Saturday, January 17, 2015

Engineers Without Borders Panel on "Illicit Financial Flows"

Tomorrow I will be participating on a panel on "Illicit Financial Flows" at the Engineers Without Borders 2015 National Conference, currently taking place in Montreal. The goal of the session is to discuss the nature and impact of so-called illicit financial flows in Canada, the United States, and the world's developing countries.

I have been asked to address the question "what promising policy instruments or reforms could potentially curb outflows of illicit finance?" The use of the term illicit in this context seems to be an attempt to elide the distinction between avoidance and evasion. Those familiar with my work know that I approach this terminology with caution because I think it is a mistake to conflate evasion and avoidance into a single category for purposes of advocating generalized policy reform. In a paper I published last year on Evasion, Avoidance, and Taxpayer Morality, I argued why I think the phenomenon of tax evasion is distinct from tax avoidance, each represents a different type of governance failure, and each requires a tailored response. But I certainly understand the instinct to see both tax avoidance and tax evasion as essentially drains on public resources that we'd like to imagine would otherwise be available for various socially useful projects.

I'll try to lay out the field as I see it in the time allotted. It is a big topic to cover in a limited time. I suppose I could just plug Martin Hearson's very good work on this subject. I am curious as to how Engineers Without Borders came to concern itself with this issue; the rest of the conference focuses on innovative, sustainable, and inclusive development.  I think it is another sign that tax justice advocacy groups, like the Tax Justice Network, are successfully inducing NGOs across a broad spectrum to view taxation as a human rights issue that permeates all facets of social and economic development.

Friday, January 16, 2015

Devereux & Vella on Corporate Tax System for the 21st Century

Michael P. Devereux and John Vella recently posted in SSRN their new paper entitled Are We Heading Towards a Corporate Tax System Fit for the 21st Century? Here is the abstract:
The most significant problems with the existing system for taxing the profit of multinational companies stem from two related sources. First, the underlying “1920s compromise” for allocating the rights to tax profit between countries is both inappropriate and increasingly hard to implement in a modern economic setting. Second, because the system is based on taxing mobile activities, it invites countries to compete with each other to attract economic activity and to favour “domestic” companies. The OECD Base Erosion and Profit Shifting (BEPS) initiative essentially seeks to close loopholes rather than to re-examine these fundamental problems. As a consequence, it is unlikely to generate a stable long-run tax system. We critically examine the principle guiding the OECD’s reform proposals in its BEPS initiative and outline some more fundamental alternative reforms.

In my view the technical difficulties of taxing corporate income are dwarfed by the political ones. It is political will, not administrative ability, that makes GE/Google/Apple-style income tax payments in the low single digits a global reality.

Thursday, January 15, 2015

The Mercedes Benz of state tax competition

State-to-state tax competition continues unabated: Georgia has successfully lured Mercedes Benz away from New Jersey, presumably with a very generous package of employer- and capital-friendly tax and other regulatory policies. Politicians everywhere run on jobs & growth. Tax competition is about seeking a temporary displacement to your jurisdiction at the expense of another. Temporary because you are only as good as your last tax break, zero is not the bottom, and excessive tax reductions are unsustainable.

Wednesday, January 14, 2015

SCC says the Income Tax Act is not so bad that it's void for vagueness; your results may vary

I write on occasion about tax protestors and their persistent tilting at windmills to defeat the income tax. I find them fascinating and a reminder that income taxation is a really difficult tax to administer. Taxpayers will do everything they can to avoid it, justifying their actions in myriad ways. A major difference between the tax protestors (who usually represent themselves) and tax planners (whose business it is to represent others) is that the latter are well-trained and sophisticated. When tax planners make ridiculous arguments about the applicability of income tax, they typically do so in highly technical and targeted ways, and they can sometimes confuse administrators and courts into believing them. Not generally so with protestors. My student Marc Roy points me to a recently decided Canadian Federal Court of Appeal decision of interest: Brown v. Canada.  Marc describes the case as follows:

The Federal Court of Appeal decided against a novel argument presented by self-represented taxpayer whose business losses the CRA had denied. In his appeal, Ian Brown raised, along with a more technical argument, an argument that the entire Income Tax Act is void as a constitutional matter “due to vague and convoluted interpretations in the [Act].”

