The Costs of International Tax Cooperation

Tsilly Dagan (Bar-Ilan University) published this 2002 article at Michigan Law and Economics Research Paper No. 02-007; and U of Michigan Law, Public Law Research Paper No. 13

Here is theAbstract:

This Article discusses the three levels of international tax (the unilateral, the bilateral and the multilateral). It describes the seemingly appealing arguments (based on cooperation) advocating neutrality, double taxation prevention, and harmonization. A closer look at these arguments, however, reveals that pursuing these goals often brings about completely different and sometimes undesirable results. While acknowledging the potential benefits of inter-nation cooperation for some, this article highlights the (sometimes hidden) costs of such cooperation for others. Thus, domestic interest groups tend to win or lose from adopting an (elusive) cooperative strategy as the unilateral mechanisms of their countries; developing countries tend systematically to lose tax revenue when they enter into the (more cooperative and thus seemingly benign) bilateral treaty regime; finally, the emerging multilateral regime, promoted as an all-benefiting cooperative strategy, also creates potential losers both among and within nations.

Based on this analysis, the paper argues that cooperation serves as a useful rhetorical tool that supports a certain contingent policy choice, but obscures other, potentially important, considerations and alternatives. Identifying the winners and losers of cooperative policies is necessary in order to evaluate such polices. Cooperation cannot be and is not the ultimate goal in international tax policy.

Available at SSRN: http://ssrn.com/abstract=315373 or DOI: 10.2139/ssrn.315373

Uncertain Taxes in China

There is a very interesting article entitled "China's Uncertain Tax Positions" posted by chinalawblog.com:

"Donald Compton of Pricewaterhouse Coopers LLP just had published a nice introduction to some of the tax issues likely to confront multinational companies doing business in China. The article is entitled, "China: Determining Uncertain Tax Positions In China," [free subscription may be required] and its focus is on what such companies need to do to comply with Financial Accounting Standards Board Interpretation No. 48.

The introduction to the article nicely summarizes the article itself:
By now many multinational companies have begun the process of addressing how Financial Accounting Standards Board Interpretation No. 48 ("FIN 48") will apply to their global business. The challenge in understanding the FIN 48 implications for tax planning and local country compliance issues in foreign jurisdictions will be significant. FIN 48 requires companies to ascertain, evaluate, and conclude on discrete tax risks. Companies must not only account for the interest and penalties on these conclusions, but must also adhere to a new disclosure regime.

Companies may not have the wherewithal to fully appreciate the implications of their tax posture due to many factors, including lack of knowledge, time constraints, resource constraints, quality of the past compliance filings, and insufficient mechanisms to gather data. Many issues, including documentation, transfer pricing, arbitrary enforcement and inconsistent interpretation by regulators, are common in many jurisdictions, although each jurisdiction may have its own particular twist.
For companies operating in China, the tax planning environment creates another level of complex Uncertain Tax Positions ("UTPs") analysis. This complexity arises because many companies have negotiated at the provincial and local levels to reduce the national statutory rate, plus there are numerous local incentive regimes. This article provides the author's perspective on UTPs in China and suggests some areas that companies currently or potentially operating in China should consider."

Harnessing the Costs of International Tax Arbitrage

Professor Adam H. Rosenzweig (from Washington University) has postes Harnessing the Costs of International Tax Arbitrage, 26 Va. Tax Rev. 555 (2007). Here is the abstract:

The issue of international tax arbitrage has proven a difficult and intractable one. Rather than try to minimize costs of the arbitrage or prevent “abuse” of the laws of a particular regime, the United States should also consider affirmatively bearing some of the costs of the international tax arbitrage transaction to further the policy of international vertical equity and shift the incentives in the worldwide regime that led to the rise of the arbitrage in the first place.

