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Conference Focuses on Intersection of Tax Law and Citizenship

Conference Focuses on Intersection of Tax Law and Citizenship

By Gene Magidenko, ’12
October 14, 2015

Tax experts from the United States, United Kingdom, Canada, Brazil, and Israel spoke at a two-day conference at Michigan Law about the challenges of the Foreign Account Tax Compliance Act (FATCA) and a multitude of other issues at the intersection of the law of taxation and citizenship.

Panel discussions at the Oct. 8 and 9 Taxation and Citizenship Conference, hosted by the U-M Law School in conjunction with the McGill University Faculty of Law, focused on FATCA; the merits of citizenship-based taxation (the policy of taxing all citizens of a country on their worldwide income, versus residence-based taxation, where non-resident citizens are generally not taxed); and the exit tax. The conference was organized by Reuven Avi-Yonah, the Irwin I. Cohn Professor of Law and director of the International Tax LLM Program at Michigan, and McGill's Professor Allison Christians.

Elise Bean, ’82, former chief of staff on the U.S. Senate Permanent Subcommittee on Investigations, delivered the keynote. Bean worked for former Michigan Senator Carl Levin for many years and described the Senate's investigations of several foreign banks which prompted the unprecedentedly quick enactment of FATCA as part of the HIRE Act in 2010.

She emphasized the uniqueness of the American approach of encouraging transparency in banking, versus that of many European countries, which value bank secrecy. She brought up the example of one Swiss bank that had been investigated by the Senate, and that had urged its managers to "above all, protect the bank's secrecy." Although an earlier bill proposed by Senator Levin targeted banks located in tax havens, FATCA was written to apply worldwide instead, to all foreign financial institutions. "Nobody's ever suggested anything like that," said Bean, who noted that many even in Congress were surprised at the expansiveness of FATCA in its final form and the alacrity with which it was passed. Although FATCA has since become controversial, FATCA, Bean suggested, is here to stay. "Polls show great support for cracking down on tax evaders," she said, and FATCA is effective at doing that.

Addressing American exceptionalism in being the only country (aside from Eritrea) with an explicitly citizenship-based tax system, Avi-Yonah observed it to be "one of our oldest tax rules," though notably one not adopted by any other country. However, Avi-Yonah said, the United States is uniquely positioned to adopt constructive tax policies unilaterally, which can in turn lead to multilateral cooperation, with FATCA being a notable recent example.

FATCA, which requires foreign financial institutions to report to the IRS on U.S. citizen accountholders, has begun to prompt countries to exchange more tax enforcement information. At the same time, the persisting difficulty with FATCA, said Professor Ruth Mason of the University of Virginia School of Law, "is that the IRS is increasingly aware of violations it simply cannot enforce."

Michigan's James R. Hines Jr., the L. Hart Wright Collegiate Professor of Law and codirector of the Law and Economics Program at Michigan Law, listened in on several panels and offered witty and insightful commentary. At one point, eliciting much laughter in the audience, he said, "Imagine if U.S. persons in FATCA were replaced with babysitters. Would it not lead to an absurd result, instituting a FATCA-like regime for 12-year-olds? How far can it go until it goes too far?" A heated though good-natured discussion ensued about the merits of a FATCA-like regime being imposed in contexts other than international banking. Returning to citizenship taxation generally, Professor Edward Zelinsky of the Benjamin N. Cardozo School of Law quipped, "I don't lose sleep over Boris Johnson; he kept the American passport for a reason," in reference to the London mayor who renounced his U.S. citizenship after he had to pay a substantial capital gain tax bill.

At the end of the conference, Christians said, "This conference has given a sense of what the best arguments are on both sides of the citizenship taxation debate." She noted that before FATCA, issues of citizenship and taxation were less salient due to the U.S. government's lack of enforcement ability. "There were a lot more provocative questions that need to be answered," said Ajay Mehrotra, professor of law at Indiana University Maurer School of Law, currently on leave while serving as director of the American Bar Foundation. In concluding the conference, Avi-Yonah urged consideration of the "extent to which the extraterritorial application of tax laws conflicts with other countries' interests" and observed that the resolution of these conflicts will guide the future direction of international tax law.

For a full list of participants and presentation topics, please go here. The conference was sponsored by the University of Michigan Center for Comparative and International Law; Procopio, Cory, Hargreaves & Savitch LLP; and the Michigan Journal of International Law.

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