The State Administration of International Tax Avoidance
This Article documents a process in which a national tax administration in one jurisdiction is consciously and systematically assisting taxpayers to avoid taxes in other jurisdictions. The aiding tax administration collects a small amount of tax from the aided taxpayers. Such tax is functionally structured as a fee paid for government-provided tax avoidance services. Such behavior can be, and probably is, easily copied by other tax administrations. The implications are profound. On the normative front, the findings should fundamentally change our conceptual understanding of international tax competition. Tax competition is generally understood to be the adoption of low tax rates in order to attract investments into the jurisdiction. Instead, this Article identifies an intentional “beggar thy neighbor” behavior, aimed at attracting revenue generated by successful investments in other jurisdictions, without attracting actual investments. The result is a distorted competitive environment in which revenue is denied from jurisdictions the infrastructure and workforce of which support economically productive activity. On the practical front, the findings suggest that internationally coordinated efforts to combat tax avoidance are missing an important part of the tax avoidance landscape. Current efforts are largely aimed at curtailing aggressive taxpayer behavior. Instead, this Article proposes that the focus of such efforts should be on curtailing certain rogue practices adopted by national tax administrations.
To explain these arguments, this Article uses an original dataset. In November 2014, hundreds of advance tax agreement (ATAs) issued by Luxembourg’s Administration des Contributions Directes (Luxembourg’s Inland Revenue, or LACD) to multinational corporate taxpayers (MNCs) were made public. One hundred and seventy-two of the documents are hand-coded and analyzed. The analysis demonstrates that LACD cannot be reasonably viewed—as some have suggested in LACD’s defense—as a passive player in tax avoidance schemes of multinational taxpayers. Rather, LACD is best described as a for-profit manufacturer of tax avoidance opportunities.
We Have a Consensus on Fraud on the Market— And It’s Wrong
James Cameron Spindler
Recent scholarship contends that the fraud on the market securities class action has neither deterrent nor compensatory effect and should be cut back or even abandoned entirely. This scholarship largely focuses on two critiques: circularity, which holds that shareholder class action claimants are suing themselves, making compensation impossible; and diversification, which holds that fraud constitutes a diversifiable risk, such that diversified shareholders both gain and lose from fraud in equal measure and hence are not negatively impacted. These critiques are arguably the most important and widely-used theoretical development of the last two decades in securities law, and enjoy a broad consensus.
Unfortunately, these critiques are wrong. After tracing the evolution of these critiques, this paper demonstrates economically that, despite widespread acceptance, none of the principal claims of these critiques are correct. In particular: fraud on the market does indeed compensate defrauded purchasers despite circularity (under certain conditions, perfectly); and diversified investors do have expected losses from fraud and have incentives to undertake deadweight precaution costs. Further, the fraud on the market remedy can deter such wasteful precaution costs. The critiques are fundamentally flawed, the academic consensus on fraud on the market is incorrect, and the panoply of reform proposals based on these critiques is without foundation. These critiques have fueled a trend of cutbacks and ongoing existential challenges to fraud on the market (as in Halliburton) that, in light of these results, should be rethought.
Gone but not Forgotten: Does (or Should) the Use of Self-Destructing Messaging Applications Trigger Corporate Governance Duties?
This Article examines the prevalent use of ephemeral, self-destructing messaging applications in publicly traded companies, and whether such use violates existing securities regulations, corporate preservation duties, and fiduciary obligations. Seemingly, the business judgment rule immunizes officers and directors from liability resulting from the use of transitory media, prohibiting shareholder-plaintiffs from successfully maintaining lawsuits and necessitating regulatory intervention. Current jurisprudential thought severely constrains a shareholder-plaintiff’s ability successfully to hold officers and directors accountable for their lack of corporate oversight and their failure to disclose material information, including risks associated with the types of information systems a company uses in its daily operations. Regulatory intervention is needed to ensure the board, external auditors, and the trading public may assess the extent to which such media jeopardizes the company’s finances, risk posture, and cybersecurity, and provide plaintiffs with a viable avenue of redress for lackadaisical oversight.
Too Important to Fail: Bankruptcy Versus Bailout of Socially Important Non-Financial Institutions
Systemically important financial institutions are broadly considered to impose a risk to the entire economy upon failure; thus taxpayers act upon their failure, providing them with an implied insurance policy for ongoing liquidity. Yet taxpayers frequently provide de facto liquidity insurance for non-financial institutions as well. Taxpayer money is used to rescue hospitals, utility providers, and major employers.
The Article defines a new category of socially important non-financial institutions (SINFIs) and proposes a method for their ex-ante identification. SINFIs are corporations exclusively providing an essential social function, and the Article offers guidelines for defining essential industries and essential social functions.
The case for bailouts of socially important non-financial institutions is discussed. Liquidity distress for a SINFI is unlikely to be resolved efficiently through bankruptcy, as the risk of an operating default for the socially important institution imposes an immediate crisis of confidence. The provision of service by a socially important institution imposes positive externalities on the general public. This renders two of the main features of bankruptcy, debtor-in-possession rules and the ability to sell assets free and clear of all liens, sub-optimally efficient. Private investors are unlikely to capture the full value of their investment in the socially important institution on the edge of illiquidity. Thus, in a financially distressed SINFI, both the likelihood of new investment opportunities and their potential terms are expected to be suboptimal. Public finance is likely to be required as SINFIs are too important to fail.
The Article further analyzes the structural characteristics and distorted corporate governance of socially important non-financial institutions. The elevated probability of rescue in case of failure makes the socially important non-financial institution prone to unwarranted expansion, and distorts its corporate governance well before failure occurs. The resulting moral hazard creates both enhanced incentives for excessive leverage and risk-taking, and elevated incentives for empire building due to the weaker corporate governance mechanisms available.