TAX, SOCIETY & CULTURE

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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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Dagan on International Tax and Global Justice

Published May 01, 2017 - Follow author Allison Christians: - Permalink

Tsilly Dagan recently posted this new paper on the limitations of normative tax analysis that constrains itself to the state. Here is the abstract:

Inequality, as well as the scope of the duty of justice to reduce it, has always been a central concern of political justice. Income taxation has been seen as a key tool for redistribution and the state was the arena for discussions of justice. Globalization and the tax competition it fosters among states change the context for the discussion of distributive justice. Given the state’s fading coercive power in taxation and the decreasing power of its citizenry to co-author its collective will due to global competition, we can no longer assume that justice can be realized within the parameters of the state. 
International tax policy in an effort to retain justice often opts for cooperation as a vehicle to support distributive justice. But cooperation among states is more than a way for them to promote their aims through bargaining. Rather, it is a way for states to regain legitimacy by sustaining their very ability to ensure the collective action of their citizens and to treat them with equal respect and concern. The traditional discussion in international taxation seems to endorse a statist position — implicitly assuming that when states bargain for a multilateral deal, justice is completely mediated by the agreement of the states. 
In contrast, this Article argues that such a multilateral regime intended to provide the state with fundamental legitimacy requires independent justification. Contrary to the conventional statist position, I maintain that cooperating states have a duty to ensure that the constituents of all cooperating states are not treated unjustly because of the agreement. I argue that not only cosmopolitanism but political justice too requires that a justiciable cooperative regime must improve (or at least not worsen) the welfare of the least well-off citizens in all cooperating states. I explain that cooperation alone is no guarantee of improved welfare and that certain transfer payments between rich and poor countries might be required to ensure this.
 This is an important and provocative paper, highly recommended reading.

Tagged as: globalization governance institutions justice scholarship tax policy

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Tax Coop 2016: "Winning the Tax Wars" May 23-24

Published May 16, 2016 - Follow author Allison Christians: - Permalink

Tax Coop and the World Bank are hosting a conference on tax competition and cooperation to be held in Washington DC on May 23-24. As last year, I've constructed the debate, which this year will be livestreamed on May 23 at 16:15 EST.  I'll post the link when I have that information. At last year's conference, Dan Mitchell (Cato) and Richard Murphy (TJN) put corporate taxation on trial, debating the continuing viability of this tax in the face of technological innovation and economic globalization. This year's debaters are Alison Holder of ActionAid and Veronique de Rugy of the Mercatus Center at George Mason University.

They will debate the following:

What’s Better for Developing Countries: 
Tax Competition or Tax Cooperation?

This question will be explored through a series of three resolutions, as follows:
  1. First, be it resolved that: tax competition harms developing countries by reducing their capability to raise fiscal revenue to finance physical and social infrastructure needed for economic growth and social inclusion.
  2. Second, be it resolved that: tax competition increases developing countries’ reliance on foreign aid, making them more vulnerable to aid volatility. 
  3. Third, be it resolved that: tax competition aggravates existing income disparities between developed and developing countries.
Arguing the “affirming side” of each resolution will be Alison Holder of ActionAid. Arguing the “opposing side” of each resolution will be Veronique de Rugy of the Mercatus Center at George Mason University. Evidence from all jurisdictions will be admissible. The emphasis will be on persuasive, clear, and logical argumentation. The debate will proceed in four rounds and will be moderated and judged by Louise Otis of McGill University and Jay Rosengard of Harvard University. Last year's debate was definitely a highlight of the conference and I look forward to hosting Ms. Holder and Ms. DeRugy for this year's event. 

The full conference program features a slate of distinguished speakers from around the world and across public, private, and academic sectors.  Registration is free; additional program and speaker information available here and you can follow @taxCoop on twitter for updates and links. 







Tagged as: conference corporate tax economics globalization governance institutions Tax law tax policy

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

Published Nov 11, 2015 - Follow author Allison Christians: - Permalink

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)

Tagged as: FATCA governance information institutions IRS US

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In global tax governance, institutions matter.

