Tuesday, April 28, 2015

Fei, Hines, Horwitz on PILOTs as Property Taxes for Nonprofits

Interesting new paper on PILOTs: "payments in lieu of taxes" that some municipalities request of otherwise tax-exempt orgs. At a recent talk I did at Notre Dame on the topic of taxation and human rights, I explored the dual "social contribution" budgets that highly visible/profitable multinationals often have in impoverished places--the tax budget (that ends up appearing quite small in many cases) and the Corporate Social Responsibility or "CSR" budget (the fees some companies pay to build infrastructure or schools or provide basic services as a matter of "good corporate citizenship"). I brought up Starbucks' dealings with HMRC in response to charges of tax dodging as a rarely-seen tax-like-but-not-quite-tax arising in a developed country, and wondered aloud whether we ought to consider this kind of CSR outlay as in the nature of a tax, or not. One of the audience members suggested that the Starbucks payment or a CSR budget seems analogous to PILOTs, so it's worth taking a look at them. Good idea. I'll add this paper to the reading list. Here's the abstract:
Nonprofit charitable organizations are exempt from most taxes, including local property taxes, but U.S. cities and towns increasingly request that nonprofits make payments in lieu of taxes (known as PILOTs). Strictly speaking, PILOTs are voluntary, though nonprofits may feel pressure to make them, particularly in high-tax communities. Evidence from Massachusetts indicates that PILOT rates, measured as ratios of PILOTs to the value of local tax-exempt property, are higher in towns with higher property tax rates: a one percent higher property tax rate is associated with a 0.2 percent higher PILOT rate. PILOTs appear to discourage nonprofit activity: a one percent higher PILOT rate is associated with 0.8 percent reduced real property ownership by local nonprofits, 0.2 percent reduced total assets, and 0.2 percent lower revenues of local nonprofits. These patterns are consistent with voluntary PILOTs acting in a manner similar to low-rate, compulsory real estate taxes.

Monday, April 13, 2015

Upcoming event on Delivering Tax Benefits through the Tax System

On April 24, the American Tax Policy Institute is live-streaming an all-day conference "Delivering Benefits to Low-Income Taxpayers through the Tax System."  The conference is organized by Les Book, Villanova University School of Law and Deena Ackerman, U.S. Department of Treasury.  

You can view the program and also register to attend the conference in person here.  

Beginning at 8:45 a.m. (EST) on April 24, you can view the livestream conference webcast

I will be presenting on panel 4, "The International Approach to Delivering Benefits Through the Tax System." 

One focus of this panel is a comparative approach to the delivery of benefits (US/UK/Australia), but I plan to focus on the international implications of the US approach to delivering benefits through the tax code from the perspective of a specific group of “end users” whose financial situations would make them eligible for benefits delivery but who are nevertheless systematically denied these benefits. 

This group is the globally dispersed population of “US persons” who are deemed to be permanently resident in the United States for tax compliance and financial reporting purposes but are not so deemed for purposes of benefits delivered through the tax code, notably, the earned income tax credit. 

The premise I am studying: The inclusion of all US persons in the tax base regardless of domicile, juxtaposed with the blanket denial of eligibility for income support based solely on domicile, reveals the manifest injustice of citizenship-based taxation. I'll examine three inter-related rights-based claims in support of this premise. First, dispersed geographically and without a unified voice in Congress, the diaspora is inevitably denied effective civil and political rights in the design of the US tax system. Second, subject to the most complex aspects of the U.S. tax code regardless of any activity in the United States, and facing extraordinary compliance costs and disclosure risks even for nil returns, this group is effectively denied the administrative rights articulated in the taxpayer bill of rights. Finally, this group is systematically denied income support accorded to similarly situated taxpayers, in contravention of any normative policy. 

These are ideas in progress, so I really look forward to having the opportunity to work through them a little further by participating in this event.

Thursday, April 2, 2015

Kadet on Transfer pricing vs Formulary Apportionment: How About the Profit Split Method?

