canadian tax journal / revue fiscale canadienne (2016) 64:3, 683 - 703
Current Tax Reading
Co-Editors: Robin Boadway, Jinyan Li, and
Alan Macnaughton*
Kenneth J. Klassen, Auditing the Auditors: Tax Auditors’ Assessments and
Incentives, C.D. Howe Institute Commentary no. 234 (Toronto: C.D. Howe
Institute, April 2016), 10 pages
One of the metrics used by the Canada Revenue Agency (CRA) to measure the quality of its work is the extra tax assessed as a result of audits; if this increases from year
to year, the CRA’s work is considered to have improved. However, in this paper
Kenneth Klassen argues that this is a flawed measure because the taxpayer may challenge the assessment of extra tax, either by going through the CRA’s Appeals division
or by launching an action in the courts, and ultimately the assessment may not be
supported. Hence, an apparent increase in the quality of audits from one year to the
next may simply reflect auditors’ choosing to be more aggressive and issuing assessments on flimsy grounds. Klassen therefore recommends replacing the CRA’s current
measure with a measure based on the extra tax that is determined to be owing after
all taxpayer appeals have been exhausted. Klassen is careful to note that this is one
of many measures used by the CRA to assess the quality of its work, so it is important
not to exaggerate any concerns associated with a particular measure.
The choice of a metric to measure the quality of audits may seem to be an exercise
of interest only to policy makers and public service managers, and of no relevance
to tax practitioners. After all, the CRA explicitly states that the measure of extra tax
assessed is not used to assess individual auditors. However, Klassen argues that the
use of a metric for any group, even one as large as the CRA’s audit unit, can become
an implicit incentive for individual employees. For example, auditors may believe
that making their actions consistent with organizational goals will increase their
chance of promotion. Thus, the CRA’s portrayal of a constant year-over-year increase in extra tax assessed as an organizational goal could ultimately lead to both
higher reassessments and more reassessments that may be found to be unjustified.
* Robin Boadway is of the Department of Economics, Queen’s University, Kingston, Ontario.
Jinyan Li is of Osgoode Hall Law School, York University, Toronto. Alan Macnaughton is of
the School of Accounting and Finance, University of Waterloo. Other contributors of reviews
in this issue are Almos Tassonyi, executive director and fellow of the Urban Policy Program,
School of Public Policy, University of Calgary; and Michael Motala, a JD candidate at
Osgoode Hall Law School, York University. The initials below each review identify the author
of the review.
 683
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Given the slow pace of the appeals process, Klassen’s proposed replacement
metric—tax owing after all appeals have been exhausted—also appears to be flawed,
in that the metric for a particular year may not be determined for several years
subsequent to the time of the original audits. Thus, it remains to be seen whether
Klassen has proposed a measure that could be practically implemented.
A.M.
Michael Littlewood, Using New Zealand as a Tax Haven: How Is It Done?
Could It Be Stopped? Should It Be Stopped? Working Paper no. 1 of 2016
(Auckland: University of Auckland, Law School, April 2016), 18 pages
(papers.ssrn.com/sol3/papers.cfm?abstract_id=2761993)
In this paper, Michael Littlewood discusses why New Zealand is a tax haven and
answers the questions posed in the title. The paper exposes the naked truth that
every country can be a tax haven and many “reputable” countries are in fact tax
havens.
According to Littlewood, non-residents of New Zealand can use the country as a
tax haven because the structure of the NZ tax system allows them to do so. Specifically,
non-residents can use trusts established in New Zealand to avoid taxes that they
would otherwise have to pay in their home country. For example, a person resident in
Portugal who owns a forest in Indonesia can channel the income from that property
through a trust established in New Zealand that has an NZ resident as trustee. To the
extent that the income is accumulated in the trust, there is no tax in New Zealand
because, under sections CW 54 and HC 26(1) of the Income Tax Act 2007, the trust
is not taxable on its foreign-source income if the settlor is not resident in New
Zealand. Further, the trustees are not required to provide much information to the
NZ government, so that even if there is a treaty obligation to exchange information,
there is little that will be of use to tax authorities in the settlor’s home country.
What is the policy behind sections CW 54 and HC 26(1) of the Income Tax Act
2007? In terms of tax policy, the income does not belong to New Zealand’s tax base
if it is derived from a foreign country and the beneficial owner of the trust is a nonresident. The exemption “costs the New Zealand government nothing.”1 In terms
of economic activities, the provision of tax-haven services by accountants, lawyers,
and other advisers contributes between NZ $25 million and NZ $50 million per year
to New Zealand’s economy. “The rumour among tax advisers is that the industry is
about the same as the avocado export industry.”2 So, in the short run, New Zealand
seems to benefit from functioning as a tax haven.
1 At 9.
2 At 3.
current tax reading  n  685
Should New Zealand stop being a tax haven? Littlewood suggests that it may not
be in New Zealand’s national interest to allow the country to be used as a tax haven.
The main reason is that New Zealand benefits from behaving as a responsible member of the international community of nations. If it allows itself to be used as a tax
haven, it will alienate the countries whose taxes are being avoided and its reputation
as a responsible member of the international community will suffer. The label of
“tax haven” can be “disreputable and stigmatising.”3 This is particularly true when
the NZ government chooses to portray the country as a reputable member of the
international community and denies that New Zealand is a tax haven.
If New Zealand wants to be a responsible member of the international community, it can simply repeal sections CW 54 and HC 26(1) of the Income Tax Act 2007,
or it can beef up the disclosure requirements and be prepared to share information
with other countries.
J.L.
Bret N. Bogenschneider and Ruth Heilmeier, “Google’s ‘Alphabet Soup’ in
Delaware” (2016) 16:1 Houston Business and Tax Law Journal 1-43
This article examines the tax-avoidance aspect of Google’s Alphabet Delaware reorganization. It highlights the point that it takes two to tango in the international
tax-planning dance: the taxpayer wants to minimize taxes, and a jurisdiction wants
to lure and poach the tax base of other jurisdictions.
