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.

Latest IRS Statistics of Income on Individual Tax Returns

The IRS has issued its latest SOI reports, including the 2011 Individual Income Tax Returns (Publication 1304). These are always interesting. This year's data shows that 145 million individual income tax returns were filed in 2011, about 108M showing a taxable income amount, and 95M showing income tax, for total revenues of just over $1 trillion from the individual income tax. Some highlights:

• salary or wage income: 119M returns, $6T
• unemployment comp: 13M returns, $92B
• social security benefits: 25M returns, $490B
• foreign earned income (i.e. residents of other countries): 445K returns, $28B
• gambling earnings: 1.9M returns, $26B

The IRS also issued 2010 Corporation Research Credit Tables, derived from Form 6765, Credit for Increasing Research Activities, and 2010 Corporation Depreciation Data, derived from Form 4562, Depreciation and Amortization.

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.

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

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

All of this is going to require Treasury to amend the regulations and the model IGAs to adopt these rules, but taxpayers are advised they can rely on the Notice until that happens. Here is the explanation:

Comments have indicated that certain elements of the phased timeline for the implementation of FATCA present practical problems for both U.S. withholding agents and FFIs. In addition, while comments from FFIs overwhelmingly supported the development of IGAs as a solution to the legal conflicts that might otherwise impede compliance with FATCA and as a more effective and efficient way to implement cross-border tax information reporting, some comments noted that, in the short term, continued uncertainty about whether an IGA will be in effect in a particular jurisdiction hinders the ability of FFIs and withholding agents to complete due diligence and other implementation procedures. 

In consideration of these comments, and to allow for a more orderly implementation of FATCA, Treasury and the IRS intend to amend the final regulations to postpone by six months the start of FATCA withholding, and to make corresponding adjustments to various other time frames provided in the final regulations, as described in section III below.

There is also language about jurisdictions that have signed IGAs but have not yet ratified them according to their internal procedures for ratifying international agreements, in line with what the IRS agreed to in the Norway IGA, but notice that there are no hard deadlines here. Instead, FATCA partner jurisdictions get a "reasonable" period of time to get the IGAs through their respective legislative processes. I cannot see how a foreign jurisdiction would have any recourse to an unfavorable IRS determination that its internal ratification period is "unreasonable." I'd say that falls into a rather delicate area of diplomacy: I doubt the IRS will be eager to tell some other country its legislative procedures are too slow, sorry, you're off our whitelist. In any event:

A jurisdiction will be treated as having in effect an IGA if the jurisdiction is listed on the Treasury website as a jurisdiction that is treated as having an IGA in effect. In general, Treasury and the IRS intend to include on this list jurisdictions that have signed but have not yet brought into force an IGA. The list of jurisdictions that are treated as having an IGA in effect is available at the following address: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCAArchive.aspx. 

A financial institution resident in a jurisdiction that is treated as having an IGA in effect will be permitted to register on the FATCA registration website as a registered deemed-compliant FFI (which would include all reporting Model 1 FFIs) or PFFI (which would include all reporting Model 2 FFIs), as applicable. In addition, a financial institution may designate a branch located in such jurisdiction as not a limited branch. 

A jurisdiction may be removed from the list of jurisdictions that are treated as having an IGA in effect if the jurisdiction fails to perform the steps necessary to bring the IGA into force within a reasonable period of time. If a jurisdiction is removed from the list, financial institutions that are residents of that jurisdiction, and branches that are located in that jurisdiction, will no longer be entitled to the status that would be provided under the IGA, and must update their status on the FATCA registration website accordingly. 

More details in the link to the Notice. I have some questions about the various exceptions and wheretofores, including a general sense of confusion about which of the various procedures and penalties starts when, but I'll save these thoughts for another day.

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

Apple in front of the Senate

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Thoughts on the "you first, no you first" provision in Norway's FATCA agreement with the US Treasury

Norway signed an IGA with the US Treasury on April 15.  I blacklined the Norway agreement against the Model 1 FATCA, (you can download the comparison here) and note that some of the regular features appear, including deemed-compliance status for pension funds and "local" banks* but want to address in this post what I'll call the "you first, no you first" provision in Article 4, paragraph 6.

Some FATCA watchers were surprised to see this paragraph, and I admit I had not noticed it before so I assumed it was new--until I blacklined it and found that no, that paragraph is in the Model 1 Agreement (however it is not in the IGAs with Mexico or the UK), and the Model language is identical to that in the Norway agreement.

