American Citizens Abroad: Don't Tax Us as Residents

The US should tax on the basis of actual residence, and not citizenship, says Jack Bugnion of ACA.  This is a reprint of remarks he gave in a press release in February, covered here.  The major arguments are the standard three: efficiency, administrability, and fairness (discussed in that order).

The competitiveness argument is the standard "if you change the tax system companies will hire more people."  There is no empirical evidence in support; experience suggests this is unlikely.  I similarly have no way to judge whether FBAR really is FUBAR from an administrative point of view, but it's of course true that Congress perpetually underfunds IRS so we can expect uneven enforcement--that's as much a fairness argument as an administrative one, and probably could be made more compelling.

The fairness argument is that "Americans abroad would not only be freed from the unjust burden of double tax reporting and double taxation but would also enjoy expanded job opportunities overseas and the possibility to invest in local investment vehicles ... now out of reach due to the burdensome U.S. filing for PFICs (passive foreign investment corporations). They would also be relieved of foreign currency risks when purchasing a home."  I don't know that a double reporting burden is unjust.  It's certainly a pain and it's really unfortunate that it is also likely a jobs act for accountants.  But unjust seems like a strong word to use in the grand scheme of things.  Double taxation is relieved by credit and in some cases exemption on the US side though there are undoubtedly limitations and it's complex, no doubt about it, see previous point.  The PFIC and currency risks are more compelling, because now we are talking about investment traps for the uninformed.

The problem is that even if I agreed with every point, there is a fix, and it is revocation of U.S. citizenship or permanent residence.  The price of that citizenship and permanent residence status just went up, maybe remarkably so.  As a result it is hard to argue that the U.S. cannot do what it is doing from a normative perspective.

Brazil Banks to US: Fix FATCA

The Brazilian Federation of Banks has some ideas on FATCA:

We are supportive of regulations that increase tax transparency and reduce tax evasion, as well as prevent money laundry. However, we also understand that these regulations should be enacted by national authorities of each country or through international treaties so that they have reciprocity and are fully compatible with the constitutional and legal order of each country concerned.  

Due to certain legal constraints and high operational costs, F.A.T.C.A., as currently established, may not be fully implementable in each country even if its financial institutions desire to do so, nor achieve the intended results in the most efficient manner. In order to try to minimize these legal constraints and risks, and optimize costs, while still pursuing the major objective of F.A.T.C.A., we have worked on a set of proposals and requested clarifications that we submit to your consideration.

...F.A.T.C.A. clashes with certain aspects of the Brazilian Federal Constitution, especially concerning the fundamental rights of non-prejudice and equality of a US person as compared to any other person, the right to privacy and secrecy of financial data, and the prohibition to use unlawful pressure to do otherwise. F.A.T.C.A. also goes against the Brazilian tax system, since income tax can only be collected according to Brazilian law and to the benefit of the Brazilian Federal Union. Financial market regulations do not allow financial institutions that operate in Brazil to charge the US withholding costs to their customers contractually. The acts of Brazilian financial institutions to pursue F.A.T.C.A. enforcement may thus be considered as illegal and unconstitutional, putting those institutions in a position of having to face unfair US tax costs, civil and regulatory legal suits in Brazil.

Much more in the letter. This sounds similar to the Canadian perspective, perhaps an ad hoc multilateral coalition to oppose FATCA is forming.

 

Tax transparency, democracy and "expertise"

Transparency is being fully contested in international tax circles:

The hosts were expecting a heated but constructive debate, and for most of the nine-hour conference delegates heard in turn the impassioned arguments of campaigners for country by country reporting and the deliberations of tax professionals whose main argument centred on the complexity of international tax.

The complexity issue is that if regular, uninformed people are given all the data, they will misinterpret it and hang effigies of the innocent.  This is an unconvincing argument that the OECD tried to imply with its consideration of the matter in 2011: “the issue of whether greater transparency could aid public debate on appropriate tax policy” would be “very difficult to assess” because the political discourse would involve “differing arguments, [that] can be used more or less responsibly.”  This is an argument that tax compliance is so subjective, no one could ever make sense of it definitively, so it's best not to argue it in public.  Only experts should do so, and then only in quiet rooms.

I was happy to see Sol Picciotto mentioned in the article, he's a terrific thinker and scholar on international tax:

During a discussion on tax dispute resolution Sol Picciotto, Emeritus Professor of Law at Lancaster University, interrupted James Bullock’s defence of modest meals shared at meetings with HMRC to say that the level of transparency being proposed was ‘quite clear – that taxpayers should declare what tax they pay in each country’.

Picciotto added: ‘As regards disputes, the terms of a settlement should be public. We’re not talking about sandwiches, we’re talking about the transparency of what tax people pay where. If a dispute goes to the tribunal, it’s public. If there’s a settlement, it should be public.’

