Allison Christians takes complex ideas and makes them not just clear, but compelling. In this episode, she describes her optimistic vision of the future of international taxation. With the world caught between too many taxes and too little tax revenue, Christians explains what digital services taxes reveal about the failures of our century old system for taxing multinationals. More importantly she explains what they might mean for our future. Could her alchemy of turning two problems (our failures to tax multinationals and to tackle climate change) into a single solution save us? Christians also answers a pencil question from an article by Dana Brakman Reiser about a surprising episode in the history of nonprofit law.
Allison Christians is associate dean for research and the H. Heward Stikeman Chair in the Law of Taxation at the McGill University Faculty of Law. Her research and teaching focus on national and international tax law and policy issues, with emphasis on the relationship between taxation and economic development and on the role of government and non-government institutions and actors in the creation of tax policy norms.
Christians is the author of ‘The Big Picture,’ a column for Tax Analysts’ Tax Notes International and regularly comments on developments in international tax law and policy on her blog and on Twitter as @profchristians. She has been awarded the John Durnford Prize in Teaching Excellence and the Principal’s Prize for Excellence in Teaching. She was named among the International Tax Review’s "Global Tax 50" in both 2015 and 2016 for her influence and impact on taxation, and in 2018 was identified by Economia as one of the top 50 most influential sources of finance news and information in social media.
Our student quote is by Kris from Livingston, NJ
Resources
Speaker 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Speaker 2:
You have a beautiful tax return, the nicest one I've ever seen.
Speaker 3:
Okay folks, but remember your manners, no stampeding, walk slow like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean, this is the Tax Maven. Here, we are going to, in each episode, talk to our tax maven, who will be a person proving Archimedes' point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax and the place to put it is here at NYU Law.
Steven Dean:
Today's tax maven is a glass half full kind of person. Although she sees the foundation's crumbling under the taxation of multinationals, she sees an opportunity rather than failure. When you listen to her, you might be forgiven for thinking that we might just come together to improve upon a century old system for taxing multinationals, and this time just maybe get it right.
Steven Dean:
I'm Steven Dean, the Faculty Director of the Graduate Tax Program at NYU Law, and I'm here today with Allison Christians who is not only a full professor and associate Dean for research, but also the H. Heward Stikeman Chair in the law of taxation at McGill. Professor Christians also got her LM in Tax from NYU in 2003, I thank you for coming.
Allison Christians:
Well, it's a great pleasure to be here, Steven.
Steven Dean:
Professor Christians is the kind of scholar that is able to see the details, but also to understand the big picture.
Allison Christians:
When we think about tax, international tax especially, we're thinking there's a problem in the way that the tax system allocates income across countries and there's a struggle for dominance of ideas, and there's a struggle also for coherence. So we in the international tax have pinned our hopes on some ideas about how we should allocate profit. The core, or the crux, of those ideas seems in some way to lie in value, but we never really used to say that.
Allison Christians:
But then, a couple years ago, you could see the OECD started saying, "Well, there's a principle that explains how we decide which country gets what, and it's that income should be taxed where value is created, and where economic activities take place."
Allison Christians:
So the OECD is the Organization for Economic Cooperation and Development. It's a 30 some member intergovernmental organization. The United States is a member, albeit reluctantly on occasion. Canada's a member, but it's often referred to as the rich countries club. Effectively, the OECD is a policy making organization. The idea is that it's heads of state, finance directors, finance ministers, getting together and comparing notes on important regulatory areas. The idea is that in that space, they can compare practices and come up with coherent or coordinated strategies to solve mutual problems.
Steven Dean:
To understand why the OECD is concerned with taxing where value is create, and why that might be controversial, you have to know a little something about the way international tax has worked for the last hundred years or so.
Allison Christians:
You look at a multinational and a multinational is a bunch of companies that are controlled or affiliated with each other. So that is, you have Apple in Cupertino, California, that's one company. Then Apple also has a company in Ireland and that's a separate company. Together those two companies make up Apple, the multinational. Then of course, Apple has 200 other companies in the structure. So that's the big picture of the multi-national.
Allison Christians:
So the idea is, well, when Apple is designing a product in Cupertino and developing it in a lab in Ireland, developing intellectual property ideas, branding, and so on, and then making the phone in a third company in China that whole supply chain produces one profit. How should each of those three countries get it?