In any event, having now read this Art. 4 paragraph 6 more closely, I notice there is actually a good bit of maneuvering going on here. Here is the language:

6. Coordination of Timing. 

Notwithstanding paragraphs 3 and 5 of Article 3:

a) Norway shall not be obligated to obtain and exchange information with respect to a calendar year that is prior to the calendar year with respect to which similar information is required to be reported to the IRS by participating FFIs pursuant to relevant U.S. Treasury regulations;
b) Norway shall not be obligated to begin exchanging information prior to the date by which participating FFIs are required to report similar information to the IRS under relevant U.S. Treasury regulations;
c) the United States shall not be obligated to obtain and exchange information with respect to a calendar year that is prior to the first calendar year with respect to which Norway is required to obtain and exchange information; and
d) the United States shall not be obligated to begin exchanging information prior to the date by which Norway is required to begin exchanging information.

This is actually not at all easy to read (on purpose? One always wonders).  But for sure this does not say, as some readers initially thought, that Norway can wait to give info to the IRS until the IRS begins to give info to Norway. In fact, it rather says quite the opposite. Nor, as I thought when I first read it, does it say that Norway need not exchange until Treasury begins to require equivalent information be reported on Norwegian account holders by US FIs to the IRS.

Instead, it says very simply that Norway need not exchange information with the IRS before the US Treasury regulations require FFIs to begin reporting to the IRS, and the IRS will not exchange info with Norway before Norway starts exchanging. All this use of negatives is confusing so let me try to put it in positive terms: it in effect says that Norway will start giving the IRS info once the IRS requires FFIs to begin reporting per the Treasury regs. Notice that Treasury makes no affirmative commitment on the part of the IRS to actually exchange thereafter--only that in any case it will not exchange before Norway does. It implies that it will be obligated to automatic exchange thereafter, but I am not sure even that is so clear.

The Mexico IGA--the only agreement that is technically in force right now--should provide ample proof that the Treasury has not committed to actual automatic exchange of information with its IGA partners (regardless of para. 6), and certainly that the Treasury is not going to go first. On the contrary, Treasury has only said that it will begin requiring US banks to provide the IRS with information on IGA-country account holders, which could be exchanged with such IGA partners if Treasury determines that such sharing would be appropriate. According to the Treasury, "Even when [an info exchange] agreement exists, the IRS is not compelled to exchange information… if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate.”

No word on what those other factors might be, so read this as a broad grant of discretion to the Treasury, with no accountability required toward the IGA partner.

Mexico, it appears so far, has not yet been given the green light, so I can only assume that the status quo right now is Mexico dutifully turning over (on a monthly basis I believe) IGA-compliant information, while the IRS provides Mexico nothing in return. You might like to see what the American Banking Association thinks about this status quo. I think it is safe to say that the Florida and Texas Bankers Associations are determined to at minimum delay reciprocal automatic information exchange as long as possible, if they cannot eliminate it all together.

Now, if I have these facts incorrect and the IRS is actually exchanging information with Mexico under the IGA, I hope that someone will please correct me right away because this is tremendously important--as I have suggested before, the information Mexico could get from the IRS under such an arrangement could be explosive in terms of exposing the volume and direction of tax evasion as between these two countries (not that the public will get much or any information on these things--on the contrary we most likely will learn absolutely nothing, more's the pity).

One might say the USA won't similarly refuse to share information with Norway as such behavior smacks as bad faith, and countries have a positive duty to on the contrary act in good faith with respect to "international agreements". Moreover, it strains credulity to think that Treasury would start collecting information on Norwegian account holders from US banks, without actually planning to share it.

To that I would counter, presumably Norway knows exactly what it got in this deal: the same promises as have come before.

This is consistent with the rest of the IGA, which suffers from the same lack of reciprocity that in my view belies the character of these instruments as international agreements at all, even beyond their likely constitutional violation in the USA.  I recently wrote an article about the lack of reciprocity in the IGAs, why I think that is so problematic in terms of creating a perverse market advantage for the USA to facilitate tax evasion, and why there is not much reason for being optimistic that the necessary sea change will occur to make FATCA a viable multilateral regime with equal applicability to the world's largest destination for foreign capital. You can read that article here, and as alway I welcome feedback, especially to correct any of my misunderstandings.

To sum up, in my view the "you first, no you first" provision adds nothing in terms of greater reciprocity in the Norway IGA, while the same procedural and substantive defects we have already seen continue unabated.

