Thursday, May 26, 2016

What does it mean to implement BEPS?

Today I took part in a panel discussing the topic of "Life After BEPS," at which I laid out the three categories of BEPS commitments in three slides. These categories are "minimum standards" (there are four), "recommendations" (there are several) and "best practices" (there are many). These are defined terms in BEPS world but it is already fascinating that there is some category blurring going on in the discourse surrounding implementation. I'm interested in that blurring because of course we are in the midst of a major cycle of law- and norm-making in international tax, and "what countries actually agreed upon" is really going to matter pretty soon, as the difference between convergence and divergence depends on a meeting of the minds at the level of rulemaking. This will play out through conflict and resolution at the domestic and international level in the form of both hard law (multilateral and bilateral agreements and domestic law changes) and soft law (OECD models, guidelines, and peer monitoring). In case they are of interest, I thought I would post my three slides here.




Tuesday, May 17, 2016

Kill Switches in the New US Model Tax Treaty

I posted previously on the new US Model, which was released in February of this year; I've now posted my article, co-written with McGill PhD student Alex Ezenagu, on the "kill switch" provisions in the new model. These provisions are found in the new articles and definitions involving special tax regimes and subsequent law changes, which would allow countries to switch on and off specified treaty benefits if their treaty partners get too aggressive in the ongoing race to the bottom on tax.

Here is the abstract:
The new US model income tax treaty contains an unusual addition: mechanisms for the parties to unilaterally override the negotiated treaty rates in specified circumstances. Previewed last year in proposed form—a first for Treasury—these new mechanisms work as kill-switches, partially terminating the treaty as to one or both treaty partners. The idea is to forestall a more problematic outcome, such as an enduring breach of one of the parties’ expectations, or the opposite, a complete termination of all the treaty terms in the face of such a breach. Yet embedding a kill-switch in a treaty creates distinct legal, procedural, and political pressures in the tax-treaty relationship that implicate treaty negotiation, ratification, interpretation, and dispute resolution. Kill-switches also communicate a defensive tenor in the tax treaty relationships among many countries. This Article analyzes the new kill-switch provisions and concludes that their introduction in the U.S. Model reflects the steady deterioration of tax treaties from essentially diplomatic documents premised on the good faith of the parties to detailed contracts drafted in anticipation of the opposite.
It has long been assumed that tax treaties are uncontroversially technical agreements that no one outside of tax circles cares about or pays attention to--including, it seems, all too many lawmakers tasked with adopting these agreements into law. But with the US Treasury and the EU competition commissioner trading barbs over the fence about what seems right or fair when it comes to global tax competition and coordination, this assumption might be changing. The consensus built up over decades by OECD nations is under stress as the pressure for coherence in the international tax realm increases. Treasury released these provisions in draft from last fall, expressly in order to influence the OECD's work on BEPS. Now that the provisions are in the model, it remains to be seen how they will play out as BEPS, currently at a mid-cycle of norm making, moves from the articulation of principles to the implementation phase. This article doesn't provide answers or predictions about the future but it examines one aspect of the ongoing contestation and tries to situate it in historical and contemporary terms.

Monday, May 16, 2016

Tax Coop 2016: "Winning the Tax Wars" May 23-24

Tax Coop and the World Bank are hosting a conference on tax competition and cooperation to be held in Washington DC on May 23-24. As last year, I've constructed the debate, which this year will be livestreamed on May 23 at 16:15 EST.  I'll post the link when I have that information. At last year's conference, Dan Mitchell (Cato) and Richard Murphy (TJN) put corporate taxation on trial, debating the continuing viability of this tax in the face of technological innovation and economic globalization. This year's debaters are Alison Holder of ActionAid and Veronique de Rugy of the Mercatus Center at George Mason University.

They will debate the following:


This question will be explored through a series of three resolutions, as follows:
  1. First, be it resolved that: tax competition harms developing countries by reducing their capability to raise fiscal revenue to finance physical and social infrastructure needed for economic growth and social inclusion.
  2. Second, be it resolved that: tax competition increases developing countries’ reliance on foreign aid, making them more vulnerable to aid volatility. 
  3. Third, be it resolved that: tax competition aggravates existing income disparities between developed and developing countries.
Arguing the “affirming side” of each resolution will be Alison Holder of ActionAid. Arguing the “opposing side” of each resolution will be Veronique de Rugy of the Mercatus Center at George Mason University. Evidence from all jurisdictions will be admissible. The emphasis will be on persuasive, clear, and logical argumentation. The debate will proceed in four rounds and will be moderated and judged by Louise Otis of McGill University and Jay Rosengard of Harvard University. Last year's debate was definitely a highlight of the conference and I look forward to hosting Ms. Holder and Ms. DeRugy for this year's event. 

