The Other Eighty Percent: Private Investment Funds, International Tax Avoidance, and Tax-Exempt Investors

The taxation of private equity managers’ share of funds’ profits—the twenty percent “carried interest”—received much attention in academic literature and popular discourse. Much has been said and written about the fact that fund managers’ profits are taxed at preferred rates. But what about the other eighty percent of funds’ profits? This Article theorizes that the bulk of such profits are never taxed. This is a result of a combination of three factors: First, private equity, venture capital, and hedge funds (collectively, Private Investment Funds, or “PIFs”) are major actors in cross-border investment activity. This enables PIFs to take advantage of international taxation planning schemes not available in a purely domestic context. Second, PIFs are aggressive tax-planners. The Article summarizes some existing evidence that suggests that PIFcontrolled multinational enterprises (“MNEs”) are more likely to engage in aggressive international tax behavior when compared with MNEs that are not PIF-controlled. The result is that PIF-controlled entities are uniquely situated to avoid tax at the source jurisdiction. Lastly, PIFs are dominated by tax-exempt investors. This enables PIF profits, which escaped source taxation, to also escape taxation at the jurisdiction of residence. The result is that most private equity gains from cross-border investment activity are taxed nowhere. The Article concludes, therefore, that PIF-controlled entities should be a target of international tax policy making. However, such policymaking must be grounded in better understanding of PIFs’ international tax behavior. This is a difficult task, since PIF operations are rarely subject to public disclosure requirements. The Article proposes opening PIF international tax planning to public scrutiny through a revision of the country-by-country reporting (CBCR) standards adopted under Action 13 of the BEPS Project. It is hoped that information garnered from such increased reporting will assist in developing anti-tax-avoidance policies that are better targeted at PIF-controlled MNEs

Home-Country Effects of Corporate Inversions

This Article develops a framework for the study of the unique effects of corporate inversions (meaning, a change in corporate residence for tax purposes) in the jurisdictions from which corporations invert (“home jurisdictions”). Currently, empirical literature on corporate inversions overstates its policy implications. It is frequently argued that in response to an uncompetitive tax environment, corporations may relocate their headquarters for tax purposes, which, in turn, may result in the loss of positive economic attributes in the home jurisdiction (such as capital expenditures, research and development activity, and high-quality jobs). The association of tax-residence relocation with the dislocation of meaningful economic attributes, however, is not empirically supported and is theoretically tenuous. The Article uses case studies to fill this gap. Based on observed factors, the Article develops grounded propositions that may describe the meaningful effects of inversions in home jurisdictions. The case studies suggest that whether tax-relocation is associated with the dislocation of meaningful economic attributes is a highly contextualized question. It seems, however, that inversions are more likely to be associated with dislocation of meaningful attributes when non-tax factors support the decision to invert. This suggests that policymakers should be able to draft tax-residence rules that exert non-tax costs on corporate locational decisions in order to prevent tax-motivated inversions

Unilateral Responses to Tax Treaty Abuse: A Functional Approach

In recent years, there has been a dramatic increase in the attention given to abusive tax schemes that take advantage of bilateral tax treaties. The ensuing discourse tends to view potential responses to treaty abuses as a hierarchical set of options, gradually escalating, in which treaty termination is a last resort option. This article argues that the hierarchical view of unilateral responses to treaty abuse is misguided. Unilateral responses to treaty-based abuse are not hierarchically ordered. Rather, the approach to treaty abuse is (and should be) functional, adopting specific types of unilateral responses based on the type of treaty abuse at issue. This article develops a taxonomy of tax-treaty abuses based on two factors: a geographical breadth of abuse and a substantive breadth of abuse. The geographical breadth of abuse refers to whether there is only one or a few treaties being abused, or whether there are many treaties that are consistently abused. The second factor—namely, the substantive breath of abuse—considers whether there are only one or two provisions consistently being abused, or whether the treaty as a whole is used as an instrument of abuse. Based on the geographical and substantive breadth of abuse, different unilateral responses are called for. For example, treaty termination should not be viewed as a “last resort” measure. Sometimes it is simply a first-best (if not the only) solution. Specifically, if the abuse is geographically narrow (meaning, only one treaty is abused), but substantively broad (meaning, the treaty as a whole is primarily used for abusive purposes), a treaty should be terminated. In such context, termination is the most cost-effective way to solve the abuse problem. On the other hand, termination might be an irrelevant response in other instances, for example, when multiple treaties are narrowly abused. In such cases, a treaty override is the correct policy response

Home-Country Effects of Corporate Inversions

This Article develops a framework for the study of the unique effects of corporate inversions (meaning, a change in corporate residence for tax purposes) in the jurisdictions from which corporations invert (“home jurisdictions”). Currently, empirical literature on corporate inversions overstates its policy implications. It is frequently argued that in response to an uncompetitive tax environment, corporations may relocate their headquarters for tax purposes, which, in turn, may result in the loss of positive economic attributes in the home jurisdiction (such as capital expenditures, research and development activity, and high-quality jobs). The association of tax-residence relocation with the dislocation of meaningful economic attributes, however, is not empirically supported and is theoretically tenuous. The Article uses case studies to fill this gap. Based on observed factors, the Article develops grounded propositions that may describe the meaningful effects of inversions in home jurisdictions. The case studies suggest that whether tax-relocation is associated with the dislocation of meaningful economic attributes is a highly contextualized question. It seems, however, that inversions are more likely to be associated with dislocation of meaningful attributes when non-tax factors support the decision to invert. This suggests that policymakers should be able to draft tax-residence rules that exert non-tax costs on corporate locational decisions in order to prevent tax-motivated inversions

