easy steps.

Step 1: get control over state land allocation and resource extraction licensing by becoming a state authority.
Step 2: open a series of accounts in trust or corporate form, in places will hide your identity and assets from other state authorities, for example, in "the new Switzerland."
Step 3: have the state sell land at nominal prices to your family members and/or companies you control.
Step 4: when buyers inquire at your state offices about making land leases or purchases, direct them to your family members.
Step 5: have your family members and lawyers explain to the buyer that the purchase will require two purchase contracts plus a side arrangement for licensing rights.
Step 6: write the first purchase contract for a nominal price to legally transfer the property locally but generate minimal (or no) profit.
Step 7: write the second purchase contract to direct the remaining purchase price to be paid directly to one of the offshore accounts.
Step 8: have the buyer write the side arrangement fee directly to one of the offshore accounts.

Query: how do you make sure your buyer actually pays you the second purchase price? That is, if the first contract documents the sale, what stops the buyer exercising ownership rights if he double crosses you on the offshore bank contract? The woman in the video says no problem, this has "been done." How has it been done? Are we talking about hiring thugs to break kneecaps? I've heard of similar triangular contractual arrangements in other equally criminal schemes, and I always wonder about how that aspect works out. Honor among thieves?

Can States Shame Each Other into Good Behaviour?

Interesting new paper by Sandeep Gopalan & Roslyn Fuller, Enforcing International Law: States, IOs, and Courts as Shaming Reference Groups. From the abstract:

We seek to answer the question as to whether international law imposes meaningful constraints on state behaviour. Unabated drone strikes by the dominant superpower in foreign territories, an ineffective United Nations, and persistent disregard for international law obligations suggest that the sceptics have won the debate about whether international law is law and whether it affects state behaviour. We argue that such a conclusion would be in error because it grossly underestimates the complex ways in which IL affects state behaviour. ... We show that IL is enforced by states, courts, and international organizations by the imposition of shame sanctions on offenders and that these sanctions affect state behaviour in the same ways that traditional coercive sanctions do. In doing the above, we also develop the concept of a shaming reference group.

I'm in general a skeptic, viewing the tripartite failures highlighted in this abstract as overwhelming evidence that in the international community, might makes right, full stop. The tenth anniversary of America's unprovoked war on Iraq, which is now clearly characterized as a strategy to gain control over its oil resources that was planned far in advance of 9/11, seems too ample evidence backing the skeptical view. But I'm willing to engage that social pressure might have some amount of impact on state behaviour in some cases. At least, I am willing to believe that states will work hard to appear to be good citizens in the international legal order, and that this might cause some leaders to make decisions differently than they might absent shaming in the international community. But I remain at heart a skeptic so I will continue to believe that in practice states will use any power they have to achieve their ends at the expense of other states (much as leaders will do the same at the expense of their own people if they can get away with it).

This skepticism is reinforced by the part in the paper that talks about how shaming is undertaken and shows that the resources of the "shamer" come to bear in important ways on who and what gets shamed:

States are likely to be the principal enforcers of shame sanctions. ... States make evaluative opinions about other states all the time. Some have the resources to make elaborate justifications and provide evidence for those opinions in a legal manner. One example is the United States State Department’s annual human rights reports. These have come in for harsh criticism as being partisan. ...partisanship is a major problem for shaming. The US has also been accused of hypocrisy. 

Attacks based on the lack of neutrality and credibility to engage in shaming are severely debilitating, and do suggest that neutrality, or a perception thereof, is important if shaming sanctions are to work. This is not to say that shaming by individual states should be ignored altogether. Some states will be persuaded by the US State Department’s reports, and it must ultimately fall to a process of democratic debate to determine if the state being shamed is indeed deserving of punishment. There is nothing stopping Iran and Venezuela from issuing shaming reports of their own. If members of the international community believe these reports are the products of serious investigation and research, they will be credible. On the other hand, if they are merely propaganda, they are likely to be ignored. 