Allison Christians:
So the OECD, and all the OECD countries that is to say, come to a kind of an uneasy compromise, which is to say, "Well, each country will tax that portion of the profit that's related to the things that happened in their country." That's the basic structure.
Steven Dean:
How does that align or contrast with this idea of taxing where the value is created? Does that embody that, or does it conflict with that?
Allison Christians:
Well, I think when the OECD started talking about the goal of this whole project is to tax income where value is created, it caused some of us to pause a bit because we actually didn't know that that was necessarily the goal, we thought the goal was to have workable consensus, sort of like which side of the road should we drive on, not some sort of economic statement about the world. Like, "Here's a dollar that we got an international profit, now let's fragment it and assign it to the different people that might claim it."
Allison Christians:
So I think there was some surprise, maybe, when the OECD talked about value and what's interesting because now you see them backed into a corner a little bit on this language, because if you're going to tax where value is created, well, let's talk not about Apple, but let's talk about Google. What is Google's value? Where is their value created? Their value is created by users voluntarily providing copious amounts data, which then Google employees people all over the world to algorithmically analyze and then spit back useful, valuable things, and in the meantime, collect advertising dollars all along the chain.
Allison Christians:
So where is the source? Where's the value created in a Google supply chain where there's no good or product, but there's a bunch of digital data and certainly there's cables under the sea, but that's nice, it's pretty hard. Are we going to divide it based on like, how long is your cable versus my cable? That's a hard way to go. So we see, now, OECD countries really struggling, "Oh, value creation in the context of a digital ... How do we talk about that?"
Steven Dean:
This all sounds pretty disheartening, but as I said, Professor Christians is an optimist.
Allison Christians:
There's a door opening that has been closed for a while because you're quite right, we'd been using these ways of thinking, we'd been telling ourselves stories, let's say, for about a hundred years that we know what to do and here's how to do it and this is a mutually agreed consensus position that everyone can work with. Maybe you lose some in one place, but you gain it in another. So it's acceptable, it's mutually beneficial. So it's workable.
Allison Christians:
But man, you would think something you've done for a hundred years, you would think it would have got better over that time, that you would have learned something, but instead, the foundations have crumbled underneath and it's going to fall into a state of disrepair very quickly, I think, because the only solution, when you realize that the consensus, you're not sure that you actually are getting benefits anymore, then you get some key countries saying, "Okay, well we're not actually going to follow the rules anymore." So you see some countries adopting digital services taxes, and doing different things to try to capture some of the value.
Steven Dean:
So tell us about the digital services taxes. What is the digital services tax?
Allison Christians:
Yeah, so I think, I wouldn't call this a solution that I think is necessarily going to work. I'm not sure, we'll see. But so effectively, if you've got Google in your jurisdiction, but they're not actually they're there, people are searching on Google, your users are searching, your customers are searching, your taxpayers are searching on Google, but Google has no office in your country, and what they're doing is selling advertising to local advertisers, but they're not taxpayers in your jurisdiction.
Allison Christians:
You look at that flow of data from your people and the advertising dollars. You say, "It's not enough to tax the consumer. It's not enough to tax the advertisers who are in our jurisdiction. We actually want some of the profit that Google is making, which is booked somewhere else." So you basically need a separate tax, unless you can adjust the one we have.
Allison Christians:
The digital service tax or any kind of new tax that is different than what we're doing, that's the outward sign that the compromise is no longer acceptable. So that means a door is opening. That is, countries that are saying, "Okay, the compromise that we have on how we divide the profits of multinationals, we're uneasy with it now, we don't know how to work it, so we need to go find something somewhere else. So we're just going to slap on this other tax and hope for the best."
Allison Christians:
But when that happens, what it shows is that the tolerance for tax competition or the tolerance for engaging in a certain kind of tax competition might be shifting, not changed, not eliminated, but just shifting, the terrain is shifting. I think that gives us an opportunity, right? So in 1919, when the League of Nations is thinking about this, it's because the modern income tax is being born and people are just starting to open the door to realize, "Oh, there are these coordination problems. We need to fix these things."
