12 Major Deficiencies of the Code Which Should Be Rectified As Part of Tax Reform

By Herman B. Bouma, Esq.

Buchanan Ingersoll & Rooney PC, Washington, DC

Set forth below are 12 major deficiencies of the Internal Revenue Code of 1986 (the Code) which should be rectified as part of tax reform.

Deficiency 1: Confusing Use of the Terms "Corporation" and "Partnership"

The Code focuses on individuals and ownership arrangements that qualify as "entities."1 An entity constitutes a tax unit either by itself or together with one or more other entities. Individuals and tax units are referred to under the Code as persons. Tax units are generally classified as corporations, partnerships, trusts, estates, and non-profit organizations. Thus, corporations and partnerships are two types of tax units (and thus two types of persons). However, there is no correlation between the terms "corporation" and "partnership" for tax purposes and the same terms that are used for business law purposes. Thus, a corporation for tax purposes may be a partnership for business law purposes and a partnership for tax purposes may be a corporation for business law purposes.

To eliminate the confusion, the Code should simply use the term "for-profit" rather than the terms "corporation" and "partnership." A "for-profit" would be a tax unit the principal purpose of which is to derive profit for those who contribute to it. Under the approach proposed here, tax units would generally be classified as for-profits, trusts, estates, and "non-profits." A "non-profit" would be any tax unit other than a for-profit, trust, or estate. Thus, a non-profit might have a profit motive - it just would not have a motive to derive profit for those who contribute to it. (If a non-profit met certain requirements, it would qualify for some type of tax-exempt status; if not, it would be taxed as a for-profit.)

Deficiency 2: Two Different Taxation Regimes for Business

Under the current Code, there are two different taxation regimes for business - one applies to corporations and the other applies to partnerships. Under the regime for corporations, income is taxed at the corporate level and then again when the income is deemed distributed to the owners. Under the regime for partnerships, income "flows through" to the owners and is only taxed at the owner level.

There is no good reason for having two different regimes. One should decide which regime is better and apply it to all for-profits. Given the extreme complexity of the flow-through approach,2 taxation at the tax unit level is far superior (assuming, as discussed below, a mechanism is provided to avoid taxation of income at both the tax unit level and the owner level). Thus, all for-profits should be taxed at the tax unit level.3

Deficiency 3: Elective, Rather Than Mandatory,"Disregarded Entity" Treatment

Under the current Code and regulations, a wholly owned eligible business entity4 may elect "disregarded entity" treatment. Under this treatment, the income, and assets and liabilities, of the disregarded entity are included with the income, and assets and liabilities, of the owner for tax reporting purposes. When the owner is a corporation, the treatment results in true consolidation for tax purposes since the disregarded entity and the owner are treated together as one tax unit.5

"Disregarded entity" treatment should be mandated for any wholly owned for-profit that is owned by another for-profit. Mandating this treatment would preclude the possibility that different U.S. tax results would obtain depending upon how many wholly owned for-profits are set up by a parent for-profit.6 One thing politicians apparently get upset about is that multinational groups can change their worldwide tax burden by simply setting up entities in different jurisdictions.7 There's a simple solution to this - mandatory "disregarded entity" treatment for every for-profit wholly owned by another for-profit.  Thus, a parent company and all of its wholly owned subsidiaries would be treated as one tax unit for tax purposes, and thus its taxation would be the same regardless of whether it set up three or three hundred subsidiaries.8

Deficiency 4: Distinction Between U.S. and Foreign Corporations

Under the current Code, a corporation is "domestic" (U.S.) if it was "created or organized in the United States or under the law of the United States or of any State…. ."9 A corporation is "foreign" if it is not a U.S. corporation.10 Thus, whether a corporation is a U.S. or foreign corporation for U.S. income tax purposes has absolutely nothing to do with the location of the corporation's property, employees, or business operations, or the nature of its interest holders as U.S. or foreign persons. Rather, it is based entirely on the law pursuant to which the corporation was organized.