This suggests major cognitive bias problems if shaming is to be a regime for uncovering egregious offenders, at least, if we seek any sort of even-handed regime. If we don't worry about that problem, I think we're back to might makes right, and shaming just becomes another resource for wielding power to act in self-interest, while simultaneously shielding the shamer from reciprocal pressure.

It also suggests the major role of geo-politics in the name and shame game. In a footnote to the above paragraph, the authors highlight a particularly disturbing example:

...William Schulz, executive director of Amnesty International USA, remarked on the occasion of the release of the State Department’s annual human rights report: “The content of this report has little correspondence with the administration’s foreign policy; indeed, the U.S. is increasingly guilty of a ‘sincerity gap,’ overlooking abuses by allies and justifying action against foes by post-facto references to human rights. In response, many foreign governments will choose to blunt criticism of their abuses by increasing cooperation with the U.S. war on terror rather than by improving human rights.” 

This is a frightening and ultimately very discouraging status quo. It suggests that when we talk about shaming the result will not necessarily be better behaviour, but rather behaviour aimed at currying the favor of those who decide whom to shame. It worries me if that is the best we can do to guard against states doing terrible things to each other and state leaders dong terrible things to their people.

Treaty angle on PPL, the US foreign tax credit case

David Cameron has a fresh take on the PPL case which is worth a read, in yesterday's Tax Notes [gated]. He's wondering why no one has raised the US-UK tax treaty, which he thinks would resolve the creditability issue with ease.  He says:

... Because neither PPL nor Entergy raised the treaty issue, the Tax Court, the Third Circuit, and the Fifth Circuit relied solely on the requirements of section 901 and the regulations that define a creditable tax. The complete lack of any reference to the U.K.-U.S. tax treaty is extremely curious because the treaty provided more than adequate grounds to conclude that the windfall tax was creditable under U.S. law. 

...The [applicable] U.K.-U.S. tax treaty identified specific existing taxes imposed by the United Kingdom and designated them as income taxes for which a credit would be available (covered taxes).  

Importantly, covered taxes may well include foreign taxes that would not qualify as income taxes under domestic law.... 

...[T]he language describing the indirect credit under article 23(1) does not specifically refer to an "income tax" but only to a "tax paid to the United Kingdom by that corporation with respect to the profits out of which such dividends are paid." 

... The failure of the taxpayers in PPL and Entergy to raise the treaty issue is all the more curious given the IRS's recognition in a coordinated issue paper that the windfall tax involved a treaty issue.[The IRS claimed that the Windfall Tax would not be creditable because it was a one-time levy imposed on appreciation in value, but the] IRS's analysis of the treaty issue is not ... convincing. 

... The Supreme Court need not decide whether a formalistic or substantive analysis applies under section 901 because the U.K.-U.S. tax treaty provides an alternative argument -- a definition of an income tax at least as broad as that under section 901 and the application of a substantive analysis to determine if a tax satisfies that definition -- to conclude that the windfall tax is creditable based on the Tax Court's findings. 

...By ignoring the existence of the U.K.-U.S. tax treaty, the parties and the lower courts in PPL have overlooked a significant aspect of the case. The Supreme Court should not repeat their mistake.

I agree with David that the treaty argument should have been made, even though I am less convinced than he is that on substance the "windfall tax" is really even a tax at all--I think it looks like a purchase price adjustment. But that was also not an argument brought up by anyone at trial, instead the IRS conceded that the "tax" was in fact a tax. Having done so, the treaty does seem to present the more permissive regime.

But a big part of this story is David's puzzlement about the treaty being overlooked by all the parties and all the judges, despite the IRS having previously articulated a treaty-based position on the very tax in question. Can it be that the parties just assumed the treaty did not apply, or if it did apply, did not provide a different result? Can it be that they all made those assumptions without undergoing a close analysis, without doing any research?

