Tax at Osgoode Hall Law School

 

Perspective Matters:  One Country’s “Offshore” is Other Countries’ “Onshore”

This post just as easily could have been entitled, “The Realpolitik of International Tax and Fiscal Relations” or, “Multilateralism: Be Careful What You Wish For”. Or, reflecting how these comments conclude, “As for Position in Art, Here Fiscal Position Matters.”

 

Global Minimum Tax and Tax Base “Sharing”

What is the inspiration for this post?  Most immediately, it is “The Made In America Tax Plan” recently released by the U.S. Department of the Treasury to outline President Biden’s Administration’s outlook on taxation, notably in so far as the “internationalization” of taxpayers’ undertakings is concerned. This document provides more detail about the U.S.’s nascent willingness to embrace global minimum taxation, which lies conceptually at the core of the Organisation for Economic Co-operation and Development’s (“OECD”) ongoing Pillar One and in particular Pillar Two work.

At the outset, it needs to be said that the US plan and related US experience is the inspiration for, not the object of these comments.  It presents a kind of fiscal laboratory for detecting and illustrating possibly key tension and friction embedded in “multilateralism” initiatives in tax.   We could just as easily substitute the interests and conditions of any country for the U.S. in this discussion and wonder about many of the same things.  The issues targeted in the U.S. plan are outgrowths of the OECD’s “Base Erosion and Profit Shifting” (“BEPS”) project begun in 2012 and now a focal point of the OECD-led “Inclusive Framework” of countries co-operating and collaborating in various ways to reconcile the application of their tax systems to stem unwarranted tax base leakage.

That said, it should be remembered that in the BEPS and Pillars environment  but also more generally since U.S. international tax reform initiated by the Kennedy administration in the 1960s, international tax “norms” that we assume are “international” in origin are very much connected to, driven by, and derived from U.S. tax policy and practice devised in the U.S.’s fiscal interests.  Equally, it is no secret that that the business organization and tax planning of U.S. multinational enterprises, notably those that involve “customer facing” and “automated digital services", has been a significant on the tax world’s concerns about the adequacy of international tax parameters and via the Pillars an inspiration for a global minimum tax.  These are businesses that by their nature carry on business “in” jurisdictions where, precisely because of the nature of those businesses, they need not actually be “present” in the ways most think not only sufficient f or compatible with but indeed necessary for a local taxable presence.  So, there is a lot at stake as the U.S. faces other countries’ efforts to claim or preserve “tax market share”.   How the U.S. is positioned in the international tax conversation is important to realize.

 

“Multilateralism” and Tax

“Multilateralism” and “globalisation” are not mere platitudes.  They have implications.  Notably, they implicate the independence of countries in devising and carrying out various kinds of regulation including taxation and its undercarriage fiscal policy – both exponents of a particular country’s self-awareness socially, culturally, and economically.  Harvard political economist Professor Dani Rodrik explores the cross currents of “democracy, national sovereignty, and global economic integration” which he considers to be “mutually incompatible:  we can combine any two of the three, but never have all three simultaneously and in full” in his book The Globalization Paradox (2011), which and as the distinguished tax thinker Professor Wolfgang Shön quotes in his recent paper Taxation and Democracy (New York University Tax Law Review (2019)).  Shön’s paper was written as “a contribution to comparative constitutional law and policy in the area of taxation … devoted to the relationship between taxation and democratic decisions making.”  Broadly, Rodrik observes that a consequence of ultimate multilateralism is the erosion of important manifestations of sovereignty and democracy necessarily in favour of global institutions that displace national institutions and independence they afford and create – an outcome that can be as much by circumstance as will.  In the current and seemingly urgent attention being paid to possibly salutary effects arising from a more consistent international tax outlook by countries, Rodrik’s observations may be apocryphal.  Even the fact that these and other distinguished and thoughtful commentors are engaged by foundational governance subjects is important for how we critically understand, evaluate, and respond to international tax developments – a “wake-up call” or “sanity check” on herd multilateralism literally, whether absolutely or effectively, at all costs.

 

Whose Perspective?