Published Aug 04, 2015 - Follow author Allison Christians: - Permalink

José Antonio Ocampo posted a plea for institutional reform in tax policymaking today,  in which he decries the jealous guarding of tax policy exclusivity by OECD countries, especially the US and the UK. At the recent Financing for Development conference, developing countries called for a greater role for the UN in global tax governance but the OECD countries balked. Ocampo writes:

The OECD, whose members are essentially the world’s 34 richest countries, certainly has the capacity to set international standards on taxation. Yet the domination of a select group of countries over tax norms has meant that, in reality, the global governance architecture for taxation has not kept pace with globalization. 
The Monterrey Consensus reached in 2002 included a call to enhance “the voice and participation of developing countries in international economic decision-making and norms-setting.” But although the OECD invites some developing countries to participate in its discussions to establish norms, it offers them no decision-making power. The OECD is thus a weak surrogate for a globally representative intergovernmental forum.
I understand that it is costly and complicated to develop institutions that allow for meaningful participation by all people affected by transnational tax policy norms.  But the international tax system is a resource allocation machine that has significant impacts on people's life chances across all populations. I fail to see what principles of justice support a world in which a small and privileged group of people make decisions of both process and substance that directly impact, and yet purposefully and systemically exclude, the majority of the world's population. The substance of norms, rules, and standards may matter in global tax governance, but ultimately institutions matter even more.

Tagged as: institutions justice OECD political malfunction tax policy

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Sheppard on International Tax: What's Gonna Work? Teamwork.

Published Jul 28, 2014 - Follow author Allison Christians: - Permalink

Lee Sheppard has a nice column today on dual consolidated loss rules and BEPS (gated), in which she states:
Would-be reformers of the corporate income tax like to believe in the tax equivalent of a single game-changing player. They want an instant, simple solution -- be it a territorial system or formulary apportionment. They don't want to have to think about the grunt work of making an international system work. They don't want to have to think about the heavy lifting of rewriting the source rules. They don't want to think about detailed anti-hybrid rules. 
Of course she uses Argentina v Germany rather than the Wonder Pets, but same idea.

She goes on to explain the multiple problems posed by hybrid entities and how the BEPS hybrid draft has, and has not, addressed these. Sheppard's article demonstrates yet again that making income taxation work today means regulatory globalization that parallels the scale and scope of economic globalization.

The magnitude of the task is vividly demonstrated in FATCA: a concise statute that has rapidly expanded into thousands of pages of regulations, guidance, and agency explanations, a bilateral agreement network that dwarfs the US tax treaty network, and the spawning of a global compliance industry trucking in data collection, transfer, and analysis in both the private and public sectors. BEPS would be no different. it would require the same type of global infrastructure and the same level of sustained commitment. But it is clear that while the US has a great appetite for making FATCA work, and has directed all of its economic might to that effort, it is much, much less interested in seeing BEPS through. The ultimate outcome of BEPS is all too predictable from past OECD efforts that were not initiated by the US.

Tagged as: BEPS globalization institutions rhetoric tax policy u.s.

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Today at McGill Law: Tax Justice and Human Rights Research Symposium #TJHR

Published Jun 18, 2014 - Follow author Allison Christians: - Permalink

Today is the first day of the Tax Justice and Human Rights Research Collaboration Symposium, a three-day conversation among students, academic researchers, and tax justice advocates and activists on the topic of tax justice: what is it, how is tax connected to human rights or how could it be, and what research needs to be done to further this emerging field? You can follow the proceedings and make comments on twitter at #TJHR.

Here is the day's lineup:

Day 1: Emerging Scholars Symposium
Wednesday, 18 June

Time
Topic
Location
08:30 – 09:00
Registration & Arrival Tea/Coffee
Atrium
09:00 – 09:30
Welcome RemarksDaniel Jutras (Dean, McGill Faculty of Law)
Room 316
Panel A
Samuel Singer (Associate, Stikeman Elliott), Moderator
Room 316 
09:30 – 10:00
Leyla Ates (PhD candidate, University of Wisconsin and Istanbul Kemerburgaz University), Developing Countries And Globalization of Tax Law Making: Turkısh Tax Law Reforms on Fighting Tax Evasion
Steven Dean (Professor, Brooklyn Law School), discussant
10:00 – 10:30
May Hen (Master's candidate, Simon Fraser University), Who runs the Cayman Islands? Field notes on elite tax discourse
Lyne Latulippe (Professor, University of Sherbrooke), discussant
10:30 – 10:45
Refreshment Break
Third floor lobby
Panel B
William Stephenson (Editor in Chief, McGill Law Journal), Moderator
Room 316
10:45 – 11:15
Regina Duarte (LLM Candidate, Federal Univ. of Minas Gervais, Brasil),Globalization, Tax Competition and Tax Base Erosion: a Matter of Human Rights
Henry Ordower (Professor, Saint Louis Univeristy), discussant
11:15 – 11:45
Martin Hearson (PhD candidate, LSE), Why Do Developing Countries Sign Tax Treaties?
Lee Sheppard (Journalist, Tax Analysts), discussant
11:45 – 12:15
Montano Cabezas (LLM Candidate, Georgetown University Law Center),Giving Credit Where it is Due: Rethinking the Corporate Tax Paradigm
Kim Brooks (Dean and Weldon Professor of Law at the Schulich School of Law at Dalhouse University), discussant
12:15 – 13:45
Stikeman Chair’s Luncheon featuring a keynote talk by James A. Robb, Stikeman Elliott
Atrium
Panel C
Sas Ansari (Phd Candidate, Osgoode University), Moderator
Room 316
13:45 – 14:15
César Alejandro Ruiz Jiménez (LLM Candidate, Vienna University), Right to Property and Taxation
Stephen Cohen (Professor, Georgetown University Law Center), discussant
14:15 – 14:45
Juan Agustin Argibay Molina (LLM Graduate, McGill), Trade Mispricing in Argentina: A Case Study
Neil Buchanan (Professor, George Washington University Law School), discussant
15:45 – 15:15
Daisy Ogembo (Assistant Lecturer, Strathmore Law School, Nairobi), VAT Refunds and Tax Justice
Andre Moreira (Associate Professor of Tax Law, Federal University of Minas Gerais, Brazil), discussant
15:15 – 15:30
Refreshment Break
Third floor lobby
Panel D
Sarah Blumel (Independent), Moderator
Room 316
15:30 – 17:00
Incubator Session: Designing a Research Project, Methodology & Collaboration, and Publishing
Adrienne Margolis (Founder and Editor, Lawyers 4 Better Business);Krishen Mehta (Senior Advisor, Tax Justice Network); Gabriel Monette(Réseau Justice Fiscale); and Shirley Pouget (Senior Program Lawyer, International Bar Association Human Rights Institute)
17:00 – 19:00
Cocktail reception
Atrium
19:00 – 20:30
Roundtable on Tax Justice and Human Rights: Open to the Public
Allison Christians (Stikeman Chair in Tax, McGill Faculty of Law), Moderator
Featuring Alex Himelfarb (Director, School of Public and International Affairs, York University); Kate Donald (Adviser to the United Nations Special Rapporteur on Extreme Poverty and Human Rights); Attiya Waris (Senior Lecturer, Faculty of Law, University of Nairobi); and Denise Byrnes(Executive Director, Oxfam Québec)

Tagged as: conference human rights justice McGill scholarship tax policy

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Bruce Zagaris on US Perspectives on Information Exchange

Published Jun 17, 2014 - Follow author Allison Christians: - Permalink

Bruca Zagaris has a two-part article on U.S. policies on the exchange of information in tax matters, published  by Tax Analysts on June 9 and  June 17, of great interest (but gated, unfortunately). He provides an overview of the applicable treaties (bilateral and MAATM), TIEAs and IGAs, and discusses the various forms of information exchange. He gives a nice level of detail on how information exchange requests are processed in the US and how the US achieves its information goals vis a vis other countries. He goes through the legal structures and the developments at the OECD and EU. He then provides a series of detailed hypotheticals focusing in on US information exchange policy with respect to Latin America. Bruce is very clear about the lack of reciprocity that characterizes the US position toward information exchange and notes, rightly, I believe, that this position is sure to lead to conflict going forward.

His conclusion is rather bleak but I don't disagree with anything he is saying. Here are a few excerpts:

The U.S. budgetary problems, the pay-as-you-go system, the revenue estimates obtained for the anti-tax-haven bills, and the proclivity of some members of Congress to focus on tax enforcement and compliance directed at U.S. taxpayers concealing money abroad ensures that the anti-tax-haven bills will constantly be appended to appropriations legislation in this session of Congress and in future sessions. There are so many anti-tax-haven initiatives and the lack of actual reciprocity by the U.S. government, as opposed to the rhetoric, may well lead to dispute resolution proceedings soon and to disagreements within the international initiatives of the OECD and FATF, as a result of the perceived lack of a level playing field. 
A global trend toward criminalization of tax compliance and enforcement will continue.... Governments will continue to try to privatize tax enforcement by deputizing FIs and service providers regarding reporting, ethics, and a range of other requirements. Criminal investigations and prosecutions of noncompliant institutions and service providers will continue. 
... Disagreements are likely to continue among the OECD and developing countries about the proper financial architecture, not only in tax policy, but also financial regulation. If possible, the G-8 countries will try to continue to centralize decision-making in elite informal groups, such as the G-20, the Financial Stability Forum, and the OECD and the groups it controls, such as the Global Forum on Taxation. 
... OECD and Latin American governments, including the United States, Argentina, Mexico, and Brazil, will continue to impose sanctions through blacklists and countermeasures against small financial center jurisdictions, both unilaterally and through international organizations (for example, the OECD and IMF) and informal groups (for example, G-20, FATF, and Financial Stability Board), even though small-state offshore financial centers do a much better job of enforcing the prohibition on anonymous companies and bank accounts than do large OECD countries, and the United States is the main offender in failing to enforce the international standards prohibiting anonymous companies 
The biggest potential impediment to the United States achieving its global tax priorities is the political gridlock, especially regarding the budget, spending, raising taxes, and raising the debt limit. ... 
The upshot of globalization and increased penalization of international tax and money movement flows is increased pressure on financial intermediaries, including lawyers, trust companies, banks, accountants, and other wealth management professionals who must advise clients. Increasingly, tax authorities, law enforcement, and regulators will be acting to obtain information and bring administrative and criminal cases for reporting violations, nonpayment, nonfiling, and allegedly fraudulent activities, or conspiracy to do the same.
All in all this is a tremendous resource for anyone wanting to understand information exchange from the US perspective. I hope that others will undertake similar analyses for other countries, so that we can start to understand what tax information exchange actually looks like now, and what it will likely look like going forward. The combination of non-reciprocity, a starved administration, and political gridlock in the US with a continued policy jealousy on the part of the US and its close "elite" allies that Bruce describes portends deep trouble ahead for the rest of the world, especially as these countries continue to reserve their own rights to act as tax havens.


