TAX, SOCIETY & CULTURE

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Monday at McGill: Pichhadze on Transfer Pricing and GAAR in Canada

Published Oct 21, 2017 - Follow author Allison Christians: - Permalink

On Monday October 23, Amir Pichhadze, Lecturer at Deakin University, Australia, will present his work in progress, entitled "Canada’s Federal Income Tax Act: the need for a principle (policy) based approach to legislative (re)drafting of Canada’s transfer pricing rule" as part of the annual Spiegel Sohmer Tax Policy Colloquium at McGill Law.

Pichhadze's new paper builds on his prior work with Reuven Avi-Yonah on GAARs and the nexus between statutory interpretation and legislative drafting and draws on insights from Judith Freedman's work on the topic of legislative intention in statutory interpretation. The working draft explores the evolution of arm's length transfer pricing in Canada and makes the case for Canada’s parliament to adopt and apply a more explicit principle/policy-based approach to legislative drafting. It argues that Canada’s courts cannot effectively distill relevant policies and principles unless they are clearly conveyed by parliament, using Australia's experience as relevant and constructive.

The tax policy colloquium at McGill is supported by a grant made by the law firm Spiegel Sohmer, Inc., for the purpose of fostering an academic community in which learning and scholarship may flourish. 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.


This fall, in celebration of the centennial anniversary of the introduction of federal income taxation in Canada, the Colloquium focuses on the historical significance and development, as well as the most recent challenges, of the modern tax system in Canada and around the world. The complete colloquium schedule is here.

The Colloquium is convened by Allison Christians, H. Heward Stikeman Chair in Taxation Law. 

Amir Pichhadze's talk will take place from 2:35-5:35pm in New Chancellor Day Hall Room 101, 3644 Peel Ave, Montreal. All are welcome to attend.

Tagged as: Canada colloquium McGill scholarship tax policy transfer pricing

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Gribnau & Vording on The Birth of Tax Law as an Academic Discipline

Published Mar 13, 2017 - Follow author Allison Christians: - Permalink

Hans Gribnau and Henk Vording recently posted an interesting paper on SSRN. Here is the introduction:

The academic discipline of tax law as we know it today has its roots in the late nineteenth century. In the Netherlands, it emerged out of a confrontation between (predominantly British) classical political economy and German Staatslehre (theory of the state). This contribution analyses the impact of the relevant ideas on Dutch theorizing about taxes. It is argued that tax law as a legal discipline is heavily indebted to the German tradition. This may help to explain why it has proven difficult to develop meaningful communication between tax lawyers and tax economists.  
The paper focuses on the development of tax doctrine in the Netherlands over the nineteenth century, but the paper's thoughtful analysis of the evolution of tax goals and priorities, the conceptualization of the taxpayer-state relationship, the complex interaction on tax policy of political and economic theory, and the impact of rule of law theory on tax policy are of general interest.


Tagged as: history institutions rule of law scholarship tax culture Tax law tax policy

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OECD seeking "technical" input from the public on "multilateral instrument" to modify tax treaties

Published Jun 08, 2016 - Follow author Allison Christians: - Permalink

The OECD recently released what it calls a "public discussion draft" in connection with its work on the multilateral instrument (MLI), and seeks public input until June 30. As I explained in a post a  few months ago, the MLI is be used to 'modify' all existing tax treaties in force among signatory countries to conform to BEPS standards and recommendations. However, the released document is not actually a discussion draft of the MLI--there are no terms to be reviewed. The drafting committee, which currently includes 96 members (OECD members and "BEPS Associates"), only met for the first time two weeks ago so this is decidedly not a draft of substantive provisions to be debated in the public discourse. No, that would be chaos and contrary to the plan:

