Monday, February 23, 2015

Lee Sheppard at NYU Law School

Today Lee Sheppard appeared at NYU Law School to give a talk on a paper that she is writing - evidently not intended to be a Tax Notes column - entitled "Beyond Tax Avoidance: Managing Multinationals' Tax and Contractual Relationships With Developing Countries."

The session had excellent comments from Rebecca Kysar and Michael Schler.  But as usual, I view the session as having been off-the-record, and hence I can't comment specifically here about any of the speakers' comments, as opposed to the issues that Lee addresses in the paper.

The underlying idea that Lee's paper expresses is that, while the developed countries have their own set of issues with multinationals (MNEs) that they are dealing with (or not) through the OECD BEPS initiative and the like, developing countries have their own set of problems.  But these aren't confined to tax.  For example, a country with mineral wealth that MNEs want to extract and sell on world markets really needn't care whether it's getting better royalties or more taxes paid to it out of the deal - leaving aside the fact that the taxes may qualify for home country foreign tax credits (a point that I of course have elsewhere emphasized from a developed country perspective).

Lee's paper urges developing countries to consider capital controls, cherry-pick good tax base protection ideas from the OECD, verify mineral extraction quantities that determine royalties due, and be smart / only sign good contracts to begin with.

It further argues that developing countries should not: sign OECD model tax treaties, sign US model bilateral trade agreements, sign treaties with tax havens, sign arbitration clauses (at least if the arbitrators are likely to be biased), borrow from the IMF, or listen to economists.  It suggests that economists not only are sometimes being paid by big companies, but are too anti-tax and too blind to the downsides of free trade ideology (recall, for example, the rise and fall of the 1990s "Washington consensus").

This critique of economists is similar to what Joe Stiglitz or Paul Krugman, themselves economists, might say.  Note also that the IMF, or at least its staff, has recently changed course on questions such as whether austerity makes any sense these days.  And while economists may often be anti-capital controls, consider that decades ago James Tobin wrote about the dangers small countries face from rapid, speculation-driven global capital flows, Jagdish Bhagwati has more recently been writing about this.

 The core issue, from the standpoint of developing countries that encounter MNEs that want to engage in inbound activity of some kind, is how much market power the countries have.  Despite global economic forces, the paper suggests that these countries - even when short of the scale of China, India, and Brazil, which stand up for their own economic interests quite effectively - often have more market power than they apparently realize or have exercised.  E.g., if you have a national sales market or workforce or natural resources that the companies want to tap, that is worth something.

Now, part of the question goes to such countries' ability to arrange cooperation among themselves, rather than competing to mutual detriment in a prisoner's dilemma scenario.  But the paper suggests that, to a considerable extent, ignorance, naivete, and misplaced trust in outside professionals or experts have led developing countries to demand less than they have the power to extract.  And you don't have to be a non-economist or anti-economist to agree that, if this critique is correct,then developing countries would benefit from addressing it.

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