Friday, February 5, 2016

Documenting the spread of OECD norms: Country by Country Reporting Map

Here is a world map showing status of implementation of the OECD's Country by Country Reporting regime; clicking on the flags gives a brief country status report. I'm not really sure how informative it is in that it is not all that useful to read simply that CBCR is being implemented but the implementation date is "unknown" in various countries, especially when the little flag masks real controversy surrounding the country's intentions.  Also I am not sure what to make of all the blank space--do the map's curators think these other countries are irrelevant to the inquiry? Even so, if the idea is that the map will one day be covered in green flags, and that the world with green flags is remarkably different than today's world with mostly red and yellow ones, watching the map evolve will be a fascinating study in the power of soft law.

Thursday, February 4, 2016

Global Tax 50

I'm honoured to have a spot on the Global Tax 50 list this year--International Tax Review's list of people and organizations that have had a global impact or influence on tax. European Competition Commissioner Margrethe Vestager tops the list this year, a fitting choice given the importance of the fiscal state aid investigations to the pace and direction of global tax reform efforts.

Wednesday, February 3, 2016

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

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.



Tuesday, January 26, 2016

Tax justice and human rights: call for essays on litigation strategies

I received the following notice by email, of interest:
Oxfam and the Tax Justice Network are joining together to launch a tax justice and human rights essay competition for legal students and professionals. With tax justice rising up the human rights agenda, we want to hear your ideas on how human rights law can be used in the fight against tax dodging.

Tax justice is a human rights issue

International tax dodging by multinational corporations and wealthy elites costs countries both rich and poor billions of dollars a year in lost revenues. This is undermining vital public services where they are most needed and further driving inequality at a time when the richest 62 people in the world have as much wealth as half the world's population.  Overall, substantial damage is done to human rights through the use of tax havens, the opacity of corporate accounting, the manipulation of trade prices and the disguising of beneficial ownership. But national and international fora may provide scope for redress.

What we want

We're inviting 3,500-word complaints to identify the plaintiffs, defendants, remedies sought, and arguments that are considered enforceable in an existing legal forum. We seek complaints that could form the basis of effective  advice to developing countries, or to groups of citizens in countries at any income level who have suffered, and want to know how they could best use law to protect their or their people's human rights in the face of tax injustice.
I have a few thoughts on this and I really look forward to seeing the results of the competition.

Saturday, January 23, 2016

Apple's private meeting to lobby the European commissioner in state aid investigation

The FT reports that Tim Cook took it upon himself to go and visit the European commissioner Margrethe Vestager, "to lobby the EU’s antitrust chief weeks before she is set to rule on a landmark case that could force the California-based technology company to pay billions in underpaid taxes to Ireland." Really? Let's see, this is a private meeting with a person who is in charge of deciding whether your company benefited from a scheme to violate an agreement among EU members on trade practices within the internal market.

Pretty clearly the Commissioner should have flatly refused such access. I don't know what the rules are for private parties to attempt to influence a sitting Commissioner in the midst of a procedure laid out in an international treaty that directly impacts one's pecuniary interests. Apple is not a party to a case; rather it is a beneficiary of something Ireland did, and that it the action being investigated. But Apple has had a chance to make its statements and explanations according to a process. According to the EC, the formal investigation procedure accords an opportunity for input from all those that may be affected by its investigation:
The Commission is obliged to open a formal investigation under Article 108(2) TFEU where it has serious doubts about the aid's compatibility with EU State aid rules, or where it faces procedural difficulties in obtaining the necessary information. 
The decision to initiate this procedure is sent to the relevant Member State. It summarises the factual and legal bases for the investigation and includes the Commission's preliminary assessment, outlining any doubts as to the measure's compatibility with EU state aid rules. The decision is published in the EU's Official Journal, and Member States and interested third parties have one month from the date of publication to submit comments. The Member State concerned is in turn invited to comment on observations submitted by interested parties.
I have not seen comments submitted by Apple according to this procedure. It seems to me that the private meeting has an appearance of impropriety. First, it was private so it does not form part of a record of information reviewed in the course of the investigation. Neither party has given any public comment regarding what was discussed. Having a private meeting deprived Ireland of its role in responding to observations submitted by interested parties, as described above. The conversation took place for the specific purpose of influencing a decision. The conversation raises the question of whether others have also private meetings, also trying to influence the commissioner beyond the procedures laid out for investigations.

