Tempering expectations for the BahamaLeaks

Hey, ho. Another month, another exotic tax haven leak. Another political storm, another media circus, another rush to condemn. And maybe this time, it will lead to lasting change. Who knows? But my guess is the Bahama Leaks won’t quite live up to whatever hype it has attracted in its short life. There are two main reasons for that:

Scale and scope

Just like the Panama Papers, the Bahamas Leaks have been shared with German newspaper Süddeutsche Zeitung by a John Doe, from where it has been passed to the International Consortium of Investigative Journalists (ICIJ) and on to their partners. And just like the Panama Papers, the documents reveal previously secret ownership lines and corporate structures in an island haven famous for its tax haven usage. But unlike the Panama Papers, the largest ever such leak, which contained a massive 11.5 million documents on, the Bahamas Leaks features only a tenth of that, at around 1.3 million files.

While the Panama Papers stories led with stories of world leaders such as Vladimir Putin, the Saudi King, the Prime Ministers of Pakistan, Malta and Iceland (who eventually stepped down), and large banks across the Western world, the Bahamas Leaks have kicked off with rather dry stories on former EU Competition Commissioner Neelie Kroes’ and UK Home Secretary Amber Rudd. Not quite the same crowd.

Simply, there seems to have been more meat on the bone with the Panama leaks. Extensive documentation of under-the-table documents between banks, trustees and Mossack Fonseca certainly looks to eclipse “the names of directors and some shareholders” from the Bahamas company registry.

Leak fatigue

Ever heard about “donor fatigue”, the notion that people (typically in the West) get tired of hearing about third world disasters and crisis? I think we may be seeing a similar dynamic with tax haven leaks. In recent years, we’ve had a plethora of such leaks – Swiss, Offshore, Lux, Panama, Bahamas, etc. The novelty factor and the outrage decreases by each one (though counteracted by the scale and scope of revelations). Thus, we have “leak fatigue”, a situation where each new leak is afforded less attention, thus limiting the associated impetus for change.

We shouldn’t be entirely bearish on the BahamasLeaks outlook, though. As ever, it does contribute to some political momentum, even if it mainly serves as an occasion for policy groups to push their existing agendas (EU: the new CCCTB, NGOs: public BO registries, OECD: automatic exchange of information, etc.). And certainly it provides a very good case for discussion of our current global transparency system. But all in all, I am tempering my expectations for any consequent political initiatives.


Running thoughts on EU Apple-Ireland state aid decision

While the storm is raging in wake of the European Commission’s decision in its state aid investigation of Apple’s Irish tax structure, and while we wait for the 130 page decision documentation, here is a log of my thoughts on the issues:

1) This is historic

Before any more analytical thoughts, I must remark that this is absolutely historic. The significance is not to be understated. Although the €13bn is not formally a fine imposed on Apple, the payback order will feel like one to everyone involved. And the amount would be the largest EU fine ever.

But it’s not just the numbers. With this decision, the international tax landscape will fundamentally change. States would certainly become more cautious about granting Advance Pricing Agreements (APAs) for companies, and the normative environment for corporate tax structures would definitely change. Regulatory traction is up, tax risks are up for companies, disputes will be up. A new world indeed.

Apple’s response, as expected, is skeptical, and outlines what it thinks would be the implications:

The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.


The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe.

2) The EU-US tax war is set to reach lava-like heat levels

The European Commission is doubling down on its pursuit of fair tax competition via state aid. The EU-US tax war should be extreeemely interesting after the EC decision.

When the US Treasury last week released a White Paper on state aid, it was clearly a last-gasp attempt to persuade the EC to change its stance on Apple’s Irish tax structure – or else. Repercussions were threatened, in a diplomatic manner of course.

After rumors of a payback order in the range of €0.5 to €1bn, the €13bn finding indicates that the EC in no way sought a compromise solution on their analysis – something which I had certainly expected. They are standing firm on their findings.

Although Competition Commissioner Margrethe Vestager reiterated in her press conference the strong cooperation between the EU and the US in the G20 and OECD forums on tax issues, she also remarked very clearly that, “this is an EU tax issue”, and that she was not positioned to “discuss the US tax code”.

Even so, the EC press release included a snappy retort to the US White Paper, suggesting that the US should not be complaining about the EU state aid investigation, when it could just go ahead and tax the profits themselves! A clear reference to the deferral rules that allow Apple to pile up its.


3) The EC doesn’t want Apple to pay €13bn to Ireland.

Huh? Yes, that’s correct. Sure, the EC wants €13bn paid, because its analysis finds that is the correct amount of tax outstanding. But it does not want Ireland to collect it all (which Ireland doesn’t want either).

In fact, the EC wants the €13bn distributed among the EU Member States, where Apple’s sales have been located. Also of interest is that the EC opens the door for the outstanding tax to be paid in the US (as noted above).

Both the EC press release and Vestager in her conference emphasised repeatedly – they practically pressed for it – that other EU Member States may seek for Apple’s profits to be allocated to their states, rather than to Ireland:

Furthermore, Apple’s tax structure in Europe as such, and whether profits could have been recorded in the countries where the sales effectively took place, are not issues covered by EU state aid rules. If profits were recorded in other countries this could, however, affect the amount of recovery by Ireland (see more details below).

