Considering Citizenship Taxation : In Defense of FATCA

Inspired by Ruth Mason’s recent article, Citizenship Taxation, which reaches a general conclusion against citizenship taxation, this Article also questions citizen taxation under the same normative framework, but with a particular focus on efficiency and administrability, and takes a much less critical stance towards the merits of citizenship taxation. First, neither citizenship taxation nor residence-based taxation can completely account for the differences between residents’ and nonresidents’ ability to pay taxes under the fairness argument. Second, the efficiency argument, that citizenship taxation may distort both Americans’ and non-Americans’ citizenship decisions, is not convincing. The American citizenship renunciation rate is not particularly serious compared to other countries, and it is U.S. immigration law, not U.S. tax law, that should be blamed for obstructing highly skilled and educated immigrants. Third, despite enforcement difficulties abroad under the administrative argument, determining residence by considering all facts and circumstances in residence-based taxation would be worse than the bright-line citizenship criterion in citizenship taxation. After discussing the competing normative arguments on citizenship taxation, this Article aims to defend the administrability of citizenship taxation in conjunction with new reporting obligations. Individual taxpayers’ obligations to file Foreign Bank Account Reports (FBAR) or report under the Foreign Account Tax Compliance Act (FATCA) are not seriously onerous. The fact that citizenship taxation along with FBAR and FATCA enhances global transparency further supports the case for citizenship taxation

Tax Reporting as Regulation of Digital Financial Markets

FTX’s recent collapse highlights the overall instability that blockchain assets and digital financial markets face. While the use of blockchain technology and crypto assets is widely prevalent, the associated market is still largely unregulated, and the future of digital asset regulation is also unclear. The lack of clarity and regulation has led to public distrust and has called for more dedicated regulation of digital assets. Among those regulatory efforts, tax policy plays an important role. This Essay introduces comprehensive regulatory frameworks for blockchain-based assets that have been introduced globally and domestically, and it shows that tax reporting is the key element of those regulatory frameworks. Furthermore, this Essay argues that tax reporting and transparency requirements can significantly stabilize the digital financial market and provide additional funding for much-needed regulatory programs through increased tax compliance. Tax reporting requirements have been effective tools in traditional financial markets. By replicating such policies in the digital financial market, the market would significantly improve. These requirements would help combat money laundering and tax evasion. Also, reporting requirements that target both financial institutions and taxpayers would increase tax compliance and lower administrative burdens. The requirements also have the potential to generate revenue, which can fund additional regulatory developments. For these reasons, tax reporting requirements could be an important tool whose utilization would bring much needed stability to digital assets and the market

Brief of Amici Curiae Tax Law Professors

Professors Reuven S. Avi-Yonah, David Gamage, Orly Mazur, Young Ran (Christine) Kim, and Darien Shanske (collectively, “Tax Law Professors”) write this amici curiae brief in support of the Appellant in COMPTROLLER OF MARYLAND v. COMCAST — the Maryland Digital Advertising Case. Many digital transactions currently evade sales taxation in Maryland, even though the closest non-digital analogues are subject to tax. Specifically, digital advertising platforms like Respondents obtain vast quantities of individualized data from and on Marylanders in currently untaxed transactions. The scope and value of these transactions is vast and growing, as they allow advertising platforms the lucrative opportunity to sell advertisers precisely targeted, individualized, and verifiable digital access to Maryland residents. Maryland is the furthest along of at least ten states that have in recent years sought to address the substantial problem that much of the modern digital economy is untaxed as compared to traditional commerce, through taxing a proxy for the gap in consumption and building on work by economists seeking to reconcile our tax systems with digital advancements. Amici here address Respondents’ substantive claims under the Internet Tax Freedom Act (ITFA) and the dormant Commerce Clause. The Circuit Court decision from the bench was cursory, but its essence was that Maryland’s tax discriminates against electronic commerce in violation of the ITFA and against out-of-state businesses in violation of the dormant Commerce Clause. Both holdings were mistaken. As for alleged discrimination against electronic commerce, digital advertising has no meaningful parallel in the non-digital world. It is used differently, has a significantly different impact, and relies on a business model and fee structure that is deeply and fundamentally different from traditional advertising, the most comparable non-digital industry. It is thus not “similar” to any non-digital service for purposes of discrimination under the ITFA. Further, rather than seek to confer an advantage upon non-digital advertising at the expense of a digital counterpart, the state’s policy simply seeks to impose a consumption tax on currently untaxed transactions, unlike those transactions that take place in non-digital markets. As for the dormant Commerce Clause, Maryland’s tax passes muster because it applies only to revenue derived from digital advertising in Maryland. While the tax rate varies depending on a platform’s worldwide gross receipts, that is a reasonable tax practice comparable to progressive income taxes that similarly consider out-of-state income and have been held to be constitutional