The full conference program features a slate of distinguished speakers from around the world and across public, private, and academic sectors.  Registration is free; additional program and speaker information available here and you can follow @taxCoop on twitter for updates and links. 







Wednesday, May 11, 2016

Citizenship-based Taxation and FATCA

I am occasionally asked for a list of the things I've written or presented about FATCA and citizenship-based taxation, and decided I may as well post it here. I have a newer article on the adoption of the IGA in Canada, will post that soon and add to this list.

On the personal impact of CBT/FATCA:


Providing Legal Analysis of FATCA and the IGAs:
Videos and Podcasts:






Tuesday, May 10, 2016

Tax competition redux: the Kansas-Missouri tug-of-war

Image result for tug of war
Although I dislike the use of quasi-military imagery to describe tax competition, I think "tug-of-war" is more commonly used than "rope-pulling contest" and this is, I think, a good image to describe the phenomenon. This Planet Money podcast brilliantly captures the rope-pulling contest that characterizes tax competition among US states, which is a version of the same game playing out among the nations of the world. It should not escape attention that the taxes at stake in this story are those on property, but the two states are also involved in a race to the bottom on corporate tax--Kansas was featured in a prior Planet Money podcast (The Kansas Experiment) because its Governor is a true believer in a Laffer curve that tips at single-digits. 

The ending to this story is only surprising to those not paying attention to tax competition. Like any good rope-pulling contest, it ends with most of the people laying in the mud or on each other, and a short-lived victory for the last ones standing since there is always someone else willing to pick up the rope and tug again.





Thursday, May 5, 2016

Azémar and Dharmapala on Tax Sparing and Foreign Aid

Céline Azémar  and Dhammika Dharmapala recently posted "Tax Sparing, FDI, and Foreign Aid: Evidence from Territorial Tax Reforms," of interest. Tax sparing refers to the intentional exemption of income from tax by two countries working cooperatively. The idea of tax sparing is to ensure that tax incentives granted to investors by source countries are not “cancelled out” by income taxation in the residence country. This is typically accomplished by ensuring that the residence country gives credit for the amount of tax that would have normally been paid to the source country, instead of a reduced (or eliminated) amount that was actually paid according to an incentive scheme. In other words, tax sparing is treaty-based double nontaxation.

Here is an example of tax sparing from Article 21 of the 1993 tax treaty between Indonesia and the United Kingdom,:
For the purposes of paragraph (1) of this Article, the term “Indonesian tax payable” shall be deemed to include any amount which would have been payable as Indonesian tax for any year but for an exemption or reduction of tax granted for the year….”    
In this type of provision, an amount of tax would be credited by the taxpayer’s home country (presumably the UK) in accordance with the standard double tax relief provisions of the treaty even though not ultimately paid to the source country (presumably Indonesia).

If the residence country does not tax foreign income (i.e., is an exemption or territorial system as the UK is now), tax sparing would be pointless since the incentive in the source country accomplishes the desired result of nontaxation unilaterally. Yet this paper finds a surprising result: tax sparing increases FDI even after a treaty partner switches to a territorial system.

