E-commerce and attribution of profits

Georg Seitz posted on SSRN in September 2005 International Income Taxation of Cross-Border Electronic Commerce Transactions - A United States-German-New Zealand Case Study

Here is an Abstract:
With the growth of electronic commerce tax authorities were faced with the challenge of applying traditional tax principles, which have been developed in times where business comprised the delivery of physical goods and services were provided in face-to-face transactions, to cross-border transactions carried out over the Internet. This article outlines the main issues income characterisation and permanent establishments in the international taxation of cross-border transactions in an electronic commerce environment. It analyses the tax consequences in detail along the lines of a case study considering the United States, Germany, and New Zealand. Moreover, the article deals with the current discussion on the attribution of profits between a head office and its permanent establishment of a business involved in electronic commerce. In the final chapter the work describes tax planning strategies and opportunities that are available to an electronic commerce business to further minimise the tax burden.

EU Commission is moving on tax issues

The European Commission released on 26 October 2005 containing a comprehensive plan on EU-wide taxation and customs measures to achieve the so-called Lisbon objectives .

Based on the plans disclosed and the planning for 2006, the following is a summary of the EU Commission actions in the tax field expected to be adopted in the next months:

Community Customs Code
2004/TAXUD/015
Expected timeframe: Nov-05
Type of proposal or act: Proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EEC) No 2913/92 establishing the Community Customs Code.
Brief Description: The e-customs initiative aims to modernise and simplify customs rules and procedures and to reduce costs for traders. It represents a positive contribution to the Lisbon strategy.

Uniform application of VAT rules
2004/TAXUD/012
Expected timeframe: 4th quarter 2005
Type of proposal or act: Proposal for the implementation of a mechanism for eliminating double taxation in individual cases, under the Sixth VAT Directive.
Brief Description: The Commission intends to introduce a multilateral mechanism to resolve the problem of individual cases of double taxation under the Sixth VAT Directive. This will not deal with differing interpretations of the Sixth Directive, since this is a matter to be resolved either in the VAT Committee or ultimately by the Court. It is instead aimed at cases where different national administrations interpret the nature of a supply differently which then leads to divergent and sometimes conflicting tax treatment. Experience has shown that bilateral double taxation agreements, which provide for a procedure to eliminate double taxation in the direct tax field simply by getting the national authorities of the States concerned to discuss a case, very often result in a settlement. Accordingly, the Commission would like to see similar arrangements introduced in the Sixth VAT Directive.

Agreement with Japan on customs co-operation
2005/TAXUD/002
Expected timeframe: 4th quarter 2005
Type of proposal or act: Agreement with Japan on customs co-operation and mutual administrative assistance in customs matters TAXUD 4th quarter 2005
Brief Description: In April 1993 the Council adopted a Decision authorising the Commission to negotiate a customs cooperation agreement on behalf of the Community with Japan. The Council lays down that such negotiations shall be conducted in accordance with the afore-mentioned Decision. The Directives of the Decision are being followed for the negotiations of an agreement between the Government of Japan and the European Community on co-operation and mutual administrative assistance in customs matters According to the mandate of the Council, the scope of the agreement in the field of co-operation covers: legislative co-operation, aiming at simplification and harmonisation of customs procedures; technical assistance, would cover the computerisation of customs procedures and formalities, exchange of officials, and mutual administrative assistance, aiming at exchanging information for fighting against frauds and irregularities.

Home State Taxation pilot project
2004/TAXUD/007
Expected timeframe: nov-05
Type of proposal or act: Commission recommendation concerning the experimental application of the Home State Taxation approach for the corporate tax treatment of the EU-wide activities of interested small and medium-sized enterprises
Brief Description: The concept of "Home State Taxation" provides in simple terms that the profits of a group of companies active in more than one Member State should be computed according to the rules of one company tax system only, the system of the Home State of the parent company of the group. Each participating Member State would continue, however, to tax at its own corporate tax rate its share of the profits of the group’s business activities in that State. This approach addresses precisely the tax issues, which hamper SMEs most in their cross-border activities: disproportionately high tax compliance costs resulting from the administrative tax formalities, bookkeeping requirements etc.; current difficulties with the cross-border offsetting of losses.