It will be said more than once in these comments.  Perspective matters.  All countries are not created equal; they do not have the same outlook on cultural, social, and economic badges of citizenship including, for example, kinds and degrees of mutual responsibility among and accountability to fellow citizens manifest in whether and how public goods like healthcare, education, and economic development are promoted and funded.  Nor do they have the same economic and fiscal tools at their disposal, based on their unique resources, to spend as they must or would like (see, for example, Edward Kleinbard, We Are Better Than This, How Government Should Spend Our Money, Oxford University Press (2015)) to fund collective consumption and provide assurance among their citizens that somehow they will be sustained even when exigent circumstances of the sort in our present consciousness because of the COVID-19 pandemic become real and pervasive and threaten their material existence and emotional well-being.

Even apart from perspective and the specific insights about multilateralism in the BEPS mold and shadow, we ought not to lose sight of outlier or free-rider countries who for their own fiscal and other reasons choose not to actually embrace the inertia of global collaboration – a minimum tax, for example, or more broadly the initiatives framed by the Pillars while nevertheless seeming to join in by their rhetoric.  Even among the willing, accomplishing what amounts to a de facto world tax order will require coordinated, systemic, and equivalent specific legal changes in most if not all countries espousing support.  Other important questions, then, emerge.  Who are the “necessary players” for the new multilateralism to be effective?  What happens if they or any of them actually or effectively exclude themselves from participation, even if, still, seeming to offer emotional and political support for its broad objectives and even possibly in their own images acting separately and distinctly in that spirit?

It is not out of place to observe that the BEPS project begun as a focused attempt to limit absolute tax base erosion attributable to insubstantial tax planning and generally unquestioned fiscal significance of private law constructions that animate planning.  Since, and most recently with the introduction of the Pillars, there has been a change, almost unnoticeable, in the direction of presumptive acceptance of at least systemically and legislatively harmonious if not harmonized countries’ tax laws and inter-country tax relations via treaties.

It is an important shift in emphasis if not position.  Attention does need to be paid to it, even by those persons and countries who abjure gratuitous fragmentation of economic events into legally distinct fragments that then allow private parties to mix and match legal and tax provisions to concoct what amount to their own legal and tax regimes, in their particular images, to suit their particular needs, and nevertheless speaking with the authority of the intrinsic components.  The Columbia University sociologist Saskia Sassen has spoken in related ways about the significance of “territory, authority, and rights” as cornerstones of institutional design and status (see Saskia Sassen, Deciphering the Global:  Its Spaces, Scales and Subjects, transcribed comments made as the 2007 Carroll D. Clark Lecturer at the University of Kansas prepared by Ada Van Roekel-Hughes).  Much the same effect is achieved, though we do not typically think of it this way, through garden variety tax planning.

 

Countries are “Countries” – The World May Be Small, But Maybe Not That Small

Despite the allure of multilateralism and its possible benefits, countries do not cease to be self-interested, as for example the United States tax commentator Charles Kingson analyzed in his seminal 1981 paper, The Coherence of International Taxation (Columbia Law Journal (1981)).  Among other things, he perceived international tax policy as the coalescence of intersecting self-interested tax bargains between countries.  In effect, tax concessions – even those more benign or more benign appearing than those that are the stuff of BEPS – manifest country-to-country transactions (actual, as reflected in tax treaties, or anticipatory, as underling a country’s unilateral accommodation of foreign tax claims through foreign tax credit) in which “tax expenditures” are made by each as the transaction consideration to procure resources and opportunities to encourage their separate economic and social objectives and national wealth creation.

There is no getting away from this.  In fact, there is a curiously understated awareness of this inconvenient truth in the BEPS project reports themselves, notably the report for Action 11.  This BEPS Action is concerned with identifying and measuring impugnable base erosion attributable to multinationals’ tax planning engendered by countries’ tax regimes, the signals from which taxpayers effectively are invited and expected to respond, in the national interest, it must be said, of those countries. In commenting on how to identify BEPS, there is an irresistible implication that there is and can be no universal perception of “bad” tax policy and practices, because what is “bad” or “base eroding” from one country’s perspective is from the perspective of another fiscal and tax policy in the service of worthy economic and social objectives, within its economic capacity and according to its social and cultural self-awareness.  In other words, the fiscal perspective and fiscal policy matter as the inspiration for the ensuing tax policy and legislation that enable fiscal policy, and they are not homogeneous among countries in the sense of ultimate multilateralism.  The countries whose policies they are, are not the same, are not imbued with the same or same kinds of resources to look after themselves and their populations.  This uncomfortable fact lies at the heart of BEPS and its Pillars progeny.  It yields an inconvenient friction with the particular multilateral direction taken in the Pillars that seems to presume a world tax order of sorts and the unquestionable desirability of global minimum tax, which has become for its own reasons a key plank in the U.S. Administration’s recently espoused tax plan.

