RISA GOLUBOFF:
Welcome to everyone, and thank you all for coming. Our format will be a
little different today than it usually is. So Ruth will lecture first,
and then we have box lunches. And I encourage you to take
them and sit outside and commune with people afterwards. But do whatever is
comfortable for you. So the beginning of the school
year is always a hectic time, and there's a lot going on. And this year I think
is especially hectic, given that we are all
navigating our return to in-person classes. And it is just wonderful
to have such a happy event to all come together for, and
something so central to what we do here, which
is to celebrate our colleague and
her scholarship, and have her share
some of it with us. So I'm really, really
pleased to see you all and to see so many students,
which is real testament to Ruth and her relationship with them. So this is the Chair Lecture
for the Edwin S. Cohen Distinguished Professorship
in Law and Taxation. It was funded by Edwin S.
Cohen of the class of 1936, and his son, Edwin C.
Cohen, of the class of 1967, as well as other donors. The elder Mr. Cohen joined
the law faculty in 1965. He subsequently served as
assistant treasury secretary for tax policy and as
undersecretary of the Treasury. He was a special consultant
on corporate taxes to the House Ways
and Means Committee. And in 1977, he became a
partner in the law firm of Covington and Burling. The younger Mr. Cohen
served for many years as a president of Carlin
Ventures, Inc., an investment company. We have had one
previous recipient of this professorship, George
Yin, from 2006 to 2019. And I'm delighted that
George is here with us today. And I'm also delighted
that Ruth Mason is following in his footsteps. He has left large shoes, and
she is ready to fill them. Ruth graduated from
Columbia University in 1997, receiving her BA with
honors in History-- US History. She received her JD cum
laude from Harvard Law School in 2001. After law school, Ruth
worked as a Tax Associate at Willkie, Farr, and
Gallagher in New York, and entered academia
in 2002, serving as the Executive Director of
NYU's Graduate Tax Program and the deputy director of
NYU's International Tax Program. Ruth then moved to the
University of Connecticut Law School, serving as Associate
Professor, Professor, and ultimately, Anthony J.
Smits Professor of Global Commerce between 2006 and 2013. She then joined our law school,
the University of Virginia Law School, as a tenured
professor in 2013, and has been here ever since. She is a leading voice, a
leading voice internationally-- I want to emphasize
that-- on issues relating to cross-border
taxation and corporate tax reform. She has an abiding interest
in tax discrimination and the Dormant Commerce Clause. And she has written articles
on a variety of tax issues that have appeared
in the Virginia Law Review, the Virginia
Tax Review, the Yale Law Journal, and the Tax Law Review,
among other publications. I'll talk about some of the
other publications in a minute. Ruth's scholarly interests
and her reputation extend far beyond
our national borders. She has academic appointments
as Professor-in-Residence at the International Bureau
of Fiscal Documentation in the Netherlands. She has served as a
Fulbright Senior Scholar at Vienna University of
Economics and Business Administration, and
she's been a visiting Professor at Universite Paris. Her scholarship, in addition
to her law review articles, includes a book, The Primer on
Direct Taxation in the European Union, a section on tax
discrimination in the Research Handbook on
International Taxation. She is the co-editor of
Kluwer's series on International Taxation, and a member of the
editorial board of the World Tax Journal. She has also served as national
reporter for the United States to the International
Fiscal Association, and as principal author
of several amicus briefs, including one cited by the
United States Supreme Court in Comptroller of Treasury
of Maryland versus Wynne. That is quite a body of work,
both scholarly and practical. It is one we should
all aspire to. Closer to home, and as I
imagine everyone in this room already knows, Ruth is
a remarkably engaged, energetic, and supportive
member of our entire UVA law community. One example of her
enthusiastic contributions, not only to her own scholarship,
but to the scholarly development of all of us, is
how she threw herself into her leadership of the Faculty
Enrichment and Visibility Committee over the past
several years, joining Twitter, writing blog posts and
op-eds, appearing on podcasts, including mine and Leslie's. In short, she made
herself a guinea pig for every half-reasonable
idea she came across for how to disseminate
faculty scholarship, much to the benefit it
of everyone in this room. Ruth is equally generous
with her students, and their presence here today,