Environmental taxes
2003/ENV+/28
Expected timeframe: 4th quarter 2005
Type of proposal or act: Communication on the use of economic instruments within the environmental policy of the internal market
Brief Description: The Communication will update the 1997 Communication on environmental taxes and charges, and widen its scope to incude tradable permits and the new guidelines on State aid for environmental protection. It will analyse the existing rules in the above areas, their consistency and mutual influence as well as their impact on the use of MBI by Member States. It will also explore the opportunities for measures to further promote the use of MBI at EU level.

Standardised EU-wide transfer pricing documentation
2005/TAXUD/012
Expected timeframe: Nov-05
Type of proposal or act: Communication to the Council on the report of activities of the EU Joint Transfer Pricing Forum and a proposal to create a Code of Conduct on a common approach to transfer pricing documentation for associated enterprises in the EU.
Brief Description: The will present its activity report and its conclusions after its second year of activity on issues related to transfer pricing documentation requirements in the EU. Following this report and in line with its taxation policy foreseeing soft law initiatives where appropriate, the Commission may propose a Council recommendation to Member States to implement the conclusions of the Forum and to establish a global standardised EU-wide transfer pricing documentation policy. Standardising transfer pricing documentation requirements in the EU is aiming at substantially reducing business compliance cost and thus strengthening their global competitiveness.

Mutual assistance for the recovery of claims
2005/TAXUD/009
Expected timeframe: 4th quarter 2005
Type of proposal or act: Report from the n of Directive 76/308 76/308/EEC on mutual assistance for the recovery of claims
Brief Description: Biennially report on the use made of the recovery arrangements and on the results achieved

Customs 2013 programme
2006/TAXUD/001
Expected timeframe: 2006
Type of proposal or act: Decision on the renewal of an Action Programme for Customs in the Community (Customs 2013)
Brief Description: The Customs 2013 programme is the successor of the Customs 2007 programme and has as objective to further improve cooperation between tax administrations. The Customs programme will continue to develop and modernise the trans-European computerised systems that underpin the implementation of customs policy. The Customs 2013 programme will tackle a number of new challenges, such as securing the supply chain and support for the use of a common risk management system, while promoting the incorporation of risk management into all aspects of customs work. Customs 2013 will continue to support activities to protect traders from piracy and counterfeiting. The Customs programme will also support the further development of initiatives to set up a paperless electronic customs environment while underpinning indispensable initiatives such as modernisation and simplification of the customs legislation.

Fiscalis 2013 programme
2006/TAXUD/002
Expected timeframe: 2006
Type of proposal or act: Decision on the renewal of a Community programme to improve the operation of the taxation systems in the internal market (Fiscalis 2013)
Brief Description: The Fiscalis 2013 programme will continue to support initiatives that focus on improving the proper functioning of taxation systems in the internal market by increasing cooperation between participating countries, their administrations and officials. It will raise awareness of relevant Community law and encourage Member States to share experience of implementing Directives. The programme will also encompass tools to help combat harmful tax competition and tax fraud, both within the EU and in relation to third countries. To support administrative cooperation and mutual assistance between tax administrations, the programme will develop and modernise the trans-European computerised networks required for the exchange of information for control purposes, such as the VAT Information Exchange System (VIES) and the Excise Movement Control System (EMCS).

EU anti-tax fraud strategy
2006/TAXUD/003
Expected timeframe: 2006
Type of proposal or act: Communication of the Commission to the European Parliament on a strategy to improve the fight against tax fraud
Brief Description: The purpose of the communication is to launch a debate on an overall anti-tax fraud strategy at EU level. The responsibility for control and anti-fraud work is clearly a matter for the Member States. The role of the Commission is to provide an appropriate legislative framework at Community level and to facilitate co-operation between Member States. A communication is therefore the appropriate tool to launch the debate. However, achieving the objective of the anti-fraud strategy will probably require both legal and non-legal activities at a later stage

Other future developments expected:
- Communication on cross-border loss relief in the EU (1st half of 2006)
- Legislative proposal to adapt the VAT financial services rules to the evolution of the single financial market (end of 2005 - beginning of 2006)
- Recast of the Capital Duty Directive (end of 2006)
- Communication providing guidance on R&D tax incentives (2006).
- Communication on a strategy against counterfeiting (2005)
- Legislative proposal on VAT public bodies, (end of 2006)
- A new strategy for car taxation (2005)
- Legislative proposal on Common Consolidated Corporate Tax Base for EU businesses (2008)

Social Security Treaties - US apporach

Allison Christians (University of Wisconsin Law School) made available the following paper on SSRN “Social Security in United States Treaties and Executive Agreements”.