 

Limits of Multilateralism?

This issues that this perspective conjures up are undeniably hard.  In effect, what are the reasonable limits of multilateralism, and can countries co-operate in their reciprocal and mutual self-interest, without conceding their independence and with it their cultural, social, economic, and political individuality and entitlement to “decide for themselves”?

On the one hand, reflecting the accessory nature of taxation to the legal and circumstantial realities on which tax law is engrafted, there is an urge to “weed out” situations in which even in purely legal constructionist terms taxpayers do not behave in a fashion that reflects the implicit expectations of the legal constructions they adopt.  On the other, a push to policy and legislative harmony morphing into homogeneity risks deeper and more profound consequences for countries, as Rodrik’s comments and Schön’s respectful attention to them and the notions underlying them reflects.

Too, there are trade law implications, of the sort that are addressed by World Trade Organisation constraints on subsidies in the WTO Agreements and by the EU in the Treaty on the Functioning of the European Union that constrains “state aid” in section 107 of that treaty but curiously also constrains objections to states’ economic interventions in what might be seen as a conflicting way through a bespoke remedy in section 116.  In that context, we might consider a “thought experiment” that assumes no specific or systemic tax-based relief or subsidy – tax is “collected” in the usual way at the usual and even robust rates, but that country provides financial assistance in other ways with the same or a similar effect to not collecting the tax in the first place – it simply returns the tax revenue to achieve the same outcome that more directly possibly would have been funded by systemic tax expenditures.  Is that BEPS, and if so, what would the multinational world have to say about it, notably if it navigates the signposts of trade and competition law constraints.  Most recently Pillar Two essentially treats countries’ taxes as fungible; "inadequate" taxation by one would entitle others to “occupy the room” as if the objectives served by tax, any tax, are the same everywhere even though they are not.  Should Canada, for example, be satisfied that tax paid elsewhere is just as good as tax paid "at home", as long as it is levied according to a minimum standard?   Would taxpayers be indifferent facing this reality or would they alter their business arrangements to conduct them more "at home" particularly if the businesses are of a kind that effectively can be conducted "anywhere"?

 

More than “Tax” – Elusive Normative Standards

We, in the tax world, privilege ourselves with the assumption that somehow tax is a discipline unto itself and within it direct and indirect tax aspect are somehow unique and self-contained regulatory environments.  But as others have observed, there are various ways all with the same effect as taxation, for countries to intervene in the financial and economic affairs of their taxpayers, in pursuit of national economic and social interests (Michael Daly, Fiscal Affairs Department, International Monetary Fund, Is the WTO a World Tax Organization, A Primer on WTO Rules for Tax Policy Makers (2016)).  Tax may be a medium for pursuing fiscal interests, but its effects may be replicated outside the tax context with equivalent effect, testing what seems to be a prevailing assumption in the ongoing BEPS induced international tax conversation that being in a community of nations requires all nations to do more or less the same thing – even though they are not necessarily or even likely in the same condition.

So, is what we call BEPS in the tax context, with more critical insight we might ascribe to countries’ pursuit of fiscal policy in their own interests while to that end accommodating each other in targeted ways, missing the point of “perception” in tax matters?   Also, is it missing the point that there are non-tax ways that may or may not be impugnable under trade or competition law that would have similar effects beyond the pale of tax?

Professor Ruth Mason’s critiques of attempts made in European judicial decisions about state aid to ascribe to the arm’s length standard the status of an over-arching principle come to mind are very much worth considering (See Ruth Mason, Identifying Illegal Subsidies, American University Law Review (2019)).  She, incisively, observes that there is no normative standard to be found, as the European courts and the European Commission might like to do in “state aid cases” dominated by transfer pricing, in transfer pricing’s arm’s length principle.  There is no comparative point of reference for what is right or wrong by trying to apply that principle, if indeed it be one, beyond the internal limits of a country’s tax law.  There is nothing, she would say, in that principle as a normative standard beyond a particular country’s tax experience to say how other countries should formulate and administer their tax policy, law and practice.  The relative test of purposeful financial intervention and resulting competition or trade distortion which are the objects of competition and trade law, makes the limits of limitless multilateral perceptions sharply focused.