Tagged as: FATCA information institutions international law Tax law treaties u.s.

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Koskinen: Tough as Nails on Individuals; Cautious and Worrisome on US Multinationals

Published Jun 03, 2014 - Follow author Allison Christians: - Permalink

Further to the last post, below are the full remarks from Commissioner Koskinen, with a few key remarks in bold. The remarks are long but I think worth reading in their entirety if only for the marked contrast between the IRS' divergent approaches to "cracking down" on individuals versus US multinational companies. These approaches will most certainly diverge further in the future, if Commissioner Koskinen's statements reflect hardening policy positions. 

I don't want to spend too much time analyzing what is, in the main, a plea for Congress to give the IRS more money, and secondarily some cheerleading for the hard work put in by the IRS and the financial industry to get FATCA operational. Still, it is worth noting that there is much unstated here, for instance: what is meant by "home" jurisdiction--a question no one seems too keen to ask or answer even as we rush headlong into global automatic information exchange. If we actually care about getting these things right we have got to have a global conversation about who owes what to whom as a matter of justice and as a matter of rights, and most importantly: who is going to make those decisions. 

When we don't have those conversations it is all too easy for someone to wax enthusiastically about the project of demanding the bank account numbers and balances of millions of people who don't reside in their country while in the next breath advising caution and restraint when it comes to other countries taxing "their" corporations.



PREPARED REMARKS OF
JOHN A. KOSKINEN
COMMISSIONER
INTERNAL REVENUE SERVICE
BEFORE THE
U.S. COUNCIL FOR INTERNATIONAL BUSINESS-OECD INTERNATIONAL TAX CONFERENCE
WASHINGTON, D.C.
JUNE 3, 2014


Thank you to the U. S. Council for inviting me to be here today. I’m honored to have the opportunity to participate in this important discussion about international tax issues.
Although I have been IRS Commissioner for only a few months, I have quickly come to appreciate the great importance of focusing on the international tax compliance of both business and individual taxpayers. And I’ve come to understand that it is not possible to overstate the challenge that globalization poses to tax administration for the United States and I’m sure for many other jurisdictions as well. Rapid and extensive globalization of markets, business models, and financial systems has presented taxpayers and tax administrations with challenges and opportunities of all sorts.

As you know, the United States government is attempting to respond to the global challenges -- sometimes aggressively and sometimes cautiously and collaboratively, but hopefully always with thoughtfulness, perspective, and a sense of global responsibility. It seems we are in a critical time in these respects, as all of you know well, and this makes it a very exciting time for global tax administration, a time in which rapid and dramatic changes are afoot. For example, it was only a few years ago that tax administration officials were talking about the need to pierce the veil of bank secrecy, and today it seems that veil is being shredded as we move toward a cooperative environment based on tax transparency.

One of the most exciting aspects of our current times is to see governments working so closely together to ensure that taxpayers comply with the tax obligations of their home jurisdictions. With respect to individual tax compliance, we see this collaboration in the process by which FATCA will soon go into effect, and its younger but already bigger sister, the Common Reporting Standard, or CRS, will soon be adopted globally. The cornerstone of these efforts, of course, is the automatic, multilateral exchange of information, which signals quite clearly that international tax transparency is no longer a distant hope, but rather an immediate reality.

