TAX, SOCIETY & CULTURE

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Introduction to Tax Policy Theory

Published Jun 14, 2018 - Follow author Allison Christians: - Permalink

Every year I make this primer, an Introduction to Tax Policy Theory, available to my tax policy students (and otherwise send it whenever I'm asked for an overview look at tax policy basics), so I decided to post it on SSRN. It is not a published piece but may be some day. Here is the description:

Taxation involves the compulsory transfer of resources among members of society. Tax policy is concerned with how societies carry out taxation. That is a technical and legal question, but it is inescapably a political, social, and cultural one as well. To study tax policy is to engage simultaneously with the existential philosophical foundations of taxation: why and how societies tax. This introduction to tax policy theory presents an overview of tax policy discourse. The goal is to outline a working framework for reflection and analysis to examine the ways in which current assumptions and approaches require further development.  
Part I asks why we tax, and posits state-building, internal management, and negotiated expansion as three broad goals. Part II asks how we should tax, and examines the conventional frameworks of equity, efficiency, and administrative capacity as the three guiding principles for most tax policy analysis. Part III concludes.
And here is the brief TOC:

I.          Why Do We Tax?        
A.         State Building
B.         Internal Management
C.         Negotiated Expansion
II.         Normative Foundations          
A.         Equity
B.         Economic Efficiency
C.         Administrative Capacity
III.        Conclusion

Input as to what is missing is welcome; this is a work in progress. 

Tagged as: scholarship tax policy theory

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Tax Sovereignty in the BEPS Era

Published Jun 17, 2017 - Follow author Allison Christians: - Permalink

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 Sovereignty
  • 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 
And finally, here is a brief description:

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

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Update: The Price of Entry: Latest Research plus Infographic

Published Apr 18, 2017 - Follow author Allison Christians: - Permalink



* September update: I've found some more information on Russia's program, which brings it closer to the global averages instead of being a glaring outlier. I've also now uploaded my working paper, Buying in: Residence and Citizenship by Investment, and would welcome comments. Here is the abstract:
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 Russia, at over USD$5 million now Austria, at about $3.3M. The average price for all residence and citizenship by investment programs that we found is about $1 million, but this number isn't perfect because some programs are based on job creation rather than investment (e.g., Portugal, Turkey, UK), some involve having entrepreneur/angel investment support rather than a direct investment (e.g. Australia, Canada), and some involve annual amounts (Italy and Switzerland).

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

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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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Should Corporate Tax Returns be Public?

Published Mar 05, 2015 - Follow author Allison Christians: - Permalink

Last year, I participated in a symposium at NYU on the topic of tax and corporate social responsibility, on a panel with the above title. The NYU Journal of Law and Business has published the symposium issue, including a transcript of the discussions. You can view the entire symposium issue here,. Below I excerpt from my contribution but the entire exchange is worth a read.