The EC has not looked into this issue – Vestager was also clear on this. But she was also clear the the analysis provided by the Commission could be beneficial for those ends. In other words, “EU Member States – go ahead and pursue Apple profits using our findings”. As France and others have sought for Google’s European taxes, we might soon see a surge of EU Member States pursuing a share of Apple’s European profits over the past ten years.

Update 1 (31 Aug):

4) Of course Ireland doesn’t want the €13bn

We should not be surprised that the Irish government has immediately appealed the decision. Still, many are. As one Twitter user remarked (sorry, couldn’t find the tweet again), the heavily indebted Irish government will now spend millions on lawyers and years of time to argue that the world’s deepest private pockets should not pay them €13bn.

Why? Because it would ruin the Irish economy. Or so the thinking goes. Ireland has spent years building its reputation as a highly tax competitive investment environment. And whatever you might think of the strategy, it has succeeded in some sense. Apple, Google, Facebook and a host of major global corporations have chosen to invest in Ireland – and it’s not just virtual relocation; the influx has come with plenty of local jobs as well.

If suddenly now the carpet is pulled from under a key component of this strategy (favourable tax rules), the hit to Ireland’s investment attractiveness could be considerable. The added uncertainty and the potentially negative outlook for other companies with special tax deals could mean a serious chill in foreign investment inflows. It might also speed up outright withdrawals of investment. Which in turn could hurt the real economy by making workers less productive, etc. etc.

All of this, of course, is arguable. Does the Irish economy really benefit from foreign relocations when you consider the price paid elsewhere? And is it even fair for Ireland to engage in this kind of tax competition to the detriment of other countries? But from the Irish government perspective, it is clear that maintaining the status quo is the best possible outcome.

Update 2: 3 Sep

5) Does the decision harm state sovereignty?

One of the more prevalent criticisms of the Apple state aid decision is that it harms Ireland’s sovereignty. And that the continued use of state aid rules to clamp down on national tax rulings threatens to harm sovereignty more broadly in the EU. What right does the EU have to reverse an independent, authoritative decision made by a sovereign government to agree on a certain profit allocation for a multinational company? In particular as the EU does not have competence over national direct taxes.

The sovereignty criticism activates a profound concern held by many Europeans that the EU has gone too far, has too much power, meddles too much in national affair (witness Brexit). So it’s no wonder that the state aid decision will be queried in this light.

The criticism rests on a central point: The EC has re-interpreted state aid and international tax law in order to pursue the case. If it hadn’t, it would not be able to leverage state aid rules to prosecute Apple and others. This is the central tenet of critics’ claims, even if it isn’t always recognised outright.

In response, the EC has been clear: We are not infringing national sovereignty, and we have not reinterpreted state aid or international tax law. The EC outlined its approach to tax rulings and state aid in a White Paper, arguing that state aid rules have applied to tax and transfer pricing issues for decades. No new practice, they are saying, just new cases.

In fact, the EC has been hinting that it is enforcing state sovereignty with its Apple pursuits, rather than harming it. The EC has been vocal about the fact that these are not Irish profits to tax; rather other Member States, where the products are sold, and the US, where the IP is held, are entitled to (some of) it. So Ireland has perhaps infringed the sovereignty of those countries.

Which side is right remains to be seen, as the Irish government has now appealed the state aid decision to the European Court of Justice (ECJ) General Court of the EU (thanks hselftax). There are a few possible outcomes:

If, as also the US has argued in the Treasury White Paper, the EC has extended beyond its mandate on state aid, then yes, there is clearly an infringement on sovereignty. I personally think it is unlikely that the Court(s) will find the EC guilty of outright trespassing, as there seems to be a solid basis for undertaking the investigations in the first place – but anything can happen.

Second, if the Courts rule in favour of Ireland on the basis of the substance of the case, rather than the scope of EC’s activities, it will reaffirm that EC has not infringed national sovereignty de jure, even if it may have hurt public trust in the EU institution and its acceptance of sovereignty de facto.

Finally, the Courts could rule in favour of EC, thereby confirming that EC is not infringing sovereignty and has correctly analysed the situation. I note that such an outcome would probably not defuse but spur on criticism of ‘the sovereignty-defying EU’, but in a legal sense that argument would now be wrong.

The Commission has indicated that the Apple state aid decision will be released within the new few months. Once we know more, the real scrutiny will set in…

More to come..
Relevant links:

Discussing discussions around the corporate income tax

The corporate income tax is under pressure. A host of factors have contributed to economic, normative and political discussions on the need for corporate income taxation and its role in the architecture of national and international tax systems.

Among the most persistent calls today is the lowering or scrapping of corporate income tax (CIT) altogether. And that’s not surprising, given that statutory CIT rates around the world have been in free fall for decades:


Although arguments to support this call are in the media weekly, two recent posts brought them very clearly to my attention. First, Diego Zuluaga, of The Institute of Economic Affairs (a UK free-market think tank), wrote this post in City A.M., the City of London newspaper, arguing that the CIT should be abolished because it discourages investment and incentivises tax avoidance. Second, Scott A. Hodge of TaxFoundation (a US tax policy research organisation) re-iterated arguments that the CIT is harmful to economic growth.