"the draft text of the multilateral instrument is the subject of intergovernmental discussions in a confidential setting."
Instead it is in effect a crowdsourced, and very carefully framed, issue-spotting exercise. The document consists of three pages: page one is the BEPS narrative (why the OECD undertook this project and what has happened so far). Page two describes what BEPS changes will be covered in the MLI once drafted. Page three lays out three "technical issues" the OECD faces in drafting the MLI, and finally gives the call for input. The discussion is very brief and in OECD-passive-speak so it's almost comical to summarize but here are the three issues, as I understand them:
  1. the MLI must be able to modify existing treaties, and this will be done with "compatibility clauses."
  2. the MLI will be broadly worded so will require commentary and maybe explanatory notes for consistent interpretation
  3. the MLI will be in French and English but will interpret thousands of treaties written in different languages.
These are all very interesting international law issues and not technical tax law issues at all. They are also clear expressions of intent to cement the OECD's role as the principal curator of international tax norms. This is especially clear in respect of point 2, because consistent interpretation means that the OECD commentary and "guidance" must harden ("ossify") into more persuasive and ultimately binding legal authority. For a discussion of what that implies for the rule of law, see this old thing I wrote a long time ago.

Point 1 raises the issue that seems to me most difficult in terms of the transition to complete OECD domination of global tax policy: I am still not sure how the MLI is supposed to work on top of a network of individualized and distinct bilateral agreements among sovereign nations. The OECD says "If undertaken on a treaty-by-treaty basis, the sheer number of treaties in effect would make such a process very lengthy." Indeed it would but as a matter of law in many countries, revising an existing international agreement requires another international agreement that is ratified in the same manner as the original, which appears to require the signatories to come to a meeting of the minds as to the terms that govern their unique relationship. The OECD says that distinguished experts have carefully considered the public international law questions at hand. But I haven't seen any study and I don't quite understand how you get a coherent international tax law regime in anything like a "quick" process. The OECD's implied answer in point 1 only raises another question for me: what is a compatibility clause? Is this a well-understood mechanism in play in other areas of international law? Can I get a precedent somewhere to anticipate where we are going with this?

Further, is the MLI going to be a matchmaking exercise in practice? If country A agrees to revisions 1 through 6 as to countries B and C, but only revision 5 as to country D, and country B agrees to revisions 1-3 for countries A and D but only 5 and 6 for C, and countries C and D agree in principle but never ratify anything, then what, exactly, are the agreements between and among these countries?

I am also not sure what the agreement matrix looks like when there are multiple standards for several of the BEPS items.  Notably the "prevent treaty shopping" minimum standard provides multiple choices for defending treaties against "abuse": a principal purpose test, a limitation on benefits provision, an anti-conduit provision, or some combination. May each of countries A, B, C, and D choose a different combination vis a vis each of the others? It is difficult to see convergence. At the panel I attended in Montreal a couple of weeks ago this was a topic of vigorous discussion. The more I think about this, the increasingly uncertain I become regarding how this is going to work out in practice.

Any thoughts on these observations are welcome as I develop my thinking on these issues. And if you are submitting comments, please note:
 Comments and input should be submitted by 30 June 2016 at the latest, and should be sent by email to multilateralinstrument@oecd.org in Word format (in order to facilitate their distribution to government officials). Please note that all comments received will be made publicly available. ... Persons and organisations who submit comments on this document are invited to indicate whether they wish to speak in support of their comments at a public consultation meeting that is scheduled to be held in Paris at the OECD Conference Centre on 7 July 2016 beginning at 10.00 am.






Tagged as: BEPS international law OECD tax policy treaties

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EU Report: give fiscal state aid recoveries to tax competition victims; sanction the culprits

Published Feb 03, 2016 - Follow author Allison Christians: - Permalink

In an annual report to the European Parliament on EU Competition Policy, MEP Werner Langen has proposed that the fiscal state aid rules be changed so that other EU states receive any recoveries. Thus, if Ireland loses in its investigation by the EC, it will have to recover some billions from Apple as punishment, and Langen proposes that Ireland--the "culprit"--not be allowed to keep the money. The Report:

Calls on the Commission to modify the existing rules without delay, in order to allow the amounts recovered following an infringement of EU tax-related State aid rules to be returned to the Member States which have suffered from an erosion of their tax bases, or to the EU budget, and not to the Member State which granted the illegal tax-related State aid, as is currently the case, as this rule provides an additional incentive for tax dodging;
Even if the proposal goes nowhere, one can understand why the sentiment would arise. When I first started looking at the fiscal state aid investigations, this element struck me as counter-intuitive: where a state has foregone revenue in order to lure business in contravention of the antitrust rules in the TFEU, the punishment is then to collect the revenues foregone. The narrative thus is that the state successfully cheated its EU neighbours of an opportunity to attract foreign investment and the punishment is a cash windfall.

This looks more like a punishment if you think the collection of revenues by the state will cause the investment to flee to other jurisdictions because the targeted state is not competitive but for the state aid. That might not seem likely for Ireland, both because Ireland's general corporate tax rate is still lower than much of Europe even without the extra padding of the state aid, and because the successful luring of Apple arguably had its intended effect, creating spillover effects that gave Ireland a first-mover advantage which now extends its attractiveness beyond the favourable tax climate. In that case the MEP's position on the cash windfall is sympathetic.

Even if it is sympathetic, it is hard to imagine redistributing Apple's foregone tax revenue to other EU members, when it is at least debatable whether any of the recipients hold out clean hands. Tax competition is so ubiquitous, so multifaceted, every victim is a culprit, too.

In a potentially even more problematic move, the report "[c]alls on the Commission to consider the introduction of sanctions, either against the state or the company involved, for serious cases of illegal State aid". The array of issues involved in sorting out that kind of power structure is vast.

On a side note, the report contains a long list of tax harmonization goals, and it includes an interesting call for the EC to get in on the multilateral exchange of tax rulings, which, via the OECD BEPS initiative, are to be automatically shared among countries under conditions of confidentiality, including restrictions as to their use for non-tax purposes. The report "Emphasises that the Commission must, as a matter of course, have access to data exchanged between tax authorities which are relevant in the context of competition law." I am not sure whether sharing tax rulings with the EC would be compatible with the OECD confidentiality framework.

A very provocative report that signals a growing amount of frustration with ongoing tax competition, and an increasing desire of some to use the fiscal state aid rules to stop it. Will be interesting to see where this takes the field.



Tagged as: fiscal state aid tax competition

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Intergovernmental Agreements (IGAs) as Hybrid Tax Agreements

Published Oct 17, 2015 - Follow author Allison Christians: - Permalink

I recently published "Interpretation or Override? Introducing the Hybrid Tax Agreement." Here is the abstract:

In the effort to overcome foreign law impediments to the implementation of the Foreign Account Tax Compliance Act (FATCA), the U.S. Treasury introduced intergovernmental agreements (IGAs). IGAs are hybrid tax agreements: Treaties to most of the world, in the United States they instead constitute an executive interpretation of the underlying tax treaty. This introduces a great deal of interpretive uncertainty where the terms of IGAs and tax treaties conflict. Prompted by recent queries in the EU regarding the legal nature of the IGAs, this article explores a concrete example of the legal principles at stake by examining how the public policy rules for information sharing found in US tax treaties interact with the information exchange provisions found in the IGAs.
Further in, I explain that it is difficult to understand how as a matter of international law the IGA, as a document that purports to "interpret" the underlying tax treaty, in fact obviates some of the provisions of the treaty, but do so only for the party other than the United States. I conclude:
Process matters in law. It is what makes the rule of law function as a legitimate source of authority. It is ironic that even as the United States partners with its fellow OECD members to try to address the major challenges to international taxation posed by hybrid legal entities and hybrid financial instruments, Treasury has invented the hybrid tax agreement. Conflicts resulting from this invention are inevitable and I anticipate they will be costly. I believe that Treasury took a few shortcuts around established legal precedents on the road to implementing FATCA. I understand that this may be considered expedient in the effort to get FATCA to work. But in the long run the sacrifice renders a disservice to the rule of law. That sacrifice deserves careful reflection by all those affected.
I continue to be fascinated by the rapid developments in international taxation over the past several years, in terms of both substance and process/rule of law.

