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Does a country's willingness to exchange tax info alter the character of its trade in services?

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

Delimatsis and Hoekman have posted National Tax Regulation, International Standards and the GATS: Argentina—Financial Services, of interest especially in light of ongoing discourse about what kinds of tax competition are approved versus harmful in OECD terms. Here is the abstract:

Can a WTO Member discriminate against foreign suppliers of services located in jurisdictions that refuse to share information with a government to permit it to determine if its nationals engage in tax evasion? Does it matter if the Member uses standards developed by an international body as the criterion for deciding whether to impose measures? In Argentina—Financial Services the WTO Appellate Body held that services from jurisdictions that share financial tax information may be different from services provided by jurisdictions that do not cooperate in supplying such information. It overruled a Panel finding that measures to increase taxes on financial transactions with non-cooperative jurisdictions were discriminatory. We argue that the AB reached the right conclusion but that an important opportunity was missed to clarify what WTO Members are permitted to do to enforce their domestic regulatory regimes, and how international standards could have a bearing on this question. By giving consideration to arguments that the likeness of services and service suppliers may be a function of prevailing domestic regulatory regimes, the AB increased the scope for confusion and future litigation.

Tagged as: scholarship tax policy WTO



How to rob from the poor and give to the rich: Border Tax Equity Act of 2016

Published Nov 07, 2016 - Follow author Allison Christians: - Permalink

In September, Donald Trump started calling for the US to tax imports from Mexico and China etc, on various theories having to do with his vision of what fair trade policy involving the United States would require. Democratic lawmaker Bill Pascrell appears to have seized the moment to re-introduce a bill that has failed multiple times in the U.S. Congress over the years, namely, the so-called Border Tax Equity Act. The idea of this act is simple: tax US consumers on imports and give the money to US companies that export things. If you find it amazing that anyone anywhere could support a tax and redistribute scheme like this, blame it on the pitch: Pascrell (and others) laud this as an answer to what they have characterized as a discriminatory practice, namely the exemption of exported products from value added taxes (VAT) by the 160+ countries that have federal consumption taxes. The argument is that "[t]he disparate treatment of border taxes is arbitrary, inequitable, causes economic distortions based only on the type of tax system used by a country, and is a primary obstacle to more balanced trade relations between the United States and its major trading partners."

This argument is specious and I don't expect the bill to pass but this issue is one that just does not seem like it will go away, I think because it is too easy to pitch the VAT border tax adjustment as "unfair." I had an exchange with trade expert Simon Lester almost ten years ago on this very subject, and re-reading my response today, it seems to cover the bases so I thought I would re-post it. You can see his original post here including a discussion in the comments between myself, Simon, and Sungjoon Cho on the matter. Sungjoon helpfully linked to a GATT working party report from 1970 but his original link is dead, however you can find that report here. Here is what I said (highlights added):

The great fallacy here is that the foreign exporter to the U.S. is somehow subject to no tax while the U.S. exporter is subject to two taxes. This is simply not the case. Other countries, especially our biggest trading partners (e.g. Canada) have both a federal corporate income tax and a federal consumption tax, while the U.S. has only a federal corporate tax. You cannot honestly assess the impact of the VAT in the context of only one country’s corporate income tax, and supporting this legislation this way is dishonest. The Textileworld site you reference conveniently ignores foreign corporate taxes in its analysis—I will leave you to decide for yourself why they might do that.

...I will give a drastically oversimplified example. Assume a U.S. person manufactures a product in the U.S. which it will sell in Canada. The company’s profit on the sale is subject to federal income tax in the U.S., plus VAT in Canada (there called a general sales tax). Let us assume a Canadian company makes a similar product. With the same profit margin as the U.S. company on that product, the big issue here is the different rates of federal corporate taxes each company pays to its home country, because both pay an equal amount of VAT tax in that market. What the export credit in the U.S. would do is lower the U.S . company’s federal income tax burden relative to the Canadian one.

