On Monday October 23, Amir Pichhadze, Lecturer at Deakin University, Australia, will present his work in progress, entitled "Canada’s Federal Income Tax Act: the need for a principle (policy) based approach to legislative (re)drafting of Canada’s transfer pricing rule" as part of the annual Spiegel Sohmer Tax Policy Colloquium at McGill Law.
Pichhadze's new paper builds on his prior work with Reuven Avi-Yonah on GAARs and the nexus between statutory interpretation and legislative drafting and draws on insights from Judith Freedman's work on the topic of legislative intention in statutory interpretation. The working draft explores the evolution of arm's length transfer pricing in Canada and makes the case for Canada’s parliament to adopt and apply a more explicit principle/policy-based approach to legislative drafting. It argues that Canada’s courts cannot effectively distill relevant policies and principles unless they are clearly conveyed by parliament, using Australia's experience as relevant and constructive.
The tax policy colloquium at McGill is supported by a grant made by the law firm Spiegel Sohmer, Inc., for the purpose of fostering an academic community in which learning and scholarship may flourish. The land on which we gather is the traditional territory of the Kanien’keha:ka (Mohawk), a place which has long served as a site of meeting and exchange amongst nations.
Tagged as: Canada colloquium McGill scholarship tax policy transfer pricing
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 SovereigntyAnd finally, here is a brief description:
- 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
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
Last week I presented a work in progress on the OECD's newest global forum, which is being created to fulfill and further its BEPS initiative, as part of the BYU symposium "The Cutting Edge Of International Tax Reform." I tentatively titled my paper (ok, outline) "Not So Soft Law: The OECD Tax Regime" but I don't think I will stay with that title because soft law is still a fairly obscure notion among tax academics and practitioners, at least, in North America (it seems somewhat better-understood elsewhere). In any event I don't have a working paper yet but here is my working abstract:
Tax jurisdiction gaps and overlaps are inevitable in a world economy powered by constant cross-border flows of capital and income. States have long sought to overcome issues thus created by engaging in consensus building over nonbinding “soft law” norms via the Organisation for Economic Cooperation and Development (OECD). But with its most recent exercise, the Base Erosion and Profit Shifting initiative, the OECD is hardening these norms into a genuine global tax regime. It is doing so with model legislation, peer monitoring, and institutions that supplant its more inclusive policy rival, the United Nations, bringing in non-OECD countries as "BEPS Associates". This Article argues that the implications of these developments include building a new international tax organization (or world tax order) to avoid the encroachment of the United Nations as a potential tax policy rival, thus ensuring the continuing global tax policy monopoly of a core set of OECD nations.I'm still thinking through all of the fascinating institutional changes taking place as part of the BEPS process, and don't have any grand conclusions. International tax governance has become infinitely more complicated over the past several years, with multiple institutions popping up as potential rivals for the OECD's monopolistic grip on global tax policy norms and processes. I welcome the OECD's desire to develop an inclusive forum to enable more effective participation in global tax norm development. However I am wary about whether and how inclusive the proposed institution can be in light of the observation that agenda-setting is such an important aspect of effective participation. BEPS Associates don't quite seem like full partners yet, hence their title unfortunately seems all too apt.
If non-OECD countries set up a new forum, to which they invited OECD countries as Associates, would the major action items be those covered in BEPS? I am not convinced. A serious study of formulary apportionment as an alternative to transfer pricing seems like a topic that a truly inclusive forum would insist upon immediately. That is not to say that formulary apportionment is wonderful or great or a panacea--I am not sure it is. But there are so many calls for it, it seems to me impossible to understand the continued insistence by the OECD to quash the discussion. If it's not a great idea, fine: study it and reveal its weaknesses. If it is a great idea, why suppress it? Perhaps there are good reasons, but in general I favour studying things to not studying them, especially when not studying them looks like an attempt to intentionally thwart progress. Similarly, I would expect such a forum to tackle items of interest especially to "less developed" countries (as far as that term may be adequately defined), such as the longstanding source/residence compromise and the expansion of the permanent establishment regime to deal with services.
If these items were to become topics of attention and study within or because of the new OECD forum, I think I would reflect on this new tax order as a success story in developing the means for effective participation of more countries in the global tax dialogue. If not, I would be less sure that progress has been made. At this stage I have far more questions than answers.