I think, testify to that. They rave about her
teaching and her mentorship. She has been the faculty
advisor and moving force behind the law school's
International Tax Moot Court Team, which has won three
international championships, including the first one
ever by an American team. I once heard Ruth
advise a group of 1Ls to take Federal Income
Tax early because, quote, "There is nothing
sadder--" nothing sadder-- "There is nothing sadder
than a spring semester 3L who realizes in their
very first tax class that they want to
be a tax lawyer." Nothing sadder. Ruth has, I think,
single-handedly made tax lawyers out of
many of our students. To her students
and her colleagues, both here and around
the world, she brings wit, humanity, a
wide and deep curiosity about the law and
connections to practice, in addition to her
brilliant scholarship and extensive experience. I am so looking
forward to her talk today on the transformation of
international tax in the wake of the recession in 2008. Please welcome our new
Edwin S. Cohen Distinguished Professor of Law and Taxation. [APPLAUSE] RUTH MASON: Help. I'm stuck on the wrong
side of the podium. Well, thank you, Risa, for that
far too generous and really moving introduction. Risa said some words
about Edwin S. Cohen, and I just want to add
a little bit for myself. So some things not
mentioned by Risa-- Cohen led an effort to conform
the Virginia income tax with the federal
income tax, thereby simplifying the tax compliance
of millions of Virginians. In addition to his
devoted public service, he was also an
inspirational teacher and a consummate
institution builder. He helped found the Tax
Forum, where New York City tax lawyers to this very day
gather and discuss tax papers. And he also helped
found the Virginia Tax Review and the Virginia
Tax Study Group. So I never had the privilege
to meet Eddie Cohen, but it is a special honor for me
to hold the chair name for such a renowned tax professor
and public servant, especially one so recently held
by my dear colleague, George Yin. So thank you to Eddie Cohen,
his family, our alumni, and the dean for the
opportunity to talk to you. And thank you to faculty,
students, staff, my family and friends, for joining
me on this occasion. [LAUGHTER] You can see why I blanked
it before you came in. [LAUGHTER] When Teri Johnson told me that
the dean would buy everyone lunch and I would get to
talk to you for an hour, I thought, what
an awesome power. I would have the whole UVA
faculty captive for an hour. How could I spend the time? What would I talk about? Now, tradition
dictated that I should give a paper that I had written,
so that narrowed it down. But what topic? I could talk to you
about tax discrimination, and you'd listen
politely and be bored. I could talk to you about
the EU state aid principle, its anti-subsidy
principle, which I've been banging my head
against for a couple of years. Finally, I have a breakthrough. I have something to say. I could tell you about that. And I would have to tell you
about the international tax rules and transfer pricing. I would need slides. The problem is
that then you would feel as if you were banging
your heads against a brick wall. I realized I couldn't
do it to you. You're my friends. And I hope that after an hour
you'll still be my friends. So I'm not going to talk to
you about the Apple tax plan. [LAUGHTER] [APPLAUSE] Instead, I'm going to talk to
you about a paper that grew out of the Common Law broadcast. The first season of the Common
Law broadcast, Leslie and Risa approached me and
said that they wanted to talk about something
that was of general interest in international tax. Now, despite all the lies Leslie
just told-- or Risa just told-- I did not joyfully agree
to do this podcast. The first thing I did
was try to get out of it. I assured them both
that there was nothing of general interest
in international tax, nor would there ever be. But Leslie and Risa persisted. They gave me a time and
a place and a location that I should show up and
talk about international tax. Since our topic was
the future of law, I thought that I should talk
about the then-new 2017 tax legislation. But I couldn't talk about
the technical details because that's not
of general interest. So we talked instead about
why the United States would want to dramatically reduce
its corporate tax rate and apply a minimum tax to its
multinationals on their income abroad. So we had a nice chat about
the corporate tax planning. And Risa and Leslie were
happy-- or, at least, I didn't hear any complaints. And I went back to state aid
and to tax discrimination. Then a strange thing happened. I went to my nephew's wedding. And at the rehearsal
brunch he said, Aunt Ruth, I listened to your podcast. [LAUGHTER] I said, Danny, I already
made out the check. There's no reason
for you to say this. And his sister
