Tax Law Commons^™

It-Apas - Vertical Harmonization Of Transfer - Pricing Standards, Richard Thompson Ainsworth

Faculty Scholarship

The World Customs Organization (WCO) and the Organization of Economic Cooperation and Development (OECD) have begun considering the harmonization of transfer pricing norms among income tax, customs and VAT regimes. Two conferences have been organized in May of 2006 and 2007.

These conferences have concluded so far: (a) that more analysis is needed; (b) that harmonization will require adjustments on all sides; and (c) that pilot projects (real world statutory and administrative efforts to harmonize) or case studies in harmonization (hypothetical fact patterns) are needed to facilitate consideration. This paper assesses the three basic paths being pursued at the present …

It-Apas: Harmonizing Inconsistent Transfer Pricing Rules In Income Tax - Customs - Vat, Richard Thompson Ainsworth

Faculty Scholarship

In most jurisdictions there are three separate spheres of transfer pricing analysis - income tax, customs and VAT. Although they share policy objectives, terminology and frequently borrowing methodologies from one another these domestic transfer pricing systems are not in harmony.

Businesses find this lack of harmony costly, problematical, but also a planning opportunity. The door is open for arbitrage.

What if the transfer pricing rules within a jurisdiction were harmonized? The World Customs Organization (WCO) and the Organization of Economic Cooperation and Development (OECD) are considering this question.

This paper synthesizes the range of transfer pricing regimes currently in use, …

Car Flipping In The U.K.: The Vat Fraud Marketplace And Certified Solutions, Richard Thompson Ainsworth

Faculty Scholarship

Missing Trader Intra-Community (MTIC) fraud and its offspring carousel fraud and contra trading fraud are siphoning huge amounts of VAT revenue from the UK Treasury. This fraud is not a function of the goods involved. It is a function of the market-place. Recently another type of market-place dependent VAT fraud has taken hold in the UK - car-flipping.

In some instances the market-place where these frauds festers is a pre-existing or natural market-place, one that grows out of legitimate commercial practices. Fraudsters enter this market-place (so the argument goes) and take advantage of legitimate businesses who unwittingly get caught up …

Philosopher Kings And International Tax: A New Approach To Tax Havens, Tax Flight, And International Tax Cooperation, Steven A. Dean

Faculty Scholarship

Tax flight treaties could help to solve the $50 billion-a-year problem that tax flight (the evasion of income taxes through the use of offshore tax havens) poses for the United States. Tax flight treaties would offer tax havens a substantial portion of the increased tax revenues that they could generate by providing the United States with the enforcement assistance it needs. Those payments, potentially representing as much as half of the added tax revenue produced by tax flight treaties (and in all probability an amount that is greater than any GDP gains attributable to eliminating waste and other economic distortions …

Tax Shelters And The Code: Navigating Between Text And Intent, Steven A. Dean, Lawrence M. Solan

Faculty Scholarship

Tax shelters raise difficult problems of statutory interpretation. In her interesting article, Of Lenity, Chevron, and KPMG, Kristin Hickman explores one of them: the recent tendency of courts to apply the rule of lenity in civil cases, potentially leading to a narrow interpretation of the Code that would undermine efforts to collect the taxes that Congress intended to impose. In that article and in earlier work, she also discusses the importance of courts deferring to the IRS under the Chevron doctrine as a tool in collecting taxes. We agree both with Hickman's articulation and analysis of this problem. Here, we …

Financial Accounting And Corporate Behavior, David I. Walker

Faculty Scholarship

The power of financial accounting to shape corporate behavior is underappreciated. Positive accounting theory teaches that even cosmetic changes in reported earnings can affect share value, not because market participants are unable to see through such changes to the underlying fundamentals, but because of implicit or explicit contracts that are based on reported earnings and transaction costs. However, agency theory suggests that accounting choices and corporate responses to accounting standard changes will not necessarily be those that maximize share value. For a number of reasons, including the fact that executive compensation often is tied to reported earnings, managerial preferences for …

Consumer Law As Tax Alternative, Rory Van Loo

Faculty Scholarship

Policymakers and scholars have in distributional conversations traditionally ignored consumer laws. Tax law dominates distributional conversations partly because legal rules are seen as less efficient and partly because consumer law research speaks to narrow and siloed contexts. Even millions of dollars in reduced credit card fees seem trivial compared to the trillion-dollar growth in income inequality that has sparked concern in recent decades. This Article is the first to synthesize the fragmented studies quantifying inefficiently higher consumer prices across diverse markets — called overcharge. These studies indicate that laws reducing overcharge could make a substantial reduction in inequality. Moreover, this …

Biometrics, Certified Software Solutions, And The Japanese Consumption Tax: A Proposal For The Tax Commission, Richard Thompson Ainsworth

Faculty Scholarship

Significant change is anticipated in the Japanese Consumption Tax. The Japanese Tax Commission is recommending that the rate should double, multiple rates should be employed, and the "bookkeeping method" of accounting should be abandoned in favor of the European "invoice method."