Tagged as: institutions OECD scholarship tax policy
Jinyan Li of Osgoode Hall recently posted a paper of interest: China and BEPS: From Norm-Taker to Norm-Shaker. Here is the abstract:
This article considers the implications for China of the G20/OECD Base Erosion and Profit Shifting (BEPS) initiative and the international implications of China's BEPS measures. More specifically, the article examines China's transfer pricing, anti-treaty shopping and general anti-avoidance rules. It suggests that China is transforming itself from a taker of international norms to a shaker of such norms.Li notes that China is viewed as a victim of BEPS, that the phenomenon "highlights the unfairness in sharing the tax base between developed countries and developing countries," and that the OECD initiative is an opportunity for China to gain traction in global tax governance. From the conclusion:
China’s BEPS measures go beyond the scope of the BEPS initiative. ... China has high hopes on the outcomes of the BEPS initiative. At the same time, China appears to be realistic regarding what can be achieved at a global level. The BEPS initiative is not about redesigning the basic international tax rules and the system continues to be biased in favour of capital exporting countries (CEN), i.e. residence countries. The BEPS initiative is not designed to rethink the arm’s length principle to assign more value to productive activities and markets in both developing countries and developed countries. Instead, the BEPS initiative pursues the objective of attributing more profits to the jurisdiction where intangibles are generated, which are predominantly developed countries.
China has a high stake in the future of the international tax system, as it is both a major recipient of foreign direct investment (FDI) and a major source of outbound FDI. The BEPS initiative marks the beginning of a process that involves China. It is uncertain if the G20 and OECD member countries will be able to agree on the recommendations of the BEPS initiative and introduce the necessary legislative changes to initiate the reforms. It is even more uncertain as to the effect of the BEPS initiative on developing countries, in spite of the efforts of the UN Subcommittee and the DWG. However, to the extent that BEPS is shaking up the international tax norm, China is surely an active norm-shaker.
Tagged as: BEPS governance OECD scholarship tax policy
Recognizing the reality that multinational corporations are centrally managed and not groups of entities that operate independently of one another, the OECD base erosion and profit-shifting project is considering expanded use of the profit-split method. This article provides background on why expanded use of the profit-split method is sorely needed. In particular, resource-constrained tax authorities in many countries are unable to administer or intelligently analyze and contest transfer pricing results presented by multinational groups. Most importantly, this article suggests a simplified profit-split approach using set concrete and objective allocation keys for commonly used business models that should be welcomed by multinational groups and tax authorities alike.And here are a few excerpts:
December 2014 saw the OECD issuing several base erosion and profit-shifting discussion drafts, one of which was titled "BEPS Action 10: Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains" ....
Despite all the continuing rhetoric about how arm's-length pricing and the separate entity principle are sacrosanct, there are compelling reasons why the OECD BEPS project has focused on the possible expanded use of the profit-split method, a method that clearly flies in the face of these icons. ...
[A] combination of factors has strongly motivated the highly successful tax structures that have significantly lowered the effective tax rates of multinational corporations (MNCs) and eroded the tax bases of many countries. The existence of these factors means that some of the transfer pricing methods are a part of the problem; they are not a part of a solution. These factors include ... [t]he Separate Entity Principle ... Fragmentation ... Respect of Related-Party Contracts ... The Arm's-Length Standard... the Inability to Effectively Audit MNC Transfer Pricing ... [and other issues].
...Paragraph 2.108 of the OECD transfer pricing guidelines gives a concise statement of what the profit-split method is. It states:
The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate . . .) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the "combined profits"). . . . It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length.
Additional guidance in the existing guidelines (paragraphs 2.132ff) makes clear that the criteria or allocation keys on which the combined profits are split should be "independent of transfer pricing policy formulation." Hence, these criteria and allocation keys "should be based on objective data (e.g. sales to independent parties), not on data relating to the remuneration of controlled transactions (e.g. sales to associated enterprises)." Paragraph 2.135 makes this objective basis clear by stating:
In practice, allocation keys based on assets/capital (operating assets, fixed assets, intangible assets, capital employed) or costs (relative spending and/or investment in key areas such as research and development, engineering, marketing) are often used. Other allocation keys based for instance on incremental sales, headcounts (number of individuals involved in the key functions that generate value to the transaction), time spent by a certain group of employees if there is a strong correlation between the time spent and the creation of the combined profits, number of servers, data storage, floor area of retail points, etc. may be appropriate depending on the facts and circumstances of the transactions.
