Manal Corwin, now at KPMG, to discuss Reputational Risk Deriving from the Tax Transparency Movement

Fresh out of Treasury, Manal Corwin and some of her new/old colleagues will present a webcast next Tuesday on Tax Transparency and OECD Initiative on Base Erosion and Profit Shifting:

KPMG's Tax Governance Institute will host a webcast that addresses the implications of tax transparency and the potential impact of the OECD initiative on base erosion and profit shifting. Board and audit committee members, CFOs, tax directors and other business professionals interested in attending the program – one in a series of KPMG presentations on this timely topic – can register at: www.taxgovernanceinstitute.com.

The webcast will focus on "the debate over the shift of taxable business income out of the United States and high-tax jurisdictions around the world and into low or no-tax jurisdictions, and the resulting issue of tax base erosion." I'm not sure if debate is the right word there.  Is there a debate about these two phenomena existing as a factual matter? I think no.  Is there a debate about the appropriateness of such shifting and base erosion? I think decidedly yes.

Interestingly, however, KPMG suggests this is a debate about neither the existence nor the appropriateness of profit shifting and base erosion, but rather it is specifically about transparency, namely, the extent to which the public will gain a right to know about the existence and legal sanction of these practices:

The global debate on tax transparency has sparked both public interest and concerns among many companies, and the spotlight will grow brighter in coming weeks as the OECD prepares to deliver its coordinated action plan on base erosion and profit shifting and the European Commission moves forward with announced plans to address issues around tax fairness. With potentially significant changes in future tax obligations and reputational risks at stake, senior executives and board members at multinational companies should find this webcast, and those that will follow, especially useful as they formulate how their organizations should respond to the debate and possible outcomes.

[Emphasis mine.]  This statement is from Brett Weaver, who is described as "tax partner in KPMG's International Corporate Services practice and the firm's partner-in-charge of Tax Transparency" and a member of KPMG's "Tax Transparency Steering Committee," along with Corwin, who is described by KPMG as:

national leader of KPMG's International Corporate Services practice, principal-in-charge of International Tax Policy in the firm's Washington National Tax practice, and former deputy assistant secretary for Tax Policy for International Tax Affairs in the U.S. Treasury Department and U.S. delegate/vice chair to the OECD's Committee on Fiscal Affairs. 

The other participant on the webcast will be Philip Kermode, "director of the Directorate-General for Taxation and Customs Union of the European Commission".

It seems very clear to me that the "reputational risk" Weaver identifies is going to be something corporate tax managers and their legal & accounting advisers will be forced to price in going forward. The last paragraph illuminates this:

...the [KPMG] Tax Governance Institute ... provides opportunities for board members, corporate management, stakeholders, government representatives and others to share knowledge regarding the identification, oversight, management, and appropriate disclosure of tax risk.

I think it is safe to attribute the creation of reputational risk (or what some might call an internalizing of a cost that heretofore has been externalized thanks to strong corporate tax confidentiality laws), as well as any potential that may currently exist for systemic change to occur in the OECD's approach to the taxation of multinationals, to the international tax activist movement. As a result this should be a very informative webcast.

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.

Periodic Table of FATCA Acronyms

Cute and useful. Acronym overload is a common feature of just about all tax law it seems, and FATCA provides no respite, as this chart demonstrates:

At the link, you can click on any of the elements to get an explanation and links for further information.

McGill Law Journal Podcast on Tax Avoidance

I recently sat down with David Groves of the McGill Law Journal to talk about tax justice as part of the Journal's podcast series. From the MLJ website:

Tax Avoidance, Tax Evasion, and Tax Justice with Professor Allison Christians

Apple, Google, Starbucks: Some of the biggest corporations on the planet are paying virtually no tax on the profits they make. We sat down with Professor Allison Christians, H. Heward Stikeman Chair in Tax Law, to discuss fairness and justice in taxes. 

You can listen to the podcast here.

Webcast of McGill Roundtable on Tax Justice-now online

Last week the McGill Faculty of Law hosted a public roundtable on Tax Justice featuring John Christensen, James Henry, Diana Gibson, and Frédéric Zalac. If you missed the live webcast, you can now view the archived version online here.

Apple's simple design interface most certainly does not extend to its tax department.

Lee Sheppard has an article today on Apple's tax tricks [gated] where she works through Apple's multinational structure & planning detailes as outlined in the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI) report. You should read the whole article, but here are some of its key concepts:

We're ... not easily shocked by transfer pricing practices that the U.S. government accepts, for better or worse. ...But Apple's planning ... is a special case . We're talking gross worldwide revenues the size of the California state budget, and no tax being paid anywhere on a huge chunk of profits. What is truly surprising about the Apple case is its brazenness. PSI concluded that Apple's self-serving intercompany contracts had no effect on its business practices.

...Nearly two-thirds of Apple's revenue comes from foreign sales. According to the PSI report, this foreign income is routed through Ireland and may be taxed nowhere, not even in Ireland. ... 

Apple Operations International (AOI), Apple's Irish-registered holding company, acts as an internal finance company. ... AOI claims tax residence nowhere.

Apple Sales International (ASI), an Irish principal company that manages Apple's supply chain and sales to Europe and Asia, is a subsidiary of Apple Operations Europe (AOE), which is a subsidiary of AOI and has employees and operations. ASI has 250 employees and deals with Apple's third-party Chinese manufacturers. 

ASI claims no tax residence anywhere ... [emphases added].