The Tax Commission faces a tax policy dilemma. The aging population drives the need for a tax increase (making the Consumption Tax an obvious target for revenue enhancement) at exactly the same time the population is shrinking in overall size, thereby reducing the number of working-consumers who can pay the higher tax.

These are dramatic changes for the Japanese …

Impersonating A Nonprofit, Alan L. Feld

Faculty Scholarship

The Senate Finance Committee minority staff report concerning Jack Abramoff's use of tax-exempt organizations details the misuse of charities and social welfare organizations for lobbying and other purposes. It shows how Abramoff moved money from clients through exempt organizations to influence legislative and administrative decisions favorable to those clients, but without disclosing the true source of the funds. In one case, money from the Mississippi Band of Choctaw Indians, anxious to bar competition from a new casino, transferred funds through Americans for Tax Reform (ATR) to antigambling organizations associated with Ralph Reed. In other examples, money passed from clients to …

Taxing Services Under The Eu Vat And Japanese Consumption Tax: A Comparative Assessment Of New Eu Place Of Taxation Rules For Services And Intangibles, Richard Thompson Ainsworth

Faculty Scholarship

Place of taxation rules are the seminal cross-jurisdictional provisions of any consumption tax regime. They determine where among competing jurisdictions a particular service is taxed. They are not important for transactions that are restricted to a single jurisdiction and to businesses or individuals belonging to that jurisdiction. However, when two or more jurisdictions are involved, these are the essential tools for revenue allocation and avoidance of double taxation.

It is therefore of considerable importance to Japanese businesses and consumers when the European Union (EU) undertakes a wholesale revision of the place of supply rules for services and intangibles. The European …

Digital Consumption Tax (D-Ct), Richard Thompson Ainsworth

Faculty Scholarship

Modern technology is dramatically changing the way consumption taxes are collected, but it is also changing the way policymakers assess the operation and impact of these taxes. Whether the design is a standard credit-invoice value added tax (VAT) of European design, or a retail sales tax (RST) of American design, or the credit subtraction VAT without invoices type of consumption tax (CT) of Japanese design, technology is having a profound impact.

Government certified transaction software is in place in the United States. The Streamlined Sales Tax offers taxpayers in 18 states the option of having their retail sales tax determined …

Carousel Fraud In The Eu: A Digital Vat Solution, Richard Thompson Ainsworth

Faculty Scholarship

Recent reports from the UK's Office for National Statistics estimate (as of May 11, 2006) that Missing Trader Intra-community Fraud (MTIC) may exceed 10 billion pounds this year.

Carousel fraud, a variant of MTIC where the same goods are sold over and over again, exploits the lingering non-certified, non-digital attributes of the EU VAT. The UK believes that carousel fraud cost the Exchequer between 1.12 and 1.9 billion pounds in the 2004-05 financial year. This article proposes that carousel fraud be eliminated in the EU through selective insertion of Digital VAT functionality into the present system. In other words, it …

The Digital Vat (D-Vat), Richard Thompson Ainsworth

Faculty Scholarship

The most sustained U.S. tax policy debate of the past 30 years concerns proposals to replace and/ or supplement the Federal Income Tax with a consumption tax. Public finance economists and legal tax policy scholars challenged and defended the current income tax system on grounds of fairness, efficiency, and simplicity.

This debate over revamping the national taxing scheme has not been argued purely in the academic forum. Concrete legislative proposals have been advanced for a national retail sales tax, a European-style Value Added Tax, as well as a whole host of what David Bradford calls "the two-tiered consumption taxes."

From …

Digital Vat And Development: D-Vat And D-Velopment, Richard Thompson Ainsworth

Faculty Scholarship

This article suggests that the time is right for developing countries to consider adopting a comprehensive, fully digital VAT, (complete with certified software and trusted third party intermediaries who could assume all of the taxpayer's VAT responsibilities) within the limited group of enterprises encompassed by the large taxpayer group.