Further discussion in the guidelines provides various approaches to splitting the combined profits among the relevant group members. While these approaches are not detailed here, the point is that the approaches that were set out and discussed require a facts and circumstances case-by-case analysis before they can be implemented.Kadet suggests that this facts & circumstances approach should be shelved in favour of developing a detailed set of objective allocation keys tailored specific types of business, and that for these businesses, the profit split method ought to be presumptive. In other words, profit split is another word for apportionment; some types of businesses are so integrated that apportionment is the best way to allocate profits to the right jurisdiction; what is needed is a formulaic approach that tax administrations can administer. He notes:
The application of such rules should result in a reduction in complex BEPS-motivated structures since all combined profits will be spread among the group members that actually conduct activities with little or none left within low-taxed group members that do not conduct economic activity and thereby contribute little if anything to value creation. In sum, a simplified and standardized approach for each common business model will provide significant benefits as well as give results that are fair to MNCs and all relevant governments.He then goes on to provide a couple of examples taken from the DD10, one involving an internet service provider and the other featuring a manufacturer of R&D-intensive products. In the former, allocation keys include location of customers and workers; in the latter, they include location of customers and key workers (weighted at 25% each) and location of manufacturing operations (weighted at 50%). This is a fairly detailed discussion and well worth reading in full. I'll be interested to see how this idea develops.
Tagged as: BEPS corporate tax OECD transfer pricing
Last year, I participated in a symposium at NYU on the topic of tax and corporate social responsibility, on a panel with the above title. The NYU Journal of Law and Business has published the symposium issue, including a transcript of the discussions. You can view the entire symposium issue here,. Below I excerpt from my contribution but the entire exchange is worth a read.
... I think the story Josh is telling is that using transparency as a means to generate the political will for corporate tax reform poses some risk, real risk, to the tax system administration. I think we'll have some discussion about how genuine that risk is and how it should be measured against other risks, like firm competitiveness and proprietary information and so on. But I'll leave that discussion aside for now to focus on the first part of the proposition, and that is that what we're trying to do with corporate tax transparency is generate the political will for reform.
Now I should preface this by saying that I am by nature and profession a curious type of person, and I would love nothing more than to be able to pore over the 57,000 pages of some corporation's tax return ... I think if you've read some of my prior work on the subject, you will no doubt be unsurprised to hear me say let's raise the curtain and have a look. Let's call it an issue of accountability and governance, and let's keep lawmakers on their toes by letting folks at this data that lawmakers are so jealously gardening for their own reasons. We humans don't seem to have too much privacy from the government, so let's us get to the business of crowdsourcing, the monitoring of the artificial people among us.
But I keep coming back to the problem of what are we trying to solve here. If the goal is to generate political will for change, then I'm actually not so optimistic that corporate tax return disclosures is going to get us there. Instead I think it will lead us to continue having interesting discussions about whether or not we should be taxing corporations at all, or the variation that we had earlier today, which is how to draw the line between avoidance and evasion.
That's to say we've already been taught, even without corporate tax disclosure, to expect that most American companies, especially those with a global footprint, aren't paying much tax anywhere. The jig is already up. This is not a secret. We're not rioting in the streets about it for the most part. Sure, corporate tax disclosure will confirm what we already know, but I'm not sure if getting all the gory details is going to push the political picture that much further. Maybe it will, because we clearly have an "Overton Window" in which really taxing American corporations is not thinkable. And maybe widespread naming and shaming, or just naming, will move that window. I think it's also possible that the sheer enormity of everything that you're going to see laid bare is going to very quickly lead to resignation and more handwringing, and not so quickly to actual reform.
But if we're already at that stage now, we already have the stories - we already know the story. If we're already there, then we don't have to wait for corporate tax disclosure, do we? We can already accept the notion that if we're going to collect more from any taxpayer, corporate or not, what we need is not more public information, but more withholding and more third-party reporting.