According to the authors, Google’s Delaware Alphabet holding structure created
in August 2015 may be the domestic replacement for the globally famous double
Irish-Dutch sandwich structure.4 Alphabet was designed as an intellectual property
(IP) holding company in order to achieve several tax results, including the following:
The intercompany licensing agreements between Google affiliates and Alphabet
will create non-taxable royalty income in Delaware and royalty deductions in
all the various US states in which Google files a corporate tax return.
n Foreign royalty payments to Alphabet will be excluded from the unitary
group’s income in those states that require combined reports.
n The domestic IP licensing agreement may be used as a benchmark for foreign
IP licensing agreements for transfer-pricing purposes. If the amount of foreign royalty payments is thereby increased, Google can repatriate foreign
earnings in the form of royalties as opposed to dividends, thereby avoiding
federal tax.
n
All in all, it is a clever structure.
3 At 15.
4 For a description of this structure, see, for example, Edward Kleinbard, “Stateless Income”
(2011) 11:9 Florida Tax Review 699-773, at 706-13.
686  n  canadian tax journal / revue fiscale canadienne
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Delaware corporate law makes it possible for the Alphabet restructuring to occur
on a tax-free basis and without a vote of the public shareholders. Under Delaware
tax law, because Alphabet’s activities are limited to maintaining and managing intangible assets, Alphabet is exempt from Delaware tax on its royalty income.
The authors suggest that, to counter Google’s tax-avoidance behaviour, the Internal
Revenue Service (IRS) and US states whose tax base is eroded can rely on the economic substance doctrine because the Alphabet restructuring lacks a non-tax business
purpose. They also question the morality of Google’s aggressive tax-planning behaviour and challenge Google to live up to its original corporate slogan “Don’t Be
Evil” in its tax affairs.
J.L.
David C. Elkins, “The Merits of Tax Competition in a Globalized Economy”
(2016) 91:3 Indiana Law Journal 905-54
Tax competition is a key issue in international tax debates. Over the past two decades or so, the European Union and the Organisation for Economic Co-operation
and Development (OECD) have introduced measures to curb “harmful” tax competition. Tax competition may be viewed as harmful when it aims at attracting mobile
income or income from capital and the result is poaching of another country’s tax
base. Tax competition may also be viewed as harmful when it aims at attracting or
luring real economic activities (such as foreign direct investment) by giving tax incentives only to non-residents; this practice, known as ring fencing, instigates a race
to the bottom among countries.
In this article, David Elkins takes issue with the anti-tax-competition position in
regard to ring-fencing schemes. He argues that not only is international tax competition inevitable as a matter of fact, but also free and fair tax competition is necessary
in order to allocate resources efficiently and to maximize global welfare. Under a
regime of tax competition, the taxes demanded by host countries, the tax incentives
that they offer, and the investment decisions of multinational enterprises (MNEs)
convey essential information regarding the availability of resources, consumer preferences, and the expected impact of investments on the residents of host countries.
This information is important to induce behaviour that is conducive to the efficient
utilization of resources and the maximization of global wealth.
Elkins also challenges the negative views about ring fencing. In his view, countries should be free to determine the level of social services that they wish to provide
without fearing that too high a level of corporate tax will impede their ability to
attract foreign investment. In the absence of ring-fencing measures, countries
would be forced to lower their general corporate tax rate, thus reducing their ability
to finance social services. As far as MNEs are concerned, they have no obligation to
finance the social assistance programs of the host country, beyond paying full market price for the services from which they benefit. Furthermore, the international
tax system is an ineffective and inefficient means of redistributing wealth across
current tax reading  n  687
countries. Therefore, restricting ring fencing will likely exacerbate problems of
global poverty and lead to a more unequal distribution of wealth.
Elkins is critical of the prevailing view that international tax competition should
be discouraged. He argues, instead, that tax competition should be encouraged, and
transnational organizations should focus their efforts on improving the competitive
atmosphere. Overall, this is a thought-provoking article.
J.L.
Kim Brooks and Richard Krever, “The Troubling Role of Tax Treaties,”
in Geerten M.M. Michielse and Victor Thuronyi, eds., Tax Design Issues
Worldwide, Series on International Taxation, vol. 51 (New York: Wolters
Kluwer Law and Business, 2015), 159-78, ISBN 9789041156105
Tax treaties have historically played a role in preventing double taxation by limiting
source-based taxation and requiring recognition of source-country tax by the residence country. In the case of cross-border investments, the two contracting states
to a tax treaty are simultaneously the residence country and the source country.
When the flow of investments between them is more or less equal, the treaty does
not result in any transfer of tax revenue from one country to the other. However,
when the investments flow predominantly one way, tax treaties transfer tax revenue
from the source (typically low-income) country to the residence (typically highincome) country. As a result, as Brooks and Krever argue in this paper, tax treaties
between low-income countries and high-income countries may truly be a poisoned
chalice for the former.5 Furthermore, the sacrifice of tax revenue by low-income
countries may yield limited or no offsetting benefits, such as increased foreign direct investment.
Drawing on existing literature, Brooks and Krever eloquently make the case
against low-income countries entering into tax treaties. They maintain that these
countries should “fiercely guard their jurisdiction to tax”6 and not cede tax jurisdiction through tax treaties. They note the recent cancellation or suspension of tax
treaties by low-income countries: Mongolia cancelled its treaties with the Netherlands, Luxembourg, Kuwait, and the United Arab Emirates on the grounds that those
treaties facilitated the tax-free repatriation of profits from Mongolia’s extractive
industries; Argentina cancelled treaties with Austria, Chile, Spain, and Switzerland;
Malawi cancelled its treaty with the Netherlands; and Uganda suspended new treaty
negotiations. Brooks and Krever suggest that if there are circumstances that may
justify ceding taxation rights, low-income countries should do so unilaterally in
domestic legislation.
5 At 161.
6Ibid.
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Brooks and Krever are critical of the OECD base erosion and profit shifting
(BEPS) program for its deliberate avoidance of any principled re-examination of the
tax norms that underlie treaties based on the OECD model. They maintain that
genuine reform of the international tax system requires multinational action, and
they support the idea of establishing a World Tax Organization. They call upon
capital-importing countries to halt the negotiation of new bilateral treaties and to
support efforts in creating a more equitable global tax system.