Now flip the scenario, the U.S. manufactures and sells a product in the U.S., where there is no VAT, and the Canadian company manufactures a product in Canada to sell in the U.S. Now each company again will pay its income tax to its home country but what happens to the VAT? Well there is no U.S. federal sales tax, and Canada’s VAT only applies to sales in that market, so the VAT is not imposed on the Canadian product coming in to the U.S.—it is exempt from their VAT. Again, in the U.S. market, there is no price distortion other than the difference in corporate income tax burdens—neither product is subject to VAT. If the U.S. imposes a border tax, I think you might now see that as distortionary (to the extent you believe that a tariff is distortionary in any event). Now you might say yeah, but many states have state sales taxes, wouldn't that equalize the incoming product, exempted from sales (VAT) tax in its foreign country? The answer is, of course, yes. But you don’t see very many people complaining if New York does not impose its sales tax on a product being shipped out of New York for sale in Canada—that is a (much-ignored) direct corollary to the VAT exemption.

I could go on but this argument has been made many times before. I appreciate that tax is complex and there are many alternative taxes and scenarios in which they apply differently, so that it is easy to be swayed by something that “seem unfair.” The bottom line is that people will continue to compare VAT to income taxes when it suits their purposes (i.e., supports protectionist policies like the border tax), and not when it doesn’t (i.e, when they want to pressure a government to lower its corporate tax rate to align with other nations’ corporate tax rate). But don’t be fooled by someone who tries to get you to look at one piece of a complex puzzle and guess what the image is.
[I]f you seek a level playing field, border taxes and rebates do not achieve that, and in fact, I doubt anyone could ever be confident about how to go about getting it via tax breaks for some and tax penalties for others (I have some ideas about where I would start, but I'll restrain myself). A border tax/rebate does not operate like an inverse VAT or offset an extra cost imposed by a VAT. A border tax is a tariff and a rebate is a subsidy, plain and simple, and I would expect many of our trading partners to oppose it if enacted.

Incidentally, abolishing all income taxes might solve the problem of the income tax competition, but then you have a much different problem. By some estimates, if the U.S. were to abolish the income tax entirely in favor of a sales tax, the rate could be as high as 50%. More likely scenario: we keep the income tax just like it is and ADD a 10-20% federal VAT. This would get rid of the erroneous "VAT as distortion" complaint but I personally would rather keep the debate and take a pass on the VAT.
Today, I am less convinced that the income tax is worth saving and more open to a federal VAT, but that's a discussion for another day. To the above I would only add that in 2009 the US Congressional Research Service undertook a study called International Competitiveness: An Economic Analysis of VAT Border Tax Adjustments, well worth reading--the authors were Maxim Shvedov (now tax policy expert at AARP) and Donald Marples, whose more recent work on inversions with Jane Gravelle is also of interest. Their conclusion:
Economists have long recognized that border tax adjustments have no effect on a nation's competitiveness. Border tax adjustments have been shown to mitigate the double taxation of cross-border transactions and to provide a level playing field for domestic and foreign goods and services. Hence, in the absence of changes to the underlying macroeconomic variables affecting capital flows (for example, interest rates), any changes in the product prices of traded goods and services brought about by border tax adjustments would be immediately offset by exchange-rate adjustments. This is not to say, however, that a nation's tax structure cannot influence patterns of trade or the composition of trade.
In summary: No, taxing at the border for the reasons given does not introduce "equity." It introduces WTO-prohibited tariffs and export subsidies. One could imagine that if the tariffs so raised were used to fund public goods, the possibility for an equitable outcome could be increased. But taking the money out of the pockets of US consumers and putting it in the pocket of US exporters in no way fulfills the stated policy goal.