That is an arresting point – in the BEPS environment we presume there is a normative standard and drive on, without even questioning the legitimacy or utility of that assumption. The concession that because countries are different there is no normative universal tax standard would be very inconvenient for initiatives to somehow “standardize” countries’ tax regimes is if there was a universal common objective and regime in the service, it would have to be assumed, of common underlying fiscal policy.  The latter, of course, is an irremediably faulty assumption.   Indeed, adopting an observation recently made to me by a close and well-informed friend in the tax world, it seems that much of the international initiative anchored in BEPS entails either a lack of or an insistence to impose perspective, careless or willful or possibly both at the same time.  In any event, the avoided question must be asked:  In whose interest?  Not to pick on the U.S., but the Made in America Tax Plan is a transparent answer to that question, and it is not a go

Untethered assumptions about the imperatives of globalism service a correspondingly problematic feature of BEPS and the Pillars.  It is resplendent in Pillar 2, including its assumption countries’ taxes are fungible among jurisdictions - that unoccupied tax room by “under taxation” in one country is fair game to occupy by others to achieve the degree of global minimum tax foreseen as the natural expectation and objective of any and together all tax systems.  In fact, what BEPS, notably Actions 8 – 10, and in Pillar One and Two in the most obvious but also at the same time if it is possible understated way, seeks is a universal notion of the “source” of income in a world where there is no necessary or natural such notion as Hugh Ault and David Bradford noted so many years ago (See Hugh J. Ault and David F Bradford, Taxing International Income: An Analysis of the U.S. System and Its Economic Premises, in Assaf Razin and Joel Slemrod, eds., Taxation in the Global Economy (Chicago: University of Chicago Press, 1990).  The “source” of income is what countries in their general and tax law say it is.  What they say it is takes account of their fiscal conditions that include how those conditions and their tax exponents relate to equivalently motivated conditions of each other and their important commercial and economic interactions.

Associated with and very closely related to the latent “source” issue are suppressed questions about the fiscal significance of legal constructions for where income should be considered to be earned and come to rest.  It might be said that without tackling these questions head on but so assiduously it seems avoided in the BEPS and Pillars orchestrated attempted reconstruction of global tax and legal order, the rest is almost beside the point.

There are, possibly, subdued indications of awareness of this, notably for example in the amplified attention paid to economic considerations in transfer pricing shrouded in the opacity of “accurate delineation”, “commercial rationality”, an “value creation”.  But ignoring or moving to the sideline the inevitable significance of legal order, for both these issues, to concentrate as if equivalent on mechanical and measurement devices that obscure the pervasive significance of “source” and reassignments of “source” facilitated by otherwise entirely typical legal constructions, is confusing not enlightening.  Yet, it is the absence of a universal notion of income’s “source” the opportunities to “resource” income relying on mundane legal constructions, that in turn either effect or distort the achievement of fiscal objectives served by tax law.

 

Methods and Tax Jargon are Not Normative Standards – Fiscal Policy First

All the complexity of methods in the world – and there is plenty in the Blueprints for Pillar One and Pillar Two – cannot obscure the inescapable core issue, namely the “source” of income.  There is no common perception of that notion, grounded as it is in local law and not geography or politics.   Questions about the source of income endure in significant part because even with common or over-arching international guidance, countries are different in the fiscal objectives and indeed perceptions of their relative roles in the somewhat faddish notion of “value creation” that now permeates transfer pricing.  Professor Adolfo Martín Jiménez has critiqued the opacity and virtually infinite malleability of the “value creation” notion that with its companions “accurate delineation” and “commercial rationality” of transactions, is without normative meaning (Adolfo Martín Jiménez, Value Creation – A Guiding Light for Interpretation of Tax Treaties?, IBFD, Bulletin for International Taxation (2020)) but obscures the “source” issue that if so addressed exposes the continuing difficulty experienced by countries in relation to each other to assert and defend their tax entitlements.  Without solving for “source”, the rest is almost beside the point (e.g., Scott Wilkie, The “Source” of the International Tax Conundrum, Kluwer International Tax Blog (2020)).  I hasten to say that none of this is a defense of the so-called “race to the bottom”; to the contrary, implicitly it is a suggestion that we identify critically what we are trying to solve for before presuming that what is in the popular consciousness is necessary, good, or good for everybody.

