Law Commons^™

A Technological Approach To Reforming Japan's Consumption Tax, Richard Thompson Ainsworth

Faculty Scholarship

Significant change has been forecast for the Japanese Consumption Tax. Revenue needs are pressing, and the Consumption Tax appears to be underutilized. Should the rate be doubled from 5% to 10%, or more? If so, will rate increases necessitate further structural changes – recasting this annual credit-subtraction levy into a European style credit-invoice VAT? These options have not proven to be politically palatable, but they are directions that have been under active consideration.

On October 1, 2013 the Japanese Cabinet Office announced that the Consumption Tax would rise from 5% to 8% effective April 1, 2014. The rate will increase …

Transfer Pricing: Un Guidelines -- Brazil, Richard Thompson Ainsworth

Faculty Scholarship

The UN Practical Manual on Transfer Pricing for Developing Countries endeavors to provide “clearer guidance on the policy and administrative aspects of applying transfer pricing analysis.” Chapter 10 is particularly noteworthy. It sets out specific country practices. The rules in Brazil, China, India and South Africa are offered as templates for developing countries to follow.

This article considers the Brazilian contribution to Chapter 10. Although some writers believe that developing countries should adopt the Brazilian model this article suggests otherwise. Even though it is a theoretically simple system, some aspects of the Brazilian model consistently work to the fiscal disadvantage …

Rwanda -- Cutting-Edge Vat Compliance, Richard Thompson Ainsworth, Goran Todorov

Faculty Scholarship

On August 26, 2013 the Ministerial Order on Modalities of Use of Certified Electronic Billing Machine, No. 002/23/10TC of 31/07/2013, was published in the Official Gazette of Rwanda. This Order has set loose a technology revolution in VAT compliance that promises business efficiencies, and revenue enhancements that are only imagined in more developed countries. To open the door to technology Rwanda has taken the traditional digital invoice security model, and connected it to a central security portal at the Rwanda Revenue Authority (RRA). Rwanda will now be able to securely monitor transactions in close to real-time (oversight is on-demand).

Capital Income, Risky Investments, And Income And Cash-Flow Taxation, Theodore S. Sims

Faculty Scholarship

It has become conventional wisdom, based partly on postulated portfolio adjustments by investors in risky assets, (1) to view an income tax as equivalent to a tax levied only on the risk free return to capital and as therefore equivalent to a wealth tax; and (2) to view the difference between an income tax and a cash-flow consumption tax as limited to tax on the risk free return. I show that the propositions (1) equating an income tax to a tax on the risk free return, and (2) distinguishing an income tax from a cash-flow tax only by tax on …

Dice – Digital Invoice Customs Exchange, Richard Thompson Ainsworth, Goran Todorov

Faculty Scholarship

A digital invoice customs exchange (DICE) is a technology-intensive tax compliance regimen for VAT/GST that utilizes invoice encryption to safeguard transactional data exchanged between seller and buyer in both domestic and import/export contexts while simultaneously notifying concerned jurisdictions of the transaction details.

DICE facilitates real-time VAT/GST enforcement as well as real-time commercial contract verification. It is a commercial invoice validation system that prevents tax evasion, most notably missing trader fraud and the non-declared import of trade-able services. DICE mimics the most effective administrative enforcement effort ever undertaken by the US IRS – the requirement to disclose the social security numbers …

Vat -- East African Community: The Tradable Services Problem World-Class Solution, Richard Thompson Ainsworth, Goran Todorov

Faculty Scholarship

The value added taxes (VATs) of the East African Community (EAC) are open to manipulation and are leaking revenue from tradable services transactions. The EAC’s response has been to adopt a unique Reverse VAT mechanism. Something more is needed – a Digital Invoice Customs Exchange. Together these adjustments will provide a world-class solution to a world-wide problem. The EAC appears to be moving in this direction.