J.L.
Victor Fleischer, “Alpha: Labor Is the New Capital Gains,”
Tax Law Review (forthcoming)
Capital gains receive preferential tax treatment in the United States, Canada, and many
other countries. There are two common justifications for preferential treatment:
1. capital gains are often inflationary; and
2. it is necessary to compensate investors for risk and to reduce the lock-in effect, which distorts economic decisions.
Capital gains are generally earned by high income earners. In other words, the rich
and superrich earn a disproportionate share of capital gains and benefit more from
the tax preferences.
In this article, Victor Fleischer makes the point that capital gains are often a
form of labour income in disguise. This is especially true at the very top of the income distribution in the United States, where a large and rising share of national
income is derived from partnership allocations of carried interest (the share of
partnership profits allocated to the manager of an investment fund as compensation
for services rendered) and the sale of founders’ stock. Individuals who derive the
latter type of capital gain include Bill Gates (Microsoft), Warren Buffett (Berkshire
Hathaway), Larry Ellison (Oracle), Jeff Bezos (Amazon), Charles and David Koch,
Mark Zuckerberg (Facebook), Larry Page and Sergey Brin (Google), and Michael
Dell (Dell).
Fleischer argues that unlike traditional financial capital, the capital of corporate
executives, founders of technology companies, and investment fund managers is
human capital (labour, ideas, knowhow), or “sweat equity,” by reference to the value
of a capital asset. He refers to this type of capital gain as alpha income and argues
that the traditional justifications for a capital gains preference do not apply to alpha
income. Further, he suggests that if one wants to reduce income inequality, the capital gains preference should be repealed.
Fleischer’s article focuses on alpha income in the US context. For Canadian readers, it is useful to consider his arguments in relation to the Canadian tax treatment
of capital gains, employee stock options, and lifetime capital gains exemptions.
J.L.
current tax reading  n  689
Luzius U. Cavelti, Christian Jaag, and Tobias F. Rohner, Why Corporate
Taxation Means Source Taxation: A Response to the OECD’s Actions
Against Base Erosion and Profit Shifting, Swiss Economics Working
Paper 0054 (Zurich: Swiss Economics SE AG, May 2016), 33 pages
(ssrn.com/abstract=2773614)
Adam H. Rosenzweig, “Source as a Solution to Residence”
(2015) 17:6 Florida Tax Review 471-526
Mitchell A. Kane, “A Defense of Source Rules in International Taxation”
(2015) 32 Yale Journal on Regulation 312-61
By convention, many countries define their tax jurisdiction by reference to the residence of taxpayers and the source of income. “Source” and “residence” are often
key issues in international tax debates. Richard Bird and Scott Wilkie have suggested, however, that “confining discussion of the fundamental tax jurisdiction issue
within the limits of the traditional ‘source vs. residence’ paradigm no longer provides a useful framework,” and that the “source or residence dichotomy does not
deal adequately with the core problems confronting international tax policy today.”7
In other words, the source-versus-residence debate does not get to the real question, which is how to allocate the international tax base among competing national
tax claims. In the case of corporations, there is wide recognition that corporate residence is largely meaningless as a determinant of tax jurisdiction.8 The Group of
Twenty (G20)-OECD BEPS project has downplayed the significance of corporate residence and emphasized the importance of taxing corporate profit in jurisdictions in
which profit-producing activities take place (that is, source taxation). The three
contributions to the topic reviewed here lend support to this shift in thinking about
corporate taxation.
Luzius Cavelti et al. advocate moving away from residence-based taxation of
corporations and instead taxing corporate income in the countries in which the relevant business activities take place. They describe criteria for determining where
corporate business activities effectively take place. They suggest that business activity
of a corporation is best described as a transformation of inputs into outputs and that
that transformation manifests in the profit and loss statement. Inputs are better suited
to determining the location of the country of source because information about the
costs of inputs from lenders, employees, and other stakeholders is readily available.
In contrast, locating outputs is more difficult and would require tax authorities to look
7 Richard M. Bird and J. Scott Wilkie, “Source- vs. Residence-Based Taxation in the European
Union: The Wrong Question?” in Sijbren Cnossen, ed., Taxing Capital Income in the European
Union: Issues and Options for Reform (Oxford: Oxford University Press, 2000), 78-109.
8 Robert Couzin, Corporate Residence and International Taxation (Amsterdam: IBFD, 2002).
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at the location of consumers. Further, outputs or sales are often taxed under a valueadded tax (VAT), giving the sales jurisdiction some tax revenue. Where a corporation’s
inputs are in more than one country, a formulary apportionment allocation method
will apply. Cavelti et al. suggest ways of designing such an apportionment method.
They conclude by saying that the best justification for corporate income taxation is
that it effectively allocates the right to tax to source countries, and without corporate income taxation, it would be impossible for source countries to tax the business
activities of foreign taxpayers.
Adam Rosenzweig argues that the construct of source and residence as two competing and irreconcilable doctrines is largely incorrect as a legal matter. Both source
and residence rules can and should be thought of solely as instruments for the allocation of taxing rights in a globalized world with mobile capital. As a doctrinal
matter, source rules can be used to solve problems in applying residence rules; in
other words, source and residence can converge into a single concept. Rosenzweig
proposes to define corporate residence on the basis of the source of corporate income.
For example, for US tax purposes, a corporation is a US person if it earns more than
a threshold amount of US-source income. Rosenzweig suggests that his proposed
approach could be used to resolve two pressing US international tax problems: the use
of corporate inversions and the use of offshore hedge funds. Rosenzweig does not get
into the details of determining source of income. He suggests, however, that his proposed approach may make the adoption of formulary apportionment easier and more
effective for the United States than if this is attempted under the existing system.
Mitchell Kane’s article defends source rules in international taxation. Kane disagrees with the view of many academic commentators that the source concept is
completely incoherent. He claims that it is in fact coherent to conceive of the source
concept in terms of the spatial location of income. As legal rules, the source rules
are designed to reflect factual predicates about the geographic location of income.