Engineering Pass-Throughs in International Tax: The Case of Private Equity Funds

Fund investment, or indirect investment, does not entail entity-level taxation domestically, so investors enjoy “tax neutrality” between direct and indirect investments made within a country. In contrast, when investments are made across borders, tax neutrality cannot be guaranteed because current international tax regimes are built upon bilateral tax treaties and lack pass-through tax rules for multinational fund investment schemes. This may put investors in a worse tax position than had they invested directly. In response, investors have created many strategies to reduce tax liabilities internationally when investing indirectly. Sometimes those strategies enable investors to pay even less taxes than they would with a tax-neutral benchmark. Recognizing that systematic pass-through taxation more likely would achieve tax neutrality goals, the OECD, through its limited rule-making power, developed several proposals for pass-through treatment. Unfortunately, none of them have been effective, either because of too narrow implementation or because they supply bilateral solutions to a multilateral problem. As an alternative, this Article proposes an innovative multilateral approach in which both the source country and the residence country may look-through certain fund vehicles in intermediary countries and will collect tax as if the investment was made directly from the residence country to the source country. This Article further develops the proposal by demonstrating its feasibility for private equity funds (PEFs). PEFs offer unique opportunities to reform international pass-through taxation because they tend to have only a handful of high-profile investors who rarely change during the fund’s lifetime. Although information about PEF investors notoriously has been less available to tax authorities, new public and private databases as well as a newly enhanced system for the exchange of tax information make such information now more accessible to governments. Tax authorities will be able to obtain information on the considerably small and manageable number of investors behind PEFs and implement pass-through taxation to realize robust tax neutrality goals

Tax Reporting as Regulation of Digital Financial Markets

FTX’s recent collapse highlights the overall instability that blockchain assets and digital financial markets face. While the use of blockchain technology and crypto assets is widely prevalent, the associated market is still largely unregulated, and the future of digital asset regulation is also unclear. The lack of clarity and regulation has led to public distrust and has called for more dedicated regulation of digital assets. Among those regulatory efforts, tax policy plays an important role. This Essay introduces comprehensive regulatory frameworks for blockchain-based assets that have been introduced globally and domestically, and it shows that tax reporting is the key element of those regulatory frameworks. Furthermore, this Essay argues that tax reporting and transparency requirements can significantly stabilize the digital financial market and provide additional funding for much-needed regulatory programs through increased tax compliance. Tax reporting requirements have been effective tools in traditional financial markets. By replicating such policies in the digital financial market, the market would significantly improve. These requirements would help combat money laundering and tax evasion. Also, reporting requirements that target both financial institutions and taxpayers would increase tax compliance and lower administrative burdens. The requirements also have the potential to generate revenue, which can fund additional regulatory developments. For these reasons, tax reporting requirements could be an important tool whose utilization would bring much needed stability to digital assets and the market

State Digital Services Taxes: A Good and Permissible Idea (Despite What You Might Have Heard)

Tax systems have been struggling to adapt to the digitalization of the economy. At the center of the struggles is taxing digital platforms, such as Google or Facebook. These immensely profitable firms have a business model that gives away “free” services, such as searching the web. The service is not really free; it is paid for by having the users watch ads and tender data. Traditional tax systems are not designed to tax such barter transactions, leaving a gap in taxation. One response, pioneered in Europe, has been the creation of a wholly new tax to target digital platforms: the Digital Services Tax (DST). Though controversial, ten states have entertained imposing a DST, and Maryland actually did so. Maryland’s tax was immediately challenged, with the strongest argument against the tax being that it is preempted by the Internet Tax Freedom Act. There is considerable consensus that Maryland’s tax is in serious trouble, and a judge in Maryland recently found it preempted and unconstitutional. We contend that this decision and this consensus is wrong and that states should not abandon a promising solution to a set of pressing problems. A DST is a tax on consumption from the barter side of platforms that is not currently taxed. With this policy goal in mind, the main legal objections to DSTs appear much weaker because those claims rely on the notion that the tax is discriminatory against internet activity. In fact, there is no discrimination; DSTs are just a different tax used to capture untaxed digital purchases in response to different business models. We further offer other normative arguments for DSTs, including that they tax digital platforms that enjoy supranormal returns. Finally, we respond to policy objections as to potential tax pyramiding, regressive tax incidence, administrative difficulties, and the use of sales tax and corporate income tax instead of imposing DSTs