In other words, fiscal policy matters, and fiscal policy is the mirror of a country’s unique conditions and prospects.   In the community of nations, these are not universal or homogeneous, even though enlightened self -interest would expect measured multilateral co-operation though far short of the ultimate concession to global institutions and governance at one end of Rodrik’s spectrum for his “trilemma”.

 

Back to Perspective – The U.S. “Laboratory”

This has been a long pathway back to the theme of this post.  Perspective does matter.  Fiscal policy and its enablers tax policy and tax law are statements of perspective.  Even as ultimately formulated in tax law, they embed moral judgments (Lon Fuller, The Morality of Law (Yale University Press, 1964)) even though as at least one Canadian court has said about morality in so far tax is concerned, “the morality of the taxpayer’s conduct" does not have a place in the application of tax law (The Queen v. Canadian Imperial Bank of Commerce, 2013 FCA 122).  Certainly, exogenous, and episodic moral judgments about taxpayer conduct may not displace the law as enacted.  But the law as enacted is replete with moral judgments about how taxpayers ought to act and how the society whose tax system it is ought to treat them and be treated by them.  They reflect a country’s perception of itself and the responsibility of its citizens to each other collectively.  Possibly the hardest aspect of statutory interpretation is detecting and giving voice to these moral undercurrents in the law in the language and according to the institutions of the law without dissolving into a self-possessed philosophical inquiry.  One country’s tax avoidance may well be another’s fiscal policy.  Even the OECD’s BEPS initiative recognizes this, though in a subtle even understated way in the Action 11 Report.

What makes this realization so immediately relevant?

Well, possibly the United States’ present embrace of the global minimum tax, a possibly worthy idea in some respect, in The Made in America Tax Plan.  Before we simply assume that the U.S. has decided to follow the OECD along the pathway of global tax reform, maybe we should ask why, and why now, and to what end?

First, we might focus on “Made in America”, rich with possible multiple meanings.   What is made in America?  The Plan?  Yes, but that is not the point.  What is made in America is what America could make in America but is not at the moment.  At the moment that industrial enterprise is carried on elsewhere.  That is the problem the U.S. is tackling, in its own fiscal interest.  There is no doubt about it. What is billed as a tax plan starts out this way:

“This report describes President Biden’s Made in America tax plan, the goal of which is to make American companies and workers more competitive by eliminating incentives to offshore investment, substantially reducing profit shifting, countering tax competition on corporate rates, and providing tax preferences for clean energy production.  Importantly, this tax plan would generate new funding for investments in infrastructure research, and support for manufacturing, fully paying for the investments in the American Jog Plan over a 15-year period and continuing to generate revenue on a permanent basis.”

The objective of the tax plan is to make “offshoring” income and the enterprise that generates is comparatively unattractive to U.S. domestic enterprise, and assuming that what is “offshore” – not just “intangibles” but ordinary “tangible” business too – becomes “onshore” to rely on enhanced tax revenue to fund various U.S.- centric fiscal objectives.  That is not a fault, but it is a reality of fiscal policy.  As earlier noted, what is “offshore” of the U.S. is “onshore” elsewhere else.  Its reclamation by the U.S. is conceivably a material shift away from enterprise carried on in countries that for their own purpose depend on it.

A question comes to mind about why the U.S. would be so ready to embrace equivalent minimum taxation elsewhere.  In the pursuit of good global fiscal conduct?  Is it fine if “U.S. enterprises” are carrying on their businesses “offshore” the U.S. as long as they are taxed to the same degree as they would be in the U.S.?   Ask this provocative question:  Is it just as good, given the plan’s objectives, for tax that could be paid in the U.S. to be paid to another country as long as there is no tax rate arbitrage?  And, in this vein substitute any country for the U.S.; the point is not different.  The question answers itself, doesn't it?  What prevents the dispersion of economic activity encourages its concentration somewhere, does it not?

