Tax Law Commons^™

Proposals For International Tax Reform: Is There A Middle Road, Reuven S. Avi-Yonah

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In this article, Avi-Yonah looks at two recent tax reform proposals and discusses plausible avenues for post-election tax reform, suggesting two proposals for solving the problems of the U.S. international tax regime. This article was originally prepared for the Century Foundation's November 17 conference, "Paying for Progress: A Tax Reform Agenda for the Next President." See https://tcf.org/content/report/proposals-international-tax-reform/. The author would like to thank Jeff Madrick and the Century Foundation staff for hosting the conference and revising the article.

Apple State Aid Ruling: A Wrong Way To Enforce The Benefits Principle?, Reuven S. Avi-Yonah, G. Mazzoni

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After an in-depth investigation, the European Commission concluded Ireland granted tax benefits of up to €13 billion to Apple in violation of the state aid rules. Ireland must now recover the illegal aid. That decision has been criticized by Treasury Secretary Jacob Lew, who believes that only the IRS has the right to tax Apple's foreign income, since most of the company's R&D took place in the U.S. However, that is not how the big EU countries, where sales are made, see things. Who is right?

This article seeks to answer that question by analyzing the impact of the U.S. …

Can A Cost Sharing Arrangement Prevent A Tax Shelter Label?, Jeffrey M. Kadet

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In connection with an ongoing effort of the government to examine certain Microsoft documents, the government on October 12, 2016, stated in a filed document that one of the transactions at issue is "unquestionably" a tax shelter for purposes of section 7525. The significance of that is in whether some written communications should be protected from IRS scrutiny by the section 7525 confidentiality privilege that may apply to tax advice between a taxpayer and tax practitioners. Under section 7525(b)(2), written communications will not qualify if they are "in connection with the promotion of the direct or indirect participation of the …

Thoughts On Treasury's White Paper On Eu State Aid, Jeffrey M. Kadet

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The U.S. Department of the Treasury on August 24 issued a White Paper that expresses its concerns about the European Commission’s efforts to apply the European Union’s State aid restrictions to multinational enterprises’ profit-shifting structures. This article comments on two aspects of the white paper that are technically correct, but require a little more explanation for readers to understand their significance. These two aspects are:

First, the article clarifies that the general comments that the White Paper makes about “call[ing] into question the ability of Member States to honor their bilateral tax treaties” might be true, but the specifics of …

Effects Of Australia's Maal And Dpt On Internet-Based Businesses, Antony Ting, Tommaso Faccio, Jeffrey M. Kadet

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Australia has received considerable attention as a result of its unilateral actions to discourage multinational profit shifting. Those actions include the 2015 enactment of the Multinational Anti-Avoidance Law and the Australian Treasury’s May 2016 proposal for a diverted profits tax. This article considers how those actions might affect non-Australian multinational entities that conduct internet platform services for, and earn revenues from, Australian customers if those MNEs take no action. It also reviews structural alternatives.

As will be seen from the example set out in the article, the Australian royalty withholding tax is a major portion of the possible tax increases …

Profit-Shifting Structures: Making Ethical Judgments Objectively, Part 2, Jeffrey M. Kadet, David Koontz

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MNCs and their advisors have seemingly taken ethics out of the mix when considering the profit-shifting tax structures they have so prolifically and enthusiastically implemented over the past several decades. There may be a variety of reasons for this. First, U.S. tax law is a self-assessment system, meaning that in most cases taxpayers compute and pay tax without advance approval of their tax positions from the IRS. No third party technical test or propriety standard has to be passed on the front end for any tax strategy or structure. Second, direct personal benefits accrue to management and advisors from implementing …

Profit-Shifting Structures: Making Ethical Judgments Objectively, Part 1, Jeffrey M. Kadet, David Koontz

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MNCs and their advisors have seemingly taken ethics out of the mix when considering the profit-shifting tax structures they have so prolifically and enthusiastically implemented over the past several decades. There may be a variety of reasons for this. First, U.S. tax law is a self-assessment system, meaning that in most cases taxpayers compute and pay tax without advance approval of their tax positions from the IRS. No third party technical test or propriety standard has to be passed on the front end for any tax strategy or structure. Second, direct personal benefits accrue to management and advisors from implementing …

Profit-Shifting Structures And Unexpected Partnership Status, Jeffrey M. Kadet, David Koontz