... I think the story Josh is telling is that using transparency as a means to generate the political will for corporate tax reform poses some risk, real risk, to the tax system administration. I think we'll have some discussion about how genuine that risk is and how it should be measured against other risks, like firm competitiveness and proprietary information and so on. But I'll leave that discussion aside for now to focus on the first part of the proposition, and that is that what we're trying to do with corporate tax transparency is generate the political will for reform. 
Now I should preface this by saying that I am by nature and profession a curious type of person, and I would love nothing more than to be able to pore over the 57,000 pages of some corporation's tax return ... I think if you've read some of my prior work on the subject, you will no doubt be unsurprised to hear me say let's raise the curtain and have a look. Let's call it an issue of accountability and governance, and let's keep lawmakers on their toes by letting folks at this data that lawmakers are so jealously gardening for their own reasons. We humans don't seem to have too much privacy from the government, so let's us get to the business of crowdsourcing, the monitoring of the artificial people among us. 
But I keep coming back to the problem of what are we trying to solve here. If the goal is to generate political will for change, then I'm actually not so optimistic that corporate tax return disclosures is going to get us there. Instead I think it will lead us to continue having interesting discussions about whether or not we should be taxing corporations at all, or the variation that we had earlier today, which is how to draw the line between avoidance and evasion. 
That's to say we've already been taught, even without corporate tax disclosure, to expect that most American companies, especially those with a global footprint, aren't paying much tax anywhere. The jig is already up. This is not a secret. We're not rioting in the streets about it for the most part. Sure, corporate tax disclosure will confirm what we already know, but I'm not sure if getting all the gory details is going to push the political picture that much further. Maybe it will, because we clearly have an "Overton Window" in which really taxing American corporations is not thinkable. And maybe widespread naming and shaming, or just naming, will move that window. I think it's also possible that the sheer enormity of everything that you're going to see laid bare is going to very quickly lead to resignation and more handwringing, and not so quickly to actual reform. 
But if we're already at that stage now, we already have the stories - we already know the story. If we're already there, then we don't have to wait for corporate tax disclosure, do we? We can already accept the notion that if we're going to collect more from any taxpayer, corporate or not, what we need is not more public information, but more withholding and more third-party reporting. 
So let's see if I can unpack that a bit because I know that's to say a lot. I think it's worth noting that for the vast majority of people, it is not the case that the income tax system is voluntary. And why is that not the case? It is because for that vast majority, every dollar they earn is reported to the IRS by someone else. And most of these dollars are also subject to withholding, and so you have to work some to get any of it back at the end of the year. And if you are an employee, you won't get much opportunity in terms of base erosion at all; you're basically paying a gross receipts tax. We have made wage earners easy to tax with withholding and third-party reporting. And more or less, gross basis taxation with a few exceptions. 
But corporations are different. They are really hard to tax, especially when they are crossing borders. We give them lots of opportunities to carve away their gross and get to a very small net. Withholding and third-party reporting and filing for refunds is generally not the way we get corporations to pay tax. For them, as Reuven said earlier today, the income tax system really is voluntary, and lawmakers have given them a lot of discretion. Transfer pricing is just one very prominent example of this. 
... maybe disclosure is a way to have more informed public debate about the income tax system. But if we're having that discussion, then it seems not at all clear to me why we would be limiting the conversation to publicly traded corporations at all, when we are as or more interested in Cargill or SC Johnson or your local mom and pop cash flow all-cash business as we are in Google or Apple, who have at least to tell us a few stories about their tax affairs. 
And if we have that conversation, you must admit we are limiting ourselves to corporations ... and not looking at other untold billions of dollars that go untaxed because they're not subject to reporting or withholding. 
So now we come to the punch line, and that is that it is possible that corporate tax transparency is going to throw back the curtain on one sector of society - publicly traded corporations - but the irony is these are the people, this is the very sector about whom we actually have more information about tax than any other, precisely because they already have disclosure rules. That disclosure is exactly why we already know there's a problem, and yet we have not mustered the will to solve it. 
GE has been in the news with its zero corporate tax rate for years. ... I think little is likely to change with more info ... the conclusion, I think, we will be eventually forced to draw is that we, the public, haven't really mustered the political will for reform that would lead to more taxation of American companies. And we really can't help the IRS administer or enforce the tax system. In fact, as Josh suggests, we run the risk of undermining that effort, so disclosure might not get us very far at all. 
What we're going to have to do is start figuring out ways to do a lot more withholding and a lot more third-party reporting, and we are going to have to do that for all of our taxpayers, corporate or not, publicly traded or not. Maybe some or most of us already know that. We didn't need to read the corporate tax returns to tell us that, and we won't know anything new about the corporate tax system when we get that opportunity. 
Now I hate to end with the topic of FATCA. For those of you who don't know, FATCA is a global third-party reporting and preemptory withholding regime designed to make sure Americans declare and pay their taxes on income and assets held overseas. It is not a workable system, it's a mess, but think about the design. In theory, it says the IRS could eventually, once all the kinks are worked out and everybody gets onboard, track every dollar ever paid to any American anytime, anywhere. If that's true, if that's even partially possible, we can see the problem here is not at all about capacity. It is purely a question of political will and nothing more, and it never has been. 
A parade of stories about offshore tax evaders got the U.S. to adopt FATCA. Yet a parade of stories about GE, Google, and Apple avoiding their taxes has not got the U.S. to embrace corporate taxation. 
In fact, we seem to be seeing the opposite response in the base erosion and profit shifting initiative, but that's another story altogether. I'm not convinced, therefore, that corporate tax transparency will lead to more corporate tax. However, I would still love to get my hands on GE's tax return. Thank you.

Tagged as: corporate tax disclosure governance politics scholarship

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This Fall at McGill: Colloquium on Tax Philosophy

Published Sep 12, 2014 - Follow author Allison Christians: - Permalink

I am pleased to announce that the annual McGill tax policy colloquium is now being generously supported by the law firm Spiegel Sohmer, Inc., under a grant established for the purpose of fostering an academic community in which learning and scholarship may flourish.

This fall, in its inaugural instalment, the Spiegel Sohmer Tax Policy Colloquium will return to tax policy fundamentals by critically examining the goals of taxation from a law and philosophy perspective.