What would happen to the benefit from restored, i.e., “onshored” U.S. enterprise in the U.S. national interest and the tax revenue that would go with it if it were equally fine that that tax would be collected to an equivalent degree elsewhere?  Is it fine, for this plan, that that tax revenue is elsewhere as long as tax systems do not abet a rate race to the bottom?  Customarily, countries accommodate each other’s income taxes, particularly generously for business income, by reducing tax to the extent of foreign tax levied directly or indirectly on their citizens and residents via some form of foreign tax recognition, i.e., a foreign tax credit.  In light of the opening words of the tax plan, is it likely that the U.S. will be satisfied with the equilibrium of global tax affairs as long as tax that would have been levied and collected in the U.S. is paid elsewhere, at the same rates, recognized by foreign tax credit?  Does that make financial sense as part of the plan?

Well, some indication of the answer to that question, possibly, is reflected in later comments in the plan that foreshadow levers to make earning income outside the U.S. unattractive including by limiting recognition of foreign tax claims even preemptively.  The Plan says, in the spirit of “the devil is in the detail”:

“The plan takes aim at offshoring through a series of reforms that reverse tax-based incentives for moving production overseas.  Perhaps the most consequential of these are fundamental changes to the GILTI regime introduced by the TCJA. The Made in America tax plan would eliminate the incentive to offshore tangible assets by ending the tax exemption for the first 10 percent return on foreign assets. It would also calculate the GILTI minimum tax on a per-country basis, ending the ability of multinationals to shield income in tax havens from U.S. taxes with taxes paid to higher tax countries. The plan would also increase the GILTI minimum tax to 21 percent (up to three-quarters of the proposed new 28 percent corporate tax rate, as opposed to the current one-half ratio). In addition to these reforms to GILTI, the plan would disallow deductions for the offshoring of production and put in place strong guardrails against corporate inversions. Overall, the stronger minimum tax regime would substantially reduce the current tax law’s preferences for foreign relative to domestic profits, creating a more level playing field between domestic and foreign activity.

The President’s plan would dramatically reduce the significant tax preferences for foreign investment relative to domestic investment that are embedded in both the current GILTI and FDII regimes, including a near-elimination of profit shifting.21 Past scholarship suggests that profit shifting costs the United States $100 billion annually (estimated in 2017, prior to the TCJA), or $60 billion at current rates, two-thirds of which is from the profit shifting of U.S. multinational companies.  Transitioning to a per country GILTI minimum tax is estimated by scorekeepers at both the Treasury Department and the Joint Committee on Taxation to raise more than $500 billion in revenue over a decade—beyond the current estimated corporate tax revenues generated from the poorly designed GILTI regime.

In parallel to these efforts to eliminate profit shifting by U.S. multinational companies, proposals to repeal and replace the Base Erosion and Anti-Abuse Tax (BEAT) would counter the profit shifting of foreign-headquartered multinational companies. All told, these proposals would bring well over $2 trillion in profits over the next decade back into the U.S. corporate tax base.”

The “fairness” that this tax plan seeks is not fairness for the world, though it may piggy-back on the OECD’s aspirations in this regard which may lack fiscal perspective or alternatively seek to impose an alternate global fiscal perspective possibly with limiting effects on countries' fiscal autonomy.  This is very much the U.S. asserting its fiscal interest through its fiscal policy according to its perspective of its interests and consequently of those of other countries in relation to it and its interests.  Too cynical?  I do not think so; responsible government are meant to act in their enlightened self-interest, which in a multilateral context means making self-interested trade-offs in favor of and in relation to the interests of other countries, where, using a financial mathematics metaphor, the rate and internal rate of return from investing foregone tax (tax conceded by foreign tax credit, for example) is higher in the national interest than alternative investments made by actually collecting the tax and deploying it domestically.

To test the direction of this, we might ask more questions.  Assuming that there is a global minimum tax, at least to that extent why would businesses maintain the status quo and pay it elsewhere, particularly if there would be limitations on recognition by way of reduced tax “at home”?  If the rates of tax among countries converge, what does that imply about the location of income generating activity?  If a minimum tax limits the attractiveness of “re”sourcing income from high to low tax jurisdictions through the private law “magic” that BEPS and the Pillars seek to counter, leaving that income back in more normative “high” tax, jurisdictions, why would businesses (that are not locked in place as for example natural resource businesses are) simply not relocate their operations “home” if they are to be equivalently taxed elsewhere and would possibly face more limited foreign tax recognition at “home”.  And, even so, between what may be the global minimum tax rate, currently talked about in the region of 12.5% (acknowledging that headline tax rates are not very meaningful) and a headline corporate tax rate at “home”, there is a lot of room to offer tax incentive at “home” that reduce the effective tax rate considerably before meeting up with the ostensible global minimum tax rate.