I note that "All decisions and procedural conduct of the Commission are subject to review by the General Court and ultimately by the ECJ." The Commissioner will not likely seek review of its own decision. I do not know whether other member states could seek such a review. It seems most likely that Ireland could seek a review, which it would only do if the decision was unfavorable. If that were to happen, would Tim Cook also have private meetings with the judges of the ECJ?

I should hope not.

Monday, January 18, 2016

Uncle Sam Wants...Who? At UBC Law This Week

This week I will be in Vancouver to present a paper at the UBC Allard School of Law. The paper, "Uncle Sam Wants...Who? A Global Perspective on Citizenship Taxation," is now available in draft form on SSRN. Here is the abstract:
Across the globe, banks are flagging accounts with indicia indicating their owners may be “US Persons,” making it possible for the United States to enforce its taxation of nonresident citizens extraterritorially for the first time in history. The indicia method constitutes a mining expedition for US citizens carried out by foreign banks and governments. Establishing a tax jurisdiction in this manner is unprecedented and has significant practical and normative consequences. In the case of so-called “accidental Americans,” it violates one of the most fundamental and universally- acknowledged tenets of taxpayer rights, namely, the right to be informed about what the law requires. Third party indicia-searching should be universally rejected as a means of identifying a taxpayer population. Instead, the United States itself is responsible for cataloguing, informing, and educating its global population of taxpayers. Those who don’t belong in the system should be allowed to opt out without cost.
I welcome comments on this work in progress.

Apple may owe $8bn in back taxes after European commission ruling

I have been following the EU state aid cases with particular attention to Apple and its SEC disclosure involving its sweetheart deal in Ireland. A recent story in the Guardian suggests the amounts at stake could be significant, even if not by Apple's standards:
The European commission’s recent ruling against tax breaks for multinational corporations in Belgium strongly suggests that the tech behemoth could be subject to a hefty bill when the open investigation against its activities in Ireland concludes. 
...The commission found that Starbucks owed Dutch authorities upwards of $22m, and a ruling from Belgium this week determined that 35 companies across the EU owe the equivalent of $760m in back taxes. 
Apple has already said it would appeal against a ruling against the company; CEO Tim Cook called the investigation “political crap” in a recent 60 Minutes interview. “There is no truth behind it,” he said. “Apple pays every tax dollar we owe.” 
This is not the first time Apple has been investigated for its accounting practices in Ireland. Executives including Cook appeared before the US Senate in 2013 to testify about whether it had renegotiated Ireland’s 12.5% corporate tax rate down to 2%. The company denied any wrongdoing. Matt Larson, litigation analyst for Bloomberg Intelligence, calculates that the company would owe $8.02bn at that rate....
$8 billion sounds like a lot of money until considered in the reflection of its $200 Billion cash stash, which is being held offshore pending US international tax reform as openly advocated by Tim Cook.

Still, the figure is not nothing and it is pretty far off what Apple intimated to investors back in April of 2015:
As of March 28, 2015, the Company recorded gross unrecognized tax benefits of $4.6 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $844 million and $630 million of gross interest and penalties accrued as of March 28, 2015 and September 27, 2014, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact. 
That language was new in the April 2015 filing, but the latest Apple filing reverts to the more general message found in prior filings:
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. 
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material. 
The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition, operating results and cash flows could be adversely affected.
I continue to wonder whether there will be shareholder litigation (more than nuisance suits) in the event of a major clawback by the EU.

