Paul L. Caron

Friday, September 24, 2021

Weekly SSRN Tax Article Review And Roundup: Kim Reviews Has Cross-Border Arbitrage Met Its Match? By Mason & Saint-Amans

This week, Young Ran (Christine) Kim (Utah; Google Scholar) reviews a new work by Ruth Mason (Virginia; Google Scholar) and Pascal Saint-Amans (OECD), Has Cross-Border Arbitrage Met Its Match?, in Thinker, Teacher, Traveler: Reimagining International Tax. Essays in Honor of H. David Rosenbloom (Georg Kofler, Ruth Mason & Alexander Rust, eds., IBFD 2021), reprinted in the 41 Va. Tax Rev. 1 (2021).


Earlier this month, a group of international tax lawyers and policymakers got together to celebrate H. David Rosenbloom (Caplin & Drysdale, NYU)'s 80th birthday. The group spent two years secretly creating a Festschrift honoring Rosenbloom. The Festschrift is titled " Thinker, Teacher, Traveler: Reimagining International Tax. Essays in Honor of H. David Rosenbloom," edited by Georg Kofler (WU), Ruth Mason (Virginia), and Alexander Rust (WU) (IBFD 2021). Mason and Pascal Saint-Amans (OECD) contributed a chapter to the Festschrift titled, Has Cross-Border Arbitrage Met Its Match?, reprinted in the 41 Va. Tax Rev. 1 (2021). In their essay, Mason and Saint-Amans reviewed Rosenbloom’s criticisms of regulatory responses to international tax arbitrage, the academic response to those criticisms, and subsequent international cooperative efforts to curb international tax arbitrage. This review introduces their essay.

Rosenbloom, in his famous Tillinghast Lecture at New York University in 1998, characterized international tax arbitrage as "the deliberate exploitation of differences in national tax systems. (Recently, the term "mismatches" is more often used to describe arbitrage.) To Rosenbloom, international tax arbitrage is an inevitable by-product of independent tax policymaking by sovereign states. Thus, preventing arbitrage "is not and should not be a first-rank policy objective of the United States." Rosenbloom also identified line-drawing problems related to distinguishing impermissible arbitrage from permissible tax planning. Rosenbloom considered "international income" and the "international tax system" to be imaginary, rejected Reuven Avi-Yonah (Michigan)'s single-tax principle, and thus, argued that there was no principled objection to arbitrage.

I believe that Rosenbloom intended his somewhat provocative critique of the concept of arbitrage to be a steppingstone towards a certain argument. The argument being, if arbitrage raised a legitimate policy concern, then that concern had yet to be clearly identified. Academics responded to Rosenbloom’s critique by clarifying the policy concerns raised by international tax arbitrage. For example, Avi-Yonah sought to explain the normative basis of the single tax principle (see here). Adam Rosenzweig (WashU, article available here) and Diane Ring (Boston College, article available here) argued that international tax arbitrage raised equity concerns because not everyone could benefit from it. Daniel Shaviro (NYU, article available here), Mitchell Kane (NYU, article available here), Ring, and Rosenzweig highlighted the efficiency concerns raised by arbitrage, arguing that arbitrage could cause various behavioral responses of taxpayers, such as substituting cross-border transactions for domestic one and distorting the choice of location.

Finally, some commentators were concerned about the interaction effect that could arise from policy responses. Shaviro pointed out that a unilateral response may cause retaliation by other countries. Kane developed a model involving zero-sum tax competition among states seeking to attract capital and argued that a state might exploit the ambiguity of mismatches to win this competition without instigating retaliatory responses. Omri Marin (UC Irvine)'s study of the LuxLeaks rulings showed a real-world example of this model. Until national legislators and the European Commission began to uncover the Luxembourg's secret ruling practice, other states did not retaliate because they simply did not know about them.

In addition to the academic discourse, countries also clarified their thoughts about arbitrage as a threat to revenue. Rosenbloom pushed back on this notion, arguing that as long as the taxpayer complies with each national tax regime, no one country has cause to complain about revenue loss. Rosenbloom rejected the conception of hypothetical, collective income or revenue that could have been available had arbitrage not existed. However, member jurisdictions of the Base Erosion and Profit Shifting (BEPS) Inclusive Framework confirmed their position that "[a]lthough it is often difficult to determine which of countries involved has lost tax revenue, it is clear that collectively the countries concerned lose tax revenue."

The ensuing history of international tax arbitrage is well known. In recent years, many countries have been more willing to cooperate and harmonize underlying tax rules to resolve mismatches, as shown in the G20/OECD BEPS Project. This is contrary to Rosenbloom's preferred solution for arbitrage, which is doing nothing. However, it is also true that substantive harmonization was unlikely to be successful as a comprehensive solution to arbitrage because all types of states would be reluctant to either defer to other states' underlying rules or agree on a common set of rules. Instead, states could, and have, pursued conditional rules (see, e.g., Mason’s article). As an example of conditional rules, penalty defaults may be set up in tax law and treaties if states do not resolve tax ambiguities against the taxpayer. Rules that deny tax-treaty benefits to fiscally transparent entities could be understood as penalty defaults. Another conditional rule is fiscal fail-safes, which attempt to ensure that cross-border income does not escape tax by identifying "conditions under which, if one country does not tax, another country fills the tax void." Controlled foreign company (CFC) regimes, BEPS anti-hybrid rules, and the GLoBE proposal for a global minimum tax are examples of fiscal fail-safes. Although not extensively harmonious, the examples reflect a new willingness of states to coordinate their efforts to address tax arbitrage in a more comprehensive way. Many examples are the results of the OECD's BEPS projects, which could not have been achieved without Saint-Amans’ leadership as the Director of the Center for Tax Policy and Administration at the OECD.     

However, Rosenbloom's critique still resonates with commentators in the next generation, such as Leopoldo Parada (Leeds, article available here), because it reminds us of an axiom of international tax—that is, the sovereign supremacy. In response, Mason and Saint-Amans first illustrate areas other than tax policy, such as trade law, where countries regularly compromise important domestic regulatory interests to promote other policy goals, such as the free flow of trade. Mason and Saint-Amans conclude that what we observe these days in global tax policy—that is, more willingness of states to coordinate—is analogous and would be a middle-ground solution to the two extremes of doing nothing or substantive harmonization. The essay not only shows the historical development of international tax scholarship and policy in the past two decades but also proves Rosenbloom's influence on the journey. Rosenbloom has always been excellent in taking a provocative position to clarify the issues, fueling the momentum for the agenda.  

90 contributors around the world, including many names mentioned in this review and yours truly, have contributed 52 chapters discussing various hot topics in international tax. Mason and Saint-Amans' essay is an example. The complete list of essays is available here. Also, NYU School of Law presents a dedicated website for the Festschrift, where you can check out amazing anecdotes about Rosenbloom. Rosenbloom is a critical thinker as a scholar, a sympathetic and capable mentor to his students, a knowledgeable teacher when he is in the expert witness stand, and a curious and energetic traveler all over the world. Kudos to the authors of the essays, editors of the book, Rosenbloom's family, and NYU in making the Festschrift project successful. The Festschrift is available to order here.

Here’s the rest of this week’s SSRN Tax Roundup:

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