Since the e-commerce revolution began in the 1990's, tax policy discussions in developed economies have enlisted "e-solutions" to streamline consumption tax administration, as well as to resolve technical problems.

Inspiration came from the marketplace. Policy-makers observed widespread, business-initiated e-solutions to consumption tax compliance problems in a wide spectrum of jurisdiction. There …

Two Tweaks For The Taxation Of Social Security Benefits, Alan L. Feld

Faculty Scholarship

The ongoing public discussion of possible changes in the Social Security retirement system has largely ignored a small but significant aspect: The relationship between the retirement benefits paid and the federal income tax. Internal Revenue Code section 86 includes Social Security retirement benefits in the federal income tax base on a three-tier system. Individuals may exclude benefits from gross income, include them at 50 percent, or include them at 85 percent. Proposed legislation would repeal the top tier. Modification of section 86, to better accord with the proper measurement of income subject to tax, perhaps embodied in a larger "fix" …

The One-Stop-Shop For Vat And Rst: Common Approaches To Eu-U.S. Consumption Tax Issues, Richard Thompson Ainsworth

Faculty Scholarship

In March 2004 the European Commission solicited comments on a proposal to simplify value added tax (VAT) obligations through a one-stop scheme. The proposal was modest in scope. It was designed to build upon the success of a similar scheme that dealt with non-EU established persons supplying digital products to non-taxable EU persons. That scheme is found in Article 26c of the Sixth VAT Directive.

In its March Consultation Paper the Commission proposed that businesses established within the EU be allowed to participate in a one-stop scheme that would be similar to the Article 26c scheme. Limited to B2C transactions, …

Attractive Complexity: Tax Deregulation, The Check-The-Box Election, And The Future Of Tax Simplification, Steven A. Dean

Faculty Scholarship

Political failure has long been the scapegoat for the increasing complexity of the income tax. Over the last few decades, confusion over the meaning of the term simplification appears to have become a second important obstacle to creating simpler tax laws. Because some tax complexity is attractive to taxpayers, relying on taxpayer preferences to identify complexity and to guide simplification efforts has produced reforms and proposals that promise simplification but instead deliver pro-taxpayer deregulation that may cause more of society's resources to be devoted to paying, minimizing and collecting taxes rather than less. The check-the-box election, which provided taxpayers with …

Global Changes In Regulating Corporate Auditors: A Comparative Assessment, Richard Thompson Ainsworth

Faculty Scholarship

Auditor independence was a global concern of financial regulators in the 1990's. Some observers saw this in a positive light, a natural development. Adjusting auditor independence rules was a manifestation of global convergence in corporate governance structures. New rules, especially rules leaning toward a harmonized system were welcome.

There was a more sobering view. This view held that global regulators were less concerned with convergence than they were with a sense of impending disaster. Things had gone too far. Significant, maybe even radical change was needed. The independence of corporate auditors had eroded; trust had been fundamentally compromised in the …

Dividends Reconsidered, Alan L. Feld

Faculty Scholarship

When JGTRRA 2003 reduced the income tax rate on dividends received by individuals to that of net capital gains, Feld explains, it also changed the relative attractiveness of alternative forms of corporate payout. Interest payments on shareholder debt and compensation to shareholder-employees, which generally provide superior returns to individuals, now yield less after-tax benefit in some circumstances than dividend payments. Feld says the change also calls into question the continuing function of a number of code provisions intended to prevent a "bailout" of corporate earnings at net capital gain rates and whose rules now affect primarily corporate rather than individual …

Preserving Basis After Redemption, Alan L. Feld

Faculty Scholarship

To shut down a particular kind of offshore tax shelter scheme regarded as abusive, the Treasury has proposed changes in the way shareholders recover investment after engaging in corporate redemptions taxed as dividends. This article argues that the proposed regulations operate poorly in the more typical setting of distributions by corporations to individual shareholders, that existing law produces better results in those situations, and that the Treasury should employ narrower rules to attack tax shelter arrangements.