In other words, is a possible conclusion about the U.S.’s apparent change of pace to embrace initiatives in the spirit, at least, of those advocated by the OECD and the Inclusive Framework, a kind of “Trojan Horse” in the more general spirit of the Made in America Tax Plan to shift what is now “onshore” elsewhere to be “onshore” the U.S.’s shores?  And if so, is there really an impending convergence of countries’ interests in a global tax society which would be enabled by a global minimum tax championed by the U.S. in the spirit of the OECD’s aspirations?  Or, in other words, would we do well to think first about countries’ relative fiscal interests and ensuing industrial policy before we start measuring global tax co-operation and income source by “rates”?

Late in March, a prominent member of the U.S. tax advisory community and a former Assistant Treasury Secretary for Tax Policy, Pamela Olson, testified to the U.S. Senate Finance Committee.

Her testimony, given among others’ presentations, was entitled:  How US International Tax Policy Impacts American Workers, Jobs, and Investment  (also see here).

She says many interesting things, but there is an undeniable fiscal underpinning of her views in which she criticizes the ostensibly “rosy outlook”, Ms Olson says, of U.S. Treasury Secretary’s seeming willingness to embrace global tax fairness.  She says:

“The BEPS project was technically difficult. It required the identification of loopholes in and between national taxing regimes that allowed income to fall into gaps and one country’s tax system to be used to erode the tax base of another. It also required determining and agreeing on the best method of closing those loopholes and gaps. Although BEPS has had limited time to work, the anecdotal evidence suggests it has had (and continues to have) a significant effect on business operations that have been adjusted to satisfy BEPS’ substantive requirements.

Although technically difficult, BEPS was politically easy because it did not seek to reallocate companies’ global profits among countries, but rather to align corporate taxation with economic activity and ensure all profit was booked and taxed in the location of the economic activity. BEPS brought countries an expectation of increased tax revenue, not that they would be asked to reallocate global profits within their taxing jurisdiction to another country. This politically fraught question is exactly what Pillar 1 puts on the table.

Pillar 1 diverges from longstanding international tax rules and no discernible economic (or other) principle underlies it. It is true that technological advances permit a company to operate in a country without a physical presence, but borders open to trade have allowed market access for sales of products for decades, if not centuries. That has not led to countries in which sales are made requiring payment of income tax on a share of the product manufacturer’s global profits.

The Pillar 1 discussion would have an effect on US taxing rights that differs from any other country. Based on information PwC has gathered, over half of the global profits taxable by market countries under the Pillar 1 proposal are profits of US companies. It should not be a surprise then that the United States Treasury has been reticent about agreeing to Pillar 1. Rather than acknowledging the surrender of taxing jurisdiction the proposal asks of the United States, however, the OECD discussion has largely revolved around not whether, but how much of global profits to reallocate.

…

Perhaps most important, whatever the outcome of the OECD negotiations, other governments are going to act, and they will act in a manner they believe will foster the interest of workers, jobs, and investments in their countries, not in the United States.

…

The Committee’s focus on international tax policy’s effect on American workers, jobs, and investments is timely and proper. As the Committee considers tax policy changes, whether directly to the international provisions or to the provisions that determine the attractiveness of the United States as a place to invest and create jobs, it will be important to apply lessons from the past and understand how the actions of other governments will affect American workers, jobs, and investment. US policymakers do not operate in a political or economic vacuum.”

Ms. Olson does not confine her comments to Pillar One only, but equally subjects Pillar Two’s aspirations to equivalent critical doubt.

