No, You Really Don't Have to Pay: Protecting Tax Havens

• Jurisdiction: United States,Federal,European Union
• Citation: Vol. 46 No. 3
• Publication year: 2018
• topic: Corporate / Commercial,Tax Law

NO, YOU REALLY DON'T HAVE TO PAY: PROTECTING TAX HAVENS

Max Mathew Wallace II^*

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Table of Contents

I. Introduction...............................................................................810

II. Factual BACKGRoUND................................................................812

III. Legal Background.....................................................................815

IV. Analysis.......................................................................................820

V. Conclusion..................................................................................824

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I. Introduction

The old adage "the only two certainties in life are death and taxes" is certainly true for most of the population.¹ From prince to pauper, every man must eventually pay his due to two entities: the Grim Reaper and the IRS. Corporations, however, fare better than the rest of us in this regard; they have many of the same legal rights as flesh and blood humans with the added benefit of not having to be concerned with mortality.² Ironically, this means that taxes are in some ways more certain even than death. This has in no way discouraged corporations from attempting to evade the only remaining inevitability of their existence. Even corporations that have not managed to entirely avoid taxes have been largely successful in limiting their exposure.³ Similarly, rather than trying to increase their tax revenue, many nations have deliberately lowered their tax rate in order to motivate foreign businesses to bring them jobs and increased capital.⁴ Perhaps no country has been more successful at enticing corporations with attractive tax benefits than Ireland.⁵ However, the competition between nations for lucrative transnational investments can easily breed resentment, and nations unwilling to offer such beneficial terms to foreign investors feel that their more open-handed counterparts are engaging in unfair competition.⁶ This produces significant

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complications, most notably in the European union (Eu). While each member state maintains its sovereignty, there is also a supranational body, the European Commission, that ensures that members do not engage in unfair commercial practices.⁷ This does not necessarily mean that countries offering low tax rates to multinational corporations are in violation of their obligations within the European community. Realistically, however, this is often the result as companies frequently negotiate agreements with individual corporations that extend to them a reduction on the country's already low corporate tax rate.⁸

When confronted with potential unfair taxation, the European Commission can attempt to rectify a competitive imbalance by requiring that the nation that gave a company preferential tax treatment reassess the company's taxes to appropriate rates.⁹ Because it is primarily American corporations that are lured into making off-shore investments in nations with beneficial tax structures, tax reassessments pose significant challenges to the U.S. government.¹⁰

The united States then has to address the problem of having some of its largest and most well-known multinational corporations face staggering amounts of newly assessed back-taxes.¹¹ The most obvious concern is addressing backlash from the private sector for what it perceives as an unfair revision of an agreement with a foreign government. However, the united States has a more direct concern than quelling corporate anger over an increased tax bill. An increase in the amount of taxes paid by a corporation to foreign nations will reduce the amount of taxes payable to the IRS once the funds reach U.S. shores.¹² This represents a rather novel problem: a country is compelled to collect taxes from a corporation at the expense of the corporation's home country, which directly loses its own tax revenue as a result. This therefore presents the question that this note will answer: What

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avenues, if any, are available to the united States, under domestic and international law, in order to retaliate against a perceived unjust taxation of American corporations?

Commentators have noted an obscure portion of the U.S. Internal Revenue Code (IRC) that would allow the President to unilaterally double the taxes assessed on corporations that originate from any nation subjecting U.S. companies to discriminatory taxation.¹³ However, this provision of the code has never been exercised, and its current status in light of modern American jurisprudence and the international treaty obligations of the united States is uncertain.¹⁴ Current scholarship focuses almost exclusively on how tax policy relates to trade policy and does not contemplate the legality of a specific provision of domestic law being used in retaliation for taxes being reassessed by a supranational body.¹⁵

Setting aside the political feasibility of any increase in U.S. taxes assessed against foreign corporations, this Note will evaluate the legal feasibility of the use of § 891 of the IRC as a retaliatory measure to increase taxes assessed by the European Commission against multinational corporations based in the united States. First, this Note will explore the background that has given rise to this legal issue. Next, it will assess the likelihood of domestic legal complications arising as a result of the use of an antiquated statute. This Note will then examine any relevant international legal ramifications of such use, including the bilateral tax treaties that the united States maintains with individual EU member states, as well as the obligations it bears as a member of the World Trade organization (WTO) and the organization for Economic Cooperation and Development (OECD).¹⁶

II. Factual Background

Over the past few years, Ireland has become an increasingly attractive tax haven for multinational corporations. Taking into account only its nominal corporate tax rate, Ireland is one of the most attractive investment locations in Europe.¹⁷ This has precipitated a severe backlash from multiple nations,

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most notably France and Germany, who championed a failed attempt to establish a common European union corporation tax rate.¹⁸ Failing to enact change through other avenues, the European community turned to the European Commission which accelerated their investigation into a number of American companies residing in various European states including Luxembourg and the Netherlands.¹⁹

In June of 2014, the European Commission turned its attention to Ireland and initiated an investigation into the tax treatment the nation had extended to Apple, specifically focusing on the decision of Irish courts to grant Apple tax rates well below one percent.²⁰ For its part, Ireland insists that its conduct was in keeping with standards set by the European Commission.²¹ Ultimately, the European Commission assessed a fine of over $14 billion to be placed on Ireland for violating EC standards, with some estimates putting the final amount as high as $19 billion.²²

The decision generated controversy for multiple reasons. On a broad level, this decision of the European Commission raised issues of sovereignty because it directly contravened a clear ruling by a national court on a traditionally domestic legal matter.²³ More specifically, Ireland and the united States objected to the decision on two grounds. First, they contended the European Commission departed from precedent in determining that Apple's tax agreement constituted impermissible state aid, and they alleged that the shift in standards was grounded in political motivations rather than

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an unbiased application of tax policy.²⁴ Second, from a policy standpoint, the ruling would detract from Ireland's attractiveness to businesses and U.S. tax revenues.²⁵

The united States has thus far been unsuccessful in attempting to dissuade the European Commission from imposing these increased taxes through normal diplomatic channels.²⁶ At the time of writing, the ruling is currently pending appeal, but should it stand, would represent a considerable shift in the international tax system that would be detrimental to both the united States and tax haven countries.²⁷

The united States does not possess the right to intervene directly in the appeal of the European Commission's fine on Apple. It is an interested party, but it is not being ordered to assess back taxes on any corporations. Therefore, it is appropriate to examine possible domestic avenues that would allow the federal government to exert pressure in defense of American corporations. Section 891 of the IRC appears to present the most direct way to allow the united States to implement retaliatory taxation.²⁸

Section 891 provides that "[w]henever the President finds that, under the laws of any foreign country, citizens or corporations of the united States are being subjected to discriminatory . . . taxes, the President shall so proclaim and the rates of tax . . . shall . . . be doubled in the case of each citizen and corporation of such foreign country. . . ."²⁹ On its face, the law appears to

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give complete discretion to the President in regards to determining what constitutes discriminatory taxation and when such discrimination calls for the imposition of retaliatory measures.³⁰ The implementation of retaliation to that degree would certainly carry significant political implications.³¹ Nevertheless, the language relating to discriminatory taxation in § 891 certainly appears to map roughly to the recent language espoused by the Treasury Department.³²

III. Legal Background

Before investigating the implications of this tax provision in a domestic and international context, it is necessary to briefly discuss the international legal tax structure. For purposes of this Note, three key areas are particularly relevant: bilateral tax treaties establishing basic principles of taxation between two nations, OECD measures adopted via consensus to ensure fairness...