* I also note a new conditionality to the local bank exception, in Annex I Part II.A.(e):

"provided thatNorway provides information on an automatic basis to the relevant Member State;"

This seems to mean that until Norway is actually exchanging info, its local banks will not be deemed compliant but will be withheld upon once the "you first" rule kicks in (i.e., once FFIs must begin reporting per Treasury regs).  

The local bank exception is a get-out-of-FATCA-free card for banks whose account holders--including US citizens--mostly live in the country. I've been told the provision is meant to help Americans living abroad whose local banks are dropping them in the (mistaken) hopes that this will relieve the FI of FATCA scrutiny. I have a lot of trouble with this local bank exception in terms of what the US appears to be trying to do with it, tempering citizenship-based taxation with an escape hatch that potentially encourages and even invited casual noncompliance, but that's a conversation for another day.

My intrigue with the new language in the Annex here is that I'm not sure why this condition applies only to local banks, and not other deemed compliant FIs. Those who think the FATCA regime is now deliberately aimed not at catching HNW Americans living in the USA and stashing cash offshore (few of whom hold large amounts of cash in accounts with their own names attached, as Lee Sheppard has repeatedly pointed out) but instead at imposing upon US citizens living abroad with their middle class wage earnings and their lack of effective representation in Washington, could have a field day with this provision. 

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.

Bridge Over the River Detroit

Surprise--despite determined efforts to stop the process, the US has pushed through approval for the new Detroit-Windsor Bridge.  As you may know the new bridge is opposed by Matty Maroun, who controls much of the current cross-border traffic between these two cities via his ownership of the Ambassador Bridge. From the WSJ blog:

The Detroit-Windsor bridge would be the third international connections between the two cities, joining the 84-year-old Ambassador Bridge and the 83-year-old Detroit-Windsor Tunnel. Those two links are the busiest, and second-busiest, border crossings in North America, respectively, funneling tourists and trade between the two countries.

Canada agreed last year to provide as much as $550 million to build the new six-lane bridge, which would relieve congestion at the border. Under the deal, the private sector will cover the rest of the costs, sparing the already stretched Michigan taxpayers from having to pony up. 

The cross-border financing deal was a big issue and Maroun wanted to take the question to voters via a referendum with the help of some sympathetic funders, but apparently, he failed. Of course, there is the matter of staffing all the booths--that's going to be tough on the US side given sequester-driven cuts.

FATCA reciprocity in Obama 2014 Budget?

One line in the budget itself:

Provide for reciprocal reporting of
information in connection with the
implementation of FATCA ................... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... .

The blanks indicate that the measure is deemed to have no impact, positive or negative, on the deficit.

This explanation in the Analytical Perspectives:

Provide for reciprocal reporting of information in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA).—In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA provisions of the Hiring Incentives to Restore Employment Act of 2010 by reporting to the IRS information about U.S. accounts. Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS.  Requiring U.S. financial institutions to report similar information to the IRS with respect to nonresident accounts would facilitate such intergovernmental cooperation by enabling the IRS to reciprocate in appropriate circumstances by exchanging similar information with cooperative foreign governments to support their efforts to address tax evasion by their residents.  The proposal would provide the Secretary of the Treasury with authority to prescribe regulations that would require reporting of information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-U.S. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities. 

But nothing further from the Treasury in its own explanation of the budget.

So we will just have to wait and see, some more. Note that even this brief move forward highlights the aspiration involved in referring to any currently configured IGA as "reciprocal."

Upcoming conference on tax & philanthropy

Over at Philanthropy blog Lucy Bernholz alerts us to an upcoming conference in DC  (to be webcast) on "The Charitable Deduction in American Political Thought," in which participants will discuss the charitable deduction's "deepest dimensions as an expression of fundamental American political principles." And there is required reading:

• Alex Reid, "Renegotiating the Charitable Deduction," and
• Rob Reich's "Toward a Political Theory of Philanthropy"

Neither of which I've read so I had better get going. 

US to OECD: target your anti-BEPS regime carefully

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

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

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

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

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

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

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

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

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

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

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

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

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

Treasury economist Michael McDonald added that

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

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

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

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

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

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

How to Make America a Global Tax Haven

Isn't it astonishing that at the very moment the USA is twisting arms the world over ostensibly to crack down on tax havens and the erosion of the tax base they help perpetuate, Bloomberg could run this headline without irony or shame, and we can get a brand new quote from yet another American lawmaker about the virtues of making the US a tax haven. This time it's not Paul Ryan who wants to "make America a tax shelter" but his friend Devin Nunes, who says the US ought to abandon corporate income tax, and substitute for it a cash flow consumption tax, in order to "make the U.S. the largest tax haven in human history."