This distinction between U.S. and foreign corporations is the ultimate in form over substance. It plays right into the hands of tax havens and is the main reason for their "success." It is also the main reason why the U.S. international tax system has a foundation of sand and is close to collapse. If all for-profits were treated the same regardless of "residence" and a reasonable method were chosen for allocating income among jurisdictions, then that would be a house built on the rock, which would stand up well when "the rain fell, and the floods came, and the winds blew and beat upon that house."11

Politicians are upset with the fact that corporations can be set up to have no residency anywhere.12 However, the whole notion of "residency" for a corporation is problematic and in fact there is no satisfactory means to determine the residency of a corporation. Certainly, place of organization is inappropriate since this elevates form over substance and plays right into the hands of tax havens. Place of "management and control" is not much better since this can also be easily arranged in a particular country. The location of shareholders is also problematic since nowadays a corporation's shareholders may be located all over the globe. Given the difficulty of determining the residency of a corporation, it simply should not be done - all for-profits should be treated the same and not assigned a residence.

Deficiency 5: Use of the Arm's-Length Standard

Under the current Code and regulations, the arm's-length standard applies to transactions between related persons.13 Under the arm's-length standard, the price charged in a transaction between related persons is supposed to be the price that would have been charged in a comparable transaction between unrelated persons. The arm's-length standard has proven to be very difficult for taxpayers to comply with and for the IRS to enforce, particularly for related-party transactions for which unrelated-party comparable data are not available. In those cases, there often is a wide disparity between what the taxpayer considers to be an arm's-length price and what the IRS considers to be an arm's-length price.

This leads politicians to get upset about "abusive" transfer pricing.14 They claim that companies push the envelope on transfer prices and "shift" income from one jurisdiction to another. There's a solution for this - worldwide formulary apportionment.15 The income of a for-profit should be allocated among jurisdictions using worldwide formulary apportionment, e.g., on the basis of a three-factor formula using property, payroll, and sales.16

Deficiency 6: Failure to Piggy-Back onto Financial Accounting Rules

Under the current Code, taxable income is generally determined without regard to the rules for determining income for financial accounting purposes. FASB, with oversight by the SEC, spends a lot of time and effort developing financial accounting rules - why reinvent the wheel? Many, if not most, countries tie income for tax purposes into income for financial accounting purposes.17 Why shouldn't the United States? Using financial accounting rules (U.S. GAAP or, in appropriate circumstances, IFRS) to determine the income of for-profits would not only be much simpler but would also avoid the situation where politicians excoriate a company for paying little or no tax when in fact it has little or no income for tax purposes (even though it may have significant income for financial accounting purposes). Hopefully, in 50-100 years, the whole world will use IFRS for financial accounting purposes and all income tax systems will be based on IFRS.

To recapitulate the proposed taxation for for-profits, a for-profit tax unit: (1) would consist of a for-profit entity and all of its wholly owned for-profit entities; (2) would not have a residency; (3) would be subject to worldwide formulary apportionment; and (4) would generally compute its income using financial accounting rules.

Deficiency 7: Double Taxation of Dividends

Under the current Code, a distribution from a corporation is taxed as a "dividend" to the extent it is considered attributable to "earnings and profits." A dividend is taxed as ordinary income but may be subject to reduced rates (to alleviate double taxation). To the extent a distribution does not constitute a dividend and exceeds an owner's basis in its stock, it yields capital gain for the owner and may be subject to reduced rates (to alleviate double taxation).

Dividends from a for-profit to its owners should be tax-free.18 Such would provide complete relief from double taxation, not just partial. There is no theoretical justification for only providing partial relief from double taxation of dividends.

Ideally, gain or loss realized on the sale of an ownership interest in a for-profit should not be taken into account for tax purposes in order to avoid duplicating income or loss realized by the for-profit. If such approach were adopted, then all distributions from a for-profit (not just dividend distributions) would be tax-free.

Deficiency 8: Application of Capital Gains Rates to Income from Other Than the Sale of Corporate Shares

Currently under the Code, reduced income tax rates apply to capital gains (at least with respect to individuals).  It makes eminent sense to apply reduced income tax rates to gains on the sale of corporate shares because of the possibility of double taxation in that context (i.e., taxation of value derived by the corporation at both the corporate level and the owner level, either in the current taxable year or at some point in the future). However, the term "capital gains" is defined very broadly in the Code 19 and currently covers much more than gains on the sale of corporate shares. There is little, if any, theoretical justification for applying reduced income tax rates where the possibility of double taxation does not exist. Thus, the special capital gains rates should be limited to gains on the sale of ownership interests in for-profits.20 (As mentioned above, ideally there should be no tax on such gains, and losses should not be taken into account for tax purposes.)