Harnessing the costs of international tax arbitrage transactions will not always be the appropriate response to each particular arbitrage transaction. Depending on the circumstances, the traditional responses may be sufficient, a fundamental change to the underlying United States domestic tax law may be appropriate or a worldwide consensus on harmonization in a particular area may arise. Harnessing the costs of the international tax arbitrage should be considered, however, when such responses prove inadequate. At a minimum, in adopting such an approach the United States would provide some level of subsidy for investment in developing countries at little to no cost to the current international tax regime. At best, however, harnessing the costs of international tax arbitrage could place of the issue of international tax arbitrage back on the international scene, restart stalled international tax discussions and potentially move towards a greater worldwide consensus, not only on the international tax arbitrage itself but on the larger issue of the role of international vertical equity in the worldwide tax regime. In a second-best world, United States unilateral action in harnessing the costs of international tax arbitrage may be the first step towards a first-best solution.

IBM under the wire tax break

Big Blue’s Under-the-Wire Tax Break
Posted by Peter Lattman, from http://blogs.wsj.com/

It looks like IBM’s tax lawyers are earning their keep. Just two days after they used a complex corporate tax loophole to save an estimated $1.6 billion, the IRS moved to close the loophole down. Here are stories from the WSJ and NYT.

On May 29, IBM said it had structured a $12.5 billion stock repurchase to take advantage of overseas earnings without making them subject to stiff U.S. corporate tax rates. Because they’re designed to make an end around IRS section 367(B) covering U.S. taxes on repatriated earnings, tax lawyers call these deals “Killer B” transactions.

Two days later, the IRS announced plans to issue regulations making companies pay U.S. taxes when they buy back their stock, even if the shares are purchased by an international subsidiary. It said the planned ban on the practice would take effect that day.

Stewart Lipeles, a tax attorney with Baker & McKenzie, told the WSJ it looked like the IRS rushed out a notice after it caught wind of IBM’s “Killer B.” The IRS won’t say.

Intercompany Loans and Profit Shifting

Intercompany Loans and Profit Shifting – Evidence from Company-Level Data
Thiess Buettner (Ifo Institute for Economic Research and CESifo) and Georg Wamser (Ifo Institute for Economic Research) published this paper on March 2007 at CESifo Working Paper Series No. 1959.

Here is the Abstract:

This paper is concerned with tax-planning strategies of multinational corporations. A theoretical analysis discusses the choice of the capital structure in a setting where intercompany loans can be used to shift profits to low-tax countries. Empirical evidence is provided using micro-level panel data of virtually all German multinationals made available by the Bundesbank. This comprehensive dataset allows us to exploit differences in taxing conditions of almost eighty countries during a period of nine years.

The empirical results confirm a robust impact of tax-rate differences within the multinational group on the use of intercompany loans, supporting the profit-shifting hypothesis. However, the implied tax-revenue effects are rather small, suggesting that costs related to adjusting the capital structure for profit-shifting purposes are substantial.

Available at SSRN: http://ssrn.com/abstract=981120

Which Countries Become Tax Havens?

Which Countries Become Tax Havens?
Dhammika Dharmapala (University of Connecticut) and James R. Hines Jr. (University of Michigan) published this paper for the National Bureau of Economic Research (NBER) in December 2006.

Here is the Abstract:

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal.

The effect of governance on tax haven status persists when the origin of a country's legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which may explain why poorly governed countries do not generally attempt to become tax havens - and suggests that the range of sensible tax policy options is constrained by the quality of governance.

