Stephen E. Shay

Senior Lecturer on Law

2016-2017

Biography

Stephen E. Shay is a Senior Lecturer at Harvard Law School.

Before joining the Harvard Law School faculty as a Professor of Practice in 2011, Mr. Shay was Deputy Assistant Secretary for International Tax Affairs in the United States Department of the Treasury. Prior to re-joining the Treasury Department in 2009, Mr. Shay was a tax partner for 22 years with Ropes & Gray, LLP. Mr. Shay served in the Office of International Tax Counsel at the Department of the Treasury, including as International Tax Counsel, from 1982 to 1987, during which Mr. Shay actively participated in the development and enactment of international provisions in the Tax Reform Act of 1986.

Mr. Shay has published scholarly and practice articles relating to international taxation, and testified for law reform before Congressional tax-writing committees. He has had extensive practice experience in the international tax area and while in active practice was recognized as a leading practitioner in Chambers Global: The World's Leading Lawyers, Chambers USA: America's Leading Lawyers, The Best Lawyers in America, Euromoney's Guide to The World's Leading Tax Advisers and Euromoney's, Guide to The Best of the Best. Mr. Shay discloses certain related interests and activities not connected with his position at Harvard Law School on the Harvard Law School website.

Mr. Shay is President of the American Tax Policy Institute Board of Trustees and is the IBFD Professor in Residence for 2015. Mr. Shay serves on the Executive Committee of the New York State Bar Association Tax Section and has been active in the American Bar Association Tax Section as a Council Director and Chair of the Committee on Foreign Activities of U.S. Taxpayers, in the American Law Institute as an Associate Reporter and in the Taxes Committee of the International Bar Association. Mr. Shay is a 1972 graduate of Wesleyan University, and he earned his J.D. and his M.B.A. from Columbia University in 1976.

Areas of Interest

J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Getting From Here to There: The Transition Tax Issue, 154 Tax Notes 69 (2017).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Federal
Type: Article
Abstract
If there is fundamental U.S. international income tax reform, regardless of the reform option chosen, the United States must decide how to handle the $2.4 trillion to $2.6 trillion of previously untaxed foreign income accumulated by U.S. multinational corporations. In this report, Fleming, Peroni, and Shay argue that the proper approach is to treat the income as a subpart F inclusion in the year before the effective date of fundamental reform and to tax it at regular rates with an option to make the payments in installments that bear market-rate interest. The authors explain why the case for a low or deferred tax on this income is inferior to the case for full immediate taxation.
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Defending Worldwide Taxation With a Shareholder-Based Definition of Corporate Residence, 1016 BYU L. Rev. 1681 (2017).
Categories:
Taxation
,
Corporate Law & Securities
Sub-Categories:
Shareholders
,
Taxation - Corporate
,
Tax Policy
,
Taxation - International
Type: Article
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Two Cheers for the Foreign Tax Credit, Even in the BEPS Era, 91 Tulane L. Rev. 1 (2016).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - International
,
Taxation - Personal Income
Type: Article
Abstract
Reform of the U.S. international income taxation system has been a hotly debated topic for many years. The principal competing alternatives are a territorial or exemption system and a worldwide system. For reasons summarized in this article, we favor worldwide taxation if it is real worldwide taxation – i.e., a non-deferred U.S. tax is imposed on all foreign income of U.S. residents at the time the income in earned. This approach is not acceptable, however, unless the resulting double taxation is alleviated. The longstanding U.S. approach for handling the international double taxation problem is a foreign tax credit limited to the U.S. levy on the taxpayer’s foreign income. Indeed, the foreign tax credit is an essential element of the case for worldwide taxation. Moreover, territorial systems often apply worldwide taxation with a foreign tax credit to all income of resident individuals plus the passive income and tax haven income of resident corporations. Thus, the foreign tax credit is actually an important feature of many territorial systems. The foreign tax credit has, however, been subjected to sharp criticisms and Professor Daniel Shaviro has recently proposed replacing the credit with a combination of a deduction for foreign taxes and a reduced U.S. tax rate on foreign income. In this article, we respond to the criticisms and argue that the foreign tax credit is a robust and effective device. Furthermore, we respectfully explain why Professor Shaviro’s proposal is not an adequate substitute. We also explore an overlooked aspect of the foreign tax credit – its role as an allocator of the international tax base between residence and source countries – and we explain the credit’s effectiveness in carrying out this role. Nevertheless, we point out that the credit merits only two cheers because it goes beyond the requirements of the ability-to-pay principle that underlies use of an income base for imposing tax (instead of a consumption base). On balance, however, the credit is the preferred approach for mitigating international double taxation of income.
Stephen E. Shay, An Overview of Transfer Pricing in Extractive Industries, in International Taxation and the Extractive Industries 42 (Philip Daniel, Michael Keen, Artur Świstak & Victor Thuronyi eds., 2016).