Allison Christians:
Now in 2019, where we see that we haven't solved those problems, the fact that countries are adopting unilateral strategies is saying, "Oh, we actually need a new compromise. The thing we have is not working." So from my perspective, and I know you share this perspective, Steven, from my perspective, there's not only an opportunity to open the door and re-examine our principals for their own sake, to say, "We need better principles, principles that can be mutually beneficial," but also to consider the sort of global social economic implications of our system, which by the way, as you know, we have ignored for a century.
Steven Dean:
What would that look like? What are the socioeconomic implications that you think we've been ignoring?
Allison Christians:
Well, I think the one for me, the big one, and that's sort of in that paper that you mentioned, is that when you look at a global supply chain and you look at how the tax system credits the various contributions of different countries, you end up in this place where highly productive countries that are very wealthy, effectively claim most of the profit from multinational activity.
Allison Christians:
Even though the things we're talking about, this is especially in the case of digital products, like all of us have that phone, the products that we need to use those things, they're made from rare earth and minerals that have to be dug out of the ground and non-renewable resources that have environmental impacts that we have allowed to be externalized, we have used irresponsibly, and we are seeing the growing climate crisis as a result of those things. So those things are not reflected in the current system and they're not reflected for good reasons, but we need to fix those things.
Steven Dean:
Well, those are broader market failures, right? So the idea you're saying is that we don't do a good job of pricing in environmental costs or the cost of bad labor laws. You're suggesting that the tax laws can be fixed without waiting for the underlying market failures to be addressed everywhere?
Allison Christians:
Well, I think there's no one solution and everybody needs to work together on different approaches. So one way is to have different kinds of taxes to deal with different kinds of problems. For example, a carbon tax is an option to try to deal with environmental damage. But think about the consequences if we allow externalized costs to not be counted for tax purposes. What that means is that the profit that's derived from saving costs is attributed not to the place where you save the cost, but it's attributed to some place else in the global supply chain. Normally, that's going to high income countries.
Allison Christians:
So if you look at what countries need to spend to be dealing with their economies and their development needs, what we perversely have done is built a tax system that allocates most of the gains of international trade and commerce to high income countries, and very, very little to low-income countries, and that just has to be fixed. Now, I think that there are ways to fix that. I think we could and should be looking at the way that the ... and this is the plumbing, this is really the plumbing. This is in the weeds of the rules.
Steven Dean:
We get excited about this, but-
Allison Christians:
Yeah, we do. We do. We could spend some time in the transfer pricing, the rules for multinational profit allocation, but suffice it to say that the system is built on a structure, which is an economic fiction creating structure, which is, it takes a multinational and tries to come up with an artificial counterfactual that pretends the multinational is a bunch of companies that don't deal with each other as a controlled group, but as market participants.
Allison Christians:
In that structure, a lot of economic analysis is going on about value drivers. Now that we're learning more about the economic and ecological costs of, for example, energy extraction, those are inputs that can go in to that same analysis and it would produce a different result. We're getting wonkish though, we need to be careful with that.
Steven Dean:
That's true. So you mentioned a carbon tax. Could that save us all or is that-
Allison Christians:
No, no.
Steven Dean:
No? Okay.
Allison Christians:
No, I don't think so. Part of the reason it's hard for a carbon tax to save us all is not that it's not the correct thing to do, of course, it's a good and correct thing to do. Part of the reason that it's not going to save us all is because the carbon tax is a consumption tax, and it's politically tough to get people to understand that you have to consume less. You have to consume less. That is really hard. That is really hard to sell not because it's wrong, it's correct. But what politician is going to go the distance to make that carbon tax the amount that it needs to be and risk their political future to gain a collective benefit? Not too many.
Allison Christians:
Whereas, and this is sort of just a thought, sometimes there's an attraction to a more complex regime, which, as you know, you can quantify that complexity, but there's a political benefit to that complexity too. I think that's harder for us to talk about, because what we're saying is, is if the carbon tax can be politically difficult for people to accept, can we internalize the environmental costs in a way that is not as obvious, it's not as clearly put right on the consumer, and is that okay if we do that? We're not hiding it, but we are changing the way we impose it.
Steven Dean:
Working within the system a bit.
Allison Christians:
That's the idea. Yeah.
