Subsidy to the Celtic tiger or just healthy tax competition?

A lot has been written about the Celtic Tiger (Ireland) and its economic growth. Today I read an interesting economic analysis performed Martin A. Sullivan on the so-called “U.S.'s Multibillion-Dollar Subsidy for Ireland” (See Tax Analysts WTD Daily July 27, 2005).

We all know that transfer pricing and tax havens, individually and in combination, adversely affect the ability of many countries to raise tax revenues. The story of Ireland's success (specially if we talk about GDP growth in the last years) is not of a tax haven but something close. We can say that Ireland is a country that understood the importance of lowering the CIT in order to attract FDI and at the same time use fiscal incentives as a key point to develop its industrial policy. The current state of affairs is that according to the Irish Development Authority, foreign corporations (many of them MNE) employ more than 130,000 Irish residents.

The exercise of Martin Sullivan article is designed to estimate of the amount of "excess" profits U.S. corporations have shifted into Ireland (the subsidy). He starts by referring that Irish subsidiaries of U.S. corporations reported in 2002 $18.3 billion of profit (equal to 15.1 percent of Irish GDP) and then presents estimates that between $1.9 billion and $4.8 billion represent the so-called annual subsidy paid by the U.S. Treasury to Ireland and to U.S. companies doing business in Ireland. That is a lot! even if we start from the lower number. It interesting to note that the author refers to a combination of the low Irish tax rates and leaky U.S. transfer pricing rules as factors for this multibillion-dollar subsidy! For example do you remember a famous US transfer pricing case involving manufacturing in Ireland, the Bausch & Lomb case?

European Commission proposed changes to the rules determining the place of supply of services

The European Commission issued an amended proposal on 20 July 2005 of a Directive to amend the Sixth VAT Directive (77/388/EEC) as regards the place of supply of services (COM(2005) 334 final).
(a) Background. On 23 December 2003, the European Commission presented a Proposal (COM(2003) 822 final) concerning the place of supply of services between taxable persons (B2B). Following open consultations by the European Commission on possible improvements to the VAT rules that apply when services are supplied to private consumers, the present proposal improves the first draft and includes a new set of rules covering services supplied by taxable persons to non-taxable customers (B2C). Currently, the general rule with regard to the place of supply of services is that it is deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied. To eliminate anomalies when services are supplied in an international context, a set of exceptions to this general rule are also currently in place. The Commission has nevertheless stated that due to the increasing supply of services across borders, the general rule no longer ensures that the tax accrues to the Member State of consumption, and therefore can provide unfair competition.
(b) Proposal. The Commission proposes to break up Art. 9 of the Sixth VAT Directive into several Articles (Art. 9 to 9(j)) which will contain the new set of rules covering services supplied by taxable persons to taxable persons and non-taxable customers. The most significant proposals included in the Directive are summarized below:
- According to the general rule contained in the new Art. 9, for services supplied to taxable persons the main rule is that the place of supply of services is the place where the customer/taxable person has established his business or has a fixed establishment to which the service is supplied. With regards to the place of supply of services to non-taxable persons, the main rule is the place where the supplier has established his business or has a fixed establishment from which the service is supplied;
- Arts. 9(a) to 9(c) provide for three specific place of supply rules applicable to services rendered both to taxable and non-taxable persons. These exceptions to the general rule cover: services related to immovable property (Art. 9(a)); passenger transport services (Art. 9(b)); and services relating to cultural, artistic, sporting, entertainment, or similar activities (Art. 9(c));
- Art. 9(d) under the title “specific services to taxable persons”, provides for an exception from the general rule for services that can be described as tangible services (i.e. services supplied for immediate consumption at a readily identifiable location) when supplied to a taxable person;
- Arts. 9(e) to 9(i) provide for specific place of supply rules of services to non-taxable persons, which apply in some cases wherever such persons are established or in some cases only to non-taxable persons established or residing within the Community. These exceptions to the general rule cover: transport of goods(Art. 9(e)); specific listed services (Art. 9(f)); services which can be supplied at a distance (Art. 9(g)); and services supplied by an intermediary (Art. 9(h));
- Art. 9(i) provides for specific rules applicable to supplies of services to non-taxable persons outside the Community. Accordingly, the place of supply of certain listed services supplied to a non-taxable person who is established or who has his permanent address or usual residence outside the Community is the place where that person is established, has his permanent address or usually resides;
- Art. 9(j) allows Member States to consider the place of supply of services mentioned in Art. 9 to 9(i) (instead of only supplies governed by the current Art. 9(2)(e)) to be where the effective use or enjoyment take place, i.e., either outside the Community (Art. 9(j)(a)) or within the territory of the country (Art. 9(j)(b)); and
- The proposed directive also includes an extension of the scope of the information exchanged between Member States through the VIES system (Art. 22(6)(b)), requiring taxpayers to include services on their recapitulative statements.

Is the World Still Round?

How about another post not tax related? In a very interesting article called The World Is Still Round, Robert J. Samuelson (published in the Washington Post last Friday, 22 July) talks about globalisation and its effects. I would challenge you to take a break of tax and read it.

You can click here or read below:


The World Is Still Round
"One of the unheralded contrasts of our time is this: Everywhere we see the increasingly powerful effects of globalization, and yet the single most important reality for the economic well-being of most people is their nationality. The idea that we're all being swept along by the impersonal forces of globalization seems intuitively logical and instinctively menacing. The older and less-noticed truth is that nations usually remain, for better or worse, the decisive force in determining the economic condition of their citizens.