Insulation by Separation: When Dual-Class Stock Met Corporate Spin-offs

The recent rise of shareholder engagement has revamped companies' corporate governance structures so as to empower shareholder rights and to constrain managerial opportunism. The general trend notwithstanding, this Article uncovers corporate spin-off transactions-which divide a single company into two or more companies-as a unique mechanism that insulates the management from shareholder intervention. In a spin-off the company's managers can fundamentally change the governance arrangements of the new spun-off company without being subject to monitoring mechanisms, such as shareholder approval or market check. Furthermore, most spin-off transactions enjoy tax benefits. The potential agency problems associated with the managers' unilateral governance changes can be further compounded when the managers adopt multiple classes of common stock with unequal voting rights (dual-class stock) in the new spun-off company without shareholder approval. This is the first Article to systematically examine the problem from both corporate and tax law perspectives and to offer possible solutions. The Article argues that when the managers' unilateral governance changes are substantial, certain adjustments to corporate and tax laws may be necessary to curb managerial opportunism. For instance, under corporate law, when spin-off transactions accompany a charter amendment, shareholder approval, either at the state law level or company charter level, can be mandated. In addition, tax law can revisit the "continuity of interest" requirement to evaluate whether material changes in shareholder voting rights can disqualify certain spin-offs from tax-free treatment. The Article will also present new insights into the long-standing debate on dual-class stock by showing how the perceived risk of dual-class stock can be magnified when combined with spin-off transactions

State Digital Services Taxes: A Good and Permissible Idea (Despite What You Might Have Heard)

Tax systems have been struggling to adapt to the digitalization of the economy. At the center of the struggles is taxing digital platforms, such as Google or Facebook. These immensely profitable firms have a business model that gives away “free” services, such as searching the web. The service is not really free; it is paid for by having the users watch ads and tender data. Traditional tax systems are not designed to tax such barter transactions, leaving a gap in taxation. One response, pioneered in Europe, has been the creation of a wholly new tax to target digital platforms: the Digital Services Tax (DST). Though controversial, ten states have entertained imposing a DST, and Maryland actually did so. Maryland’s tax was immediately challenged, with the strongest argument against the tax being that it is preempted by the Internet Tax Freedom Act. There is considerable consensus that Maryland’s tax is in serious trouble, and a judge in Maryland recently found it preempted and unconstitutional. We contend that this decision and this consensus is wrong and that states should not abandon a promising solution to a set of pressing problems. A DST is a tax on consumption from the barter side of platforms that is not currently taxed. With this policy goal in mind, the main legal objections to DSTs appear much weaker because those claims rely on the notion that the tax is discriminatory against internet activity. In fact, there is no discrimination; DSTs are just a different tax used to capture untaxed digital purchases in response to different business models. We further offer other normative arguments for DSTs, including that they tax digital platforms that enjoy supranormal returns. Finally, we respond to policy objections as to potential tax pyramiding, regressive tax incidence, administrative difficulties, and the use of sales tax and corporate income tax instead of imposing DSTs

Tax Harmony: The Promise and Pitfalls of the Global Minimum Tax

The rise of globalization has become a double-edged sword for countries seeking to implement a beneficial tax policy. On one hand, there are increased opportunities for attracting foreign capital and the benefits that increased jobs and tax revenue brings to a society. However, there is also much more tax competition among countries to attract foreign capital and investment. As tax competition has grown, effective corporate tax rates have continued to be cut, creating a “race-to-the-bottom” issue. In 2021, 137 countries forming the OECD/G20 Inclusive Framework on BEPS passed a major milestone in reforming international tax by successfully introducing the framework of a global minimum corporate tax, known as Pillar Two. It aims to set a floor for corporate tax rates with various corrective measures so that multinational enterprises’ income will be taxed once in either source country or residence country at a substantive tax rate. Hence, Pillar Two is the first implementation of the “single tax principle” at the global level. Because Pillar Two requires an unprecedented amount of coordination among countries, it is important to understand Pillar Two thoroughly so that countries can maneuver the challenges of implementation, while still enjoying the ultimate benefit that would come from this global tax harmony. This Article analyzes the issues of tax competition and why most countries in the world have come to the conclusion that a global minimum tax is needed. This Article explains the single tax principle as the theoretical underpinning of Pillar Two, breaks down the principles and policies that comprise Pillar Two, and anticipates what promise and pitfalls passage of the global minimum tax will bring. Because the basis of Pillar Two is a direct extension of the Global Intangible Low Tax Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) provisions of the Tax Cuts and Jobs Act, it is reasonable to anticipate that the global minimum tax will be considered a success if it is implemented by all the G20 countries