Source is not an economic concept, and the discipline of economics should not be
expected to shed any meaningful light on the basic distributional question addressed
by source rules. Kane claims that, as distributional rules, source rules are constrained by geography and are subject to practical considerations. However, the
various difficulties in applying the source rules are evidence of deeper problems in
the construction of a comprehensive income tax base, which arise equally in a closed
economy. According to Kane, these foundational problems go to core issues such as
the labour-capital divide, the proper definition of deductible expenses, and timing.
In other words, it is these core issues, and not any inherent spatial indeterminacy,
that cause the difficulties with source rules. Nevertheless, there is room to incrementally improve source rules. Finally, Kane claims that source rules could theoretically
achieve an efficient outcome in corporate taxation. Assuming that corporate tax is a
tax on rent, from an efficiency perspective, innovative source rules can be used to
segregate rents from non-rents and mobile income from non-mobile income. Practically speaking, however, there are substantial hurdles. Kane invites other scholars
to further explore these issues.
J.L.
current tax reading  n  691
J. Peter Byrne and Kathryn A. Zyla, “Climate Exactions”
(2016) 75:3 Maryland Law Review 758-86
Working within the Canadian context for the establishment of local development
charges—whether from the perspective of municipal and provincial fiscal decisions
related to land use and infrastructure finance (growth paying for growth) or from
jurisprudence (direct versus indirect taxation, regulatory schemes, and “pith and
substance”)9—a Canadian reader looking at the title of this article would likely think
about a discussion of tax measures, not about tying the regulation of land use and
development specifically to the charging of an impact fee designed to motivate a
reduction in automobile usage and thereby reduce greenhouse gas (GHG) emissions.
The reader would be wrong.
This article argues the case for an innovative use of local development impact
fees (exactions) to affect land use that results in an increase in activities that create
GHG s. The approval of suburban development (low density) implies increased traffic in areas underserviced by public transportation.10 Generally, federal and state tax
and regulatory initiatives are directly aimed at reducing the polluter’s activity following standard Pigouvian or Coasean theory-based environmental taxation.11 In
contrast, the authors of this article lay out the legal basis for the design of a mechanism that could directly affect the actions of land developers, as those actions change
land use and enable local economic activity that gives rise to the generation of GHGs.
Even though the most direct regulatory approach would be to prohibit new development that increases emissions or lessens the capacity of the community to adapt to
the effects of climate change, it is unlikely that such an approach would withstand
current US jurisprudence on regulatory takings and the wiping out of value without
significant compensation that is beyond the means of local governments.
The argument sets out the case that “climate exactions fall squarely within the
[Supreme] Court’s approval of monetary exactions that mitigate public harms.”12
9See Ontario Home Builders’ Association v. York Region Board of Education, [1996] 2 SCR 929, in
which the Supreme Court of Canada upheld the rights of school boards in Ontario to levy a
provincially sanctioned development charge. The decision provides a discussion of direct versus
indirect taxation and the use of “pith and substance” as an interpretive principle. For a more
detailed discussion of the jurisprudence on user fees in Canadian municipalities, see Kelly I.E.
Farish and Lindsay M. Tedds, “User Fee Design by Canadian Municipalities: Considerations
Arising from the Case Law” (2014) 62:3 Canadian Tax Journal 635-70.
10 The authors cite the need for restricting low-density development using rigid zoning
restrictions, referring (at footnote 13) to Peter Calthorpe, Urbanism in the Age of Climate
Change (Washington, DC: Island Press, 2010).
11 See Stephen W. Bowman and Nancy D. Olewiler, “Environmental Taxation,” in Heather Kerr,
Ken McKenzie, and Jack Mintz, eds., Tax Policy in Canada (Toronto: Canadian Tax Foundation,
2012), 10:1-33; and William A. Fischel, Zoning Rules! The Economics of Land Use Regulation
(Cambridge, MA: Lincoln Institute of Land Policy, 2015), 219-28 (www.lincolninst.edu/pubs/
dl/3551_2896_ZR_Web_Chapter.pdf ).
12 At 768.
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Given international commitments on climate change, specific initiatives within the
constitutional ambit of local governments can reinforce federal and state initiatives.
The authors then take the reader through the recent US jurisprudence and the criteria that have been upheld by the courts, including “nexus” and “attribution,” as
well as aspects related to the law concerning regulatory takings that would apply to
the design of such an extension of the normal use of exactions (principally capital
finance of new infrastructure).
The article focuses on the recent exactions decision of the United States Supreme
Court in Koontz v. St. Johns River Water Mgmt. Dist.13 The authors also suggest
design criteria that would be consistent with other tests that have been elaborated
in recent and historic US Supreme Court decisions.
In 1926, the Supreme Court in Village of Euclid v. Ambler Realty Co.14 concluded
that the use of zoning by local governments is a reasonable extension of local police
power. It also provides legal sanction for the use of the municipal boundary for the
imposition of exactions. This decision set the stage for local zoning and exactions,
both in kind and subsequently in monetary terms. Monetary exactions or development impact fees have grown in prominence because they offer distinct advantages
over in-kind exactions both to governments and to developers. US jurisprudence has
distinguished mitigation from specific harms by exactions from taxes for general
revenue even though exactions may have specific incentive effects.
The authors argue that using exactions to address climate concerns is consistent
with the US Supreme Court’s constitutional takings framework; they note, in particular, that “[t]he Takings Clause of the Fifth Amendment is construed to require
the government to pay ‘just compensation’ not just when it expropriates or physically occupies land but also when regulations of use go ‘too far.’ ”15
Recently, a new rule has been invented providing that when a regulation eliminates all economic value from a parcel of land, it will be deemed a regulatory taking
without any consideration of the public justification for such a regulation. This was
the result of a challenge to a prohibition by the South Carolina Coastal Council of
new construction seaward of an erosion line;16 Koontz held that the general constitutional test for exactions applies to monetary exactions as well.17
Nollan v. California Coastal Commission18 and Dolan v. City of Tigard 19 established
a federal constitutional floor for exactions, requiring that every exaction have an
essential nexus with a public harm justifying regulation and that the value of the
13 133 S.Ct. 2586 (2013).