said, no, it's true. He sent me the link. And I-- you know,
trust but verify. I looked at YouTube,
and 400 people had listened to this
Common Law broadcast. Now Mary Wood assured
me in a very kind way that that's not really so very
many people as these things go, but they couldn't
all be relatives. So I suddenly had
what I always wanted-- relevance in tax. So I decided that if nephews
and 400 perfect strangers could be interested
in international tax, so could others. And I didn't want anyone's tax
curiosity to go unanswered. I also hope to build bridges
to international lawyers whose insights we tax
people will sorely need as international tax
becomes more international. Tax has a deserved
reputation for being complex. But I hope today to
convince you that you don't need a lot of
technical background to understand what's at stake
when the disputes are about how countries can effectively
tax multinationals, and how they can split
the revenue between them. So overall, the paper that I'm
presenting does a few things. So one, is it provides
this general introduction to what's happening
in international tax. Another is to push
back on what I saw as an overly
negative reaction in the scholarly community
to the BEPS, the Base Erosion and Profit Shifting project. The scholarly reaction
to this project was that it was no big deal. And that's a tempting
position to take if you look only at the reforms
that were recommended from it. But in my view, that misses
the forest for the trees. So what you have
at the end of BEPS is a much more cooperative,
much more international way of forming tax policy. There's a tendency to
undervalue incrementalism, but I wanted to highlight
what, in my view, BEPS had really changed. Last, I wanted
this paper to serve as a record of what one informed
tax person who is carefully following the
developments thought. Because the other thing
that's happening here, which makes it harder
for us to appreciate how much the
landscape has changed, is that we analyze
everything in retrospect. And things have a way
of looking inevitable when we look at them from
even a short distance of time. So I hope you will all be
relieved that I will not be reviewing that slide. That is not even my slide. I just googled "Apple tax plan,"
and picked the most complicated picture I found. That one was from
Wired magazine. To my students, we will be
reviewing the Apple tax plan, but I will not use
that diagram to do it. OK. Nevertheless, to
give you a sense of what's going on
in international tax, I do have to give you
some broad background. So the international tax system
reflects two broad principles-- source and residence. A corporation's residence
for tax purposes is clearly, although
arbitrarily, defined as its place
of incorporation or its place of
management and control. And the resident state gets
to tax a corporation on all of its income wherever earned. The source of a
corporation's income is, informally speaking,
where it derives its income. So the source state
gets to tax that income. Now, the source of
income is something that's highly disputed. Source and residence
jurisdiction overlap. One country can be the
source, while another country is the resident state
of a corporation. In this case, both
states get to tax. The source state goes first,
and the resident state is expected to relieve
any resulting double tax. Tax treaties changed
the situation by obliging the source state
to share in the obligation to avoid double tax,
specifically by taxing less. Because poorer states tend
to be net source states, and richer states tend to
be net resident states, treaties tend to shift revenue
from poorer states to richer states, compared to a
no treaty situation. Tax treaties introduce important
limits on source states' entitlement to tax. For example, under tax treaties,
a state cannot tax a foreign corporation unless that
corporation has what's called a permanent establishment
in the source state. That's the Nexus rule. A permanent establishment
is a physical place, a physical presence,
or a dependent agent. So that's the
background to our story. Now, our story begins
before the 2008 crisis. The best way to describe states'
attitudes towards corporate tax avoidance before the crisis is
one of indulgence, or at least, complacency. And there are a number
of reasons for that. So first, countries knew that
this permanent establishment requirement was growing
more and more obsolete, but tax treaties are
hard to renegotiate. And what's more,
the obsolescence of the permanent
establishment requirement meant that other
countries couldn't tax the income of US companies
when they had income putatively sourced in other jurisdictions. So this meant that the US
didn't have an obligation to relieve that double tax,
because the first tax didn't happen. So it wasn't in the interest
of the United States to update the permanent