Categories:
Environmental Law
,
Taxation
Sub-Categories:
Oil, Gas, & Mineral Law
,
Taxation - International
Type: Book
Abstract
The taxation of extractive industries exploiting oil, gas, or minerals is usually treated as a sovereign, national policy and administration issue. This book offers a uniquely comprehensive overview of the theory and practice involved in designing policies on the international aspects of fiscal regimes for these industries, with a particular focus on developing and emerging economies. International Taxation and the Extractive Industries addresses key topics that are not frequently covered in the literature, such as the geo-political implications of cross-border pipelines and the legal implications of mining contracts and regional financial obligations. The contributors, all of whom are leading researchers with experience of working with governments and companies on these issues, present an authoritative collection of chapters. The volume reviews international tax rules, covering both developments in the G20-OECD project on ’Base Erosion and Profit Shifting’ and more radical proposals, identifying core challenges in the extractives sector. This book should become a core resource for both scholars and practitioners. It will also appeal to those interested in international tax issues more widely and those who study environmental economics, macroeconomics and development economics.
Stephen E. Shay, J. Clifton Fleming, Jr. & Robert J. Peroni, Treasury's Unfinished Work on Corporate Expatriations, 150 Tax Notes 933 (2016).
Categories:
Taxation
Sub-Categories:
Taxation - International
,
Taxation - Corporate
,
Taxation - Federal
Type: Article
Abstract
Continued tax-motivated inversions of U.S. corporations into foreign corporations highlight the systemic tax advantages that a foreign-owned U.S. corporation has over a U.S.-owned corporation in avoiding U.S. corporate tax on U.S. business income. In the absence of congressional action, this article emphasizes the need for the Treasury to further reduce U.S. tax incentives for inversions and other foreign acquisitions of U.S. corporations. The two most important of the tax incentives are earnings stripping and the ability to use, directly or indirectly, a U.S. group’s unrepatriated foreign earnings for the benefit of shareholders of the foreign parent corporation without incurring current U.S. income tax. These tax advantages will not be meaningfully reduced by any plausible lowering of the top U.S. corporate tax rate. Moreover, earnings stripping would be exacerbated by adoption of a territorial system. Treasury should use the administrative authority Congress delegated to it under Code sections 385 and 956 to restrict these foreign parent tax advantages and counter renewed market pressure on U.S. groups to engage in this form of tax avoidance. Treasury should employ existing anti-abuse regulations to address use of unrepatriated CFC earnings to benefit foreign parent groups.
Stephen E. Shay, J. Clifton Fleming, Jr. & Robert J. Peroni, R&D Tax Incentives: Growth Panacea or Budget Trojan Horse?, 69 Tax L. Rev. 419 (2016).
Categories:
Taxation
,
Technology & Law
Sub-Categories:
Tax Policy
,
Science & Technology
,
Intellectual Property Law
Type: Article
Abstract
Research and development (R&D) activity has long held a privileged place in the U.S. income tax system and in policy debates. The premises for R&D tax incentives, however, are grounded in theory regarding a market failure for investment in R&D that does not align well with the target of U.S. R&D tax incentives. Moreover, factors contributing to innovation are now understood to include, in addition to R&D, other “knowledge-based capital” (KBC), investment in training and other human capital development, organizational processes, computer software, and architectural and engineering designs. The combination of existing R&D tax incentives, income shifting, and deferral of foreign income from U.S. tax, with intellectual property protection for successful R&D, result a poorly designed mix of overlapping benefits only loosely related to fostering innovation. Proposed “innovation box” tax incentives would add to the incoherence of the existing incentives. This article calls for a re-examination of U.S. R&D tax incentives under a framework that critically examines the scope of tax incentives and how they fit into an overall U.S. R&D and innovation incentive regime. The framework requires an evaluation whether R&D tax incentives address market failure or other nontax objectives, whether tax incentives are designed to efficiently achieve those objectives, and whether regulatory or direct expenditure alternatives would be more effective in achieving those objectives.
Stephen E. Shay, The Truthiness of “Lockout:” A Review of What We Know, Tax Notes, Mar. 16, 2015, at 1393.
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
,
Taxation - International
Type: Article
Abstract
Shay reviews what is known about "lockout" and unrepatriated offshore earnings. He concludes that the limited evidence available does not support claims that economic harm from lockout justifies shifting to a territorial tax system.
Rosanne Altshuler, Stephen E. Shay & Eric Toder, Lessons the United States Can Learn From Other Countries’ Territorial Systems for Taxing Income of Multinational Corporations (Urb. Inst. Tax Pol'y Ctr., Jan. 21, 2015).
Categories:
Taxation
Sub-Categories:
Taxation - Corporate
,
Taxation - International
,
Tax Policy
Type: Other
Abstract
The United States has a worldwide system that taxes the dividends its resident multinational corporations receive from their foreign affiliates, while most other countries have territorial systems that exempt these dividends. This report examines the experience of four countries – two with long-standing territorial systems and two that have recently eliminated taxation of repatriated dividends. We find that the reasons for maintaining or introducing dividend exemption systems varied greatly among them and do not necessarily apply to the United States. Moreover, classification of tax systems as worldwide or territorial does not adequately capture differences in how countries tax foreign-source income.
