Grey matters

The Long Arm of Section 337: International Trade Law as a Global Business Remedy, American Business Law Journal (forthcoming)

Marisa Anne Pagnattaro & Stephen Park

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2583417

Abstract

This article analyzes the use of international trade law by American companies as part of a broad-based legal strategy to protect their commercial and investment interests in the increasingly knowledge-based global economy. It focuses on Section 337 of the Tariff Act of 1930, which provides companies with a private right of action to enjoin the importation and sale of goods in the United States that have been produced in violation of their intellectual property rights. Section 337 has recently emerged as a powerful enforcement tool to combat offshore misappropriation of trade secrets by employees, and this article constitutes the first scholarly analysis of Section 337 offshore trade secret cases brought before the U.S. International Trade Commission.

The article describes the broad and far-reaching implications of Section 337 as a global business remedy, focusing on the extraterritorial projection of U.S. regulatory power and the growing overlap of multiple regulators over similar business conduct. Drawing from our normative and doctrinal analysis, the article proposes specific strategies that companies can adopt to maximize the value of Section 337, and outline certain measures that regulators can adopt to address the systemic concerns raised by Section 337.

CFR Comment

When a U.S. firm thinks a foreign firm has stolen its intellectual property, it can use Section 337 to seek redress. Since the 2011 decision of the US Court of Appeals for the Federal Circuit in TianRui Group Co. Ltd. v. Int’l Trade Comm., 661 F.3d 1322 (2011), U.S. companies have been making use of this to claim foreign companies have misappropriated the U.S. firms’ trade secrets. This article provides not only a concise summary of the various measures U.S. firms use to protect themselves but also suggests how it can be used by U.S. firms. Anyone concerned with IP and trade with U.S. firms ought to read this.

The Truthiness of ‘Lockout’: A Review of What We Know, 146 Tax Notes 1393 (Mar. 16, 2015)

Stephen E. Shay

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2578713

Abstract

The article reviews what is known about “lockout” and unrepatriated offshore earnings. It concludes that the limited evidence available does not support claims that economic harm from lockout justifies shifting to a territorial tax system.

CFR Comment

Harvard Law Prof. Stephen Shay provides a concise explication of the offshore “lockout” of U.S. company profits and deftly skewers the recent U.S. Senate Finance Committee majority staff report on “Comprehensive Tax Reform for 2015 and Beyond” provisions on the issue. The short version: The problem is not nearly as big as many people think and drastic action is not needed. Read the article – it’s just seven pages of text and Shay writes clearly and thoughtfully.

Source as a Solution to Residence, Florida Tax Review (forthcoming 2015)

Adam H. Rosenzweig

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2613666

Abstract

The choice between source-based and residence-based taxation has defined the terms of the debate for the international tax regime since its inception in the early 1900s. The thesis of this article is that the construct of source and residence as two competing and irreconcilable doctrines is largely incorrect as a legal matter. Rather, both source rules and residence rules can and should be thought of solely as instrumental tools to divide taxing authority in a globalized world with mobile capital. Under this approach, there is no reason why source rules as a doctrinal matter need to be used only for source taxation as an economic matter, or that residence rules as a doctrinal matter need be used for residence taxation as an economic matter. Instead, the source rules as a doctrinal matter can actually be used to solve the problems of the residence rules as a doctrinal matter. Put differently, source and residence as doctrinal rules can converge into a single concept in the modern global economy.

If it is true that residence as a conceptual matter has become increasingly meaningless in the globalized world, tying the doctrinal rules of residence to the doctrinal rules for source can better effectuate the ultimate goals of the international tax regime. This article introduces a proposal to define the residence of entities as domestic for purposes of U.S. tax law based on the source of the income of such entities. In its most simplistic form – an entity would be a U.S. Person if it earns over a threshold amount of U.S. source income. Of course, such an approach would prove more complex than such a simple statement, but the basic premise holds. The article then demonstrates how such an approach could be used to resolve two of the most difficult and pressing issues confronting the modern U.S. international tax regime: corporate inversions and offshore hedge funds.

CFR Comment

As the ongoing debates demonstrate, sorting out who gets to tax what is increasingly contentious. Into this debate steps Adam Rosenzweig, a leading tax scholar at Washington University in St. Louis with a bold bid to cut the Gordian knot and bridge out the source/residence divide. The virtues of Rosenzweig’s approach are in its relative simplicity to implement and he gives examples for hedge funds and corporate inversions that illustrate this well. Those invested in complexity in tax need not fret, however; this is far too sensible to ever make it through the U.S. Congress. Even so, this is worth a read for the clarity of explanation. And, sometimes lightening does strike.

Foreign Tax Havens and Domestic Acquisitions

Jeremiah Harris & William O’Brien

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2613016

Abstract

The authors examine whether the establishment of aggressive tax avoidance structures by U.S. firms is associated with an increase in domestic (U.S.) acquisitions. They find evidence consistent with this idea using the establishment of a “double Irish” subsidiary structure, a particularly aggressive tax haven structure used for tax avoidance. This evidence is robust to several different variable definitions and econometric specifications, including propensity score matching tests that control for differences in tax-haven-using and non-haven-using firms. They also find that the establishment of tax avoidance techniques is associated with an increase in the use of cash as payment in domestic acquisitions. These results suggest that tax-avoiding firms may be using tax “loopholes” related to domestic acquisitions to reinvest profits stored offshore domestically without triggering the repatriation taxes associated with these pre-tax profits.

CFR Comment

This technically sophisticated paper finds statistically significant effects on domestic cash acquisitions by firms using a “double Irish with a Dutch sandwich” structure, suggesting that U.S. tax laws are not preventing firms with cash abroad from accessing that cash to fund U.S. acquisitions. It also has a useful literature review of the work in the area. Worth a read for the statistically minded and worth applauding for adding to the empirical literature on offshore finance in a thoughtful way.

Voluntary Disclosure of Evaded Taxes — Increasing Revenues, or Increasing Incentives to Evade?

Dominika Langenmayr

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607956

Abstract

Many countries apply lower fines to tax-evading individuals when they voluntarily disclose the tax evasion they committed. The author models such voluntary disclosure mechanisms theoretically and shows that while such mechanisms increase the incentive to evade taxes, they nevertheless increase tax revenues net of administrative costs. The author confirms the importance of administrative costs in a survey of German competent local tax authorities. The author then tests the effects of voluntary disclosure on the tax evasion decision, using the introduction of the 2009 offshore voluntary disclosure program in the U.S. for identification. The analysis confirms that the introduction of voluntary disclosure increases tax evasion.

CFR Comment

Using an interesting mix of theoretical modeling, survey data, and empirical analysis across jurisdictions, this paper makes the claim that voluntary disclosure programs increase tax evasion and boost total revenue collection. It is a plausible argument with some data to back it up. Even if you skip the math, the discussions of the survey results from German tax authorities is worth a read.

Exploring Flows to Tax Havens Through Means of a Gravity Model: Evidence from Italy

Alessia Cassetta, Claudio Pauselli, Lucia Rizzica, & Marco Tonello

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575647

Abstract

This article exploits a gravity model to study the main determinants of cross-border financial flows and to identify those flows that appear to be abnormally above the predicted value. The data include all Italian cross-border bank transfers that took place between 2007 and 2010. The authors find that, other things being equal, financial flows to risky destinations are 36 per cent larger than in other countries. Using the residuals from our main econometric specification, they then construct an index of anomaly and find positive and statistically significant correlations between this and the rate of property and drugs-related crimes in the province of origin, and also between the index and other measures of foreign jurisdictions’ riskiness and opacity of legislation.

 

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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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