establishment requirement. The second issue
was what might be called national fragmentation. So different states
had different laws, and importantly, they
had different tax rates, and lawyers were able to exploit
those differences to avoid tax. So for example, companies could
move mobile and highly valuable intangibles to low-tax states. So, for example, a company
could move a valuable intangible to a low-tax state, and
then charge related parts of the company high
royalty rates-- deductible payments out
of higher tax states-- to be paid into the
low-tax jurisdiction. From a group perspective, the
company's income didn't change, but it would save tax due to
the differential between the two states' incomes. In a world where countries
have different tax rates, a taxpayer that can
choose where in the world to declare its income
can choose its tax rate. In another example,
Ireland defined residence for tax purposes--
corporate residence-- to be where a company was
managed and controlled. The United States
interpreted it to be where the company was incorporated. So by incorporating
companies in Ireland and managing and controlling
them in the United States, lawyers were able to
create stateless companies taxable on their worldwide
income by no country on earth. As Ed Kleinbard
poetically put it, "Stateless persons
wander a hostile globe looking for asylum; by
contrast, stateless income takes a bearing for
any of a number of low- or zero-jurisdictions, where
it finds a ready welcome." Although some states
enacted unilateral measures to reduce corporate
tax avoidance, those measures were not
particularly effective. Enforcement was spotty, in part
due to interest group capture, and in part due to real
concerns that states would lose real investment
to other less strict states. Tax competition drove headline
corporate tax rates down, and politicians came to
believe that tax avoidance strategies available to
their corporations that were unavailable to other
countries' corporations was an important source
of competitive advantage. There was also the problem
of tax havens, which did not want to cooperate
because they had nothing to gain from cooperation. They certainly
couldn't be introduced to cooperate by the promise
of higher tax revenue. They knew that if they
raised their taxes instead of more revenue, they
would get less investment. There was also a
general uneasiness about ceding any part of
a state's tax sovereignty to a supranational entity
as part of an agreement to combat tax avoidance. Moreover, because each national
tax system was sealed off from the others,
domestic tax authorities only saw the part of
the company's income that the company
chose to show them. The scope of the problem
was, thus, unknown and remains to this day a matter
of dispute among empiricists. Don't get me wrong. As the OECD put it, there
was abundant circumstantial evidence of profit
shifting, including that in 2010, Barbados, Bermuda,
and the British Virgin Islands received more foreign direct
investment than did Germany. Yeah-- abundant
circumstantial evidence. The British Virgin Islands was
the world's largest investor in China, well ahead
of the United States. Statistics like this suggested
significant profit shifting, but the full scope was unknown. Finally, and I don't think
this can be underestimated, tax avoidance techniques
used by multinationals were perfectly legal. Take the US/Irish
residence mismatch. Apple took advantage of this. By doing so, Apple broke neither
the laws of the United States, nor the laws of Ireland. One way to close
this loophole would be for Ireland and
the United States to have the same
tax residence rule. But the one thing all
the states agreed on was that they didn't want
to harmonize their taxes. So due to all of these
barriers to competition we had before the 2008
crisis, international tax just wasn't all that international. Each state had
domestic rules for how to treat inbound
transactions, and each state had rules for how to treat
outbound transactions. There was a large network
of 3,000 bilateral tax treaties that connected
the domestic systems, and these treaties were
based on a model that was negotiated at the OECD. But the OECD itself only
recently reached 38 members. Other than the model treaty,
we had the OECD commentaries to interpret the treaty, and
the transfer pricing guidelines, also written at the
OECD, these define how to determine the income
of separate legal entities and branches of multinationals. But overall,
international tax just didn't get all that
much attention. Moreover, the main goal of the
rules derived cooperatively was to reduce transaction
costs for multinationals to pave the way for investment,
and in particular, to eliminate double tax. So while countries were
really good about eliminating double tax, they
ignored the gaps. All this changed with the