Here is the abstract:
The governments of many developing countries seek to attract inbound foreign direct investment (FDI) through the use of tax incentives for multinational corporations (MNCs). The effectiveness of these tax incentives depends crucially on MNCs' residence country tax regime, especially where the residence country imposes worldwide taxation on foreign income. Tax sparing provisions are included in many bilateral tax treaties to prevent host country tax incentives being nullified by residence country taxation. 
We analyse the impact of tax sparing provisions using panel data on bilateral FDI stocks from 23 OECD countries in 113 developing and transition economies over the period 2002-2012, coding tax sparing provisions in all bilateral tax treaties among these countries. We find that tax sparing agreements are associated with 30 percent to 123 percent higher FDI. The estimated effect is concentrated in the year that tax sparing comes into force and the subsequent years, with no effects in prior years, and is thus consistent with a causal interpretation. 
Four countries - Norway in 2004, and the U.K., Japan, and New Zealand in 2009 - enacted tax reforms that moved them from worldwide to territorial taxation, potentially changing the value of their preexisting tax sparing agreements. However, there is no detectable effect of these reforms on bilateral FDI in tax sparing countries, relative to nonsparing countries. 
These results are consistent with tax sparing being an important determinant of FDI in developing countries for MNCs from both worldwide and territorial home countries. We also find that these territorial reforms are associated with increases in certain forms of bilateral foreign aid from residence countries to sparing countries, relative to nonsparing countries. This suggests that tax sparing and foreign aid may function as substitutes.
The link to foreign aid is intriguing: it looks like compensation for the loss of a benefit. The OECD's Action Plans to counter BEPS are specifically designed to eliminate benefits like those created by tax sparing provisions. Is BEPS the end of tax sparing? If so, will BEPS also result in increased foreign aid?


Wednesday, May 4, 2016

This Friday in London: Conference on The Changing Shape of Tax Avoidance

This Friday, I'll be in London participating in a conference on tax avoidance and evasion, hosted by the Journal of Tax Administration. Here is the program:

11.00 – 11.15 Welcome and Introduction

11.15 – 11.50 Matthew Rablen: Optimal Income Tax Enforcement in the Presence of Tax Avoidance

11.50 – 12.25 Maya Forstater: Can Stopping ‘Tax Dodging’ by Multinational Enterprises Close the Gap in Development Finance?

12.25 – 13.00 Allison Christians: Tax Avoidance in a World of Aggressive Tax States

13.00 – 13.45 Lunch

13.45 – 14.15 Federica Bardini: The “Ius Commune Europeum” on Tax Avoidance

14.15 - 14.45 Shu-Chien Chen: The Common Pattern of the “Tax Avoidance Concept” in the EU and USA

14.45 – 15.00 Discussion

15.00 – 15.20 Break

15.20 – 15.55 David Duff: Tax Avoidance – Causes, Consequences and Responses

15.55 – 16.30 David Quentin: Tax Risk Mining and Corporate Responsibility for Human Rights

The venue for this conference is Friends House, 173 – 177 Euston Road, London.

Here is the abstract for my presentation:
Tax Avoidance in a World of Aggressive Tax States 
Media coverage of tax “dodging” by high profile elites and multinational companies leads the public to believe that tax avoidance happens when individuals act to thwart the efforts of the state. Confined to the domestic arena this may be an apt description, and a problem anti-avoidance regimes are designed to solve. But on an international scale, tax avoidance is not a one-person show. Instead, it involves interactions among four types of actors: individuals, home states, host states, and intermediary states. International tax avoidance persists largely because home, host, and intermediary states intentionally use their tax systems to lure investment away from other jurisdictions that impose higher tax burdens, and individuals do their best to exploit available opportunities to the fullest. In deciding whether and how law should be used to prevent international tax avoidance, the goals and interests of each of the four actors must be examined.



Kadet and Koontz: Are US MNCs profit shifting their way to "accidental partnership" status?