Monday, December 14, 2015

Update to Canada's FATCA litigation

The grassroots group responsible for launching the FATCA-based litigation in Canada has issued a public call for witnesses. They are looking for "a Canadian who has been somehow harmed by this FATCA legislation, are interested in helping out by becoming a Witness in our lawsuit, and are willing to have your affidavit statements and name go public." The group is up front about the risks involved in coming forward: being a witness is to expose oneself to public scrutiny, some of which is decidedly hostile, as well as of course the risk of ruinous consequences deriving from US tax rules as they apply to noncompliant nonresident persons' lives.

Tuesday, December 8, 2015

Understanding the Accidental American: Tina's Story

Tax Analysts has published my talk on taxpayer rights and citizenship-based taxation as enforced via FATCA, which I gave in November at the International Conference on Taxpayer Rights in Washington DC, organized by National Taxpayer Advocate Nina Olson. Tax Analysts' content is normally gated but they have made this column available on their free site.

Friday, November 20, 2015

FATCA, Citizenship-Based Tax, and Taxpayer Rights

I recently sat down with Bob Goulder of Tax Analysts to talk about FATCA, citizenship-based taxation, renunciation, and taxpayer rights.


Wednesday, November 11, 2015

Senate Foreign Relations Committee Approves 8 Tax Treaties

Senator Rand Paul has been holding up tax treaties for several years but he apparently stepped away from the Foreign Relations Committee yesterday and eight slipped through. They will be considered by the full Senate which I assume will give consent to their ratification, since as far as I know Sen. Paul was the only opponent. From Reuters:
The U.S. Senate Foreign Relations Committee on Tuesday approved eight long-delayed international tax treaties, which had been held up for years because of one Republican senator's objections, despite support from companies that want consistency in rules for how to do international business. 
The treaties are with Switzerland, Luxembourg, Hungary, Chile, Spain, Poland and Japan and the international convention on mutual assistance on tax matters. 
U.S. Senator Rand Paul objected to the agreements for privacy reasons, saying they would allow more inter-governmental sharing of financial information on citizens, which U.S. officials deny. Although the Republican is a member of the committee, he was not at the meeting where the pacts were approved by unanimous voice vote. 
It was not yet certain when the treaties would be considered by the 100-member U.S. Senate, where they need a two-thirds vote to be ratified.


Please Give: Passionate Plea for IRS Funding from Former IRS Commissioners

The IRS faces constant funding pressure from Congress, despite becoming a victim of constant mission creep thanks to Congressional mandates (ACA and FATCA in particular). Over the years many have pled with Congress to stop underfunding the agency. The latest comes from seven former commissioners, who note that not least among the reasons to fund the IRS is the need to spend money on cyber security as the IRS fends off one million hacking attempts each week.

That's a lot of hacking because of course the payload is enormous. FATCA has surely expanded the payload significantly by developing an enormous database of personal information attached to bank account numbers and detailed account activity on a global scale. Even a small breach of security with respect to that vault will be disastrous for the taxpayers involved.

The commissioners also suggest that the IRS workload is going to increase due to BEPS. BEPS is expected to result in more treaty-based conflicts among jurisdictions, so I expect more competent authority hours will be needed. But it's likely also the case that country-by-country reporting requirements will add another enormous treasure trove of information to the database, further increasing the payload.

At minimum, Congress has simply got to fund security for this massively expanding taxpayer information database.
November 9, 2015

The Honorable Thad Cochran
Chairman
Committee on Appropriations
United States Senate
113 Dirksen Senate Office Building
Washington, D.C. 20510

The Honorable Harold Rogers
Chairman
U.S. House Committee on Appropriations
U.S. House of Representatives
2406 Rayburn House Office Building
Washington D.C. 20515

The Honorable Barbara A. Mikulski
Vice Chairwoman
Committee on Appropriations
United States Senate
503 Hart Senate Office Building
Washington, D.C. 20510

The Honorable Nita M. Lowey
Ranking Member
U.S. House Committee on Appropriations
U.S. House of Representatives
2365 Rayburn House Office Building
Washington, D.C. 20515 
Subject: IRS Appropriations for Fiscal Year 2016
Dear Chairman Cochran, Vice Chairwoman Mikulski, Chairman Rogers and Ranking Member Lowey: 
We are all former Commissioners of the Internal Revenue Service. Over the last fifty years we served during the administrations of Presidents John F. Kennedy, Lyndon B. Johnson, Ronald Reagan, George H.W. Bush, William J. Clinton, and George W. Bush.