Deficiency 9: Taxation of Nonresident Individuals

Currently under the Code, nonresident individuals can be subject to U.S. income tax when they come to the United States for a foreign employer and make more than $3,000 rendering services in the United States.21 This can impose a horrendous burden, both on the employer (in terms of wage withholding and reporting to the IRS) and on the employee (in terms of having to file a U.S. income tax return). The complexity becomes even more severe if the employee is deriving stock options and deferred compensation (whether qualified or non-qualified).22

As a general matter, individuals (including U.S. citizens) should be subject to income tax only on a residency basis. Individuals have enough to worry about without having to be concerned about paying income taxes to countries other than their home country.23 Thus, as recommended here, for-profits would be taxed on the basis of worldwide formulary apportionment and individuals would be taxed on the basis of residency.24 In situations where countries have conflicting views as to where an individual has his residence, the issue could be addressed in negotiations under the OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which, despite its title, is open to all countries.25

Deficiency 10: FATCA

Under FATCA,26 the United States unilaterally requires every foreign bank in the world (including, e.g., a bank in Uzbekistan) to report directly to the IRS about the bank's U.S. account holders. In fact, the requirement is much broader than this since it applies to all foreign "financial institutions" (FIs), a term defined broadly to include not only foreign banks but also foreign brokerage houses, mutual funds, private equity funds, pension funds, and insurance companies (to name a few).27 Thus, for purposes of FATCA, the term "account" includes a traditional bank account (on-demand payable), a brokerage account, and an ownership interest in a mutual fund.28 It has been estimated that there are at least 600,000 foreign FIs in the world.29

As has been written before by this author,30 FATCA must be repealed because it involves: (1) the height of arrogance on the part of the United States; (2) a blatant violation of the Golden Rule; (3) bullying at the nation-state level; (4) disruption of international relations; (5) direct conflict with many foreign laws; (6) a negative impact on the U.S. economy; (7) an immense compliance burden on foreign FIs; (8) a burden on U.S. individuals residing abroad who are now having difficulty obtaining banking services; (9) a waste of Treasury and IRS resources; (10) an unnecessary "solution" since efficient and effective enforcement tools already exist; and (11) non-reciprocity on the part of the United States.

Because FATCA is in direct conflict with many foreign laws, Treasury currently is in the process of negotiating intergovernmental agreements (IGAs) with scores of countries so that FATCA can be implemented. However, many of these IGAs vary from the final FATCA regulations and also vary among themselves. Moreover, data transmission protocols must be negotiated for IT purposes by the U.S. Competent Authority and foreign Competent Authorities so that data can be transmitted efficiently, and no doubt there will be variations among these also. Thus, mass confusion lies ahead for foreign FIs who operate globally.31

To deal with this problem, and also to gain access to information from around the world concerning their own taxpayers, many countries, particularly European Union (EU) countries, are now pushing for the automatic exchange of information on a global, multilateral basis.32 Given the push now for a global, multilateral system, most likely within the framework of the OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the prudent course of action is for the United States to repeal FATCA. Otherwise, the system set up under FATCA (along with its myriad IGAs) will no doubt have procedures at odds with those of the global, multilateral system, which obviously would exacerbate the confusion and inefficiencies for FIs worldwide. At a minimum, FATCA should be suspended while a global system is being developed.33

Deficiency 11: Override of Code Rules by Bilateral Income Tax Treaties

Under the current Code, the rules of the Code can be overridden by an income tax treaty between the United States and a foreign country.34 Currently the United States has 66 income tax treaties in force and thus a U.S. international tax practitioner needs to know not only the rules of the Code but also the rules of 66 income tax treaties. Assuming there are 193 sovereign jurisdictions in the world, the number of possible bilateral income tax treaties that could be in effect is 18,528.35 Obviously, it would be very difficult for the tax director of a multinational that is operating in 193 countries to stay on top of the provisions of 18,528 bilateral income tax treaties - it's hard enough to stay on top of the domestic tax laws of 193 countries!