Jeffery Kadet and David Koontz have posted a new paper on SSRN entitled Profit-Shifting Structures and Unexpected Partnership Status, in which they argue that the way US-based MNCs share profits and risks with their global subsidiaries might actually result in their being in partnership with these companies for tax purposes, thus triggering interesting potential US tax consequences for the whole group.  Here is the abstract:
Many U.S.- and foreign-based MNCs that have implemented carefully researched tax strategies to reduce their income taxes are coming under increased scrutiny. Most MNC tax strategies involve businesses they conduct worldwide, but which are managed from the U.S. These strategies have several factors in common: 
(i) Companies established in tax havens or otherwise structured to attract little if any tax;
(ii) Intercompany agreements placing commercial risk and intangibles in such companies, thereby shifting profits to such companies;
(iii) Conduct of centralized activities and functions in the U.S. (in addition to group senior management), which are integral to and which critically benefit all MNC group members conducting that line of business (examples of such activities include product development, product sourcing, management of contract manufacturing process, management and control of internet platforms, etc.); and
(iv) No significant changes made to their business operations when tax strategies were implemented, meaning potentially that these structures lack economic substance.
This article suggests that in their haste to create these profit-shifting structures, the MNCs and their advisors may have overlooked two important weapons in the IRS’s arsenal to attack profit-shifting strategies. 
First, because of the centralized activities and functions within the U.S. that are integral to the business conducted by various group members (including both U.S. and foreign group members), an MNC may inadvertently create through its actions and intercompany contracts a partnership that is recognized solely for U.S. tax purposes. Once such a partnership exists for tax purposes, the various group members become its partners and the partnership conducts the applicable worldwide line of business. 
Secondly, because the partnership conducts a portion of its activities through U.S. offices and other facilities, the foreign group member partners are treated by statute as being engaged in a trade or business in the U.S. This makes them subject to U.S. taxation on their share of effectively connected income (ECI) earned by the partnership. U.S. taxation will be imposed at effective rates of 54.5% or higher. (The effective rate could be 38.25% or higher if a tax treaty applies.) 
In the absence of a partnership, whether a foreign group member is engaged in a U.S. trade or business is a factual determination that may be difficult for the IRS to establish. However, to their collective detriment, MNCs whose factual situations support the existence of a partnership that conducts such a U.S. trade or business have made it a slam-dunk for the IRS to conclude that the foreign group member partner is so engaged. The U.S. tax rules are clear – if a foreign corporation is a partner in a partnership engaged in a U.S. trade or business, then that partner will be so engaged. All MNCs with this general fact pattern and their auditors should re-examine existing profit shifting structures to determine if they could withstand an IRS charge asserting both the existence of a partnership and taxable ECI.
An interesting perspective and worth a read.

Thursday, April 28, 2016

May 4: International Tax Governance in Action at Tilburg University

Next week, I will be participating in a workshop at Tilburg University in the Netherlands on the topic of International Tax Governance, a timely topic especially given the recent developments in the coordination of the international organizations, the expansion of the OECD's global forum idea to monitor BEPS, the impact of the state aid cases within and beyond Europe, and the increasing role of NGOs in shaping international tax policy. Here is the program:
10:00- 10:30 Welcome and registration
10:30- 11:00 Opening
Cees Peters (Tilburg University): International Tax Governance in Action
11:00- 12:30 Session 1 - Transparency
Edwin Visser (PwC): reaction of MNC's to transparency pressure: CbCR and CSR discussion (30 minutes + 15 minutes discussion)
Maaike van Diepen (Tax Justice Network): The perspective of an NGO (30 minutes + 15 minutes discussion)
12:30- 13:30 Lunch break
13:30- 15:00 Session 2 - EU State Aid
Allison Christians (McGill University): a US perspective - the reaction of the US government and US MNC's
Anna Gunn (Leiden University): an EU perspective - the reaction of the EU Member States and EU MNC's
15:00- 15:30 Break
15:30- 17:00 Session 3 - Compliance of states with new norms of international taxation
Carla De Pietro (Tilburg University and University of Bologna): Implementation of the OECD BEPS measures (Action 6) in the light of the relationship between international and EU law.
More details and registration information are here.





Tuesday, April 19, 2016

Evasion, Avoidance, and Bashing Panama in a World of Aggressive Tax States

I've talked to a few journalists and commented a bit on the Panama Papers (e.g. here at 6:09 and here) but I've refrained from writing much to date because I am uneasy about a couple of central themes in this story: first, the constant confluence of tax evasion and tax avoidance, which are two completely different phenomena that require two very different responses in my view, and second the bashing of Panama as if only bad things can be done there, so anyone who does anything there from anywhere else must be doing a bad thing.

I am uneasy about this bashing because, although I think there are bad guys doing bad things in Panama, I also think there are bad guys doing bad things all over the world and I don't like Panama being singled out; I am also wary of suggesting that in a world of global trade and investment flows, anything and everything done through or with Panama must eternally be tinged with a sense of wrongdoing. This sense seems to imbue the imagination in the campaigns to "shut down the tax havens." What, exactly, does that mean? Does it mean that some countries, because someone decides they are mostly bad actors, must be effectively cut off from the global financial system and no one must be allowed to transact with or in these countries from the outside? What if most of the world are actually bad actors, each scheming to use its tax system to undermine and undercut the others? That's essentially the vision drawn by the OECD in countering BEPS, so we will run into some problems if we take this reasoning to its logical conclusion. But if this is not the idea behind shutting down tax havens, then what is envisioned, exactly?