The Colloquium will therefore be convened jointly by myself and Daniel Weinstock, who is the James McGill Professor in the Faculty of Law and Director of the McGill Institute for Health and Social Policy.  His research explores the governance of certain types of liberal democracies, and the effects of religious and cultural diversity from an ethical perspective on the political and ethical philosophy of public policy.

Each talk takes place in the Seminar Room, Institute for Health and Social Policy, 1130 Pine Ave, from 14:35 to 17:35.  These events are free and open to everyone. We welcome students, faculty and the general public to attend. Here is the line-up:

Monday, October 6: Wayne Norman, Mike and Ruth Mackowski Professor of Ethics, Kenan Institute for Ethics and Department of Philosophy, Duke University. His work focuses on business ethics and his published work includes numerous books and journal articles, as well as contributions to “Ethics for Adversaries: How to Play Fair When You’re Playing to Win.”

Monday, October 20: Joseph Heath, Professor in the Department of Philosophy and the School of Public Policy and Governance at the University of Toronto; Director of the University of Toronto Centre for Ethics. He has published work very widely including the recent book "Enlightenment 2.0: Restoring Sanity to Our Politics, Our Economy, and Our Lives."

Monday, October 27: Patrick Turmel, Professor in the Department of Philosophy, Laval University. His work focuses on ethics and political institutions, particularly cities. His publications include co-authorship of a book titled “La Juste Part: Repenser les Inégalités, la Richesse et la Fabrication des Grille-Pains.”

Monday, November 11: Martin O’Neill, Senior Lecturer in Moral and Political Philosophy, Department of Politics, University of York, U.K. His research examines global and intergenerational justice. Among his many publications, Professor O’Neill’s most recent book is “Property-Owning Democracy: Rawls and Beyond.”

Monday, November 17: Peter Dietsch, Professor, Department of Philosophy, Université de Montréal. He works on questions of distributive justice with particular emphasis on the application of philosophical theories through social instruments including the tax system. His work is widely published, including a recent article titled “Tax Competition and Global Background Justice” in The Journal of Political Philosophy. He is also working on a book on tax competition entitled “Catching Capital”.

I am looking forward to hearing what these pre-eminent philosophers can tell us about the state of contemporary tax policy theory. Over the course of the semester it is my hope that we can develop a framework for thinking about tax policy that responds to the world in which we find ourselves today, with all of its promises and challenges for democracy, economy, and identity.

Tagged as: McGill philosophy scholarship tax policy

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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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IRS claims statutory authority for FATCA agreements where no such authority exists

Published Jul 04, 2014 - Follow author Allison Christians: - Permalink

Over at federal tax crimes blog Jack Townsend has posted a letter from the IRS to Congressman Bill Posey, in response to an inquiry the Congressman apparently made about the intergovernmental agreements ("IGAs") to implement FATCA by other governments (instead of directly by foreign financial institutions, per the law Congress enacted in 2010). Treasury says:
“Your letter also asks about statutory authority to enter into and implement the IGAs. The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons)."
None of these sources of law contain any authorization to enter into or implement the IGAs.  It is patently clear that no such authorization has been made by Congress, and that the IGAs are sole executive agreements entered into by the executive branch on its own under its "plenary executive authority”. As such the agreements are constitutionally suspect because they do not accord with the delineated treaty power set forth in Article II. As Michael Ramsey wrote in a 1998 article, the danger is that if the president seeks to reach agreements outside of his plenary constitutional powers, the agreement lacks domestic legal effect.

Just to be clear, the fact that a document signed by an individual might or might not bind the United States as a matter of constitutional law does not mean that the United States will not honor whatever commitments the individual makes under such an agreement. The contrary is likely the case especially given the predicament Treasury found itself in, coupled with the pitiable small promises undertaken by the US in these "agreements."

But we should be clear that the analytical terrain we should be traversing is whether the scope of the plenary executive authority can suffice to support as a matter of law the promises made in some 80 or so IGAs (many of which are currently agreements in principle only). We should not be wasting anyone's time pretending that Congress has authorized Treasury or the Secretary of State to enter into the IGAs. It has not.

So let’s take a look at what these sources actually say.

22 USC 2656 is about the power of the secretary of state. It says:
The Secretary of State shall perform such duties as shall from time to time be enjoined on or intrusted to him by the President relative to correspondences, commissions, or instructions to or with public ministers or consuls from the United States, or to negotiations with public ministers from foreign states or princes, or to memorials or other applications from foreign public ministers or other foreigners, or to such other matters respecting foreign affairs as the President of the United States shall assign to the Department, and he shall conduct the business of the Department in such manner as the President shall direct.
If that is an authorization for the IGAs, it is a vague one at best. Does an IGA constitute “correspondences, commissions, or instructions,” “negotiations”, “memorials or other applications,” or “such other matters respecting foreign affairs”? Under what interpretation of such relevant provisions? Also there is nothing here about the content or scope of the treaty power hereby implicitly authorized. Is IRS saying that with this power the Secretary of State can bind the nation at will on any matter, without the need for the President to seek advice and consent from the Senate prior to ratification? If so this is an extraordinary claim that does not scan with either historical practice or constitutional theory. 