It is becoming more and more apparent that the current system of bilateral income tax treaties is not a good way to run a railroad. In connection with the BEPS comprehensive action plan, which staff in the OECD Centre for Tax Policy and Administration (CTPA) are currently working on for release at the G20 Summit (of finance ministers) in Moscow on July 19, 2013, there is concern about how the action plan could actually be implemented in an efficient manner, realizing that renegotiation of bilateral income tax treaties to implement it would take years and years. Marlies de Ruiter, Director of the Tax Treaty, Transfer Pricing, & Financial Transactions Division of the CTPA, has suggested that perhaps the BEPS action plan could be implemented through a multilateral tax treaty.36 However, even though that would be much more efficient than the renegotiation of thousands of bilateral income tax treaties, it would still involve a rather lengthy process since the multilateral treaty would have to go through a ratification process in each signatory country.

A much more efficient approach would be for the OECD to come up with Model "Anti-BEPS Provisions," which each country would be expected to implement on its own. The OECD has shown that "peer pressure" can have a significant impact with respect to promoting the OECD standard on information exchange,37 and such pressure might work just as well in this context.

In fact, the whole system of bilateral income tax treaties should be jettisoned in favor of a system built on "Model International Tax Provisions" promulgated by the OECD. These would be provisions that each country of the world would be expected to incorporate into their own domestic law.38 Such a system would be much more efficient and also much easier for taxpayers to comply with, since a taxpayer would only need to know the rules of 193 countries, and not also the rules of 18,528 bilateral income tax treaties.39

Besides substantive tax provisions, bilateral income tax treaties also include procedural provisions relating to the way in which the Competent Authorities of the treaty countries can work together with respect to mutual agreements, exchange of information, and assistance in tax collection. These procedures could be handled instead under the OECD/Council of Europe Multilateral Convention for Administrative Assistance in Tax Matters.

Deficiency 12: No Clear Vision of Reality

The current Code is not founded on a clear vision of reality and thus one ends up with a Code that approaches incomprehensibility.  Judge Learned Hand once wrote:In my own case the words of such an act as the Income Tax, for example, merely dance before my eyes in a meaningless procession … couched in abstract terms that offer no handle to seize hold of … [A]t times I cannot help recalling a saying of William James about certain passages of Hegel: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have significance save that the words are strung together with syntactical correctness.40

One reason the Code is so difficult to understand is because the fundamental concepts are never clearly and precisely defined. Thus, in the words of Judge Hand, they become "abstract terms that offer no handle to seize hold of." For example, nowhere does the Code define such fundamental concepts as "property" and "asset." One would think such fundamental concepts would have clear and distinct meanings; however, they appear to be used throughout the Code in a haphazard, extremely murky way. In fact, in §367(a) one finds both terms used and they appear to be used interchangeably, contrary to the interpretive principle that if two separate terms are used in a statute, they are assumed to have different meanings.

A sound tax system requires a clear vision of reality and precision in language. Fundamental concepts, such as "property," "asset," "liability," "income," "cost," and "expense," should be defined precisely, with definitions that tie into reality.41

This commentary also will appear in the July 2013 issue of the  Tax Management International Journal.  For more information, in the Tax Management Portfolios, see Isenbergh, 900 T.M., Foundations of U.S. International Taxation,  and in Tax Practice Series, see ¶7110, U.S. International Taxation: General Principles.


  1 For a discussion of the term "entity," see Regs. §301.7701-1(a). The term "entity" is somewhat non-descript and gives little hint as to its referent, i.e., a certain type of ownership arrangement, consisting of assets and liabilities. In fact, the term can be misleading since it may suggest something "out there" that exists independently of individuals. William Alexander, IRS Associate Chief Counsel (Corporate), recently stated that an entity (more specifically, a corporation) is a "legal fiction." Elliott, "IRS Officials Indicate Economic Substance Not at Issue in Corporate Freezes," 2013 TNT 112-7 (6/11/13). However, an entity is not a legal fiction; it is simply a type of ownership arrangement and there is nothing fictitious about an ownership arrangement. Perhaps, in lieu of the non-descript term "entity," it would be better to use a term such as "recognized separate ownership arrangement" (or RSOA, for short). Use of that term would more clearly indicate the nature of the reality with which we are dealing. 

  2 The flow-through approach is inherently complex, not just the U.S. version of it. At a Spring 2013 international tax forum in Paris, a number of European participants stated that partnership taxation is extremely complex in their home countries and "nobody understands the rules." 