Tagged as: FATCA governance IGAs scholarship tax policy treaties US

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Brunson on Enforcing Foreign Tax Judgements: Kill the Revenue Rule

Published Feb 27, 2015 - Follow author Allison Christians: - Permalink

The revenue rule is a common law rule that holds that one country will not enforce the tax debts imposed on its people by a foreign sovereign. The revenue rule prevents US courts from enforcing foreign country tax liens, which prevents assistance in collecting taxes for other governments under tax treaties. Samuel Brunson has posted a paper on this topic entitled Accept this as a Gift: Unilaterally Enforcing Foreign Tax Judgments, of interest. Abstract:

Current U.S. law treats foreign tax judgments differently than other foreign civil judgments, prohibiting U.S. courts from recognizing and enforcing the former, even though they recognize and enforce the latter. In this article, Brunson argues that there is no compelling reason for this different treatment and that it is ultimately detrimental to the government’s revenue collection. As long as the revenue rule continues to prevent the United States from enforcing foreign tax judgments, the nation cannot enlist foreign help in reducing the foreign tax gap; other countries will only collect U.S. tax judgments if the United States reciprocally collects their tax judgments. The revenue rule also allows foreign persons to hide their assets in the United States, effectively turning the United States into a tax haven. For the sake of reducing the international tax gap and for the sake of international tax justice, the United States must revoke the revenue rule.

Tagged as: international law Tax law tax policy

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Samaha and Strahilevitz on Information policy and legal design

Published Jan 30, 2015 - Follow author Allison Christians: - Permalink

Adam M. Samaha and Lior Strahilevitz recently posted a paper called Don't Ask, Must Tell — And Other Combinations, which on its face looks like it has nothing to do with tax but it is relevant to questions about compliance and enforcement, so I thought it worth reading. Here is the abstract:

The military’s defunct Don’t Ask, Don’t Tell policy has been studied and debated for decades. Surprisingly, the question of why a legal regime would combine these particular rules for information flow has received little attention. More surprisingly still, legal scholars have provided no systemic account of why law might prohibit or mandate asking and telling. While there is a large literature on disclosure and a fragmented literature on questioning, considering either part of the information dissemination puzzle in isolation has caused scholars to overlook key considerations. 
This Article tackles foundational questions of information policy and legal design, focusing on instances in which asking and telling are either mandated or prohibited by legal rules, legal incentives, or social norms. Although permissive norms for asking and telling seem pervasive in law, the Article shows that each corner solution exists in the American legal system. “Don’t Ask, Don’t Tell,” “Don’t Ask, Must Tell,” “Must Ask, Must Tell,” and “Must Ask, Don’t Tell” each fill a notable regulatory space. 
After cataloguing examples, the Article gives accounts of why law gravitates toward particular combinations of asking and telling rules in various domains, and offers some normative evaluation of these strategies. The Article emphasizes that asking and telling norms sometimes — but only sometimes — are driven by concerns about how people will use the information obtained. Understanding the connection to use norms, in turn, provides guidance for a rapidly advancing future in which big data analytics and expanding surveillance will make old practices of direct question-and-answer less significant, if not obsolete. In any event, the matrix of rule combinations highlighted here can reveal new pathways for reforming our practices of asking and telling in life and law.
The authors cover taxation under the category Must Ask, Must Tell (MAMT). A highlight:
The personal income tax regime is perhaps the most familiar MAMT regime to many Americans. ... Strikingly, because it collects tax information from third parties like employers, banks, and brokerages, IRS already has much of the most important information that a taxpayer will provide on the applicable 1040. This redundancy has sparked reformers to call for replacement of the current, high-transaction costs MAMT regime with one where the government automatically calculates each taxpayer’s liability (or refund) each year and sends her a bill (or check). Notwithstanding the substantial time savings for taxpayers that such plans may entail, these proposals for reform have not been implemented. What gives?
The authors propose that MAMT might be explained by a need to resolve agency problems, which I don't really buy, and then they suggest that making people make tax declarations themselves is a way to make sure they value their citizenship or participate in democracy or make socially good choices, all notions I have heard before but cannot possibly believe when I read that the vast majority of taxpayers pay a tax prep service to help them get through their tax filing every year. Remember, the tax prep service makes money by making it so the taxpayer doesn't have to understand the form, much less the law. The tax preparation industry would definitely find it a hardship if they could not rent-seek off the complexity of tax filing. Remember California's ready return? TurboTax didn't like it.