2008 financial crisis, which triggered job losses,
budget and monetary crises, and a new intolerance of
corporate tax dodging. Corporate tax dodging
was nothing new. What was new was the
degree of popular awareness and opposition to it,
especially in Europe. The Senate Permanent
Subcommittee on Investigations and the UK House of Commons
Public Accounts Committee conducted some hearings. They called corporate
executives from some of the world's largest,
most profitable companies-- Amazon, Google,
Starbucks, Apple, HP. The topic was corporate
tax avoidance. These were
informational hearings. How are you doing it? Tell us how you're doing it. The testimony was explosive. A Starbucks executive testified
to the UK Public Accounts Committee that it had a low-tax
ruling with the Netherlands, and that the Netherlands
had asked Starbucks not to share it. The same executive
from Starbucks testified that Starbucks had
been unprofitable in the UK for 14 out of 15
of the prior years, despite opening
numerous new stores and having sales of over
$5 billion year over year. British people
boycotted Starbucks. They picketed Starbucks
in the streets. Back home, in the Senate,
an Apple executive testified that Apple
negotiated a special tax rate with Ireland. Apple later amended that
testimony, but not before it was published in every
major newspaper on earth. It was at these hearings that
we learned of the statelessness of the Apple subsidiaries. Major newspapers published
diagrams of Apple's tax plan. There was a picture
of Apple's tax plan on 1A of The New York Times. That picture came
from Wired magazine. Everybody was interested
in Apple's tax plan. Double Irish with
a Dutch sandwich entered the vernacular. Not long thereafter,
in an episode that came to be
known as LuxLeaks, a whistleblower inside a
PWC disclosed a large cache of rulings that the
government of Luxembourg issued to PWC clients. Many of these rulings were
nothing out of the ordinary, but some seemed to appear
to grant secret sweetheart deals to the PWC clients. This news, too, was splashed
all over the newspapers, and it inflamed popular
sentiment against corporate tax dodging, especially in Europe,
where the perception was that it was US
companies coming in, making money, and paying no tax. Treasury official Manal
Corwin described this as the mainstreaming
of international tax. Suddenly, voters were paying
attention to corporate tax, and that meant politicians
had to pay attention, too. The G20 resolved it
had to do something about corporate tax avoidance. Lacking a permanent staff,
the G20 assigned the task to the OECD, and the BEPS, Base
Erosion and Profit Shifting, project was born. Thus, it was the
financial crisis and popular dissatisfaction
with corporate tax dodging that overcame long-standing
barriers to multilateral tax cooperation. Working tirelessly over
the next 2 and 1/2 years, I think nobody at
the OECD slept. By the end of 2015, the OECD
delivered recommendations in 15 areas. The academic reception to
BEPS was generally lackluster. So leading commentary,
Reuven Avi-Yonah, called it a patch-up. Our own Graeme Cooper called it
a project which skirted danger, was vague, and anemic. Mindy Herzfeld
called it so watered down as to be meaningless. Allison Christians
characterized it chiefly as a move by
the OECD to secure control of
international tax policy over rival policy-making
institutions. The general reaction was one
that BEPS imposed or suggested only minimal, or at
best, modest reforms. But here, as in so
many areas of tax, I think we encounter
a baseline problem. Many academics were disappointed
because BEPS did not implement their favored reforms. But should BEPS be
judged by a baseline of academics' most
optimistic goals for international tax reform? Or is it more appropriate
to measure BEPS against what came before? I agree with my tax
colleagues that most of the specific recommendations
emerging from the BEPS project, the so-called
BEPS deliverables, do not represent
dramatic reforms. In my view, however,
evaluating BEPS only according to its deliverables
understates its impact. Now, I don't want to take
you through the specific BEPS recommendations,
but at a high level, I want to suggest that
BEPS had a profound effect on the decision-makers,
agendas, institutions, norms, and even the legal forms
of international tax. So first the decision-makers. For nearly 100 years,
international tax policy was the near exclusive
domain of the OECD countries, a small group of
mostly rich countries. The BEPS project brought
into the process, on an equal footing with the
OECD countries, the eight G20 countries that
were not OECD members. That's Argentina, Brazil, China,
India, Indonesia, Russia, Saudi Arabia, and South Africa. These eight countries
collectively have a population of
3.5 billion people. They widen the
perspective of the OECD. And in particular, they