The United States, Europe and Japan offer an object lesson. All face, generally speaking, the same opportunities and threats from globalization. But results vary dramatically. Since 1995 American economic growth has averaged 3.3 percent; Europe's, 2 percent; and Japan's, 1.3 percent. (Europe refers to the 12 countries using the euro.) Even in Europe, stark contrasts emerge. Ireland's growth averaged 7.9 percent over the decade; Germany's, 1.3 percent. Somehow national policies, culture and business overshadow globalization.

Why? It's not because globalization is a myth. In his highly readable and informative book "The World Is Flat," New York Times columnist Thomas Friedman describes an economic system of transnational supply chains, foreign "outsourcing" of services and intensifying international competition. He asks Dell to describe geographically how his laptop was made. Here's the abbreviated answer: Engineers in Texas and Taiwan designed it; the microprocessor came from one of Intel's factories in the Philippines, Costa Rica, Malaysia or China; memory came from Korean, German, Taiwanese or Japanese firms with factories in their countries; other components (keyboard, hard-disk drive, batteries, etc.) came from U.S., Japanese, Taiwanese, Irish, Israeli and British firms with factories mainly in Asia; and the laptop was assembled in Taiwan.

What Friedman means by "the world is flat" is that everyone increasingly competes with everyone else on everything. Adam Smith wrote that "the division of labor is limited by the extent of the market" -- meaning that larger markets spawn more specialization. Now markets seem universal; national borders seem to crumble. The Internet is a global auction block. Someone mistakes me for a business, so I receive occasional e-mails from Asian and U.S. Web sites to buy industrial goods. Last week it was forklifts. But, of course, the world is not flat. Borders, though battered, survive and have economic meaning. National markets do exist. One big difference is their vigor in creating local demand and jobs. Europe's sluggishness may reflect more than high taxes and restrictive regulations. Some Europeans blame attitudes: Because Europeans fear the future more than Americans, it's said, they spend less and save more. Even if the argument is wrong -- and who knows? -- the larger point is right: National markets are defined by psychology as well as politics.

It's easy to exaggerate globalization. Yes, some computer, software and engineering jobs have already moved to India, China and other low-cost countries. More will follow. But the process is limited. The McKinsey Global Institute says that 750,000 U.S. service jobs have been "offshored" out of about 140 million total U.S. jobs. Perhaps 9 percent of U.S. service jobs might theoretically migrate abroad, McKinsey says, but "it is unlikely that all these . . . jobs will move offshore over the next 30 years." There are practical obstacles: language differences, management resistance or computer incompatibilities. Similarly, it's easy to overrate trade's impact on factory jobs. A study by economists Martin Baily of McKinsey & Co. and Robert Lawrence of Harvard University attributes roughly 90 percent of manufacturing's recent job losses to domestic forces.

Localization usually trumps globalization, though countries seem to succeed more when they encourage globalization. In 1990 per capita incomes in Ireland were 28 percent lower than in Germany, reports the Organization for Economic Cooperation and Development (OECD). In 2004 the Irish were 26 percent higher. One reason that Ireland grew faster is that it eagerly welcomed foreign investment. Half of Ireland's manufacturing employment comes from foreign multinationals, compared with Germany's 6 percent, says the OECD.

The real question about globalization is whether all these nations -- each with its own psychology and each pursuing its self-interest -- can fashion a system that works for everyone. If too many national economies are weak, then the global economy will be weak. If too many countries try to manipulate the system to their advantage, then the global economy may become unstable or succumb to mutual suspicions. These threats already exist. Europe and Japan are weak; many Asian countries, including China, strive for permanent trade surpluses through undervalued currencies. (China's small revaluation yesterday is a start in reversing that.)

Globalization is not preordained to advance inexorably, driven by constant improvements in communications and transportation. It's vulnerable to economic and political setbacks. The irony is that its fate rests heavily on the behavior of that supposed economic relic -- the nation-state."

Inferiority of the European social model?

When between friends I criticize US politics (Bush, Chaney, Rice and friends) I am far from making a judgment about the US economic model. As European, I have lived quite satisfied with the European model, although sometimes worried with its rigidity and its lack of openness for reform. Nevertheless, the distance from the US does not mean to me (as should not mean to other Europeans) a lack of interest in the good things of the American model. We have much to improve also. But this is just an introduction to the post of today.

In a recent speech, Roger Kerr of the New Zealand Business Roundtable compares the robust performance of Anglo-American economies with the stagnant - and statist - economies of Japan and continental Europe. Kerr cites the recent work of Olaf Gersemann's Cowboy Capitalism: European Myths, American Realities to dispel myths that American success is associated with social costs.

Here is an abstract: The big world story of the last two decades of the twentieth century was the demise of communism as an economic system and power bloc, and with it the end of the cold war between East and West. At the same time, another story has been unfolding, not as dramatic as the ending of an entire political and economic system but still of great long-term significance. That story is about the pre-eminent success of the Anglo-American economies (which include not just the United States but also Canada, Australia, New Zealand, Ireland and the United Kingdom) and the relative failure of the various versions of the so-called social market economy or managed capitalism in Continental Europe and Japan. In the last dozen years or so, economies based on free trade, private ownership, light regulation and moderate taxation have opened up what looks increasingly like a decisive lead over economies characterised by active state partnership with business and trade unions in steering the economy, high levels of taxation and social spending, a greater role for banks than for stock markets in corporate ownership and control, and intrusive regulation of business. I fully expect American ideas and practices to continue to exert in the twenty-first century the all-pervasive influence they did in the twentieth century and to set the standards by which all societies are judged, however much they may also be resented and subject to bogus criticism. It seems unlikely that hard-working Chinese, Indians and other Asians will be attracted to the European model.

Who said tax competition between US States was not an issue in the US?

In Europe, tax competition between member states has been an issue for more than a decade now. The EU is marked by a significant diversity of company tax systems. The Ruding Committee in its 1992 report concluded, on the basis of an empirical survey, that tax differences among Member States distort foreign location decisions of multinational firms, and cause distortions in competition, especially in mobile activities. But what about the US?