Available at SSRN: http://ssrn.com/abstract=952721

Mason on Tax Discrimination in the EU

Proffessor Ruth Mason (UConn) has published an interesting report entitled In Search of Internal Consistency: Tax Discrimination in the EU, 46 Colum. J. Trans. L ___ (2007), on SSRN. Here is the abstract:

The European Union was created to bind the countries of Europe together economically to prevent future wars. Rigorous enforcement of EU nationals' fundamental economic freedoms before the European Court of Justice (ECJ) has furthered economic integration. The fundamental freedoms prohibit tax discrimination—harsher tax treatment of cross-border economic activities than purely internal activities. Critics of the ECJ argue that the Court's broad interpretation of the EC freedoms causes it to find tax discrimination where there is none. This tendency encroaches upon the sovereignty of EU member states and hampers their ability to pursue economic policy goals. In contrast, based upon a survey of all the ECJ's tax discrimination decisions, this Article offers a more nuanced critique that shows the ECJ's errors in tax discrimination cases go in both directions. In addition to finding discrimination where there is none, the Court also sometimes fails to recognize discrimination. The Court's failure to recognize tax discrimination undermines the economic integration of Europe and abridges EU nationals' personal rights.

This Article is the first to identify the Court's method of review in tax discrimination cases, the comparable internal situation test (CIST), as a principal contributor to the Court's difficulty in tax cases. Instead of CIST, the Article proposes that the ECJ borrow a method developed by the U.S. Supreme Court for tax cases arising under the Commerce Clause: the internal consistency test (ICT). Adoption of this simpler method should enable the ECJ to make more coherent tax decisions, which will promote economic efficiency and integration of the European common market.

Lecture on VAT in the European Union

Here are the lecture by Prof. Dr. Michael Tumpel, made April 11, 2007.

Listen to Prof. Tumpel's Lecture:

Introduction:
Download the MP3

Lecture:
Download the MP3

Q & A:
Download the MP3

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment
Qing Hong (University of Toronto) and Michael Smart (University of Toronto) published this paper for the CESifo (Center for Economic Studies and Ifo Institute for Economic Research)CESifo Working Paper Series No. 1942

Here is the Abstract:

The multinationalization of corporate investment in recent years has given rise to a number of international tax avoidance schemes that may be eroding tax revenues in industrialized countries, but which may also reduce tax burdens on mobile capital and so facilitate investment. Both the welfare effects of and the optimal response to international tax planning are therefore ambiguous.

Evaluating these factors in a simple general equilibrium model, we find that citizens of high-tax countries benefit from (some) tax planning. Paradoxically, if tax rates are not too high, an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus fears of a "race to the bottom" in corporate tax rates may be misplaced.

Available at SSRN: http://ssrn.com/abstract=976577

Institutional Culture, Actor Interests, and Tax Cooperation in the OECD, IMF and United Nations

Webb, Michael. "Institutional Culture, Actor Interests, and Tax Cooperation in the OECD, IMF and United Nations" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA, Feb 28, 2007
Publication Type: Conference Paper/Unpublished Manuscript

Abstract: The OECD is the most prominent and most widely studied international institution in international tax diplomacy, but it is not the only one. This paper compares the approaches taken by the OECD, the IMF, and the United Nations to international taxation, particularly corporate taxation and developing countries.

The IMF provides so-called "technical assistance" on taxation to developing countries, assistance that is heavily influenced by tax theory developed by academic economists and that helps constitute states and state-society relations in developing countries. Various agencies within the UN have developed a Model Tax
Treaty that is more favorable to developing countries than the OECD Model, and they providetechnical and diplomatic assistance to developing countries on tax issues. The paper argues that some similarities and differences in the approaches taken by these institutions can be accounted for by the interests of their memberstates (which in turn are shaped by societal interests, especially those of transnational taxpayers), but that the culture, norms and traditions of the institutions also matter.

The Future of Offshore

Sharman, Jason. "The Future of Offshore" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA, Feb 28, 2007 http://www.allacademic.com/meta/p180572_index.html

Abstract: Since the turn of the century Offshore Financial Centres (OFCs), or tax havens, have been roiled by various challenges from the G7 states and international organisations including the OECD, the EU and the FATF. Collectively these interventions, premised on combatting tax evasion and money laundering, have tended to erode tax havens' traditional attractions for non-resident investors: secrecy and light regulation.Currently the pace of change has slowed enough to make a preliminary assessment of what impact these changes have had on the 'offshore world'as a whole, not just individual tax havens. Conventional wisdom, often supported by those in tax havens themselves, is that as tax havens' traditional attractions have been weakened, this decade has and will continue to be lean times.