26 U.S. Code § 1471 is, of course, part of FATCA. It is entitled “Withholdable payments to foreign financial institutions”.  It sets out the reporting obligations imposed on foreign financial institutions and states that the Secretary is authorized to treat a foreign financial institution as “meeting the requirements” of 1471 if the institutions complies with procedures or requirements set forth by the Secretary or is “a member of a class of institutions” identified by the Secretary. 

There is explicit authorization in 1471 for the Secretary to engage in agreements with FFIs to implement FATCA. However where is the authorization in 1471 for the Secretary to engage in agreements with other countries to implement FATCA? It is not in the text, certainly.

Therefore to what specific provision of 1471 could IRS possibly refer when it suggests this statute authorizes individuals to sign agreements altering the reach of FATCA on behalf of the United States? There is clearly no explicit authority. Is it implied? If so, by what?

Moreover, many or most of the IGAs have been signed by officers of the Secretary of State, ambassadors, consulates general and others, and not by Treasury. Does s1471 also impliedly delegate its implied treaty power authority to those outside of Treasury who have signed on behalf of the United States? Certainly there is no explicit delegation here.

26 U.S. Code §1474(f), also part of FATCA, is the statutory authorization for the Secretary of the Treasury to 
“prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter.” 
There is no authority expressed in this provision for the Secretary to enter into agreements with other governments. Does IRS suggest that an IGA constitutes “regulations” or “other guidance”? Under what interpretation of that characterization does the Treasury interpret the promulgation of either regulations or other guidance as an authorization to negotiate an agreement with a foreign government?

26 U.S. Code § 6011 is entitled “General requirement of return, statement, or list,” and it states the parameters under which a person must make a return “[w]hen required by regulations prescribed by the Secretary.” There is authorization in 6011 for the Secretary to require taxpayers to fulfill various reporting requirements, including electronic reporting. There is no authorization in 6011 for the Secretary to engage in agreements with other countries to implement 6011. 

What provision of 6011 is IRS suggesting confers the authority to negotiate agreements with other governments without Senate advice and consent?  Does IRS mean to imply that each and every authorization that Congress gives Treasury for the prescription of regulations is an implicit authorization for Treasury (or its implied designees in other departments) to conclude agreements with other governments? If so, this is a surprising claim of executive power that is inconsistent with the treaty power described in Article II of the constitution. I would think Congress would like to know under what interpretation of Congressional direction to the Secretary to issue guidance, IRS or Treasury would conclude that it now holds the power to make treaties on behalf of the United States.  

In other words, if IRS stands by this authorization it is suggesting that any tax code section that authorizes Treasury to regulate implicitly contains both a treaty making power as well as the power to delegate authority to departments other than that specifically charged with implementing the statute. That is not a plausible claim.

26 U.S. Code § 6103 is entitled “Confidentiality and disclosure of returns and return information” and it provides that “returns and return information shall be confidential,” with exceptions provided by statute. There is authorization in 6103 for the Secretary to engage in agreements with taxpayers to implement 6103 (for example in the case of advance pricing agreements). There is no authorization in 6103 for the Secretary to engage in agreements with other countries to implement 6103. Therefore, as with 1471 and 6011, to what specific provision of 6103 does IRS refer, and under what interpretation of the authority given by Congress in 6103 to enter into agreements with taxpayers does IRS find the authority for anyone to enter into agreements with other countries?

26 U.S. Code Part III, Subpart B is entitled “Information Concerning Transactions With Other Persons” and it contains 26 US Code §§ 6041 through 6050W—a very broad set of statutes involving information reporting, none of which explicitly grant anyone the power to bind the nation to anything. Certainly nowhere in the subpart appears any express authorization for Treasury to enter into agreements with other governments in respect of s1471 or otherwise. Therefore the same questions I have raised with respect to 1471, 1474, 6011, and 6103 would seem to arise here.

In short I see no express authorization anywhere in any of these authorities for the Treasury to enter into the intergovernmental agreements. Moreover there is no precedent for such agreements, and they are being signed by US officials who are not members of the Treasury. Does it not seem at least noteworthy that an enormous network of bilateral tax agreements has been established, a network that dwarfs the existing tax treaty network in size and scope, all without any explicit Congressional authorization, and without any regard to the Treaty power clearly laid out in Article II of the Constitution? 