Tagged as: fairness politics tax policy VAT



Rosenzweig: An Antigua Gambling Model for the International Tax Regime

Published Jun 22, 2014 - Follow author Allison Christians: - Permalink

Adam Rosenzweig recently posted An Antigua Gambling Model for the International Tax Regime. Here is the abstract:

The international tax world is facing a defining moment. While there is little agreement on anything within the field, there appears to be a growing consensus that the modern international tax regime — the so-called flawed miracle emerging from World War II — is irrevocably broken. As the countries of the world confront the challenges facing the international tax regime in the next century, new models for an institutional framework for international tax become increasingly crucial to its success. While significant progress has been made in developing underlying norms to serve as the basis for a modern international tax regime, less focus has been paid to building the institutions and structures necessary to implement these norms. To this end, this Essay proposes looking to the recent experience of the WTO in the Antigua Gambling case as a model for a new institutional framework for the new international tax regime. The Essay then proposes three potential ways to do so: (1) the creditable gross-withholding tax method, (2) the extraterritorial excise tax method, and (3) the WTO cross-retaliation method. 
By serving as an example of how to balance the needs of larger, wealthier countries and smaller, poorer ones, the Antigua Gambling model could help overcome one of the largest obstacles confronting the development of a modern international tax regime. Perhaps an Antigua Gambling model could serve as the basis for a new institutional framework for international tax.
Ambitious, and on my to-read list.

Tagged as: international law scholarship Tax law tax policy WTO



Should you (virtually) go to Antigua to gamble or download?

Published Feb 04, 2013 - Follow author Allison Christians: - Permalink

What an odd story from Above the Law last week:

Antigua & Barbuda can now legally offer downloads of copyrighted U.S. works, and there's not a damn thing the U.S. can do about it. The decision marks the latest chapter in the long-running trade dispute between the U.S. and the tiny Caribbean nation over Antigua's internet gambling industry. The U.S. banned Antigua's internet casinos, Antigua took the U.S. to court through the WTO, and Antigua won — and has continued to win — consistently throughout the appeal process.
ATL describes WTO dispute resolution thusly:
"Because you pulled Sally's hair, she gets a free shot to kick your friend from school in the nuts. Justice!!!"
But what Antigua really wants is a deal:
"The economy of Antigua and Barbuda has been devastated by the United States government's long campaign to prevent American consumers from gambling online with offshore gaming operators," Harold Lovell, Antigua's finance minister, said in a statement. "We once again ask our fellow sovereign nation and WTO member, the United States of America, to act in accordance with the WTO's decisions in this matter, before we move forward with the implementation of the sanctions authorized this day by the WTO."
I have two multi-part questions and two asides.

  1. just as a factual matter, can people currently download US-copyrighted works from Antigua with impunity? That is, would that not be a breach of copyright on the part of the downloader, even if it is not for the download-facilitator? Obviously i have no understanding of copyright law.
  2. can a nation state, as a matter of power/capacity, prevent its people (however it defines them) from gambling offshore via the internet?  And if it can, why shouldn't it?  This is a loaded question.

Tagged as: culture globalization governance institutions international law



WTO Trade disputes "from the inside"

Published Jan 25, 2013 - Follow author Allison Christians: - Permalink

This will be an interesting talk:
Appellate Body Member Tom Graham will be giving a talk at Hofstra on Feb. 6 entitled "It Sure Looks Different From the Inside: Deciding International Trade Disputes at the WTO". The title sounds promising, and from what I understand he will talk a bit about the use of the Vienna Convention by the AB in its decision-making.  He is not likely to be as forthcoming as, say, Justice Scalia, but he may say some interesting things nonetheless.
I don't see anything about live feed, too bad. I would have like to hear what he had to say--WTO decision-making is of interest to those of us keeping an eye on arbitration in tax treaties.  

