With the return of Canada's Parliament to business this week, debate theoretically should take place on Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting, a.k.a. the "Multilateral Instrument in Respect of Tax Conventions Act" (the official short title). But we can call it the BEPS bill since its job is to implement a set of consensus positions the OECD developed to eliminate "Base Erosion and Profit Shifting" by multinational taxpayers.
This BEPS Bill implements the OECD's MLI to Prevent BEPS, which is a multilateral treaty that amends existing bilateral tax treaties. The rationale is that countries were engaging in or at least facilitating BEPS, and they were often doing so through tax treaties, so a blanket change to a few thousand of these treaties was needed to prevent ongoing tax avoidance.
Given that the BEPS bill adopts one treaty to rule them all, Parliament might be expected to undertake careful scrutiny of its terms, but these expectations are not likely to be met. A study I completed with help from a very adept graduate student in 2016, entitled “While Parliament Sleeps: Tax Treaty Practice in Canada,” (published in the Journal of Parliamentary and Political Law / Revue de droit parlementaire et politique 10 (1) : 15-38, March / mars 2016 and available in draft form here), found that over a fifteen year period, Parliament has adopted legislation implementing 32 international tax agreements without a single standing vote occurring in the House of Commons at any point in the legislative process.
These 32 agreements collectively form over 750 pages of binding law in Canada, none of which was considered for more than two sittings at any stage of consideration in either the Senate or House of Commons.
In Canada, tax-treaty implementing legislation is generally introduced in the Senate, studied very little there, and then sent to the House of Commons where it receives even less attention. Although tax scholars focus, rightfully, on scrutinizing the substance of tax treaties, we should not be lulled into ignoring the process by which Parliament discharges its role in legislating tax treaty implementation. To that end, some of the debate in Parliament is downright disappointing.
For example, consider the most recent exercise (written after my study), when the Senate was seized with Bill S-4, whose official summary reads:
This enactment implements a convention between the Government of Canada and the Government of the State of Israel for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and an arrangement between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. It also amends the Canada–Hong Kong Tax Agreement Act, 2013 to add to it, for greater certainty, an interpretation provision.In a speech of only a few minutes on the bill, the Legislative Deputy of the Government Representative in the Senate stated:
It is urgent that we move forward with the study of this bill because if we want the agreements on double taxation to go into effect in 2017, the bill must receive Royal Assent by the end of 2016. Therefore, I invite all honourable Senators who wish to speak to this bill to do so as quickly as possible so that the bill may be referred to a committee as soon as possible.In total, the entire House Finance Committee's study took less than 15 minutes. The third reading debate in the Senate lasted less than 10 minutes and, after calling the bill a "no-brainer," a "marvellous bill," and "a continuity-of-government bill" that "does wonderful things for Canadian industry and consumers alike," the Senators continued with this exchange:
Senator Day: Should I tell anybody what this bill is about?Then followed a dubiously notable comment by Senator Plett that "I'd like to add my voice and simply say that this, again, is clear evidence that occasionally a good biscuit can be found in a garbage can."
Some Hon. Senators: No.
The idea that Parliament should rush to meet the government’s preferred timetable in what the Senate characterizes as a "garbage can" of a bill (or of a government--I am not sure which) is highly problematic. If it takes longer to scrutinize a bill, so be it. The government – for its part – didn’t leave Parliament much time in this case, having only introduced S-4 in the Senate on November 1st, 2016. By the time the Legislative Deputy of the Government Representative in the Senate got to make her speech on November 24th, the clock was ticking quickly toward the MPs' and Senators' winter break.
I single out this debate not only for the unprincipled concession to expedited timing, but particularly for the exchange that followed. A Senator asked the Legislative Deputy of the Government Representative in the Senate “In your opinion, does the bill before us pertain to our participation in the WTO?” The response: “I do not know much about this bill. However, I do know that it is important, that it is urgent that we move it along, and that it has significant consequences.”
Putting aside the carefree decision to speak to a bill one “does not know much about” and the apparent confusion about how the bill relates to the WTO (did the Senator mistake a tax treaty for a trade agreement?), it would be hard to characterize the limited early Senate Chamber debate as well-informed or thoughtful in any way. On the House side, the bill was fast-tracked – a motion passed by unanimous consent stipulated that “when the House begins debate on the third reading motion of the Bill, a Member from each recognized party, as well as a Member from the Bloc Québécois, may speak for not more than five minutes, with no question and comment period, after which the Bill shall be deemed read a third time and passed."