Stephen E. Shay, Clifton J. Fleming, Jr. & Robert J. Peroni, Designing a 21st Century Corporate Tax — An Advance U.S. Minimum Tax on Foreign Income and Other Measures to Protect the Base, 17 Fla. Tax Rev. (2015).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
Type: Article
Abstract
The 21st Century has seen unprecedented levels of corporate tax aggressiveness and avoidance. This article continues our exploration of second best international tax reforms that would protect the U.S. corporate tax base and have some likelihood of adoption. In this case, we consider how a U.S. minimum tax on foreign income earned by a controlled foreign corporation should be designed to protect the United States against erosion of its corporate income tax base and to combat tax competition by low-tax intermediary countries. In the authors’ view, a minimum tax should be an interim levy that preserves the residual U.S. tax on foreign income, as distinguished from a final minimum tax that partially eliminates the U.S. residual tax. An interim minimum tax would be a significant improvement over current law and would more effectively limit incentives to seek low-taxed foreign income while ameliorating pressure to retain excess earnings abroad. To achieve the objectives of such a minimum tax, corresponding changes should be made to the U.S. corporate resident definition, the source taxation of foreign MNCs, and the residence taxation of U.S. portfolio investors in foreign corporations to reduce tax advantages under current law for investments in foreign corporations. These changes would reduce tax advantages for foreign parent corporate groups and thereby further protect the U.S. tax base as well as reduce incentives for U.S. corporations to expatriate as a consequence of increased U.S. taxation of foreign income under an interim minimum tax.
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Getting Serious About Cross-Border Earnings Stripping: Establishing an Analytical Framework, 93 N.C. L. Rev. 673 (2015).
Categories:
Taxation
Sub-Categories:
Taxation - Corporate
,
Tax Policy
,
Taxation - International
Type: Article
Abstract
The term “corporate inversion” is used to identify several transactional forms by which U.S. resident corporations are converted into foreign corporations or into U.S. subsidiaries of foreign corporations. These transactions are currently a large concern to U.S. tax policy makers and a lively debate is in progress regarding the best way forward. From a tax standpoint, corporate inversions are driven by the triple objectives of (1) enabling inverting U.S. corporations to escape U.S. taxation of their foreign-source income, (2) enabling U.S. corporations to effectively repatriate foreign-source income without paying a U.S. tax on such income, and (3) enabling those U.S. corporations to move U.S.-source income out of the U.S. tax base by means of deductible expense payments — a tactic known as cross-border earnings stripping. In previous work, we have explained how the first two of these objectives could be forestalled if the definition of a U.S. domestic corporation were broadened to include a shareholder ownership test and if the U.S. international income tax system were changed into a real worldwide system. In this Article, we address ways to forestall the third objective by imposing limits on earnings stripping. Focusing on inversions, however, results in a view of earnings stripping that is far too narrow. A principal emphasis of this Article is that earnings stripping presents challenges to the U.S. tax base that are much broader than corporate inversions and so we have developed an analytical framework for identifying responses to the full menu of earnings stripping tactics employed by multinational enterprises (MNEs), of which inversions are only a part. That framework shows that deductions for interest payments on intra-MNE debt, which are the largest contributor to earnings stripping, are also the most vulnerable to criticism from a policy standpoint. Consequently, we examine various approaches to limiting earnings stripping interest deductions and conclude that the best promise lies in employing a proportionate allocation approach to distinguish between interest expenses that are deductible as real costs and interest expenses that should be nondeductible because they are costless foreign related party payments that do not effect a proper inter-nation income allocation. We conclude that distinguishing between properly deductible and properly nondeductible cross-border payments for services is much more difficult and requires reliance on transfer pricing law. Finally, this Article advances understanding of the proper taxation of royalties paid by a U.S. subsidiary to a foreign member of an MNE but concludes that the ultimate resolution of that issue requires further work. Most importantly, this article shows that cross-border earnings stripping is devastating to the tax bases of both worldwide and territorial international tax systems. Thus, action needs to be taken to curtail the use of earnings stripping to erode the U.S. tax base without waiting to resolve the controversy over whether the United States should adopt a territorial system or instead significantly strengthen its badly flawed worldwide system.
Stephen E. Shay, Mr. Secretary, Take the Tax Juice Out of Corporate Expatriations, Tax Notes, July 28, 2014, at 473.
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
,
Taxation - International
Type: Article
Abstract
Shay describes the principal tax benefits companies seek from expatriating, and he outlines regulatory actions that can be taken without legislative action to materially reduce the tax incentive to expatriate.
Hugh J. Ault, Wolfgang Schon & Stephen E. Shay, Base Erosion and Profit Shifting: A Roadmap for Reform, 68 Bull. Int’l Tax’n 275 (2014).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
,
Taxation - International
Type: Article
Abstract
In this Editorial, the authors explain the context of this special issue of the Bulletin for International Taxation. The fundamental premise of the BEPS project is that a coordination of national responses to BEPS can both eliminate double non-taxation and protect against material unrelieved double taxation. The articles in this issue further a dialogue among tax policymakers, taxpayers, advisors and academics that is critical to achieve this objective.