If so David is suggesting that a big mistake has potentially been made, and if the Supreme Court rules against the taxpayer in PPL, it may have been a quite costly mistake. That's bad for the taxpayer and bad form on the part of the lawyers, but intriguingly, it also suggests that even in a top fight litigation situation like this, it is possible that the tax law experts on both sides overlooked an applicable legal regime, most likely because the regime in question involved international law rather than a statute in the tax code.

That is a fascinating observation for those of us who like to think about the rule of law as the product not of legal texts by themselves but of their dynamic implementation in practice. If a legal text exists but is ignored by the legal system, can it really be said to be law at all? David is suggesting that the US-UK treaty is a tree falling in a forest, unheard by anyone. Usually I am worried that people will imagine that they hear trees falling in forests when there are no trees at all--that is, I worry about non-legal assertions being treated as equivalent to law (for example, OECD guidelines). David's article suggests that the opposite may have happened in this case.

IRS brushes aside the constitution to make way for FATCA

In a Tax Notes International article [gated] today, Lee Sheppard discusses remarks about FATCA by Jesse Eggert, Treasury associate international tax counsel, at a March 1 IFA meeting. The most troubling aspect for me comes in the last part, when Sheppard describes a Q&A over the intergovernmental agreements and the IRS rep casually dismisses any constraints on the Treasury's attempt to bind the US with these documents as a matter of international law. There are two main questions here and both answers strike me as deeply problematic. First, there is this:

Can there be an IGA with a country that has no treaty or tax information exchange agreement? Yes, Eggert responded. It would have to be a Model II or nonreciprocal Model I . Amendments would have to be made to add information protections and assistance provisions.

With respect, this does not accord with what we have been given to understand so far about these IGAs. One need only read the preambles to the IGA models and signed agreements and consider the treaty power briefly to see that there is a very large legal difficulty here. As I have said before (and have a feeling I will be saying repeatedly), the Executive Branch cannot simply bind the US to any agreement it wants to without doing violence to a constitutional process that has been expressly laid out and subject to decades of analysis and debate by the country's most preeminent legal minds.

This is why the IRS has been very quietly implying that the IGAs interpret existing treaties. I don't agree on the merits that this could possibly be true, but the IRS needs it to be true because if it is not true, the only alternative is that the IGAs are sole executive agreements entered into by the executive branch with no congressional oversight whatsoever. That puts them on the most precarious legal ground in terms of foreign policy power in the US, and by this statement Eggert pushes them closer in that direction.

Second, there is this:

Does Treasury have authority to make IGAs? Eggert argued that IGAs are within Treasury's statutory authority to make FATCA regulations (section 1471(b)). Treasury and IGA signatories are discussing how to make domestic implementing laws consistent.

Again with all due respect, this just simply is not true as a matter of US law. The executive branch does not have the power to authorize itself to enter into treaties without congressional oversight. It is the constitution that provides the treaty power, and Congress is expressly involved. Congress could have granted the executive specific authority in this case, as it has done in other cases, but it clearly did not do so here. It is not clear what Eggert means by "making domestic implementing laws consistent." Maybe that refers to the domestic laws of treaty partner countries, which will have to change their data privacy laws to accomodate the information sought by the IRS. If so, that has nothing to do with the US. From what we have seen so far, it seems clear that the IRS is treating the IGAs as operational once the other country so indicates it is operational from their perspective (cf Mexico).

Arguing that the authority is implied within Congress' mandate to Treasury to issue regulations under 1471 is blowing a hole through the treaty power. It argues that Congress empowers the Executive Branch with treaty making authority with each and every directive to enact regulations. It makes a farce of the congressional executive agreement process that has been begrudgingly accepted as authentic by most constitutional scholars today. And never mind the old standard, the Article II treaty power. By this logic if the President wants an international agreement--any international agreement of any kind--he never needs to consult the Senate again, he can simply find some reference by the Congress directing his regulators to regulate. If Eggert is right in this assessment, it is not a stretch to see this as the beginning of the end of the Article II treaty ratification process in the United States. In other words if this works, then it's anything goes when it comes to the Executive Branch overriding domestic law with an international agreement.