As such, in its last debate, the bill received less than 20 minutes of attention in the House with no questions –that is, each party spoke but there was no dialogue in substance. The bill received Royal Assent on December 15th, 2016.
This brings me back to the BEPS Bill, which actually bucks the trend by being introduced in the House of Commons instead of the Senate. This is important because even though Senate debates on tax treaty implementing legislation are limited (as evidenced above), the Senate is still the body that generally studies these matters and has nominally built up expertise. Because the general trend in Parliament is that the Chamber that receives a tax bill second is the one that studies it less, one is left to hope without confidence that the House will undertake its due diligence.
There is cause for concern with C-82. Unlike the other tax treaty implementing bills I studied, this was preceded by a ways and means motion that provided the text of the bill in advance. In other words, the Minister of Finance tabled a notice on May 28th that contained essentially what would become C-82. But, rather than debate the Notice, the House on June 19th deemed that motion agreed to and further deemed the BEPS bill formally introduced.
Without venturing too far into the procedural weeds, it is perhaps sufficient to observe that there could have been a debate on that ways and means motion. Instead, the decision in June deemed this motion adopted ‘on division’ – that is, dissent is indicated for the record but we don’t know who disagreed or on what basis because there was no actual debate on the record.
This leads me to wonder whether we’ll see an actual debate occur on the merits of C-82 if even its introduction was fast-tracked through deeming. I doubt it. After all, MPs (and Senators alike) often find tax matters confusing and technical. Maybe in this case especially, the whole things seems like a foregone conclusion since we are talking about an OECD initiative in which Canada has been involved over many years. Moreover, Canada's undertakings in the MLI are modest to say the least. Even so, that doesn’t mean these bills don’t deserve careful study since it is agreed that certain tax arrangements erode Canada’s tax base (cf: the recently decided Alta Energy case). It is much harder (and more costly) to re-negotiate and re-legislate (if need be) a treaty than to get things right the first time (for a discussion, see See Charlie Feldman, “Parliamentary Practice and Treaties” (2015) 9 J. Parliamentary & Pol. L. 585). Adopt in haste, repent at leisure ought to be a mantra for tax treaties.
Unfortunately, Canada's Parliament has limited involvement in the treaty process and only so much influence over treaty-implementing legislation. An additional concern is that there is only so much time left in the legislative calendar with an election a year away. The government has important pieces of legislation moving – including implementing the TPP, adopting the first-ever national legislation on accessibility, and an election law overhaul that the government has already tried to fast-track. Moreover, of the 366 commitments the Trudeau government has made, the government’s own analysis indicates that just 96 have thus far been met. Many others also
Moreover, Parliament already has many bills to consider which have yet to complete the legislative process. Parliament's Legislation-at-a-glance page shows just how much each House has before it already, including criminal justice and family law reforms, firearms regulation, and military justice changes remaining in the House, and many big legislative matters before the Senate including bills on sustainable development, access to information, and fisheries reform. While the BEPS bill could be a step ahead of bills yet to come, it is easy to imagine easier-to-debate matters (such as labour reforms) getting much more debate in the House and, if and when it does get to the Senate, that body will be even more pressed for time given all the other items from the House being added to its plate.
Tagged as: BEPS Canada MLI scholarship
I'm very happy to announce the 2018 McGill Tax Policy Colloquium, which will take an interdisciplinary approach to tax policy analysis. The colloquium is made possible by a grant from Spiegel Sohmer. The land on which we gather is the traditional territory of the Kanien’keha:ka (Mohawk), a place which has long served as a site of meeting and exchange amongst nations. The distinguished speakers who will contribute to this year’s colloquium include:
- Oct 22: Sam Singer, Assistant Professor, Faculty of Law, Thompson Rivers University. Prof. Singer's research focuses on tax dispute resolution, the policy rationales underlying tax measures, and the regulation of charities and charitable giving.
- Nov 12: Lindsay Tedds, Scientific Director of Fiscal and Economic Policy and Associate Professor, Department of Economics, University of Calgary. Dr. Tedds’ research focuses on tax policy and she has done extensive work with the Government of Canada in the areas of public economics and policy implementation.
- Nov 19: Laurens van Apeldoorn, Assistant Professor of Philosophy, Leiden University. Prof. Van Apeldoorn’s research examines the nature and prospects of the sovereign state, with a special focus on the normative aspects of international taxation rules in relation to the global justice.