The vulnerability of the EAC VATs to tradable services is not surprising. The EAC borrowed VAT designs from the major VAT models, the EU VAT and the New Zealand Goods and Services Tax (NZ …

American Vat – The Carousel Fraud Threat: Will The Eu Show The Us The 'Way Forward', Richard Thompson Ainsworth

Faculty Scholarship

On Thursday, March 29, 2007 the European Commission, Directorate-General for Taxation and Customs Union, will host a one-day Conference on Fiscal Fraud – Tackling VAT Fraud: Possible Ways Forward. The conference is based on the Communication of May 31, 2006 explaining the need to develop a coordinated strategy to improve the fight against fiscal fraud. This paper indicates that the EU examination of carousel fraud points the way forward for advocates of a US VAT as well.

About 40% of EU VAT fraud appears to be 'missing trader intra-community' (MTIC) or carousel fraud. The best estimates of EU losses to …

Tackling Vat Fraud: Thirteen Ways Forward, Richard Thompson Ainsworth

Faculty Scholarship

In a May 31, 2006 Communication to the Council, the European Parliament, and the European Economic and Social Committee, the European Commission indicated a need to develop a coordinated strategy to improve the fight against fiscal fraud [COM (2006) 254 final]. Although the Communication considers fiscal fraud broadly (VAT, excise duties and direct taxes) the most pressing need seems to be for a VAT strategy that will effectively deal with carousel fraud.

This paper considers thirteen proposals that deal with missing trader intra-community fraud (MTIC):

(1) Common VAT (origin system) (2) Vanistendael’s foreign tax offices proposal (3) CVAT (Compensating VAT) …

A Tale Of Four Treatments: Preferential Taxation And Asset Valuation, Theodore S. Sims

Faculty Scholarship

Conventional wisdom is that preferential taxation of property income elevates asset values above their values in the absence of a tax, with those values strictly increasing in the marginal rate of the holder. I show that preferential tax rates (such as the rate on realized long-term capital gains) do indeed have that property. Preferential timing on the other hand -- pure "tax deferral" -- does not. The value of an asset subject to pure deferral does increase with the holder’s marginal rate, but only up to a point, at some marginal rate in excess of 50 percent. With increases in …

Vogtländische Straβen-,Tief- Und Rohrleitungsbau Gmbh Rodewisch (Vstr) V. Finanzamt Plauen – Vat Triangulation V. Drop Shipments, Richard Thompson Ainsworth

Faculty Scholarship

In ECJ Case 587/10 (Vogtländische Straβen-,Tief- und Rohrleitungsbau GmbH Rodewisch (VSTR) v. Finanzamt Plauen) an American firm, Atlantic International Trading Company (AIT) is a middleman in an otherwise all-European VAT triangulation. AIT appears to have approached its compliance obligations as if it was a middleman in an American drop shipment.

However, drop shipments are treated very differently from VAT triangulations.

Commercially these transactions are very similar. They are composed of two back-to-back sales, A/B followed by B/C, with a single delivery from A directly to C. This article compares the tax treatment of drop shipments under the RST with triangulation …

Leveling The International Playing Field With The Marketplace Fairness Act, Richard Thompson Ainsworth, Boryana Madzharova

Faculty Scholarship

Quill v. North Dakota unbalanced the American retail market with its preference for out-of-state over in-state sellers. The preference under Quill is that sellers without physical presence in a state cannot be compelled to collect the sales tax. If the buyer does not voluntarily remit the complementary use tax, the purchase is effectively tax-free. As a result, Quill is seen as facilitating tax avoidance and driving business to sellers who have no in-state nexus, notably e-businesses. Revenue losses are estimated in excess of $10 billion per year.

The reach of the Quill decision is international. Preferred sellers can reside just …

Stopping Mtic -- With A 3rd Invoicing Directive, Richard Thompson Ainsworth

Faculty Scholarship

A Third Invoicing Directive for the EU VAT seems to be a foregone conclusion. Corrections are needed in the Second Invoicing Directive. The hallmark of the next Directive will be its application of digital invoice technology. The Commission’s proposals will include adoption of tax-technology advances in invoice-control that are currently in use outside the EU. The next Invoicing Directive will require comprehensive e-invoicing, invoices that are digitally signed, and invoices that are fed into a system of relational databases that match transaction data across the Single Market. There will be real-time EU sales/purchases lists, and remote/real-time audit functionality.