But as far as we have come on this road, there is still a great deal of work to be done. Although the policy issue has been settled and tax transparency is the common goal, tax administrators still must answer the question of how we make automatic information sharing work well as a practical matter. We must devise brand new systems, processes, and protocols that maximize efficiencies, minimize burden on taxpayers and financial intermediaries, and ensure the safety and security of the information being transmitted. But before talking about these, I would like to step back for a moment and look at where the U.S. is today on offshore tax compliance and how we got to this point.

The IRS’ serious efforts to combat offshore tax evasion, which had long been a problem, began in 2008 with our efforts to address specific situations brought to our attention in part by whistleblowers. The most notable example of this was the situation with UBS. The IRS realized that the globalization of investment opportunities, and the marketing of those opportunities, could do serious harm to the integrity of the U.S. tax system if complete tax transparency was not part of the equation. This is especially true because our tax system is built on the notion of voluntary compliance. Allowing wealthy individuals to use overseas accounts without paying taxes not only erodes the home jurisdiction’s tax base, but it also is an affront to the vast majority of taxpayers who play by the rules and expect their neighbors to be doing likewise. So from the outset, the IRS adopted a clear message: International tax evasion was, and would continue to be, a top priority for the agency, and people hiding assets offshore would find themselves increasingly at risk of enforcement actions.

A turning point in our enforcement efforts came in 2009 with the agreement reached with UBS. This agreement represented a major step toward global tax transparency and helped build a foundation for our future enforcement efforts. Importantly, the agreement sent the message that the IRS would pursue tax evasion around the world, wherever it might be based, and would also focus on those facilitating tax evasion practices. The agreement also showed the IRS’ keen interest in working cooperatively with other governments to obtain the information needed to bring evaders to justice.

Since 2009, the IRS has taken a multifaceted approach to the offshore noncompliance problem. This has included working diligently and cooperatively with other governments to obtain information on U.S. owners of offshore accounts, as well as banks and other promoters of tax evasive techniques, and using that information to prosecute those willfully evading the law. We have mined the information we’ve obtained for future leads, and have shared our findings with other governments to help them enforce their own laws.

While maintaining strong enforcement programs, the IRS has also sought to encourage taxpayers to come into compliance voluntarily. In 2009, the agency first made available a special Offshore Voluntary Disclosure Program, or OVDP. This program has allowed U.S. citizens with undisclosed offshore accounts to voluntarily disclose those accounts, pay a monetary penalty, and avoid criminal prosecution. Because of this program’s success, modified voluntary programs were made available in 2011 and again in 2012. Since 2009, these programs have resulted in more than 43,000 voluntary disclosures from individuals who paid more than $6 billon in back taxes, interest, and penalties, and the numbers continue to rise. In fact, we have noted a significant uptick in participation since the Department of Justice announced its program for Swiss banks last August. So we have clear evidence that our enforcement efforts are working together with our voluntary programs, and we are hopeful that this dynamic will flourish until the offshore problem is stamped out completely.

Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.

We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.

Now, I’ve mentioned FATCA a couple of times and let me talk about it more directly. With FATCA, Congress took a significant stride towards global tax transparency by calling for automatic information reporting on financial accounts held by U.S. taxpayers, no matter where those accounts are located. And so, as everyone knows, FATCA’s enactment has had a dramatic impact on the global financial system, as financial intermediaries all around the world have had to modify their systems and processes to carry out what FATCA calls for. We know that this implementation has been difficult and costly, to say the least, and I’d like to thank the financial community for working so closely with us to ensure that, in the future, all international investors are also tax-compliant investors. In a truly global economy, this is fundamental, of course, and I believe at some point in the future all of us, in both the private and public sectors, will look back with not only a strong sense of accomplishment, but also with wonder at how it ever could have been otherwise.

I’ll also note that the U.S. government’s preparations for FATCA have not exactly been easy. Since enactment, the IRS and Treasury have been working extremely hard to solidify the legal framework, global relationships, and infrastructure necessary to convert FATCA from a concept into a practical reality, and this has been no small task. For four years now, FATCA implementation has demanded a tremendous amount of hard work and dedication on the part of a relatively small group of public servants, without whom offshore tax evasion might still be considered a viable practice. These folks have diligently worked on issuing guidance that is clear and eases the FATCA compliance burden as much as possible, and they have made a herculean effort to take into account the extensive stakeholder comments we’ve received in order to get there. I know there are still a few more things to do, but I should take the time, midstream, to thank the IRS and Treasury FATCA team for the work they have completed so far, because that work has been monumental.