Blockchain Havens and the Need for Their Internationally-Coordinated Regulation

This Article describes the rise of a new form of regulatory havens. Jurisdictions that have traditionally been characterized as “tax havens” are gradually becoming hubs for blockchain-based ventures. These jurisdictions attract blockchain entrepreneurs by offering refuge from regulatory and tax burdens imposed by developed economies. These new “Blockchain Havens” create a regulatory “race to the bottom” that is traditionally associated with the world of international tax evasion and avoidance. Over the past several years, developed economies have put to use—mostly through coordinated efforts—several regulatory frameworks aimed to address some of the negative effects of tax havens. These regulatory instruments are aimed against the haven jurisdictions themselves, or the private institutions operating in such jurisdictions. However, this Article argues that the unique nature of blockchain-based technology—most importantly, decentralization and temper resistance—makes such traditional anti-tax haven policies ineffective in the blockchain context. This Article argues that coordinated international regulatory policies must be quickly developed to address certain important aspects of blockchain technology. Such coordination is necessary to prevent an uncontrolled regulatory race to the bottom, while at the same time preserving the benefits of blockchain-based applications

Blockchain Havens and the Need for Their Internationally-Coordinated Regulation

This paper describes the rise of a new form of regulatory havens. Jurisdictions that have traditionally been characterized as “tax havens” are gradually becoming hubs for blockchain-based ventures. These jurisdictions attract blockchain entrepreneurs by offering refuge from regulatory and tax burdens imposed by developed economies. These new “Blockchain Havens” create a regulatory “race to the bottom” that is traditionally associated with the world of international tax evasion and avoidance. Over the past several years, developed economies have put to use—mostly through coordinated efforts—several regulatory frameworks aimed to address some of the negative effects of tax havens. These regulatory instruments are aimed against the haven jurisdictions themselves, or the private institutions operating in such jurisdictions. However, this paper argues that the unique nature of blockchain-based technology—most importantly, decentralization and temper resistance—makes such traditional anti-tax haven policies ineffective in the blockchain context. This paper argues that coordinated international regulatory policies must be quickly developed to address certain important aspects of blockchain technology. Such coordination is necessary to prevent an uncontrolled regulatory race to the bottom, while at the same time preserving the benefits of blockchain-based applications

Taxing Data

The Article offers a new theory of tax on data collection and transmission as a primary source of government revenue. This tax does not depend on the monetary value of data. This data tax can supplement, and in some instances replace, income taxes. The data tax can (1) mitigate some of the failures of income taxes in a globalized data based economy, and (2) serve to alleviate some of the externalities of a data based economy. The Article advances the following four arguments. First, current challenges to tax systems stem largely from the fact that traditional models of taxation were designed for an economy in which the location of labor, the ownership of capital, and the monetary value of income were identifiable. These assumptions no longer stand in the modern economic environment: the data economy. Today, one the most significant sources of value creation is the analysis, manipulation, and utilization of large quantities of dispersed data. In so called data-rich markets, source, ownership, and value are not only hard to identify — they are not always economically meaningful concepts. Second, current responses to the tax challenges of the digital economy constitute — for the most part — efforts to identify proxies for the location in which monetary profits are created, or to identify the owners of such profits. The results are attempts to keep taxing the economic components of income (consumption and savings). Instead, this Article posits that one must look again at the normative goals of taxation, and question whether taxes on savings and consumption are still the best functional instruments to achieves such goals. The Article argues they are not. Income tax is only theoretically justifiable where it is the best proxy for ability to pay. In a data economy, monetary income is not necessarily the best instrument to measure ability to pay. Third, to address such challenges, the Article offers a framework of tax on data collection and transmission. The tax does not depend on the monetary value of such data. Data ta x is a suitable instrument to achieve the primary normative purposes of taxation. Moreover, tax on data can alleviate some of the challenges that the data economy presents to democratic institutions. Fourth, data tax can be designed to be fair, efficient, and administrable. The Article offers various possible tax instrument designs in which data (rather than savings or consumption) is the tax base

Home-Country Effects of Corporate Inversions

This Article develops a framework for the study of the unique effects of corporate inversions (meaning, a change in corporate residence for tax purposes) in the jurisdictions from which corporations invert ( home jurisdictions ). Currently, empirical literature on corporate inversions overstates its policy implications. It is frequently argued that in response to an uncompetitive tax environment, corporations may relocate their headquarters for tax purposes, which, in turn, may result in the loss of positive economic attributes in the home jurisdiction (such as capital expenditures, research and development activity, and high-quality jobs). The association of tax-residence relocation with the dislocation of meaningful economic attributes, however, is not empirically supported and is theoretically tenuous. The Article uses case studies to fill this gap. Based on observed factors, the Article develops grounded propositions that may describe the meaningful effects of inversions in home jurisdictions. The case studies suggest that whether tax-relocation is associated with the dislocation of meaningful economic attributes is a highly contextualized question. It seems, however, that inversions are more likely to be associated with dislocation of meaningful attributes when non-tax factors support the decision to invert. This suggests that policymakers should be able to draft tax-residence rules that exert non-tax costs on corporate locational decisions in order to prevent tax-motivated inversions