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Formulary Apportionment in the U.S. International Income Tax System: Putting Lipstick on a Pig?, 36 Mich. J. Int'l L. 1 (2014).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
,
Taxation - International
Type: Article
Abstract
Perhaps surprisingly, this Article has shown that the debate over formulary apportionment is little more than an alternative path to the larger debate over worldwide taxation versus territorial taxation. The present U.S. international income tax regime for U.S. MNEs is an implicit, overly-generous, and incoherent quasi-territorial system that relies on residence rules, source rules, and the arm’s-length approach to apportion international business profits between domestic income that is currently taxable by the United States and foreign income that is effectively exempt, or nearly so, from U.S. taxation because of deferral and cross-crediting. This version of territoriality is quite ugly because it is highly complex and it imposes only modest restraints on the ability of U.S. MNEs to shift income out of the U.S. tax base to low-tax foreign countries. Four forms of explicit territoriality have been proposed as alternatives to the current U.S. system. The first is traditional territoriality, which relies on source rules and the arm’s-length approach to apportion international business profits between taxable domestic income and exempt foreign income. This is a simpler regime than the current U.S. system because it confers exemption directly rather than implicitly through deferral and cross-crediting. It does, however, preserve the capacity of taxpayers to shift income to low-tax foreign countries subject only to the modest restraint imposed by the arm’s-length approach. Most importantly, it is inconsistent with the principle of ability-to-pay and it provides a powerful incentive to locate business activity in low-tax foreign countries. The other three forms of territoriality that are currently part of the debate are three-factor, two-factor, and single-factor global formulary apportionment. Each of them is simpler than either the current U.S. system or traditional territoriality, but each of them leaves U.S. MNEs with considerable capacity to accomplish erosion of the U.S. tax base through income shifting and each of them shares the defects of traditional territoriality regarding inconsistency with the ability-to-pay principle and distortion of business activity. Thus, U.S. policy makers are left with a choice between a normatively flawed and distortive territoriality that imposes modest restraints on income shifting through the arm’s-length approach (i.e., both the current U.S. system of de facto territoriality and traditional territoriality) and a simpler but normatively flawed and distortive territoriality that still allows a substantial amount of income shifting (i.e., three-factor, two-factor, and single-factor global formulary apportionment). This unhappy dilemma can be avoided by adopting real worldwide taxation or, alternatively, by keeping the current regime while creating a Subpart F income category for low-taxed foreign income and insulating that category from cross-crediting with a separate foreign tax credit limitation basket. A more limited form of formulary apportionment then should be used for, and tailored to, particular forms of income, such as intangible income and global trading income, that present discrete taxation problems. Nevertheless, when such income is earned by a U.S. MNE, allocation of income to a foreign jurisdiction under this more limited form of formulary apportionment should not ipso facto result in the income being exempted from U.S. taxation.
Stephen E. Shay, Theory, Complications, and Policy: Daniel Shaviro’s Fixing U.S. International Taxation, 9 Jerusalem Rev. Legal Stud. 104 (2014).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
,
Taxation - International
Type: Article
Stephen E. Shay, Preface to Tax Law and Development viii (Yariv Brauner & Miranda Stewart eds., 2013).
Categories:
Taxation
,
International, Foreign & Comparative Law
Sub-Categories:
Developing & Emerging Nations
,
Nonprofit & Nongovernmental Organizations
Type: Book
Stephen E. Shay, J. Clifton Fleming, Jr. & Robert J. Peroni, Territoriality in Search of Principles: The Camp and Enzi Proposals, 141 Tax Notes 155 (2013).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - International
Type: Article
Abstract
This article reviews proposals by House Ways and Means Committee Chairman Camp and Senator Mike Enzi to shift the United States from its current system of deferring taxation of active foreign income to a system that would exempt foreign business income from U.S. tax. (Neither proposal would materially affect the present U.S. system for taxing U.S.-source income.) The major contributions of the Camp Proposal lie in its recognition of the need to (i) make the treatment of foreign branches and foreign subsidiaries more neutral, and (ii) protect the U.S. tax base from excess interest deductions and the base-eroding incentives of very low foreign tax environments that stimulate U.S. income shifting. However, these improvements to current law would not justify changing to an exemption regime under the Camp Proposal in light of its many weaknesses, which include (but are not limited to) (i) material under-allocation of expenses to exempt foreign income, (ii) material loopholes in its anti-abuse rules for protecting the U.S. tax base, (iii) an apparent failure to tax gain upon transfers of appreciated assets into the exemption regime, (iv) foreign tax credit changes that would result in additional erosion of the U.S. tax base and (v) a misguided proposal for a reduced tax rate on royalties earned from foreign persons. The Enzi Proposal has similar weaknesses while lacking the strengths of the Camp Proposal. Our analysis of the Camp and Enzi Proposals highlights that U.S. international tax reform is integrally related to U.S. corporate, shareholder and business pass-through taxation. A full consideration of any international business taxation proposal must be in the context of the overall income tax regime within which the international rules must operate. Chairman Camp has promised a comprehensive tax reform proposal; and business and financial products elements have been put forward. However, a final evaluation of his international proposal must await release of a completed, integrated tax reform package, including final corporate and individual tax rates. Senator Enzi’s proposal is a stand-alone reform and apparently is intended for adoption irrespective whether the corporate tax rate is reduced or other tax reforms are enacted. In a recent article we articulated how a principled exemption system should be designed so as to protect the U.S tax base. It is possible to modify the Camp and Enzi Proposals to address their weaknesses in ways consistent with a principled exemption system. We recognize that such changes would make them unattractive to many in the multinational corporate community; however, that likely is true of any exemption system that would be a material improvement over current law. In our view, unless a shift to an exemption system would constitute a material improvement over current law, the likely revenue losses and transition costs of such a change would outweigh the benefits.
Stephen E. Shay, Daunting Fiscal and Political Challenges for U.S. International Tax Reform, Bull. Int'l Tax'n (IBFD), Apr./May 2012, at 229.
Categories:
Taxation
Sub-Categories:
Taxation - International
,
Tax Policy
Type: Article
Abstract
This article reviews fiscal and political challenges to agreement on U.S. tax reform. Due to current U.S. budget deficits, fiscal structure and political gridlock, the challenges to finding common ground on a broad tax reform or a separate international tax reform are daunting.
