Grey matters

A review of the latest research papers on finance and tax – and the legal issues surrounding the facts, debates and possibilities.

 

Submission to Finance Department on implementation of FATCA in Canada.

Allison Christians & Arthur J. Cockfield.  

(March 10, 2014) available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407264 

Abstract: 

The United States enacted a tax reform in 2010 known as the Foreign Account Tax Compliance Act (FATCA), which will impose an extensive third-party monitoring and disclosure regime on financial institutions around the world in an effort to “smoke out” American tax cheats and expose their undeclared foreign assets to the U.S. Internal Revenue Service (IRS). The flow of information from Canadian financial institutions directly to the IRS that is required by FATCA would violate a number of laws in Canada. Accordingly, the United States has requested changes to these laws. The Canadian government now seeks to accommodate these requests in the form of an “intergovernmental agreement” (IGA) with the United States, which will be enacted into law as the Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act (the Implementation Act) pursuant to a proposal released for comment by the Department of Finance. The Department of Finance invited public comments on these documents. We examined the proposed Implementation Act and the IGA and we find that they raise a number of serious issues ranging from likely constitutional violations to violations of international law. We submit these comments in the hope that they will help lawmakers and the public understand that FATCA, while intended to catch tax evaders, is poised instead to impose serious and unjustified harms on people who live around the world as non-resident U.S. citizens and green card holders, as well as their family members and business associates. 

CFR comment: 

CFR’s position is that FATCA is a bad law that will harm the global economy. In this thoughtful comment, Profs. Christians (an expert on international tax at McGill University and a leading voice on FATCA) and Cockfield (an international tax expert at Queens University) provide a model response to the problems of FATCA and U.S.-pressure to sign IGAs. This is an important contribution to crafting a response to FATCA and should be read widely.

 

Avoidance, evasion and taxpayer morality
Allison Christians

Washington University Journal of Law and Policy, Vol. 44, Forthcoming 2014, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417655  

Abstract: 

In popular discourse, tax evasion by wealthy individuals is conflated with tax avoidance by multinational corporations to tell a single story about tax dodging and its negative impact on society. But conflating avoidance and evasion muddies the tax policy waters in important ways by turning legal obligations into moral ones. This essay, prepared in connection with the Washington University School of Law colloquium on “Conceptualizing a New Institutional Framework for International Taxation,” makes the case for caution in using morality as a stop-gap measure to avoid drawing a regulated line between tax evasion and tax avoidance, while still meting out punishment within the undefined space between these two poles. It acknowledges the political gains derived from the rhetoric of morality but argues that the alternate view — that taxpayer behavior must ultimately be managed by law rather than social sanction — has the best chance of driving tax policy toward greater coherence in the long run because it makes the best case for more transparency in both lawmaking and the consequences of legislative decisions.

CFR comment: 

This essay, expanding on remarks made at a Washington University in St. Louis conference last year, sets out the case for focusing attention on the political process that creates opportunities for tax avoidance strategies rather than attempting to pressure taxpayers into foregoing legal avoidance by blurring the lines between avoidance and evasion. Prof. Christians is a leading voice in the debate over tax compliance and this is a thoughtful contribution on an important topic.

 

The relationship between China’s tax treaties and indirect transfer anti-avoidance rules
Qiguang Hardy Zhou

Tax Notes International, Vol. 74, No. 6, p. 543, 2014, available at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435883  

Abstract: 

China has been actively applying its general anti-avoidance rule since its introduction on January 1, 2008. One of China’s well-known anti-avoidance measures is Guo Shui Han [2009] No. 698 (Circular 698), which taxes indirect transfers. Indirect transfers arise when a non-P.R.C. resident company transfers shares in a non-P.R.C. resident holding company (offshore holding company) that holds shares in a P.R.C. resident company.
This article discusses whether Circular 698 is compatible with the provisions of China’s tax treaties, particularly article 13(5) of the U.N. model income tax treaty. The OECD and U.N. commentaries state that generally, there is no conflict between domestic anti-avoidance rules and the provisions of tax treaties. Some commentaries even state that Circular 698 is compatible with article 13(5) of the U.N. model under either a factual approach or an interpretative approach.
This article argues that both a factual approach and an interpretative approach fail to address Circular 698’s compatibility with China’s tax treaties. There is a consistency between article 10(2) and article 13(5) of the U.N. model, and both article 10(2) and article 13(5) will apply to the form of the pertinent transaction rather than its substance. In other words, no look-through of the offshore holding company is allowed under either article 10(2) or article 13(5) of the U.N. model.