Steven Dean:
Well, so now I'm going to ask you a question that I don't think you know the answer to, and I don't, even though you live in Canada, I don't want you to think this is some weird anti-Canadian question I'm going to ask you, but maybe it kind of is. Well, you'll decide.
Allison Christians:
I'm ready.
Steven Dean:
We're going to talk about the world of tax exempt organizations. So we're tax lawyers, but part of tax is tax exempt organizations. So the question is which of the following tax exams faced a 'takeover' attempt by an anti-immigrant campaign in sort of a proxy voting battle? So one of the three, it was either the Sierra Club or the Boy Scouts of America or the American Red Cross. So they wanted to turn one of these three organizations into ... add a plank to its mission that was about restricting immigration into the United States.
Allison Christians:
And they are, Red Cross-
Steven Dean:
The Boy Scouts of America, or the Sierra Club.
Allison Christians:
This just doesn't seem plausible that it could be any one of those three.
Steven Dean:
It is definitely one of those three, Professor Christians.
Allison Christians:
Okay, I will just pick the Sierra Club, and here's the rationale. The Sierra Club has a global focus. So maybe there's some connection. Also, there's some connection to animals with the Sierra Club and preservation. So that's why I'm [crosstalk 00:17:44].
Steven Dean:
Your answer is correct. Your explanation is wrong. Your explanation is dead wrong. So for getting the answer right, I'm going to give you this lovely NYU Law Graduate Tax Program pencil.
Allison Christians:
I'm overwhelmed with gratitude.
Steven Dean:
Use it, use it sparingly. There aren't that many of those to go around. So I'll tell you the story. So the story is that ... So I'm going to read a quote from an article by [Dana Brachman-Reeser 00:18:07], nonprofit takeovers regulated in the market for Michigan full from 2006, she said, "It's the most volatile of these nonprofit takeover attempts began following a 1996 board resolution that adopted a neutral stance on a US immigration policy in response members of the club formed Sierrans for US Population Stabilization, S-U-S-P-S to advocate a return to traditional Sierra Club population policy.
Steven Dean:
So the idea is that if you care about the US environment, fewer people is good for the US environment, right? The landscape, the resources within the US, so an anti-immigrant stance was considered consistent with that vision. So the good news, for us, I think, is that they lost. So it didn't succeed and it turns out the Sierra Club is not currently ... It remains neutral on immigration.
Allison Christians:
Yeah. So see, that's the thing, I thought ... Sierra club, so the one thing that's clear is that butterflies can go wherever they want, whether there's a border or not, and there's just sort of no stopping that-
Steven Dean:
And they do.
Allison Christians:
Right. So I thought-
Steven Dean:
They do, they migrate an incredibly long way.
Allison Christians:
Right. So I thought ... Yeah, I can imagine the most absurd place where you would try to restrict human migration would be the one industry, or the one entity, whose, one of their main things is to think about things that do not observe borders at all.
Steven Dean:
Allison, the world is rich in irony, as we know.
Allison Christians:
Exactly, exactly.
Steven Dean:
So thank you so much for joining us today Professor Christians. Thank you for listening to the Tax Maven, and I also want to give a very special thank you to those that help make the podcast possible. Patrick Kelly, Joe Rivera, Greg Addison, Rebecca Carmichael, Jill Rachlin and Anthony Pietrangelo, and thank you Rachel Burns.
Steven Dean:
The NYU Law Graduate Tax Program has been the premier place to learn about tax law for the past 75 years. So please visit us on the web, visit our Graduate Tax Program website to see the different programs we offer, both in-person and online, both for lawyers, and non-lawyers. Take a look at what we offer, and I hope you consider joining us.
Steven Dean:
Now, we like to end each of our episodes with a quote about taxes read by one of our students. Today's student quote is read by [Chris 00:20:41 from Livingston New Jersey.
Chris:
The source of this quote is Randolph E. Paul's article, The Responsibilities of the Tax Advisor. The mills of tax law and their perpetual motion grind exceedingly fast and exceedingly fine. The end product is a recalcitrant ambiguous body of turbulent law with no fields of black and white, where exactness would be only delusive, where logic makes frequent concession to practical values and where considerations of policy tip many nicely balanced scales.
Steven Dean:
Please email us info@taxmavenpodcast.com if you have any questions or comments or suggestions, and if you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.