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Designing a U.S. Exemption System for Foreign Income When the Treasury is Empty, 13 Fla. Tax Rev. 397 (2012).
Categories:
International, Foreign & Comparative Law
,
Taxation
Sub-Categories:
International Law
,
Tax Policy
,
Taxation - International
Type: Article
Abstract
This article springs from two concurrent phenomena. First, U.S. federal deficit spending projections indicate that any feasible deficit reduction plan will require substantial additional revenue. Second, the U.S. system for taxing foreign-source income is so badly flawed that if the United States were to adopt a principled exemption or territorial system under which eligible foreign source income is taxed at a zero rate, the fisc would actually gain revenue with which to ease the deficit problem. To realize its revenue raising potential, however, an exemption system will require the following characteristics (or comparable analogues): 1) A robust subject-to-tax requirement (to foreclose use of low-tax foreign regimes) and continued current taxation of passive and mobile income under an updated Subpart F regime; 2) Disqualification from exemption for royalties (including deemed royalties from a foreign branch), interest, services payments and other foreign-source items that do not bear a significant foreign tax; 3) Elimination of the current tax exemption for 50 percent of the income from U.S. export sales; 4) Allocation of domestic expenses to foreign-source income to protect the U.S. tax base from “deduction dumping” in a more realistic way than an inadequate 5 percent “haircut” and 5) A prohibition against deducting foreign losses from U.S.-source income. To the extent that an exemption system deviates from these five characteristics, it creates revenue transfers to a relatively small group of mostly prosperous U.S. multinational corporate taxpayers at a time when the Treasury is in distress. This ought not to be allowed unless the transfers can pass a rigorous cost/benefit test.
Stephen E. Shay, Jobs, Deficit Reduction, Revenues, and Fundamental Tax Reform, 64 Tax Notes 213 (2011).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
Type: Article
Abstract
This article argues that flat opposition to revenue increases has contributed to U.S. economic vulnerability and has had unintended effects, including contributing to increased deficits instead of smaller government. The article distinguishes fundamental income tax reform from raising revenues from tax expenditures and recommends that the Treasury Department spearhead fundamental income tax reform, within the context of an overall budget framework that includes revenue increases, and develop detailed proposals to make the individual and corporate income taxes fairer, simpler and more efficient.
Stephen E. Shay, Commentary: Ownership Neutrality and Practical Complications, 62 Tax. L. Rev. 317 (2009).
Categories:
Taxation
Sub-Categories:
Taxation - International
,
Tax Policy
Type: Article
Abstract
In "Reconsidering the Taxation of Foreign Income," Jim Hines analyzes the consequences of taxing, as opposed to exempting, active foreign business income by comparing the expected effects on capital ownership of a "pure" worldwide income taxation system with the effects on capital ownership of a "pure" territorial taxation regime. Consistent with his earlier work, Hines asserts that a capital ownership neutrality analysis supports exempting foreign active business income from home country residence taxation and points to global welfare losses from taxing income on a worldwide basis with a credit for foreign taxes. As he has previously, Hines sets up his discussion of capital ownership neutrality by criticizing the "older wisdom" of international tax policy that established a "tension between policies that maximize national welfare - NN - and policies that maximize global welfare - CEN." According to Hines, perhaps the most critical of the assumptions underlying the traditional investment location neutrality framework is that "home country taxation does not directly or indirectly affect foreign firms." Hines argues that if greater investment abroad triggers greater investment by foreign firms in the residence country, "[t]he NN implication that home countries maximize their own welfare by subjecting foreign income to taxation with only deductions for foreign income tax payments then no longer follows." If the productivity of an investment depends on its ownership (without regard to the location of the investment) and home and foreign firms compete for ownership of capital around the world, then taxation of foreign income (with a credit for foreign tax) does not necessarily contribute to production efficiency. Instead, Hines argues, different home country taxation resulting from worldwide taxation distorts optimal asset ownership and results in a global welfare loss. In the absence of a global adoption of worldwide taxation, Hines concludes that under an ownership neutrality analysis, exemption of foreign income advances national welfare. In considering the problem of allocation of expenses, Hines argues that, to assure ownership neutrality, it is not enough to exempt foreign net income. In addition, "general expenses," such as interest and general administrative overhead, should "not be allocated at all [between domestic and foreign income], but instead traced to their uses." Hines briefly considers the implications of certain practical complications, including transfer pricing and the difficulty of sourcing income, for his analysis. Hines suggests that allowing transfer pricing enforcement concerns to affect the policy prescription would have "a strong element of the transfer pricing tail wagging the tax system dog." In response to fairness questions raised by favorable treatment for foreign income, Hines argues that equity considerations in fact support a special regime for foreign income. This Commentary first considers the significance of ownership neutrality for economic efficiency based on observations of ownership arrangements in today's marketplace. It next probes certain premises of Hines' argument, including whether substituting foreign-owned for domestic-owned investment results in equal tax revenue from the investment and whether asset ownership is meaningfully linked to the method of double taxation relief employed by a residence country. I argue that the uncertainty of the explanatory power of ownership efficiency, and the limits of current empirical understanding of the effects of alternative international tax policies, makes ownership neutrality an unreliable guide for policy prescription. This Commentary next considers the effect of tracing indirect expenses, such as interest and general and administrative expense, and suggests this will result in an over-allocation of such expense to domestic income. I question whether it is desirable to further advantage foreign investment in light of the extent of questions regarding ownership neutrality as a policy guide. I then consider some of the "practical complications" briefly addressed by Hines, focusing on transfer pricing difficulties that make Hines' proposed exemption of foreign income (and the current system of deferral) problematic. This discussion supports evaluating policy changes at least in part on the basis of their expected effects on the business income tax base. The Commentary concludes with a brief consideration of Hines' comments on fairness.