So let's see if I can unpack that a bit because I know that's to say a lot. I think it's worth noting that for the vast majority of people, it is not the case that the income tax system is voluntary. And why is that not the case? It is because for that vast majority, every dollar they earn is reported to the IRS by someone else. And most of these dollars are also subject to withholding, and so you have to work some to get any of it back at the end of the year. And if you are an employee, you won't get much opportunity in terms of base erosion at all; you're basically paying a gross receipts tax. We have made wage earners easy to tax with withholding and third-party reporting. And more or less, gross basis taxation with a few exceptions.
But corporations are different. They are really hard to tax, especially when they are crossing borders. We give them lots of opportunities to carve away their gross and get to a very small net. Withholding and third-party reporting and filing for refunds is generally not the way we get corporations to pay tax. For them, as Reuven said earlier today, the income tax system really is voluntary, and lawmakers have given them a lot of discretion. Transfer pricing is just one very prominent example of this.
... maybe disclosure is a way to have more informed public debate about the income tax system. But if we're having that discussion, then it seems not at all clear to me why we would be limiting the conversation to publicly traded corporations at all, when we are as or more interested in Cargill or SC Johnson or your local mom and pop cash flow all-cash business as we are in Google or Apple, who have at least to tell us a few stories about their tax affairs.
And if we have that conversation, you must admit we are limiting ourselves to corporations ... and not looking at other untold billions of dollars that go untaxed because they're not subject to reporting or withholding.
So now we come to the punch line, and that is that it is possible that corporate tax transparency is going to throw back the curtain on one sector of society - publicly traded corporations - but the irony is these are the people, this is the very sector about whom we actually have more information about tax than any other, precisely because they already have disclosure rules. That disclosure is exactly why we already know there's a problem, and yet we have not mustered the will to solve it.
GE has been in the news with its zero corporate tax rate for years. ... I think little is likely to change with more info ... the conclusion, I think, we will be eventually forced to draw is that we, the public, haven't really mustered the political will for reform that would lead to more taxation of American companies. And we really can't help the IRS administer or enforce the tax system. In fact, as Josh suggests, we run the risk of undermining that effort, so disclosure might not get us very far at all.
What we're going to have to do is start figuring out ways to do a lot more withholding and a lot more third-party reporting, and we are going to have to do that for all of our taxpayers, corporate or not, publicly traded or not. Maybe some or most of us already know that. We didn't need to read the corporate tax returns to tell us that, and we won't know anything new about the corporate tax system when we get that opportunity.
Now I hate to end with the topic of FATCA. For those of you who don't know, FATCA is a global third-party reporting and preemptory withholding regime designed to make sure Americans declare and pay their taxes on income and assets held overseas. It is not a workable system, it's a mess, but think about the design. In theory, it says the IRS could eventually, once all the kinks are worked out and everybody gets onboard, track every dollar ever paid to any American anytime, anywhere. If that's true, if that's even partially possible, we can see the problem here is not at all about capacity. It is purely a question of political will and nothing more, and it never has been.
A parade of stories about offshore tax evaders got the U.S. to adopt FATCA. Yet a parade of stories about GE, Google, and Apple avoiding their taxes has not got the U.S. to embrace corporate taxation.
In fact, we seem to be seeing the opposite response in the base erosion and profit shifting initiative, but that's another story altogether. I'm not convinced, therefore, that corporate tax transparency will lead to more corporate tax. However, I would still love to get my hands on GE's tax return. Thank you.
Tagged as: corporate tax disclosure governance politics scholarship
The OECD has been rolling out a very modest version of country-by-country reporting --only really, really big companies will have to report, the info must be kept strictly hidden from public view, the info mostly won't flow to the world's poorest jurisdictions--and now, from its Feb 6 report, I see that governments must use the info they obtain only to further arms' length transfer pricing, and not to try switching to formulary apportionment:
"Jurisdictions should not propose adjustments to the income of any taxpayer on the basis of an income allocation formula based on the data from the CbC Report"Formulary apportionment must be a pretty effective way to tax multinationals at source, if the OECD is conditioning government-to-government data flows on not using it.
The picture I am drawing from the OECD's guidelines for CBC is very troubling. If I understand this correctly, the OECD wants info to flow from all jurisdictions to the ultimate parent jurisdiction, which will then dispense info to other jurisdictions provided they have tax information exchange agreements (TIEAs) with the parent jurisdiction, and provided they keep the secrets and don't use the information to switch to formulary apportionment, even if that is a better system for them than arm's length transfer pricing.