Finally, I note that one other Q&A Sheppard mentions is also intriguing, though on the surface it seemed uncontroversial:

Existing IGAs will be interpreted to say that countries may choose the definition of an item in the final regulations which came later in time. Treasury will not amend IGAs wholesale when regulations change, Eggert explained.

This may seem benign--it provides flexibility despite the apparently rigid parameters of the documents (which are treaties, after all, and not so easy to just unilaterally alter at whim). But this is in fact very interesting as a legal matter because it quietly moves the world a little closer to yet another US tradition that many people in other countries find odd if not outright incompatible with international law, namely, the treatment of treaties as equal in legal status to other laws, including statutes and case law, so that treaties can be overridden at any time by a new statute or judicial decision. But it goes a further step to include regulations within that overriding scope--where they might not so clearly belong even under US law.

In other words, the IRS is saying that not only does the "last in time" rule apply to IGAs (as they would to any US international agreement), but we'll apply the last in time rule to other countries too (even if under their own laws the treaty would override later-enacted domestic laws); moreover the last-in-time rule is now extended to treasury regulations (a unilateral law that will be used to "interpret" a bilateral agreement, yet another controversial treaty interpretation position), and finally we are going to make it the treaty partner's choice to pick among the regimes to get the best result (which treats treaty partners not as negotiators in a bilateral agreement but rather in the same way as taxpayers subject to an elective regime).

It is getting progressively more difficult to keep up with the sheer volume of violations of laws and norms being undertaken by the IRS in order to get FATCA to work. It is rather disheartening (in the sense of being a scholar who studies legal process as though it matters) to realize that to many or most people involved in this project, all of these violations are just technicalities and semantics getting in the way of a result everyone wants.

Who is to blame for Starbucks-style tax dodging?

The answer is "government" if you believe the Telegraph, from an opinion by "Richard Emerton, Head of Board Practice at Korn/Ferry Whitehead Mann" (an executive recruiting firm). He's enthusiastic about tax competition: the kind that will keep European companies "competitive" on a "level playing field" by lowering their taxes on purpose, and he's keen to blame government alone for any failure of tax policy to date, e.g. the kind of failure that led to the public shaming of Starbucks and friends.

I agree with Emerton when he says stop blaming the companies (alone) for failing to pay taxes when this is the system that has been deliberately set up to meet them. But let us not forget that the rules have long been written collaboratively amongst government and business interests with virtually no civil society oversight. Once again, multinationals have the best tax system money can buy. Emerton does forget to mention that part, and goes too far in shifting the blame to government alone. Excerpts:

...The UK Government has done a good job in creating a tax system that encourages businesses to set up in Britain and the Chancellor has made it clear he wants international businesses to operate here. It is therefore important he does all he can to prevent European politics from perverting his well-intentioned efforts to look at the problem from an international perspective.  

What strikes me as counter-productive about the debates that have taken place over the likes of Starbucks and Google is the anti-business rhetoric from many politicians in the search for public approval. A degree of anger from the public may be understandable, but is it directed at the right targets? Korn/Ferry’s latest “Boardroom Pulse” survey of FTSE 100 chairmen suggests that business leaders think not.

Not sure what that survey asked, but let's assume it was something on the order of, "do you enjoy being publicly pilloried for doing your best to exploit every means of tax reduction your government generously makes available to you?" And the follow up question ought to have been (but probably was not) "Do you enjoy public scrutiny of your constant attempts to influence tax policy at every level of governance in order to achieve that generosity of spirit on the part of lawmakers?" To which the answer would no doubt have likewise been a resounding "business leaders think not." Emerton goes on:

While agreeing that the public has a right to be angry, many respondents felt that dissatisfaction should be directed towards the tax legislation and those in charge of it, rather than the companies observing it.Indeed, it is governments that have failed to modernise international tax legislation in decades, despite the wholesale changes that have taken place in the way businesses operate across borders. 