The United States Court of Appeals for the Sixth Circuit recently ruled, in Cuno v. DaimlerChrysler that an Ohio investment tax credit designed to enhance business-investment in the state violated the Commerce Clause of the U.S. Constitution because it discriminated against interstate commerce. The Cuno decision has far-reaching implications that threaten tax competition between the states and point toward court-imposed state tax uniformity.

In the US, low-tax states out-perform high-tax states, and states without income taxes do best of all. This encourages states to lower tax rates and demonstrates the value of tax competition. But some states pursue a less desirable form of competition, keeping tax rates high but offering special exemptions for some companies. A federal court has just ruled against this practice. A Washington Times column by a former Bush Administration criticizes the Court and argues that states should be allowed to offer special preferences. The Tax Foundation on the other hand filed an amicus brief with the U.S. Supreme Court recommending review of the ruling in Cuno v. DaimlerChrysler—which invalidated an Ohio tax credit for business investment—on grounds that it is legally flawed and threatens state tax competition.

UK PE is not entitled to credit for foreign tax

One more interesting decision by the United Kingdom Special Commissioners of Income Tax (Avery Jones for example is one of the Special Commissioners). This decision in the USB case deals with the eventual application of the non-discrimination relief under Switzerland-UK tax treaty to a UK branch(PE) of a Swiss resident company claiming a tax credit on UK dividends received. Accordingly, UK law allows a UK resident company to surrender trading losses against payment of the tax credit on UK dividends. The PE argued that it was entitled to claim the relief by virtue of the non-discrimination provision in Art. 23 of the UK-Switzerland tax treaty. The Special Commissioners considered that the payment of the tax credit is part of the levying of taxation for the purposes of Art. 23 with the result that the appellant was less favourably taxed than a comparable UK resident company and was therefore entitled to the benefit of Art. 23. However, the Special Commissioners held that the PE's right under the treaty to receive the payment of the tax credit had not been incorporated into UK law.

It should be noted that the OECD Commentary (Art.24 Comm. para.51.) clearly states that a permanent establishment is entitled to credit for foreign tax in the same way as domestic enterprises are entitled to it under internal law. It appears in this case that the credit could not be extended to a permanent establishment in accordance with the non-discrimination provision because there was no internal law giving effect to the treaty by delegated legislation. The Special Commissioners reached this decision with considerable reluctance because the result is considered unsatisfactory. It basically means "that the UK has made a treaty but has not given effect to it in domestic law and is therefore in breach of the Treaty in the sphere of international law". In fact, the Special Commissioners urge the Parliament to reconsider s 788.

QUOTE OF THE WEEK (XI)

Who told you that the concept of tax avoidance was unknown in ancient Greece? A Greek friend just sent the quote of this week (and he told that Plato was also a tax advisor in his free time).

"When there is an income tax, the just man will pay more and the unjust less on the same amount of income."
Plato (Ancient Greek Philosopher 428 BC-348 BC)

Previous quotes:
Week I
Week II
Week III
Week IV
Week V
Week VI
Week VII
Week VIII
Week IX
Week X

Leiden Alumni Program on 31 August 1 September 2005

As an Alumni of the International Tax Center in Leiden I am proud to present the following Program for 31 August and 1 September 2005. I promisse more details after the meeting.

Wednesday 31 August 2005
Special Alumni lecture by Raffaele Russo on the Attribution of profit to permanent establishments followed by a discussion panel, from 13.30-15.00 h. At 16.00 h, there will be an introductory meeting for the incoming LLM students (of the 2005-2006 class) at the International Tax Center Leiden. This meeting will last for about one and a half hour and will be followed by a informal reception.

Thursday 1 September 2005
At 13.00h the ITC hosts the alumni symposium organized by Pasquale Pistone on Selected Pending And Recent ECJ Cases:
13.00-13.10 Introduction Prof. Dr. Pasquale PISTONE
13.10-13.30 CFC legislation: the Cadbury Schweppes case (C-196/04)
Speaker: Linda FAVI, LL.M. 1999-2000
13.30-13.50 Imputation credit: the Manninen (C-319/02), Meilicke (C-292/04), Test Claimants Class IV (C-374/04) and Test Claimants F II (C-446/04) cases
Speaker: Angel JUAREZ, LL.M. 2002-2003
13.50-14.10 Tax treatment of cross-border losses: the Ritter (C-152/03), M&S (C-446/03) and Rewe (C-347/04) cases
Speaker: Massimiliano RUSSO, LL.M. 2003-2004
14.10-14.30 Withholding taxes: the Scorpio (C-290/04), Centro Equestre de Leziria Grande (C-345/04) and Commission vs. Belgium (C-433/04) cases
Speaker: Barbara PIZZONI, LL.M. 2001-2002
14.30-14.50 Most-favoured nation: the D (C-376/03), van Hilten (C-513/03) and Bujara (C-8/04) cases
Speaker: Juanita BEZZINA, LL.M. 2000-2001
14.50-15.00 Question time

At 16.00 h the 2004-2005 academic year of the Leiden LLM Program in International Taxation will be concluded and, simultaneously, the 2005-2006 academic year will be opened with the official Graduation Lecture to be given this year by David A. Ward, Q.C., one of the world’s leading authorities on tax treaty interpretation, who will speak on ‘The interpretation of income tax treaties with particular reference to the commentaries on the OECD model”. The lecture will take place at the Groot Auditorium of the Academy building (Rapenburg 73) and will begin at 16.15

The Attribution of Profits to Permanent Establishments: The taxation of intra-company dealings