Since most multinationals are based in OECD countries, it starts to really matter which jurisdictions have TIEAs with these countries. Indeed, these TIEAs are starting to be the world's answer to everything tax cooperation-related. This means that a country without TIEAs is very quickly finding itself out in the cold when it comes to the brave new world of tax transparency being built by the USA and the OECD.
Just taking a quick zoom in to this world, it should be noted that the United States, home to many of the world's biggest and most profitable multinationals, has very few tax agreements with countries in Sub-Saharan Africa. It is not necessarily that these countries do not want tax agreements with the United States. Many of them have requested tax agreements for many years. But only the US decides who has a tax agreement with the US.
What does this mean for a country in Sub-Saharan Africa that is the destination for a US multinational's direct investment dollars? I am afraid it means that most will continue to struggle to impose income taxes on these multinationals. They will in effect be forced to continue using arm's length transfer pricing even if it is too expensive for them to administer effectively, and even if they would prefer to use formulary apportionment. Meanwhile, they will be forced to set up complex financial asset monitoring and reporting systems to ensure they are not locked out of the global financial system by the US via FATCA or the OECD via the common reporting standard.
Yet even after doing all of that, without the requisite tax agreements in place, these countries seem increasingly likely to receive no tax information from the US or the OECD. That leaves them virtually powerless to stop tax evasion by their own residents, who may freely continue to hide their financial assets in the United States and elsewhere. It also leaves them at a serious disadvantage in addressing complex tax avoidance by US and other OECD-based multinationals.
So much for that quaint notion of "tax sovereignty" the US and the OECD are always so worried about. And so much, I think, for the notion that developing countries have an effective voice in OECD decision-making. The OECD has been very clear that it did not want to even discuss formulary apportionment, even as it purported to review the fundamental international tax structure in its BEPS project. With this latest guidance, it seems the OECD is intent on building a framework that will eliminate any possibility for future discussion for formulary apportionment, as well.
Tagged as: institutions OECD sovereignty tax policy transfer pricing
Thanks to a visit from Savior Mwambwa to Montreal last week in connection with the Symposium on Tax Justice and Human Rights, I finally sat down to look closely at the complaint raised by several NGOs against Glencore International AG, a Swiss company, for their transfer pricing strategies related to the Zambian-based Mopani Copper Mines Plc.
What I found was quite startling news to me (but not to a number of NGOs, and not to Martin Hearson, who is quickly becoming an indispensible go-to for interesting developments in international taxation): the OECD has apparently set up a sort of soft-law dispute resolution regime in which anyone can bring complaints against perceived tax dodging by multinationals, by lodging a request to a designated bureaucrat in the multinational's home states. This is a metaphor for taxpayer standing, an issue I have been curious about in the past but haven't made much progress on despite more than a little help from some of my regular readers.
This soft-law dispute resolution regime is quirky, to say the least. That's, of course, to be expected. So far the regime seems to be toothless or offer little more than a bit of theatre, but it is intriguing to watch the NGOs try to make hay with it, and more power to them if they can gain any traction. If they can, I expect to see the floodgates opened up for taxpayer-standing suits levied against MNCs in OECD member nations for their tax dodging efforts in developing countries, all on the strength of a document that isn't law anywhere.
This is the stuff of global legal pluralism.
The regime emerges from a non-binding set of OECD guidelines that require multinational enterprises to (among other undertakings) adhere to the arm’s length transfer pricing standards (also developed by the OECD) wherever they operate, and to structure transactions consistent with economic principles unless there are specific local laws allowing deviation from this general rule. Again, these guidelines are non-binding standards. But there is a real live process built up in this document. It is sprinkled throughout the Guidelines but the main parts are these:
[from p. 18:] Governments adhering to the Guidelines will implement them and encourage their use. They will establish National Contact Points that promote the Guidelines and act as a forum for discussion ... The adhering Governments will also participate in appropriate review and consultation procedures to address issues concerning interpretation of the Guidelines in a changing world.
[from p. 72:] The National Contact Point will ... Respond to enquiries about the Guidelines from: a) other National Contact Points; b) the business community, worker organisations, other non- governmental organisations and the public; and c) governments of non-adhering countries.