Oh, but Mr. Emerton, you failed to define a key term here: "those in charge of it." I mean, it's not like the companies that help write the law are shy about it. That is, after all, what organizations like the BIAC and the ICC are for, and if you don't know what the BIAC or ICC are, well, you're not trying hard enough to understand international tax. Look also for example at any number of marketing brochures by the likes of the big four. They are not hiding their influence, they are selling it as a product. Here's one by KPMG that I just happened to come across yesterday:

Our professionals have been directly involved in writing and reviewing the applicable Treasury regulations ... which govern tax-free separations."

You will come across this kind of claim all the time if you do any work at all in tax, so it is disingenuous at best to fail to mention industry influence as a major aspect of tax lawmaking at the national and international levels. But Mr. Emerton moves along quickly to make hay of the old adage that every one has a right to minimize their taxes and for company directors this has become a duty:

The chairmen we surveyed pointed out that company directors have a fiduciary duty to minimise tax bills, providing they are acting in an ethical manner and are not inviting legal risks.

That's a pretty vague provided, and a big weight to carry for fiduciary law. Emerton hammers it home:

Which raises a fundamental question stemming from the tax issue – should the primary duty of a company’s board and senior management be to its shareholders, or to the wider moral and social concerns of the public?

Notice this is assumed to be an either/or and not a both, and it's also committing the false dilemma fallacy. But having committed, we must have follow-through:

The chairmen we talked to were divided. Yes, business leaders have a duty to drive value for their shareholders. And yes, businesses also have a duty to act responsibly as members of wider society. It is the responsibility of the leaders of these businesses to strike a balance and most of them make significant efforts to do so. Inevitably, sometimes they get this balance wrong, but attacking them for trying to drive shareholder value while playing by the rules of the game will solve little. A better focus of our energies is to ensure that international tax laws are strengthened by the regulatory framework governing businesses, allowing them to focus on achieving long-term sustainable value for shareholders and for society. However, policymakers must ensure that this isn’t achieved at the expense of a level playing field for businesses across the world, not just one part of it.

The author channels every "we paid all the tax that is legally due" defense ever given in the face of public pressure against tax dodging. He also invokes the "level playing field" metaphor, which is always invoked for every destructive tax policy that was ever invented in response to every other destructive tax policy that was ever invented. So three cheers for tax industry rhetoric, bandied about in any tax policy dialogue to make sure no one thinks too hard about the systemic choices at issue here.

Score ten points to Mr. Emerton in pointing out that blame for tax dodging rests in a legal system that has been specifically designed to encourage it. But take away nine points for failing to mention the big part business plays in constantly perpetuating that kind of design. Then take away two more points for failing to mention that some things only look like dutiful tax minimization until the tax authority figures out what you are doing, and then they are clearly tax evasion. Cf Dow, Ernst & Young, and Jenkins & Gilchrist tax partners, and that's all in just one week.

That puts the column in the negative territory, which is right about where the author appears to think that the tax liabilities of fiduciary-duty-abiding corporate managers ought to keep their companies' tax burdens.

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.

The Dubious Legal Pedigree of FATCA intergovernmental agreements (and why it matters)

My latest column in Tax Analysts' Tax Notes International is here.  I argue that the IGAs have a dubious legal pedigree because they are not treaties, not congressionally-authorized executive agreements, and not interpretations of existing agreements; therefore they are sole executive agreements--entered into by the executive branch with no authorization or oversight from Congress. This puts them on very shaky ground in terms of the constitutional process for binding the US internationally, and I argue that this is both unhelpful to other governments as a practical matter (IGAs override the statute, so if they fail, then what) and an unnecessary muddling of the rule of law, which should make other governments wary (if you have a process in place to bind the US under international law, why aren't you using it).

