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:
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Q & A:
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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