... The National Contact Point will contribute to the resolution of issues that arise relating to implementation of the Guidelines in specific instances in a manner that is impartial, predictable, equitable and compatible with the principles and standards of the Guidelines. The NCP will offer a forum for discussion and assist the business community, worker organisations, other non-governmental organisations, and other interested parties concerned to deal with the issues raised in an efficient and timely manner and in accordance with applicable law.
In providing this assistance, the NCP will: ... Make an initial assessment of whether the issues raised merit further examination and respond to the parties involved. ... consult with these parties ... facilitate access to consensual and non-adversarial means, such as conciliation or mediation ... make the results of the procedures publicly available.From this we can discern the following soft law dispute resolution regime:
- If you think a MNE is engaged in behavior inconsistent with the MNE guidelines, you can make a complaint to the National Contact Point (NCP) in the country(ies) where your target MNE is organized/operates.
- The NCPs "will" respond to enquiries from the public.
- The NCPs "will" assess issues raised, and, if the NCP thinks the issues merit further review, will consult with you and with the MNE about the issue you raised, facilitate mediation, come to a decision and publish their results.
"the complainants are disappointed that the agreement did not go further than an agreement to disagree. They feel that the result shows that there is little value in engaging in a dialogue with the companies on these issues. According to the complainants, the company has not complied with its commitment as part of the agreement to respond to a detailed set of questions regarding its tax payments."So, a dead end and as far as I see, no way to appeal or contest anything that has happened or not happened; on the other hand, there doesn't seem to be anything (other than resource constraints of would-be complainants) preventing reopening the case by simply filing a new complaint.
- CBE vs. National Grid Transco, opened in 2003 in connection with acquisition of Copperbelt Energy Co (CEC), stating that "financial and tax incentives given to CEC are alleged to have resulted in an unstable macroeconomic environment by having increased the tax burden on the poor, having introduced discriminatory treatment and massive externalisation of funds." Case closed by UK NCP in 2005 "for 'want of prosecution'." I am not sure what that means.
- NiZA et al. vs. Chemie Pharmacie Holland (CPH), a conflict minerals complaint opened in 2003 that sought clarification of whether tax payments made by CPH subsidiaries in the DRC were consistent with the Guidelines. Case first accepted but then quickly rejected by the Dutch NCP in 2004, for "lack of an investment nexus."
- War on Want and Change to Wins complaint against Alliance Boots, opened in November 2013 and quickly rejected by the UK NCP for offering only "unsubstantiated" allegations. The NGOs alleged that Alliance Boots violated the Guidelines disclosure and tax provisions, by, among other items, failing to act "in accordance with the spirit of UK taxation laws by shifting profits to offshore tax havens using complex financial instruments, shell financial companies in Luxembourg, and payments from one party to another to finance the purchase of company debt in a circular manner. The complainants sought mediation to bring concrete reforms of the company' governance, tax, and disclosure procedures so they are aligned with the Guidelines." I hope they assemble some documentation and try again: this is an interesting case for observers of the emerging links between tax justice and human rights.
- Global Witness vs Afrimex, regarding tax payments made by Afrimex (a UK co operating in the DRC) to an "armed rebel group with a well-documented record of carrying out grave human rights abuses." The UK NCP agreed with many of GW's charges and concluded "that Afrimex failed to contribute to the sustainable development in the region; to respect human rights; or to influence business partners and suppliers to adhere to the Guidelines." Global Witness later followed up with Afrimex to see how things were going; the company said it had stopped trading in minerals. But GW seems skeptical, and states that "the case illustrates the severe limitations of relying on voluntary guidelines to hold companies to account. The OECD Guidelines for Multinational Enterprises remain a weak, non-binding mechanism. The NCP does not have the legal powers to enforce decisions arising from its conclusions and there is no in-built mechanism for following up its recommendations. The UK government will have to take further action to ensure that the investigation and conclusions of the NCP are more than just a theoretical exercise."
So far, the process isn't looking too promising for those using the guidelines to resist the status quo of international tax practice. Still, I found one that was re-opened from a prior failed attempt, 15 Belgian NGOs complaint against Nami Gems for tax evasion in the DRC. This is a re-opening of a complaint that was rejected 10 years ago on what look like fairly flimsy grounds, will be interesting if the NGOs are learning from experience and improving their strategy as they go along.