14 272 US 365 (1926).
15 At 763.
16 Lucas v. South Carolina Coastal Council, 505 US 1003, at 1019 and 1027 (1992).
17 Supra note 13, at 2599.
18 483 US 825 (1987).
19 512 US 687 (1994).
current tax reading  n  693
property exacted be roughly proportional to the degree of harm threatened by the
proposed development.
The authors argue that neither of these requirements would be inconsistent with
a monetary development impact fee based on the potential for increased traffic that
would generate increased levels of emissions within the boundaries of a local government. Further, they note that
[u]nder Nollan and Dolan the government may choose whether and how a permit applicant is required to mitigate the impacts of a proposed development, but it may not
leverage its legitimate interest in mitigation to pursue governmental ends that lack an
essential nexus and rough proportionality to those impacts.20
They also cite Alito J’s comment in Koontz, where he noted that “[i]nsisting that
landowners internalize the negative externalities of their conduct is a hallmark of
responsible land-use policy, and we have long sustained such regulations against
constitutional attack.”21 The authors note that, in designing the fee, funds collected
must be segregated in an account that may be used only to mitigate the harm for
which the money was exacted. Also, in accordance with Dolan, there must be a process
for individual appeals. The latter criteria are also features of Canadian development
charges law and practice.
In terms of a calculation methodology, the authors note that while the social cost
of carbon may be the right measure for nationwide emissions mitigation strategies,
it may not be the best basis for calculating local development fees. An alternative
approach would involve quantifying the emissions resulting from a given project
and then identifying the local cost to achieve the same level of reduction. This could
be done using existing traffic study methodology combined with studies of emissions resulting from traffic flows. There are also US precedents for development fees
to support green initiatives, with fees being imposed on residential projects that do
not meet green building standards on emissions from energy use. Thus, the rough
proportionality rule could apply to related non-transportation-based emissions.
The authors conclude that the “adoption of a GHG mitigation fee on new development is both legally and technically viable.”22 The safest approach for a jurisdiction
is to design a fee program that (1) applies to developers broadly rather than ad hoc,
(2) meets the Nollan and Dolan tests, and (3) takes into account the implications of
Koontz concerning more general risks in terms of imposing a regulatory taking. The
authors also note that
[ j]urisdictions that may have struggled to justify transportation impact fees based on
other metrics may find that applying a GHG emissions lens to the analysis reveals
20 At 767.
21 Supra note 13, at 2595.
22 At 786.
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both an essential nexus and rough proportionality that might otherwise be difficult to
demonstrate.23
Thus, the article provides a thought-provoking argument as to how local development impact fees and land-use regulations might reinforce the efforts of senior
levels of government in developing policies that seek to reduce GHGs.
A.T.
Peter Dietsch and Thomas Rixen, eds., Global Tax Governance: What Is
Wrong and How To Fix It (Colchester, UK: ECPR Press, 2016), 382 pages
This is a timely collection of essays that marries international tax law, political science, and normative political theory. As noted by the editors in the introduction, an
anthology on tax governance would have been unimaginable until recently.24 Following the high-profile controversies in 2012 surrounding the tax practices of some
MNE s (including Starbucks, Apple, Facebook, and Google), international tax acquired unprecedented political salience. The release of the so-called Panama papers
in early 2016 enhanced the spotlight on international tax issues. These issues are
very difficult to tackle. In the context of rapid globalization, as D.H. Robertson
predicted, MNEs have become “islands of conscious power in an ocean of unconscious cooperation.”25 Government supply-side tax competition, coupled with increased tax mobility and demand-side residence election by MNEs, has produced a
race-to-the-bottom effect in national corporate tax policy. Compounding the issue
is a nation-state collective action problem. Moreover, since tax lies at the heart of
the social contract, tax evasion and avoidance pose an existential threat for the
democratic welfare state, exacerbating social and economic inequalities.26 The
OECD’s use of soft power—constituted by its expertise, recommendations, models,
and norms—is no longer adequate.27
There is a lacuna in international tax scholarship that traces its origins to the
formative history of public finance. Arthur Cecil Pigou, one of the world’s preeminent 20th-century economists, conceded his failure to incorporate international
relations into economic theory.28 Much work in international tax law remains artificially demarcated from questions of policy, overlooking the complex political,
23 Ibid.
24 At 1.
25 D.H. Robertson cited in Stephen Hymer, “The Efficiency (Contradictions) of Multinational
Corporations” (1970) 60:2 American Economic Review 441-48, at 441 (originally quoted in
R.H. Coase, “The Nature of the Firm” (1937) 4:16 Economica 386-405).
26 At 10.
27 At 6.
28 Enrique G. Mendoza and Linda L. Tesar, “The International Ramifications of Tax Reforms:
Supply-Side Economics in a Global Economy” (1998) 88:1 American Economic Review 226-45.
current tax reading  n  695
diplomatic, and behavioural implications for neoclassical economic theory. An interdisciplinary approach that yields actionable and effective global policy coordination
is necessitated by current context. Global Tax Governance is therefore an essential
read for tax practitioners and scholars concerned with global tax policy innovation.
This volume contains 15 papers, organized in four parts:
Part One—The Problem: International Tax Competition
Part Two—Shortcomings of the Current Regulatory Framework and
Initiatives
n Part Three—Normative Principles for Global Tax Governance
n Part Four—From Theory to Practice: Just Institutions for International Tax
Governance
n
n
The collection brings together political scientists, lawyers, economists, and political
philosophers. In contrast to many other edited volumes, the contributions to Global
Tax Governance are well orchestrated: each has a well-defined role in producing a
comprehensive assessment of the problems to be overcome in achieving global tax
governance.
The editors, Peter Dietsch and Thomas Rixen, set out a bold framework for challenging the inherent path dependencies plaguing global tax governance.29 In their
introduction, they explain what global tax governance is; the relationship between
tax competition, democracy, and state sovereignty; and the connection between tax
competition and rising inequalities in the world. In the culminating chapter, Rixen
makes an argument for an international tax organization (ITO) that would facilitate
multilateral rule making and dispute settlement.30 Rixen argues that an ITO is the
only way to overcome the asymmetric prisoner’s dilemma confounding global tax
cooperation.31 He then derives a set of principles for regulating tax competition,
coupled with a framework for institutional design.32 Implicit support for Rixen’s ITO
thesis is found in the volume’s multidisciplinary contributions, notwithstanding the
fact that each chapter engages different subject matter.