A new book edited by my friend Raffaele Russo and with preface by Kees van Raad, has been recently published by the IBFD. This book deals with one of the most complex subjects of the international tax, the attribution of profits to permanent establishments (PEs). The book begins by examining how the dealings between a PE and the enterprise of which it is a part should be treated for tax treaty purposes. An overview of the historical development of Article 7 of the OECD Model Convention is provided, starting with the Draft Conventions prepared by the League of Nations up to the current OECD Model and Commentary, and taking into account the recent OECD Discussion Drafts. Part II is a comparative survey on the tax consequences of dealings between different parts of the same enterprise on the basis of the domestic law of the countries covered. Four different cases are scrutinized: (1) the transfer of assets (both fixed assets and trading stock); (2) the use of intangibles; (3) the provision of services; and (4) the transfer of funds. The survey covers 19 countries: Argentina, Austria, Belgium, Brazil, Canada, Chile, Finland, France, Germany, India, Italy, Mexico, the Netherlands, South Africa, Spain, Switzerland, the United Kingdom, the United States and Venezuela. Finally, Part III includes an analysis of selected issues, such as the application of the PE non-discrimination clause, the effects of EC legislation and possible source taxation in relation to the tax treatment of intra-company dealings. Having the book in my hands, I decided to invite Raffaele Russo to an interview, so that I can challenge him to tell the readers a bit more of the contents of the book and his ideas about International and EU tax. In fact, I plan to start a new feature on this blog - “Interview Tax”.

Two research (economic) papers dealing with taxation

Recently, I ran across two papers dealing with interesting tax issues (they have a lot of math, so if you do not like it stay away!). The first discusses eventual incentive effects of information exchange and revenue sharing in the effective taxation of cross-border capital flows when asymmetric countries cannot discriminate between residents and nonresidents (which is the case in Europe). The central conclusion (and quite suprising) is that in this case both countries—small (low tax) and large (high tax) prefer simple information exchange (under which all revenue arising from information sharing accrues to the residence country) to simple withholding (under which al revenue from the withholding tax is retained by the source country). The second paper deals with the quasi-philosophical question whether we need Corporate Taxation after all? and .... do we?

MICHAEL KEEN (International Monetary Fund), JENNY E. LIGTHART (Tilburg University) have recently published Revenue Sharing and Information Exchange under Non-Discriminatory Taxation, CentER Discussion Paper No. 2005-69
Here is the abstract: The international exchange of tax information, and its merits compared to withholding taxes, is the central topic in current debates in international tax policy. The purpose of this paper is to characterize and compare the tax regimes that emerge with and without information exchange, under the assumption that countries are unable to differentiate between the taxes they apply to residents and non-residents. It focuses in particular on the role of asymmetries in country size (capturing a key feature of tax havens) and on the impact and potential desirability of schemes to share the revenue raised by withholding (as under the new EU savings tax arrangements) or (more innovatively) as a consequence of information exchange. It is shown that (irrespective of country size difference) Pareto efficiency requires that all revenue collected from nonresidents be transferred to the residence country which would require taking the EU practice even further from the norm, but is currently the norm in relation to information exchange. A withholding scheme with revenue fully reallocated in this way Pareto dominates information sharing, whatever the allocation under the latter. Comparing schemes in which there is no revenue sharing, however, shows that information exchange Pareto dominates simple withholding.


Alfons Weichenrieder (University of Frankfurt and CESifo - Center for Economic Studies and Ifo Institute for Economic Research)) published recently, (Why) Do we need Corporate Taxation? , CESifo Working Paper Series No. 1495

Here is the abstract: According to the author, Tax rates on corporate income have considerably come down in the process of tax competition and further pressures are evident. Against this background, the paper discusses possible benefits of corporate income taxation that may be at risk. In particular, the paper surveys the empirical evidence for a backstop function of the corporate income tax that allows preserving individual taxes. In fact, the author concludes that the importance of the corporate tax as a backstop for labor taxation largely depends on the functioning of alternative measures to avoid income shifting. Nevertheless, more empirical analysis in this area would be very welcome.

More on the so-called D-case

In a recent post I mentioned the surprising European Court of Justice Decision in the so-called D-case, where the court ruled against the use of the most favoured nation (MFN) principle in EC Law (see my post from 5 July). At this stage, It is not clear whether this is a political decision on the principle of MFN treatment, implying that the right of free movement of capital could not be invoked in order to receive MFN treatment. In a recent article, Lee A. Sheppard (Contributing Editor of Tax Analysts) makes some considerations about The ECJ's Common Sense in the D Case. This article, with insights from tax practitioners will help you understand more about the issues at hand and the eventual unanswered questions.

Fun story: a man turns down prize because of Tax reasons!

Of course, only in the US this story is news! The issue of gift taxation is everywhere, but in the US everything is news. Read an interesting published by Wall Street Journal about Jack McCall, who won an American Airlines contest but turned down the prize of 12 round-trip coach tickets for two (for U.S. or international travel) because of tax considerations.
The contest, launched as part of the airline's We Know Why You Fly marketing campaign, awarded free tickets to travelers submitting the best videos, essays or photographs about their flying experiences. The grand prize winners were offered 12 round-trip restricted coach tickets for two from the U.S. to anywhere in the world American flies. In exchange, American has the right to use the winning materials for promotional purposes.
The contest's fine print explains that winners must pay federal and state income taxes, where applicable, on American's "approximate retail value" of the 12 round-trip tickets for two, which the airline valued at $52,800, or $2,200 per ticket.
Jack McCall, a New York resident who won American's grand prize in the video category by submitting a video montage of snapshots he and his wife collected during their travels around the world, estimates that federal, state and local taxes on the prize could amount to roughly $19,000, given the couple's probable federal tax bracket and because they live in New York City, where income taxes are high. That's equivalent to about $800 for each of the 24 tickets.
And in today's cut-rate airline pricing environment, American's valuation is far more than a winner would likely pay if he or she simply bought the tickets. The result: The tax bill could be higher than the tickets actually sell for.
McCall declined the prize. The IRS, in an effort to keep from looking too bad, claimed that McCall could have tried to work out a way to better value the prizes. Right. Trust that the IRS would be nice, and not demand the most money they can squeeze out of the deal? Yeah, sure!