Rent-seeking by tax compliance professionals, and the ongoing battle to keep the IRS from being able to serve taxpayers properly, are inter-connected key aspects of tax compliance and enforcement. The more hideously complex the law, the more the tax return preparer can charge for the service (I note that paying premiums to overcome tax complexity and attendant risk of error is but one reason why the US practice of treating certain nonresidents as permanent tax residents cannot possibly be fair).

The authors of this paper seem to understand the interplay between complexity and rent-seeking but they dramatically under-emphasize this in the analysis, and that is a pity. This paper barely scratches the surface of the "must ask, must tell" nature of income tax declarations, and I would have liked to have seen more discussion, especially regarding the global scope of the US tax system. But that is a lot to ask of non-tax experts. The paper concludes with a normative discussion that I am still working through, and I'm not sure if there are lessons there for taxation, or not. In any event, a novel paper that raises some interesting points about mandating the furnishing of information.


Tagged as: compliance information institutions scholarship

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Questions on the Canada-US FATCA Agreement

Published Nov 26, 2014 - Follow author Allison Christians: - Permalink

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.

Tagged as: Canada FATCA governance information institutions rule of law treaties

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The power to tax

Published Sep 05, 2014 - Follow author Allison Christians: - Permalink

The start of a new semester means the return to fundamentals in taxation for me, which always begins with a discussion of the power to tax. Yesterday I asked my students: could Queen Elizabeth say hey Canadians, I notice you still have my face on your dollar and you've got a nice surplus shaping up; over here in England it's all austerity and program cuts. Mind helping out a bit? General consensus: she might as a legal matter be able to tax Canadians to help the Brits out, but she won't. Hmmm. During the discussion a student informed me that Canadians pay more for monarchical services than the Brits do. Well, sharing is caring.

Relatedly and on a more scholarly note, a recent twitter conversation brought me to a chapter in a book on socio-legal tax research (thanks to Martin Hearson for starting that conversation and Judith Freedman for making this recommendation). The book is called Taxation: a Fieldwork Research Handbook, edited by Lynne Oats, and the chapter I had my eye on today is entitled Tea Parties, Tax, and Power, by Rebecca Boden. Boden writes:

History...points to a longstanding power relationship between rulers and those they rule that is articulated through tax regimes. States, whether feudal or modern, need money to operate, to pursue their various programmes, from war to welfare, As citizens may be unwilling to relinquish their money voluntarily, the state must have powers to require payment, with sanctions for non-compliance. By the same token, this power is held in balance in democracies by the principle of consent, exercised through representation. Ultimately, taxpayers give their consent to be dominated and have their money taken away from them.
This contingent nature of the state's powers in taxation - taxation by "consent"- chimes with Foucault's notion that power can never be absolute (Foucault 1977). No, Foucault argues, is power only hierarchical or structural, rather it works in a capillary fashion. As such, the analysis of such power relationships is central to the critical tax project - only by viewing tax structures, policies, and practice through the prism of power relationships that change them can we understand how and why they are constituted and what their effects are likely to be.
There is much more in the chapter to reflect upon, but I found this intro intriguing. In my view a lot of mischief takes place in the subtle--maybe you missed it--transition from the use of the word "citizen" to the use of the word "taxpayer." This is a transition all too many scholars make without even noticing it, yet it masks a world of ideology and assumption that frame and define how we think about tax today.