These and other positions are heard often in the debate on corporate income taxation, so it’s fair to examine the arguments and the science behind, which is the aim of this post. I want to break down some of the most prevalent discussions:

Corporate income tax, investment and wages

One central discussion around the CIT concerns its impact on investment and wages. A particularly popular argument comes straight from the neoclassical econ textbook, and is well-established: The CIT discourages investments, harming wages. Capital and investments will flow where the costs are lowest and the returns are highest, relatively speaking. Thus, the higher the CIT, the lower the returns, and thus the less desirable investment climate. If your country has a high corporate tax burden, investors will find it less attractive to invest there. In turn, fewer investments lead to a greater labour to capital share (K/L), meaning workers have relatively less machinery, technology, etc. at their disposal, making them less productive. And since each production factor is rewarded according to their marginal productivity, labour’s wage compensation decreases as a result.

And it’s not just theory. A well-known empirical meta study on these behavioural effects (tax elasticities) tells us that in the average situation, a 1%-point decrease in the effective marginal corporate tax rate will increase the corporate tax base by 0.4% due to intensive investment decisions (e.g. increasing production), and a 1%-point decrease in the effective average corporate tax rate will increase the tax base by 0,65% due to extensive investment decisions (e.g. buying a new plant).


On the other hand, there are a few criticisms of the argument. First, tax is only one side of the fiscal coin – expenditure is the other. Wherever there’s a tax, there’s a corresponding expenditure (or saving for future expenditure). So if the corporate income tax is raised, current or future government expenditure increases consequently, and vice-versa if the corporate income tax is lowered. The actual or potential government expenditure could raise the investment incentive by increasing returns or lowering risk, for instance via spending on education, infrastructure, technology – and thus if it is de-financed, the investment climate might deteriorate. And in fact, studies confirm that CIT rates are relatively unimportant factors in business investment decisions – far trumped by market size, human capital, infrastructure, etc. Most empirical studies on the investment effect of CIT deal with this by using large data sets – long time series (usually 10-20 years) and many countries, thus controlling for other effects on investment. Yet, even 20-year timelines may not necessarily be sufficient to reflect public spending impacts, as it may take several decades for investment benefits or economic growth harms (e.g. from increase inequality) to kick in. Still, in the current research, the results are often, but not always, a negative semi-elasticity of investment to corporate income tax:


Second, even if investment is harmed by the CIT – what kind of investment is it? If it is real, productive investment that is discouraged, it is obviously harmful. If it is virtual ‘on paper’ investment is that is discouraged, it does not hurt the real economy. The latter could be profit shifting, round-tripping investment, or white-washing of black/grey investments. Evidence on the tax elasticity split of these two is naturally extremely sparse, given the difficult task of assessing the ‘real’ or ‘virtual’ nature of investments. Some studies have found that corporate tax incentives are poor at attracting real investments, whilst others argue that there is no relationship at all between low CIT rates and increased foreign investment. Well-known tax economist Kimberly Clausing has also argued that virtual investment re-allocations are far more tax sensitive than real economic activities.

The CIT and economic growth

A related argument, that CIT harms economic growth, is probably the most prevalent and well-analysed position against corporate income taxation. The intensely cited OECD ‘Tax and Economic Growth‘ piece from 2008, also referred to by Hodge, found corporate taxation to be the most harmful tax to economic growth. The conclusion was partly based on a statistical analysis of OECD firm investment levels and corporate taxes 1996-2004. In another study, the OECD compared tax levels with growth rates for 21 countries over 35 years and found that “corporate income taxes appear to have the most negative effect on GDP per capita”. Theoretically, the backdrop is familiar: the CIT causes behavioural distortions (fewer investments, more tax avoidance, etc.), which are harmful to overall output.

As noted above, there may be reasonable questions of the universal “CIT is harmful” thesis in relation to the timeline and the strength of conclusion. Are economic and statistical models sufficiently robust and sensitive to long-term structural evolutions caused by CIT changes, such as the impact of changed public spending levels, inequality (which may also harm growth), to provide clear evidence that the CIT is generally, or even in the average situation, harmful to economic growth? Much of the underlying economic science, based on statistical modelling and econometrics, is taken as evidence of universal laws or generalisable cause-effect relationships, but there are fair questions whether causality is really evidenced. Rather than asking or answering whether the CIT is generally harmful, you might say the more apt question concerns the specific circumstances under which a certain CIT raise or reduction might contribute to economic growth. We know, for instance, that because the CIT acts as a backstop for personal income taxation, at a certain low point, the CIT will facilitate significant tax avoidance as individuals disguise personal income as corporate income. In recent years, even the OECD itself has distanced its 2008 analysis with a more balanced view. Still, we must recognise that a sizable economic literature today holds that the CIT is, generally, harmful to economic growth.

Second, again parallel to above, even if the CIT harms economic growth – what kind of growth is it? If national output growth is based on proceeds from paper shifted assets, the real economy impact might be negligible. If it’s based on actual economic activity shifts, then the story is different. There are reasons to believe real economic activity is less sensitive to tax than virtual capital re-allocation, as noted above. And if that is the case, then lowering the CIT rate merely facilitates an international negative-sum tax competition game, based on virtual capital reallocation, harmful to overall world welfare.