Advocate General: The Bouanich case

A very interesting opinion by Advocate General KOKOTT in the Bouanich case was made available today. The Swedish Administrative Court of Appeal) had requested a preliminary ruling in the case (Case C-265/04) of Margaretha Bouanich against the Skatteverket (Local Tax Board) on the following issues:

The first question was whether Articles 56 EC and 58 EC permit Sweden to tax a payment in respect of a share repurchase, paid out by a limited company in Sweden, in the same way as a dividend, without there being a right to deduct the cost of acquisition of the repurchased share, if the payment is made to a shareholder who is not domiciled or permanently resident in Sweden, whereas a share repurchase payment made by such a limited company to a shareholder domiciled or permanently resident in Sweden is instead taxed as if it were a capital gain, with a right to deduct the cost of acquisition of the repurchased share?

Regarding the first question the AG considered such difference in treatment entails a restriction of a fundamental freedom. The AG considers that Article 56(1) EC and Article 58 EC precludes provisions that in case of share repurchases, a shareholder domiciled or permanently resident in that Member State has the right to deduct the cost of acquisition of the repurchased shares and instead if the shareholder is not domiciled or permanently resident in that Member State, no such right to deduct the cost of acquisition of the repurchased share is made available. Therefore, the second question submitted b the Swedish court should be addressed.

According to the Swedish Court, if the answer to Question 1 is no (and that is the case according to the AG), when the double taxation agreement provides that there is to be a lower rate of taxation than that applied to a share repurchase payment made to a shareholder in Sweden and also permits a deduction corresponding to the nominal value of the repurchased shares, do the articles mentioned in the previous question permit, in those circumstances, a Member State to apply a rule such as that set out above?

Basically, the Swedish court is asking that, since the domestic rate for repurchase of shares is 30% (net for resident and gross for non-residents) is reduced under the treaty to 15%, and since the treaty itself also permits the deduction of the nominal value of the repurchased shares, the result after the application of the treaty may eliminate any discrimination that was identified on the basis of the first question. In fact, the AG appears to go in this direction also. In a very interesting decision on the interrelation of double tax treaties and Community law, the AG considered that the Member State has to determine or guarantee, on a case-by-case analysis, that when a tax treaty is applicable no unequal treatment of domestic and foreign situations remains.

New International Tax LL.M. Program in the US

Over the past 30 years, the Graduate Tax Program at the University of Florida Levin College of Law has established itself as one of the premier tax programs throughout the United States (see rankings below). The faculty of the College of Law have now proposed to establish a new degree within the Graduate Tax Program, the LL.M. in International Taxation, starting in August 2005. The curriculum for the LL.M. in International Taxation will provide extensive and in-depth study of major problems and issues in international taxation and will include courses and coverage in:

• U.S. International Taxation (Parts I & II) • Tax Treaties
• International Tax Policy • European Taxation
• International Tax Planning • Comparative Taxation
• International Tax Seminars • Transfer Pricing

For more information click here

According to the U.S. News & World Report 2004-05 Graduate Tax Program Rankings, the US Graduate Tax Programs are ranked as follows:
1 New York University
2 Florida
3 Georgetown
4 Northwestern
5 Miami
6 Boston University, San Diego
8 University of Washington
9 Loyola-L.A
10 Denver , SMU and Villanova

For foreign students wanting to study international tax in the US the story is a bit different. The fact is that the majority of the programs are exclusivly US oreintated makes the choice harder for students educated outside the U.S.. I should mention that NYU, Georgetown and Michigan have special LL.M. programs for foreign students. The new program in Florida follows this track, to adapt the US graduate tax program to foreign students willing to study in the US.

CFC’s in Europe under attack - New ECJ cases in the pipeline

In a recent posting I discussed about CFC Legislation and EC Law: Lessons from Sweden and UK. In that post, I mentioned a Swedish ruling from April 2005 issued by the Swedish Council for Advance Tax Rulings and made a parallel with the Cadbury Schweppes Case (Case C-196/04) referred to the European Court of Justice (ECJ) by the UK Special Commissioners on April 2004. Now, two more cases dealing with CFC legislation have reached the ECJ. The first case (Case C-201/05) is a UK Group Litigation Order (1), referred to as the “CFC and EU Dividend Group Litigation”. This class action concerns claims, which seek to challenge the UK CFC and EU dividend provisions and to assert that these provisions were or are in breach of the EC Treaty (2) and/or the non-discrimination article of various Double Taxation Conventions and/or the European Convention on Human Rights. The second case (Case C-203/05) referred by the Special Commissioners concerns the proceedings between Vodafone and the UK tax authorities. Basically, in this case Vodafone 2 (a subsidiary of Vodafone PLC), is responding to an enquiry by the UK Inland Revenue with regard to the UK tax treatment of its Luxembourg holding company, Vodafone Investments Luxembourg SARL (LuxHold) under the UK’s CFC Regime.