brought a much needed developing country
perspective to BEPS. In addition to
bringing in the G20, the OECD formed a larger group
called the inclusive framework, which consists of all
the countries committed to implementing the
BEPS minimum standards. This organization presently
stands at 140 members. Next, institutions and agendas. Here, I largely agree
with Allison Christians, that one of the effects
of the BEPS project was to entrench the OECD
as the principal place for international
tax policy-making. The success not only of BEPS,
but of prior OECD projects, especially on tax
information exchange related to individuals,
solidified the position of the OECD as the premier
forum for international tax. But more than merely
entrenching the OECD, BEPS vastly expanded
its charter. The OECD now makes policy
not just for its 38 members, but effectively, it
stands at the center of policy-making for
the 140 countries in the inclusive framework. No longer is
international tax policy limited to a model
bilateral treaty commentary on that model and
the transfer pricing guidelines. As an example, in
BEPS, the countries made recommendations for
changes to domestic law. That was a first. What's more,
countries implemented those recommendations for
changes to domestic law, including the United States. While the OECD
does not represent a supranational legislative body
or any of the other nightmare scenarios that it's
sometimes accused of, it is undeniable that
BEPS greatly expanded the influence of
the organization, and made the OECD
the obvious forum to resolve the current global
allocation dispute, which I will discuss later. Third, norms. For a long time, the
most important norm in international tax was
that companies should not pay tax twice to two different
countries on the same income. States overcomplied with this no
double tax norm, which resulted in widespread non-taxation. Today, however,
states increasingly support a norm of
what might be called full taxation, under which
all of a company's income should be taxed where it has
real business activities. The full tax norm
didn't begin with BEPS, but to a significant
extent, BEPS reflected and
effectuated this norm. Nearly all the BEPS
recommendations aim to promote
full tax, and three out of four of its
minimum standards, which all of the 140 states
agreed they would implement, do so. For instance, one
minimum standard requires country-by-country
reporting. This provides governments a
global and per-country overview of profits, sales,
employees, income, and places where companies
declare and pay taxes. This way, countries
can have a sense of where income is over
and underreported relative to real activities. Thus, instead of only
seeing their part of the corporate
structure, each state gets a good sense of what
the corporation is doing and what it's earning
all over the world. The clear motivation for such
a view is to promote full tax. Another transparency
measure requires exchange of administrative rulings. Before BEPS, a taxpayer
could secure a ruling from state A, in which state
A agreed not to tax income, because that income would
be more appropriately taxed by state B. But nothing
required the company to actually declare
that income to state B. And before BEPS,
state B wouldn't even know of the existence of the
ruling that state A gave. After BEPS, the states exchange
the rulings with each other. This reduces the
taxpayer's ability to take inconsistent
positions in different states with respect to the same income. Opposition to such
inconsistent positions reflects a full tax norm. Even more obviously in
support of full taxation, states agree to change the
preamble of their tax treaties to reflect that
their purpose was not merely to avoid double tax,
but also to prevent tax evasion and avoidance. Likewise, they agreed to
stronger anti-abuse rules in their treaties. Fourth-- effectuating
BEPS recommendations necessitated new legal forms. Many of the BEPS
recommendations require changes to be made to
bilateral treaties. To implement these
changes expeditiously without requiring renegotiation
of 3,000 bilateral tax treaties in force,
the BEPS countries invented a new instrument
of international law-- the Multilateral
Instrument, or MLI. This was a multilateral treaty
to update bilateral treaties. The MLI embodies the pragmatic
innovation typified by BEPS. It's also a
significant step toward and a proving ground for
a real multinational tax treaty in the future. The BEPS countries also
implemented a collection of coordinated
unilateral measures. They set standards cooperatively
with the expectation that the law would be
implemented domestically, either by the legislature
or by the executive. Many of these measures,
these coordinated unilateral measures, took the form of
what I like to call fiscal fail-safes-- rules under which if
one state doesn't tax, another state automatically