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Worse Than Exemption, 59 Emory L.J. 79 (2009).
Categories:
Taxation
Sub-Categories:
Taxation - Exemptions
,
Tax Policy
,
Taxation - International
Type: Article
Abstract
n this article, we discuss how various defects in the current U.S. international tax system - deferral, defective income-sourcing and cost allocation rules, lenient transfer-pricing rules, generous cross-crediting, the export sales source rule, the effectively tax-exempt treatment of many types of foreign-source royalties, and the deduction of foreign losses against U.S.-source income - can be combined to make the present U.S. system as generous as, and in some important respects more generous than, a properly designed exemption or territorial system for taxing foreign-source income of U.S. resident corporations. In other words, when judged from a public policy standpoint, the current U.S. system can produce worse-than-exemption results. Because of this, the U.S. multinational corporate community largely has shifted its lobbying efforts away from support for an exemption or territorial system and toward support for changes in the current incoherent international tax system that would further reduce the effective U.S. income tax rate on U.S. corporations’ foreign-source income by magnifying the worse-than-exemption results. In our view, reform efforts in the international tax area should be directed toward comparing the strengths and weaknesses of a properly designed worldwide system with the strengths and weaknesses of a properly designed exemption system, and then proceeding to enact one of those two coherent systems for taxing the international income of U.S. persons. Based on our prior work in the international tax area we believe that such an analysis will lead to a conclusion that a strengthened and properly designed worldwide system is superior to a properly designed territorial system and is definitely superior to our defective and incoherent current U.S. international tax system.
Stephen E. Shay, Report of the Task Force on International Tax Reform, 59 Tax Law. 649 (2006)(principal draftsman).
Categories:
Taxation
Sub-Categories:
Taxation - International
Type: Article
Robert J. Peroni, J. Clifton Fleming, Jr. & Stephen E. Shay, Reform and Simplification of the U.S. Foreign Tax Credit Rules, 31 Tax Notes Int'l 1177 (2003).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
,
Taxation - Personal Income
Type: Article
Abstract
In this report the authors consider alternatives for reform and simplification of the foreign tax credit rules. Also published in 101 Tax Notes 103 (2003).
Stephen E. Shay, J. Clifton Fleming, Jr. & Robert J. Peroni, The David R. Tillinghast Lecture: "What's Source Got to Do With It" - Source Rules and U.S. International Taxation, 56 Tax L. Rev. 81 (2002).
Categories:
Taxation
Sub-Categories:
Taxation - International
Type: Article
Abstract
Arguably, the largest problem in international income taxation is the proper treatment of income that is subject to the legitimate taxing claims of two or more countries. A source country's jurisdiction to tax foreign persons is limited to income earned within the source country's borders. Under current international norms, however, the taxpayer's residence country is required to accommodate the source country's taxing right by employing a foreign tax credit or by exempting foreign source income. Thus, source taxation is at once geographically constrained, but also jurisdictionally superior to residence taxation. These principles require that international income be divided and accounted for between countries according to criteria that relate income and deductions to geographic locations. To be specific, the consequence of geographically limited source taxation and overlapping, but secondary, residence taxation is that the source of income must be determined so that the right to tax can be assigned. In this sense, the concept of "source" is at the heart of international taxation. We argue in Section II that the right of source countries to tax foreign persons on their source country income has a robust normative foundation. By contrast, we find that source rules that serve as instruments for implementing source taxing jurisdiction and effecting residence country accommodation of source country taxation are surprisingly lacking in normative content. Thus, if timing of income and expense recognition is the Achilles heel of a purely domestic income tax system, the source of income and expense is an equally weak link in the international tax rules. Because no clear economic or equitable principles guide the formulation of rules to divide income and expense by geographic origin, the construction of these rules has been a significantly arbitrary exercise. Why is it important to get source and source taxation rules right? One reason is to protect the U.S. income tax base. Today, sophisticated taxpayer planning exploits weaknesses in the income tax regimes of the United States, as well as other developed countries, by taking advantage of (1) the evolution of economic activity in the developed world toward value-added services and intangible assets, (2)increased flexibility in locating tangible economic functions and intangible assets, (3) technological and communications advances that challenge the ability of countries to impose tax at source, (4) substantial innovations in the structuring of financial assets, and (5) the continued availability of low-tax countries that sometimes erect enforcement obstacles in the form of confidentiality restrictions. Although source taxation plays a vital role in the U.S. international income tax regime by protecting the U.S. income tax base, there has not been a systematic reexamination of U.S. source taxation rules since 1966. In that year, the Foreign Investors Tax Act of 19669 reduced the "force of attraction," net-basis taxation of. foreign investors' U.S. investment income in order to encourage investment of foreign capital in the United States to relieve a chronic balance of payments deficit in the early 1960's. Since that time, however, the balance of payments has ceased to be a concern and the United States has become a net importer of foreign direct as well as portfolio investment." A reexamination of U.S. source taxation rules is long overdue. A fresh consideration of source rules and source taxation also is timely because international income is an increasingly important element of the U.S. economy. The 2002 Economic Report of the President identifies two directly relevant trends: (1) increased globalization and location of economic activity according to advantageous terms of trade, and (2) a related evolution of U.S. economic activity toward highly mobile value-added services and intangible products (and tangible products with embedded intangible value). Indeed, total trade (measured as imports plus exports) increased from 16% of gross domestic product in 1975 to 26% in 2000. In our reconsideration