Weekly SSRN Tax Article Review And Roundup: Elkins Reviews International Response To The U.S. Tax Haven By Noked & Marcone

This week, David Elkins (Netanya, visiting NYU 2021-2023; Google Scholar) reviews Noam Noked (Chinese University of Hong Kong (CUHK); Google Scholar) & Zachary Marcone (CUHK), International Response to the U.S. Tax Haven, 48 Yale J. Int’l L. ___ (2022):

The term “tax haven” tends to evoke images of sparsely populated Caribbean islands with pristine beaches and whose most important industry is the registration of corporations. Alternatively, it may bring to mind countries such as Switzerland or Luxembourg, whose banking laws have traditionally provided for strict secrecy, enabling wealthy individuals to shield their capital and income from the prying eyes of their home countries’ tax authorities.

Wherever they may be and whatever function they serve, tax havens have been the subject of intense scrutiny and criticism in recent years. The United States has been particularly active in this regard. One of the primary tools in its arsenal is the Foreign Account Tax Compliance Act (FATCA) that prohibits foreign financial institutions from aiding and abetting tax evasion by U.S. persons. Foreign financial institutions that run afoul of these regulations are subject to stiff penalties (even, it may be noted, when abiding by the regulations would constitute a violation of local law).

It is therefore ironic, argue Professors Noked and Marcone, that one of the most notorious tax havens today is none other than the United States itself. While it demands that foreign financial institutions cooperate by divulging the identities of U.S. account holders, it has been steadfastly unwilling to reciprocate by requiring U.S. financial institutions to divulge the identities of foreign account holders. Further solidifying its status as a tax haven, the United States does not ordinarily tax nonresident aliens, foreign corporations, and foreign trusts on interest paid by U.S. corporations or on gain from the sale of U.S. stocks and securities.

According to the OECD, the common characteristics of tax havens are that they generally have zero or nominal tax rates; no obligation to exchange information; a lack of transparency in the operation of the legislative, legal, or administrative provisions; no need for a substantial local presence; a relaxed regulatory framework; and a solid business infrastructure. The authors argue that the United States possesses all of these attributes. Furthermore, they point out, relevant actors in the U.S. financial industry highlight these advantages in their promotional literature, seminars, and websites.

Eyeing the U.S. FATCA regime, the OECD has attempted to follow suit by developing the Common Reporting Standard (CRS), a multinational tax standard for automatic exchange of financial account information. CRS has been adopted by over 100 countries. The most prominent holdout is, not surprisingly, the United States. In recommending against adoption of the CRS, the General Accounting Office noted the additional costs that CRS would impose on U.S. financial institutions and the fact that the United States would not benefit from its implementation because it already receives all of the information that it needs via FATCA. Unstated but perhaps just as significant is the concern that adoption of CRS would drive away offshore funds that currently exploit the lack of transparency.

The most noteworthy attempt at forcing the United States to adopt a reciprocal information exchange program was a 2018 threat by the EU, which maintains a list of non-cooperative jurisdictions, to blacklist the United States if it did not comply by June 2019. The Unites States did not comply and the EU quietly backed down.

Against this background, the authors consider what the rest of the world could do to force cooperation by U.S. financial institutions. As demonstrated by the EU example, it appears that international pressure on the United States is unlikely to succeed. Therefore, they propose that CRS-compliant nations take another page out the FATCA playbook and operate against U.S. financial institutions directly, without attempting to involve the U.S. government. U.S. financial institutions that fail to comply with CRS requirements could be subject to sanctions, the most significant of which would be withholding. The authors delineate the form that such a regime could take, its goals, and some of the measures that it might institute to achieve those goals. They also speculate on the possible reaction of the United States.

At a time when the international tax regime is undergoing its first major overhaul in a century and when international cooperation in the prevention of tax avoidance and tax evasion is a stated policy goal, this article makes an important contribution to the discourse.