Moreover, it is well-established that CIT rate cuts harm national inequality, as tax burdens are shifted from capital onto labour and consumption, which is usually less progressive, and as public spending (where less wealthy citizens are often the target) is cut. Thus, economic growth from CIT cuts might come at the cost of inequality, less social cohesion and democratic harm.
The question of incidence

A third common discussion on the corporate income tax is its incidence. Who bears the burden of the corporate income tax? Some might find that a strange question, but in economic theory, the corporation is merely an intermediate vehicle. In the end, all flows move through the corporation and end up elsewhere, as dividends to shareholders, as products and services to customers, as wages to employees, etc. When speaking of the CIT incidence, the debate is usually whether it is labour (in the form of lower wages) or the shareholders (in the form of lower dividends or retained earnings) that bear the brunt of the burden. The answer to that question is instrumental to both economic, normative and political assessments of the corporate income tax. If, for instance, it falls primarily on labour, a CIT reduction could well be quite progressive; if it falls mainly on capital (shareholders), it is more likely to be regressive (depending on who those shareholders are).

Hodge’s post and the WSJ essay cited both argue that “workers bear the true economic burden of the corporate income tax through reduced wages.” This is a popular sentiment, and is usually employed in arguments for reducing the CIT. And certainly, scientific support is abundantly available. Theoretically, the incidence depends on the elasticities (yes, that word again) and mobilities of the production factors. In a modern open economy, capital is said to be more able than labour to ‘escape’ the tax incidence, by shifting investments abroad, thus reducing the marginal productivity of labour and incidentally leaving them to bear the burden. Empirically, you can pick any of a long list of studies that find labour’s share of the burden in an open economy to be significant (e.g. 1, 2, 3)

Both the theory and the empirics here are simplified, of course. Corporate tax incidence is highly complex and context-dependent, with differences in the short-, medium, and long-term, but there is no doubt that a large literature supports the notion that labour bears the main burden of corporate taxation.

On the other hand, you can find an equally large literature to support the notion that capital bears the main burden of corporate taxation. Yes, that is correct. Again, there are variations in the way incidence is studied and theorised, but there is a similarly long list of studies available (e.g. 12, 3). In short, the argument here is that capital is not always more mobile and flexible than labour, partly because the ability of capital to ‘escape’ may have been decreased over time due to more sophisticated regulation.

In other words, there is a fundamental lack of consensus in the economics literature on the incidence of corporate taxation. There is no reasonable argument that the burden “clearly falls on labour”, nor that it “clearly falls on capital”. The only likely agreement is that there is some split, which is difficult to define and is context-dependent.

Corporate taxation and profit shifting

A final discussion, invoked by Zuluaga amongst others, is the extent to which the corporate tax burden incentivises tax avoidance. The argument that it does so significantly is, again, based in economic theory, as well as empirics. The CIT lowers the rate of return, and thus capital will flow elsewhere – a part of which will be virtual financial re-allocation (profit shifting). As De Mooij and Ederveen’s table 4 shows above, they empirically estimate that a 1% increase in the statutory CIT rate will decrease the corporate tax base by 1.2% due to profit shifting. The 1.2% estimate is based on a number of longitudinal and cross-sectional studies, mainly from the OECD countries or North America in the 1980s and 1990s. Whether one can generalise based on such evidence is, as discussed above, probably questionable. Still, there are many studies with similar findings. And the effect of profit shifting is obviously less corporate tax revenue, and thus public spending cuts or the shift of the tax burden to other areas.

On the other hand, and as noted elsewhere, over the past decades regulatory tightening of corporate profit shifting may have contributed to a notable reduction in the profit shifting elasticity. Subsequent international reforms have contributed to the lessened ‘virtual mobility of corporate profits. The OECD certainly seem to think so, at least. Furthermore, even if the elasticity is still substantial, ongoing reform attempts will likely squeeze the slipperiness more and more, so that in the future we might expect the effect on tax avoidance of corporate income taxation to become less and less important. So while lowering or abolishing the CIT might be advocated as one way to reduce tax avoidance, there are clearly regulatory alternatives, which may be more prudent.

To sum up: the impact of corporate income taxation on investments, wages, growth and profit shifting are hot, important and contested, and for each debate there are clear arguments for and against. Again and again, we see these arguments being used selectively by different discussants in debates. But it is important to maintain some balance. Ultimate claims on the “truth” about corporate income tax and the science behind it are simply untrue – there is no one answer. The state of our knowledge on these topics are not so that we can conclude decisively on cause and effect, unfortunately. Still, science can bring us far, and we should employ the best research available. But we should employ it with caution. I think we would all do well to keep that in mind.

The quiet BEPS revolution: Moving away from the separate entity principle

For the longest time, international law has treated multinational enterprises (MNEs) as consisting of separate, independent units, rooted in separate national jurisdictions. Apple’s US corporate headquarters is distinct from its Irish holding company, which is distinct from its local national subsidiaries – even though they are all part of the same multinational group. Their reporting compliance and tax liabilities are, to a large extent, manifested separately at the country-level.

This ‘separate entity’ principle resonates throughout international taxation. It is, in particular, the basis of the entrenched arm’s length standard (ALS), the notion that related-party trade should accord to market terms.