I know that there are those that believe it is frustrating or even pointless watching activists work through international tax rules looking for justice. But activists are a finger on a pulse. They are looking to the rule of law to produce justice. When they feel that it doesn't, they again look to the rule of law for avenues of redress against unjust situations caused or ignored by the law. It is an optimistic and hopeful strategy, that refuses to give up on law. I hope that law can live up to its promise in this respect. It is the case that we perceive international taxation to occur mostly in the anarchy of the post-Westphalian nation-state-based global order. Yet organisations like the OECD transcend this order all the time, often in ways we don't understand and usually with a very little amount of scrutiny from tax law scholars. The activists are watching more closely. We would do well to pay attention.
Catherine Lu of McGill and Pablo Gilabert of Concordia will be presenting on the topic of global principles of distributive and labour justice tomorrow at 12:30 pm as part of McGill Law's Speaker Series on Economic Justice, sponsored by the Centre for Human Rights and Legal Pluralism. I will be moderating the discussion. This event is free and open to all, details:
Date: 14 March 2014
Location: Room 609 New Chancellor Day Hall
3644 rue Peel
Montreal Quebec Canada , H3A 1W9
I have started reading Catherine Lu's 2006 book, Just and Unjust Interventions in International Law: Public and Private. In it, she argues that the concept of state-to state intervention as a moral problem rests on an image of sovereignty as privacy, and therefore uses the same imagery of intrusion that we see in the domestic privacy context as a basic element. The domestic case against government intrusion into private affairs of individuals and social groups (family) involves balancing between curbing domestic abuse and government intruding too deeply into family lives. Lu argues that the same principles animate the question of legitimacy in intervention, making similar normative claims to privacy accorded to families in the domestic realm. Lu thus argues that:
The concept of intervention .. assumes some distinction between private and public domains. In the Westphalian model of interstate relations, the posited sovereignty of states functions like privacy to give states a right to be free from interference by outside parties --especially other states, as well as non citizens, nongovernmental organizations, and even the international community -- in their own internal affairs."The public/private argument is an interesting and I think controversial position that adds to a discourse about sovereignty that we see being challenged all the time in taxation, including (especially of late) in taxation. Consider the OECD's project on BEPS, the US imposition of FATCA on the rest of the world, the rise of global tax justice activism, the addition of taxation to the corporate social responsibility discourse, and the UN tax group's attempt to change the conversation on transfer pricing. There are many other examples in recent and not so recent history.
It will be interesting to discuss the pressures involved in the area of labour. I have viewed it as essentially necessary for states to trap labour in order to extract enough revenues to pay for the state (in the form of taxation or otherwise). It is clear that governments have come to rely on labour as their primary resource of such revenues over the past century, so cannot let labour move as capital does, footloose and free of obligation.
Tagged as: conference human rights institutions justice McGill scholarship
Professor Miranda Stewart has published a short article today in which she nicely sums up the G20 agenda for 2014: base erosion & profit shifting, thin capitalization and transparency/information exchange. She concludes with some of the challenges for reform:
The G20 ... says that fixing global tax regulation is key to fighting poverty. A 2012 UN General Assembly Resolution 66/191 calls on the international community to develop effective international company tax rules and to increase participation of developing countries in tax policy processes. But ... it is only recently that OECD member countries have begun to acknowledge that their own tax rules and harmful tax competition are making it more difficult for developing countries to raise adequate taxes.
There may be some tensions in the G20 about how to reform our fundamental international tax principles for the future. The OECD BEPS project mostly aims to protect the residence basis of taxation for multinationals. This will help prevent corporate tax base erosion for rich, capital and intellectual property-exporting countries. Current OECD profit shifting rules, which emphasise the arm’s length transfer pricing principle, can be strengthened. But these current rules for allocation of the right to tax business profits between countries are under attack from capital importing countries who seek to protect and enhance source taxation of business activity.
India, South Africa, Brazil and China may benefit more from a “formulary apportionment” approach, which has also been called for by activist organisations such as Oxfam and Christian Aid. We might begin to see cracks in the G20 on these fundamental international tax principles in 2014.A nice overview of what to look for from the G20 in 2014.