Later, Judith Freedman, University of Oxford tax prof, said that publishing details of settlements ‘would not be that helpful’ to people: ‘What are they going to make of them? I want to have a properly instituted organisation which has independent experts who can scrutinise those settlements. That’s far better than leaving it to whoever happens to be able to pick up on this, the press …’

‘That’s democracy,’ a delegate shouted from the audience. Freedman continued: ‘I believe it’s the job of properly constituted organisations, rather than the press, to examine this because that would give us integrity and confidence in the system. These are very, very difficult things to understand.’

That statement is distressing on grounds of the expertise question alone.  Who decides what constitutes "a properly constituted organisation"?  Professor Freedman?  The Oxford Center for Business Taxation?

The article closes with a mention of a twitter feed associated with the conference, in which it was tweeted ‘It has to be admitted that few tax experts have oratory skills or passion comparable to [those of] tax campaigners and politicians.’


Perhaps, but it's a matter of backing and platforms, isn't it.

The Impossibility of Accurate Basis Reporting

The new cost basis reporting rules came into effect for stock brokers in 2011 and will come into effect for mutual funds and ETFs in 2012.  Bloomberg ran an article a few weeks ago outlining outlined a series of the major issues; yesterday Steven Rosenthal wrote on the many compliance headaches to expect, and concluded that although he thinks that on balance basis reporting is appropriate and necessary, "the transition will be painful."

I sent the article to David Nangle, a student of mine who has been interested and vocal on the importance of keeping track of basis given the taxpayer's propensity to prevaricate with impunity in the absence of a third party backstop.   He has extensive experience with corporate information management and worked with a software platform that automatically sent trade information and pricing data (including basis and valuation information) to prime brokers and fund administrations for hedge funds including funds of funds.   His response is that enforcement is not just difficult and painful, in fact it is impossible [edited & posted with his permission]:

"Whenever migrating existing a new fund onto our software, I always needed to know how they wanted their basis calculated similar to what the article discusses in #1.  FIFO was among the most popular used by funds, yet not uniform. HIFO - highest in, first out - was equally widespread, and in the case of arbitrage funds (who do thousands of trades a day) they frequently used our 'Min Tax' option or another exotic and rarely used scheme. Obviously heavy trade volume in a particular security clouds the cost basis of your overall position, so it was essential to be able to track different trade tax lots to see which ones were closing off against each other and keep all the different parties involves on the same page. It would be a massive headache for a couple weeks if one institution's internal accounting of the fund's changing portfolio positions was off and we needed to figure out why, though generally speaking after a couple weeks these issues would fade. 

Having seen firsthand the complex nature of this cost basis problem, I have absolutely no faith that regulators could ever successfully track the different tax lots of each trade and ensure that funds are doing it 'right'. There is just no way that the IRS will be able to track every funds' trade activity, along with pricing information, and conclude that particular funds are dodging tax liabilities. Its possible that they could find mistakes if they happened to know which fund or position to investigate, but this would be enormously difficult to look into without a tip that something is amiss in the first place. 

The problem becomes much more complex when the overall structure of hedge funds, mutual funds and fund of funds is considered.  When a fund uses a master feeder structure, or a 'block' fund, it buys a huge chunk of a particular security and then allocates the chunk of securities across multiple funds or investment pools.  This clouds the reporting discussed in the article even more, because technically the brokerage houses are not using the individual fund account numbers to make the purchases, merely the 'block' account.  The fund itself is allocating the shares to different strategies or sub accounts. Eventually, fund admins and brokerages learn the allocations after reconciliation, but that is not captured in the initial trade itself. Allocations can go to sub accounts that might have an existing position in that security, thus distorting the cost basis by either closing out or adding to the position, while other allocations are the first of that security's kind to be allocated to that sub account. 

Therefore it is the fund's internal decision making which will ultimately be reporting this information anyway, and even if the IRS forces a brokerage unit to report on a client funds' trade activity the block account will shield the allocations until the fund has decided the best way to report out their sub portfolios' positions.

I have to agree that the task sounds impossible.  Yet overstating basis is a major problem for the IRS, one made even more challenging by last week's Home Concrete decision [pdf], which tightens the IRS' time to review and investigate even in egregious cases.  Rock: hard place.

Arbitration and Jurisprudence in the Investment Treaty Regime

I'm not a true believer in tax treaty arbitration because I have read some of the literature on investment treaty arbitration that grapples with the many of jurisprudential issues we seem to be all but ignoring in tax.  Susan Franck's latest paper, Managing Expectations: Beyond Formal Adjudication, is a case in point.  It uses the "guidance and clarity on standards" gleaned from arbitration decisions to talk about the jurisprudence of the investment treaty regime, an approach that would be impossible in the international tax regime arbitration structure.  Here is the abstract:

The international investment system has depended heavily on international arbitration to provide guidance and clarification on the standards contained in international investment agreements. In order to assess the system realistically, this commentary discusses unpacking stakeholder expectations by recognizing where expectations may have been overly optimistic and thinking systematically about the mechanisms through which to capture and manage regulatory discretion. This article evaluates ideas expressed by Anne van Aaken and Bart Legum, which consider different ways to achieve regulatory and commercial balance, and offers a lens for thinking systematically about managing stakeholder expectations in the international investment system. A critical issue for international investment law relates to cognitive psychology and how to manage the expectations of differently situated stakeholders. This commentary explores different methods to managing stakeholder expectations and investment treaty conflict such as education and different doctrinal opportunities such as administrative law's model of formal and informal rule-making and adjudication. This commentary concludes that an evidence-based nuanced analysis allows consideration of specific dynamics about stakeholder objectives, enabling a more realistic assessment of the international investment regime.