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

• E.J. Aronmwan (Benin) & O.O. Igbinoba (Benin), Corporate Social Responsibility and Corporate Tax Planning: Does CSR/tax payment Orientation matter?, 4 Int’l J. Intell. Discourse 120 (2021)
• Opeyemi Bello (Knightview), Nigeria’s 2021 Finance Act and the Digital Tax Framework: Another Attempt to Boil the Ocean, AfronomicsLAW (Feb. 1, 2022)
• Joshua D. Blank (UC Irvine) & Ari D. Glogower (Ohio State), The Tax Information Gap at the Top, __ Iowa L. Rev. __ (2023)
• Michael James Boland (Cork), The OECD Global Corporate Tax Deal: What It Is, What It Will Do, and Why It’s Good, Cork Online L. Rev. __ (2022)
• Carly Burd (Boston University), Elisa Casi-Eberhard (Norwegian School of Economics) & Petro Lisowsky (Boston University), Does the Story Matter? Financial Statement Numbers into Context using XBRL Data (2022)
• Allison Christians (McGill), Policy Forum: Cross-Border and Multijurisdictional Issues in Carbon Taxation – Carbon Pricing and the Income Tax, 70 Can. Tax J. 97 (2022)
• Andrew Granato (Yale), A Matter of High Interest: How a Quiet Change to an Actuarial Assumption Turbocharges the Life Insurance Tax Shelter, 29 Conn. Ins. L.J. __ (2022)
• Philip Hackney (Pittsburgh), Written Testimony of Philip Hackney for the Hearing on Laws and Enforcement Governing the Political Activity of Tax-Exempt Entities (U.S. Senate Finance Committee Subcommittee on Taxation and IRS Oversight, May 4, 2022)
• Melissa Belle Isle (Griffith), Brett Freudenberg (Griffith) & Tapa Sarker (Griffith), The Business of Tax Literacy of Australian Small Business, (2022) Australian Tax F. 37
• Tatrun Jain (Supreme Court of India), To Appeal or not to Appeal? Curious Case of Anti-Dumping Duty not Levied, SCC Online Blog (2022)
• Emina Jerković (Strossmayer), Reducing the Tax Compliance Gap by Improving Tax Administration (2021)
• Lyla Latif (Nairobi), FinTech led Tax Justice: Redistribution Using Zakat for the Socio-Economic Improvement of Women, 4 Kardan J. Soc. Sci. & Human. 44 (2021)
• Peiwei Lyu (Bath), Paul Baker (Bath) & Pietro Perotti (Bath), Does Tax Avoidance Impair Corporate Comparability? (2022)
• Emma Ndiyo (IOLA), Tax War in Nigeria: Likely Implications of A.G. of Rivers State v Firs (2021)
• Felix P. Niggemann, Mandatory Book-Tax Conformity and its Effects on Earnings Management and Tax Avoidance (2022)
• Jose Albino Nogueira, Tax Sustainability and Transparency – The Role of Tax Disclosures as an Arbitrator for Tax Avoidance (2022)
• Amanda Parsons (Columbia), Cryptocurrency, Legibility, and Taxation (2022)
• Jeffrey Pennell (Emory) & Reid K. Weisbord (Rutgers), Trust Alteration and the Dead Hand Paradox, __ ACTEC L.J. __ (2023)
• Richard Romp (Connecticut), Re-Evaluating Turnover/Gross Receipts Taxes: Their Myths and Their Realities, 40 J. State Tax. __ (2022)
• Tulio Rosembuj, Tax Complexity and the Return of the State. A Tribute to Pierre Bourdieu (2022)
• Jay A. Soled (Rutgers) & Kathleen DeLaney Thomas (UNC), AI, Taxation, and Valuation, __ Iowa L. Rev. __ (2023)
• Yan Xu (New South Wales), The Destination Principle in International Trade in Services: The Chinese Experience, Virtues and Fallacies of VAT: An Evaluation after 50 Years __ (Robert F. van Brederode, ed., 2021)