Pending publications

The June 9 edition of International Tax Notes will be publishing the text of my recent lecture at Luxembourg University, entitled "Capital Levies: A Solution to the Sovereign Debt Problem?," in its "Current and Quotable" section.

In addition, Jotwell should, within a couple of weeks, be publishing a short teaser that I've written on the subject of Thomas Piketty's "Capital in the Twenty-First Century."  I call it a "teaser" because I'll be working on a much more substantial piece on this topic over the summer.

These are both micro-pieces - about 4,400 words for the capital levy talk and 1,200 for the Jotwell bit.  More in due course on the larger-scale pieces that I will be writing this summer and in the fall (when I am on sabbatical but will mainly be in residence at NYU).

UPDATE: It turns out that my capital levies piece will appear in International Tax Notes on June 16, not June 9.

Also, a Kindle version of Fixing U.S. International Taxation should be up in Amazon within the next day.  I'll feature this exciting (?) fact in a new blog post shortly.

My slides from the BEPS conference

The slides that I used at the Bocconi University BEPS conference this past Wednesday are available here.

A one-paragraph summary of my intended content, which I largely followed in writing up the slides, went as follows:

The US and EU have both some ability to address multinationals' base erosion and profit-shifting unilaterally, and good reason to want to do so.  Even if they might reasonably choose to allow profit-shifting up to a point, on the view that multinational investment and residence are highly mobile, at present things appear to have gone too far.  The two main tools for unilaterally addressing profit-shifting are (a) rules that address the reported source of net income, including transfer pricing / formulary apportionment and the treatment of interest expense, and (b) subpart F-style anti-tax haven rules, including those in territorial countries that limit the scope of exemption for resident companies' foreign source income.  These two sets of rules have different strengths and weaknesses, although it is notable that the latter can't help with respect to non-resident multinationals.  A more formulary approach to source may be unilaterally sustainable, and indeed might potentially induce other countries to follow suit.

An idea worth noting that I added to the slides after writing the above paragraph was that, against the background of U.S. concern about Pfizer / AstraZenica-style inversion transactions, we might want to consider an exit tax with respect to the unrepatriated foreign earnings of U.S. companies that expatriate.

Note, by the way, that in the absence of such an exit tax, the opportunity to repatriate is one more reason why "new view" assumptions - under which U.S. companies can't reduce the present value of the repatriation tax by keeping their foreign earnings abroad - may not hold.  Other reasons include the option value of waiting (e.g., lest the U.S. enact exemption in the future or else offer further repatriation tax holidays), and the possibility that one need never repatriate if doing so is merely an adverse paper-shuffling election, not needed to have all needed practical access to the funds and not just the firm level but even the shareholder level.

BEPS conference at Bocconi University in Milan

While for technical reasons I can't post my slides from the conference today until I am back in NYC, here are a few quick thoughts inspired by the session, which featured academics, government officials, and practitioners from various countries:

1) Many Europeans take a view of the U.S. check-the-box rules, which permit U.S. multinationals to avoid tax abroad on foreign-to-foreign income-shifting that otherwise would give them U.S. tax liability under subpart F, that is quite different from what one mostly hears in the U.S.  (If I do say so myself, however, I anticipate it in my international tax book.)  To the Europeans, the check-the-box rules, rather than being some dastardly scheme that the U.S. multinationals have managed to put over on the U.S. Treasury due to an inadvertent error in the regulatory process 15 years ago, are a deliberate device in the field of ongoing tax competition that the U.S. uses to benefit its multinationals, by permitting them to avoid foreign countries' taxes more easily.  The parallel they like to cite is the UK's engaging in headquarters tax competition by lowering its corporate tax rate, scaling back its CFC rules, and enacting a low-tax "patent box" regime.

2) For this and other reasons, U.S. willingness to cooperate with EU countries, in the BEPS project and otherwise, is held to be in some doubt.  Along these lines, someone asked the Americans at the conference if we saw any chance that the U.S. would cooperate with ongoing multi-jurisdictional efforts to address VAT evasion cooperatively.  We were skeptical that this would happen, given that the U.S. doesn't have its own VAT.