The CFC Regime serves to subject a UK resident company to corporation tax in the UK in respect of the profits of a controlled foreign company in certain circumstances. Vodafone 2’s argues that it is not liable to corporation tax in the UK under the CFC Regime in respect of its LuxHold Company on the basis that the CFC Regime is contrary to EU law. In summary, it is argued that imposition of corporation tax under the CFC Regime amounts to unlawful discrimination or an unlawful restriction on the exercise of fundamental freedoms under the EU Treaty (particularly Articles 43 and 56). On 3 May 2005 the Special Commissioners referred the matter to the ECJ requesting that a number of questions in relation to the invalidity argument be determined as a preliminary matter. I should add that Vodafone has taken provisions, amounting to £1,757 million, for the potential UK corporation tax liability and related interest expense that may arise if the Company is not successful in its challenge of the CFC Regime. It is not expected that the ECJ will deliver a judgment in this matter until, at the earliest, mid 2006.

(1) Group Litigation Orders (GLO) resemble class action suits and involve a process where "test claimants" are chosen from the body of claimants to determine the main issues of the case. The "group" is made up of claimants with similar claims, and within the groups there are "classes" which further separate the individual fact patterns into easily manageable sub-groups. In the UK, Dorsey’s tax litigation group has been the main Law firm handling GLO claiming tax refunds from the UK Inland Revenue on the basis of EC Law.

(2)The vast majority of EU claims rely on one or more of the EC Treaty fundamental freedoms: the free movement of goods (Articles 28-31 EC), the free movement of persons, including the freedom of establishment (Articles 43-48 EC), freedom to provide services (Articles 49-55 EC) and the free movement of capital and payments (Articles 56-60 EC). It should be noted that, the first three of these freedoms focus solely on movements within the EU. However, Article 56 explicitly states that it relates to movements of capital and payments both within the EU and in an EU/third-country context.

New Book: Markets in Vice, Markets in Virtue

Did you know that from 1996 to 2000, Microsoft Corporation paid 3 billion dollars in taxes at the same time that it reaped the benefits of 12 billion dollars in tax breaks? You may ask yourself how could such a major MNE have paid so little of taxes? ( I am sure that know you are thinking of the pockets of the tax advisors...)

You may find the aswer to this and many more related questions on the last book of John Braithwaite (Professor in the Regulatory Institutions Network at the Australian National University) called Markets in Vice, Markets in Virtue (Oxford Univ. Press, 2005). Reuven Avi-Yonah (Michigan), which sings the book's praises states that "this book draws on a wide range of interviews to offer a compelling depiction of the growth of the tax shelter industry in both Australia and the United States, and of the ways it might effectively be combatted by sophisticated regulators. It should be required reading for anybody interested in the tax shelter problem and, more broadly, the problem of how contemporary competition is creating markets in vice and how they may be turned into markets in virtue".

Here is an abstract:
In this sweeping comparative study of taxation in the United States and Australia, John Braithwaite shows that even as governments in the Western world have become increasingly sophisticated tax collectors, a competitive and ruthless market in advice on tax avoidance has developed. Tax avoidance, like any good, follows market logic: as the supply increases, so does demand. The same competitive forces in the late twentieth century which have driven down prices and sparked efficiencies in the production of fast food or computer parts have helped stimulate the markets for "bads" like tax shelters and problem gambling. How can we change the course of a growing supply cycle for "bads"? Braithwaite draws the surprising conclusion that effective regulation could actually flip markets in vice to markets of virtue. By creating incentives for tax compliance and by regulating promoters of tax avoidance more assiduously, governments could stimulate suppliers of tax avoidance to become providers of legitimate tax advice. Advocacy of virtue coupled with effective regulation in a market society ensures that markets run to virtue and tax systems become more just. Essential reading for anyone involved in policy, governance, and regulation, Markets in Vice, Markets in Virtue provides a blueprint for restoring the equity of Western tax systems and a breakthrough theory of how regulators can support markets in virtue and curtail markets in vice.

Tax Treaties and Social Security Conventions

Michael Lang and the Vienna University of Economics and Business Administration hosted a conference last week (7 - 10 July) on the topic of "Tax Treaties and Social Security Conventions - Influence of Community Law on the Future of DTCs". The conference held in Rust (Austria) put together reporters from Europe, Australia, New Zealand and the US for a comparative discussion of the various approaches taken to achieve international coordination of social security programs. The draft national reports from the participants can be accesed here.

QUOTE OF THE WEEK (X)

We've got so much taxation. I don't know of a single foreign product that enters this country untaxed except the answer to prayer.
By Mark Twain (in Morals speech 1906)
Previous quotes:
Week I
Week II
Week III
Week IV
Week V
Week VI
Week VII
Week VIII
Week IX

Most-favoured nation principle denied in European law

The European Court of Justice decision on 5 July 2005 in the "D" case (C-376/03) is a landmark decision, which ruled that taxpayers may not benefit from a most-favoured nation principle under European law. Using the words of Wattel, “bilateral treaties are the outcome of negotiations between two different jurisdictions with their own idiosyncrasies, budgetary interests and taxpayer and income migration flows and cannot simply be extended to other bilateral situations with other jurisdictions with different systems and different taxpayer and income migration”. The ECJ simply followed this approach and denied Mr. D (a German resident) the possibility to benefit from an allowance included under the Netherlands-Belgium treaty.

In fact, in 1998, a German national and resident D owned real estate in the Netherlands, which accounted for 10% of his property. Accordingly, the taxpayer was subject to the Netherlands net wealth tax as a non-resident taxpayer. The taxpayer requested the granting of the basic allowance of Art. 14(2) of the net wealth tax on the basis of the principle of the free movement of capital (Art. 56 of the EC Treaty), in particular because Belgian residents were always entitled to the allowance under Art. 25(3) of the 1970 Netherlands-Belgium treaty. The Netherlands tax authorities refused the taxpayer's request, as the 90% test was not satisfied, and the taxpayer appealed.