You just cannot make these things up. You remember Nunes, I hope--yes, that's him, the co-chair of the international working group on tax reform convened by Camp & Levin. Yes, that Levin, the one that wrote FATCA, the legislation that is supposed to stop Americans from cheating on their taxes by using other countries as tax havens.

Of course you can say that in substance the two are very different--Levin's focus is to stop Americans hiding cash overseas in foreign bank accounts, while Nunes just wants to let corporations pay less tax on the income they earn in the US. And a cash flow consumption tax might not be evil. But using the tax haven and tax shelter rhetoric as a marketing strategy is objectionable. Either you think tax havens and tax shelters are an abuse of the rule of law, in which case you shouldn't try to turn your country into one, or you think they're just dandy in which case you shouldn't try to shut everyone other country down  to capture the market for yourself.

Rosenbloom on proven incentives to get offshore cash back home

David Rosenbloom has a great letter to the editor in Tax Notes today [gated], excerpts:

Recent press reports describe a large increase in January tax receipts as taxpayers shifted substantial amounts of income forward into 2012 in order to avoid the higher taxes anticipated for 2013. 

...We have been told, again and again, that there must be lower tax rates on accumulated foreign earnings in order to provide an appropriate incentive for U.S. multinational companies to repatriate the enormous sums they hold offshore.  

...It turns out that incentives can be created just as well by raising taxes as by lowering them. 

Who knew?

Nice. Empirical evidence that to get cash repatriated, the trick is to raise taxes with enough lead time for companies to move thing around. Best part: this process is totally repeatable next year.

Public disclosure of global corporate tax info, coming soon in the US?

I was happy to see a rather lengthy discussion in Tax Analysts[gated] a little while ago, authored by Randall Jackson on the emerging US corporate tax transparency rules. These rules derive from a global movement to counter corruption, called the Extractive Industries Transparency Initiative (EITI). The US rules were enacted as a hasty and rather stealthy last-minute addendum to the Dodd-Frank Wall Street Reform Act of 2010, and have yet to be implemented, in part because of intense industry pressure. That pressure continues, especially from the American Petroleum Institute, even though that organization expresses support for EITI in principle. Jackson describes how the disclosure rules came about under Dodd-Frank, and what information is set to be disclosed when the first US companies begin making their disclosures thereunder (February 2014 at the earliest):

Dodd-Frank section 1504 amends the Securities Exchange Act of 1934 by adding a new section 13(q), "Disclosure of Payments by Resource Extraction Issuers," which requires country-by-country (and project-by-project) reporting of all payments, including taxes, made to all foreign governments and the U.S. federal government. (Analysis of Dodd-Frank .) 

The legislation requires companies engaged in the commercial development of oil, natural gas, or minerals that file a yearly report with the SEC to file an additional detailed annual report (new Form SD, which is separate from countries' 10-K annual report) listing all their payments, including taxes, fees (including license fees), royalties, production entitlements, bonuses, dividends, and payments for infrastructure improvements. Payments of at least $100,000 during the most recent fiscal year must be listed.

...Reports must be detailed and specific, listing payments to each foreign government, foreign subnational government, and the U.S. federal government. (Payments to subnational U.S. governments, such as state governments, need not be reported.) The reports will be publicly available online. 

More specifically, the reports must separately list each project and the types and totals of payments made in connection with each project; the types and totals of amounts paid to each government, including a separate list of the governments that received payments; the total payments by category; the currency in which the payments were made; the relevant financial period; and the business segment of the company that made the payment.

Jackson discusses the origin of the inclusion of the EITI addendum in Dodd-Frank (by means of an amendment by Senators Cardin & Lugar, whose prior attempt to pass EITI as a stand alone bill failed in 2009) and the subsequent industry pressure in some amount of detail. He includes a description of API's attempt to unwind the legislation via a legal challenge. API is arguing that the SEC failed to undertake a sufficient cost/benefit analysis of the rules, failed to study how the rules and costs would impact US companies doing business in other countries, and failed to create exemptions in cases where foreign law would prohibit the required disclosure. Jackson quotes the complaint: "the Commission did not even bother to determine how many countries had laws on the books prohibiting disclosure." He also quotes the SE's response:

[T]he SEC wrote that it had rejected commentators' suggestions to exempt firms operating in countries where the required disclosure is prohibited because the agency is skeptical that such prohibitions actually exist, and allowing exemptions would violate the spirit of the law. Furthermore, it said that allowing that kind of exemption could encourage foreign countries to pass anti-transparency laws or to interpret existing laws in a harsher fashion.