When I heard these statements--more than once--in the hearings, I wondered why on earth the Senator who was asking at the questions at the time didn't stop right there and say hold on, are you telling us that these companies exist, we are supposed to treat each as a separate taxpayer and respect its independence from the parent company for tax purposes, and accept at the same time that each resides for tax purposes in no country anywhere?

Let's be clear: humans never get away with these kinds of arguments. You might be resident in many places but I think it is very hard to claim that you are resident nowhere--governments always seem to find some reason and some way to claim you. But somehow the Senator didn't challenge this troubling statement.

If the challenge had come, we might have heard a not-so-simple design explanation from Apple, such as that the subsidiaries are incorporated in Ireland, which would make them Irish residents for US tax purposes, but for Irish tax purposes each is resident in Bermuda, while for Bermuda purposes each is resident in Ireland or at least not resident in Bermuda; either way, certainly neither is resident in the United States even though both are clearly controlled from California.

Simple, clean, one button design interface Apple's corporate structure is not.  Funny how Steve Jobs' vision was, and now Tim Cook's vision is, so different for the tax department. Yet this basic structure is, I must hasten to repeat, perfectly, unequivocally legal, understood and accepted and in many ways even facilitated by governments all over the world including and perhaps especially the United States with its deferral regime.  But that doesn't mean the whole structure is similarly straightforward from a legal compliance perspective. More from Lee:

Apple conducts all of its research and development in the United States. Apple Inc., the U.S. parent, has a cost-sharing agreement with AOE and ASI, which pay 60 percent of the cost of this research. Apple's intellectual property is in the United States with the U.S. parent, Apple Inc. Apple told PSI that it divides R&D costs according to worldwide sales revenues.

This arrangement, Lee tells us, dates back to a more permissive time in cost sharing regulatory history and would probably be protected from today's more stringent requirements. Lee observes:

...AOI has no employees; its American board members, who are Apple executives, hold their meetings in California, often without the participation of the lone Irish director. Apple's tax director told PSI that he believed AOI is not managed and controlled in Ireland. Apple told PSI that AOI has not paid income tax to any government for the past five years.

...Ireland takes the position that it is a legitimate low-tax country that only permits the 12.5 percent rate for income from trade, an ancient English concept that appears to require a ruling. Yet Apple told PSI that Ireland permitted an income calculation that enabled Apple subsidiaries to pay Irish corporate income tax at a rate of 2 percent or less. 

Lee wonders if this puts Ireland in a troublesome place vis a vis EU law which prohibits burying state aid within generally applicable tax laws, especially since Ireland is already getting some heat for changing its laws "to accommodate the numerous U.S. multinationals that use it to shelter European sales income." She then works through US domestic tax law and the US-Ireland treaty to show that AOI could very well be viewed as being taxable in the US, yet its income probably wouldn't be subject to tax in any event given the rather complex, internally inconsistent, but overall taxpayer friendly rules of subpart F and its ancillaries.

All in all Lee runs through of some of the more arcane complexities of the US international tax rules in this article, and makes a pretty persuasive case for viewing the system as hopelessly absurd in the extreme.  Tim Cook says he wants to change that, that he's all for a simpler, cleaner interface for the tax code. But remember that very often when someone says they want simplicity, what they really just want is to be able to pay (even) less tax.

New Book: Looking through the Corporate Structure

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

Since the introduction of the term “beneficial owner” to the OECD Model Tax Convention in 1977, courts and the OECD have struggled to interpret the term, and to use it as a test for deciding conduit company cases. 

If applied in a formal legalistic sense, the beneficial ownership test has no effect on conduit companies because companies are legal persons that, in law, own both their assets and their income beneficially. By contrast, in a substantive sense, a company can never own anything because economically a company is no more than a matrix of arrangements that represents individuals who act through it.

Faced with these opposing considerations, courts and the OECD have adopted surrogate tests for the beneficial ownership test. These tests, however, were originally meant to counter different kinds of tax planning strategies. They did not indicate the presence of beneficial ownership. Therefore, they are inappropriate for determining the correct tax treatment of passive income derived by conduit companies. 

This book examines the conflict between the general policy of double tax treaties embodied in the beneficial ownership requirement and the concept of corporations. The work highlights the shortcomings of surrogate tests with the help of analyses of reported conduit company cases. It offers an alternative approach for interpreting and applying the beneficial ownership test. It contains a critique of the work of the OECD Committee on Fiscal Affairs before the insertion of the term, and suggests appropriate amendments to relevant parts of the official Commentary on the OECD Model Tax Convention.

John Prebble alerted me to this book and he says:

The book is particularly timely because it addresses one of  the principal means by which multinational companies siphon profits to low-tax jurisdictions. One apparently obvious way to address the conduit company problem is for states to re-draft and to renegotiate their tax treaties. But that is easier said than done, and usually very time-consuming.

Until there can be wholesale re-drafting of treaties, the book argues persuasively that within current legal frameworks it is not only possible but legally correct for tax administrations and courts to interpret beneficial ownership provisions in tax treaties purposively. The result would be to thwart the use of stepping-stone strategies that shift profits from high-tax countries in Europe, Asia, and the Americas to low-tax jurisdictions.

The book adopts a comparative approach, analysing reported cases from a number of jurisdictions, comparing judgments that have interpreted treaties purposively with formalistic reasoning that creates loopholes that states never intended.

I agree, this is a particularly timely topic. It's technically and conceptually difficult, and it is difficult to solve as a matter of law as well.  The book is available at the link above, and at a 20% discount until May 31 using promotional code EBOT_2013.