Shaffer on Transnational Legal Ordering

Gregory C. Shaffer has a new book of interest: Transnational Legal Ordering and State Change. Abstract:

Law can no longer be viewed through a purely national lens. Transnational legal ordering affects the boundary of the state and the market, the allocation of power among national institutions, the role of professions and their expertise, and associational patterns that provide new normative frames. This book breaks new ground for understanding the impacts of transnational legal ordering within nation-states in today's globalized world. The book addresses the different dimensions of state change at stake and the factors that determine these impacts. It brings together leading scholars from sociology and law who study the effects of transnational legal ordering within different countries. Their case studies illustrate how transnational legal ordering interacts with national law and institutions in different regulatory areas, and cover anti-money laundering, bankruptcy, competition, education, intellectual property, health, and municipal water law and policy in different countries. The book explains the extent and limits of transnational legal ordering in today's world.

Tax law is not specifically covered but international tax law folks will find much of interest here for thinking about how law emerges through networks and norms and evolves through transplantation into national spheres.

H/T Int'l Law Reporter

Obama admin taking the high road on FATCA reciprocity?

I have predicted that real FATCA reciprocity would not fly in the US once people began to understand what the details entailed, but I would like to be wrong about that, and I have argued that the best course forward for FATCA is real reciprocity coupled with adherence to residence-based taxation. Here's a sign from the Chicago Tribune that I could get at least one of my wishes:

Foreigners' accounts in U.S. banks eyed in tax crackdown

The Obama administration may soon ask Congress for the power to require more disclosure by U.S. banks of information about foreign clients' accounts to those clients' home governments, as part of a crackdown on tax evasion, sources said on Monday. 

In a move facing resistance from some in the U.S. banking industry, two tax industry sources said the administration was considering asking Congress in an upcoming White House budget proposal for the authority to require more disclosure from U.S. banks. 

...At the heart of FATCA is a law requiring more disclosure by non-U.S. banks of information about Americans' accounts to the Internal Revenue Service, with the goal of exposing Americans' efforts to dodge U.S. taxes through secret offshore accounts. 

As Treasury has implemented FATCA, some countries - possibly including France, Germany and China - were said to be driving a hard bargain. They have been saying that if their banks have to tell the IRS about Americans' secret accounts, then U.S. banks should have to reciprocate by disclosing more information about the U.S. accounts of French, German and Chinese nationals. 

...China has been publicly dismissive of FATCA, but it is talking with U.S. officials behind the scenes, sources said.

...France and Germany "have been asking for something more like full reciprocity," said Jonathan Jackel, a lawyer with the law firm of Burt Staples & Maner LLP in Washington, D.C. 

The story says that "The IRS this year started disclosing to some foreign governments information about bank interest payments earned by their citizens with U.S. bank accounts."--but I am not sure that that is true, given that the only country currently on the list for automatic info sharing on portfolio interest is Canada-and Canada was already on that list anyway.


The story quotes Itai Grinberg, who has to be the foremost expert on the legislation and really ought to be listened to on the underlying principles:

"The United States should be moving toward full reciprocity," said Georgetown Law School Professor Itai Grinberg, a former Treasury official, adding it would be "deeply hypocritical" of the United States to ask for U.S. taxpayer information "without offering some kind of reciprocity."

Progress, perhaps. But this is America, so here comes a lawsuit:

The Texas Bankers Association is considering a lawsuit against the government to stop accountholder information sharing with Mexico, said Eric Sandberg, the group's president.

Why, what s the problem?  Well, you see, it's financial privacy.

"We are concerned with Latin American countries like Mexico," said Fran Mordi, senior tax counsel at the American Bankers Association. "In the past, U.S. banks didn't report interest payments to non-resident aliens ... IRS is now saying you have to report that."