Here is an abtract of the paper:
The employee dispatched by her company to work temporarily in international destinations is not a new phenomenon, but social structures between which the worker may move have arguably never been more complex. In a world of social insurance programs that feature broad contribution requirements coupled with limitations on benefits, global workers may be required to contribute in multiple jurisdictions, yet be eligible for benefits in none. Having introduced its own social insurance program in the 1930s when workers were much less likely to be sent on temporary cross-border assignments, the United States social security system has had to adapt to the increasingly international workforce. Adaptation has occurred over the last two decades in the form of coordination of taxes and benefits through treaty-like instruments called executive agreements. However, some matters of social security taxation, like other tax matters, have traditionally been addressed in income tax treaties. This article examines the role of tax treaties and executive agreements in the administration of the United States social security program, discusses some of the conflicts and issues that arise due to the use of multiple and potentially conflicting instruments, and suggests ways in which international coordination of social security could be improved in the United States.

ATO Guidelines on the Attribution of Profits to an Agency PE

The Australian Taxation Office (ATO) released on 6 of October 2005 a guide on how to apply Australia’s permanent establishment (PE) attribution rules to an Agency PE. The guide, which is based on several ATO taxation rulings, follows in part a previous ATO discussion paper on attribution of profits to commissionaire PE’s, released on 30 of June 2002.
The guidelines released by the ATO include:
- A summary of the principles and approaches used by the ATO to attribute profits to Agency PE’s; and
- Examples illustrating how these principles and approaches are applied to sales agency and toll manufacturing patterns.

The ATO position appears to be largely based on the recent OECD approach on attribution profits to PE’s. In fact, the similarity in approaches between the OECD and the ATO are evident on the fact the both differentiate between functions, assets and risks assumed by the dependent agent and functions, assets and risks of the Agency PE.

If you are interested on the subject, see also the UK approach dealing with solutions involving marketing and distribution - commissionaires.

Since this is a subject of my personal interest I will come back to it soon.

Are EU bank secrecy rules and country practices not to exchange tax information with other countries harmful tax competition?

In a speech on “Tax harmonisation versus tax competition in Europe” delivered in 20 October 2005, László Kovács (European Commissioner for Taxation and Customs) emphasized the importance of exchange of information in the tax area and stated that bank secrecy rules are acceptable as long as they do not stand in the way of proper exchange of information, particularly for purely tax purposes.


The Commissioner was discussing, in the framework of tax competition, whether limitations on bank secrecy should also extend to tax related matters and noted, in that regard, that limited access to bank information and the absence of effective exchange of information in some EU countries constitutes an anomaly and therefore will (probably) be subject of the attention of the EU Commission in the coming years.

Fixed base under the UK-Australia Tax Treaty

The Australian Tax Office (ATO) made available recently an interpretative decision on a case dealing with a non-resident performing independent personal services in Australia. This ATO interpretative decision is a good example of how tax authorities should publicize their decisions on the interpretation of tax treaties. It is also a good way to practice the real application of treaties to concrete situations. Below you find the decision (with the text slightly adjusted). In fact, for purposes of simplification all references to Australian domestic law were eliminated and focus given to the issue under the tax treaty between UK and Australia.

The issue was whether income derived by the taxpayer, a resident of the United Kingdom (UK), from the provision of services in Australia as a designer was taxable in Australia.

The underlying facts were the following:
(1) The taxpayer is a non-resident for Australian tax purposes and carries on a design business from a home office in the UK.
(2) The taxpayer contracted with an Australian company to provide design services within the arts and entertainment industry.
(3) After initially providing the services pursuant to the contract from the home office in the United Kingdom, the taxpayer then continued doing this in Australia continuously for 111 days at space made available to the taxpayer within a studio.
(4) The space made available each time the taxpayer provided the services was merely an area within the studio not already in use at that particular point in time. The space made available was not a specifically defined area within the studio, such as an office or other such room, nor was it the same space on all occasions.

