Of Risks and Remedies: Best Practices in Tax Rulings Transparency.” Leandra Lederman Indiana University Maurer School of Law

Of Risks and Remedies: Best Practices in Tax Rulings Transparency.” Leandra Lederman Indiana University Maurer School of Law

FALL 2020 NEW YORK UNIVERSITY SCHOOL OF LAW “Of Risks and Remedies: Best Practices in Tax Rulings Transparency.” Leandra Lederman Indiana University Maurer School of Law September 29, 2020 Via Zoom Time: 2:00 – 3:50 p.m. EST Week 6 SCHEDULE FOR FALL 2020 NYU TAX POLICY COLLOQUIUM (All sessions meet online on Tuesdays, from 2:00 to 3:50 pm EST) 1. Tuesday, August 25 – Steven Dean, NYU Law School. “A Constitutional Moment in Cross-Border Taxation.” 2. Tuesday, September 1 – Clinton Wallace, University of South Carolina School of Law. “Democratic Justice in Tax Policymaking.” 3. Tuesday, September 8 – Natasha Sarin, University of Pennsylvania Law School. “Understanding the Revenue Potential of Tax Compliance Investments.” 4. Tuesday, September 15 – Adam Kern, Princeton Politics Department and NYU Law School. “Illusions of Justice in International Taxation.” 5. Tuesday, September 22 – Henrik Kleven, Princeton Economics Department. “The EITC and the Extensive Margin: A Reappraisal.” 6. Tuesday, September 29 – Leandra Lederman, Indiana University Maurer School of Law. “Of Risks and Remedies: Best Practices in Tax Rulings Transparency.” 7. Tuesday, October 6 – Daniel Shaviro, NYU Law School. “What Are Minimum Taxes, and Why Might One Favor or Disfavor Them?” 8. Tuesday, October 13 – Steve Rosenthal, Urban-Brookings Tax Policy Center. “Tax Implications of the Shifting Ownership of U.S. Stock.” 9. Tuesday, October 20 – Michelle Layser, University of Illinois College of Law. “How Place-Based Tax Incentives Can Reduce Economic Inequality.” 10. Tuesday, October 27 – Gabriel Zucman, University of California, Berkeley. “The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts.” 11. Tuesday, November 10 – Owen Zidar, Princeton Economics Department. “The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates.” 12. Tuesday, November 17 – Abdoulaye Ndiaye, NYU Stern Business School. “Redistribution With Performance Pay.” 13. Tuesday, November 24 – Lilian Faulhaber, Georgetown Law School. “Searching for Coherence: The Overuse of Excess Returns and Excess Profits.” 14. Tuesday, December 1 – Erin Scharff, Arizona State Sandra Day O’Connor College of Law. “Revisiting Local Income Taxes.” Working draft—please do not cite or circulate Of Risks and Remedies: Best Practices in Tax Rulings Transparency Leandra Lederman* ABSTRACT The phrase “international scandal” hardly brings to mind tax rulings. It is not just that tax rulings may seem arcane, they are also a legitimate tax administration tool. Advance tax rulings provide certainty to taxpayers and the tax administration on the tax treatment of a planned transaction, lowering costs on both sides. Advance tax rulings are therefore openly used by many countries, including the United States and numerous European countries. Yet, secrecy that is followed by criticism and often by revelations that may embarrass a country’s leaders is a recurring aspect of these rulings. The United States has experienced this, and keeps Advance Pricing Agreements (APAs) confidential, while publishing letter rulings in anonymized form. The 2014 “LuxLeaks” scandal, revealing what the press sometimes termed “sweetheart deals” between the Luxembourg tax authority and multinational companies, is probably the best- known scandal regarding tax rulings. LuxLeaks helped trigger legal changes that require tax authorities, including those of European countries and the United States, to automatically share information about cross-border advance rulings with other countries’ tax authorities. Luxembourg’s tax rulings, along with U.S. APAs, otherwise remain confidential. The pattern—in the United States, Luxembourg, and elsewhere—of nondisclosure of tax rulings followed by revelations of documents helps inform the question of what level of transparency of tax rulings is appropriate. This Article accordingly (1) develops a typology of risks of opaque rulings; (2) catalogues the levels of possible disclosure, connecting each level with the risks it would address; and (3) examines the possible costs of tax ruling transparency. It argues that best practices include disclosing anonymized letter rulings and, at a minimum, the transfer-pricing methodologies a tax administration has approved in APAs. * William W. Oliver Professor of Tax Law, Indiana University Maurer School of Law. This project was supported in part by a research grant provided by the Fulbright Belgium/Luxembourg Commission. The author thanks Werner Haslehner for hosting her at the University of Luxembourg and for many helpful discussions. She is grateful to Nicholas Almendares, Antonio Ancora, Jennifer Bird- Pollan, Stephen Daly, Charles