Friday, September 23, 2016

Slides for my conference talk

Excellent conference, which ended just a half hour ago, on "Human Rights and Tax in an Unequal World."  Very diverse range of topics, ideas, and approaches, but it also hung together well.  Props to Philip Alston and Nikki Reisch for all their great work in bringing it to life.

While it's a bit too late on Friday afternoon, after a long day, to say anything more about it at the moment, here are the slides for my talk (with one slight addition, motivated by a tweet about one of my slides before I made the editing change).  And the paper itself is here.

Wednesday, September 21, 2016

"Human Rights and Tax in an Unequal World": NYU Law School conference this Thursday and Friday

Tomorrow and Friday at NYU, we will be holding our long-planned conference on Human Rights and Tax in an Unequal World.  Very good and varied speakers list, bringing together lots of interesting people who are not always seen at the same venues.  You can find a full schedule and program here.  It will take place at Lipton Hall (108 West 3rd Street).

I myself will be speaking at Session 4, which meets on Friday from 10:30 to 11:45 am.  Here again is my paper (mainly in the form of a dialogue between two fictional individuals).

Further information, including re. how to register to attend the conference, is available here.

Two birds with one stone?

An op-ed by Morris Pearl in today's NYT argues the following: "With companies engaging in high-risk tax avoidance, the investing public needs more information, clearly expressed.  Investors should, at a minimum, be given a list of all countries in which a company operates, the revenue and earnings attributed to each country, and the amount of taxes paid in each."

He argues that, otherwise, investors can't realistically evaluate tax risks, such as those in the Apple case.  I gather that neither Apple nor its peer companies had pre-2014 financial accounting reserves for what's now clearly threatened by the EU state aid cases, because their advisors blithely thought there was no risk.

There are obviously more issues to consider with regard to Pearl's proposal.  For one, would it further empower governments to challenge companies' tax positions?  That might be good for the world, but is less good for current shareholders, who benefit if the positions aren't challenged.  Note, however, that investors generally shouldn't mind, since a higher expected tax bill would presumably be built into the stock price at which they bought.  Note also that OECD-BEPS may succeed in inducing some measure of country-by-country reporting anyway.  (This ostensibly would not be public, but one would not be surprised if salient tidbits leaked out.)  What's more there are already instances in current financial reporting practice of apparently sacrificing accounting accuracy for ethical / compliance reasons (e.g., not taking into account tax savings that have a less than 50% chance, even if well above 0%, of being sustained).

Companies no doubt will also argue - I don't know how credibly, as this isn't an area of personal expertise - that publicly reporting the information would give competitive advantages to rival companies, including those not facing U.S. reporting requirements, by revealing info about the scope and direction of their operations.

But the points in favor include not only that emphasized by Pearl - that otherwise investors may be under-informed about significant tax risks - but also the point, which has come out in accounting research over the last ten-plus years, that companies which engage in aggressive tax planning often turn out  to have unexpected negative earnings shocks even if for wholly separate reasons.  A company's international tax profile genuinely is and should be relevant to investors for multiple reasons, and it doesn't appear that financial reporting to date has done all that it could have to inform investors properly.

Forthcoming colloquium on high-end inequality

As I've mentioned in prior blog posts, during the second half of the semester at NYU Law School, economist Robert Frank (generally at Cornell) and I will be co-teaching a Colloquium on High-End Inequality.  The afternoon sessions, with invited speakers, will be held at NYU Law School, 40 Washington Square South (Vanderbilt Hall), Room 202, from 4:10 to 6:00 pm on Mondays from October 24 through December 5.  They're open to the public, although non-NYU people might want to RSVP in advance (details to be available later).  We'll also be going to small-group dinners after the sessions.

I've previously mentioned the list of speakers, but I now also have the list of papers.  (Indeed, I also now have the papers, which I can send to interested parties, although we'll also be posting most of them online and sending all of them to our email distribution list.)  It's as follows:

October 24 – Robert Frank, Cornell University. 5 short pieces: (1) Why Has Inequality Been Growing?, (2) Why Luck Matters More Than You Might Think, (3) Does Inequality Matter?, (4) Why have weddings and houses gotten so ridiculously expensive? Blame inequality, and (5) The Progressive Consumption Tax.  Guest commentator: K. Anthony Appiah, NYU Philosophy Department.
October 31 – Kate Pickett, Department of Health Sciences, University of York.  (1) Income Inequality and Health: A Causal Review; (2) The Enemy Between Us: The Psychological and Social Costs of Inequality (both co-authored by Richard Wilkinson).
November 7 – Ilyana Kuziemko, Princeton University Economics Department.  Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations (coauthored by Vivekinan Ashok and Ebonya Washington).
November 14 – Alan Viard, American Enterprise Institute.  Progressive Consumption Taxation: The X Tax Revisited (chapters 1-3) (coauthored by Robert Carroll)
November 21 – Daniel Shaviro, NYU Law School.  The Mapmaker’s Dilemma in Evaluating High-End Inequality.  Guest commentator: Liam Murphy, NYU Law School.
November 28 – Adair Morse, Haas School of Business, University of California at Berkeley.  Trickle-Down Consumption (coauthored by Marianne Bertrand).
December 5 – Daniel Markovits, Yale Law School.  Meritocracy and Its Discontents.

Never give up, never surrender

The tree in the tree pit outside our house seemed to have died, so folks from the city came and cut it down, leaving only a stump.  But it refused to go so easily, sending up an array of branches and leaves.  It was cut down again, but fought back a second time.  Although it doesn't currently look very tree-like, I'm admiring its fighting spirit and wondering if we should keep it there after all.

Tuesday, September 20, 2016

Interesting article on the EU state aid cases

Mindy Herzfeld has recently posted an interesting News Analysis in Tax Notes (here, although I believe it's behind a paywall), entitled "Is the EU a Country?: Creditability of State Aid."

Three points of particular interest in it are as follows:

1) "To state aid and EU law experts, the Apple decision came as no surprise. Those who study the development of EU law are well aware of the methods the commission uses to expand its authority over EU matters and how it has continually extended the scope of state aid and competition law. The Apple decision can be viewed as a logical progression along those paths. From the perspective of the evolution of EU law, the recent state aid decisions are simply the latest example of the commission's use of all its available tools to expand its authority into areas where it has not been granted specific powers under the EU treaty. State aid observers also view the extension of state aid principles to tax rulings as a necessary corollary of the state aid doctrine. Given that state aid is essential to protect the single market, restrictions on the commission's ability to apply those principles to tax benefits granted to individual companies -- including via tax rulings -- could render moot the entire doctrine as countries would seek to recharacterize direct subsidies as tax preferences."

She then notes that there is a genuine debate under EU law as to whether the EC's authority should indeed override that of national tax authorities.  But for me an important takeaway from this passage is that it strongly suggests the state aid rulings were indeed foreseeable, and that if Apple's experts (along with those of other companies facing state aid investigations) did not realize this, it was their own failure to exercise proper due diligence. Is it asking too much for the tax experts to realize that they should talk to people who have been following broader EU legal developments, including in the state aid area? There were, after all, large stakes in accurate financial reporting (even leaving aside the underlying planning).

2) Regarding the question of whether the amounts that will be paid to Ireland and other EU countries under the state aid cases (if the EC's position prevails) will qualify for foreign tax credits: "How Ireland recovers the amount from Apple is relevant for the creditability of that amount because, as mentioned, a foreign levy is creditable only if it is made under the foreign country's authority to levy taxes as determined under U.S. principles.

"Ireland will likely do everything it can to characterize the recovery amount as a tax to help Apple claim the FTC. But regardless of how Ireland characterizes the payment, the question still remains whether an amount being levied by the Irish government because it has agreed to EU competition policies, and by virtue of having signed the TFEU and made it its national law, is being levied under its taxing authority as determined under U.S. principles.
"There do not appear to be any authorities on whether a foreign country that is not levying a tax because it claims the ability to do so under its own authority, but because it is being forced to do so as a result of a treaty obligation, should be considered exercising its authority to levy taxes under U.S. principles."
I myself would bet in favor of an ultimate U.S. legal determination that the taxes are creditable, but that basically just reflects a hunch on my part that, even if the IRS contests this point (which it conceivably might not), the basic policy behind the FTC, such as it is, supports creditability so long as we are confident, as I think we can be in these cases, that the U.S. taxpayers were not paying the extra levies voluntarily or via collusion of any kind.
3) "In an article on the history of U.S. international tax rules, Michael Graetz and Michael O'Hear have described the U.S. FTC system as extraordinarily generous ("The Original Intent of U.S. International Taxation," in Follow the Money (2016)). Others have agreed and questioned whether the United States should continue to offer a dollar-for-dollar offset against foreign taxes paid.
"In 'The Case Against Foreign Tax Credits,' (3 J. Legal Analysis 65 (2011), Daniel Shaviro of New York University School of Law questioned whether the FTC is the best tool for attaining U.S. tax policy goals and suggested it might be prudent to consider an alternative. Recent developments in international tax worldwide -- including expansive assertions of the permanent establishment concept in the U.K. and Australia, and of the existence of PEs on audit in India, and encouragement from international organizations for developing countries to assert more taxing jurisdiction at source -- indicate that this is an appropriate time to consider other options. But for now at least, the administration is instead advocating for a worldwide minimum tax, which will only continue to encourage foreign countries to increase their taxes to soak up taxes that would otherwise be paid in the U.S."
Yes, we all like being cited.  But I mention this here because I agree with Herzfeld that recent developments, including the EU state aid cases, do indeed raise the issue of whether a marginal reimbursement rate of 100 percent for foreign taxes paid (as foreign tax credits offer, absent the applicability of foreign tax credit limits or the complicating effects of deferral), can create significant incentive issues for U.S. companies that ought to be of concern to U.S. policymakers.