However, there is some evidence that the pessimism concerning the future of OFCs is considerably overdone. This paper will provide a preliminary assessment of the future of offshoreusing recently published IMF studies of 42 OFCs, interview data from 15 such jurisdictions, and a ten year survey of the commercial investment press, to lay the foundations for a larger project along the same lines.

Did the OECD Attack on Tax Havens Have Measurable Effects?"

Kudrle, Robert. "Did the OECD Attack on Tax Havens Have Measurable Effects?" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA, Feb 28, 2007


Abstract: The 1998 OECD Report, Harmful Tax Competition, essentially declared war on jurisdictions with practices that most member governments regarded as abusive. The declaration was followed by a set of actions that many have viewed as severely undermining the credibly of the organization with friends and foes alike. The negative reactions of the largely small and weak states classified as ?tax havens? caused a rethinking and a change of tactics within the OECD. This resulted in a rather abrupt change in approach: the replacement of unilateral demands by a kinder, gentler cooperative approach that created the impression for many that the OECD was incompetent, weak, or both. This paper will employ interrupted time series data analysis of tax haven activity to evaluate claims about the effectiveness of the project in changing the location and volume of international investment and the implied changes of tax revenue by other states.

A Level Playing Field and the Space for Small States

Vlcek, William. "A Level Playing Field and the Space for Small States" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA, Feb 28, 2007

Abstract: In the course of producing a project against tax competition, the OECD has insisted on the establishment of a level playing field. The subjects of this project are predominantly small states with offshore financial centres and few alternatives available to achieve economic development. This paper reflects upon the broad parameters of the OECD's concern with tax competition and its proposed method to resolve the issue.

The following argument is an interrogation of the meaning embedded within the term 'level playing field' as used in the debate over international tax competition. It outlines some of the broad consequences that an OECD success with implementing the project holds for small economies. The conclusion reached is that a level playing field in the global political economy is a mirage with more substance for some states than for others.

Forex rules in China real estate ownership

I encourage readers to have a look a this article entitled "Foreign Ownership Of Real Estate In China/China's New Forex Rules" writed by Steve Dickinson, from chinalawblog.com:

"In July 2006, the Chinese government issued rules prohibiting foreign individuals and companies from directly owning commercial real estate in China. Just this month, China's State Administration of Foreign Exchange ("SAFE") issued new foreign exchange rules. In my experience dealing with real estate investors here in Shanghai and elsewhere in China, both of these rules are misunderstood.

The Opinion on Regularizing and Managing the Entry of Foreign Capital into the Real Estate Market ("Opinion") requires foreign participation in commercial real estate investment be through a Chinese commercial entity. This means foreign companies and individuals can own real estate in China only through a Foreign Invested Enterprise (FIE), such as a Wholly Foreign Owned Entity (WFOE) or through an Equity or Contractual Joint Venture (JV). Residential property not for personal use is considered commercial real estate and its ownership is similarly restricted. This is true even if the residential property is not rented to third parties.
This rule applies to all of China. The ramifications of this new rule are clear: foreign individuals and foreign companies can buy commercial real estate in China only if they do so in the name of a Chinese corporation (such as a WFOE or JV) established for this purpose. This is a clear and inflexible rule. It also is not actually a change in Chinese law, just a reaffirmation by opinion of what has always been the case.

The opinion has one limited exception to its no foreign ownership rule and that is for residential real estate as a personal residence. This exception is limited to Representative Offices or to foreign individuals who have been legally resident in China for at least one year while employed or as a student. These foreign individuals are limited to one residence. There are somewhat less restrictive rules for residents of Hong Kong and Taiwan.

