Florida Tax Review

Global Tax Hubs

Eduardo Baistrocchi — Mon, 27 Jan 2025 00:00:00 -0500

Global tax hubs are the black boxes of the international tax regime (ITR). The driving forces of their strategic interaction with other building blocks of the ITR remain undertheorized. This Article offers the first theory of tax hubs as a two-sided global marketplace. It argues that tax hubs are the matchmakers of the ITR. Indeed, international investors, tax hubs and endpoint jurisdictions play different yet interrelated roles within the same ecosystem, i.e., the two-sided platform. The theory is positive rather than normative. It aims to explain how the creeping marketization of the ITR, as part of international law, has been frequently instrumented worldwide over the last century. The Article provides a stress test to the theory’s explanatory power and its limitations. Antitrust law and economic concepts form the conceptual framework of this piece.

The Impact of SEC v. Jarkesy on Civil Tax Fraud Penalties

Bryan T. Camp — Mon, 27 Jan 2025 00:00:00 -0500

On June 27, 2024, the U.S. Supreme Court issued its decision in Securities and Exchange Commission v. Jarkesy. It held that when the SEC sought a $300,000 civil penalty against Mr. Jarkesy for securities fraud, the Seventh Amendment entitled him to a jury trial in an Article III court. The week before, the Tax Court, an Article I court, issued a decision upholding the IRS’s imposition of a $6.3 million civil penalty against a taxpayer for tax fraud. No jury was available. That has been true since 1862: no jury has ever been available to taxpayers facing fraud penalties, unless they pay first.

This Article considers whether Jarkesy now requires adjudication of civil tax fraud penalties in an Article III court with access to a jury. That question is more nuanced than it might first appear. The answer depends on how one balances government administrative needs against individual liberty interests. Jarkesy inverts prior teachings on how courts should perform that balancing.

The Article first reviews why courts have found the pay-first structure of tax administration constitutional. That case law, however, mostly involves collection of taxes, not penalties. It then considers whether the result in Jarkesy, the logic by which it reached that result, and recent changes in tax administration together open a plausible path for a different conclusion as to the imposition of tax fraud penalties.

Phantom Tax Loopholes

Emily Cauble — Mon, 27 Jan 2025 00:00:00 -0500

This Article reports the results of a new survey of 726 U.S. adults designed to gauge people’s intuitions about tax law. Survey respondents consider several scenarios. In each scenario, the survey describes two ways that parties to a transaction can achieve their non-tax objectives. The two available routes are equivalent from a non-tax perspective. The survey asks respondents to provide their best guess about whether the two routes will produce the same or different U.S. federal income tax consequences. The survey asks
respondents to rate on a five-point scale how confident they are that their answer is correct and to explain why they select their chosen response. They are also asked whether, in their opinion, the options should receive the same or different tax treatment, and they are asked to rate the strength of their opinion on a five-point scale. In general, this study’s results show that many respondents harbor form-driven intuitions about tax law. That is, they expect the form of a transaction will dictate its tax outcome.

The results point to what may be a side effect of tax law’s failures—in some contexts—to appropriately tax transactions and its tendency to benefit the well-advised. In particular, non-experts expect tax law to contain “loopholes” even in cases when it does not. The results demonstrate the propensity of tax law to trap unwary taxpayers, in that, in many scenarios, respondents’ best guesses about tax outcome diverge from actual law. The results underscore the need to clearly prompt taxpayers when reporting of non-cash income is required and suggest that, absent such prompting, lack of compliance may be attributable not just to willful evasion but also to a failure to understand what tax law requires. The results reveal information about perceptions of the (un)fairness and complexity of tax law. Finally, the results offer one additional justification for closing actual tax “loopholes”—the prospect that doing so might exorcise phantom ones.

The Association Between Fairness and Judicial Decision-Making

Jonathan Farrar, Harjot Mehmi — Mon, 27 Jan 2025 00:00:00 -0500

Empirical literature on judicial decision-making has not yet considered the association between the normative value of fairness and
judges’ decisions. Using a sample of tax cases at the Tax Court of Canada (2010–2019) containing 4,420 disputes, we investigate whether a litigant is significantly more likely to obtain a favorable outcome if there is a reference to fairness in the court judgment. Compared to disputes without a mention of fairness in the court judgment, disputes with any mention of fairness have a 51% greater likelihood of a successful outcome. Notably, even when a court judgment mentions fairness not clearly in favor of the taxpayer, taxpayers are still 28% more likely to obtain a successful outcome than taxpayers without a mention of fairness. Together, these findings show that fairness is strongly associated with judicial outcomes and suggest that fairness considerations may influence judges. Furthermore, analysis of the subsample with fairness references reveals that two dimensions of fairness significantly
and positively affect the likelihood of a taxpayer winning a tax dispute (procedural fairness and interpretive fairness), and one dimension of fairness significantly and negatively affects the likelihood of a taxpayer winning a tax dispute (outcome fairness). These results show the contextual and normative importance of fairness.

Reforming Business Taxation by Introducing a Resident Owner-Based Business Income Tax (ROBIT)

Savvas Kostikidis — Mon, 27 Jan 2025 00:00:00 -0500

Fighting corporate tax avoidance is not a suitable method to save the integrity of the corporate tax. Rather, more fundamental reform is needed focusing on taxing the individual shareholders at residence. For this purpose, this Article proposes a resident owner-based business income tax (ROBIT).

The ROBIT retains taxation at the entity level but provides for reduced flat tax rates for all business enterprises, taxation only of the rent by introducing an ACE regime, and exemption of inter-company dividends. At the level of the individual shareholder, dividends and capital gains are taxed as ordinary income. Integration takes place via an imputation system for domestic taxes and (short of reciprocity) deduction of foreign taxes or alternatively through a withholding tax on dividends and capital gains. To curtail deferral, capital gains are taxed by charging interest for the holding period until realization for nontraded assets and for traded assets by taxing them on a mark-to-market basis. Some additional measures are also proposed especially referring to the residence taxation of individuals. By earmarking the revenue from the enactment of the ROBIT to redistributive purposes, reform can happen and will be sustainable. Support can also come from corporate managers if windfalls for existing shareholders are avoided through phased-in reform.

The ROBIT will attract and boost investment and all the positive externalities that it brings. Some emigration of individuals as a reaction is possible, but it can be addressed by regional cooperation which is easier as regards individual taxation. Finally, the ROBIT is
superior compared to other proposals for corporate tax reform, especially destination-based corporate tax proposals.

Reviving the Value Creation Principle in International Taxation

Mohanad Salaimi — Mon, 27 Jan 2025 00:00:00 -0500

This Article aims to clarify the value creation principle and its role in shaping international tax policy that aligns taxation with the location of economic activity. It examines recent developments in international taxation, including aligning taxation with the place of substance, taxing “excess returns” and allocating taxing rights to market jurisdictions, each addressing different aspects of value creation. The Article advocates for a balanced profit allocation method that considers both supply-side and demand-side factors, offering a comprehensive approach to developing a fair and effective international tax framework.