3) The International Monetary Fund staff has been preparing a report on BEPS-type issues, with particular focus on the issues faced by developing countries, that will probably be publicly available within a few weeks.  This sounds like it is likely to be a very useful and informative document.

4) Speakers from private industry at the sessions emphasized the extent to which managers' efforts at tax reduction, in publicly traded companies, are driven by the objective of not having a higher worldwide effective tax rate than one's peer companies.

5) Milan is currently having a taxi strike that, as I noted in an earlier post, added a touch of adventure to my arrival.  (It may also complicate my departure tomorrow morning.)  The cause, apparently, is that the Uber app, permitting one to arrange car transport services on-line outside of the official medallion system has recently been introduced here, leading to disgruntlement among Milan's taxi drivers, who paid very large amounts for their medallions.  One of the speakers compared the taxi drivers' dilemma to that of countries that still are hoping they can levy significant source-based or residence-based corporate taxes.

European travels

After five days in Luxembourg, I have just this evening arrived in Milan.

In Luxembourg, as planned and previously noted I taught two classes (one on income taxation / consumption taxation, one on tax expenditures and allocative / distributional government policy through the tax system and otherwise).  Plus I gave a public talk on recent EU discussion of capital levies, and participated in a panel discussion of my international tax book.  People appear to agree that the book has some original ideas, whether or not they subscribe to them 100 percent.  (As it's written from more or less a big-country perspective, even if not exclusively that of the U.S., no surprise to encounter some disagreement in a country like Luxembourg that occupies quite a different niche in the international tax community.)

I may find a vehicle for publishing my capital levies talk, which I had initially thought I would simply post here.  More on that soon.

Here in Milan, also as previously noted I will be attending a conference on the OECD's BEPS project (addressing base erosion and profit-shifting).  I was able to use a stint in the airport to prepare slides that I will indeed post here.

Luxembourg City is quite nice, an old European city that happens to be situated amid picturesque mountains and valleys.  More French than German, contrary to what I had expected.  Like Jerusalem, its location evidently reflects the site's defensive potential as a fortress, rather than, say, exceptional access to rivers and harbors.

Keeping in mind what all work and no play did to poor Jack Torrance, I also managed to fit in a couple of weekend day trips, seeing the beautiful nearby German city of Trier on the first day, and then hiking in the woods from Beaufort to Echternach in the Mullerthal region of eastern Luxembourg on the second day.

Here in Milan, the excitement of managing my transport from Malpensa Airport to my hotel was certainly increased a bit by the fact that there is a taxi strike here today.  That could potentially be quite an obstacle for the unprepared arriving traveler.  But I had already planned on taking a train from the airport to a transit hub in town, and was then able to negotiate subway + tram + just a block on foot in order to find my hotel.

I've used Malpensa before but never seen the city, which at first glance looks huge but pleasant.

Light posting immediately ahead?

I'm about to leave on an overnight flight to Luxembourg (through Frankfurt), where this Thursday and Friday mornings (at Luxembourg University) I will teach two classes.  The first will be on income taxation / consumption taxation, and the second on tax expenditures/ fiscal language.

Also, on Thursday and Friday evenings I will give / participate in talks, the first concerning capital levy proposals in the EU recently, and the second concerning my international tax book.

I'm also planning to fit tourism / sightseeing into my schedule.  But I may conceivably post concerning public aspects of the various events.  My talk on capital levies is all written out and ready for posting, if I don't conceive of some different and inconsistent use for it.

After that I head to Milan, where on Wednesday of next week I will participate in a one-day conference concerning the OECD's BEPS project.  Then back to NYC, and it's as yet uncertain if I'll be going abroad again before this September.  I am one of those few people who actually likes the summer in New York City, conditioned only on my home AC's working properly.  No outerwear needed, everything is green, fresh fruit in farmer's markets, lots of free time professionally, etc.

Foreign tax credits

Martin Sullivan, in his review of my international tax book here, rightly notes that I "stand[] out from the rest of the international tax reform crowd" in what he (OK, fine) calls my "strident opposition to the foreign tax credit."