We are writing to express our great concern about the proposed reductions by the House and Senate in appropriations for the Internal Revenue Service for the current fiscal year that will end on September 30, 2016. We understand that the Appropriations Committees in the House and Senate have proposed to reduce the FY 2015 IRS appropriation of $10.9 billion by $838 million and $470 million, respectively, for the current fiscal year. If Congress were to reduce the IRS appropriation for the current year, it would represent yet another reduction in the IRS appropriation. The appropriations reductions for the IRS over the last five years total $1.2 billion, more than a 17% cut from the IRS appropriation for 2010. None of us ever experienced, nor are we aware of, any IRS appropriations reductions of this magnitude over such a prolonged period of time. The impact on the IRS of these reductions is that the IRS has lost approximately 15,000 full-time employees through attrition over the last five years, with more losses likely in the current fiscal year unless Congress reverses the funding trend. These staffing reductions come at a time when the IRS workforce is aging, with nearly 52% of IRS employees now over the age of 50 and 24% already eligible to retire. Three years from now, 38% of IRS employees will be eligible to retire. This loss of IRS knowledge and experience is alarming, particularly in light of the fact that, out of a present workforce of about 85,000 employees, the IRS has only about 3,400 employees under the age of 30 and only 384 employees under the age of 25 due to hiring freezes for budgetary reasons at the IRS since 2010 and periodically from 2005 to 2010. Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.

These reductions in IRS appropriations are difficult to understand in light of the fact that, at the same time these reductions have occurred, the Congress repeatedly has passed major tax legislation to substantially increase the IRS workload. Most recently the Congress passed the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act, two major new programs, each of which significantly expands the IRS' tax administration burdens. The IRS personnel reductions come at a time when the IRS is stretched to the breaking point to cope with tax enforcement challenges attributable to global and domestic changes that are impacting our tax system. Increasingly, the United States is facing tax challenges as the result of efforts that are taking place in the international tax arena to deal with the tax non-compliance that is accompanying the continued globalization of business and investment activities. The most recent tax changes to address international tax non-compliance are proposed in the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting Report. Regardless of one's view of these proposed changes, it is clear that the IRS will be substantially impacted by changes and challenges of other countries who adopt them.

Additionally, increasing incidents of identity theft and refund fraud are being perpetrated against our tax system by large, sophisticated organized crime syndicates around the world. These criminals seek to file false returns and claim fraudulent refunds using personal taxpayer data obtained from sources outside the IRS. At the same time, many unlicensed, unregulated return preparers are preparing and filing fraudulent tax refund returns. Every time there is an information technology hacking event in the public or private sectors in which Social Security numbers are stolen, the likelihood exists for additional identity theft and refund fraud. The growing refund fraud challenge to our tax system is especially alarming to us because of the need, which is fundamental to our tax system, for the IRS to be able to assure taxpayers who are paying their fair share of taxes that other taxpayers are doing the same thing. To emphasize the seriousness of refund fraud, the Government Accountability Office earlier this year placed identity theft and refund fraud on its list of "high risk areas" in the federal government, a sure sign to each of us that the IRS should have more, not fewer, enforcement resources to deal with this threat to the integrity of our tax system,