His argument was essentially that the definitions in s. 248(1) of “business,” “employee,” “employment,” “person,” and “taxpayer,” are incomplete and render the Act unconstitutionally vague. These are inclusive definitions, a non-exhaustive style frequently used to define terms in the Act, which leaves room for the defined words to encompass things not explicitly contemplated in the statutory definition.

Unsurprisingly, the Court rejected Mr. Brown’s challenge to these terms and to the act as a whole, walking quickly through the approach to vagueness — a law is only unconstitutionally vague if it is so imprecise that it fails to provide sufficient guidance to legal debate. The court indicated that even if these terms were entirely undefined, there is sufficient meaning that their precise definitions could be, and beyond their inclusive definitions are, judicially determined according to their ordinary meanings in accordance with standard approaches to statutory interpretation.

This case nonetheless raises the question of access to justice for individual taxpayers. It is not unfair to note that the Income Tax Act and its interpretations are at times incredibly convoluted, and it may be impossible for an individual without legal training to accurately and confidently determine her tax liability without costly advice from tax professionals. As in criminal law, in tax ignorance of the law is no excuse — but ordinary persons’ meaningful access to this knowledge is increasingly illusory.

Thanks to Marc, for this succinct summary.

Tuesday, January 13, 2015

Report by UN Special Rapporteur on Tax and Human Rights

UN Special Rapporteur Magdalena Sepulveda Carmona recently posted this Report of the Special Rapporteur on Extreme Poverty and Human Rights; of interest. Here is the abstract:
In the present report, the Special Rapporteur on extreme poverty and human rights presents fiscal policy, and particularly taxation policies, as a major determinant in the enjoyment of human rights. Taxation is a key tool when tackling inequality and for generating the resources necessary for poverty reduction and the realization of human rights, and can also be used to foster stronger governance, accountability and participation in public affairs. She outlines relevant human rights obligations to guide and inform State revenue-raising practices, including the duty to use the maximum available resources for the realization of economic, social and cultural rights. She also analyses the questions of how the principles of non-discrimination and equality and the duty of international cooperation and assistance should inform taxation policies at the global and national levels. After assessing how revenue-raising policies and practices can be strengthened through a human rights-based approach, she makes recommendations for fiscal and tax policies that are grounded in human rights and can lead to poverty reduction, sustainable development and the realization of transformative rights.

Friday, January 9, 2015

Lux Leaks: Revealing the Law, One Plain Brown Envelope at a Time

I recently published the above titled article, now available on SSRN here.  Abstract:
A group of journalists recently revealed “LuxLeaks”: a set of documents showing that Luxembourg’s tax authority has been systemically delivering secret deals to multinationals. In this column, I explain why LuxLeaks has revealed a feature, not a bug, in the international tax system. Governments around the world have intentionally placed much of international tax law outside of public view -- in letter rulings like Luxembourg’s, but also in other agency-level decision-making processes, notably in the context of tax treaty dispute resolution. The outcomes of these confidential processes are surely the world’s largest collection of the “real” law of international taxation. But law should not be something discovered through leaks to journalists. Lawmakers could alter this flawed status quo with greater disclosure. I conclude that they don’t appear to favor this approach, but they should.

Thursday, January 8, 2015

UPDATE: China does NOT follow US lead, taxing its global diaspora. (If they did, it would be a terrible idea).

This is an update of an earlier post. Earlier today I wrote that the NY times reported that China is embracing US-style citizenship-based taxation, by enforcing "a little-known and widely ignored regulation: Citizens and companies must pay domestic taxes on their entire worldwide incomes, not just on what they earn in China." The update is that this is entirely wrong, and that the NY Times just completely mangled this story by failing to understand the difference between defining income and defining residence (a distinction to which I alluded in my original post, below).