Slides on high-end inequality from my talk yesterday at Ohio State College of Law

Here are the slides that I used yesterday for my talk at Ohio State, entitled "The Mapmaker's Dilemma in Evaluating High-End Inequality."

Monday, September 19, 2016

Talk at Ohio State Law School today

Today at Ohio State Law School, I gave a talk on a piece  that, in the form I presented it, is somewhat of a hybrid between a forthcoming U Miami Law Review article of mine and chapter 2 of my book in progress on high-end inequality.  The "long" version, which features a far more extensive discussion of Diamond & Saez's work on high-end tax rates than I will try to cram into the book, is available here.

The article is entitled "The Mapmaker's Dilemma in Assessing High-End Inequality."  My talk mainly addressed the piece itself, but also touched more generally on my book project, on which I felt I received encouragement as well as a couple of good suggestions regarding novels I might consider.  I will post slides from the talk once I am back at NYU (tomorrow) and can conveniently create a link to them on the NYU Law website.

It was nice to see a couple of former students of mine who now teach tax at OSU, and also to get a sense that people in other disciplines than law may find the project interesting.  As it happens, publishing the book is not quite as straightforward as it is for my more standard tax policy volumes - it's kind of in a unique genre or creating a genre, which makes it slower and harder work to write.  My current first choice is to find a sympathetic editor at a university press who would not just publish it, but offer helpful feedback reflecting such individual's complementary knowledge set to mine.  (I hadn't generally felt a need for that in my straight-up tax or budget or entitlements policy books.)  But a second thought could be to find an interesting non-university press that was intrigued by and right for the project.  It's a bit too high-end (like the inequality I discuss in it) for a mass audience, but there is the potential to interest a lot of readers who would not be so interested in, say, my previous book, Fixing U.S. International Taxation.

 Any thoughts on this that readers of this blog might have would be most welcome.

My article on the Treasury White Paper and EU state aid

There's no non-paywall-protected link for it yet, but today my short article "Friends Without Benefits? The Treasury and EU State Aid," ran in Tax Notes and Tax Notes International.

The abstract, appearing up front with my photo and bio, succinctly states: "In this report Shaviro identifies flaws in Treasury's White Paper condemning recent state aid investigations by the European Commission."

The paper departs from the consensus denouncing the state aid cases that seems not only to dominate Washington, but also to have significant, and at times personally surprising to me (in its shrillness and lack of balance or perspective), academic backing.  But the paper also departs in some ways from the main opposing view in U.S. academic circles, as I agree with the Treasury that the U.S. national interest might indicate favoring the scenario where U.S. companies, owned predominantly by U.S. individuals, pay less tax to other countries, rather than more.

What I object to the most is self-righteous cant in favor of the U.S. view, based on ignoring the possibility that we would want to do exactly what the EC is doing if the sides were reversed.  But it is also important to keep in mind that, even though we may have particular zero-sum interactions with our friends across the Great Pond (e.g., suppose that a given dollar of tax revenue will either go to them or to us), in the main our interactions are both friendly and positive-sum.  This ought to be kept in mind when one is deciding how aggressively to respond to disputes that arise in the zero-sum setting.

Friday, September 16, 2016

Irish TV interview

I am about to stroll over to the East Village to tape a brief interview for Irish television with economist David McWilliams.  The topic, of course, is the Apple/Ireland EU state aid case.  I don't know how or when this interview, or a piece of it, might appear on Irish television.