And beyond the legal and regulatory framework that’s been created, you’ll find a number of other very novel elements of the FATCA implementation effort that are important in their own right.
First, so that we can identify and interact with our stakeholders in the global financial community, we had to create a new Global Intermediary Identification Number, or GIIN, and develop a unique registration system. This system allows financial intermediaries around the world to establish their FATCA-compliant status and obtain a GIIN to prevent FATCA withholding when receiving payments from U.S. sources. The FATCA registration system opened several months ahead of schedule and has performed flawlessly to date. So far, tens of thousands of financial institutions have established FATCA accounts and received their GIINs. And just yesterday in fact, we successfully made available to all potential withholding agents the so-called “IRS FFI List” of Foreign Financial Institutions, so those agents can download the database of IRS-issued GIINs to their own systems and use that data to determine which of their account holders are FATCA-compliant and thus free from FATCA withholding.

Second, we had to be very mindful that FATCA data will be coming to us from a wide variety of sources and in a variety of ways. So we had to reach intergovernmental consensus, with extensive input from the financial sector, on a common data format, or schema, that will allow us to process and interpret all FATCA data, no matter its source, once we receive it. This hard work was guided by the OECD, and for that effort that I would like to extend my special thanks to the OECD representatives here in the room today, as well as to the individual members of the OECD Secretariat staff and the private sector financial community not with us who diligently worked through a tremendous amount of detail to ensure that FATCA information reports can be used efficiently and effectively, not only by the IRS but by our reciprocal FATCA partners as well.

Third, the automatic exchange of bulk information contemplated by FATCA will require a modern mode of data transmission, one that, frankly, is not available at the moment. This too has presented a challenge for IRS like no other faced in the past. So, working again with our partners in tax administration around the world, we have had to design a new system for electronic data exchange that will allow FATCA data to be transmitted quickly and securely. So far, we are pleased with the resulting design of this new “International Data Exchange System,” which we refer to as IDES. We believe it will accomplish our goals, and anticipate it will be available to users by January of the coming year so that FATCA data can flow on time.
In this regard, I also want to emphasize that we take very seriously the need to ensure that the financial data transmitted through IDES will be transmitted securely, kept confidential, and used only for tax purposes. Protecting this information and assuring its intended use must be our number-one goal. Toward that end, we designed IDES to include state-of-the-art encryption protocols, and we developed a set of safeguard standards addressing the security and use of data once it is received by a government.

Lastly and importantly, during the past several months, we have been conducting bilateral meetings with each one of our reciprocal FATCA partners to ensure that our safeguard needs are understood and that we and our partners achieve a high level of comfort that FATCA data will be kept confidential and used only for tax purposes, as our treaty and information exchange agreements contemplate.

Before I leave the subject of FATCA implementation, I want to mention our resource limitations at the IRS. The agency continues to be in a very difficult budget environment. Since Fiscal Year 2010, IRS funding has been reduced by more than $850 million, or about 7 percent, and we have 10,000 fewer employees, even as our responsibilities have continued to expand. In the absence of additional resources, our ongoing funding shortfall has major, negative implications for the agency’s ability to continue to adequately fulfill its dual mission of excellent taxpayer service and robust tax compliance programs.

Having said that, it is also important to point out that Congress has mandated that the IRS implement FATCA. Whatever else we are going to do, the IRS must move forward with our non- discretionary legislative mandates, and FATCA is at the top of that list. So I want to assure those of you dealing with FATCA implementation in other ways and in other realms that the IRS will continue to find the necessary resources for FATCA, and implementation will not be disrupted by our budget constraints.

Let me also offer a few words on FATCA enforcement. First, as I have already said, we realize that FATCA implementation is challenging not only for the IRS, but also for the financial institutions that are covered by it. We understand there is a great deal of complexity in FATCA, and that financial institutions must make substantial modifications to their processes and systems to implement it. And we understand that complying with the letter of these requirements, down to the final dotting of “I”s and crossing of “T”s, will take some time. As we announced publicly in an IRS Notice last month, we intend to view 2014 and 2015 as a so-called “transitional” enforcement period during which we will take into account a financial institution’s good-faith efforts to comply in our evaluation of what constitutes acceptable FATCA compliance.

Second, we’re well aware that our offshore enforcement resources going forward will need to be dedicated not to small-scale issues that those trying to be FATCA compliant may have, but rather to broader-scale problems presented by those who choose to seek new ways to evade their tax obligations. That is, we recognize that compliance with FATCA by those trying to comply, and with the new Common Reporting Standard when it goes into effect, will improve and be fine- tuned over time. Problems in this area will be corrected by the compliance-minded. The IRS and other enforcement agencies around the world will be able to focus on the structures and arrangements that, unfortunately but inevitably, will be devised to stay in the shadows in a new world of tax transparency. And in that new world, governments will need to work closely together to shine light into those shadowy spaces until they no longer exist.