On Expertise and Influence: Interview with Ann Pettifor

What constitutes expertise as a social, political and cultural matter?  It involves charts, data, lines on a CV, connections, financial support, and a means of repeatedly broadcasting the same message.  In 2003, Ann Pettifor predicted the global debt meltdown but no one was listening; in this interview with the Renegade Economist [posted at NC], she discusses the crowding out of ideas that is perpetuated because of the structure of interest group-funded economics research.  This sounds so much like the Vijay Prashad interview in regards to the silencing of alternative views from UNCTAD which, like Pettifor, is credited with accurate predictions about the economic crisis.  A similar tale can be told about tax treaty policy making and the turf struggle between the OECD and the UN.  In international tax in general we see the cult of expertise in the claiming of "internationally agreed standards" on tax policy, with I think similar effects--the alternative view is too often silenced, sometimes intentionally but often just by lacking the necessary backing and platforms.

Starting at around the 7 minute mark, Pettifor has a lot to say about institutional expertise and about why we will continue to get more of the same policy prescriptions from influential economists: they are mostly "hired guns" who don't have tenure, while those with tenure, who can "afford to say that which is not mainstream," are few and far between.  She says most economists therefore "are employed in think tanks and research departments that are underwritten by the finance sector.  RE agrees: "if you watch Charles Ferguson's film Inside Job and you see the cowardice of the neoclassical economists at the end who jut blankly refuse to answer the questions and then when they do are full of spite, you get a kind of insight into the murky world you're dealing in."  

Pettifor then talks about conferences where neoclassical and heterodox economists are engaging in dialogue, and she says this is unusual because the neoclassicals "aren't used to dialogue with anyone who doesn't share their world view, and that is so damaging."

Jumping to 10:20, she lays out the intellectual/institutional conflict:

"I am right now reading a speech by a man called Ben Broadbent, who is on the board of the bank of England and who was at Goldman Sachs and who's written a paper saying that the cause of the crisis had absolutely nothing to do with easy money, i.e., unregulated money; it had everything to do with the fact that interest rates were incredibly low.   

Now when I read that paper, it is so deceptive really, and yet it's packed with charts and data, and some sources, even, of information, he does neglect to give us the source of some of his data, that paper, I am convinced, has been written in Goldman Sachs's research department and he's delivered the speech on behalf of Goldman Sachs and he's on the bank of the Board of England.   

Now, that's not a conspiracy.  It's huge political and economic power.  And those of us who have an alternative view don't have that sort of backing, and don't have those sorts of platforms, and that's very damaging for public discourse."

Much more on the substantive economic issues and debate as the interview continues.

Murphy on country-by-country reporting

If you're following the corporate tax transparency movement, you'll have heard of Richard Murphy, who takes the credit for creating the concept of country-by-country reporting.  He has a post today on his blog in which he recreates a recent speech explaining the origins and developments of the movement:

When, almost ten years ago I wrote the first ever version of country-by-country reporting in response to one of the first ever questions John Christensen asked of me I thought the entire audience for the idea would amount to just two people – John and Prof Prem Sikka, who had just introduced us. How wrong I was! It seems a good idea has a life all of its own.

...Country-by-country reporting is, and was always intended to be, a full blown and completely new view of the trading of a multinational corporation, ideally required by an International Financial Reporting Standard, but failing that by international regulation. 

What that accounting standard would demand is a full consolidated profit and loss account for each and every jurisdiction in which a multinational company trades.

And when I say full I mean 'full', including sales, costs, an analysis of labour costs and head count and full tax notes – including  a deferred tax analysis.

And in some ways I mean more than full when it comes to this profit and loss account – because country-by-country reporting would also require disclosure of all intra-group sales and purchases, all intra-group hedging and derivative trading and the disclosure of all intra-group financing activity too.

Let's be clear about why country-by-country reporting does this. It's based on a series of solid assumptions. The first is that multinational corporations might act globally but they do not float above the global economy. Their actions are all ultimately geographically located. Country-by-country reporting recognises that. It makes globalisation accountable locally.

Second country-by-country reporting recognises that it is impossible to say that existing accounts for multinational corporations can possibly give a true and fair view of business when up to 60% of world trade – the part that takes place on intra-group basis – is totally lost to view in existing financial statements. It is ludicrous that we don't account for that trade in a globalised world.

More at the link.