The reality is discussed at length by Eric over at Isaac Brock, who explains that "No, China does not have citizenship-based taxation." Eric's interpretation has been confirmed to me by a couple of people I know who are Chinese tax experts. So, I invite you to go there to read the full account, which I won't repeat here except to quote the takeaway, which is:
China as a country has many flaws and lacks many freedoms, but at least it uses the same basic system of taxation followed by nearly every democracy and dictatorship: a system which avoids placing unreasonable barriers in the way of the basic human right to leave a country.
Thanks to Eric and thanks to my colleagues who took the trouble to write me personally to correct the record. I hope that the Times acknowledges the errors and writes a new article on the subject to confirm that yes, the US is alone in its comprehensive treatment of non-residents as if resident solely on the basis of legal status as nationals.

In my earlier post I noted that last year when reviewing constitutional articulations of the taxing power, I noticed that China's constitution would suggest that its tax authority could have a global reach:
Article 56: It is the duty of citizens of the People's Republic of China to pay taxes in accordance with the law.
Accordingly, though it seems that China's constitution leaves open the possibility for China to follow the flawed US approach, it thankfully does not. The Times reported that the move would "[put] China on the same side as the United States in a global debate over whether taxation should be primarily national or global," and then says "On the other side of the issue are European nations, Japan, Australia and Canada, all of which tax people within their borders but exempt most expatriates and overseas subsidiaries from paying income taxes in their home countries."

This is not quite right. There is a global debate about taxing multinational companies on their worldwide (group) incomes, or not. However, there is no global debate about taxing individuals on the basis of their nationality. There is the United States, and then there is the rest of the world, with a very few and very limited number of exceptions (discussed below). If China were to align with the United States on this, it would be very big news not just for the global Chinese diaspora, but also for the ongoing OECD project on automatic exchange of information and for FATCA, because both regimes will struggle to implement the impossible demands of birthright tracing, which is necessary to enforce citizenship taxation.

The taxation of citizenship is about the definition of tax residence, rather than the definition of income.  Many or perhaps most developed countries tax all individual residents, regardless of nationality, on their worldwide incomes. This makes sense because taxation is the pooling of resources for shared expenditures, and nationality and citizenship are irrelevant to this project. It would be absurd to only require citizens and nationals to pay for health care, schools, roads, police, courts, financial systems, etc, when the population using all of these goods and services includes noncitizens and nonnationals. Likewise,  it is absurd to expect individuals to pay taxes in your country merely because your citizenship laws have conferred a legal status on them.

As a result, the OECD's AEoI project envisions a global system to identify the tax residence of every individual that owns virtually any financial asset, anywhere in the world, so that governments can assess their residents' tax obligations. The US project on FATCA goes further, requiring the global system to identify the nationality of every individual that owns virtually any financial asset, anywhere in the world. It won't be easy to build the OECD's residence identification database, but it is perhaps possible, with the help of tax treaties that resolve dual-residence problems. On the other hand, if the whole world gets into the business of nationality identification, we are going to have problems. This involves tracing bloodlines and will quickly become extraordinarily complicated, if not impossible, as we have already seen with FATCA.

Every income tax system necessarily has extensive residence assignment rules, including the United States; it is just that the United States also includes nationality in its definition, while almost every other country does not. The United States does this even if such persons achieved US nationality through the accident of birth, even if they never stepped foot in the United States and have never used any US goods or services of any kind, even if they are also citizens and permanent residents of other countries from their birth, even if they have never has a social security number or a US passport, even if they do not know that that they are US nationals, and even though the claiming of persons as subjects by birth by a distant sovereign was the foundation for America's war for independence.