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Many U.S.- and foreign-based MNCs that have implemented carefully researched tax strategies to reduce their income taxes are coming under increased scrutiny. Most MNC tax strategies involve businesses they conduct worldwide, but which are managed from the U.S. These strategies have several factors in common:

(i) Companies established in tax havens or otherwise structured to attract little if any tax;

(ii) Intercompany agreements placing commercial risk and intangibles in such companies, thereby shifting profits to such companies;

(iii) Conduct of centralized activities and functions in the U.S. (in addition to group senior management), which are integral to and which critically …

The Enigma Of Wynne, Edward A. Zelinsky

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The five-justice Wynne majority used that case to make a major statement about the dormant Commerce Clause. In many respects, Wynne is an enigma that perpetuates an inherent problem of the Courts dormant Commerce Clause doctrine: the Court declares some ill-defined taxes as unconstitutionally discriminatory because they encourage in-state investment, while other economically equivalent taxes and government programs that similarly encourage intrastate economic activity are apparently acceptable under the dormant Commerce Clause.

Wynne is thus more important than the immediate situation it addresses, and will have consequences beyond the immediate circumstances it addresses. A decision as enigmatic as it is …

Trade Credit And Taxes, Mihir A. Desai, C. Fritz Foley, James R. Hines Jr.

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This paper analyzes the extent to which tax differences affect the use of trade credit. U.S.-owned affiliates in low-tax countries use trade credit to lend, whereas those in high-tax countries use trade credit to borrow: 10% lower local tax rates are associated with net trade credit positions that are 1.4% higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by the temporary repatriation tax holiday in 2005, which was used most intensively by affiliates with positive net trade credit positions.

Beps - A Primer On Where It Came From And Where It’S Going, Jeffrey M. Kadet

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Governments throughout the world have been losing many billions of dollars of tax revenues from “legal” tax avoidance conducted by many multinational groups (MNEs) through aggressive structuring of operations and transactions that often lack economic reality so as to earn profits that are subjected to zero or low-taxation. The success of this “legal” tax avoidance motivated the G-20 and the OECD to initiate the two-year Base Erosion and Profit Shifting (BEPS) project, which took place from 2013 to 2015.

This discussion of the BEPS project is intended to give the reader an understanding of the project’s origin, its objectives, and …

Branding Taxation, Xuan-Thao Nguyen, Jeffrey A. Maine

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Branding is important not only to businesses,but also to the economy. The intellectual property laws and tax laws should thus further the legitimate goals of encouraging and protecting brand investments while maintaining a sound tax base. Intellectual property protections for branding depend on advertisement and enforcement, both of which demand significant amounts of private investment by firms. Although one would expect similar tax treatments of both categories of investment, the categories are actually treated as vastly different for federal income tax purposes. Additionally, tax distinctions also exist within each category. The result is that some branding investments are expensed and …

Provisions Denying A Deduction For Illegal Expenses And Expenses Of An Illegal Business Should Be Repealed, Douglas A. Kahn, Howard Bromberg

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Currently, the tax law denies a deduction for business expenses that violate a federal or state law (but only if the state law is generally enforced). In addition, losses, including business losses, cannot be deducted if they arise out of an illegal activity. For example, medical expenses are denied a deduction if they are illegal. Kickbacks, bribes, and rebates given in connection with the Medicaid or Medicare program are nondeductible. Any expenses, legal or not, incurred in connection with the conduct of a business of selling a controlled substance that is prohibited by federal law (or by the law of …

Constructive Unilateralism: U.S. Leadership And International Taxation, Reuven S. Avi-Yonah

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In recent years, various U.S. international tax proposals have been advanced on the basis that we should follow the lead of our major trading partners. For example, it has been argued that we should adopt a "territorial" tax system (really, an exemption for dividends by controlled subsidiaries of U.S. multinationals) because most of our trading partners have done so. Other voices have called for the United States to adopt a "patent box" because the United Kingdom and other EU jurisdictions have one.

Back To 1913?: The Ryan Blueprint And Its Problems, Reuven S. Avi-Yonah

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From the Revolutionary War to the late 19th century, the federal government was financed primarily through regressive tariffs on imported goods. The exception was the income tax enacted during the national emergency of the Civil War, which was allowed to expire in 1872. The rise of an industrial economy in the post- Civil War era led to significant increases in inequality, which the tariffs exacerbated by falling primarily on the working class. ‘‘Robber barons’’ like J.P. Morgan, Andrew Carnegie, and John D. Rockefeller did not consume most of their income, and their intangible wealth avoided state-level personal property taxes as …

Full Circle? The Single Tax Principle, Beps, And The New Us Model, Reuven S. Avi-Yonah

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This paper will argue that while there is some innovation in BEPS, it is in fact more of a continuation that a sharp break with the past. Like Alexis de Tocqueville’s French Revolution, BEPS represents both continuity and change. In particular, the single tax principle has formed the theoretical basis of much of the international tax regime from the beginning. And it is in fact this continuity rather than any sharp change that gives the final BEPS package its promise to, as Secretary General Gurria also promised, “put an end to double non-taxation.”