The power to define the taxpayer permeates contemporary tax policy discussion. The question of who can tax whom is one that could or should involve theory but while the scholars talk it over, reality plays out in economic might. In an intro to tax policy principles that I recently prepared for my tax policy course, I wrote:
Perhaps because taxation has been so connected to state-building, most scholars closely associate the act of taxation with the state. Some even go so far as to argue that taxation is a fundamental right belonging to the state as sovereign, often citing Thomas Hobbes for the proposition that “[t]hese are the rights which make the essence of sovereignty … the power of raising money”. None have offered theoretical grounds for the claim that states are in fact holders of rights, however.
We observe throughout history that states exercise powers (mostly through military and economic might), and only declare rights for themselves upon successful domination (such as in constitutions and charters). This observation leads to the likelihood that taxation is not anyone’s right but rather it is a constructed reality, coming about solely by and through human experience. This would explain why so much has to be done to both justify as a matter of theory - and entrench as a matter of custom - the state’s authority to tax.
We don't have to work too hard to think of a few examples where defining the taxpayer is an exercise in claiming authority, which fundamentally depends on power. FATCA is an obvious one; anti-inversions, BEPS, and the OECD common reporting standard are less obviously but equally so.

With FATCA, the US is using its sheer economic clout to get the whole world involved in chasing what it deems to be "US persons" for their tax tribute, without any discussion about whether the state's unilateral conferring of citizenship constitutes consent to (permanent and worldwide) taxation. Indeed, it continues to erect ever-higher barriers to shedding that status, without a single policy discussion at any level of government about the merits of this action. Those who think not can be expected to resist per Foucault, or, if it suits your taste better, Locke:
[People] therefore in society having property, they have such a right to the goods, which by the law of the community are their's, that no body hath a right to take their substance or any part of it from them, without their own consent: without this they have no property at all; for I have truly no property in that, which another can by right take from me, when he pleases, against my consent.
At the OECD, the common reporting standard, ostensibly modeled on FATCA but in fundamental principles not at all like FATCA, is all about making sure the "right" government gets the info it needs to exert its power over "its" taxpayers. Same idea: a state claims the authority to tax people that live within its territory, but other states have the power to thwart that exercise. (Different in fundamentals than FATCA for two reasons: (1) finding implied consent to tax is a given for residents of a state and (2) the OECD is not currently suggesting countries use economic sanctions to force others to cooperate).

The anti-inversion and BEPs issues are similarly about exerting power over a "taxpayer." Despite bemoaning their apparent helplessness in preventing corporate US persons becoming corporate non-US persons, US lawmakers clearly claim the authority to intervene and they likely have the power, too. But, this involves erecting higher and higher walls to keep the "taxpayers" inside. Internationally, discussions about the global problem of multinational tax dodging focus on the failure of the state to tax corporate persons that come in to the jurisdiction to do business. At the OECD, the BEPS project is very much about who belongs to who, so we can decide what belongs to who. Source and residence as tax concepts have always been about power and they have always been explained with ideas about authority and consent.

Globally, discussions about both corporate and personal income taxation are being forced to focus more and more on unanswered questions about the power to tax, and the issues of authority and consent that are raised when power is exerted and when it is resisted. The full Boden chapter is thus definitely recommended reading and I'm working my way through the rest of the book, which looks promising in several respects. More to come on this subject.




Tagged as: corporate tax FATCA institutions jurisdiction power scholarship Tax law tax policy

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NGOs using non-binding OECD Guidelines to launch complaints about tax avoidance #TJHR

Published Jun 30, 2014 - Follow author Allison Christians: - Permalink

Thanks to a visit from Savior Mwambwa to Montreal last week in connection with the Symposium on Tax Justice and Human Rights, I finally sat down to look closely at the complaint raised by several NGOs against Glencore International AG, a Swiss company, for their transfer pricing strategies related to the Zambian-based Mopani Copper Mines Plc.