All other nation-states tax on the basis of residence, not nationality, with a few minor and limited exceptions. Here they are:
  • Eritrea taxes nonresident citizens permanently, at a reduced flat rate of 2% of worldwide income. It does this to finance an ongoing war, and had been denounced by the United States and the UN for the practice.
  • Finland treats nonresident citizens as tax resident for three years after the emigrate unless they demonstrate that they no longer have any ties to Finland. 
  • France treats nonresident citizens as permanent tax residents if they move from France to Monaco, per a treaty between the two nations.
  • Hungary treats nonresident citizens as permanent tax residents of Hungary, unless they also have another nationality or reside in a country which has a tax treaty with Hungary. 
  • Italy treats nonresident citizens as permanent tax residents if they move to a blacklisted tax haven unless they demonstrate lack of ties to Italy. 
  • Spain treats nonresident citizens as tax residents for five years following a move to a blacklisted tax haven.
  • Turkey treats nonresident citizens as permanent tax residents if they work for the Turkish government or Turkish companies but exempts income that is taxed by the country where it is earned. 
Some countries used to but no longer practice citizenship-based taxation:
  • Bulgaria used to treat nonresident citizens as permanent tax residents, but ended the practice with the adoption of a new income tax in 1998. 
  • Mexico used to treat nonresident citizens as permanent tax residents, but ended the practice with the adoption of a new income tax law in 1981.
  • Myanmar used to tax the foreign income of nonresident citizens at a flat rate of 10% but ended the practice in 2012. 
  • The Philippines used to tax the foreign income of nonresident citizens at reduced rates of 1 to 3% but ended the practice with the adoption of a new tax law in 1998.
  • The Soviet Union used to treat nonresident citizens as permanent tax residents, but after the country was dissolved in 1991, none of its successor states continued the practice. 
  • Vietnam used to used to treat nonresident citizens as permanent tax residents but ended the practice in 2009. 
We can easily see how global AeOI might make it possible to reverse this trend. If China was to adopt citizenship taxation and exert the same pressure as the US has with FATCA to achieve it, two very important countries would be stretching the residence definition beyond the OECD's global AEoI database. Bearing the extra costs and burdens of these extra measures would surely convince other countries to consider following suit.

That's why I think this would be a terrible idea. Fundamentally, taxing on the basis of citizenship is wrong from a normative point of view. But it is also a terrible idea for practical reasons. First, it's invasive (to say the least) to make access to basic bank accounts contingent on tracing bloodlines. Second, doing so globally, including forcing the world's poorest countries to play along, is a huge waste of administration resources by everyone. Third, creating global asset databases for tax exchange purposes creates massive security issues that have not been assessed in light of the fact that this will be done on the basis of nationality rather than residence. Finally, and in the long run, taxing on the basis of citizenship effectively restricts labour mobility, serving a goal I have not heard explained by anyone.

In a world in which state's tax subjects include their globally dispersed diasporas, global asset information exchange will make it a duty of every state to sort its population for differential treatment according to the birthright laws of the other states. This has never been an agenda item on any of the discussions I have seen regarding tax information exchange. It should be.

Monday, January 5, 2015

Top Tax on Twitter

I was very pleased to be included on a list of the top tax feeds on twitter, recently compiled by Kelly Phillips (aka @TaxGirl). I follow many of those listed, especially in the IRS, government, and media categories. Many useful sources here.

Wednesday, November 26, 2014

Canada Revenue Agency accidentally sent a database full of confidential taxpayer info to the CBC

From the Toronto Star: CRA blames human error for disclosing confidential tax data to CBC
The Canada Revenue Agency confirmed late Tuesday that it has accidentally disclosed confidential taxpayer information to the CBC. 
The agency said the document was “accidentally released” through human error and acknowledges this “constitutes a serious breach of privacy.” 
CBC reported that the tax information contains data about hundreds of Canadians — many of them rich and famous — including their home addresses. 
...The CRA said in a release late Tuesday that when it became aware of the breach, officials immediately contacted the CBC to retrieve the documents. 
The agency said the CBC ”regrettably” chose to disclose names and a response from the network was not immediately available. 
However, in its story on the breach, CBC News made clear it was not disclosing much of the information it had. The network said it was "withholding most details from the list, apart from the names of some of the people cited, out of respect for privacy."
Oops, presumably.