The inescapable point, however, is that she speaks as a knowledgeable tax thinker with the U.S.’s domestic fiscal interests in mind as they would be expressed in tax law and tax relations with other countries that also use taxation to translate and enable their objectives – in their self-interest reconciled from that perspective with the self-interests of others.  That is no different for any other countries.  It is another way of appreciating the point that Rodrik makes in the Globalization Paradox.  The significance of this is very much not limited to tax, as Rodrik and Shön observe and in a critical reading of the BEPS Action 11 Report even the OECD can be seen to realize.  It is a point Kingson articulates in illuminating the inter-nation transactional perception of tax.  It is an undercurrent of Ruth Mason’s doubt about the arm’s length standard not being a normative standard particularly in the competition and trade law context.  It reflects the realization that the core BEPS issue is the absence of a universal notion of the “source” of its income and the OECD’s implicit goal of imposing one by fiat. It cuts to meaning of “source” of income as the singularly thorny core of the international tax community’s present reckoning with tax jurisdiction in the Pillars in the face of intersecting national interests without common legal and tax systems.

 

Perspective Really Does Matter

In other words, as the title to this post reflects, perspective matters, notably fiscal perspective.  Put differently and in a way that many with global tax aspirations might find unpalatable, countries do in fact use their tax systems to enable their fiscal policy – and they will continue to do that. It is a way for each of its citizens to pay part of their share of collective consumption or to invest in a pool to generate higher economic returns than they could achieve on their own with their material financial hopes and goals in mind.  It is an outcome, noted earlier, that equally could be achieved by collecting tax, and then refunding or granting it in some manner for the same purpose served by tax attributes.  To be sure, this is not an endorsement of the "race to the bottom" thought to typify "tax competition".  But these epithets are not self-defining; nor are they meaningful without due attention to fiscal considerations including the resources at hand for accomplishing what any responsible country envisages for the  social and economic well-being of its citizens.  The U.S.’s aspirations are clear in the very much “made in” America tax plan. But understated or not, other countries have their own “made in” plans and in that regard have equivalent interests to pursue.  How likely are those interests served by tax policy politesse that allows production income to gravitate elsewhere as long as the destination rate is high enough?  That is a question worth asking.

 

A Sublime Metaphor – Different is not the Same

Back again to perspective.  One of Canada’s most justifiably celebrated tax thinkers is Robert Couzin.  Retired from tax practice, Dr. Couzin is now an independent art history scholar.  He recently published an insightful book on what seems to be the neglected subject of “handedness” and “position” in early Christian and Medieval Art (Robert Couzin, Right and Left in Early Christian and Medieval Art, Brill (2021)).  Couzin’s artistic awareness of perspective offers a metaphor for images, indeed self-images, in fiscal and tax “life”.

Very briefly, where others it seems have not, Couzin has noticed the symbolism of right and left handedness in images and more generally of right and left positioning of figures in images.  Not invariably but as Couzin has discovered notably and mostly, and mostly purposefully, the “right” is more closely identified with goodness and the divine than the left.  And a singularly important part of Couzin’s analysis is that perspective matters.  It matters so to be able to appreciate what one is “seeing” and to interpret its meaning – including because though occasionally by some misadventure or for other various reasons perspective may be inverted, usually its manifestation is deliberate and purposeful.

To risk descending into crassness, the “right” in tax terms is purposeful fiscal tax policy and the “left” is impugnable “tax avoidance”.

It seems fitting to notice this metaphor and to adopt Dr. Couzin’s more sublime but in an odd way presently apposite comments on “position”, thinking in the present of countries’ relative fiscal and tax positions in the community of nations.  Couzin writes:

“A third aspect of position, critically important in the analysis of medieval imagery, is that it requires from of reference. Right and left are not the same for differently situated observers.  Only if two individuals are facing in the same direction will their perspectives coincide. The relevance to visual representation is obvious.  “To the right” will have the same meaning for the viewer and a pictured protagonist if this figure is depicted from behind, but not otherwise.  When seen in full profile, its right and left point towards or away from the viewer.  The most significant case is the common circumstance where figures are fontal, or nearly so.  Here the perspectives of the observer and the observed are diametrically opposite.  What is to the right for the one is to the left for the other.”

“Right and left are not the same for differently situated observers. …  What is to the right for the one is to the left for the other.”  Fiscal and tax policy, and tax avoidance are not the same for differently situated country observers either.  What is fiscal and tax policy to the one is tax avoidance to the other. Possibly not sublime, but not ridiculous, as earlier tax references reflect.

Might some perspective on perspective be grounding, illuminating, instructive?

As in art so in life?

 

- Professor Scott Wilkie (Distinguished Professor of Practice, Osgoode Hall Law School)