This will …

E-Verify Can Stop Refund Fraud, Richard Thompson Ainsworth, Andrew Shact

Faculty Scholarship

Two issues in the current Washington debates need to be linked. E-Verify, the Internet-based database that allows employers to verify an employee’s work eligibility that is at the center of the immigration debate, is the ideal tool for stopping tax refund fraud. All that is needed is a digital signature of the E-Verify result, and the mandatory inscription of this signature on tax documents to make them self-authenticating.

The central features of this proposal have been made before. The technology it requires is tried and proven. The processes and procedure it advocates are in place and effectively deployed in foreign …

Quantitative Model For Measuring Line-Drawing Inequity, Bradley T. Borden

Faculty Scholarship

No abstract provided.

Zappers & Employment Tax Fraud, Richard Thompson Ainsworth

Faculty Scholarship

Beyond the grey area of worker misclassifications and general employment tax irregularities there are darker employment relationships where workers are intentionally paid in cash “off-the-books” or “under-the-table.” Grey employment relationships present civil enforcement issues that may become criminal; darker-relationships are criminal from the beginning. Zappers are found on the dark side.

Zappers are fraud-technologies that automatically (and remotely) skim cash from electronic cash registers (ECRs) or back room point of sales (POS) systems. Globally, tax auditors are finding that Zappers frequently provide the cash that is used to compensate “under-the-table” workers. In fact, a Zapper appears to be at the …

Binding Choices: Tax Elections & Federal/State Conformity, Heather M. Field

Faculty Scholarship

No abstract provided.

Taxing Anxiety, Morgan Holcomb

Faculty Scholarship

In this article, I argue for a statutory change to the disparity in the taxation of damages. I submit that nearly all damages, including damages received on account of physical injury, ought to be taxable, and that juries must be apprised of tax consequences so that they can make proper adjustments to take account of these tax consequences. I will refer to this as the full inclusion proposal with jury awareness - for ease, the full inclusion proposal.

My proposed change is the more sound solution for several reasons. Full inclusion creates certainty and avoids wasteful tax gamesmanship. Furthermore, assuming …

The Great And Mighty Tax Law: How The Roberts Court Has Reduced Constitutional Scrutiny Of Taxes And Tax Expenditures, Linda Sugin

Faculty Scholarship

This article compares National Federation of Independent Business v. Sebelius – the Supreme Court’s decision upholding the individual mandate in Obamacare as a tax, with Arizona Christian Schools v. Winn – the Supreme Court’s decision denying standing to taxpayers with an Establishment Clause challenge to a state tax credit. It argues that these cases aggravate a growing tension between the economic and legal analyses of taxation by reducing the legal significance of economic analysis in constitutional cases. It suggests that Arizona Christian Schools was a truly radical decision because it conceptualized tax expenditures as private action immune from constitutional attack, …

Accepting The Limits Of Tax Law And Economics, Alex Raskolnikov

Faculty Scholarship

This Article explores the limits of tax law and economics, attributing them to the unique complexity of the tax optimization problem. Designers of the optimal tax system must account for the impossibility of deterring socially undesirable behavior, provide for redistribution, and minimize social costs on the basis of assumptions that are laden with deeply contested value judgments, pervasive empirical uncertainty, or both. Given these challenges, it is hardly surprising that economic theory has a much weaker connection to the content of our tax laws and their enforcement than it does to the content and enforcement of many other legal regimes. …

Updating The Competitive Tax Plan: A New Epilogue For 100 Million Unnecessary Returns, Michael J. Graetz

Faculty Scholarship

This is the first step of a new epilogue for my book 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States. In January 2012, the Tax Policy Center (TPC), pursuant to a grant from Pew Charitable Trust, published an article analyzing and estimating the parameters of the tax plan set forth in this book. TPC has now updated its estimates to take into account the January 2013 “fiscal cliff” legislation and other economic changes. Certain details of the plan have also been revised somewhat.