What I found was quite startling news to me (but not to a number of NGOs, and not to Martin Hearson, who is quickly becoming an indispensible go-to for interesting developments in international taxation): the OECD has apparently set up a sort of soft-law dispute resolution regime in which anyone can bring complaints against perceived tax dodging by multinationals, by lodging a request to a designated bureaucrat in the multinational's home states. This is a metaphor for taxpayer standing, an issue I have been curious about in the past but haven't made much progress on despite more than a little help from some of my regular readers.

This soft-law dispute resolution regime is quirky, to say the least. That's, of course, to be expected. So far the regime seems to be toothless or offer little more than a bit of theatre, but it is intriguing to watch the NGOs try to make hay with it, and more power to them if they can gain any traction. If they can, I expect to see the floodgates opened up for taxpayer-standing suits levied against MNCs in OECD member nations for their tax dodging efforts in developing countries, all on the strength of a document that isn't law anywhere.

This is the stuff of global legal pluralism.

The regime emerges from a non-binding set of OECD guidelines that require multinational enterprises to (among other undertakings) adhere to the arm’s length transfer pricing standards (also developed by the OECD) wherever they operate, and to structure transactions consistent with economic principles unless there are specific local laws allowing deviation from this general rule. Again, these guidelines are non-binding standards. But there is a real live process built up in this document. It is sprinkled throughout the Guidelines but the main parts are these:

[from p. 18:] Governments adhering to the Guidelines will implement them and encourage their use. They will establish National Contact Points that promote the Guidelines and act as a forum for discussion ... The adhering Governments will also participate in appropriate review and consultation procedures to address issues concerning interpretation of the Guidelines in a changing world.
[from p. 72:] The National Contact Point will ... Respond to enquiries about the Guidelines from: a) other National Contact Points; b) the business community, worker organisations, other non- governmental organisations and the public; and c) governments of non-adhering countries. 
... The National Contact Point will contribute to the resolution of issues that arise relating to implementation of the Guidelines in specific instances in a manner that is impartial, predictable, equitable and compatible with the principles and standards of the Guidelines. The NCP will offer a forum for discussion and assist the business community, worker organisations, other non-governmental organisations, and other interested parties concerned to deal with the issues raised in an efficient and timely manner and in accordance with applicable law. 
In providing this assistance, the NCP will: ... Make an initial assessment of whether the issues raised merit further examination and respond to the parties involved. ... consult with these parties ... facilitate access to consensual and non-adversarial means, such as conciliation or mediation ... make the results of the procedures publicly available.
From this we can discern the following soft law dispute resolution regime:

  • If you think a MNE is engaged in behavior inconsistent with the MNE guidelines, you can make a complaint to the National Contact Point (NCP) in the country(ies) where your target MNE is organized/operates. 
  • The NCPs "will" respond to enquiries from the public.
  • The NCPs "will" assess issues raised, and, if the NCP thinks the issues merit further review, will consult with you and with the MNE about the issue you raised, facilitate mediation, come to a decision and publish their results.
So how is this process working so far? Spoiler alert: about what you'd expect from a non-binding regime run by the OECD.

Over at OECD Watch (H/T Martin Hearson, naturellement), I searched "tax" and got 74 results. Most seem to involve conflict minerals and outright corruption (including bribery and financing armed rebels) but I am interested in how the process is being used to challenge tax avoidance, specifically with transfer pricing (on the theory that regulating transfer pricing is all about drawing that ever-elusive line between tax avoidance and evasion, so we are not always taking about activities that are inherently objectionable--in other words, these would be the hardest cases, so if any traction is gained, it is definitely worth noting). 