Since Australian law provides that income of a non-resident taxpayer includes ordinary income derived directly and indirectly from all Australian sources during the income year, the question remains whether the tax treaty restricts Australia to tax the income of the said non-resident.

In fact, the tax treaty between Australia and the UK must be considered to determine whether Australia has a taxing right in respect of the income derived in Australia by the non-resident taxpayer. Art. 11 of the actual treaty (which corresponded to the old Art. 14 of the OECD Model) provided that the income derived by a UK resident taxpayer from professional services or other independent activity of similar character may be taxed in Australia where a fixed base was regularly available to the UK resident for the purposes of performing those activities. In that regard, it should be noted that the provision of design services by the taxpayer was considered a professional service or other independent activity of a similar character within the meaning of Art. 14.

To further resolve the issue, the ATO made use of the OECD Commentaries (a good practice). In that regard, reference was made to paragraph 3 of the OECD Commentary on the former Art. 14 witch stated that: (i) the provisions of Art. 14 were similar to those for business profits and rested on the same principles as those of Art. 7 concerning the taxation of business profits; and (ii) the provisions of Art. 7 and the Commentary thereon could be used as guidance for interpreting and applying Art. 14 of the OECD Model.

In that regard, Art. 7 of the OECD Model permits the source country to tax the profits of an enterprise where that enterprise carries on business through a permanent establishment (PE) in that country. So the issue now rests in determining the existence of this fixed base/PE.

Art. 5 of the OECD Model defines PE to be a fixed place of business through which the business of an enterprise is wholly or partly carried on. Paragraph 2 of the OECD Commentary on Art. 5 of the OECD Model explains that this definition provides three conditions necessary for a PE to exist: (1) There must be a place of business; (2) The place of business must be fixed so that there is a distinct location with a certain degree of geographical and temporal permanence; (3) The business of the enterprise must be conducted through that fixed place.

The ATO decision continues then by outlining the passages of the Commentary that may support the view that a PE exists in this particular situation:
- Paragraph 4 of the OECD Commentary on Art. 5 of the OECD Model states that the term 'place of business' covers any premises, facilities or installations used for carrying on the business whether or not they are used exclusively for that purpose. Paragraph 4 also states that a place of business may exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by the enterprise or are otherwise at its disposal.
- Paragraph 4.1 states that the fact that an enterprise has a certain amount of space available at its disposal which is used for business activities is sufficient to constitute a place of business. The space made available to the taxpayer when providing the services under the contract falls within the meaning of paragraph 4 and 4.1 of the OECD Commentary referred to above.
- Paragraph 5.4 of the OECD Commentary on Art. 7 of the OECD Model states that a consultant moving from one office to another within the same branch location remains in the same place of business. Similarly, the taxpayer remained in the same place of business even though the taxpayer moved within the one studio when utilising the premises of the Australian company.
- Paragraph 6 of the OECD Commentary on Art. 5 of the OECD Model provides that a PE can be deemed to exist only if the place of business has a certain degree of permanency and is not of a purely temporary nature. A place of business may, however, constitute a PE even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time.

For the above reasons, for the time the taxpayer provided the services under the contract in Australia, the studio was a specific location with sufficient geographic permanence; a fixed place through which the taxpayer carried on business.

In relation to temporal permanence, paragraph 6 of the OECD Commentary on Art. 5 of the OECD Model also provides that: (1) A PE will not normally be considered to exist in situations where a business has been carried on in a country through a place of business maintained for less than six months; (2) One exception to this is where the activities constituted a business that was carried on exclusively. This is on the basis that its connection with the country is stronger because the business is wholly carried on in that country.

Although the taxpayer carried on business from space made available at the studio for a period of less than 6 months, the taxpayer's place of business has sufficient temporal permanence to be a PE for the following reasons: (i) The nature of the business is such that it would only have been carried on in Australia while the taxpayer was providing the services; (ii) Under the contract, the taxpayer was obliged to provided his or her services exclusively; (iii) The provision of designing services were undertaken solely by the taxpayer even though it may have been possible for the taxpayer to sub-contract some elements of those services; and (iv) While the taxpayer was in Australia the activities constituting the business were undertaken exclusively within Australia.