Now, although I’m suggesting here that FATCA will not put a complete end to the offshore problem we face, I am telling a very positive story, not a bleak one. FATCA and CRS clearly will make it much more difficult and costly to hide assets, so that those who still seek to do so will be forced to spend money to devise more complex structures, turn to riskier jurisdictions and riskier forms of investment, and face far greater certainty of prosecution when found. FATCA will also de-stigmatize those holding offshore accounts for legitimate purposes, as those accounts will be both reported and reported upon in the normal course, while tax administrations focus their enforcement efforts against those truly seeking to evade taxation.

Interestingly, we can already begin predicting that governments will be working on these future problems completely in concert. In fact, because our interests are aligned and the new instruments of transparency and enforcement we are developing together will be shared, I believe the melody of our total success will be sweet and come quickly.

Now, before I conclude, I would like to say a few words about the topic that is front and center at this conference that is, Base Erosion and Profit Shifting, or BEPS. 

For some time now, the IRS and the U.S. Treasury have been active participants in the OECD’s project to address BEPS on a global scale. We fully support the goal of developing a coordinated and comprehensive action plan to update our international tax rules to reflect modern business practices. Hopefully, this coordinated work will help prevent, rather than exacerbate, the double taxation disputes that could arise if countries unilaterally attempt to address these issues without consensus-based principles. And of course, consensus-based principles are also critically important to ensuring that businesses have the tax certainty they need to operate efficiently around the globe.

That said, I have one point that I believe needs to be considered in the context of these important discussions. I urge that your policy and legal determinations not be made without thoroughly considering the practical implications of these decisions, not only for businesses, but for tax administrations. Let me provide just one example to illustrate what I mean.

I understand that among the reforms being considered is a process known as “country-by-country reporting,” under which multinational businesses would be required to provide, to the tax authorities in each country in which they do business, certain financial information, broken down by country (hence the term, “country-by-country reporting”). I also understand that one possibility for disseminating this data is for all the information reports to be provided to the tax administration in the business’s headquarters country and then shared by that tax administration with the other jurisdictions through the vehicle of treaty-based information exchange. Lastly, I’ve heard it is contemplated that these reports would be exchanged for general risk assessment purposes, not for purposes of an existing audit, which is the current, well-established information exchange standard.

So, given all this, let’s assume that the IRS receives 2,000 of these reports from U.S.- headquartered businesses (although the number could easily be much higher than that) and let’s assume that an average of just five other countries ask for each of these 2,000 reports in any given year. This would mean 10,000 new annual requests for exchange of information coming into our competent authority’s office. And this is just the initial requests. If the proposed new risk assessment standard would justify follow-on requests for additional specific or clarifying information to further the risk assessment, the demand could grow even greater on our Exchange of Information program, or EOI, which is the conduit used by foreign governments to request tax information from us.

So, I ask that this type of simple impact be taken into account as you go forward on this issue and the others you are working to address. One possible way to exchange “country-by-country” reports would be to require that they be automatically exchanged electronically, perhaps through the IDES system I mentioned earlier. Automatic exchange would eliminate the need for a person to evaluate whether or not a requesting country really has a legitimate interest in the information for risk assessment purposes. Together with this might be an agreement that there would be no follow-on requests unless an audit is begun. If this type of care were not taken, then tax administrations with a significant number of headquarters companies would have to reallocate our already dwindling resources to our EOI programs so that we can deal with just this one aspect of the BEPS project.

So again, I urge you in your policy discussions to carefully consider the administrative impact of your decisions. In order for your policy goals to be achieved, any new regime needs to be workable not only from the perspective of taxpayers but also from a tax administration standpoint

Let me close now by saying that the IRS looks forward to working with our tax administration partners around the world as we move together toward greater tax transparency and greater coordinated efforts to address common compliance challenges. Thank you for letting me spend this time with you today, and I would be happy to take your questions. 

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

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The Shutdown and a Tea Party Tax Paradigm Shift: Guest Post by Marco Garofalo

Published Oct 14, 2013 - Follow author Allison Christians: - Permalink

One of the many benefits of hosting a tax policy colloquium is that the students become deeply engaged in grappling with tax policy principles through contemporary scholarship, and they apply these ideas to the world in which they find themselves. After our recent presentations by Reuven Avi-Yonah on the shifting pressures of globalization on the tax base, by Clifton Fleming on the politics of tax expenditure analysis, and by Lyne LaTulippe on the topic of tax competition, in which she introduced us to work by the political scientist Mark Blyth, one of my students came back with the following analysis of tax politics in the US, and he agreed to share it here.