of source taxation and the related rules that assign geographic source to items of income and expense, we assume that source taxation will continue to have primacy over residence taxation, except to the extent that treaties provide otherwise, and that international double taxation issues will continue to be addressed through unilateral and bilateral measures. Moreover, we assume that nations will not forgo self-interest in any significant way when they undertake such unilateral and bilateral measures. In short, we believe that reconsideration of source taxation and source rules must be constrained by the premise that nations will continue to approach international taxation issues within a structure that does not depart radically from current international norms. In particular, we see nothing to suggest any reasonable prospect for nations, including particularly the United States, joining in multilateral approaches that deal with sourcing and double taxation of income. In Section II we set out the theoretical justification for taxing foreign persons who earn both active and passive income by making use of the U.S. physical, legal, and/or economic infrastructure. We evaluate alternative approaches to imposing tax at source on U.S. business activity and conclude that taxation of net business income at the same progressive rates applicable to residents is the best alternative. We also evaluate the role of fairness considerations in source taxation and conclude that they do not bear significantly, except that fairness would not necessarily be enhanced by eliminating taxation at source. In Section III we summarize the U.S. tax policy objectives regarding international income and develop criteria for U.S. source taxation of foreign persons on income from their U.S. businesses and portfolio investments. U.S. source taxation of nonresidents is important to preserve the perceived legitimacy of residence-based taxation with respect to similar activities carried on by U.S. persons. Specifically, we suggest that a need for "perceived parity" requires a level of effective source taxation comparable to that imposed on residents engaged in the same activity. Moreover, source taxation is important to prevent residents from having an incentive to become nonresidents and earn U.S. income. As a country whose residents invest abroad, the United States also has strong reasons to resist excessive or discriminatory taxation of nonresidents. We suggest in Section III, however, that the existing treaty concept of nondiscrimination does not adequately recognize the ways in which differential taxation of owners of U.S. business entities should be taken into account in evaluating whether a tax rule results in discrimination in fact. Finally, in Section III we undertake an extended review of the impact of source taxation's geographical limitations on the administration and enforcement of source tax rules. We observe that withholding at source helps overcome limitations on jurisdiction to enforce. Adoption of the qualified intermediary rules extends the reach of this regime outside the United States to the financial institution dealing directly with the nonresident taxpayer. Notwithstanding these improvements in enforcement mechanisms, we conclude that administration of source taxation would be less burdensome and enforcement less problematic if exceptions from source taxation were adopted only by treaty. We also conclude that enforcement of netbasis taxation at source on a remote seller (of goods, intangibles, or services) without a direct physical presence is extremely difficult in the absence of a treaty. In Section IV we consider the implications for certain selected U.S. source rules of the criteria developed in Section III. We disclaim, however, any attempt at a comprehensive critique of U.S. source rules. Instead, we provide illustrative examples of our analytical approach by considering the consequences of applying the Section III criteria to the U.S. sourcing rules for services and royalties. We also discuss the implications of residence-based source rules. While we do not evaluate the policy wisdom of exempting income from foreign owned capital, in the light of changes in the U.S. mechanisms for enforcing source taxation of investment income, we argue that now is an appropriate time to consider whether reciprocal treaty exemptions should replace the current U.S. unilateral exemption of portfolio interest and gains on the sale of large stock holdings. We also suggest consideration of developing mechanisms to tax at source income from U.S. sales of goods and services by remote sellers, subject to relief by treaty. In Section V, we contrast the source rules used for source taxation with the source rules used for the foreign tax credit limitation. We conclude that the two sets of source rules need not be symmetrical if the differences reflect different objectives. We conclude that there is a need to reevaluate the current scope of U.S. taxation at source. In the absence of a treaty, the objective of the U.S. source taxation regime should be parity in taxation of U.S.-owned and foreign-owned businesses carried on in the U.S. marketplace and a desired level of taxation on income earned by foreign owned capital employed in the U.S. marketplace. The structure of U.S. rules for taxing international income should not expose the U.S. tax base (all income of U.S. residents and U.S. income, appropriately defined, of nonresidents) to erosion. Relief from source taxation should be extended by treaty, not unilaterally, so that the United States can receive reciprocal benefits and can obtain the treaty partner's assistance to assure that the relief does not go to inappropriate persons. We also urge a comprehensive reexamination of U.S. source rules to take account of the purpose for each rule.
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Fairness in International Taxation: The Ability-to-Pay Case for Taxing Worldwide Income, 5 Fla. Tax Rev. 299 (2001).
Categories:
Taxation
Sub-Categories:
Taxation - International
Type: Article
Abstract
Although the ability-to-pay fairness principle is a foundational element of American income tax policy, it has played a surprisingly small role in evaluating the U.S. international income tax regime. Perhaps this is because the application of the ability-to-pay concept to international income taxation is complicated by the presence of foreign taxpayers, by income earned through C corporations and by the claims of other governments to tax cross-border income. Nevertheless, it is possible, and indeed essential, to analyze international tax policy in terms of fairness. In this article, we extensively explore the international dimension of the ability-to-pay norm. We argue that this fairness criterion supports the conclusion that taxing worldwide income and ending the deferral privilege provides a tax regime that is superior to either the current U.S. international income tax system or the adoption of an exemption system.