Rendering Unto Caesar Or Electioneering For Caesar--Loss Of Church Tax Exemption For Participation In Electoral Politics, Alan L. Feld

Faculty Scholarship

The restriction on church participation in political campaigns contained in the Internal Revenue Code operates uneasily. It appears to serve the useful purpose of separating the spheres of religion and electoral politics. But the separation often is only apparent, as churches in practice signal support for a particular candidate in a variety of rays that historically have not cost them their exemptions. Although the limited enforcement by the Internal Revenue Service has reflected the sensitive nature of the First Amendment values present, the federal government should provide more formal elaboration by statute or regulation. Focus on the use of funds …

Taxes, Bankruptcy, And The Lazarus Problem, Alan L. Feld

Faculty Scholarship

[1] The Ninth Circuit recently barred the IRS from its day in court in a personal bankruptcy proceeding. ¹ The issue in the case concerned the effect, in a chapter 13 bankruptcy proceeding, of a dismissal order followed later by an order reinstating the case. The Ninth Circuit counted the number of days between the dismissal and the reinstatement against the government and ordered the IRS proof of claim dismissed as untimely. As a result, the tax owing became subject to discharge in the bankruptcy without taxpayer payment.

[2] The result defeats the intent of the statute and creates waste …

Collapse Section 341, Alan L. Feld

Faculty Scholarship

Simplification of current income tax provisions always runs an uphill course. As a proper standard for evaluating a provision of existing law we should ask whether, if it did not exist, we would need to invent it. Unfortunately, when we move to the task of crafting and altering the details of current law, the blandishments of equity, revenue yield, and special-interest gain easily outshine the sober virtue of simplification; we forget this potentially embarrassing question.

As a modest step toward simplification, I propose the repeal of one section of the code, a section famed among tax cognoscenti for its opaque …

Fewer Tax Returns, Alan L. Feld

Faculty Scholarship

Professor Alan L. Feld presents a proposal for simplifying the income tax by reducing the number of taxpayers who have to file returns.

Nunn-Domenici And Nonprofits, Alan L. Feld

Faculty Scholarship

Context determines the meaning of legal rules, especially tax rules. The Nunn-Domenici proposal to restructure the U.S. income tax system on consumption tax lines (S. 722, 104th Cong.) will have an impact on nonprofits that provides an illustration of this principle.

What Can The Irs Compel Charities To Say To Donors, Alan L. Feld

Faculty Scholarship

The 1993 tax act created new substantiation and reporting requirements for charitable giving. One of the new provisions, section 6115, requires a charity to make specified disclosures to the donor. If the charity receives a "quid pro quo contribution" of more than $75 it must inform the donor that the amount of the charitable contribution excludes the value of goods or services the donor received. The charity must provide a good-faith estimate of the value of the goods or services. If the charity fails to comply, it may incur a penalty, section 6714, of $10 per contribution, but not more …

The Indivisible Tax Gift, Alan L. Feld

Faculty Scholarship

In Greene v. United States, the District Court for the Southern District of New York recently rewarded (with an income tax refund) the taxpayers' ingenuity in designing a charitable gift. The court did so, however, without discussion of a central issue in the case. Had it considered the nature of the gift more carefully, it might have denied or modified the claimed deduction.

Cost Basis, Not Carryover Basis, For Corporate Transferees, Alan L. Feld

Faculty Scholarship

Prof. Feld writes to the editor in a letter regarding Cal Johnson's letter "Issuer's FMV Basis Is Not Carried Over" (Tax Notes, July 6, 1992, p. 115).

Long-Term Debt, The Term Structure Of Interest And The Case For Accrual Taxation, Theodore S. Sims

Faculty Scholarship

During the past 25 years, the Internal Revenue Code has become increasingly sophisticated in its treatment of long-term debt. That transformation occurred as part of a wider set of legislative changes, changes that have made the Code generally more sensitive to the consequences of compound interest and discounted (or present) values. Much of this was dictated by necessity. By ignoring the effects of compound interest, the Code often measured income in a way that was economically unsound, and thereby allowed taxpayers to take advantage of the statutory shortcomings, often with dramatic, unanticipated results.

Revenue Procedure 91-12: The Irs Launches An Information-Gathering Offensive Against International Transportation Operations, Chi K. Cheung, Kevin Outterson

Faculty Scholarship

Every day, in ports around the country, thousands of oceangoing vessels and aircraft transport passengers and property to and from the United States. In many instances, the international transportation operation is foreign-owned and has neither filed nor paid any U.S. income taxes, relying upon tax exemptions under U.S. law or bilateral tax conventions. Newly issued Revenue Procedure 91- 12 requires all international transportation operations that transport passengers or property to or from the U.S. to file U.S. tax returns. Whether or not a tax is due, a U.S. tax return must be filed and certain information disclosed. Large penalties may …