McWilliams, I gather, has responded to the European Commission's EU state aid decision by calling for his country to re-position itself as an "Atlantic Ireland with European links," rather than a "European Ireland with Atlantic links."  Whether this is right or not would be hard for me to judge from across the Pond, but he certainly has a point about the distinction between Irish and EU interests here (I have instead been focusing on the distinction between US and EU interests).

The tricky part of it all, as I think he recognizes, is that, as I discuss in my forthcoming Tax Notes piece, friendly or affiliated or allied countries frequently have a mix between zero-sum and positive-sum interactions, requiring delicate strategic calculation when the former are embedded in the latter.

More on this, perhaps, after I return from the interview.

UPDATE: Nice chat, and I may at some point have a link to what gets broadcast.

Thursday, September 15, 2016

IRS preemptive strike?

This coming Monday, Tax Notes will be publishing my short article on the EU state aid case, which is entitled "Friends Without Benefits?: The Treasury and EU State Aid."  But here is a kind of teaser as it's on the same subject, addressing a development that came out too recently (i.e., today) for me to discuss it in the article.

The IRS has just issued Notice 2016-52, entitled “Foreign Tax Credit Guidance Under Section 909 Related to Foreign-Initiated Adjustments.”

While I don’t have time right now to parse through it technically (I’m teaching a class in about an hour), it’s pretty clear what they are doing and why.  I’m personally sympathetic to their aim here, although I’ll leave it to others to assess whether, how, and how well the approach that they announce here works technically.

Section 909 addresses foreign tax credit "splitter" transactions like that in the Guardian Industries case, in which taxpayers created what were called super-charged or turbo-charged foreign tax credits, by finding workarounds to avoid the basic requirement or assumption of US law that you can only claim credits by repatriating the associated income.  The basic trick, using transparent entities and the like, was to place the profits in Entity A and the tax liability in related Entity B, so one could bring home just Entity B’s foreign tax credits, without Entity A’s earnings and profits also being included in the repatriation, and use the credits to offset the U.S. tax on other foreign source income.

It’s easy to see why Apple, in the EU state aid setting, would no doubt love to do a version of that trick this time around, if it can.  Say it owes $14.5B of Irish taxes under the state aid adjustment that the European Commission has proposed.  Since Ireland has a 12.5% tax rate, that would imply that the EC required a $116B increase in Irish taxable income.  Suppose Apple responded by repatriating $116B from Ireland (i.e., via a $101.5B dividend, grossed up for the tax liability) in order to be able to claim the credits.  That wouldn’t be so great for Apple, since the US pre-credit tax liability on this amount, at 35% (and assuming no other foreign taxes, for simplicity) would be $40.6B, reduced by the credits to $26.1B.

Now suppose instead that Apple could gin up a way to claim the $14.5B in FTCs without actually repatriating any Irish profits.  Then it would have built-in shelter for other repatriations in the amount of $41.4B that had no associated foreign taxes (and thus that would yield $14.5B in pre-credit US tax liability).  Voila, although Apple is still unhappy about the EU state ruling, at least it got to bring home lots of money for US tax purposes without paying any US repatriation tax.

Would this actually cost the Treasury $14.5B?  In a way no, since Apple wouldn’t have done the repatriation but for having the credits hypothetically made fully available.  But it might cost Treasury money in the future – e.g., if we went to a territorial system but had a deemed repatriation on pre-enactment foreign profits. Apple would have gotten to reduce by $40B the foreign earnings to which such a hypothetical tax on deemed repatriations would have applied.

Plus, as a general matter, the Treasury has good reason to dislike “splitter” transactions, which not only encourage repatriations that might not otherwise have occurred, but also can shelter repatriations that would have occurred anyway (and hence been taxable).  The EU state aid cases present a new wrinkle, by reason of their involving the sudden emergence of lots of taxes from past years that weren’t previously being accrued by the taxpayer, a scenario which certainly would motivate tax planning activity to figure out how to get around pre-existing section 909 and regulations.

Wednesday, September 14, 2016

Tax Prof blog link to my "dialogue" piece

Courtesy of the Tax Prof blog, a link describing my article, in the form of a dialogue, entitled Interrogating the Relationship Between "Legally Defensible" Tax Planning and Social Justice, which I wrote for the forthcoming (September 22-23) conference at NYU, Human Rights and Tax in an Unequal World.

One might almost read the heading to the Tax Prof blog link as suggesting that Reuven Avi-Yonah and I have coauthored a paper, which we have not, although perhaps someday we should (at times we seem to reach similar conclusions via distinct modes of analysis).