- Nov 26: Frances Woolley, Full Professor, Department of Economics, Carleton University and President, Canadian Economics Association. Prof. Wooley’s expertise and research focus on economics of the family, gender and intra-house inequality, taxation and benefits for and of families, and feminist economics.
- Dec 3: Ruth Mason, Full Professor, School of Law, University of Virginia. Prof. Mason’s research focuses on international, comparative, and state taxation. Her work on tax non-discrimination laws’ effect on cross-border commerce has been cited extensively, including by the U.S. Supreme Court.
Tagged as: colloquium McGill scholarship tax policy
Prof. Laurens van Apeldoorn of the University of Leiden will present a working paper at McGill, hosted by the Centre for Human Rights and Legal Pluralism at McGill Law and the Stikeman Chair in Tax Law (me). Here is the abstract:
Exploitation in global supply chains impacts prices that in turn bear on the allocation of corporate income tax revenue to jurisdictions where multinational enterprises transact. This presentation will develop a concept of exploitation based on the violation of the right to a living wage, put this in the context of discussions of transfer mispricing in multinational enterprises, and consider the economic dimension of the allocation of corporate income tax revenue in relation to public goods provisions in low-income countries where exploitation occurs.Prof. Van Apeldoorn is currently visiting McGill’s Centre for Human Rights and Legal Pluralism as an O’Brien Fellow in Residence (Sept-Dec 2017). He is Assistant Professor of Philosophy and a member of the Centre for Political Philosophy at Leiden University, where his research broadly focuses on the nature and prospects of the sovereign state and more recently considers the principles of international taxation in relation to global justice. As some readers will no doubt be aware, Laurens' presentation connects to collaborative work he and I are undertaking that probes the meaning and significance of taxing income "where value is created," working paper forthcoming.
The talk will be held from 1pm to 12:30 with lunch being served beginning at 12:30, in Chancellor Day Hall, Stephen Scott Seminar Room (OCDH 16), 3644 rue Peel, Montreal, Quebec. This event is free and open to all.
Tagged as: justice McGill scholarship sovereignty tax policy transfer pricing
This event is free and open to the public.
Tagged as: conference history McGill Tax law
If you are an IFA member or are attending IFA this fall, you can now download the full IFA 2017 Cahiers. The general report for Subject 1 on BEPS is co-authored by myself and Stephen Shay and is also available on SSRN. Here is the abstract:
The G20/OECD’s multi-year campaign to combat base erosion and profit shifting (BEPS) marks a critical step in the evolution of the international tax regime and the roles of institutions that guide it. This General Report for Subject 1, IFA Congress 2017, provides a snapshot of the outcomes of the BEPS project by comparing national responses to key mandates, recommendations and best practices through the end of October, 2016 based on National Reports representing the perspectives of 48 countries. These National Reports reveal that the impact of the BEPS initiative on a particular country corresponds to at least three key factors, namely: (1) the extent to which domestic law is already in substantial compliance with BEPS outcomes; (2) the degree to which implementation of BEPS outcomes appears capable of delivering positive revenue or economic results, or both, relative to a country’s experiences and perceptions prior to BEPS; and (3) the type and degree of involvement of a country in the formative stages of the initiative preceding the release of the final BEPS action plans. As BEPS continues to unfold, it is difficult to gauge the full extent to which countries in fact will adhere or defect from the rules. However, the BEPS project has witnessed the transition of global tax governance from the OECD countries exclusively to global fora. This leaves open questions regarding agenda-setting for international tax policy going forward. As we conclude this interim snapshot of the origins, standards, and responses to BEPS to date, we look to future IFA congresses for answers to these questions and a final assessment of the BEPS project.