Accordingly, while conducting business in Australia, the taxpayer was found to have a fixed base for the purposes of the treaty. Under the treaty, if the taxpayer has such a fixed base, income attributable to that fixed base shall be deemed to have an Australian source. Therefore, the income generated by the design services the taxpayer provided under contract will be taxable in Australia.

Final note: A PE issue (Art.5) is always followed by an attribution issue (Art.7). In fact, even though the ATO decision did not dealt with the issue of whether the full amount of the contract is then attributable to the fixed base in Australia, that appears to be the final result.

Are global taxes near?

Global disasters may require global taxes. This is said in an ever changing world. I don’t want to bother you with considerations about the chalanges for the world in the next decades. They are becoming self-evident. Problems of environmental degradation, poverty and population have, for example a clear international context. The question is, whether taxes may play a role in providing a solution?

While many institutions attempt to reach international consensus on a policy to tackle global problems, one should not forget mechanisms of global taxation such as a taxation on air tickets (discussed within the EU in 2005), on weapon sales (as suggested by the Brazilian President). The following list includes a number of examples of taxes which imposed globally would "help" solve some of the international problems:
- Taxing resources of the sea;
- Tax on air and sea traffic;
- Taxes on telecommunications;
- Taxes on the arms trade and the production of weapons;
- Carbon and kerosene tax (tax on aircraft fuel);
- Environmental taxes (tax on tradable emission rights);
- Taxes on capital flows (Tobin tax) .

Although the UN Under Secretary General announced the launch of a study looking into global taxes as an alternative source of funding development aid fund , developments are not expected soon. If you are interested on the subject I suggest you to read the general analysis on global taxes by the Global Policy Forum’s - Click here.

QUOTE OF THE WEEK (Week XIV)

"Like mothers, taxes are often misunderstood, but seldom forgotten.''
by Lord Bramwell, 19th Century English jurist


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

EU Company Taxation in Case of a Common Tax Base

On September of last year, the European Commission presented the common consolidated tax base project as a possible solution for profit determination rules for EU cross-border companies. This new approach is being studied by working groups. In short, the common consolidated tax base project will provide a common legal basis for the computation of profits of companies with establishments in at least two member states. The project aims at reducing compliance costs and addressing tax obstacles related to cross-border activities which is a serious problem for MNE operating in Europe.

The Centre for European Economic Research (ZEW), namely Otto H. Jacobs, Christoph Spengel,, Thorsten Stetter, and Carsten Wendt recently contributed with the following research paper: EU Company Taxation in Case of a Common Tax Base Here is the abstract:
    
Within the EU the relation between financial and tax accounting will be significantly influenced by the regulation adopted in June 2002 that obliges all listed companies to prepare their consolidated accounts according to International Accounting Standards/International Financial Reporting Standards (IAS/IFRS). Since dependency of financial and tax accounting according to different degrees prevails in all EU member states a linkage between IAS/IFRS and tax accounting seems to be possible. Compared to national GAAP the advantage of IAS/IFRS as a starting point for tax accounting derives from the advantages of the creation of a common tax base in the EU. However, the adoption of IAS/IFRS has to be restricted to those standards that are convenient for tax purposes. In particular, this means that tax accounting still has to follow the realisation principle as a general principle; the IAS/IFRS "fair value-accounting" therefore cannot be adopted for tax purposes.

In this paper we present estimates for the consequences of IAS/IFRS-based tax accounting on the comparative effective tax burdens of companies in 13 countries (Austria, Belgium, the Czech Republic, France, Germany, Hungary, Ireland, Latvia, the Netherlands, Poland, Slovakia, the United Kingdom, and the USA). Therefore, certain provisions of IAS/IFRS were considered as a starting point for the tax base. The effective tax burdens are calculated on the basis of the European Tax Analyzer model which was enhanced for the purposes of this study. A further question arises as to what extent an exclusive harmonisation of the tax base will effectively reduce the current EU-wide differences of effective company tax burdens. It turns out that a common tax base cannot alleviate the current EU-wide differences of effective company tax burdens. A major finding of our study reveals that the effective tax burdens in all countries considered here (except Ireland) tend to increase slightly since the tax bases tend to become broader. This offers the possibility to member states to reduce the nominal tax rate leaving the overall effective tax burden unchanged. A tax policy of tax cut cum base broadening would not only tend to increase the attractiveness of the member states as a location for companies. At the same time, this would reduce dispersions of effective tax burdens across industries. Therefore, such a tax policy is in line of the long term Community goals to become more competitive in international terms.

