Friday, February 11, 2022
Weekly SSRN Tax Article Review And Roundup: Roberts Reviews Love's Measuring The Flow Of Partnership Income To Tax Havens
This week, Tracey Roberts (Cumberland; Google Scholar) reviews a new work by Michael Love (Berkeley), Where in the World Does Partnership Income Go? Evidence of a Growing Use of Tax Havens.
In 2016, in The Hidden Wealth of Nations, UC Berkeley Associate Professor of Economics Gabriel Zucman quantified the amount of the world’s assets held in tax havens, clarified the ways large-scale tax evasion undermined global markets, and explained the connection between tax evasion and financial, budgetary and democratic crises occurring throughout the world. He argued that tax evasion can be stopped, but only if we have statistics to measure it, if we implement policies and penalties to address it, and if we monitor our progress. In his recent research, Michael Love has made important progress in measuring the flow of partnership income to tax havens and monitoring the effects of the Foreign Account Tax Compliance Act (FATCA) in improving reporting and compliance by U.S. investors.
While a number of scholars, including Ed Kleinbard, have catalogued efforts to exploit gaps and mismatches between different countries' tax systems, and others, such as Kim Clausing, have quantified the tax base erosion effects of profit-shifting by multinational corporations, Love’s article is the first to trace empirically the flows of partnership income to tax havens. U.S. partnerships and most foreign partnerships with U.S. source income or income from U.S. trades or businesses are required to file an information return for the partnership (Form 1065) and for each partner (Schedule K-1) that reflects each partner's distributive share of partnership income, gain, loss, deduction and credit. Love builds on the prior work of Michael Cooper, with the U.S. Department of Treasury, to match data from partnership information returns to other federal tax and information returns using masked Taxpayer Identification Numbers (TINs) for the period from 2009 to 2019. He also developed algorithms to infer, from the non-identifying information on the K-1, whether the partner is an individual or a business entity and the type of entity, whether the partner is domestic or foreign, and the country of the partner’s address. Error testing suggests that the inferences are extremely accurate. Together these techniques allow Love to describe the recipients of over 99% of the partnership income flows by type, U.S. domestic or foreign status, and country.
Love concludes that the amount of partnership income flowing to foreign investors between 2011 and 2019 is 17%, twice the level of previous estimates. Most of this income, $1.2 trillion (approximately 10% of all income flowing to owners of partnerships), is flowing to tax havens. Most of the income flows to “zero corporate tax” jurisdictions, such as the Cayman Islands ($500 billion), the British Virgin Islands, and Channel Islands ($240 billion). Other low-tax jurisdictions, such as the Netherlands and Switzerland, that help move profits from low and zero-tax jurisdictions back to larger economies, account for $250 billion in partnership income for this period. Finally, jurisdictions whose main distinction is their secrecy have received $180 billion. While most of this income was generated in the United States, very little of it has been subject to U.S. tax.
Love’s research also confirms that the expansion of reporting and withholding requirements in 2010 under FATCA have been effective In boosting reporting of income and reducing tax evasion by U.S. investors. FATCA imposed new reporting requirements for “foreign financial institutions,” which includes banks, broker-dealers, retirement fund custodians, and investment, private equity and venture capital funds, on pain of a 30% withholding tax on a range of payments. Love indicates that FATCA has been effective not only in improving information on outbound flows and foreign financial assets, but in increasing the likelihood that tax authorities may identify when taxpayers are underreporting their incomes. He also confirms that new rules on the taxation of dividend equivalent payments, under IRC §871(m), have prompted a sharp increase in reporting and a reduction in the use of swap agreements to trade U.S. dividends that are subject to tax, for foreign payments that are not subject to tax.
Love finds that financial investment firms are driving these flows. Investment firms use partnerships to allocate different types of income to different partners and corporate blocker entities to limit reporting requirements, to shield foreign investors from the estate tax, and to shield tax-exempt entities from unrelated business taxable income. The firms also structure investments to generate the types of passive income that can avoid U.S. withholding on outbound flows.
Love argues that more empirical research and policy analysis are needed to determine whether the appropriate response would be to terminate the tax exclusions that make these tax haven arrangements possible, such as the trading safe harbor and the portfolio interest exemption. These provisions were enacted with the goal of encouraging foreign investments within the U.S. While the rules may reduce borrowing costs for American households, businesses, and government and provide capital for new enterprise, they have also facilitated the shift of tax burdens to American taxpayers.