To place the impact on our tax system of the Congressional IRS appropriations reductions over the last five years in its proper context, Congress almost annually over the last 25 years has passed legislation that has imposed additional burdens on IRS tax collection and administration under our revenue laws. During this time, the Congress also repeatedly added more and more socio-economic incentives to the tax code and called upon the IRS to administer these new socio-economic programs, including healthcare, retirement, social welfare, education, energy, housing, and economic stimulus programs, none of which is related to the principal job of the IRS to collect revenue. At the same time, Congress passed even more legislation to pay for these tax spending programs. The result is that almost 30 years after the 1986 Tax Reform Act, our tax laws are a mess. Our tax laws have become so difficult for taxpayers to understand that 80% of all individual taxpayers now use paid consultants or software to prepare their income tax returns. Because of insufficient IRS resources in FY 2015, an average of more than 60 percent of the taxpayers who called the IRS for assistance in preparing their returns during the last filing season were unable to reach an IRS assistor, even after many taxpayers had remained on the telephone for more than 30 minutes before they were automatically cut off because of the volume of calls, which the reduced numbers of IRS assistors were unable to handle. Equally serious are the cybersecurity threats illustrated by the problem that occurred earlier this year involving unauthorized attempts to access taxpayer information using the IRS' Get Transcript online application. Separately, the IRS continues to experience about one million attempts each week to hack into its main information technology systems. Although the IRS has so far successfully thwarted these attacks and its main systems remain secure, all of this astonishes us and emphasizes to each of us that the IRS taxpayer assistance and IRS information technology resources are severely underfunded, especially when compared to the increasing cybersecurity budgets of private sector companies.

It is clear to each of us that the IRS appropriations reductions over the last five years materially and adversely affect the ability of the IRS to assist taxpayers who are trying to comply with their tax obligations, as well as the ability of the IRS to detect and deter taxpayers who have not complied with their tax obligations. Recently, we understand that the IRS estimated a direct annual revenue loss to the Federal government in tax enforcement at $6 billion last year and $8 billion this year, due to such appropriations reductions. Historically, for every dollar invested in IRS tax enforcement, the United States received $4 or more in return, and we understand that continues to be true today.

The Congressional Budget Office in its June 2015 Long-Term Budget Outlook projected future fiscal challenges to the United States because of the large and increasing size of our national debt and rising future operating deficits attributable to an aging U.S. population and rising healthcare costs. It, therefore, is imperative that our tax system in the future operate at an optimal level in order to maximize the revenues the IRS collects. For that to happen, the IRS must be able to assist taxpayers who are trying to comply with their tax obligations, and at the same time be able to enforce the tax laws against those taxpayers who have not complied with their tax obligations. In short, because of our country's fiscal and other challenges, our tax system must work and work well to collect the taxes that are owed.

Some have argued that the IRS can solve these problems by simply becoming more efficient. This argument ignores the reality that the IRS is already, by far, the most efficient tax collection agency among large countries in the world. The OECD recently released its bi-annual analysis of tax administration across the developed world and reported, based on 2013 statistics which don't reflect the most recent IRS budget cuts, that the amount the IRS spends to collect a dollar in taxes is approximately half the average amount spent by all OECD countries. Germany, France, England, Canada and Australia all spend as much as two to three times the amount the IRS does to collect a dollar of revenue.

In light of the foregoing, we fail to understand how it makes any logical sense to continue to reduce, rather than increase, the IRS budget for FY 2016 in order to optimize the IRS' ability to provide taxpayer service and to enforce the tax laws to increase revenue collections. To put it succinctly, we do not understand why anyone with present and projected debts and annual losses as large as those of the United States would refuse to pay for telephone assistance to people trying to fulfill their tax obligations, would turn their back on $8 billion annually in additional revenue, or would fail to make an investment that offers a return equal to at least four times the amount invested. For these reasons, we respectfully call upon each of you to support and work to accomplish the passage of an IRS appropriations request for FY 2016 that is substantially in excess of the appropriation for the IRS in FY 2015.

Mortimer M. Caplin (1961-64)

Sheldon S. Cohen (1965-69)

Lawrence B. Gibbs (1986-89)

Fred T. Goldberg, Jr. (1989-92)

Shirley D. Peterson (1992-93)

Margaret M. Richardson (1993-97)

Charles O. Rossotti (1997-2002)