Tagged as: conference rule of law WTO



WTO overwhelmed with disputes

Published Dec 17, 2012 - Follow author Allison Christians: - Permalink

Simon Lester notes a deluge of cases: "they keep coming, and it may be starting to strain the WTO's resources." He cites this report from Reuters:
The WTO's 157 members have launched 26 trade disputes so far in 2012, the most since 2003 and three times more than the eight new complaints filed in 2011. 
According to an internal WTO document seen by Reuters, the WTO decided to reallocate staff to the disputes team to deal with the increasing number and complexity of legal cases....
As well as moving staff, the trade body also advertised for a senior dispute settlement lawyer, at a starting salary of around 161,900 Swiss francs ($175,300), and is seeking short term candidates to help deal with the caseload.
Interesting development, especially against the backdrop of increased scrutiny and questions about the legal nature of these decisions.

Tagged as: arbitration institutions rule of law WTO



Why Are States Broke? Lobbying Hollows out the Tax Core

Published Dec 06, 2012 - Follow author Allison Christians: - Permalink

Over at Naked Capitalism, a lengthy discussion about that $80 billion in state-level corporate welfare from David Segal:
Our states and localities are cannibalizing one another as they concoct targeted tax breaks which they use to lure corporations from their neighbors. Meanwhile, a bevy of middlemen wet their beaks by helping corporations pit sucker states off of one another and brokering deals to sell the tax credits that comprise much of the ensuing largess. 
...It's the most basic of game theory dilemmas, and in a less corrupt political dynamic, one that could be solved by the intervention of sensible federal government actors, or perhaps even through the initiation of an interstate compact that had states agree to stop poaching from one another. 
Segal offers up Boeing as an example of the more successful manipulators ("Washington State residents bested a couple dozen other states, offering to pay the hometown company $3 billion not to forsake them" but South Carolina eventually won when it "offered Boeing around $1 billion to open a Dreamliner plant there.") Segal says only the WTO has "threatened to provide any sort of meaningful check" on these subsidies.

He also singles out one of my favorite targets, the infamous and ludicrous state film tax incentive war:
Perhaps the most transparently absurd manifestation of war-between-the-states phenomenon is the case of the film tax credit ... [which] spurred the most precipitous race to the bottom I've witnessed in my time in politics. It came to a head in 2009, when Wisconsin had just spent $100,000 dollars to support Johnny Depp's personal grooming expenses and Connecticut was fixing to subsidize episodes of Jerry Springer's talk show — lots of broken chairs to pay for.  ... California's recent budget includes a half-billion in tax credits of its own ... to keep Hollywood from off-shoring to Manhattan, Indianapolis, and Santa Fe, which are offering bribes of their own. ... At least 42 states now provide incentives, with some exceeding 40% of production costs.
That battle is lost, I think, and state-to-state is only compounded internationally. Hello Quebec, I'm looking at you, boasting about your "most advantageous cash rebates available in North America"--with your 25 % cash-back on all expenses, your 20 % bonus on all CGI and Green screen shots and no minimum spend, no caps; you don't even have to release the film in Quebec. Paradise.

Segal's got the analysis right:
all that we're doing is paying people to move jobs to-and-fro, creating no new social value, and reducing net public benefit.
WHen you do that among the several states it seems merely silly; when you do it among countries, however, that's a bit of a different matter now isn't it.

He also explains the mechanisms of the film tax credit and concludes that
tax credits of this form are always a raw deal for the public, unless a substantial percentage of the credits go unclaimed: A full 25% or so of the subsidy is misfiring, going to middlemen and corporations with significant tax burdens. If you want to fund something efficiently, just fork over cash. (This, of course, could never be made to happen, since then the public would understand that all we're really doing is forking over cash to millionaires.)
Well said. More at the link.

Tagged as: film tax incentives lobbying Quebec tax policy u.s.