Evaluating Beps: A Reconsideration Of The Benefits Principle And Proposal For Un Oversight, Reuven Avi-Yonah, Haiyan Xu

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The Financial Crisis of 2008 and Great Recession that followed have exacerbated income inequality within and between countries. In the aftermath of the economic turbulence, politicians have turned their attention to the twin problems of individual tax evasion and corporate tax avoidance. U.S. legislators enacted the Foreign Account Tax Compliance Act (FACTA), leading to the United States signing a series of Intergovernmental Agreements (IGAs) for the exchange of tax information. The Organization for Economic Co-operation and Development (OECD) developed the Multilateral Agreement for Administrative Assistance in Tax Matters (MAATM) and initiated the Base Erosion and Profit Shifting (BEPS) project to …

A Bipartisan Tax Reform?, Reuven S. Avi-Yonah

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A Bipartisan Tax Reform?By Reuven S. Avi-YonahIf one listens to what Democratic and Republicancandidates for president are saying on the cam-paign trail, it would appear that the chances for taxreform in 2017 and beyond are minimal. A biparti-san approach is essential for tax reform to passbecause even if there are majorities from the presi-dent’s party in both houses, major tax reform wouldnot likely get through the Senate without 60 votes.But the parties seem very far apart on tax reform.Democrats are focused on using the tax system toreduce inequality and are determined to raise thetax rates at the top of the …

Hillenmeyer, "Convenience Of The Employer," And The Taxation Of Nonresidents' Incomes, Edward A. Zelinsky

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In Hillenmeyer v. Cleveland Board of Review, Ohio’s Supreme Court unanimously declared that Cleveland’s municipal income tax violated the Due Process Clause of the U.S. Constitution by taxing a nonresident athlete under the “games-played” method rather than the “duty-days” method. According to the Ohio court, the games-played approach overtaxed Mr. Hillenmeyer by allocating to Cleveland Mr. Hillenmeyer’s compensation from the Chicago Bears using the percentage of the Bears’ games played in Cleveland. By this approach, Cleveland taxed Mr. Hillenmeyer extraterritorially, reaching income he earned from services he performed for the Bears outside of Cleveland’s borders. Due Process, the Ohio …

Attacking Profit Shifting: The Approach Everyone Forgets, Jeffrey M. Kadet

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No abstract provided.

No Good Options: Picking Up The Pieces After King V. Burwell, Nicholas Bagley, David K. Jones

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If the Supreme Court rules against the government in King v. Burwell, insurance subsidies available under the Affordable Care Act (ACA) will evaporate in the thirty-four states that have refused to establish their own health-care exchanges. The pain could be felt within weeks. Without subsidies, an estimated eight or nine million people stand to lose their health coverage. Because sicker people will retain coverage at a much higher rate than healthier people, insurance premiums in the individual market will surge by as much as fifty percent. Policymakers will come under intense pressure to mitigate the fallout from a government loss …

Expansion Of The Profit-Split Method: The Wave Of The Future, Jeffrey M. Kadet

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Recognizing the reality that multinational corporations are centrally managed and not groups of entities that operate independently of one another, the OECD base erosion and profit-shifting project is considering expanded use of the profit-split method. This article provides background on why expanded use of the profit-split method is sorely needed. In particular, resource-constrained tax authorities in many countries are unable to administer or intelligently analyze and contest transfer pricing results presented by multinational groups. Most importantly, this article suggests a simplified profit-split approach using set concrete and objective allocation keys for commonly used business models that should be welcomed by …

Reinventing The Wheel: What We Can Learn From The Tax Reform Act Of 1986, Reuven S. Avi-Yonah

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In 2010, when former Senate Finance Committee Chair Max Baucus was beginning his push toward tax reform, he held a hearing featuring veterans of the great tax reform of 1986. The main conclusion from this hearing was that Congress has changed too much since then to make a repeat of 1986 likely. We are now five years later, Baucus is the U.S.ambassador to China, and no tax reform has happened yet, thus confirming what the veterans told the chair in 2010.