The OECD/G2o BEPS (Base Erosion and Profit Shifting) project is, however, fundamentally challenging the separate entity principle. Stronger CFC (controlled foreign corporation) rules (Action 3) will manufacture formal links between group entities located in high-tax and low-tax jurisdictions. Tightened interest deduction rules (Action 4) will mandate group-wide formulas for thin capitalisation. Expanded use of the profit split method in transfer pricing (Actions 8-10) will put pressure on the ALS. And new transfer pricing documentation and country-by-country reporting (CBCR) obligations (Action 13) will provide tax authorities with more and better information on corporate group structures and value chains.

This trend is not a BEPS noveltyz Rather, the BEPS project underscores and accelerates a trend that has been emerging and increasing over the past 10-20 years in particular. There has been, and continues to be, a gradual move towards treating MNEs as unitary structures, rather than distinct fragments.

Interestingly, it is one of the more inauspicious regulatory innovations that provides the best illustration of the BEPS challenge to the separate entity principle: reporting mechanisms.

How can something so trivial be so crucial? Let’s take a step back first. Back in 2015, when the OECD, the G20 and a host of other stakeholders were discussing country-by-country reporting, one contested question was: How and where are companies going to submit their reports to tax authorities? Civil society groups wanted companies to file locally in all jurisdictions where they operate (e.g. to accommodate developing countries), while business lobbies advocated headquarter filing in the parent country of residence (to ensure more ‘trustworthy’ tax administrations would gatekeep the data). The eventual outcome was somewhat of a compromise. Parent-HQ filing was chosen as the primary filing mechanism, but the agreement also built in a secondary mechanism, a ‘safety valve’ of sorts. Thus, in the February 2015 recommendations on BEPS Action 13, the OECD introduced this:


And in the June 2015 Implementation Package, the secondary mechanism was detailed further. Here, we learnt that a subsidiary may be required to file the CBCR if:

a) the parent is not required to file in his home country, or
b) international information exchange or treaty sharing agreements are insufficient for the report to be exchanged from the parent company home country, or
c) there has been a “systemic failure” by the home country as regards the report.

In other words, if, for one of the stipulated reasons, a tax administration is not able to obtain the CBCR of an MNE with a subsidiary in its jurisdiction from another country’s tax administration, the tax administration in question can request the CBCR to be filed locally, by the subsidiary.

Make no mistake: This is groundbreaking. The UK HMRC and the Danish Skat can now force Apple’s local subsidiaries to obtain and provide extensive information on its global taxation and economic activity, in case they cannot procure that information from the US IRS due to a failure on the part of the US legislature, Apple, the IRS or the treaty system. And the same goes for developing country tax administrations.

But this is extraterritorial jurisdiction, surely? An espoused phenomenon in international law and international relations, a threat to the SOVEREIGNTY of nations. We are, after all, requiring purely local managers to provide information beyond the geographic boundaries of their authority, no? How would they even have access to that information?

Except, remember, we are moving towards treating MNEs as unified entities, not as disjointed networks. Therein consists the BEPS challenge to existing international law.

And this challenge is clearly on display. I want to highlight two ways in particular we can observe this:

Firstly, national law-makers are questioning whether it is even constitutional for them to enact or enforce this legislation. As EY note, in the context of the EU implementation of the BEPS agreement:

Certain Member States had expressed concerns that they may not be in position under their legal systems to require the full information of a given group from a subsidiary that cannot obtain or acquire all the information required for fulfilling the reporting requirement.

In the EU context, the proposed solution is to allow subsidiaries to file partial information (what they have available), while countries maintain the right to penalise non-compliance in such instances. But other countries have already implemented the BEPS regulation, which they may or may not be able to actually enforce, both practically and legally.

Secondly, and perhaps most blatantly, the secondary mechanism has led to panic among US multinationals. Why? While other countries have implemented the BEPS Action 13 requirements for financial years starting 1 Jan 2016, as agreed, the US has only required its companies to file for financial years starting 1 Jan 2017, to give an extended adjustment timeline. So there is a very real possibility that US multinationals, many of which have a lot of foreign subsidiaries, will be required to file locally for FY2016.

In response, the US has sought to allow voluntary filing of CBCR reports by US MNEs for FY2016. The proposed US regulations specify:

The Treasury Department and the IRS intend to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. territory ultimate parent entity to file CbCRs for reporting periods that begin on or after January 1, 2016, but before the applicability date of the final regulations, under a procedure to be provided in separate, forthcoming guidance.

The US is not alone, though. Recent OECD guidance on voluntary filing notes that also Japan and Singapore face similar issues.

The fact that OECD felt the need to issue guidance on such an otherwise trivial topic, and that American, Japanese and Singaporean MNEs are pushing for voluntary filing, underlines the dilemma created by secondary filing. There would be no push for voluntary filing if the secondary mechanism wasn’t seriously threatening existing standards within international law. Increased compliance burdens from expanded reporting requirements was the main criticism of multinationals in response to BEPS Action 13. So it should make us pause that they are now mobilising to voluntarily report to the IRS above and beyond their legal obligations.

But the secondary filing mechanism is just one or many streams pushing for a change in the perception and legal treatment of MNE groups. The ultimate push in this direction is, of course, unitary taxation, which would allocate tax based on the total consolidated worldwide income of MNEs.

What all these developments have in common is that they point in one direction: Increasingly, we will likely see legislation adjust to the new “reality”, that multinationals are not loosely connected collectives but rather more closely integrated enterprises.