The competitive tax reform plan has five pieces: First, enact …

Make The Patent “Polluters” Pay: Using Pigovian Fees To Curb Patent Abuse, James Bessen, Brian Love

Faculty Scholarship

On the heels of a widely reported uptick in egregious patent enforcement, six patent reform bills have been introduced in the last six months. All six bills aim to curb nuisance-value patent litigation, a phenomenon popularly referred to as “patent trolling,” by reducing the cost of defending these suits. In this essay, we argue that these bills, while admirable, treat the symptoms of our patent system’s ills, rather than the disease itself: a growing glut of unused high-tech patents that have little practical value apart from use as vehicles for nuisance-value litigation. Accordingly, we urge Congress to consider one additional …

I Like To Pay Taxes: Taxpayer Support For Government Spending And The Efficiency Of The Tax System, Yair Listokin, David M. Schizer

Faculty Scholarship

Why do people pay taxes? The simplest answer is that they have a legal obligation to do so. But it has long been recognized that this legal obligation alone provides an inadequate explanation for taxpaying behavior, just as legal obligations generally offer an inadequate explanation for most law-abiding activity.Another answer, then, is that some people pay taxes because – like Oliver Wendell Holmes – they like to do so. In other words, they appreciate that the government provides a vast array of public goods, such as rule of law, roads, schools, and aid to the poor, and find satisfaction in …

Oil And Water: Mixing Taxable And Tax-Exempt Shareholders In Mutual Funds, Jeffrey M. Colon

Faculty Scholarship

As of 2012, roughly 23% of U.S. households’ assets and 50% of retirement assets are invested in mutual funds, thus making mutual funds one of the most important investment vehicles for U.S. households. The federal taxation of mutual funds and mutual fund shareholders has played a vital role in the development of mutual funds and their appeal to U.S. investors. Despite the significant amount of mutual fund assets held in retirement accounts, there has been very little analysis of the issues that arise when taxable and tax-exempt shareholders invest together in the same mutual fund. A substantial body of research …

Rethinking The Penalty For The Failure To File Gift Tax Returns, Jay A. Soled, Paul L. Caron, Charles Davenport, Richard L. Schmalbeck

Faculty Scholarship

In this article, the authors argue that Congress must reform the penalty structure associated with the failure to file gift tax returns if it wants to maintain the integrity of the transfer tax system.

Hunting Stag With Fly Paper: A Hybrid Financial Instrument For Social Enterprise, Steven A. Dean, Dana Brakman Reiser

Faculty Scholarship

No abstract provided.

Tax Advice For The Second Obama Administration, Michael J. Graetz

Faculty Scholarship

Delivered January 18, 2013 as the keynote address at a conference cosponsored by Pepperdine Law School and Tax Analysts.

Navigating Tefra Partnership Audits In Multi-Tiered Entity Structures, Mary A. Mcnulty, Robert D. Probasco, Lee S. Meyercord

Faculty Scholarship

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established a unified procedure for determining the tax treatment of partnership items at the partnership level rather than the partner level. Although these rules addressed a serious and real administrative problem in the assessment of partnership level deficiencies, they also created a complex process with many new problems and potential traps. One particularly unique set of challenges arises in the context of multi-tiered entities.

Multi-tiered entities are partnerships that have a partnership or other pass-through entity as a partner. The pass-through partner is commonly referred to as a “tier,” and …

Technological Innovation, International Competition, And The Challenges Of International Income Taxation, Michael J. Graetz, Rachael Doud

Faculty Scholarship

Because of the importance of technological innovation to economic growth, nations strive to stimulate and attract the research and development ("R&D") that leads to that innovation and to make themselves hospitable environments for the holding of intellectual property ("IP"). Tax policies have taken center stage in their efforts to accomplish these goals and to capture a share of the income from technological innovations.

Designing cost-effective methods of supporting technological innovations has, however, become substantially more difficult as the world economy has become more interconnected. Where R&D is performed and where income is earned change in response to the nature and …