Stephen E. Shay, Susan C. Morse & Christopher J. Peters, Qualified Intermediary Status, Act III: Rev. Proc. 2000-12's Final Qualified Intermediary Agreement and Amendments to Final Withholding Rules, 29 Tax Mgmt. Int'l J. 403 (2000).
Categories:
Taxation
Sub-Categories:
Taxation - International
Type: Article
Abstract
This paper provides an overview of the qualified intermediary (QI) regime, Rev. Proc. 2000-12's changes to the model QI Agreement included in Notice 99-8, and elements of the May Amendments that are relevant to the treatment of a QI under the Final Agreement. Planning opportunities and possible pitfalls in applying the Final QI Agreement in practice are also discussed. Amendments to the final withholding rules are examined. In Announcement 2000-48, the IRS announced how it would treat jurisdictions that did not have adequate know-your-customer rules and heightened enforcement of QI agreements effective in tax haven or secrecy jurisdictions.
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, Taking Territorial Taxation to Task, 20 Tax Notes Int'l 1178 (2000).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - International
,
Taxation - Personal Income
Type: Article
J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay, An Alternate View of Deferral: Considering a Proposal to Curtail, Not Expand, Deferral, 20 Tax Notes Int'l 547 (2000).
Categories:
Taxation
Sub-Categories:
Taxation - International
,
Taxation - Corporate
Type: Article
Robert J. Peroni, J. Clifton Fleming, Jr. & Stephen E. Shay, Getting Serious About Curtailing Deferral of U.S. Tax on Foreign Source Income, 52 SMU L. Rev. 455 (1999).
Categories:
Taxation
Sub-Categories:
Taxation - International
Type: Article
Stephen E. Shay & Susan C. Morse, Qualified Intermediary Status: A New Withholding Role for Foreign Financial Institutions Under Final U.S. Withholding Regulations, 27 Tax Mgmt. Int'l J. 331 (1998).
Categories:
Taxation
Sub-Categories:
Taxation - International
Type: Article
Abstract
The IRS published final nonresident withholding regulations on October 14, 1997. The final regulations overhaul the US rules for withholding federal income tax on payment of US-source interest, dividends, and other fixed or determinable income to foreign persons. A central objective of the final regulations is to fundamentally alter the role played by non-US financial initiations in the administration and enforcement of US withholding tax rules by establishing a market-oriented incentive for the foreign financial institution to serve as a qualified intermediary (QI) and, in essence, act as an agent of the IRS outside the US. On March 22, 1998, the IRS and Treasury released Notice 98-16 and Rev. Proc. 98-17. Notice 98-16 extended the effective date of the final regulations to January 1, 2000. Rev. Proc. 98-27 provides guidance for QIs that desire to enter into withholding agreements with the IRS; the Notice discusses the procedures that will be followed to develop model QI withholding agreements.
Stephen E. Shay & Victoria P. Summers, Selected International Aspects of Tax Reform Proposals, in A Comprehensive Analysis of Current Consumption Tax Proposals: A Report of the ABA Section of Taxation Tax Systems Task Force 199 (A.B.A. 1997).
Categories:
Taxation
Sub-Categories:
Taxation - International
,
Tax Policy
Type: Book
Stephen E. Shay & Victoria P. Summers, Selected International Aspects of Fundamental Tax Reform Proposals, 51 U. Miami L. Rev. 1029 (1997).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - International
Type: Article
Elinore J. Richardson & Stephen E. Shay, Taxation Policy, in Economic Development, Foreign Investment, and the Law: Promoting Economic Development Through Private Sector Involvement, Foreign Investment, and the Rule of Law (Robert Pritchard ed., 1996).
Categories:
Taxation
,
International, Foreign & Comparative Law
Sub-Categories:
Developing & Emerging Nations
,
Tax Policy
,
Taxation - International
Type: Book
Stephen E. Shay, IRS Makes Flip Transactions Taxable, 5 Int'l Tax Rev., July/Aug. 1994, at 17.
Categories:
Corporate Law & Securities
,
Taxation
Sub-Categories:
Shareholders
,
Securities Law & Regulation
,
Taxation - International
Type: Article
Abstract
Report on the new 1994 Internal Revenue Service regime on flip transactions used to cut subpart F taxable income. This article discusses the definition of flip transactions, the purpose of these transactions, the subpart F taxation and the definition of subpart F income. The subpart F tax rules were tightened to further restrict the ability to defer US tax on unrepatriated non- subpart F income of a controlled foreign company
Stephen E. Shay, Re-examining Chapter 3 Income Tax Withholding and the Role of the Withholding Agent, in Essays on International Taxation (Herbert H. Alpert and Kees van Raad eds., 1993).
Categories:
Taxation
Sub-Categories:
Taxation - International
Type: Book
Stephen E. Shay, Dispute Resolution Faces Numerous Obstacles, 3 Int'l Tax Rev., Apr. 1992, at 15.
Categories:
Corporate Law & Securities
,
Taxation
Sub-Categories:
Securities Law & Regulation
,
Taxation - International
Type: Article

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