And why not cite the TIEA power?

I would add that is not at all clear why any list of authorizations for an individual to enter into agreements with other governments on behalf of the United States would not include 26 US Code § 274(h)(6)(C)(f), which has long been relied upon to by Treasury to find the authority to enter into tax information exchange agreements ("TIEAs") that were not expressly authorized by the statute (because they are not listed in Section 274 as beneficiary Caribbean Basin countries).  This statute has clearly been abused by Treasury in extending it way beyond what Congress intended. However, the fact that Congress has not complained suggests that it has acquiesced to the overreach. 

That makes the TIEAs good precedent for those who want to defend the IGAs as a matter of law. In omitting this, the only plausible source of support for the authority to bind the nation without the advice and consent of Senate, does IRS suggest that Treasury now backs away from this authority? If so, why would they do that? The answer is of course that IRS believes that if necessary the TIEAs can also be considered sole executive agreements, and as such a TIEA "does not need Senate or other congressional approval." This is an official claim that the IRS doesn't think Treasury or anyone needs even s.274 as a cover: the executive can simply act alone to achieve its tax goals through international agreements.

At the end of the day, it is clear that Treasury saw a real and serious need to work with other governments to make FATCA work. There is no disputing that fact, and indeed it is a step toward multilateral cooperation which should be celebrated if only it weren’t so lopsided, and if only it weren't being accomplished via the threat of economic sanctions for all the world’s tax havens except the United States itself. But no amount of need or want can sidestep the constitutional delegation of powers among the branches, and the treaty power is no exception: nor should it be. At least one Treasury official has already conceded that the explanation for the IGAs is that they are "executive agreements”, not Article II treaties. 

IRS and Treasury should therefore just admit that the IGAs are simply “sole” executive agreements—not authorized by Congress but entered into by the executive branch under its sole discretion. 

This is a tenuous position and it ought to fail constitutional scrutiny but for the fact that in the past, Congress has acquiesced to this exercise of power by the executive and it is likely to do so again, especially given how little has been undertaken by the United States in these IGAs. As Lee Sheppard pointed out in a Tax Notes article two years ago, "An executive agreement depends on the good will of the parties to enforce it.” And as Susie Morse also pointed out in Tax Notes last year, Treasury is very likely to try to enforce their part of the IGAs. 

Since the US side of the IGAs is to deliver very modest undertakings that Treasury also believes can be done without congressional approval (namely, extending the longstanding s. 6049-based information exchange with Canada to other countries), this is probably true; all IGA promises to alter the law in the future should be seen as what they are, unenforceable promises that are beyond Treasury’s control and so won’t be delivered. 

Therefore honesty is still the best policy for Treasury. Instead of citing non-existent statutory authority that is easily refuted by simple reading, Treasury should own what it is doing outright. These are sole executive agreements, they lack statutory approval, they undertake very little on the part of the United States, but they are an effective way of pretending to be cooperative so that other countries can save face as they submit to the threat of economic sanctions that is FATCA. There isn’t really any reason why Treasury shouldn’t acknowledge this reality, since it is, strictly speaking, of Congress’ own making.

Tagged as: FATCA rule of law Tax law tax policy u.s.

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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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New GAO Report on Exemption for Foreign Earnings of Nonresident "US Persons"

Published May 20, 2014 - Follow author Allison Christians: - Permalink

The GAO likes to call the foreign earned income exemption a tax expenditure, on grounds that a deviation from the norm of income inclusion is in effect a subsidy. Under this theory, exempting a nonresident US person's foreign earned income constitutes a deviation from the normal rule that for US persons, income means "income from whatever source derived."


But exempting foreign income earned by nonresident persons is absolutely not a tax expenditure. 

This is because the potential inclusion of foreign income earned by nonresident individuals in the first place is itself an anomaly that exists only in the US income tax. All other countries exempt foreign income earned by nonresident individuals as a foundational principle. It is only the US that does not do this. If the US sensibly followed the rest of the world, it would have no need for a foreign earned income exemption.

The anomaly of taxing nonresidents as if resident is what falsely leads the GAO to the conclusion that an exemption for foreign income constitutes a deviation from the normative baseline. When the true source of the deviation is correctly located in the extraterritorial definition of resident instead, it is clear that an exemption of foreign income earned by a nonresident individual does not constitute a subsidy or expenditure but rather a limited correction of a category error. 

In any event, read the whole report here


Tagged as: tax policy u.s.

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