Geyh, Heather Field, Ruth Mason, Katerina Pantazatou, Emily Satterthwaite, Julia Sinnig [and ...] for helpful comments on prior drafts. She is also grateful for helpful discussions with William Byrnes, Ana Paula Dourado, Hans Gribnau, Jayanth Krishnan, Leopoldo Parada, [and ...], as well as participants in a seminar at the University of Luxembourg; a faculty workshop at the Indiana University Maurer School of Law; a roundtable at the Southeastern Association of Law Schools conference; the 2020 Tax Research Network conference; and the U.C. Hastings College of the Law Tax Speaker Series. Maurer Law students Steven Bassett, Sandra Francisco, Mantas Grigorovicius, Derrick Hou, George Krug, Sarah Taylor, and Thibault Vielledent provided helpful research assistance. This is a preliminary draft. Comments are welcome at [email protected]. TABLE OF CONTENTS INTRODUCTION .................................................................................................................... 3 I. TAX RULINGS AND ADVANCE PRICING AGREEMENTS .................................................. 6 A. A Primer on Tax Rulings and APAs ........................................................................... 6 1. Advance Tax Rulings ........................................................................................6 2. Advance Pricing Agreements ............................................................................7 3. Concerns Raised by Rulings ............................................................................12 B. The Differing Transparency of U.S. Letter Rulings and APAs ................................ 14 1. Letter Rulings ..................................................................................................14 2. APAs ................................................................................................................16 II. A TYPOLOGY OF RISKS OF NONTRANSPARENT TAX RULINGS ................................... 18 A. Risks to Countries .................................................................................................... 18 1. Loss of Tax Base .............................................................................................19 2. Distortion of Competition ................................................................................20 3. Embarrassment Upon Revelation of Sweetheart Deals ...................................23 4. Lack of Protection for a Weak Tax Administration ........................................26 5. Corruption or the Appearance of Corruption ..................................................27 B. Risks to Taxpayers ................................................................................................... 31 1. Barriers to Access ............................................................................................31 2. Inconsistent Tax Treatment .............................................................................32 C. Risks to Tax Advisers ............................................................................................... 34 1. “Fighting in the Dark” .....................................................................................35 2. “Private Libraries” ...........................................................................................36 III. POSSIBLE DISCLOSURE REMEDIES AND POTENTIAL COSTS ........................................ 37 A. A Range of Disclosure Remedies ............................................................................. 37 1. Disclosure to Other Countries .........................................................................38 2. Disclosure to a Domestic or International Oversight Body .............................44 3. Disclosure to Tax Advisers ..............................................................................45 4. Disclosure to the Public ...................................................................................46 B. Potential Costs of Transparent Tax Rulings ............................................................ 47 1. Are Disclosed Tax Rulings Useless? ...............................................................48 2. Taxpayer Use of Others’ Rulings ....................................................................49 3. Would Confidential Taxpayer Information Be Disclosed? .............................50 4. Expense of Publishing Rulings ........................................................................56 5. Decline in Rulings Volume?............................................................................57 CONCLUSION ...................................................................................................................... 64 2 INTRODUCTION Many countries, including the United States, use tax rulings. A ruling provides certainty for the requesting taxpayer and avoids the potential cost

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