fills the void. I won't go into the details. You can thank me later. But many of them
are pretty neat. Fiscal fail-safes
implement the full tax norm by clawing back the
benefit of tax planning and of state-provided
tax incentives, thereby discouraging both aggressive
tax planning and state-level tax competition. This is me skipping the details. [LAUGHTER] Good decisions
happen late at night. Finally, I argue that BEPS was
not the endpoint, but rather just the starting point in these
multinational-- or multilateral negotiations. So as the states devised
effective strategies for combating corporate
tax avoidance, they were growing
the revenue pie. But they heated up
long-simmering discussions about how to split that pie. Academics rightly complained
that the BEPS countries refused to deal squarely with the
important distributional concerns that the
BEPS project raised. Instead, they preferred
to make limited progress on closing loopholes. For example, the very first
area of concern identified by the OECD when the G20
handed them this project was tax problems related
to the digital economy. This was BEPS action item one,
suggesting its importance. Here's what the
OECD said about it. They identified as a
problem the ability of a company to have significant
digital presence in the economy of another country without
being liable to tax due to the lack of nexus under
the current international rules. That's the PE problem, the
Permanent Establishment problem. But when it came to
bargaining over action one, the United States
was not in the mood. As a resident state of a
very disproportionate share of the world's largest
tech companies, the United States argued
that the digital economy was the economy and couldn't
be segregated from it. Therefore, it shouldn't be
subject to special purpose rules. So the countries swept
action one under the table, under the rug. It got no recommendation. They simply avoided
the distributive issue. Notice that the full
tax norm is also deficient on the distributive
question as well. To say that all of a company's
income should be taxed says nothing about which
country should tax that income. But without a clear
consensus on the rules to allocate tax entitlements,
a generalized norm of full tax can lead to double tax. A great example of this is the
European Commission's state aid investigation against
Ireland for alleged subsidies that Ireland granted to Apple. The nature of the
commission's claim was that by not
taxing Apple enough, Ireland subsidized the company. Apple had stateless companies. It had companies that were
incorporated in Ireland, but managed and controlled
in the United States. And consistent with good
tax planning practices, it shifted to these
stateless companies as much of its global
profit as it possibly could. The European
Commission's response was to say that because
the companies had a connection to Ireland-- they were incorporated there-- Ireland ought to have
taxed all of that income, no matter where derived. But why Ireland? Why not the United States? Why not the other
countries in Europe that had made those tax
deductible licensing payments into the stateless companies? If we don't have clear
rules about which country gets to tax and
for what reasons, we may end up with a situation
in which more than one country seeks to tax the same income. This outcome would
violate the other norm of international
tax, the older one, that companies shouldn't
be subject to tax more than once on the same income. Even the European Commission
recognized this problem in the Apple case. In a press release accompanying
its decision against Ireland, the commission suggested
to other EU member states, and astonishingly also
to the United States, that if those states would
now retroactively tax Apple, that tax would reduce the
recovery due in Ireland. So this idea of full tax,
when divorced from clear ideas about which country
ought to tax, can lead to a kind
of free for all, in which multiple
countries seek to tax the same income according
to different theories of tax entitlement. Countries have different
ideas about what entitles them to tax. Of course, it won't surprise
you that many of these ideas are self-serving. States think that
things that they have a lot of, whether
that's management, R&D, labor, natural resources,
factory sales, or lately, digital users, ought to
generate tax entitlements. But we lack strong shared
ideas about what factors generate entitlements to tax. Nor are efficiency goals
a useful guide here. There are so many
margins you can optimize for an international
tax that you end up with not just different, but
incompatible recommendations when you look at efficiency. Nor do we have
anything like consensus on distributive justice. The way countries have dealt
with distributive justice is to pretend that these