To which Cardin and Lugar responded:

"API wants to push us back to a time when the U.S. had few tools to add accountability and stability to the inherently unstable energy sector," Cardin said. "Congress and the SEC carefully crafted a reasonable and very manageable reporting requirement that will bring greater transparency to the oil, gas, and mineral sectors." 

"The U.S. economy and our values substantially benefit when our companies are working in oil-, gas-, and mineral-rich states," Lugar added. "But the benefits will not be realized if investments serve to entrench authoritarianism, corruption, and instability. With oil prices high and volatile, our economy needs more transparent markets, not less.

Cardin and Lugar, along with Senator Levin, have submitted an amicus curiae brief in support of the SEC, which Jackson quotes:

"Resource companies can believe whatever they wish and make any communication they wish about their payments to foreign governments, 'the resource curse,' or the benefits or costs of transparency; they have done so throughout this process. What resource companies may not do is impede the power of the legislative branch to require disclosure of objective information to fulfill compelling public policy objectives, including the strengthening of American national and energy security and investor protection."

It remains to be seen whether industry will be successful in pushing back the EITI regime; if not, we should start seeing the additional disclosure I believe by September of this year. So here is a question. How many multinational extractive industry companies are there in the world, and how many will be covered by the US EITI regime? In other words, if and when the US rules are in place, how many extractive industry companies will not have their information revealed through these disclosure rules by virtue of affiliation with US companies? Is it a few, many, or most? If anyone knows whether this is known or could be ascertained, I'd like to know.

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.

Eisinger: the madness of revolving door politics, American-style

Jesse Eisinger of ProPublica has a dealbook entry today, A Revolving Door in Washington With Spin, but Less Visibility, with insightful comments about governance. It would be a provocative and shocking article were it not for the utter familiarity of the story it tells about lobbying and lawmaking in America:

Obsess all you’d like about President Obama’s nomination of Mary Jo White to head the Securities and Exchange Commission. Who heads the agency is vital, but important fights in Washington are happening in quiet rooms, away from the media gaze. 

...For lobbyists, the real targets are regulators and staff members for lawmakers.

Eisinger correctly states that while White herself will be subject to public scrutiny, her staff will mostly work in "untroubled anonymity." Cue the revolving door: on Jan. 25, Senate majority leader Harry Reid hired Cathy Koch to be his chief adviser on tax and economic policy. Eisinger points out an oddity:

The news release lists Ms. Koch’s admirable and formidable experience in the public sector. “Prior to joining Senator Reid’s office,” the release says, “Koch served as tax chief at the Senate Finance Committee.”

...[but in fact] immediately before joining Mr. Reid’s office, Ms. Koch wasn’t in government. She was working for a large corporation.

Namely, GE--yes that one, that hugely profitable multinational that just doesn't seem pay tax anywhere, anytime. And the one that can't even get it's own story straight on the issue.  More from Eisinger:

Just as the tax reform debate is heating up, Mr. Reid has put in place a person who is extraordinarily positioned to torpedo any tax reform that might draw a dollar out of G.E. — and, by extension, any big corporation. 

...no rules prevent Ms. Koch from meeting with G.E. or working on issues that would affect the company. 

...In a statement, the senator’s spokesman said, “The impulse in some quarters to reflexively cast suspicion on private sector experience is part of what makes qualified individuals reluctant to enter public service.”

But that's a silly thing to say because of course Ms. Koch just did enter public service, so either the spokesman is saying we couldn't get anyone qualified so we had to go with her, or we must imagine that the reluctance has been overcome by some expected reward. We don't have to think too hard to come up with some ideas about what that reward must be.

Eisinger moves on to a particularly fluid relationship between the Office of the Comptroller of the Currency and the Promontory Financial Group, which Eisinger calls "a classic Washington creature that is a private sector mirror image of a regulatory body." Julie Williams, who was chief counsel for the OCC last year, is now at Promontory, while her replacement, Amy Friend, is coming to the OCC from Promontory. Eisinger suggests that maybe they can swap back next year; that would at least save the taxpayers all the moving expenses back and forth between these two offices. Hey, we've got money problems here and it's not looking like they are going to be fixed--every litte bit helps. Eisinger concludes:

Washington today resembles something like the end of “Animal Farm.” People move from one side of the table to the other and up and down the Acela corridor with ease. An outsider looking at a negotiating table would glance from lobbyist to staff member, from colleague to former colleague, from pig to man and from man to pig and find it impossible to say which is which.

What can we expect when this passes for democratic governance? Nothing but more of the same, I think.