The Glencore/Zambia case is documented here. The result: the NCP of Switzerland took a look, consulted the parties, and concluded that, in the words of OECD Watch, "the parties agreed to disagree." OECD Watch reports that:
"the complainants are disappointed that the agreement did not go further than an agreement to disagree. They feel that the result shows that there is little value in engaging in a dialogue with the companies on these issues. According to the complainants, the company has not complied with its commitment as part of the agreement to respond to a detailed set of questions regarding its tax payments."
So, a dead end and as far as I see, no way to appeal or contest anything that has happened or not happened; on the other hand, there doesn't seem to be anything (other than resource constraints of would-be complainants) preventing reopening the case by simply filing a new complaint.

Other dead ends:
  • CBE vs. National Grid Transco, opened in 2003 in connection with acquisition of Copperbelt Energy Co (CEC), stating that "financial and tax incentives given to CEC are alleged to have resulted in an unstable macroeconomic environment by having increased the tax burden on the poor, having introduced discriminatory treatment and massive externalisation of funds." Case closed by UK NCP in 2005 "for 'want of prosecution'." I am not sure what that means.
  • NiZA et al. vs. Chemie Pharmacie Holland (CPH), a conflict minerals complaint opened in 2003 that sought clarification of whether tax payments made by CPH subsidiaries in the DRC were consistent with the Guidelines. Case first accepted but then quickly rejected by the Dutch NCP in 2004, for "lack of an investment nexus." 
  • War on Want and Change to Wins complaint against Alliance Boots, opened in November 2013 and quickly rejected by the UK NCP for offering only "unsubstantiated" allegations. The NGOs alleged that Alliance Boots violated the Guidelines disclosure and tax provisions, by, among other items, failing to act "in accordance with the spirit of UK taxation laws by shifting profits to offshore tax havens using complex financial instruments, shell financial companies in Luxembourg, and payments from one party to another to finance the purchase of company debt in a circular manner. The complainants sought mediation to bring concrete reforms of the company' governance, tax, and disclosure procedures so they are aligned with the Guidelines." I hope they assemble some documentation and try again: this is an interesting case for observers of the emerging links between tax justice and human rights.
I found one NGO win in this database, but the victory appears hollow, at least to the NGO:

  • Global Witness vs Afrimex, regarding tax payments made by Afrimex (a UK co operating in the DRC) to an "armed rebel group with a well-documented record of carrying out grave human rights abuses." The UK NCP agreed with many of GW's charges and concluded "that Afrimex failed to contribute to the sustainable development in the region; to respect human rights; or to influence business partners and suppliers to adhere to the Guidelines." Global Witness later followed up with Afrimex to see how things were going; the company said it had stopped trading in minerals. But GW seems skeptical, and states that "the case illustrates the severe limitations of relying on voluntary guidelines to hold companies to account. The OECD Guidelines for Multinational Enterprises remain a weak, non-binding mechanism. The NCP does not have the legal powers to enforce decisions arising from its conclusions and there is no in-built mechanism for following up its recommendations. The UK government will have to take further action to ensure that the investigation and conclusions of the NCP are more than just a theoretical exercise."

So far, the process isn't looking too promising for those using the guidelines to resist the status quo of international tax practice. Still,  I found one that was re-opened from a prior failed attempt, 15 Belgian NGOs complaint against Nami Gems for tax evasion in the DRC. This is a re-opening of a complaint that was rejected 10 years ago on what look like fairly flimsy grounds, will be interesting if the NGOs are learning from experience and improving their strategy as they go along.

I know that there are those that believe it is frustrating or even pointless watching activists work through international tax rules looking for justice. But activists are a finger on a pulse. They are looking to the rule of law to produce justice. When they feel that it doesn't, they again look to the rule of law for avenues of redress against unjust situations caused or ignored by the law. It is an optimistic and hopeful strategy, that refuses to give up on law. I hope that law can live up to its promise in this respect. It is the case that we perceive international taxation to occur mostly in the anarchy of the post-Westphalian nation-state-based global order. Yet organisations like the OECD transcend this order all the time, often in ways we don't understand and usually with a very little amount of scrutiny from tax law scholars. The activists are watching more closely. We would do well to pay attention.



Tagged as: activism corporate tax institutions OECD rule of law soft law Tax law tax policy transfer pricing

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