Book review: Global Tax Governance – What is wrong with it and how to fix it

One of the major 21st century challenges for politicians and polities at both the national, regional and international levels is the governance of ever-more global, mobile and flexible economic and financial flows. No more so than in the area of taxation, which looks likely to remain the last bastion of entrenched perceptions of national sovereignty, an undisputed cornerstone of the independent and authoritative government, the undeniable prerogative of national policy-makers in the face of growing global economic integration.

Or perhaps world leaders are slowly warming to the fact that they need international co-operation, if they want to address tax competition and the pilloried global tax system in any meaningful way? Peter Dietsch and Thomas Rixen’s recent edited volume on Global Tax Governance (sub-titled “What is wrong with it and how to fix it” – straight to the point) certainly seeks to leave you with the feeling that it is both desirable and irrefutable, “an idea whose time has come”, with reform proposals waiting for the Obamas and Merkels of this world to wake up and smell the coffee.

Global Tax Governance comprises fifteen chapters from a very strong line-up of contributors across the disciplinary divides, compiled by Dietsch and Rixen into 350-or-so pages of excellent reading. International tax competition and co-operation are not simple issues; they are multifaceted, difficult, wicked phenomena, so the diversity of inputs is both welcome and necessary. The chapter authors include economists, legal scholars, political scientists, and political philosophers. This provides a well-rounded gathering of perspectives, which covers many of the key stories of both the problems and solutions related to global tax governance. But there is no denying that this is first and foremost a political economy book – the pure economic and pure legal perspectives, for instance, are marginal. Still, for anyone looking for an intermediate dive into tax competition and the state and issues of international tax governance, this is, to my mind, the top place to start today.

Compared to other recent books on global tax issues, this one scores as the least morality-born but most refined in terms of its problem-identification and solution-building. While Thomas Pogge and Krishen Mehta’s Global Tax Fairness covers more ground and is provocative in its content at times, Global Tax Governance is a more academic book (incidentally because they are more academic authors), with a greater focus on succinct analysis and structure, and probably greater overall coherence. And compared to Dietsch’s previous Cathing Capital, as a compilation it is much more diverse and yet more detailed, though the reading flow is obviously worsened by its amalgamative nature.

Dietsch and Rixen have both written extensively on the topic before, and the book emanates with their footprints. Dietsch’s work on political philosophy and economic governance, which has often touched upon taxation, provides the backdrop to many of the normative and ethical arguments throughout the book, while Rixen’s research on the nature of tax competition and the international tax system as well as his proposed institutional framework solution (an International Tax Organisation) feature especially in the opening and closings of the volume. Moreover, the flavour of Dietsch and Rixen’s close associates (including Philipp Genschel and Laura Seelkopf) shine through. A quarter of the book chapters are written by this group, and several more are based on or build directly on their work. Which is okay (it is their book after all), though you might get the feeling that this analysis and solutions are the only game in town (and of course they won’t tell you otherwise).

The purpose of the book is to identify the need for global tax governance (i.e. the cause problem), take stock of the current international institutional make-up and its shortcomings, set out the normative foundations for a new direction, and propose specific political solutions. The book is divided into four parts to reflect these purposes.

In Part One, we’re treated with two superb walkthroughs by top tax economist Kimberly Clausing and Genschel/Seelkopf on the economic and political nature of tax competition and its impacts. Tax competition is damaging on national coffers and on the economy, we’re told in resounding detail. And it is widely harmful, except for capital and everyone in small open democracies, of course. But it’s a negative-sum game, so in the end the world is worse off. So why haven’t we fixed it? The “winner group” – small economies and capital owners – have powerful voices. And that voice includes the argument that every country has the sovereign right to set their tax rates as they see fit – a significant argument in a world apparently stuck in 1648 Westphalia. And besides, as Lyne Latulippe argues in chapter three, national policy-makers tend to internalise the idea (with a nudge or two from the “winner group”) that they must keep their tax offerings competitive, just like a firm’s market offering must be competitive, no matter that it is probably an awful and damaging analogy. Latulippe’s argument that national tax policy discussions are soaked with competitiveness discourse is something I have also shown for the international level in the OECD/G2o BEPS project.

So where we have gone wrong? In a lot of places, Part Two tells us. Enforcement of international tax governance is a mess (Richard Woodward, chapter five); it will only succeed when, once in a blue moon, the US gets its act together (Lukas Hakelberg, six and Itai Grinberg, seven); and even current international tax reforms are unlikely to succeed (Richard Eccleston and Helen Smith, eight). Woodward emphasises the national implementation dimension of international tax governance, arguing that tax havens do “mock compliance” to OECD’s tax information exchange standards, feigning alignment while muddling enforcement behind their backs. As we’re also seeing in the current BEPS project and elsewhere, the national take-up of global tax standards is highly varied, so this is an interesting point to follow – and Richard has promised more work on this topic, which is absolutely welcomed.