Links this week

Published Dec 02, 2012 - Follow author Allison Christians: - Permalink

A selection of links posted on twitter this week that were not discussed here, possibly of interest:

On the Fiscal Cliff:

  • Naked capitalism says don't believe the hype, better to go over the fiscal cliff than take the grand bargain being offered 
  • FT seeks tax holiday to bring home corps' $1.5T offshore, because what we need is more tax breaks for apple, google, etc. (Sigh)
  • Krugman: proposed tax hikes would raise 14 times as much as would be saved by raising Medicare age, yet only the latter is deemed "serious" 
Of Reefer and Revenues, and other Canadian tax news
  • B.C marijuana tax could total billions if pot was legalized (CBC)
  • Canada’s budget watchdog takes government to court for refusing to release austerity details (Fin Post)
  • Outrageous: Quebec officials entitled to severance pay with just two years of service, even if they were convicted of crime during office.  
Recent scholarship:
And from around the world:
  • In communist Cuba, the tax man cometh (Reuters)
  • London calling! Dec 8th action in London revealed! Activists will descend on Starbucks flagship stores and transform them into social service centers
  • Border Carbon Adjustments and WTO law (Simon Lester)
  • Zambia Says Tax Avoidance Led by Miners Costs $2 Billion a Year (Bloomberg

Tagged as: links



Are WTO dispute settlements "Law"?

Published Dec 01, 2012 - Follow author Allison Christians: - Permalink

From Simon Lester, yet another reminder for those studying tax treaty arbitration that the issues are many and difficult. When basic questions of enforceability can't be answered in an area of the law where things are fairly well developed and are subject to ongoing extensive public vetting and debate, it serves as a warning of what lies ahead for international tax dispute resolution. From the post:
There is some famous scholarly debate on whether WTO dispute settlement rulings are binding.  Here's a media take on it, from the CBC news (in the context of the Ontario feed-in-tariff case):  The World Trade Organization appears to have upheld a [discrimination] complaint against the Province of Ontario's green energy program. ...reports Monday suggest the affected parties have been notified of the [WTO]'s decision to side with the complainants...The WTO ruling is non-binding, meaning Ontario could simply ignore it and not face any monetary punishment. But such a move would likely be met with the implementation of tariffs against any Ontario-made goods in Japan and the EU.
Simon thinks the word "binding" does not tell us much if retaliatory tariffs could be imposed in the event Ontario ignored the ruling. Instead, he says "the key question is how effective the enforcement mechanism is."

I'd agree-it's equivalent to the maxim that "tax administration is tax policy." In international tax there is no doubt that the question is not the substance of standards, rules, or even norms, but rather what countries actually do, and that happens daily through hundreds and maybe thousands of completely opaque diplomatic interactions (competent authority agreements). Adding arbitration to this mix adds yet another layer of administration and enforcement mechanisms and all the attendant problems that go along with them.

Tagged as: arbitration international law rule of law tax policy transparency



Policy autonomy and the WTO

Published Jun 04, 2012 - Follow author Allison Christians: - Permalink

Alvaro Santos has published "Carving Out Policy Autonomy for Developing Countries in the World Trade Organization: The Experience of Brazil and Mexico," discussed last week at Opinio Juris where Santos says:
I argue against the commonly held assumption that WTO legal obligations overly restrict countries' regulatory autonomy.  Despite the presence of restrictions, I claim that there is still flexibility in the system for countries to carve out regulatory space for themselves. That countries can expand their policy autonomy means that governments of developing countries have more agency and responsibility than development scholars typically admit. At the same time, however, the asymmetry of power and resources between countries does affect their experience in the system and thus influences the outcomes to a greater extent than liberal trade scholars usually acknowledge.
...countries are creating policy space ... as repeat players (RPs), to make use of textual open-endedness in legal obligations, to seek out favorable rule interpretation, and to actively participate in the WTO system through strategic lawyering and litigation. To pursue this strategy, countries invest in "developmental legal capacity," through which governments recognize the need to make gains in policy autonomy in order to pursue economic policy goals that may be in tension with the WTO's free trade objectives.
Santos analyzes the trajectories of Brazil and Mexico in the WTO to show two different experiences of repeat players and explore how and why their strategies differ.  More discussion at the Opinio Juris link.

Tagged as: development institutions international law