The reason for the difference is that I look at what the FTC is capable of doing (i.e., entirely eliminating cost-consciousness by U.S. multinationals) rather than just what it currently does (mainly not doing so, by reason of how deferral blunts the incentive effects that FTCs would have standing alone).

I'll admit that I got to my point of view by thinking about FTCs in the abstract, rather than in practice.  But the reason my perspective is important is that it shows what FTCs would do if surrounded by a different set of U.S. international tax rules - which people on various sides often propose changing without prior reflection about the interactions.

An example is the "minimum tax" idea that gets thrown about in Washington these days - possibly meaning, although it varies with the context, that US multinationals would automatically owe at least 20% of their worldwide income (computed without respect to deferral) to the US government, subject to a dollar-for-dollar offset by FTCs.  This rule change, by effectively repealing deferral up to the 20% line, would indeed cause US multinationals to be wholly indifferent to foreign taxes up to the point where they hit the 20% threshold.  So it might cost the companies money without raising significant revenue for the US government.

Another example of the broader point surfaced today in a Reuters article on the OECD's BEPS project (aimed at base erosion and profit-shifting).  The article states that IRS deputy commissioner Michael Danilack has noted that "some foreign countries are using the BEPS project as a reason to get more aggressive on [US] companies' tax audits.

"'The whole BEPS discussion has encouraged countries that felt they weren't getting their fair share to be more aggressive,' he said, warning of 'a great, big sucking sound"' of U.S. tax revenue declines.

"The United States could lose revenue under BEPS, he said, because the IRS offers foreign tax credits to U.S. companies for taxes that they have already paid to foreign governments.... [Thus, i]f a foreign government collects more taxes from U.S. companies, then the IRS might have to issue more tax credits, which could undercut U.S. corporate tax collections."

If we are dickering with foreign governments re. who gets the money if U.S. multinationals have to pay more to someone - with the companies themselves being a key, but independent, strategic player whose actions both sides must take into account - then it's not an incredibly great bargaining position to say, in effect: "We're warning you - if you grab the money, we will respond by conceding every single dollar to you, even if we simultaneously toughen up our own rules."

Kindle version of Fixing U.S. International Taxation

At present, my book is only available in hard copy.  Amazon offers it for $43.70, and used copies aren't much lower.  But I am told that a Kindle version should be available within about ten business days, presumably meaning before the end of the month.

Martin Sullivan of Tax Notes reviews my international tax book

Today in Tax Notes, Martin Sullivan was kind enough to review Fixing U.S. International Taxation.  I am pretty sure that you can read the entire review here, unless you need to be a Tax Notes subscriber.

You can see Taxprof Blog's quick summary here, including the first three and last two paragraphs of Sullivan's review.  The last two go something like this:

"In a mere 200 pages, Shaviro provides his readers with an invaluable guide through the economic and legal ideas that have framed the debate on international taxation for the last 50 years. But the literature review is ancillary. The true value comes from Shaviro's proposals and ideas. The subject matter is unavoidably complex, but he strives to boil down the material to the stuff that helps us achieve the task assigned in the title of the book. His explanations are clearly developed and rational so that readers with only a minimal background in international tax can follow even the most difficult issues. Unlike so much that is written on international tax, there is no ostensible pro- or anti-business slant and no political bias.

"Stylistically, Shaviro writes in plain language that suggests all the highfalutin talk about international tax policy may just all boil down to common sense. On top of all its other virtues, Shaviro's book is timely: If lawmakers follow through on the ideas floated by Camp and Baucus, we may be experiencing the largest changes in U.S. international taxation since the inception of the income tax. If you are striving for a true understanding of the issues involved in this historic transformation, you are lucky Shaviro wrote this book when he did."

Technology of the future?

While in a B&B on a short overnight family-related roadtrip, I started reading a copy of Evelyn Waugh's Brideshead Revisited that they had in the room,  (I'm a big Waugh fan, but tend to prefer the snark, or for that matter the harrowing Ordeal of Gilbert Penfold, to the mellow mists of memory.)  As I obviously couldn't finish it there, I was on the verge of buying it on Kindle, when it occurred to me that I might already have it at home, even though I hadn't read it previously.