Following on the Opinion, the relevant authorities issued detailed rules on foreign exchange issues related to the foreign individual purchase and sale of real estate. These rules were issued on September 1, 2006 as the Notice on Various Issues Relating to the Management of Foreign Exchange in Connections with the Regularization of the Real Estate Market ("Forex Notice"). The Forex Notice recognizes that most individual purchasers of real estate in China will be using foreign exchange form their home country for the purchase. These rules require proof of the real estate purchase in China, proof of identity, and proof of residence for at least one year. The exchange of funds must be made at the real estate buyer's bank, with the fund directly transferred to the seller's bank. No cash can be withdrawn.

The Forex Notice also provides rules for converting Renminbi (RMB) proceeds from a real estate sale by foreign individuals. The Forex Notice provides that RMB proceeds can be converted to foreign exchange if the foreign individual provides an application, a copy of the sales agreement, and proof of payment of all taxes related to the property and the sale.

The local tax offices with which I have discussed this tell me "all taxes" means any capital gains tax resulting from the sale and all taxes accrued during the foreign individual's ownership of the property, including the stamp taxes due on rental payments and individual income tax on any income earned from the property. Without proof of payment of taxes, conversion of foreign exchange will not be permitted. One of the tax officers with whom I discussed this told me that taxes are not a major issue in foreign exchange conversion since the sale itself would not be approved absent proof of payment of taxes.

I am aware of many foreign residents in China who are going to be facing a very unpleasant reality when they try to sell their China properties. Many foreign owners of real estate in China ignore the requirements of Chinese individuals income tax law and fail to file the appropriate tax return. Since taxes are owed on income earned from real property, the Chinese government will not approve the property's sale until the tax issue is resolved. This is another example of China starting to take a very serious approach to tax compliance.

I am also aware of a number of foreign residents who are violating Chinese law by buying more than one property. They tell me they feel safe in doing so because the Chinese government does not effectively track foreign real estate ownership. These people are taking large and unnecessary risks. The risk is unnecessary because all they need do to buy multiple properties legally is to form a WFOE and make the purchases through it. I view the risks as huge because I fully expect China to have effective tracking mechanisms in place before most of these people are able to sell.
This month, SAFE also issued new rules concerning the conversion of foreign exchange to RMB, called the Method for Management of Foreign Exchange by Individuals ("Forex Method") and the Detailed Rules on the Method for Management of Foreign Exchange by Individuals ("Detailed Rules"). The new system works as follows:
a. Individuals can freely convert foreign exchange to RMB up to an annual limit of $50,000 US.
b. When individuals exceed the $50,000 US annual limit, they must obtain permission for the exchange, which permission is automatic, provided the individual provides proof the exchange is for a specific and legitimate purpose.
c. The Forex Method provides that a foreign individual's sale and purchase of real estate is a legitimate purpose and should be processed according to existing rules. Section 21 of the Detailed Rules provides that such transactions should be processed according to the Forex Notice discussed above.

Accordingly, the new Forex system established this month has no impact on the purchase and sale of real estate in China by foreign individuals. Despite this, many people who contact me incorrectly believe the new rules imposed an absolute limit on foreign exchange conversion or prohibit foreign exchange conversions for buying real estate. The new rules are actually a liberalization of the old rules, not an attempt to impose new restrictions.

For those wishing to learn more on China real estate, mark May 3 and 4 on your calendar as both Steve and I will be speaking in San Francisco on those days at a seminar on China real estate investments. Steve will be speaking on China's new real estate regulations and I will be moderating a session on China's second tier cities. More information on this seminar will be forthcoming shortly."

Corporate Tax Policy and International Mergers and Acquisitions - Is the Tax Exemption System Superior?

Corporate Tax Policy and International Mergers and Acquisitions - Is the Tax Exemption System Superior?

