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Abstract:
This Essay describes the proper method of calculating prejudgment interest based on sound financial principles. Using the paradigm that the claim plaintiff holds in litigation represents an involuntary loan from plaintiff to defendant and recognizing that in bankruptcy courts treat legal claims similarly to unsecured debt, we argue that prejudgment interest should be computed using the defendant's unsecured borrowing rate. Furthermore, we argue that courts should use a short-term, floating interest rate rather than a long-term rate in order to provide the proper incentive for the parties to settle. We criticize alternative bases for awarding prejudgment interest and address modifications to account for taxes, insurance, foreign currency conversion, asynchronous payments, and suits involving individual plaintiffs.

Prejudgment interest, litigation, trial, compensation

Abstract:
Holders of compensatory stock options who perform services or reside in different countries during the term of the options face the risk of double taxation. The specter of double taxation arises because countries tax option income at different times and characterize it inconsistently: option income is taxed at times ranging from grant, vesting, exercise or sale of the underlying shares, and is treated as wages by some countries and as capital gains by others. Furthermore, within many countries, compensatory option income can be subject to different tax regimes depending on conditions existing at grant or exercise, or elections made by the option holder. These divergent domestic laws lead inexorably to conflicting income tax treaty interpretations and double taxation.

This article examines circumstances under which the double taxation of compensatory option income arises. It focuses on conflicts that arise from the mutual exertion of residence basis tax jurisdiction and from the different characterization of option income, and explores various unilateral and bilateral measures to mitigate double taxation. For persons who become U.S. residents and have previously been taxed by a foreign country on option income, this article proposes that the U.S. amend its foreign tax credit regime to permit a credit for foreign taxes previously paid if the U.S. taxes the same income.

Unilateral measures, however, offer only a limited potential to prevent double taxation; any meaningful relief must be accomplished through the income tax treaty process. This article analyzes the option provisions of the new U.S.-U.K. tax treaty, the first treaty to address the allocation of tax jurisdiction over the option income of peripatetic employees. Because the U.S. and U.K. tax options similarly, it may not have been difficult to agree on an acceptable division of tax jurisdiction. When two countries have different timing, character, and source rules for option income, however, it may be impossible to arrive at an agreement. Recognizing the obstacle of conflicting domestic laws, the OECD has issued a report on compensatory option income that proposes amending the OECD Model Treaty commentary to provide uniform rules on the sourcing, character, and allocation of primary and secondary tax jurisdiction over option income for treaty purposes. The OECD proposals are an important step in harmonizing the disparate domestic tax rules for compensatory options and should substantially reduce the double taxation of option income of cross-border employees. This article discusses the OECD report and highlights areas that need further clarification. It is hoped that this approach can be extended to other types of deferred and equity-linked compensation.

Options, Stock Options, Taxation, International Taxation

Abstract:
Tribunals in international arbitration are regularly asked by claimants to award prejudgment interest. Unless foreclosed by an agreement between the parties, there is widespread agreement prejudgment interest should put the claimant in the same position as it would have been had it not been injured by the respondent. However, there is little consensus how to calculate prejudgment interest in order to accomplish that purpose. In this Essay, we describe the proper method of calculating prejudgment interest based on sound financial principles. Using the paradigm that the respondent has forced the claimant to make an involuntary loan to the respondent, we argue that prejudgment interest should be computed using the respondent's borrowing rate. Furthermore, we argue that tribunals should use a series of short-term, floating interest rates rather than a single long-term rate at the commencement of the dispute in order to provide the parties with the proper incentive to settle their dispute. We also discuss how the calculations are different when the parties are individuals and closely held corporations as opposed to corporations and governments, and we address complications that arise when a tribunal calculates damages in one currency and makes a final award in another currency.

Prejudgment interest, international arbitration, international trade, alternative dispute resolution, law & economics, compensation, coerced loan, damages, time value of money, award, currency conversion