Questions on the Canada-US FATCA Agreement

MP Ted Hsu has presented an order paper question (OPQ 816) on the topic of the unusual process surrounding Canada's adoption of an intergovernmental agreement on FATCA. I have noted many times the anomalies surrounding the US approach to these agreements, and in Canada's case these anomalies appear to have been compounded by odd and unexplained internal procedural decisions. I am working on a paper on this topic but it is slow going, not least because it is tremendously difficult to study Canadian treaty policy--it is vague, features unwritten rules that are apparently made to be broken, and written policies that lack any semblance of meaningful procedural limitations or parameters. If there is a rule of law here, I have yet to find it.

Mr. Hsu's inquiry follows on a statement made by Peter Van Loan, Government House Leader, in the House on Monday, April 28, 2014, that the government, "actually did" comply with its own treaty tabling policy, in response to a point of order raised by MP Marc Garneau back in April regarding the failure of the Government to table the IGA prior to ratification. Mr. Hsu seeks a number of details from the Government; I take it that answers are due on January 26, 2015. Some of the questions clearly illustrate that treaty-making in Canada is really quite a mysterious process. Here are a few of the OPQ highlights--just a small selection of the many detailed aspects of the question:

  • was an exemption to the government’s Policy granted with respect to the Agreement;
  • on what date was the Agreement ratified; 
  • what steps and measures are in place to ensure that Parliament is informed of exceptions being granted to the Policy; 
  • what does “urgent” mean in the context of the Policy; 
  • did the Minister of Foreign Affairs “inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification” per the Policy; 
  • is the Government House Leader always informed of exceptions and exemptions under the Policy and, if so, how; 
  • is the House always informed of exceptions or exemptions under the Policy and, if so, how;
  • if the Agreement could have been tabled earlier in Parliament [than it was], (i) why was it not, (ii) what decisions were made in this regard, (iii) who made these decisions, (iv) how, (v) on what basis?
All good questions and I, for one, would like to know the answers, not just for better understanding the meaning and implications of the IGA in terms of both its legal status and its substance, but also for understanding the treaty process in Canada more generally. It is a maddeningly opaque regime.

Monday, November 17, 2014

Today at McGill: Dietsch on Catching Capital

Peter Dietsch, Professor of Philosophy at the Universit√© de Montreal, joins us today as the final speaker in the Spiegel Sohmer Tax Policy Colloquium at McGill. His presentation will focus on the opening chapters of his forthcoming book, entitled "Catching Capital." Here is the abstract:
 When individuals stash away their wealth in offshore bank accounts and multinational corporations shift their profits or their actual production to low-tax jurisdictions, this undermines the fiscal autonomy of political communities and contributes to rising inequalities in income and wealth. These practices are fuelled by tax competition, with countries strategically designing fiscal policy to attract capital from abroad. 
Building on a careful analysis of the ethical challenges raised by a world of tax competition, the book puts forward a normative and institutional framework to regulate the practice. In short, individuals and corporations should pay tax in the jurisdictions of which they are members, where this membership can come in degrees. Moreover, the strategic tax setting of states should be limited in important ways. An International Tax Organisation (ITO) should be created to enforce the principles of tax justice. 
The author defends this call for reform against two important objections. First, Dietsch refutes the suggestion that regulating tax competition will harm economic efficiency. Second, he argues that regulation of this sort, rather than representing a constraint on national sovereignty, in fact turns out to be a requirement of sovereignty in a global economy. The book closes with a series of reflections on the obligations that the beneficiaries of tax competition have towards the losers both prior to any institutional reform and in its aftermath.
The presentation will again take place in the Seminar Room of the Institute for Health and Social Policy, Charles Meredith House, 1130 Pine Ave., Montreal, beginning at 2:35 pm. As always, the colloquium is open to all: students, faculty and the general public are welcome.