Johannes Becker (University of Cologne) and Clemens Fuest (University of Cologne and CESifo (Center for Economic Studies and Ifo Institute for Economic Research) published this paper at CESifo Working Paper Series No. 1884

Here is theAbstract:

In this paper we ask whether recent claims that the US government should switch from the tax credit system to the exemption system are justified. We study corporate taxation in a model where international capital flows are either greenfield investment projects or acquisitions of existing firms, and where investment is motivated by either cost reduction or market entry reasons. The paper asks how corporate taxation affects the international allocation of capital under different double taxation regimes. We find that the standard view on international taxation only prevails in the case of cost driven greenfield investment. In all other cases the deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure neutrality. However, the desirability of the tax exemption system has to be qualified. We show that the cross border cash flow tax system dominates the exemption system in terms of optimality properties.

Available at SSRN: http://ssrn.com/abstract=959991

Taxes Aren't Beautiful: A Singer Moves to Switzerland to Avoid British Taxes

From Taxprof/typepad.com:

"British singer-songwriter James Blunt -- best known for his hit single You're Beautiful -- has decided to establish residence in Switzerland to avoid British taxes. From press reports:
Blunt, who earned £5 million ($9.8 million) from his debut album Back To Bedlam, is the latest in a long line of high-earners to quit their homeland for Switzerland - Phil Collins resides there and French rock legend Johnny Hallyday set up residence in Gstaad only last month.
Patrick Messeiller, director of tourism for Verbier, confirmed a report in the Swiss daily Le Matin that Blunt, who is a frequent visitor to the mountain village, had registered with the tax office there.

Each Swiss canton (state) sets its own tax rates, and can cut special deals with wealthy foreigners that allow them to pay only a fraction of what they would have to pay elsewhere. "

Taxation at Casinos and Gambling

Stream, Christopher., Thompson, William. and Myers, Nathan. "Casino Taxation Rates: Politics as Unusual" Paper presented at the annual meeting of the Southern Political Science Association, Hotel InterContinental, New Orleans, LA, Jan 03, 2007 http://www.allacademic.com/meta/p141982_index.html

Abstract: Taxes matter to business. They affect location decisions, job creation and retention, international competitiveness, and the long-term health of a state’s economy. But relatively little attention has been paid to the taxes on casinos and legalized gambling businesses. Research on gambling and casinos has largely focused on the adoption of such policy innovations in the states.

Less attention has been paid to the taxes rates on these types of firms. Among the states, the gaming tax rates vary considerably. Some states have adopted tax rates in the low teens while others collect close to 50 percent of a casino’s profits. It appears that while states with legalized gambling mimic each other in terms of the types of gaming allowed, they do not appear to follow each other in the types of rates “charged” to the casino firms. This Article examines gaming taxation rates and identifies some changes across all fifty states. We attempt to identify the factors that influenced the adoption of these tax rates in each state. We argue that state policymakers view casino taxes differently than the way they view taxes on other business firms.

These views greatly alter the politics of casino taxation in the states. The authors also provide updates on the status of gambling in several venues and suggest future research questions on the impact of gambling as an economic development tool for the states.

Exchange-of-Information Clauses in International Tax Treaties

Philippe Bacchetta (University of Lausanne; Swiss National Bank - Study Center Gerzensee; Centre for Economic Policy Research (CEPR); Swiss Finance Institute) and Maria Paz Espinosa (Universidad del Pais Vasco - Department de Fundamentos del Analisis Economico) published this 2001 paper in International Tax and Public Finance, Vol. 7, No. 3, 2000

Here is the Abstract:

This paper examines bilateral double taxation treaties, with an emphasis on information exchange among tax authorities. A major objective is to understand which countries are more likely to sign a tax-relief treaty and when information-exchange clauses will be added to a treaty. A simple model with two asymmetric countries and repeated interactions among governments is used. The paper shows that no information exchange clause may be added to a tax treaty when there is a reciprocity requirement, when there is a high cost of negotiation, when there is a cost of providing information, or with one-way capital flows. It is also shown that an information clause increases the gains from a tax relief treaty, but may make it less sustainable.

Available at SSRN: http://ssrn.com/abstract=261971