In its decision, the ECJ referred to its case law (C-279/93 - Schumacher) according to which it is not discriminatory when a Member State does not grant to a non-resident taxpayer certain benefits, which it grants to a resident taxpayer because they are not in a comparable situation. Subsequently, the ECJ established a parallel between the situation of a person liable to wealth tax and that of a person liable to income tax. The ECJ then observed that a taxpayer, who only holds a minor part of his wealth in another State than his state of residence, is not in a comparable situation as a resident. Therefore, it is not discriminatory that he is not entitled to the allowance granted to resident taxpayers.

In respect of the eventual application of the most-favoured nation principle, the ECJ started by referring to its case law (C-336/96 - Gilly) according to which the ECJ accepted that a different treatment of nationals of two contracting States resulting from the allocation of taxation powers is not discriminatory. The ECJ noted that the taxpayer is not in the same position as a taxable person resident in Belgium with respect to wealth tax levied on real property situated in the Netherlands. Consequently, the ECJ held not incompatible with the freedom of movement of capital the denial of the extension of benefits under the Belgium-Netherlands tax treaty to an individual of a third state. In this respect, the ECJ observed that the fact that reciprocal rights and obligations of a tax treaty only apply to individuals of those states is inherent to bilateral tax treaties.

In this decision, the ECJ did not follow the Advocate General's opinion of 26 October 2004. We should remember that on his opinion, the Advocate General Colomer had suggested the ECJ not to address the issue of the most-favoured-nation principle, by concluding that the taxpayer could claim equal treatment as compared to a Netherlands resident taxpayer based on a the application of the non-discrimination principle. The ECJ answered differently to the first question (relying primarily on the principles laid down in the Schumacher case), considering that Netherlands tax law, which denied the taxpayer an allowances it grants to resident taxpayers, is compatible with the freedom of movement of capital, laid down in Article 56. The ECJ then addressed the question whether or not a most-favoured nation principle may be derived from European law. In a very concise decision, the ECJ considered that a situation of a non-resident (as that of the taxpayer) could not be compared to that of another non-resident, who receives special treatment under a tax treaty. The ECJ appears to supports is ruling on the concept of reciprocity of tax treaties and on the fact that an allowance given under a tax treaty constitutes a benefit non-separable from the remainder of the treaty. Finally, this decision may affect a similar pending case dealing with application of a most-favoured nation treatment (C-8/04 - Bujara).

Recent Papers: The Four Ages of U.S. International Taxation and Criteria of International Tax Policy

In a recent stroll through SSRN(*), I found two interesting papers written by US scholars. The first one by Reuven S. Avi-Yonah (University of Michigan) analyses four periods of the history of U.S. international taxation, from the adoption of the Foreign Tax Credit in 1918 to the current times. From a different perspective, the paper of Herbert I. Lazerow (University of San Diego) deals with the issue of whether we can transpose certain criteria for evaluating income tax changes to the field of international tax. Find below the abstracts of the papers:

Reuven S. Avi-Yonah - All of a Piece Throughout: The Four Ages of U.S. International Taxation
This paper divides up the history of U.S. international taxation into four periods, on the basis of what was the basic theoretical principle underlying the major legislative enactments made in each period. The first period lasted from the adoption of the Foreign Tax Credit in 1918 to the end of the Eisenhower administration, and was dominated by the concept of the right to tax as flowing from benefits conferred by the taxing state. The second period lasted from 1960 until the end of the Carter administration and was dominated by the concept of capital export neutrality and an emphasis on residence-based taxation. The third period lasted from 1981 until 1997, and was driven by the need to preserve the competitiveness of the U.S. economy in an increasingly globalized marketplace, resulting in an emphasis on source-based taxation, albeit with significant exceptions. The last period began with the decision to cooperate with the OECD's harmful tax competition project in 1998, and is marked by a continuous attempt to coordinate residence and source taxation to prevent both double taxation and double non-taxation.

Herbert I. Lazerow - Criteria of International Tax Policy
Professor Joseph Sneed a generation ago developed seven macro-criteria for evaluating income tax changes. This paper asks whether those criteria are useful in the general field of international income tax. I conclude that Adequacy, Practicality, Equity, and Free Market Compatibility are important internationally, as is a new criterion, Balance-of-payments Enhancement, while the criteria of Reduced Economic Inequality, Stability and Political Order do not figure prominently in international tax.

(*) Social Science Research Network (SSRN) is a network devoted to the rapid worldwide dissemination of social science research. The SSRN eLibrary consists of two parts: an Abstract Database containing abstracts on over 95,200 scholarly working papers and forthcoming papers and an Electronic Paper Collection currently containing over 68,600 downloadable full text documents in Adobe Acrobat pdf format. The eLibrary also includes the research papers of a number of Fee Based Partner Publications.

The Article Crawler (II)

For the new readers or the ones that skip the interesting posts (I do not blame you!) “The Article Crawler” provides a selection of recent articles from the latest numbers of the IBFD journals (see the first post). In this post I selected 4 articles, 1 from the Bulletin, 2 from the European Taxation and 1 article from the Derivatives & Financial Instruments Journal.

Bulletin for International Fiscal Documentation
Volume 59, 2005, No. 7

Rethinking the Design of Australia's CFC Rules in the Global Economy
By Lee Burns
CFC (*) is still an issue in vogue, which raises difficult problems. This article examines the key design features of Australia's CFC rules to see whether they effectively counter the use of tax havens and preferential tax regimes and at the same time, if they unnecessarily inhibit a country's multinationals from competing in the global economy. This article (written from the perspective of Australia, where there has been much debate over the last few years on the design of CFC rules) reconsiders the design of those CFC rules in the context of the global economy. Once you read it you will see tat many of the issues raised may be transposed to your jurisdiction’s CFC rules.

Note - By the way did you knew that there is no CFC legislation in Austria, Belgium, Malta, Cyprus, Ireland, Netherlands, Poland, Slovak Republic, Latvia, Greece, Czech Republic and a quasi EU country called Switzerland?

