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Abstract:
Earnouts are becoming more prevalent in both asset and stock transactions. Under an earnout arrangement, all or part of the purchase price is contingent on the future financial performance of the target company or business. James C. Koenig and Craig M. Boise examine earnout techniques in their article, 'Contingent Consideration: The Taxation of Earnouts and Escrows'.

An earnout arrangement often lends itself to installment sales treatment. Mr. Koenig and Mr. Boise, therefore, examine installment sales and the installment method in the business acquisition context, including the interest charge and pledging rules and the application of the gross profit ratio to determine the extent of the tax deferral. The authors then examine installment sales in which the selling price cannot be determined, installment sales in which the sales have neither a stated maximum price not a fixed period, and distortions under the installment method.

Next, Mr. Koenig and Mr. Boise examine electing out of installment reporting, including valuation options. They then turn their attention to escrow arrangements and to taxpayers on the cash method, specifically addressing the economic benefits doctrine and escrow accounts. Finally, the authors address accrual-basis sellers, focusing on case law precedents and on income earned by escrow property.

Taxation, earnouts, escrows, stock transactions, tax deferral, installment reporting, installment sale, contingent payments

Abstract:
One of the more entrenched issues in international taxation over the last thirty years has been how to define and respond appropriately to harmful tax competition among nations, especially competition from offshore financial centers (OFCs). The Organization for Economic Co-operation and Development (OECD) and the European Union (EU) have both mounted initiatives seeking to regulate such competition, and OFCs have strongly objected to these initiatives as an abrogation of their sovereignty in tax matters.

This paper provides an introduction to the debate over the regulation of international tax competition, beginning with an overview of the essential architecture of international taxation and the way that its structure creates problems for developed countries and opportunities for OFCs, and continuing with an assessment of the arguments asserted in favor of, and against, regulating tax competition. The paper then examines how developed countries, through the OECD and EU, have defined international tax competition, and the efforts made by both organizations to regulate such competition. Finally, the paper draws on the way the OECD and EU dealt specifically with the twin touchstones of virtually all definitions of tax havens-low or no income taxation and bank secrecy-to suggest the direction that regulation of tax competition is likely to take in the future.

International Taxation, Tax Competition, Offshore Financial Centers ( OFC ), Organization for Economic Co-operation and Development ( OECD ), European Union ( EU ), Tax structure, Developing Countries, Tax Havens, Tax Evasion, Cayman Islands, Caribbean, Savings Tax Directive, Level playing field, I

Abstract:
Although most U.S. corporations don't pay Federal income taxes, over the last several years some corporations have been willing to report, and shell out to the Treasury, hundreds of millions of dollars in taxes that they didn't owe. They did so to conceal the fact that they were playing with Monopoly money - fabricating profits as phony as the pastel-colored money used in the classic Parker Brothers board game. Of course, once the game was up, these corporations wanted to raid the Community Chest to get their tax money back. But is it appropriate to refund taxes in such circumstances? This Article traces the history of tax refund suits and concludes that such suits are in essence claims in equity. This means that claimants are subject to well-established equitable defenses like the doctrine of unclean hands and equitable estoppel. This Article argues that given the potentially corrosive effects of tax fraud on the U.S. tax system, the assertion by the Internal Revenue Service of equitable defenses to earnings inflation-related refund claims would provide a more effective penalty regime than the current statutory system. In making this argument, this Article necessarily traverses several areas of law, including corporate fraud, the history and development of equity, the rules versus standards debate, law and economics, risk management, optimal penalty theory and even a bit of tax policy.

Federal Income Tax, Corporations, Tax Fraud, Equity, Unclean Hands, Equitable Estoppel, Tax Refund , Earnings Inflation, Refund Claim, Refund Suit, Quasi-Estoppel, Tax Penalties, Fraud Penalties, Corporate Fraud, WorldCom, Qwest, Equitable Defenses, Equitable Remedies

Abstract:
Most U.S. multinationals avoid current U.S. taxation of their foreign business income by accumulating such income in controlled foreign subsidiaries; in essence, their offshore piggybanks. It is estimated that nearly $650 billion in foreign earnings is held offshore by foreign subsidiaries of U.S. corporations and out of reach of U.S. taxation. This represents $68 billion in lost tax revenue between 2007 and 2011.

Deferral could be quite simply addressed by requiring immediate taxation of all foreign business income. But completely eliminating deferral has never been a politically feasible option. The American Jobs Creation Act of 2004 took a different approach to the problem. The Act contained a provision that gave U.S. corporations a one-year window during which to repatriate earnings from their foreign subsidiaries at a fraction of normal tax rates. The provision, new Code section 965, was intended to encourage U.S. multinationals to voluntarily end their deferral of taxation on foreign business income. Certain characteristics of section 965 make it remarkably similar to another well-known tax collection device, the tax amnesty, that typically offers a temporary reprieve from some sanction associated with tax evasion in order to encourage persons who have evaded taxes to come forward voluntarily and pay what they owe.