The Ethics of Tax Evasion

In our "never ending"search for tax literature, I would like to suggest Robert McGee, The Ethics of Tax Evasion: A Survey of International Business Academics. Here is the abstract:

In 1944, Martin Crowe, a Catholic priest, wrote a doctoral dissertation titled The Moral Obligation of Paying Just Taxes. His dissertation summarized and analyzed 500 years of theological and philosophical debate on this topic, much of which took place in Latin. Since Crowe's dissertation, not much has been written on the topic of tax evasion from an ethical perspective, with a few exceptions. In 1998 and 1999, a few articles were published on the ethics of tax evasion in the Journal of Accounting, Ethics & Public Policy. An edited book on this topic was published in 1998.

The present paper summarizes, updates and expands on Crowe's work. Recent literature is reviewed and the issues discussed in the last 500 years of theological and philosophical debate are incorporated into an 18-statement survey, which was distributed to members of the Academy of International Business (AIB), the International Management Development Association (IMDA) and the International Academy of Business Disciplines (IABD). These three groups were chosen to be the sample population because members of these groups are knowledgeable about international business practices and they come from a wide variety of backgrounds. They are more cosmopolitan in outlook than the average U.S. business school professor. A large percentage of the membership of these groups have lived in more than one country and many of them were born in a country other than the United States, which reduces the U.S. bias that would result if the sample population consisted of a random sample of American business school professors. A fair percentage of the membership of these organizations presently lives outside the United States.

Three basic views on the ethics of tax evasion have emerged over the centuries. The statements in the survey instrument incorporate all three views, which give respondents an opportunity to express their opinion regardless of which of the three positions they come closest to. Most statements begin with the phrase "Tax evasion is not unethical if...," which allows the respondents to either agree or disagree with the statement. Each question is graded on a 7-point Likert scale. The responses to each question were tallied and ranked to determine under which circumstances tax evasion might be considered most or least ethical.

Japan authorities go “itunes”- Prize for best performance by tax authorities (IV)

According to ABC news, a Japanese government committee is mulling a copyright law revision to charge royalties on digital music players, but the opinion is divided on the so-called "iPod tax". Japan already levies an extra fee for copyrights on gadgets sold in stores such as mini disk recorders that consumers can use for home copying of music.

The Japanese recording industry says that the sudden rise of the portable digital players is robbing it of revenue that used to come from the fees on digital recorders.
Solution – TAX it! It should be noted that the new charge dubbed the "iPod tax", although the money doesn't go to the government.

PS: after writing this note, I noticed that also the Dutch are looking at the same issue. I will keep you "tuned"!

See also May, April and March prizes for best performance by tax authorities.

The Attribution of profits to PE - saga continues

On 27 June 2005 the OECD Committee on Fiscal Affairs released for public comment a Discussion Draft on the Attribution of Profits to Permanent Establishments of Insurance Companies. The following contributions from the business community can now be downloaded from the OECD website: * American Council of Life Insurers * Association of British Insurers * BIAC * CEA * Deloitte * Ernst & Young * KPMG * Lloyd’s * PricewaterhouseCoopers * XL Capital Group of Companies * Zurich Financial Services

On the same press release, the OECD provides an update on its controversial project of developing new guidance on attributing profits to permanent establishments under Article 7 of the Model Tax Convention. As the readers are awere, the project is based: (1) working hypothesis that treats a permanent establishment as a functionally separate entity for the purposes of attributing tax profits; and (2) application by analogy to permanent establishmentst of the transfer Pricing guidelines. According to the OECD this issues are still under discussion and are expected to be finalised by January 2007. View