Translate how you will. I think it's a clear illustration of the state at war with itself over how to gain the maximum advantage from a combination of cooperation and competition with other states on taxation. Information sharing is going to benefit the US more in terms of dollars in the economy if it is one-way street that catches US shirkers but doesn't prevent taking advantage of other countries' ignorance about the location of their own taxpayers' resources. I think the mercenary state will prevail in the end--cooperate in principle, defect in practice--but I am very much hoping to be wrong.

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.

Galt's Gulch Chile, Randian Utopia?

I've called charter cities "the ultimate gated community," and it turns out that characterization wroks well as a marketing strategy designed to appeal to Randians with visions of state-free utopias dancing in their heads:

With the oppression of the over regulated, over taxed, war riddled and welfare riddled society consuming the world, Ayn Rand's famous protagonist character, John Galt, came to conclude that he would not use his talents to support such a society any longer...driving him to create a community where scientists, inventors, entrepreneurs and many others would come together to escape from the confines of their daily lives to not only be free...but to thrive.  

In today's world, it is becoming more and more difficult to find true freedom from very much the same oppressive forces Ayn Rand wrote of...which drove John Galt and others to a place where they found their freedom, success and peace of mind. 

But you can find yourself in just such a utopia for a modest investment:

Residential lots at Galt's Gulch Chile will be offered at much more affordable price points than one would expect for a community of this caliber. In the initial phase of the project, which is over 4,200 acres, lot sizes will range from 1.25 acres up to over 10 acres, within the separate neighborhoods of the master planned community, which is projected to have well over 1,000 lots on over 10,000 acres at build out. 

I have no idea what price point to expect from a community of that caliber.  Doesn't it depend on the height of the retaining wall built to keep the bands of roaming marauders out of my libertarian paradise?

Pictured: libertarian paradise

See that? No walls.  Also: no pesky roads, schools, hospitals, police stations, firehouses, courts, legislative bodies, telecommunications equipment, etc. But wait, here's another image:

These walls appear inadequate to protect paradise.

Galt's Gulch does have a facebook page...good thing facebook is still "free"!  But ...what is this?

The lots, roads, lakes and community amenities of Galt's Gulch Chile are currently being laid out by the architecture and engineering team. The on-site sales office is being retrofitted with solar panels and upgraded a bit inside and out, with a proposed opening sometime in March. Our Santiago office should be open sometime in the next two weeks as well. We look forward to getting in contact with everyone and meeting you down in Chile!

and, from their website:

Galt's Gulch Chile is slated to have all of the world-class amenities ...including a championship-caliber golf course, community clubhouses, tennis facilities, spa and fitness centers, hiking trails, horse facilities and trails, vineyards, underground storage facilities, downtown main street shopping, farmer's market, 24-hour guard-gated security and many others.  

Since there will be no imposing of onerous regulations or taxes here in Galt's Gulch, these items will obviously have to be priced into those "much more affordable price points than one would expect for a community of this caliber." But at least you won't have to use your talents to support a society. Your benevolent dictator GALT'S GULCH TRUSTEE LIMITED in Menlo Park, CA will contract you right out of all that messiness. Right? ....or, perhaps not.

Will this be like Independence, USA, "an entire city, developed around patterns?"

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Actually, it does sound a little alike:

Galt's Gulch Chile is being designed to be a fully self-sustaining community, affording those who live there an abundant and unending supply of fresh drinking water from the natural springs located throughout the mountains and valleys of the community, clean and renewable energy from hydroelectric and solar power generation, organic fish from the scenic manmade lakes...and a plethora of organic fruits, vegetables and nuts, born from the fertile soil and the ideal year round climate of the region. 

Well then! Oh, how I yearn to sign up for more information on Galt's Gulch, if only it wouldn't mean being inundated with advertising from some trustee company in California trying to prey on my basic mistrust of government.