Tagged as: BEPS OECD research scholarship tax policy
Kluwer law has recently published Tax Sovereignty in the BEPS Era, a collection of contributions I co-edited with Sergio Rocha, in which we and a slate of authors from a range of countries explore the impact of the BEPS initiative on "tax sovereignty"--which I take to mean the autonomy that nations seek to exercise over tax policy. Here is the description:
Tax Sovereignty in the BEPS Era focuses on how national tax sovereignty has been impacted by recent developments in international taxation, notably following the OECD/G-20 Base Erosion and Profit Shifting (BEPS) Project. The power of a country to freely design its tax system is generally understood to be an integral feature of sovereignty. However, as an inevitable result of globalization and income mobility, one country’s exercise of tax sovereignty often overlaps, interferes with or even impedes that of another. In this collection of chapters, internationally respected practitioners and academics reveal how the OECD’s BEPS initiative, although a major step in the right direction, is insufficient in resolving the tax sovereignty paradox. Each contribution deals with different facets of a single topic: How tax sovereignty is shaped in a post-BEPS world.And here is the table of contents:
Part I The Essential Paradox of Tax SovereigntyAnd finally, here is a brief description:
- CH 1: BEPS and the Power to Tax, Allison Christians
- CH 2: Tax Sovereignty and Digital Economy in Post-BEPS Times, Ramon Tomazela Santos & Sergio André Rocha
- CH 3: Justification and Implementation of the International Allocation of Taxing Rights: Can We Take One Thing at a Time?, Luís Eduardo Schoueri & Ricardo André Galendi Júnior
- CH 4: An Essay on BEPS, Sovereignty, and Taxation, Yariv Brauner
Part II Challenge to the Foundational Principles of Source and Residence
- CH 5: Evaluating BEPS, Reuven S. Avi-Yonah & Haiyan Xu
- CH 6: Jurisdictional Excesses in BEPS’ Times: National Appropriation of an Enhanced Global Tax Basis, Guillermo O. Teijeiro
- CH 7: Taxing the Consumption of Digital Goods, Aleksandra Bal
Part III Acceptance and Implementation of Consensus by Differently-Situated States
- CH 8: The Birth of a New International Tax Framework and the Role of Developing Countries, Natalia Quiñones
- CH 9: The Other Side of BEPS: “Imperial Taxation” and “International Tax Imperialism”, Sergio André Rocha
- CH 10: Country-by-Country Over-Reporting? National Sovereignty, International Tax Transparency, and the Inclusive Framework on BEPS, Romero J.S. Tavares
- CH 11; How Are We Doing with BEPS Recommendations in the EU?, Tomas Balco & Xeniya Yeroshenko
- CH 12: U.S. Tax Sovereignty and the BEPS Project, Tracy A. Kaye
The book unfolds in three parts. The first, The Essential Paradox of Tax Sovereignty, features four chapters.
- In chapter 1, Christians introduces the topic by demonstrating how BEPS arose from the paradox of tax sovereignty and analyzing why multilateral cooperation and soft law consensus became the preferred solutions to a loss of autonomy over national tax policy. The chapter concludes that without meaningful multilateralism in the development of global tax norms, the paradox of tax sovereignty will necessarily continue and worsen, preventing resolution of identified problems for the foreseeable future.
- Tomazela &; Rocha pick up this thread in chapter 2, where they demonstrate that BEPS addresses the symptoms, but not the problems, of the sovereignty paradox. In their view, the central defining problem of this paradox is an ill-defined jurisdiction concept. The chapter demonstrates why tax policymakers need to change the conventional wisdom on sovereignty in order to incorporate new nexus connections due to the changing nature of trade and commerce.
- In chapter 3, Schoueri & Galendi further the inquiry by providing a detailed analysis of the interaction of contemporary cooperation efforts with the sovereignty of states in light of historical claims in economic allegiance, economic neutrality and now cooperation against abusive behaviour.
- Brauner rounds out this first part in chapter 4, which establishes the evolution of the concept of tax sovereignty. The chapter proposes an instrumental role for sovereignty in the process of improving cooperation and coordination of tax policies among productive (non-tax haven) countries, to balance claims and serve as a safeguard against political (in this case international) chaos. Brauner concludes that such a change to the business of international tax law would ensure at least an opportunity for all participants to succeed on their own terms.
Part Two of the book, Challenge to the Foundational Principles of Source and Residence, takes an in depth look at why residence and source continue to be the two essential building blocks of tax sovereignty and the backbone of the international tax system, surviving BEPS but still subject to multiple challenges in theory and practice.
- In chapter 5, Avi-Yonah & Xu argue that BEPS simply cannot succeed in solving the sovereignty paradox because BEPS follows the flawed theory of the benefits principle in assigning the jurisdiction to tax. Avi-Yonah and Xu therefore make a compelling argument that for the international tax regime to flourish in the face of sovereign and autonomous states, countries must commit to full residence-based taxation of active income with a foreign tax credit granted for source-based taxation.
- In chapter 6, Tejeiro continues the analysis of the fundamental jurisdictional building blocks, demonstrating that by resorting to legal fictions within BEPS and beyond it, states are attempting to enlarge the scope of their personal or economic nexus, or to grasp taxable events and bases beyond their proper reach under well-settled international law rules and principles.