This Article explores the underlying structure of corporate and tax law that permits deferral, assesses the cost of the deferral problem, and reviews the development of current limitations on deferral. The article then surveys the substantial literature on tax amnesties to develop a theory of the optimal tax amnesty against which to evaluate section 965. The article concludes that, on balance, a provision like section 965 is not likely to be effective in ending deferral.

tax amnesty, Section 965, deferral, anti-deferral, Subpart F, passive foreign investment companies, amnesty theory, international tax

Abstract:
The legal regimes of offshore jurisdictions have historically differed in significant ways from those applicable in onshore jurisdictions. Inevitably, legal and financial professionals have seized upon these differences to develop strategies for reducing transactions costs. A prominent example of such cross-border arbitrage was the routing of Eurodollar loans through a small group of former Dutch island colonies in the Caribbean, a practice which peaked in the mid-1980s, when virtually every major U.S. corporation made interest payments to a Netherlands Antilles finance subsidiary. The "Antilles sandwich" strategy exploited the difference between high U.S. withholding tax rates that applied to interest payments made to most foreign lenders, and the zero rate of tax that applied to U.S. interest payments made to residents of the Antilles under its tax treaty with the United States. Both jurisdictions reaped significant benefits from the strategy until the United States unilaterally terminated the tax treaty in 1987, virtually wiping out the Antilles offshore financial sector overnight. Unfortunately, because of rigidity in its governance structure, the Antilles' failed to develop alternative financial intermediation strategies to replace the Antilles sandwich structure before its demise.

The rise and fall of the Antilles' offshore financial sector provides insight into the current struggle between onshore and offshore governments over the role of offshore financial centers like the Antilles within the global economy. Concerned about tax evasion by their residents, onshore jurisdictions including France, Germany, and the United States are pressing for major changes in offshore jurisdictions' legal and regulatory regimes that may eliminate legitimate opportunities for international arbitrage. In such an environment, offshore financial centers may find it difficult to survive. In this article, we distill from the Antilles experience a theory of "regime plasticity" and examine the role that it plays in allowing offshore financial centers to adapt to changes in the legal and political environments within which they operate. How offshore financial centers react, and whether they have learned the lessons of the Antilles' experience will play a major role in determining the future of the global offshore financial sector.

offshore financial centers, OFCs, round-tripping, financial intermediation, tax havens, finance subsidiary, tax treaty, Netherlands Antilles, Curacao, Dutch, withholding tax, eurodollar, petrodollar, multinational, regime

Abstract:
U.S. businesses typically own both U.S. subsidiaries and foreign subsidiaries. These U.S.-based businesses are tempted to consider reversing this structure, creating instead a structure in which a foreign company is the ultimate owner. The foreign-based business would then own both U.S. subsidiaries and foreign subsidiaries. This reversal process is termed an inversion transaction.

These U.S.-based businesses might seek to forestall the determents of having a U.S.-based business, including transfer pricing audits, foreign tax credits limitations, and a partial disallowance of interest expenses. Craig M. Boise and James C. Koenig examine corporate inversion transactions, focusing on practical and policy considerations. They examine the specifics of these tax determents and U.S. legislative developments.

Mr. Boise and Mr. Koenig begin with a discussion of the U.S. worldwide tax regime and describe inversion transactions. In this regard, Mr. Boise and Mr. Koenig discuss the manner in which inversion transactions work, including the earnings strip option and the treaty benefit option. They then examine the Treasury's view of inversion transactions, including problem areas such as earnings stripping and subpart F. Mr. Boise and Mr. Koenig discuss the proposed anti-inversion legislation and inversion transactions.

Taxation, foreign subsidiaries, foreign-based business, corporate inversion transactions, inversion, expatriation, Bermuda, Cayman Islands, asset transaction, cross-border merger

Abstract:
On October 22, 2004, President George W. Bush signed the American Jobs Creation Act of 2004, which included a number of provisions aimed at curbing both corporate tax shelters and corporate tax avoidance. Unfortunately, a key provision of the Senate version of the legislation was left on the conference committee cutting-room floor. That provision, a response to the wave of accounting scandals that have rocked the markets over the last few years, would have increased the penalty applicable to corporations that filed fraudulent income tax returns to disguise earnings inflation. The existing penalty provisions impose fines so small that they are not likely to have any deterrent effect on this type of tax fraud. Even without the missing legislative remedy, however, the IRS is not without the means to combat tax fraud related to earnings inflation. This article argues that because tax refund claims are in essence equitable claims, the IRS may, and should, assert equitable defenses such as the doctrine of unclean hands to deny refund claims arising from the fraudulent inflation of income. To facilitate this process, the article proposes a simple administrative structure using the newly issued Schedule M-3 to the tax return form and oversight of earnings inflation-related refund claims by the Joint Committee on Taxation.

Earnings inflation, book income, tax fraud, penalty, overstatement, equity, unclean hands, tax refund