Love’s research also adds to the body of evidence that, at this stage, the financial sector is not so much creating value as extracting value. In The Value of Everything, University College London Professor of Economics Mariana Mazzucato details several pathways by which the financial sector has been engaged in rent-seeking rather than value creation: (i) through high charges relative to risk (which is largely borne by U.S. taxpayers), (ii) through the exercise of monopoly power (via patent extensions among other things), and (iii) through the insertion of a transaction cost wedge between those who receive finance and those who provide it. To that list we should probably add facilitation of tax avoidance and evasion that generate deadweight loss to the economy and increase burdens for American taxpayers.
Here’s the rest of this week’s SSRN Tax Roundup:
- Sumit Agarwal (Singapore), Pulak Ghosh (IIMB Bangalore), Jian Zhang (Hong Kong), Tax Policy Transmission and Household Expenditures (Feb. 4, 2022)
- Chima Arubike and Marian Asuenimhen, Changing 'Gross Emolument' to 'Gross Income': Personal Income Tax Charge and Administration Issues, Working Paper Series (Feb. 7, 2022)
- Reuven S. Avi-Yonah, (Michigan), The International Tax Regime at 100: Reflections on the OECD's BEPS Project, U of Michigan Law & Econ Research Paper No. 21-020 (Oct. 14, 2021)
- Reuven S. Avi-Yonah (Michigan), International Tax Law - Status Quo, Trends and Perspectives, U of Michigan Law & Econ Research Paper No. 21-019 (Oct. 14, 2021)
- Matteo Borrotti (Milano-Bicocca), Michele Rabasco (Milano-Bicocca), and Alessandro Santoro (Milano-Bicocca), Using Accounting Information to Predict Aggressive Tax Placement Decisions by European Groups, University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 488 (Feb. 2, 2022)
- David Cade, Reimagining Section 94.1: The Offshore Investment Fund Property Rule, 69 Canadian Tax Journal/Revue fiscale canadienne 1099 (2021)
- Maria Coehlo, Brazil: Tax Expenditure Rationalization within Broader Tax Reform, IMF Working Paper No. 2021/240
- Antonio De Vito (IE University) and Martin Jacob (WHU), The Role of Creditor Protection in Lending and Tax Avoidance, TRR 266 Accounting for Transparency Working Paper Series No. 74 (Feb 10, 2022)
- Maarten Floris de Wilde (Erasmus), International Company Tax Developments and Some Reflections on Ways Forward for the African Continent, Working Paper Series (Feb. 9, 2022)
- Scott Dyreng (Duke) and Robert Hills (Penn State), Foreign Earnings Repatriations and Domestic Employment (Feb. 4, 2022)
- Gideon Ezu (Nnamdi Azikiwe) and Sarah Elechi Jeff-Anyeneh (Nnamdi Azikiwe), Effect of Indirect Taxation on Economic Development of Nigeria, International Journal of Trend in Scientific Research and Development (IJTSRD) (Jan. 26, 2021)
- Heather M. Field (UC Hastings), How the Pandemic Flipped My Perspective on Flipping the Tax Law Classroom, Pittsburgh Tax Review (Forthcoming 2022)
- Stefanie Geringer (Vienna), Implications of the OECD MTC Commentary’s Dynamic Interpretation in ECJ Case Law: The OECD as EU Legislator?, in The Power to Tax in Europe (Anders Hultqvist and Johan Lindholm eds., Hart Publishing, Oxford, Forthcoming) (Jan 30, 2022)
- Rory Gillis (Western), Rethinking the Division of Tax Room and Revenue in Fiscal Federalism (Jan. 26, 2022)
- Philip Hackney (Pittsburgh), Written Testimony of Philip Hackney for the Hearing on Donor Disclosure and Campaign Finance Regulations: Reviewing Recent Legal Precedents, Pennsylvania House of Representatives, State Government Committee, Pittsburgh Legal Studies Research Paper No. 2022-07 (Feb. 7, 2022)
- Jan Hájek (Finance and Admin) Cecilia Olexová (Economics -Bratislava), Comparing Personal Income Tax Gap in the Czech Republic and the Slovak Republic, 69 Politicka ekonomie _ (2021)
- Daniel J. Hemel (Chicago) and Robert Lord (Americans for Tax Fairness), Revitalizing the Generation-Skipping Transfer Tax