- Bal furthers the discussion in chapter 7, with an analysis of how digital commerce has upended traditional notions of source and residence. Bal advocates the consumer's usual residence as a good approximation of the place of actual consumption and therefore the best-justified place of taxation.
Part Three of the book, Acceptance and Implementation by Differently-Situated States, considers tax sovereignty after BEPS from a range of perspectives. Chapters 8 through 10 focus on perspectives from lower income or developing countries, while chapters 11 and 12 review the landscape from the perspective of Europe and the United States, respectively.
- In chapter 8, Quinones explores how developing countries might take advantage of the new international tax architecture, developed for purposes of coordinating the BEPS action plans, to ensure that their voices are truly shaping the standards. She argues that the knowledge gap between developing and developed is getting narrower instead of wider, with major negative impacts expected for the international tax order.
- Rocha continues this discussion in chapter 9, with a proposal: instead of simply accepting the BEPS Project’s recommendations and their reliance on historical decisions about what constitutes a country’s “fair share of tax”, developing countries should join in the formation of a Developing Countries’ International Tax Regime to focus discourse on the rightful limits of states’ taxing powers.
- Furthering the theme of autonomous priority-setting, in chapter 10 Tavares focuses in on a key part of the BEPS consensus, exploring whether implementing the CBCR standard, without a deeper transfer pricing reform, should be viewed as a priority in every country. He further questions whether this particular initiative, even if important, is worthy of mobilization of the scarce resources of developing countries. Tavares concludes with an incisive review of the role of the inclusive framework in prioritizing some needs over others.
- Balco & Yeroshenko then consider BEPS implementation from the very different perspective of the EU in chapter 11. The chapter demonstrates that even within the EU, BEPS implementation is not straightforward, as the interests of member states sometimes conflict and the basic notion of tax sovereignty remains fundamental even while tax coordination and harmonization across the EU expands. However, the authors note that the progress made in the last several years on key cooperation norms, which was largely inspired by BEPS, has been unprecedented.
- Finally, Kaye provides a capstone to the book in chapter 12, where she makes the convincing case that although some in the United States saw the BEPS Project as a threat to US tax sovereignty, this project was in fact necessary in order for the United States to effectively wield its tax sovereignty. Kaye’s chapter thus ends the book with a clear picture of the ongoing paradox of tax sovereignty in the world after BEPS.
Tagged as: BEPS scholarship sovereignty tax competition tax policy
This Article examines international law limitations on the ascription of citizenship in the context of U.S. taxation of non-resident citizens. U.S. citizenship practice is exceptionally generous, extending citizenship to almost all persons in its territory at the moment of birth. At the same time that it is generous at the front end, U.S. citizenship is sticky at the back. Termination of citizenship on the individual’s part involves substantial fees and tax compliance. It is difficult to shed a citizenship one may never have wanted in the first place.
This stickiness would be inconsequential if few costs were associated with the status. But the United States taxes its citizens on a worldwide basis. The 2010 enactment of the Foreign Account Tax Compliance Act has ramped up historically lax enforcement and imposes substantial administrative burdens on even middle-earner citizens abroad.
In this frame, U.S. birthright citizenship and expatriation regimes may violate international norms, especially with respect to those "accidental Americans" who departed the United States as children. Even in the context of extremely relaxed historical constraints on state nationality practice, there were acknowledged nineteenth century limitations on the extension of citizenship to individuals with insufficient connection to a state -- citizenship over-claiming, as it were. The article also describes the historical requirement that naturalization be volitional, a norm now appropriately applied in some cases in the context of birthright citizenship.
To the extent the ascription of U.S. citizenship compromises individual rights, there are tax fixes and there are citizenship fixes. Citizenship fixes include opt-in and opt-out mechanisms for birthright citizenship. The better solution may lie in frictionless exit for those with nominal ties to the national community. Though reform is more likely to be accomplished through the tax regime, the moment highlights the over-inclusiveness of U.S. citizenship and the growing salience of international law to citizenship practices.I'm less confident than Peter that reform will ever be delivered through the tax regime, but I am very glad to see this important contribution to the growing literature focusing on the citizenship/taxation link.