Will Bringing Sales Onshore In The U.K. Lead To Higher Taxes?, Tommaso Faccio, Jeffrey M. Kadet

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The authors discuss changes to the scope of the U.K. royalty withholding tax announced in the 2016 U.K. budget, which, along with the new diverted profits tax, could cause significant increases in U.K. tax paid by multinationals. As will be seen from the example set out in the article, the U.K. royalty withholding tax announced in the 2016 U.K. budget is a major portion of this increase. This will have a major impact on the economics of profit-shifting structures involving revenues that require on-the-ground sales, marketing, and other support activities in the U.K. The U.K.’s actions should be closely examined …

Fair Approaches For Taxing Previously Untaxed Foreign Income, Jeffrey M. Kadet

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In connection with any transition to a new international tax system, we need an approach that effectively deals with the trillions of dollars of previously untaxed foreign income held by CFCs. There is logic and fairness in applying a rate on those earnings that is less than the 35 percent home country rate because the rules of the game are being changed significantly.

Many U.S. multinationals have had legitimate commercial reasons for retaining their earnings overseas. For these, I can happily accept whatever rate Congress chooses, whether it is at the lower 3.5 percent level of TRA 2014, the 14 …

All Or Nothing? The Obama Budget Proposals And Beps, Reuven S. Avi-Yonah

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There is a wide bipartisan consensus that the U.S. international tax regime is broken. We have the highest corporate tax in the OECD, which at 35 percent imposes a real burden on corporations earning mostly U.S.-source income. At the same time, U.S.-based multinationals pay very low effective tax rates on foreign-source income earned through their subsidiaries, leading to a strong incentive to shift profits out of the United States. Finally, the United States is among the few countries to fully tax dividends paid by foreign subsidiaries to their domestic parents, leading to the “trapped income” phenomenon in which $2 trillion …

Predicting The Fallout From King V. Burwell - Exchanges And The Aca, Nicholas Bagley, David K. Jones, Timothy Stoltzfus Jost

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The U.S. Supreme Court's surprise announcement on November 7 that it would hear King v. Burwell struck fear in the hearts of supporters of the Affordable Cara Act (ACA). At stake is the legality of an Internal Revenue Service (IRS) rule extending tax credits to the 4.5 million people who bought their health plans in the 34 states that declined to establish their own health insurance exchanges under the ACA. The case hinges on enigmatic statutory language that seems to link the amount of tax credits to a health plan purchased "through an Exchange established by the State." According to …

Overtaxing The Working Family: Uncle Sam And The Childcare Squeeze, Shannon Weeks Mccormack

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Today, many working parents are caught in a “childcare squeeze”: While they require two incomes just to make ends meet, they end up spending a strikingly large percentage of their income on childcare so that they can work away from the home. Worse still, some parents find themselves “squeezed out” of the market entirely, unable to earn the additional income their family requires because they cannot find jobs that pay enough to offset soaring childcare expenses. This Article argues that the tax laws have played an important role in aggravating these hardships. Currently, the Internal Revenue Code treats the childcare …

Taxation And Surveillance: An Agenda, Michael Hatfield

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Among government agencies, the IRS likely has the surest legal claim to the most information about the most Americans: their hobbies, religious affiliations, reading activities, travel, and medical information are all potentially tax relevant. Privacy scholars have studied the arrival of Big Data, the internet-of-things, and the cooperation of private companies with the government in surveillance, but neither privacy nor tax scholars have considered how these technological advances should impact the U.S. tax system. As government agencies and private companies increasingly pursue what has been described as the “growing gush of data,” the use of these technologies in tax administration …

Dodging The Taxman: Why The Treasury’S Anti-Abuse Regulation Is Unconstitutional, Linda D. Jellum

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To combat abusive tax shelters, the Department of the Treasury promulgated a general anti-abuse regulation applicable to all of subchapter K of the Internal Revenue Code of 1986. The Treasury targeted subchapter K because unique aspects of the partnership tax laws—including its aggregate-entity dichotomy—foster creative tax manipulation. In the anti-abuse regulation, the Treasury attempted to “codify” existing judicially- created anti-abuse doctrines, such as the business-purpose and economic-substance doctrines. Also, and more surprisingly, the Treasury directed those applying subchapter K to use a purposivist approach to interpretation and to reject textualism. In this article, I demonstrate that the Treasury exceeded both …