Three papers in part one identify the problem of global tax competition. In
chapter 2, Kimberly Clausing reviews the empirical findings on tax competition,
focusing on the effects of virtual tax competition.33 While base erosion is unlikely
to stymie economic growth in the developed world, Clausing finds that there is a
distributive impact owing to high government revenue costs.34 Moreover, she cites
29 At 6-7.
30 At 326.
31 Ibid.
32 At 326-27.
33 At 27.
34 At 42-43.
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(2016) 64:3
ample evidence that corporations behave strategically.35 Reforming international
tax, in the final analysis, will generate welfare gains.36 In chapter 3, Philipp Genschel
and Laura Seelkopf investigate the potential welfare effects of tax competition,
arguing that there is a typology of winners and losers in the global context.37 The
choice of a national corporate tax rate distributes burdens and benefits such that
small countries benefit fiscally while the welfare of large democracies is reduced.38
In chapter 4, Lyne Latulippe explores tax competition as an internalized policy goal,
comparing Canadian and Australian policy practice.39 Latulippe argues that economic ideas such as competitiveness reinforce the power of private actors through
the global liberalization paradigm.40 For Rixen, the foregoing contributions illustrate
that the principles and rules of apportioning the tax base and ceding sovereignty can
be easily manipulated.41 The result is distributive unfairness, demanding a radical
institutional proposal.
The four chapters in part two identify shortcomings of the current regulatory
framework and provide a critical assessment of initiatives that aim to address those
deficiencies. Chapter 5 by Richard Woodward discusses the mock compliance in the
OECD -led tax transparency initiative and provides useful insight on the limitations
of global information sharing.42 Chapter 6 by Lukas Hakelberg examines redistributive tax cooperation by focusing on automatic exchange of information, US
power, and the absence of joint gains. In chapter 7 (which deals with the US Foreign
Account Tax Compliance Act [FATCA]), Itai Grinberg draws on the distinction between financial institutions and MNEs, and argues that market-access pressure is
unlikely to succeed in the case of initiatives, such as BEPS, where the United States
is not an indispensable jurisdiction.43 In chapter 8, Richard Eccleston and Helen
Smith discuss the path dependencies plaguing BEPS and international tax governance
through the G20.44 Buttressing preceding contributions, Eccleston and Smith argue
that the BEPS agenda, if politically successful, might face obstacles in achieving
implementation and compliance. Parts one and two provide a useful examination of
the limitations of statist legal forms in the globalized economic marketplace.
The three chapters in part three explore the domain of normative political
theory and the idea of tax justice. In chapter 9, Miriam Ronzoni discusses the perspectives of cosmopolitanism and its critics, arguing that both approaches provide a
35 At 47.
36 At 42.
37 At 55.
38 At 65.
39 At 77.
40 At 89.
41 At 325.
42 At 103-4.
43 At 167.
44 At 175.
current tax reading  n  697
different basis for rethinking the nature and content of obligations extending beyond
state borders.45 Her contribution is to tease out the normative implications for institutional design.46 In chapter 10, Laurens van Apeldoorn contests the Westphalian
and domestic arguments that tax competition entails the erosion of state sovereignty.47
Van Apeldoorn then articulates the account of “sovereignty as responsibility,” upholding the state’s fiscal policy discretion while focusing on the maintenance of
internal conditions relating to the democratic character of collective will formation.
One might question the practical application of van Apeldoorn’s theory in a highly
technical policy area such as tax. The US experience in response to the BEPS project
also illustrates that domestic political interference can be fatal to the achievement
of global tax cooperation. Finally, in chapter 11, Peter Dietsch explores the ethics of
global tax governance.48 Dietsch argues that the concept of economic nexus supplies
a principled ethical basis for countering virtual tax competition and poaching. He
notes that there are more complex ethical implications when it comes to real tax
competition and luring.49
Part four bridges theory and practice by surveying proposals for institutional
change.50 In chapter 12, Markus Meinzer outlines a method for identifying tax havens
and facilitating reform.51 In chapter 13, Reuven Avi-Yonah makes the case for the
reform of transfer pricing through unitary taxation and formulary apportionment.52
Gabriel Wollner then makes two sets of arguments in chapter 14 supporting the
imposition of an international financial transaction tax.53 Reading Rixen’s culminating chapter in light of the whole anthology, one can assemble a compelling case for
his proposed ITO. The current governance gap, according to Rixen, requires international tax law to become more inclusive and multilateral, supporting the partial
transfer of legislative authority.54
Contemplating questions of rationalist economics, democratic legitimacy theory,
social justice, and Westphalian sovereignty in one text is a tall order. For this reason,
Global Tax Governance is a path-breaking work. The anthology usefully illuminates
the core issues underlying tax competition and the G20-OECD BEPS agenda. More
than providing a mere diagnosis of the problem, the anthology also offers useful suggestions for institutional reform. The collection is quite compelling, although with
45 At 201.
46 At 202.
47 At 216.
48 At 231.
49 At 232.
50 At 253.
51 At 254.
52 At 303.
53 At 307.
54 At 345.
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(2016) 64:3
global tax governance scholarship still in its infancy, the work is incomplete. Future
volumes might explore the global politics discourse to move beyond a statist lens.
There is also a robust literature on transnational epistemic communities, and the
comparative cases of central banking and securities regulation are instructive in that
light. Nevertheless, the upshot is that tax specialists and scholars from other disciplines stand to benefit by engaging with the empirical, normative, and institutional
arguments made by the volume’s authors.
M.M.
Soren T. Anderson and James M. Sallee, Designing Policies To
Make Cars Greener: A Review of the Literature, NBER Working
Paper no. 22242 (Cambridge, MA: National Bureau of
Economic Research, May 2016), 32 pages
In this concise but all-encompassing paper on the different methods of reducing air
pollution and GHG emissions from vehicles, the authors demonstrate the superiority
of fuel taxes over regulatory methods, even though the public seems to prefer the
latter. The paper does not address in much detail the policy instruments used by any
particular country, but it has clear application to Canada.