Tax justice advocates seem to envision an invasive global regulatory regime in which every person in the world will have all of their assets and financial information catalogued and tagged and made public to everyone else, in order to make sure no one can break any tax rules. If this is being done just for tax--that is, if this is what it takes to make the income tax "work," I am not sure that the income tax is worth all of that trouble and everything given up to achieve it. That includes privacy, which appears to itself have become a suspicious word in certain circles, as if only those doing bad things have a desire to keep anything about their lives private. Let us recall Glenn Greenwald's words on why privacy should not come to be seen as a sinister desire. It is possible to break the tax law like it is possible to break any other law. But is requiring everyone to show all of their assets to everyone else in order to prove no laws have been broken a valid response to this enduring problem? I cannot agree with this Orwellian vision of the world. I also do not think this view is sensible if the issue is really driven by tax. If it is, then surely we can find a less invasive way to fund public goods and services.

This brings me to the evasion/avoidance point, which I find being abused just as much by lawmakers and policy advocates as it is by journalists who don't know any better.

Tax evasion is a crime that involves hiding things from a legal authority. Tax avoidance is not a crime that involves hiding: it is achieved in full view of the legal authorities. The former is a very very difficult problem but is not primarily a tax policy problem. Instead it is primarily a global financial system problem that is created, like most global financial system problems, by virtue of the difficulty of regulating behaviours in a world in which technology has moved us far beyond the frontiers of the nation state.

On the other hand, 'aggressive" tax avoidance (loosely speaking; more analysis here)--that is, avoidance not intentionally allowed by rules such as those to defer tax on retirement savings--is a tax policy issue. Taxpayers and their advisers are always going to cook up new schemes to get around inconvenient tax rules. Knowing this, regulators must decide whether and how to react. They may react with any number of tools that create an infinite call and response loop among regulators, taxpayers, administrators, and judges. These include such things as general and specific anti-avoidance rules, uncertain tax position disclosure, and random audit strategies. None of these things has the first thing to say about how to deal with a corrupt government official who steals money from the public fisc and invests it in US and European stocks and bonds through a maze of trusts and companies formed in other jurisdictions. It's just a totally different problem.

I know and understand that bad guys are always lurking around to defeat the tax law, as they are in any regulatory field. I don't have any special insights about how to deal with corruption and criminality. But in my experience with tax, when a government moves to "crack down" on bad guys, the really serious criminals--including government officials themselves--all too often escape while everyone else finds themselves increasingly tracked, surveilled, and treated like criminals even as the resources to cope with fixable tax policy flaws diminish. I don't have any answers for these worries.

Thursday, March 17, 2016

Soft Tax Law & Multilateralism: Modifying treaties with anti-BEPS measures

As observers of global tax policy know, international tax issues are dealt with in bilateral treaties that more or less adhere to a 'model' tax treaty developed and periodically updated by the OECD (provisions in a rival UN Model are occasionally invoked, and the US has its own model with its own distinctions and idiosyncrasies). There are those who have long lamented the problem of having thousands of bilateral agreements that can't be easily or quickly updated when the OECD revises the model (thus curbing the impact of OECD soft law).

As part of the base erosion and profit shifting (BEPS) initiative, the OECD is currently developing a
"Multilateral instrument on tax treaty measures to tackle BEPS" which would be used to 'modify' all existing tax treaties in force among signatory countries. The OECD says this mechanism (which it calls an 'innovative approach') 'would preserve the bilateral nature of tax treaties' even as it modified all existing bilateral treaties 'in a synchronized way'. The OECD says there are "limited precedents" for modifying bilateral treaties with a multilateral instrument.

But are there really any precedents at all? I couldn't think of any off-hand. A quick check with a few international law colleagues yielded few comparators. Tim Meyer suggested the EU harmonizing efforts on Bilateral Investment Treaties (BITs) as a candidate, albeit noting that this does not contemplate directly overriding existing BITs but requires EU members to change their bilateral arrangements to conform with EU investment policy.

Tim also made the interesting observation that"treaties that reference customary international law standards, such as BITs’ reference to the minimum standard of treatment" could be overridden in a somewhat similar fashion. He explained that "[i]f custom changed, such as through the promulgation of soft law documents or multilateral treaties, it would change the BITs that incorporate the customary standard. That isn’t exactly the same thing [as the new OECD multilateral instrument], but similar."