Jeff Kadet has a new article at Tax Analysts [gated] entitled Expansion of the Profit-Split Method: The Wave of the Future, in which he discusses the so-called transactional profit split method of transfer pricing, which could be quite a lot more like formulary apportionment than it is like transfer pricing. Recall that the OECD really does not want countries to switch to formulary apportionment, even if that might end up being more effective at producing revenue at less administrative cost. But the profit split method might offer a way out, with a little tweaking. Here is the abstract:
Recognizing the reality that multinational corporations are centrally managed and not groups of entities that operate independently of one another, the OECD base erosion and profit-shifting project is considering expanded use of the profit-split method. This article provides background on why expanded use of the profit-split method is sorely needed. In particular, resource-constrained tax authorities in many countries are unable to administer or intelligently analyze and contest transfer pricing results presented by multinational groups. Most importantly, this article suggests a simplified profit-split approach using set concrete and objective allocation keys for commonly used business models that should be welcomed by multinational groups and tax authorities alike.
And here are a few excerpts:
December 2014 saw the OECD issuing several base erosion and profit-shifting discussion drafts, one of which was titled "BEPS Action 10: Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains" .... 
Despite all the continuing rhetoric about how arm's-length pricing and the separate entity principle are sacrosanct, there are compelling reasons why the OECD BEPS project has focused on the possible expanded use of the profit-split method, a method that clearly flies in the face of these icons. ... 
[A] combination of factors has strongly motivated the highly successful tax structures that have significantly lowered the effective tax rates of multinational corporations (MNCs) and eroded the tax bases of many countries. The existence of these factors means that some of the transfer pricing methods are a part of the problem; they are not a part of a solution. These factors include ... [t]he Separate Entity Principle ... Fragmentation ... Respect of Related-Party Contracts ... The Arm's-Length Standard... the Inability to Effectively Audit MNC Transfer Pricing ... [and other issues].
...Paragraph 2.108 of the OECD transfer pricing guidelines gives a concise statement of what the profit-split method is. It states:

The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate . . .) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the "combined profits"). . . . It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. 
Additional guidance in the existing guidelines (paragraphs 2.132ff) makes clear that the criteria or allocation keys on which the combined profits are split should be "independent of transfer pricing policy formulation." Hence, these criteria and allocation keys "should be based on objective data (e.g. sales to independent parties), not on data relating to the remuneration of controlled transactions (e.g. sales to associated enterprises)." Paragraph 2.135 makes this objective basis clear by stating: 
In practice, allocation keys based on assets/capital (operating assets, fixed assets, intangible assets, capital employed) or costs (relative spending and/or investment in key areas such as research and development, engineering, marketing) are often used. Other allocation keys based for instance on incremental sales, headcounts (number of individuals involved in the key functions that generate value to the transaction), time spent by a certain group of employees if there is a strong correlation between the time spent and the creation of the combined profits, number of servers, data storage, floor area of retail points, etc. may be appropriate depending on the facts and circumstances of the transactions. 
Further discussion in the guidelines provides various approaches to splitting the combined profits among the relevant group members. While these approaches are not detailed here, the point is that the approaches that were set out and discussed require a facts and circumstances case-by-case analysis before they can be implemented.
Kadet suggests that this facts & circumstances approach should be shelved in favour of developing a detailed set of objective allocation keys tailored specific types of business, and that for these businesses, the profit split method ought to be presumptive.  In other words, profit split is another word for apportionment; some types of businesses are so integrated that apportionment is the best way to allocate profits to the right jurisdiction; what is needed is a formulaic approach that tax administrations can administer. He notes:
The application of such rules should result in a reduction in complex BEPS-motivated structures since all combined profits will be spread among the group members that actually conduct activities with little or none left within low-taxed group members that do not conduct economic activity and thereby contribute little if anything to value creation. In sum, a simplified and standardized approach for each common business model will provide significant benefits as well as give results that are fair to MNCs and all relevant governments.
 He then goes on to provide a couple of examples taken from the DD10, one involving an internet service provider and the other featuring a manufacturer of R&D-intensive products. In the former, allocation keys include location of customers and workers; in the latter, they include location of customers and key workers (weighted at 25% each) and location of manufacturing operations (weighted at 50%). This is a fairly detailed discussion and well worth reading in full. I'll be interested to see how this idea develops.