So here is the scenario that occurred to me: "Siri, could you ask Sentinel™ to check on whether we have Waugh's Brideshead Revisited?  That's W-A-U-G-H, near the end of the fiction section in the library."

Perhaps Sentinel™ could also feed the cats, or at least tell us how they are doing.  I think of it as having a voice like Hal's in 2001.

NYU Tax Policy Colloquium, week 14: Mitchell Kane’s “Transfer Pricing, Integration, and Novel Intangibles: A Consensus Approach to the Arm’s Length Standard”

Our final NYU Tax Policy Colloquium of 2014 concerned the above-named paper by my colleague Mitchell Kane.  The paper addresses current OECD efforts to address the challenges for transfer pricing that are posed by intangible assets, including the synergy value of using common control and ownership for operations in multiple countries.  The following is a nice example in the paper showing one might visually depict common control synergies:

l                       l                       l                       l

a          $75      b          $50      c          $75      d       

   Country A                                Country B

                          FIGURE 1

In this example, operations in Country A would earn $75 if separately owned and operated, as would those in Country B, but the multinational that owns both of them earns an extra $50, or $200 total, due to common control synergies.

Under transfer pricing done right, Country A will get to claim at least $75 of the company’s worldwide income (i.e., ab).  Country B will likewise to claim at least $75.  But what about the other $50?  There is no obvious way to answer this question, whether through the analysis of “comparable sales” or otherwise.

Some argue that this example exposes a horrifying logical contradiction in the underlying “arm’s length” concept that underlies transfer pricing.  How can you say what the arm’s length price would be for something that the parties can only realize by acting not at arm’s length?  Others note that this can be viewed as a standard bilateral monopoly bargaining problem.  That is, if one imagined separate owners of the operations in A and B negotiating over the terms of the merger, the problem would simply amount to one of how to divide the $50 surplus.  Alas, this doesn’t help much, unless you think the “logical impossibility” matters for its own sake, since bilateral monopoly negotiating outcomes are context-dependent and notoriously hard to predict.

The paper is mainly engaged in legal analysis, in the sense of interpreting existing OECD guidelines rather than evaluating the policy issues against a blank slate.  The chief conclusions it reaches are:

(1) The OECD shouldn’t respond to the problem by creating a novel category of intangible assets (e.g., “common control synergies” with their own set of distinctive rules),

(2) In dealings with each other, OECD members and bilateral tax treaty partners should allow pure taxpayer electivity with respect to which of the two countries gets the $50 of common control synergy income included in its tax base.

I have some sympathy with conclusion # 1, but have issues with conclusion # 2.  The following is a fuller discussion of some of the main issues in the paper, including numerous points on which I agree with it, and thus am just putting my own gloss on a conclusion that it reaches as well:

1) Does the example show that multinationals with common control synergies are earning rents?

Sometimes, in international tax policy debate, common control synergies are treated as evidence that multinationals (MNEs) are earning rents.  To illustrate the apparent intuition, suppose that, in Figure 1 up top, earning $75 in Countries A and B constituted a normal rate of return, given the amount of capital that is being employed.  Then merging them and earning an extra $50 (for $200 total) would afford the MNE a rent.

I would argue, however, that, whether or not MNEs are earning rents, the existence of common control synergies has no obvious bearing on the question.  If such synergies are significant in particular areas, that merely indicates that one would expect them to be part of the production process.  Thus, in Figure 1, it’s just as natural (and perhaps more so) to assume that $200 is a normal rate of return, and that the separately operated entities would not be earning high enough separate rates of return to stay in business.

By analogy, suppose we did a chart in which we compare the amounts that multistate firms in the U.S. would earn (a) if they still used horses to ship goods, as compared to (b) given their use of trucks.  We could portray them as having special “truck use profits,” but that wouldn’t tell us that they are earning rents.

Or to put it another way, consider economic sectors in which cross-border common control by MNEs would reduce productive efficiency, and we therefore don’t observe it.  One wouldn’t say that in these cases the separately owned firms enjoy rents from a “separate ownership windfall.”