CFR comment: 

A clear, concise discussion of China’s approach to anti-avoidance and identification of a conflict between China’s approach and the provisions of many of its tax treaties.

 

The stripping of the trust: A study in legal evolution
Adam S. Hofri-Winogradow

University of Toronto Law Journal (Forthcoming 2015) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2441709  

Abstract: 

The law of trusts has spent the last 20 years rapidly shedding many traditional requirements, forms and restrictions which imposed liability on negligent trustees, protected vulnerable beneficiaries and prevented the use of trusts to avoid the claims of settlors’ and beneficiaries’ creditors, including their spouses, their children, and their governments. This article studies seven aspects of this “stripping of the trust”, examines its consequences from both a distributive justice and a corrective justice point of view, and inquires whether the resulting stripped-down model coheres with the traditional functionality of donative private trusts. The paper finds that most of the current reforms have welfare-reducing distributive consequences, in some cases inflicting externalities on all except the parties to a given trust, in others transferring value from settlors and beneficiaries to the trust service providers serving them. Most of the reforms discussed also create potential for infringements of corrective justice which either did not exist, or was less significant, pre-reform. The paper concludes that all but one of the seven reforms examined should be reversed.

CFR comment: 

The first half of this paper is a thorough analysis of the removal of various trust requirements across multiple jurisdictions that provides an excellent overview of the evolution of trust law. The second half assesses the implications from the point of view of legal theory. The former will be of broad interest, since putting specific developments into the broader, multijurisdictional context illuminates the trends. The latter is likely to be of greater interest to academics than practitioners, but provides a thoughtful critique of developments from the author’s perspective.

 

Playing the shadowy world of emerging market shadow banking
Bryane Michael

SKOLKOVO Business School – Ernst & Young Institute for Emerging Market Studies (IEMS), Vol. 14-02, April 2014, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2429583   

Abstract: 

For emerging market regulators, shadow banking represents an activity which they must control. For businessmen in economies like Russia, Argentina, Saudi Arabia and Mexico, shadow banking represents an important business opportunity. By extending credit to risky (but promising) activities through shadow banking, financiers in these economies can earn far higher returns for excess-cash than placing it in cash management accounts. In this brief, we describe ways that cash-rich individuals and companies can use shadow banking activities to help themselves (by earning more money) and help the economy (by extending credit in these traditionally credit-starved economies). Some of these activities include issuing debt which shadow bankers use as collateral, chopping project-lending into privately-placed share offerings, investing in trade, real estate and insurance securities as well as centering shadow banking activities in regulation-friendly jurisdictions.

CFR comment: 

A thoughtful discussion of the role of shadow banking in emerging markets. 

 

Why bail-in? And how!
Joseph H. Sommer

Economic Policy Review, Forthcoming 2014, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422435 

Abstract: 

All men are created equal, but all liabilities are not. Some liabilities are more equal than others. These “financial liabilities” are products of financial firms. These products shift risk (insurance or derivatives) or provide liquidity (bank deposits, repo). Since these liabilities have an independent value as products, they are worth more than their net present value. The value of a financial firm, then, depends on its liability structure. These special liabilities therefore affect insolvency law. Most financial firms are governed by special insolvency law; those that are not receive special treatment in the Bankruptcy Code. These special laws work well for these special firms. However, they do not work for one subset of financial firms: large financial conglomerates. This article draws three major conclusions. First, no established law can succeed with these firms. Second, the “bail-in” process, which is currently under development, should succeed. Finally, we might want to rethink the meaning of capital for financial firms.

CFR comment: 

A provocative argument for “mega-banks are different” in insolvency from a researcher at the NY Fed. 

 

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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