Aside from technical and political shortcomings, Dietsch (in particular) and Rixen often emphasise the normative underpinnings of international tax governance. It’s not enough to say the system doesn’t work, we need to say, ethically, why it must work differently. Thus, Part Three takes us through the ethical case for global tax governance. Miriam Ronzoni (chapter nine) weighs global justice arguments in political philosophy, sketching out why and how either of various positions should address tax competition. And Laurens van Apeldoorn (10) discusses in detail different notions of sovereignty and how they relate to the argument for tax governance. While work by both Rixen and Dietsch (see my book review) have contended that national sovereignty isn’t harmed by tax competition, Apeldoorn mounts the stronger claim that tax competition outright harms national sovereignty, discussing sovereignty recast as a responsibility (rather than a right), requiring not merely non-interference in extraterritorial affairs but a positive obligation to support sovereignty and democracy abroad. Dietsch’s chapter (11) is essentially a shortened version of part I of his previous book, though without a discussion of implementation through an International Tax Organisation (you’ll see why shortly).

The book testifies to that fact that national sovereignty seems to have emerged as the favourite argument against tax competition/for tax governance among the Dietsch/Rixen et al. group (even if they discuss different types of sovereignty and related arguments). The sovereignty-focus has been picked up from earlier work on tax havens, such as that by Alan Hudson and Ronen Palan, but it aligns rather poorly with the political discourse of today. The book does tune into, occasionally, the popular stories of tax competition’s effect on inequality or the national coffers of developing countries, financial system risk or human rights, but those are peripheral to the sovereignty argument. I did say this book is less morality-borne than others, but in arguing their cause, it is strange to see so many well-known and well-founded arguments lay idle.

Having thoroughly assessed the issue and outlined the burning platform, Part Four finally gives us the solutions. To be honest, my hopes weren’t high for the final chapters, as I feared they would merely re-state old proposals. And indeed, the chapters pick up on existing reform ideas – unitary taxation and formulary apportionment (Reuven Avi-Yonah, chapter 13), financial transactions tax (Gabriel Wollner, 14), and an International Tax Organisation (Rixen, 15) – while not considering other fundamental questions of the international tax system (e.g. source v. residence). But still, I was to be pleasantly surprised. The chapters do a very good job of not only explaining the proposals in the context of the book, often the authors provide specific links back to the first three parts of the book, explaining to the reader why a given solution addresses current shortcomings identified in Part Two, or why they would fulfill the normative cases of Part Three.

Markus Meinzer (chapter 12), a Tax Justice Network board member and an academic, provides a strong and thorough study of and argumentation for the failure of tax haven blacklists (something I have also discussed). Not merely an advert for the TJN’s Financial Secrecy Index, his chapter is a detailed exploration of historical blacklist shortcomings, the moral and political foundations for change, and the needed response. Meinzer’s illustration of blacklist issues is very useful:


Reuven Avi-Yonah, who has published an infinite (it seems like) number of pieces on unitary taxation proposes, as we would expect, to heal the broken global tax system through unitary taxation with formulary apportionment (UT+FA). However, here Avi-Yonah is more compromise-seeking than elsewhere, where he has mostly proposed UT+FA as a “system overhaul”. His short ‘sweeping away’ of UT+FA criticism leaves something to be desired, but he puts forth the applicability of the UT+FA solution to the current issues (including as identified throughout the book) with usual pomp. Rather than promoting a full UT+FA installment, he proposes here a compromise with the prevailing arm’s length standard (ALS), using the UT+FA method selectively (within the confines of the current ALS system, notably), in situations where transfer pricing requires profit split attribution, and he discusses the need for further reconciliation between the two approaches.

Rixen himself rounds it all off, detailing the institutional solution to others’ material policy proposals. And of course, it is the International Tax Organisation (ITO), untouched by Dietsch in chapter 11 but brought back to the surface here. Rixen’s ITO is a WTO-style arbitration/enforcement solution with a forum-capacity, just as described by Dietsch in his recent book (who has the idea, I believe, from Rixen in the first place). The novelty for regular Dietsch/Rixen readers is modest, but he does engage in a much more detailed explanation of the proposed institutional design, which may serve as a blueprint for policy-makers.

Still, while Part Four contains good chapters, it remains a compilation of various proposals with Rixen’s institutional shell, and not really a coherent solution on how to “fix” global tax governance, as the book’s sub-title promises.

All in all, though, this is a fine body of work, recommendable and readworthy. It provides the fundamentals of tax competition, the burning platform, and a number of well-known policy proposals, all nicely wrapped in a book that explains well what it wants and where it is going. It can be read as a whole or as individual chapters, each of stands on their own as contributions to the literature. There are some odd chapters here and there, and there is a definitive bias in favour of certain argument (e.g. sovereignty), which leaves some interesting points and explorations on the table. But those are minor appeals in the grander scheme. The authors have told us why tax competition is damaging, why international tax cooperation is needed, and the direction of travel for policy-makers. Now, I think the authors would agree, it is up to policy-makers, academic colleagues and other interested parties to take up and discuss their ideas more widely.

My interview with TaxLinked on blacklists and Danish tax

TaxLinked, a relatively new and very interesting online community for tax professionals, publishes a weekly interview series with various people of the tax world. Previous interviews have featured Tax Notes’ Stuart Gibson on the Panama Papers, Texas A&M prof. William Byrnes on FATCA and TJN’s Alex Cobham on tax transparency, and many more fascinating talks.

For this week’s interview, I was very humbled to have the TaxLinked team reach out. I was happy to participate and I think it made for an interesting back-and-forth on tax haven blacklists and what’s going on in Danish taxation.