Taxes on motor fuel (diesel fuel and gasoline) at both the federal and provincial
levels are frequently criticized. People have trouble understanding why the rate of
commodity tax is so much higher than the standard goods and service tax/harmonized
sales tax rate, even though this is essential to achieve the environmental objective;
for example, it is frequently noted that about one-third of the price of gasoline at
the pump is tax.55 Another criticism is that as an environmental measure, motor fuel
taxes leave much to be desired in that they apply to only a small portion of the processes that generate GHGs. Only a carbon tax, such as the one adopted by the BC
government, can reach the broader set of sources.
The chief alternative to taxes is regulation. In particular, many countries set fuel
economy standards that manufacturers must meet by implementing fuel-saving
technologies. These fuel economy standards often vary with the attributes of the
vehicle (and so are referred to here as attribute-based standards); such attributes can
be as simple as car versus truck (with a truck having to meet a lower fuel economy
standard). However, because that regime has been shown to be easily skirted by
having a sport-utility vehicle classed under the preferential truck category, current
US regulations use the rectangular area bounded by a vehicle’s tires (its footprint).56
All of the world’s largest car-consuming countries use attribute-based standards. A
55 In 2015, taxes in Canada averaged 35 percent of the pump price. See Petro Canada, “Gasoline
Taxes Across Canada” (http://retail.petro-canada.ca/en/fuelsavings/213asp) (accessed July 28,
2016).
56 At 15. Weight is another attribute that can be the basis of regulation.
current tax reading  n  699
key question is whether the regulatory approach, attribute-based or not, is more
efficient and effective than fuel taxes.
The authors begin their paper by describing a theoretical model of the conditions needed to meet the social optimum in the choice of transportation services.
They then compare this welfare-maximizing model with a model of consumer
choice in transportation services. Consumers will choose their privately optimal
level of fuel consumption (through their purchase of a particular vehicle based on
fuel economy type, the number of vehicles they purchase, and their subsequent use
of each vehicle) in a way that deviates in two ways from the social optimum: external
costs (such as GHG production) are ignored, and future fuel-cost savings arising
from the vehicle type and vehicle quantity may possibly be undervalued.57 In other
words, there is consumer myopia—future benefits are not properly valued. Governments then intervene to cause the social optimum to be reached through either tax
or regulatory policies. The key result of this model is that the way to achieve the
social optimum is (1) if there is no undervaluation, to impose a fuel tax; and (2) if
there is undervaluation, to use a combination of a fuel tax and a fuel economy standard. In situation 1, a fuel tax alone cannot achieve the social optimum since a tax
that is high enough to cause people to choose the socially optimal vehicle fuel economy type would overtax their subsequent choice of miles driven.58
The above models therefore appear to provide a justification for regulation.
However, they do not justify regulation as currently practised—that is, through
attribute-based standards. If consumers are myopic, they are not just myopic in
choosing between cars with identical footprints but different fuel economy ratings;
they are also myopic in valuing the benefits of choosing a smaller vehicle. Thus, if
myopia is to be used to justify regulation, the type of regulation that should be implemented must differ from current regulation in that it should preserve the consumer
benefit from downsizing. It is not clear from the paper what that would look like.59
Fuel taxes, even if they cannot achieve the social optimum in situation 2 noted
above, can move the economy most of the way to a social optimum if they are high
enough. In particular, higher fuel prices (such as can be produced through fuel
taxes) increase the market share of smaller, fuel-efficient cars. For example, one
study found that a $1 increase in the per-gallon gasoline price (26-cent increase in
the per-litre price) produced a 3.7 percent increase in average new-car fuel economy.60 In contrast, regulation generally affects the type (fuel economy) of cars that
can be produced but, as noted above, provides no incentive for consumers to downsize. Also, fuel taxes provide an incentive for consumers to reduce the distance
57 The model assumes that consumers correctly perceive fuel costs in deciding how much to drive
a particular vehicle.
58 At 7.
59 At 17-18.
60 At 9.
700  n  canadian tax journal / revue fiscale canadienne
(2016) 64:3
travelled. Regulation not only does not do that, but it can even cause a “rebound
effect”: when fuel economy is increased while fuel prices remain unchanged, consumers may even drive more.61
The authors go on to describe many other ways in which regulation fails by comparison with fuel taxes; for example, regulation does not increase the operating cost
of inefficient used cars, but fuel taxes do.62 Also, of particular interest, fuel economy
standards create an incentive for manufacturers to game test procedures, as Volks­
wagen was revealed to have done, in 2015. In contrast, the effect of such gaming on
the attainment of government environmental objectives through fuel taxes is much
less. Such manipulations can reduce the effect of fuel taxes because they can cause
consumers to buy cars that they think are more fuel-efficient than they really are,
while the effect of those taxes on the distance travelled remains the same.63
The government’s third alternative to provide an incentive for greener cars, in
addition to fuel taxes and regulation, is to use a “feebate”—a tax on so-called gas
guzzlers, combined with a subsidy for fuel-efficient vehicles. Such policies have a
similar effect to regulation, with the disadvantages discussed above. For example,
they affect the choice of a vehicle type while producing no incentive to reduce distance travelled (and possibly having the perverse rebound effect discussed above).
Canada has used such policies in the federal ecoAUTO program (introduced in the
2007 federal budget and subsequently redesigned as an excise tax on fuel-inefficient
vehicles)64 and in various programs in Ontario (currently represented only by the
Ontario electric vehicle incentive program).65
A.M.
Henrik Jacobsen Kleven, Claus Thustrup Kreiner, and Emmanuel Saez,
“Why Can Modern Governments Tax So Much? An Agency Model of Firms
as Fiscal Intermediaries” (2016) 83:330 Economica 219-46
It is widely known that tax enforcement is generally quite successful in situations
where third-party reporting (via governmental forms) is in place and that enforcement is relatively unsuccessful where such third-party reporting is not in place (as
in the case of tips received by wait staff in restaurants, self-employment income, and
61 At 12.
62 At 13.
63 At 20-21.
64 Canada Revenue Agency, “Excise Tax on Fuel-Inefficient Vehicles” (www.cra-arc.gc.ca/E/pub/
et/etsl64/list/lst_vh-2015-eng.html).