2) Two-country vs. three-country synergy

The paper argues that, in interpreting current OECD doctrine, it is legally correct, but also desirable as a policy matter, to let MNEs assign common control synergy income to whichever country they like, among the production sites that enjoy the synergy, so long as it’s reported somewhere.  In other words, full electivity is the suggested approach.

How big an advantage is this?  In Figure 1, it is plausible that Countries A and B both will have significant tax rates, since both are actual production countries.  Pure tax havens tend not to have enough productive resources to support a lot of local economic activity.  Thus, the benefit to MNEs of full electivity seemingly would be limited, albeit far from negligible.

But suppose the MNE can put a tiny amount of locally generated income in Country C, a tax haven that has tax treaties with Countries A and B, and is an OECD member.  (The paper treats this as a precondition to accessing the benefits of full electivity.)  This may open up further tax planning opportunities, as shown here:

l                       l                      l                       l

a          $70      b         $50      c          $70      d

Country A                                   Country B

                                    _____

                                      $5

                               Country C

                               FIGURE 2

Using this structure lowers pretax profits by $5.  But the business as a whole still has common control synergies that include Country C, where $5 is actually being earned.  But now, with full electivity, the MNE can report the synergy income in Country C and pay little or no tax on it.

3) How important is it to tax everything exactly once?

Suppose all countries are homogeneous, including in the tax rates they apply.  Then taxing everything exactly once promotes global efficiency.  It also means that given countries may be unalarmed by full electivity in the above scenarios, since there is no reason to think that it would systematically disfavor them.

With heterogeneity and tax rate differences, this changes.  For example, there is no reason for Country A or B to think that the scenario in Figure 2 is just fine by reason of, say, the synergy income’s paying, say, a 10 percent rate in Country C.  Even if high-tax countries may benefit from the use of tax havens to lower the effective tax rates that MNEs may earn on inbound investment – an issue that I can’t address here – it would have nothing to do with how many times a given dollar of income is being taxed at different rates.

Does the fact that the paper’s analysis is limited to OECD members and treaty partners mean that we are actually in the homogeneity scenario after all?  Consider that OECD members which have tax treaties with the U.S. include Ireland (12.5% corporate rate), Slovenia (15%), and Luxembourg (almost 30% as a statutory matter, but generally with a much lower effective rate).

4) Transfer pricing versus formulary apportionment

In Figure 1, suppose that Countries A and B tax rates differ.  This will affect decisions about where to locate economic production.  But suppose instead that we treat production locations as fixed, and ask only whether taxes will distort the decision whether particular A and B operations should be owned and managed separately, or by an MNE that exercises common control.  In this scenario, transfer pricing’s potential virtue is that, so long as it results in the assignment of at least $75 of the MNE’s income to each country, it will not distort the common control decision, even with full electivity, whereas formulary apportionment (FA) potentially will.

Does this provide a significant reason for preferring transfer pricing to FA, even under full electivity, so long as it is hitting the bottom of the target (i.e., assigning at least $75 to each country)?  Not necessarily.  For example, consider Figure 2, where it distorts location decisions because we have added to the choice set moving some operations to Country C.  In addition, suppose that the U.S. stays with transfer pricing to achieve the 2-country efficiency gain, and accepts the paper’s proposal that the entire $50 of synergy income be shifted to other countries.  Depending on the relevant ratio of revenue raised to deadweight loss incurred by U.S. individuals who own stock in MNEs, the U.S might be better off distorting the choice in exchange for getting some revenue.

5) A better solution than full electivity?

I am far more skeptical than the paper appears to be about the desirability of basing tax liability on formal entity lines, such as between corporate parents and wholly owned foreign subsidiaries.  Why give significant tax consequences to something that is likely to have little if any economic significance?

The paper sees valuable “information” here that we shouldn’t discard.  But since the entity lines are meaningless economically, the only informational content I see is that it’s predictive of how other countries will tax a given MNE, given that in practice they rely on entity lines.  This in turn reflects assigning more normative weight to avoiding “double taxation” than to limiting tax planning and the creation of potentially huge tax advantages for MNEs.