You can head on over to their site and check out the interview here.



We’re changing the equation of tax competition and corporate profit shifting

Within tax economics, one of the central arguments for tax competition and low(er) taxes on capital, including corporate profits, is that it leads to increased investment and growth (at least in some countries, mostly small open economies).

Why? In short, we know that corporate tax rates and rate changes have behavioural effects. Capital income may change legal forms (between two corporate forms or between corporate and non-corporate forms), firms may change their debt/equity ratios, they may shift profits abroad or increase/reduce investments. It is the nature and size of these effects that determine the result of corporate tax increases or decreases. The ‘go to’ for empirical evidence on this is De Mooij & Ederveen’s 2008 “reader’s guide”. Their literature review finds that, in an average situation surveyed by the literature, the total semi-elasticity of the corporate tax base for these effects (i.e. the % change in the tax base from a 1% increase in the relevant tax, see below) is -3.1, with profit shifting (-1.2) the largest single effect:


I.e. if the statutory corporate tax rate increases by 1%, the corporate tax base is predicted to shrink by 1.2% from increased profit shifting.

There are a myriad of potential arguments to question the certainty and applicability of these findings, but that is for another potential blog; suffice to note here that these figures represent the most accepted available evidence in economic literature on the behavioural effects of corporate taxation.

Based on this evidence, it is regularly argued that corporate tax rate reductions in isolation and tax competition more broadly positively support economic growth as facilitators of investment and eliminators of tax avoidance (again, in some countries at least).

Now, a key element in such assertions is that the status quo is taken for grantedCurrent behavioural effects (tax elasticities) are assumed as universally true. Rather than endogenous to economic tax competition models (i.e. “they can be changed”), behavioural effects are treated as exogenous (i.e. “this is how the world is”). As my review of Peter Dietsch’s recent book on tax competition notes:

One of the key points in Dietsch’s dismissal of tax cooperation as economically inefficient concerns optimal tax theory. Proponents of tax competition that leverage optimal tax theory hold that lowering taxes will result in increased labour supply and decrease tax evasion and avoidance. Analytically, the consequence is less need for tax cooperation to stem a race to the bottom of capital taxation. And this may be empirically true today. But these elasticies (the extent to which the labour supply and evasion/avoidance change with tax rate changes) are (partly) institutionally determined, and thus Dietsch argues there is no reason to assume today’s elasticities for tomorrow – they can be modified through policies and thus we can change the factors in the optimal tax calculation. For instance, by introducing stronger international cooperation on capital tax evasion, it is possible limit the tax evasion elasticity, and thus make tax systems more progressive by increasing the optimal levels of capital taxation, shifting the tax burden back on to mobile capital factors.”

The highlighted part is, in fact, exactly what is happening today and what has been happening for the past decade in particular. We’re changing the equation of tax competition and corporate profit shifting. Numerous and continuous reforms to combat tax evasion and avoidance are contributing to this evolution (even if some commentators questions their effectiveness). This includes regulatory initiatives (such as (automatic) exchange of information, FATCA and the CRS, the OECD MCAA, the revised EU Parent Subsidiary and Savings Tax Directives, the OECD Harmful Tax Campaign, Dodd-Frank, country-by-country reporting, the BEPS project, the EU ATAD and the EU tax state aid investigations) and voluntary standards (EITI, PWYP and the Fair Tax Mark), but also other significant developments (such as the Offshore Leaks, LuxLeaks and PanamaPaper).

Not just in their material effect but also in their normative impact do these reforms and events lessen the ability and willingness of corporations to shift profits as part of tax and regulatory arbitrage, thus decreasing the predicted elasticities (i.e. the positive corporate tax base effect from decreased corporate tax rates). This is not an unreasonable assumption, in any case. To my knowledge, there is still no systematic studies of the effects of these regulatory and normative changes on corporate tax elasticities.

This realization is what led Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, to make the following comments in to the Wall Street Journal this week:

“For the past 30 years we’ve been saying don’t try to tax capital more because you’ll lose it, you’ll lose investment. Well this argument is dead, so it’s worth revisiting the whole story,” Pascal Saint-Amans, the OECD’s tax chief, said in an interview.

“In the past people, notably with international income, could use foreign bank accounts to receive and make payments and their home tax office would never know. That era will be over,” Mr. Saint-Amans said optimistically. “In the lead up to this new regime some countries have allowed their citizens to declare their foreign income without penalty, that alone has raised 50 billion euros in extra tax.”

Saint-Amans’ comments also come on the back of the OECD’s release of a new report entitled “Tax Design for Inclusive Growth“, which, as a lead up to this weekend’s G20 Finance Ministers meeting in China, breaks with the advice of prior decades, arguing that the case for low capital taxation and tax competition are “not as clear-cut as previously thought” (p. 40). Although this specific messaging was not included in the G20 meeting communique, the report’s section on capital income taxation is highly recommendable for those interested, and there is no understating the language used here and its policy implications.

The OECD is sending a message, which is likely to become increasingly prevalent: As reforms squeeze regulatory room for and normative consequences of tax competition, capital is less likely to flee national boundaries, and thus countries can, just perhaps, slowly start to ease the foot off the tax competition throttle.