States have complex and often conflicted attitudes toward migration and citizenship. These attitudes are not always directly expressed by lawmakers, but they may be reflected quite explicitly in tax regimes: for the world’s most prosperous individuals and their families, multiple states extend a warm welcome. Sometimes prospective migrants are offered fast track to physical residence which can lead to citizenship if the migrant desires it. Others are offered a mere commercial transaction, with citizenship granted to applicants with the right credentials and a willingness to pay. Migrants might seek to obtain residency or citizenship for personal, family, economic, or tax reasons, or some combination of them. For the granting country, the tax significance of obtaining new residents or citizens will vary depending on domestic policy goals. However, the consequences of residence and citizenship by investment programs could be severe for the international tax regime: the jurisdiction to tax and the allocation of taxing rights among countries are commonly based on residence and citizenship factors. This article accordingly surveys contemporary residence and citizenship by investment programs on offer around the world and analyzes their potential impact on international tax policy.
* update: I've found a couple of additional programs (e.g. France has a lower cost program, making it less of an outlier)--thank you twitterverse) and I've corrected a few currency conversion errors. This is still a work in progress as previously noted, and I expect to be revising again in the coming weeks.
I've been working on residence and citizenship by investment programs, and thanks to some stellar research assistance by Jake Heyka, have developed a set of data comprising what I believe is a fairly thorough look at the residence and citizenship by investment programs currently on offer around the world. I made the above infographic to show the lowest cost program per country for all countries that offer either residence or citizenship by investment.
The lowest cost residence by investment programs are offered by Panama and Paraguay, each coming in at about USD$5,000, while the most expensive is
One of the things I wondered about in looking over the programs is the inequality factor at play--that is, how much can richer/larger countries demand in terms of higher prices and more stringent requirements (such as actual residence) for entry, and how much must poorer/smaller countries be satisfied with smaller investments and fewer commitments by the applicant? The answer seems to be that there appears definitely a "rich get richer" quality to the distinctions among programs, but there are lots of details in the programs that require further thought.
The paper itself is still in progress but here is an explanation of what I am looking at:
International law and political theory scholars have long wrestled with the normative implications of commodifying citizenship and access to immigration with pay-to-play visa programs, but the analysis does not typically consider the role the tax system plays or could play in these schemes, nor how such schemes might impact the tax regime in terms of gross revenue or distributional effect. Yet governments increasingly view their tax systems as a means of potentially increasing the value of residence and citizenship in their countries, whether intrinsically or in relation to the treatment of those who gain such status by other means. Given the cost involved in reducing revenue from those arguably most able to pay, whether the programs actually produce the predicted outcomes is one obvious question to be asked. Even if the programs in fact achieve their goals, a second question surely arises regarding the normative justification for using the tax system to lure the wealthy away from other countries in this manner. Does the normative case differ when applied to humans as opposed to companies? Does it differ when the luring state is richer or poorer relative to the countries of origin of prospective immigrants? To sketch out a framework for analyzing these questions requires a sense of the various competing programs on offer. This essay takes the first step by comparing national programs that use their taxing power in some manner in order to attract immigration, and highlights some of the factors that raise normative questions about the appropriate design and uses of a tax system.Comments welcome.
Tagged as: migration research tax policy
Last fall I via twitter I shouted out two of my students who won the Tax Analysts Student Writing Competition, in the international category:
I posted about the first paper long ago but I inadvertently neglected to post the second. Correcting that oversight, here it is, available at Tax Analysts: A World Tax Court: The Solution to Tax Treaty Arbitration, by Jake Heyka. Here is the brief abstract by TA:Very proud that two of my students @LAWMcGill won this year: @montano_cabezas (2015) and @Heyka14 (2017) https://t.co/XjWV2A66Cj— Allison Christians (@taxpolblog) July 11, 2016
Jake Heyka examines tax treaty arbitration standards while demonstrating that as a matter of fundamental justice, arbitration should be revamped. He proposes the creation of a world tax court.Heyka begins by observing that "[t]he institution of international tax treaty arbitration (ITTA) is hotly debated in international business and tax law. While the process is helpful because it pressures governments to resolve contested tax decisions, opponents have called it 'secret and evil.'"
He then makes the provocative observation that "the use of ITTA ultimately frustrates the resolution of tax disputes and should be supplanted by a world tax court." In support of his proposal, Heyka lays out the history and critique of tax treaty arbitration (including by me) and concludes:
Standardizing ITTA will create some procedural certainty but does not guarantee consistent use of those procedures, allow the public to see whether the process is fair, or establish reliable precedent. As Lindencrona and Mattson suggested over 30 years ago, ITTA should be a stepping stone to what the world ultimately needs: a world tax court.