Tax services and Sarbanes-Oxley – discussion continues

Matthew J. Barrett (Notre Dame Law School) published in Michigan State Law Review, pp. 463-504, 2004 an article (Tax Services as a Trojan Horse in the Auditor Independence Provisions of Sarbanes-Oxley) that argues that the failure of the Sarbanes-Oxley Act (see www.sarbanes-oxley.com) of 2002 to prohibit auditors for public companies from also providing tax services to audit clients or their executives and selling tax shelters to anyone remains a Trojan horse that threatens both the investing public and the auditing profession.
According to the author, while various tax services present potential conflicts of interest in differing degrees, drawing lines between different types of tax services, such as tax return preparation, tax consulting, and tax planning, presents very significant practical difficulties. Recognizing these practical difficulties, this article recommends a "bright line," best practice that would bar registered public accounting firms from rendering tax services to audit clients or their executives and promoting tax shelters to anyone. The article suggests that if an auditing firm embraces and advertises such a "total independence" policy, the firm may gain a competitive advantage in attracting new audit clients. Such an approach might even allow one or more non-Big Four accounting firms to compete favorably with the Big Four, reducing consolidation and increasing competition in the industry. View

Talk Flat (II)

On a more technical mode, I would like to redirect the readers to two papers recently published dealing with issue of progression in taxation. With the hype of flat tax this discussion becomes more important. The papers published by UCLA Law Review relate to a recent symposium on Rethinking Redistribution: Tax Policy in an Era of Rising Inequality (see http://www.law.ucla.edu/lawreview/Symp2005.htm)

The first paper from Richard Bird (Toronto, Rotman School of Management) & Eric M. Zolt (UCLA), deals with Redistribution via Taxation: A New Perspective for Developing Countries

Abstract:
Inequality has increased in recent years in both developed and developing countries. Tax experts, like others, have focused on how taxes may reduce the inequality of income and wealth. In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income. This Article examines whether it make sense for developing countries to rely on personal income taxes to redistribute income. We think not, for three reasons. First, the personal income tax has done little, if anything, to reduce inequality in many developing countries. Second, it is not costless to pretend to have a progressive personal income tax system. Third, opportunity costs also exist from relying on taxes for redistributive purposes. If countries want to use the fiscal system to reduce poverty or reduce inequality, they need to look elsewhere.

This Article begins with some initial reflections on the redistributive role of the tax system. It then considers the relative success of developed and developing countries in using tax systems to redistribute income. Finally, This Article examines some alternatives in reforming the personal income tax, as well as options available to developing countries in designing and implementing more progressive fiscal systems. View

In the second paper, Marjorie Kornhauser (Tulane) discusses the issue of Choosing a Tax Rate Structure in the Face of Disagreement

Abstract
The “case” for a progressive tax rate structure may be “uneasy,” as Walter Blum and Harry Kalven so famously proclaimed half a century ago, but so is the case for a flat tax. 1 Both scholars and the general populace disagree as to whether the ideal rate structure is flat (proportionate) or progressive (graduated). The debate about the proper rate structure is so long standing and intense that no analysis, no matter how strong, will end it. Given the inevitability of disagreement, the question becomes not how to end the debate but how to act in light of it. This Essay proposes both the method Congress should use to make its decision and what the ultimate decision should be. First, it suggests that in the face of inescapable conflict, Congress should make its decision based on an Integrity Principle, derived from, but not identical to, the principle of integrity developed in Ronald Dworkin’s LAW’S EMPIRE. 2 Next, it states that under an Integrity Principle progressive taxation is the correct choice for three basic reasons. 3 First, progressivity best comports with the economic reality of how wealth and income are produced and acquired in society. Second, progressivity best reconciles the two basic, but often conflicting principles of equality and liberty. Third, progressivity best promotes the state’s legitimacy.
View

Talking Flat (I)

For some of our readers Talk Tax already talked enough about flat tax (see old posts). But because it is hype and cool to discuss this issue, I try once more to understand why a business magazine publishes an article called “Europe Circles The Flat Tax” View

Some of the argumentation deserves my comments:

"(Flat tax) In the eyes of many fiscal conservatives, it's the Holy Grail of public policy" – what I doubt is tat the ones supporting this grail are doing it fro the right reasons!

"Most of these countries' (that enacted flat tax) economies are growing at a far"-healthier clip than those of their neighbours to the west. – So what? But are the economies of the west comparable to the economies that implemented flat tax?

"Angela Merkel, the Christian Democratic Union's candidate for Chancellor in Germany's Sept. 18 elections, chose a leading flat-tax advocate as one of her main economic advisers." – Look what happen to her! The funny thing is that because of that choice one of the requirements of the SPD for the coalition that allows Mrs Merkel to become Chancellor was that they chose the Finance Minister! I wonder why!