- Caitlin Hird (Harvard) and Keith Fogg (Harvard), Pro Se Precedent in the U.S. Tax Court: A Case for Amicus Briefs, Working Paper Series (Feb. 4, 2022)
- Saurabh Jain (Jindal Global), Redrafting Process of the Income Tax Legislation in South Africa and India and Lessons from New Zealand, the United Kingdom and Australia, 27 New Zealand Journal of Taxation Law and Policy 195 (2021)
- Tarun Jain, Canadian Supreme Court decision in Alta Energy Luxembourg: Critical reflections for Indian General Anti-Avoidance Rules, Income Tax Reports, (2022) 440 ITR (Journal) 1-31 (Feb. 9, 2022)
- Tarun Jain and Surabhi Chandra, Changing Contours of Permanent Establishment Under Indian Law: Recent Trends Compel Revisit to Business Models (Jan 28, 2022)
- Nafis Kartiko (BINUS) and Ismi Fathia Rachmi (BINUS), Fintech Lending Tax Planning Strategy Based On Indonesian Taxation Rules (Jan. 27, 2022)
- Lilla Nóra Kiss (George Mason), Lex Facebook or Tax Facebook? Options Beyond the Self-Regulation of IT Companies (Jan. 26, 2022)
- Savvas Kostikidis (Max Planck) and Paul Hintermayer (Max Planck), European Union – On the Validity and Scope of Macro-Coherence, Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2022-01 (Feb. 8, 2022)
- Michael Kumhof (CEPR), T. Nicolaus Tideman (Virginia Polytechnic), Michael Hudson (Missouri - Kansas City), and Charles Goodhart (LSE), Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes onto Land, CEPR Discussion Papers 2021 (Nov. 3, 2021)
- Amélie Lachapelle (Namur), And thus Tax Whistleblowing was born! Comment on the Directive on whistleblowers in Tax Matters, Tijdschrift voor Fiscaal Recht (Nov. 18, 2021)
- Yvette Lind (Copenhagen), A Critical Analysis of How Formal and Informal Citizenships Influence Justice between Mobile Taxpayers, in Tax Justice and Tax Law: Understanding Unfairness in Tax Systems, 117 (Dominic de Cogan and Peter Harris, eds. 2020)
- Nicholas Lusiani (Roosevelt Inst.), Pandemic Profiteers Exposed: A COVID-19 Pandemic Profits Tax as One Essential Tool to Reverse Inequalities and Rebuild Better Post-Pandemic, Oxfam America
- Joel Nitikman, Equitable Rescission of Contracts for Mistake in Canada After Great Peace: Whither Solle v. Butcher?, 69 Canadian Tax Journal/Revue fiscale canadienne 1027 (2021)
- Steven Payson and Gavin Clarkson, An Economic Analysis of the Effects of State Taxes on Infrastructure Development and Economic Growth in Tribal Nations (Nov. 18, 2021)
- Katherine Pratt (Loyola - LA), The Underappreciated Benefits of Distance Law Teaching, Los Angeles Legal Studies Research Paper No. 2021-31
- Sofia Ranchordas (Groningen) and Luisa Scarcella (Antwerp), Automated Government for Vulnerable Citizens: Intermediating Rights (Feb 4, 2021)
- Kerrie Sadiq (Queensland Tech) and Richard Krever (Western Australia), The Rise and Fall of Australia’s Offshore Banking Concessions, 104 Tax Notes International 909 (2021)
- Dhruv Sanghavi, Concentrix: A Critical Review of the Delhi High Court's Ruling On the Interpretation of the India-Netherlands Tax Treaty, 104 Tax Notes International __ (Nov. 29, 2021)
- Wolfgang Schoen (Max Planck), The Role of 'Commercial Reasons' and 'Economic Reality' in the 'Principle Purpose Test' under Art.29(9) OECD Model Tax Convention 2017, Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2022-03 (Feb. 9, 2022)
- Alpa Shah, Natural Resource Taxation in Mexico: Some Considerations, IMF Working Paper No. 2021/245 (Feb. 4, 2022)
- Stephen E. Shay (Boston College), Comment on International Tax Reform Framework Discussion Draft by Senate Committee on Finance Chair Ron Wyden and Senators Sherrod Brown and Mark Warner (Sept. 7, 2021)
- Clint Wallace (South Carolina), Democracy Avoidance in Tax Lawmaking (Sept. 10, 2021)
- Wendong Zhang (Iowa State), The Tax Implications of the American Families Plan on Iowa Farmland Owners (Nov. 18, 2021)