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Monday, April 2, 2012

Atax 10th International Tax Administration Conference

AtaxThe Australian School of Taxation & Business Law hosts the 10th International Tax Administration Conference today in Syndey, Australia.  U.S. participants include:

In the past two years, the US has unilaterally adopted two, very controversial transparency initiatives:

  • FATCA -- Imposes a 30% withholding tax on a foreign financial institution (FFI) that desires to access the US financial market unless the FFI agrees to report information about its US customers.
  • Schedule UTP -- Requires large corporations to disclose uncertain tax positions (UTPs) for which a tax reserve has been recorded in audited financial statements.

While a senior US government tax official, the author was heavily involved in developing both FATCA and Schedule UTP. The primary purpose of this article is to discuss certain of the global considerations of these two ground-breaking initiatives. For example: Does the US need multilateral action to accomplish its goals with respect to either FATCA or Schedule UTP, and if so, what form might such action take? The paper concludes the following:

  • The US likely needs multilateral action to successfully implement FATCA, but it does not for Schedule UTP.
  • Foreign countries would benefit greatly from using the US’s leverage to effectively force financial institutions to join a multilateral FATCA system. The US would benefit from reducing the number of viable investment options available to US tax cheats.
  • A successful multilateral FATCA system could incorporate multiple design features. For example, it could accommodate both a reporting and withholding model. However, if this option is selected, a “punitive withholding model” should be adopted that has a relatively high tax rate and applies to both investment income and new money. The failure to apply withholding tax to new money is a major deficiency of the recent withholding agreements between Switzerland and the UK/Germany.
  • Schedule UTP requires a corporation to link a tax reserve with a specific tax issue. If tax reserves are recorded on an aggregate basis, the link between a tax reserve and a specific tax issue may be more difficult to establish. This issue had been resolved by FIN 48 in US GAAP, but it still exists for IFRS. Fortunately, there is a solution.

Any reliable evaluation of tax risk, whether from the perspective of the tax administrator, the taxpayer, or the tax practitioner, requires a fair degree of consistency both in how the government adopts regulations and other pronouncements interpreting the tax laws and also in how the courts evaluate disagreements between taxpayers and the government.  After years of ignoring changes in administrative law doctrine, judicial review of tax administration efforts in the United States is undergoing a period of transition as a result of three recent cases. 

Early in 2011, in Mayo Foundation for Medical Education and Research v. United States, the United States Supreme Court held that general authority Treasury regulations promulgated using the public notice and comment procedures imposed by the Administrative Procedure Act (APA) are eligible for the highly deferential standard of judicial review articulated in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.  A few months later, in Cohen v. United States, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit), sitting en banc, reached a series of conclusions regarding the interaction of the Internal Revenue Code (IRC) and the APA that allowed a taxpayer challenge to the procedural validity of an IRS Notice to proceed on the merits irrespective of IRC limitations on the justiciability of taxpayer claims.  Finally, the Supreme Court will soon reach a decision in United States v. Home Concrete & Supply, LLC, which questions the substantive and procedural validity of a Treasury regulation promulgated in the midst of and in reaction to litigation, using procedures that arguably violate the APA. 

Collectively, these cases have tremendous potential to alter both judicial review of Department of Treasury (Treasury) and Internal Revenue Service (IRS) interpretations of the U.S. tax laws and also the procedures that Treasury and the IRS utilize in promulgating tax regulations and rulings.  Indeed, the IRS has already modified Internal Revenue Manual provisions governing its employees in response to the Mayo decision.  To be reliable, efforts to assess and manage tax risk in the United States will need to take into account these changes, as well as some of the legal uncertainties that these three cases create.  To that end, the purpose of this essay is to summarize the Mayo, Cohen, and Home Concrete cases and consider their implications for U.S. tax administration and for tax professionals seeking to assess tax risk in the midst of the questions these cases raise.

  • Nina Olson (National Taxpayer Advocate, IRS), Plenary Address

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