The OECD's work in developing "global consensus" has in the past led some to describe OECD standards as "soft law" and others to suggest that the OECD may be understood to articulate customary international tax law; moreover the OECD has itself now taken to describing its model as soft law (including in its 2014 report on the multilateral instrument). I have urged caution in defining OECD proclamations as soft law or customary law given the OECD's exclusive membership of mainly rich countries, which excludes all of the BRICs and most of the rest of the world, as I think the nomenclature lends an imprimatur of legitimacy to OECD proclamations that may not be deserved. But it seems clear that the BEPS action items, and the new global forum to "monitor compliance" with them, are intended to overcome the exclusivity problem while endowing OECD norms with ever-greater law-like effect (without offending the unicorn that is "tax sovereignty").

It seems likely to me that a multilateral agreement that modifies existing tax treaties is actually intended to ultimately replace those treaties, making small and incremental modifications until the underlying bilateral treaties become superfluous or extinct. Accordingly I view the OECD's multilateral 'modification' function to be an exercise in creeping harmonization as well as "ossification" (or maybe transformation) of soft law into hard law.

Adding together the other elements of BEPS, including the new global forum to compel national compliance with 'minimum standards' as they develop, I recently suggested that the OECD's tax folks are giving birth to a new global tax order complete with rules, audits, and reform processes. This is perhaps not the order envisioned by those who have in the past called for global tax coordination in a supranational body for the sake of pursuing global tax justice. If the OECD-based regime is not fully supranational yet, it is close, and it looks increasingly inevitable once it sets a multilateral agreement in place.

There are many fascinating threads of soft law and public international law are at work in these developments. I recently came across an article by Jung-Hong Kim on the topic, entitled A New Age of Multilateralism in International Taxation?, abstract:
 With the OECD/G20 BEPS project, the current international tax landscape is facing challenges and changes unprecedented for the past several decades. This paper looks at the development of bilateralism and multilateralism in the current international tax regime, takes stock of the BEPS works and analyzes the proposed Multilateral Instrument. Then, the paper discusses the emerging multilateral tax order in international taxation. 
Historically, bilateralism has been the constant trend of tax treaties, and later multilateral tax treaties have emerged in some regional areas. There being some deficiencies with bilateral treaties such as dilapidation, delay in entry into force and vulnerability to treaty shopping, the experience of multilateral tax treaties can help build a foundation for future development of a multilateral tax treaty to complement the bilateral tax treaty network. 
With a caveat that BEPS output is fluid at this stage, drawing on the various examples of existing non-tax multilateral treaties, the Multilateral Instrument will be a desirable and feasible tool to reflect the necessary changes resulting from BEPS project. For Korea whose tax treaties need a systematic upgrade after a noticeable growth in quantity, the negotiation on the Multilateral Instrument of the BEPS project will be a great opportunity to revisit the existing bilateral tax treaties and to make appropriate amendments with bilateral treaty partners in multilateral format. 
Beyond BEPS, supposing that the work on the Multilateral Instrument results in a multilateral convention, the inevitable question is the emergence of a multilateral tax order. In terms of feasibility of such a multilateral tax order, there are both positive and negative sides. The positive side is that the relative success of Global Forum on Tax Transparency can be a guidance on the post-BEPS multilateral tax order. On the other hand, the phenomenon of diminishing multilateral trade regime and bilateral investment treaty regime seem to be a negative evidence. Another point to consider is the appropriate forum to manage the multilateral tax order. For this, there are two competing organizations, i.e., the OECD CFA and UN tax committee, each of which having some limit to be developed into an intergovernmental forum. 
After all, the essential question will be how those major players such as the U.S., EU, China, India etc. could build a consensus by compromising on the institutional and substantive aspects of the multilateral tax order. For now, for the emerging multilateral tax order to proceed on a sound basis, the work of the BEPS project should bear substantive and meaningful fruits. 
This is a useful contribution to the discussion and I would like to see more analysis on the OECD's developments, especially from the perspective of nonOECD countries that are being drawn in as BEPS Associates. I would be interested to hear from readers with thoughts on the public international law foundations and precedents, particularly any comparator regimes that I should be thinking about.