"In Britain, the opposition Conservatives on Sept. 7 announced they would set up a commission to study a flat-tax proposal." – I think that conservatives will do anything to regain Downing Street.

"The issue is so politically explosive that no Western European government is likely to impose a flat-tax regime anytime soon. (…) But tax simplification is clearly in the air." – This thing of marrying simplification with flat tax is poor. Tax simplification is an issue by its own.

"Even without pressure from the East, many Western European governments face growing complaints about the complexity of their tax regimes."– Right! But you will not see complaints about progressivity. Actually did you notice that this word is always missing from the articles about flat tax!

"There's no guarantee, of course, that flat taxes would work as well in Western Europe as they have in the countries to the east. In the former Soviet bloc, most of the countries that enacted flat taxes gained revenue as people who had worked in the shadow economy began reporting their income and paying taxes." – That is an argument that does not have great effect on the western economies.

Flat Tax Rates
Estonia - 24%
Georgia - 12%
Greece - 25%
Hong Kong - 16%
Latvia - 25%
Lithuania - 33%
Romania - 16%
Russia - 13%
Serbia - 14%
Slovakia -19%
Ukraine -13%

I will try again to talk falt tax soon...

JOIN TALK TAX

Talk Tax is a fast-paced international tax blog. It started as a private project (one person) and now it is looking to step up into the second phase of its development. Talk Tax is looking for bright, talented people who are great at what they do and enjoy being part and creating a tax knowledge-sharing group.

Talk Tax wants to establish itself as a source of resources, news, and information of interest to persons involved in International and European Tax. The objective is to create a platform on a niche market (cross-linking to developments, papers, articles, news, cases,books, etc) with a very personalized way of communication (one on one approach). Talk Tax wants to create a website-of-trust (www.talktax.org).

Top 10 Reasons to join the project of Talk Tax (According to who makes the Talk Tax culture and lives a Talk Tax life (i.e. me!)

1. You cannot complain about the salary – there is no salary!
2. The offices are great – they will be ready in 2010!
3. It’s great to work on new things – you always feel different!
4. We give a lot of flexibility when it comes to work hours - you chose your own!
5. There are zero politics and middle management—we’re just a bunch of people doing the same type of work!
6. You will be part of a successful team – that starts with you!
7. If you do not know, tax law is not all about giving advice – this opportunity gives you opportunities to learn and develop other skills.
8. It’s a bit like humanitarian work - you will be working towards a mission that you care about.
9. You will have fun.
10. And finally, it will look good on your CV (I hope!)

At this stage I would like to say, sorry, there are no openings anymore! But that’s not true. I am looking for partners to join this project!

Current Positions (unfortunately the CEO place is already taken!)

Senior Creative Data Analyst (Content Management Department)
You will be responsible for … being creative!

Website Developer and Web Designer (Design & Production department)
You will be responsible for … designing the future!

Senior Funny Journalist (Interviews and Fun Department)
You (funny guy) will be responsible for … something funny!

Requirements to apply for the job!
0+ years of experience in product management for a consumer focused web application, including experience with information architecture, web application usability, functionality, reliability, performance and supportability (I am joking);
Basically I only require excellent written skills in English and a bit of craziness to joint the project.

To apply - Choose the position and write in 3 lines why you are the right person for the project

P.S. – In case you did not found the text funny please do not apply, but do not forget to read often the website!

Top 10

According to the access rates, the following are the top 10 most accessed blog entries:

1. Index on European tax law research (draft version) View
2. Summary of IFA 59TH CONGRESS - BUENOS AIRES View
3. The Article Crawler (II) View
4. The Article Crawler (I) View
5. Is flat tax entering into the old Europe? View
6. MFN Clause under EC Law - CFE Forum 2005 View
7. The EU tax dilemma View
8. Could you please stop hurting my Budget? View
9. Single tax treaty for Europe. How the US is already looking at the issue! View
10. Book review - A Tax Globalist: Essays in Honour of Maarten J. Ellis View

Other relevant entries:
UK PE is not entitled to credit for foreign tax View
CFC’s in Europe under attack - New ECJ cases in the pipeline View
CFC Legislation and EC Law: Lessons from Sweden and UK View
What background do I need to be an international tax advisor? View
WTO rules vs Income Tax Treaties - Additional Reading View
WTO rules vs Income Tax Treaties View