Government Shutdown and a Tea Party-Induced Tax Policy Paradigm Shift in the United States

A paradigm shift in tax policy may be unfolding in the United States, as the Tea Party positions itself differently than either the Democrats or the Republicans when it comes to important aspects of tax policy processes and practices.  In a recent article, "Paradigms and Paradox: The Politics of Economic Ideas in Two Moments of Crisis," Mark Blyth investigated why we did not see a paradigm shift in economic policy after the financial crisis of 2008. He argues that paradigm shifts are usually:

  1. triggered by failures in the current paradigm; 
  2. accompanied by a new paradigm that is waiting in the wings to replace the current one; and 
  3. driven by a change in who can speak authoritatively on the subject.
He concluded that “it is politics, not economics, and it is authority, not facts, that matter for both paradigm maintenance and change.” Consequently, he argues that we did not see a paradigm shift after the financial crisis for a few reasons. First, even though there was a failure of the current paradigm, there was no challenger waiting to replace it. To illustrate his point, Blyth suggests that it was inconceivable that the Washington Consensus would be replaced by the Beijing Consensus, “so complete was its initial victory.” Second, the sudden policy failure did not result in a change of who speaks authoritatively on the subject, as protagonists did not change (individuals in the US Treasury, the ECB, and the IMF all retained their authority) and thus their solutions did not either. Blyth calls this ‘disciplinary incentive’; in other words, “too many careers and institutions are at stake!” Thus the financial crisis did not spur a paradigm shift.

But consider the Tea Party and its crusade. Since 2009, the Tea Party has been an unavoidable presence in US politics. While the Tea Party story has many permutations, causes, and manifestations, only the current government shutdown is important for the purposes of the current discussion. The current shutdown is not about Republicans versus Democrats; it is about the Tea Party versus Republicans. The Patient Protection and Affordable Care Act passed in Congress, was upheld by the Supreme Court of the United States, and its funding was not seriously contested by the Republican Party. This is an artificial crisis, a main architect of which appears to be Jim DeMint, former US Senator and current President of the Heritage Foundation.  If non-Tea Party GOP members do not want to play along, the implicit threat, according to Joshua Green of Bloomberg Businessweek, is that the Tea Party will turn on them, such as by launching “attack ads calling [Republican Senator Mitch] McConnell a ‘turncoat’ who ‘surrendered to Barack Obama’ in the healthcare fight."  So far, the Tea Party is pulling off this political coup: the government is shut down and positions are becoming entrenched.

Now consider this political impasse as a paradigm shift. First, we have a failure in the current paradigm (even though it is artificial). Joshua Green argues that “What’s causing the malfunction is a battle within the GOP.”  Second, we have a paradigm waiting in the wings to replace the current one. In fact, the Tea Party is not so much waiting to replace the Republicans as forcing that to happen. Third, the loci of authority in the Republican Party are shifting, either to Tea Party members or to the remaining GOP members who agree to change their tune. Hence we may see a paradigm shift, in which the Tea Party becomes the dominant faction in the Republican Party, resulting in a recalibration of the Democrat-Republican relationship.

Such a paradigm shift would have serious implications for tax policy. At least two would arise immediately, in the areas of tax expenditure analysis and tax consultations. First, tax expenditure analysis may begin to play a greater role. While the Republicans and Democrats function largely by dressing government spending as tax credits and deductions, the Tea Party is having none of that. The prime example would be the current crisis. The current government shutdown is itself a tax issue: the Patient Protection and Affordable Care Act, SCOTUS cogently reminds us, is a piece of tax policy. If the Tea Party does become the dominant Republican faction, then tax expenditure analysis may take center stage as a tool to sniff out government spending in all of its forms.

Second, the structure and content of tax consultations could change. Professor LaTulippe argues that international tax policy is beholden to a discourse of competitiveness (draft forthcoming). While part of the competitiveness discourse is about low rates, which the Tea Party presumably likes, part of the discourse is about tax expenditures, which the Tea Party would not like. Currently, tax consultations perpetuate this discourse by giving short time frames for the private sector to contribute to proposed tax reforms, with the result that a certain class of participants (accountants and lawyers) is greatly advantaged in giving feedback and achieving client-favored tax policy results. With the Tea Party paradigm, that policy loop could be disrupted, as this recent article suggests.

A paradigm shift in US politics is not certain. Any number of things could happen, including the Republican Party standing up to and beating the Tea Party. If that were to happen, then tax policy commentators should be concerned about the issues described above. Maybe once the dust settles we will meet the new boss, same as the old boss. But the current government shutdown (and impending sovereign debt default deadline) exhibits signs of a paradigm shift.  Something fundamental does seem to be changing on the small government side of political discourse. As such, we should stay tuned to the implications for tax policy.

Tagged as: political malfunction politics scholarship tax policy u.s.

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