Derivatives & Financial Instruments
Volume 7, 2005 , No. 3

Controlled Foreign Companies and the EU Parent-Subsidiary Directive
By Anton Joseph
To continue in the wave of CFC’s, here is another article examining the role of controlled foreign companies in offshore investment by Australian residents and the impact of the EU Parent-Subsidiary Directive on them. This article is very interesting since it explores the impact of the recent amendment to the Directive, which permits countries to identify fiscally transparent entities and obliges them to refrain from taxing the distributed profits of subsidiaries.

European Taxation
Volume 45, 2005 , No. 7

Harmful Tax Competition Revisited: Why Not a Purely Legal Perspective Under EC Law?
By Luca Cerioni
This long article about the contentious issue of Harmful Tax Competition examines whether or not the European Union should rely on tax competition rather than on tax harmonization with regard to corporate taxation. The author considers the competition between the Member States in designing their general corporate tax regimes and concludes that national tax policymakers may decide that the significant predictability in the effects of competition based on general corporate tax regimes could be in their long-term interests. Defiantly, a different approach.

Preliminary Ruling Requested from the ECJ on the Compatibility of French Taxation on Outbound Dividends with the Freedom of Establishment
By Séverine Baranger

Now it time to say some words about a colleague and friend’s article. This article covers the very recent request for a preliminary ruling from the ECJ regarding the question of whether or not the French withholding tax on outbound dividends (which provides for the taxation of dividends in the hands of a non-resident parent company, but which grants an exemption to a French-resident parent company) is compatible with the freedom of establishment as set out in the EC Treaty. According to severine this case can prove to be groundbreaking since it refers to issues that the ECJ has yet to consider. I already discussed with the author and even made a post on this case. Basically, I disagree on the groundbreaking factor of this case and think it will be one of those cases that is decided on the sidelines (lateral issue, no fuss and the game continues). For Severine, I hope I am mistaken.

(*) Controlled foreign company (CFC) regime is generally a regime designed to combat the sheltering of profits (deferral) in companies resident in low or no tax jurisdictions. Such regimes generally only operate by attributing tax-sheltered profits (to the shareholders on a pro rata basis) where some element of control is exercised by shareholders resident in the country applying the CFC regime. Generally, only certain types of income fall within the scope of CFC legislation, i.e. passive income such as dividends, interest and royalties produced by the provision of services or sales between affiliated companies. Subpart F is the name for the US CFC rules (if I am not mistaken the first of such kind to be enacted).

"saving" income across Europe

The EU Savings Directive became applicable today (is that good news?). So as the savings taxation agreements that the EU has concluded with Andorra, Liechtenstein, San Marino, Monaco and Switzerland and the ten dependent and associated territories of the UK and the Netherlands. To explain more about the application of such directive and to break the distance between taxpayers and the EU, the EU Commission has so kindly published a Q&A on the Savings Taxation just on the day before the Directive enters into force!

It is always good to see that the EU works so efficiently and protects its citizens from the ignorance of not knowing what the savings directive is about! Perhaps the Commission should add to its website some names of Swiss tax advisors (I know at least one) that can help in arranging the tax affairs of an individual in such a way that you escape the scope of application of the Directive. But apparently this arrangement costs money (but if you have money in Switzerland, Liechtenstein or whatever "high tax" jurisdiction, who cares if it costs! you just prefer paying the advisor than the government...) Right?

But if you are still interested in the EU frequently asked questions you can access them by clicking here.

PS: Please don't ask me the name of the Swiss tax advisor (I am not allowed to reveal my sources).

Arguments for Flat Tax

This is my second "flat" post on this blog. I first talked about flat tax when discussiong The Economist article on this same subject. Now, I had the pleasure of listening to Dr. Madsen Pirie which presented at the Danish CEPOS flat tax conference the Adam Smith Institutes arguments for flat tax in the UK. According to Madsen Pirie the flat tax broadens the tax base in 3 ways: (i) Less motivation for tax avoidance; (ii) Less black economy; (iii) Economic expansion.

A flat tax is a system that taxes all entities in a class (either individuals or companies) at the same rate, as opposed to a graduated or progressive scheme. The term flat tax is most often discussed in the context of income taxes. The flat tax is currently used very rarely in the developed world, standing in contrast to the more widely used progressive income tax. The Baltic countries of Estonia and Latvia have had flat taxes of 24% and 25% respectively with a tax exempt amount, since the mid-1990s. On 1 January 2001, a 13 percent flat tax on personal income took effect in Russia. Ukraine followed Russia with a 13% flat tax in 2003. Slovakia introduced a 19% flat tax in 2004. More recently, Romania introduced a 16% flat tax on personal income and corporate profit on January 1, 2005. Now the issue is being considered in more countries, from Denmark to the UK and even in the US there have been tentative discussions on the consequences and arguments of a flat tax.

According to Madsen Pirie, “flat tax came to new Europe first because it is politically easier to do there, not because it is more appropriate economically. The Eastern states do not have the long history of entrenched interest groups influencing the democratic process. Politicians in countries with a longer democratic tradition have to be careful in taking on groups, which perceive benefits to themselves from the progressive tax system. Some see advantages in the exemptions and allowances which characterize such systems, and fear they might lose out”. Nevertheless, he considers that the incentive boost to economic activity underlying the enactment of a flat tax would be probably higher in a more developed economy.

We all agree that flat tax becomes politically easier as more countries introduce it but we also have to agree (or disagree) that the discussion is still in its infancy and that the economic impact of such measures should be measured in more detail. Nevertheless, I am supportive in principle to any measure that not only simplifies but also flattens the operation of a tax system.

Click here if you would like to listen to Dr. Madsen Pirie presentation at the CEPOS flat tax conference.