If avoiding double taxation and formal double non-taxation were all that mattered, why not advocate the “ROSE” system?  That’s my new acronym for “Registered Official Sourcing Election.”  An MNE announces to all countries where it is reporting its taxable income, and all agree to heed this.

I might lean more towards sharing the paper’s predominant concern about over-taxation if I thought that countries were strongly prone to over-reach.  For example, suppose in Figure 1 that both Country and Country B want to grab at least $125 (i.e., the local $75 plus the full $50 of synergy income), so MNEs with normal returns overall face very high worldwide tax rates.  However, I am not persuaded that this is how even high-tax countries generally act.  MNEs not only can wield interest group power but may be treated favorably due to well-grounded concerns about their mobility. 

My preferred approach, therefore, even assuming we use transfer pricing in Figure 1 with the aim of “correctly” placing at least $75 in each of the two countries, is to use something like FA for the residual $50.

Piketty, Wodehouse, and the Mid-Twentieth Century Great Easing

As has been widely reported, Thomas Piketty’s Capital in the Twenty-First Century extensively discusses the novels of Balzac and Jane Austen, as illustrations of what a rentier society looks like, with labor income mattering far less than inheriting capital or else acquiring it by marriage.

The natural question for me was: What about Wodehouse?  Not only is he on the short list of my favorite authors, but frequently his protagonists are young men who live off inherited wealth, and who are not only unemployed but verging on unemployable, owing to what (despite Piketty’s dislike for the phrase) one could only term low human capital.  Yet, in a truly shocking omission, Piketty never mentions Wodehouse.  (Perhaps Wodehouse, despite the nod to Austen, is too idiosyncratically English?)

Luckily, I think the gap is easily filled in.  Although Wodehouse started writing in the first decade of the twentieth century, or during the pre-World War I inequality peak, he found his voice as a writer in the 1920s, after the World War I shock, and then wrote throughout the Kuznets era of lesser inequality.  Perhaps, then, it is unsurprising how comic and ineffectual the young gentlemen with comfortable livings seem to be in his work, compared to their predecessors in the Austen novels.  What’s more, Wodehouse stories and novels frequently feature wealthy inventors, self-made American millionaires, and the like, who are pushing their way into English society, and who may be a bit obnoxious and threatening, but who are not truly dangerous to the stability of what Evelyn Waugh called “Mr. Wodehouse’s idyllic world.”

Wodehouse himself grew up in a family that was comfortable enough to send an older brother to university but then, due to unexpected financial reverses, couldn’t send him.  Instead, he was dispatched to London to work as a bank apprentice or clerk.  He appears to have seen himself, no doubt rightly, as verging on long-term unemployable in an office setting. Yet he quickly found his way to self-support as a writer, through extraordinary energy that considerably predated his actually being any good (although at least some trace of the mature Wodehouse’s comic sensibility was there from the start).

No doubt Wodehouse’s rapid success as a self-supporting writer - at least to the level of staying above water (although the huge successes only came later, after a lot of hard work) – helped him to take a bemused view of the fortunate few who could live off inheritances.  But surely it’s also a broader signpost of the mid-twentieth century Great Easing that rentiers in his world, while certainly having very pleasant lives, so frequently are comic and ineffectual.

"From Darcy to Bertie Wooster: [insert here your choice of subtitle]" - possible dissertation title on offer for English nineteenth to twentieth century economic and social history.

Upcoming talks in Luxembourg

I don't know how many of my readers are likely to be in Luxembourg on May 15 and 16, less than two short weeks from today.  But at 6 pm on the first of those two dates, I will be presenting a lecture at the University of Luxembourg entitled "Capital Levies: A Solution for the Sovereign Debt Problem?"  Then at 6 pm the next night, I will be participating in a discussion of my international tax book.

Further information is available here for the talk on capital levies, and here for the discussion of Fixing U.S. International Taxation. I will post the approximate text of my capital levies talk here, shortly after giving it.

Also on May 21, I will be participating in a conference at Bocconi University in Milan, entitled "Base Erosion and Profit-Shifting: Governments' Policies Versus Corporate Strategies."  See more details here.

Then it's back to the U.S. for what I am hoping will be both a warm and a productive summer.