65 Ontario, Ministry of Transportation, “Modernized Electric Vehicle Incentive Program (EVIP)”
(www.mto.gov.on.ca/english/vehicles/electric/electric-vehicle-incentive-program.shtml). See
also the Ontario tax and credit for fuel conservation program, as studied in Nicholas Rivers
and Brandon Schaufele, “New Vehicle Feebates: Theory and Evidence,” September 3, 2014
(www.ivey.uwo.ca/cmsmedia/1361413/new-vehicle-feebates.pdf ).
current tax reading  n  701
capital gains on individuals’ investments in real estate). Where income is received
in cash, tax evasion is even more likely, but evasion continues even for non-cash
income as long as there is no third-party reporting. For example, restaurant tips
continue to be unreported even where the tips are given using credit cards and debit
cards, which leave an excellent paper trail. The effectiveness of third-party reporting
is known by tax practitioners from their everyday experience, and tax-gap estimates
prepared by tax authorities in the United States and the United Kingdom provide
more formal evidence.66
Why does third-party reporting work so well? It would not work if the two parties to the transaction colluded. Certainly such collusion occurs between firms and
consumers in the area of home renovation; consumers pay cash knowing that this
makes it easier for firms to cheat on income taxes and sales taxes, and the benefit to
consumers is often a lower price to be paid for the work. However, such collusion
is rare in the common situations in which third-party reporting is required, such as
reporting of employment income by employers and reporting of depositors’ investment income by financial institutions.
Thus, the empirical fact to be explained is why this collusion does not occur.
Through some innovative—I would say path-breaking—reasoning, the authors of
this article connect the absence of collusion to two factors: (1) the need of large
firms for accurate and rigorous records, which, if scrutinized by the government,
could prove the existence of tax cheating through collusion; and (2) the widespread
knowledge of the existence of business records within the firm. Although records
may not be known to literally everyone in the firm, they are widely used and will be
known by a number of employees.
Kleven et al. focus on the employer-employee relationship, although similar
reasoning could apply to other third-party reporting situations. They start by determining conditions under which tax evasion is complete even in the presence of
third-party reporting; firms understate their profits and workers understate their
wages to the point where no tax is paid. This complete cheating model (summarized
in proposition 1 of the article) is based on two key assumptions: (1) governments
cannot detect cheating using their own devices (that is, audits are ineffective); and
(2) employees, although they have information about their own wages and the
wages of other people in the firm, can make an ex ante commitment never to reveal
this information to the government (and thus prove the existence of cheating
through a comparison of the employee-reported wage information with the wages
reported in the internal business records noted above).
The key point of the article is that proposition 1 is based on some very strong
assumptions, and so propositions 2 through 4 illustrate why the complete cheating
result will not occur in practice in transactions involving large firms; in fact, complete
66 See the list of countries provided in Canada Revenue Agency, Tax Gap in Canada: A Conceptual
Study (Ottawa: CRA, June 2016).
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compliance is much more likely. There are two reasons, each of which provides an
explanation as to why tax evasion is bound to be uncovered through a breakdown of
the ex ante commitment:
1.Random shocks causing the government to become aware of the fakery. For example,
there is a conflict between an employee and the employer; a newly hired employee has moral concerns; or an employee accidentally reveals the true wage
records to the government instead of the fake records. Importantly, the article
proves that evasion would be uncovered, and hence deterred, even if an employee revealed only his or her own wages and not those of all employees in
the organization—provided that the proof of a discrepancy for just one person’s wages triggered an audit of the full set of reported versus actual wages.
2.Whistleblowers. Employees report to government on the tax evasion of their
employers in return for a share of the evaded taxes. This is a strategy that has
been widely employed in Germany and the United States (for example, former UBS banker Bradley Birkenfeld received US $104 million for reporting
on his employer’s involvement in assisting clients with their tax cheating),67
but it is only now coming to Canada through the international tax informant
program announced in the 2013 budget.68
A review of the assumptions that lead to the deterrence of tax evasion shows important facts about the situations in which tax evasion can continue. One of these
facts is that although a firm may be large, and thus there may be many people who
know the true facts about the firm’s transactions, there may be transactions of which
only a small number of people have knowledge, so that tax evasion might still occur;
tax-shelter transactions come to mind. Another fact is that some of the work of the
firm may be subcontracted to smaller firms that do not have the same need for
rigorous business records; here too, tax evasion can continue. The large firm benefits through having some of the savings passed on through a lower price for the
goods or services.
The second half of the article makes a brief effort to validate the theory by showing
that it generates predictions that are confirmed by data. The simplest such empirical relationship is that within a country, tax evasion by firms is lower for firms with
more employees; that is, small firms are more likely to cheat on their taxes. This
directly connects with the theory above.
Most of the authors’ empirical work, however, concerns broad patterns of economic development. It is well known that across countries, the level of economic
development (measured as gross domestic product [GDP] per capita) rises with the
ratio of tax revenue to GDP—that is, a poorer country, such as Mexico, has a smaller
67 David Kocieniewski, “Whistle-Blower Awarded $104 Million by IRS,” New York Times,
September 11, 2012.
68 Canada, Department of Finance, 2013 Budget, Budget Plan, March 21, 2013, at 154.
current tax reading  n  703
public sector than a rich country, such as Canada. The new insight provided by this
article is that the level of economic development rises with the ratio of only certain
taxes to GDP; in particular, it rises with the ratio of the revenue of modern taxes to
GDP (where modern taxes are defined as income tax, VAT, payroll tax, and social
security contributions) but not with the ratio of traditional taxes to GDP (where
traditional taxes are defined as all other taxes, such as property taxes, sales and excise
taxes, and customs duties). The relationship of this point to the theory is that modern taxes rely heavily on third-party information while traditional taxes rely more
on self-reported information.
A.M.