questions can be pushed down to the national
level where they can be dealt with through
Democratic processes. But there's no escaping
the distributive question at the heart of
international tax-- who gets to tax what? Suppose you have a
multinational enterprise with very large profits and
it's active in several states. Its shareholders are in state
A. It's incorporated in state B. Its managers are
in state C. Its R&D is in state E. Its IP is in
state F. It's got customers all over the world. Which states get to tax? If all of them, in
what proportions? Even though there's
no strong consensus as how to answer this
question, T.S. Adams called it a truism
of international tax that every jurisdiction with a
colorable claim and the power to assess will in time succeed
in collecting some tax. Lately, France and the
UK and other countries have proved this with
their digital taxes. These are countries
that have started feeling for the
first time the pain of the obsolescence of the
permanent establishment requirement. Twitter, Facebook,
Airbnb, Amazon, Google-- all of these countries
can be involved in the economies
of various states without having a physical
presence in them. They can earn profits
in France and the UK without being there physically. To quote the head
of tax for the OECD, "The Europeans have
experienced what it's like to be a
developing country. They had clever people
coming in, making money, not giving anything
back, and then leaving. These countries have
become increasingly frustrated with their inability
to tax the tech giants, especially because
they rightly perceive that their own
residents as users are contributing
significantly to the profits of those companies." So now you have the interests
of developing countries who've long given up tax entitlements
in tax treaties being aligned with those of the most
powerful European countries. Both sets of countries
have set their sights on the same object-- the US tech giants. To tax the tech
giants, they needed to get around their treaty
obligations which prevent them from assessing income
tax in the absence of a permanent establishment,
a physical presence. So they invented special
purpose digital taxes. These are not income
taxes, so they're not barred by the treaty. The countries designed
the digital taxes to narrowly target the
biggest digital companies-- US companies. There are many such taxes
around the world now. So although it's true that
the countries didn't squarely confront the allocation
question as part of BEPS, it was not true that they
could avoid it forever. We're now talking about
what has colloquially come to be known as BEPS 2.0. This negotiation is
currently taking place at the OECD in the inclusive
framework among 140 countries. The negotiation involves
two main reform efforts. One is reform of the permanent
establishment requirement, to have a nexus that doesn't
require physical presence. We'll have to see what
happens, but it's likely that this nexus will depend
on sales into the state. It will at first only apply to
the world's biggest companies. The idea here is that
if a new nexus can be agreed at the OECD, states
would, in exchange for that, give up their digital taxes. So those digital taxes were
necessary to provide leverage for these countries
against the United States, who would have
preferred to say, well, let's keep the obsolete
permanent establishment requirement as it is. The other big negotiation
happening right now is over minimum tax. The high states want to
defeat the tax havens. They want to cabin
tax competition by subjecting the income
of large multinationals to a minimum tax, as with the
current negotiations, at least 15%. This is a very complex
proposal that would at first, at least, only apply to the
world's biggest companies. The proposal is optional. States don't have to adopt it. But there's still a lot of
disputation about its features, because the states
that do adopt it want to make sure that they
all adopt the same rules. So again, we have
to wait and see what's going to
happen with that. But what we can already
see is that there are not just 38 OECD countries
involved in the negotiation. Rather, there are 140 members
of the inclusive framework participating in
the negotiation. And on July 1, the
countries issued a statement outlining their
agreement in principle. As of August, of the 140
inclusive framework countries, 134 had agreed to
the outlined reforms. I don't see any
way we could have had BEPS 2.0 without BEPS 1.0. And it's not just a
naming convention issue. What we have seen is an
international tax negotiation with widespread
participation that really would have been
unthinkable even 10 years ago. So I hope my update
on the current events in international tax
has convinced you that you are living through,
although you probably didn't know, very interesting
times in international tax. Thank you. [APPLAUSE]