As radical as it may seem, the idea is not far-fetched. World courts exist in many commercial and noncommercial contexts, and those that deal with money rather than crime are followed by many countries and used quite often. Moreover, state authority is regularly ceded to resolve disputes between commercial parties in arbitration courts such as the Permanent Court of Arbitration in The Hague, the London Court of International Arbitration, and many other arbitration institutes. A world tax court would merely serve as a place to resolve tax disputes in a similar manner while sustaining the public nature of tax law.While I am late to post it, Heyka's article remains timely as the inclusion of arbitration in the recently released MLI is sure to keep the issue front and center in international tax discourse. Congrats Jake, and sorry for the delay in posting your accomplishment.
My own view is that a switch to deductibility would increases pressure on capital importing countries to reduce their source-based taxes (a deduction does not fully offset the foreign tax, so it would make such taxes more costly to US firms as compared to fully creditable foreign taxes), and therefore transfer revenues from poor to rich countries. Deferral already places tremendous tax competition pressure on host countries, while ending it might enable some countries (to which US capital is a major source of inbound investment) to increase their source-based taxation (as explained in this paper). Therefore I was happy to see this FP&S paper give additional support to the beleaguered tax credit while still recognizing that there is such a thing as giving too much credit.
I was also intrigued to see FP&S begin their paper by picking up Reuven Avi-Yonah's premise that taxation on the basis of residence and source is customary international law. That is not only a relatively unusual argument to find in a US-authorized tax paper, but it is a potentially controversial perspective, which I am exploring in a paper of my own (making the international law case against citizenship based taxation). So, thank you Fleming, Peroni and Shay, for the additional citation support for my arguments.
It is also worth noting that FP&S include in this paper a defense of the corporate income tax in the form of footnote 200, which spans more than a page in tiny but useful print. It summarizes the main points regarding why corporate tax is necessary as a backstop to individual income taxation, citing to the main arguments for and against, thus serving as a valuable micro treatise on the subject.
Finally, I note that FP&S only give the FTC two cheers instead of three because they feel that it conflicts with the principle of ability to pay, an argument I have not seen before and that gives me pause. Their argument is that foreign taxes are a cost to individuals attendant to investing abroad, and that crediting these taxes is too generous from the perspective of fairness, that a deduction would sufficiently account for the cost in terms of measuring ability to pay. I can understand that argument where the FTC is itself too generous, allowing cross-crediting and not restricting its application to double taxation. But I do not understand that argument applied to an FTC that restricts itself to a dollar for dollar credit of actual taxes paid, which I believe is the argument being advanced here. That's something to think about a little more.
In any event, abstract below and paper at the link above. Well worth a read.
Reform of the U.S. international income taxation system has been a hotly debated topic for many years. The principal competing alternatives are a territorial or exemption system and a worldwide system. For reasons summarized in this Article, we favor worldwide taxation if it is real worldwide taxation; that is, a nondeferred U.S. tax is imposed on all foreign income of U.S. residents at the time the income is earned. However, this approach is not acceptable unless the resulting double taxation is alleviated. The longstanding U.S. approach for handling the international double taxation problem is a foreign tax credit limited to the U.S. levy on the taxpayer’s foreign income. Indeed, the foreign tax credit is an essential element of the case for worldwide taxation. Moreover, territorial systems often apply worldwide taxation with a foreign tax credit to all income of resident individuals as well as the passive income and tax haven income of resident corporations. Thus, the foreign tax credit also is an important feature of many territorial systems. The foreign tax credit has been subjected to sharp criticisms though, and Professor Daniel Shaviro has recently proposed replacing the credit with a combination of a deduction for foreign taxes and a reduced U.S. tax rate on foreign income.
In this Article, we respond to the criticisms and argue that the foreign tax credit is a robust and effective device. Furthermore, we respectfully explain why Professor Shaviro’s proposal is not an adequate substitute. We also explore an overlooked aspect of the foreign tax credit—its role as an allocator of the international tax base between residence and source countries—and we explain the credit’s effectiveness in carrying out this role. Nevertheless, we point out that the credit merits only two cheers because it goes beyond the requirements of the ability-to-pay principle that underlies use of an income base for imposing tax (instead of a consumption base). Ultimately, the credit is the preferred approach for mitigating international double taxation of income.