  3 The President's Advisory Panel on Federal Tax Reform, convened by President George W. Bush, delivered its report to Secretary Snow on Nov. 1, 2005 (hereinafter, "the 2005 Panel report"). The 2005 Panel report recommended that all business entities with more than $10 million of gross receipts be taxed at the entity level. 2005 Panel report, p. 129. The 2005 Panel report also recommended that smaller business entities be given the right to elect entity-level taxation. Id. However, in the interest of simplicity, all for-profits, regardless of size, should be taxed at the tax unit level. 

  4 Defined in Regs. §301.7701-3(a). Basically, it is any entity, other than a trust or other entity subject to special treatment under the Code, that is not treated as a per se corporation under Regs. §301.7701-2(b). 

  5 Consolidation under §1501 is really schizophrenic, or incomplete, consolidation since tax is imposed on the income of the consolidated group but the members are still recognized as separate tax units (persons) for tax purposes; thus the tax must be apportioned among the members. If there were true consolidation, the members of the group would form one tax unit (person) for tax purposes. 

  6 Mandating this treatment would permit the elimination of the complicated consolidated tax return rules. 

  7 See III.C. of "Offshore Profit Shifting and the U.S. Tax Code - Part 2 (Apple Inc.)," a 5/21/13 memorandum prepared by Senator Carl Levin (D-MI), Chair of the Permanent Subcommittee on Investigations (PSI) of the U.S. Senate Homeland Security and Government Affairs Committee, and by Senator John McCain (R-AZ), Ranking Minority Member of the Subcommittee (hereinafter, "the PSI Apple report"). 2013 WTD 98-42 (5/21/13).

This issue is also a focus of the 2/12/13 report prepared by the Organisation for Economic Co-Operation and Development (OECD) entitled, "Addressing Base Erosion and Profit Shifting" (hereinafter, "the BEPS report").  The term "base erosion and profit shifting" is quite vague and its referent is not clear. However, p. 10 of the BEPS report lists six, somewhat disconnected, issues of concern ("the main pressure areas"), thus shedding some light on the term. (Since the BEPS report actually deals with a potpourri of issues, it would be more appropriate to call it the Potpourri report.) Even though the six issues listed shed light on what is meant by "base erosion and profit shifting," the issues are presented with a fair amount of imprecision, and the report as a whole has a fair amount of vague generalities (and, one might even dare say, mumbo jumbo). When seeking to address a problem, it is important to be precise about the problem and then precise about the solutions. The OECD is expected to have a "comprehensive action plan" ready for the G20 Summit (of finance ministers) in Moscow on July 19-20. Hopefully that action plan will be written with a bit more precision. The U.S. House Committee on Ways and Means held a hearing on the BEPS report on June 13, 2013, at which Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, was one of the speakers. Arora and Madara, "Ways and Means Considers Base Erosion and Profit Shifting," 2013 TNT 115-1 (6/14/13). 

  8 "Almost wholly owned" for-profits (e.g., more than 80% owned) should also be subject to mandatory "disregarded entity" treatment in order to avoid any shenanigans. If it is decided to conform tax to financial accounting (see Deficiency 6, below), a consolidated group for financial accounting purposes would be treated as one tax unit.

  9 §7701(a)(4); Regs. §301.7701-5(a).  Pursuant to Regs. §301.7701-1(e), the term "State" includes the District of Columbia for this purpose. 

  10 §7701(a)(5). 

  11 Mt. 7:25 (RSV). 

  12 See III.C.2. of the PSI Apple report. 

  13 See §482 and Regs. §§1.482-1 through -9. 

  14 See III.C.3. of the PSI Apple report. See also pp. 42-43 of the BEPS report. 

  15 The European Commission is moving in this direction with its proposal for a Common Consolidated Corporate Tax Base (CCCTB). Philip Kermode, Director of the European Commission's Directorate-General for Taxation and Customs Union, is promoting the project. Stewart, "OECD and European Commission Leaders Discuss Fundamental Corporate Tax Reform," 2013 WTD 113-3 (6/12/13). As noted by Marko Gruendig, the CCCTB will take care of a lot of problems with "base erosion," at least in the European context. Sheppard, "Offshored Intangibles and the OECD Base Erosion Project," 2013 WTD 76-2 (4/19/13).

  16 No one says worldwide formulary apportionment will be easy, but it'll certainly be a lot better than the arm's-length standard. It's similar to what Churchhill said about democracy - it's a horrible form of government but it's better than all the others.

If a for-profit had predominantly "passive" income, and thus was in the nature of a passive foreign investment company (PFIC), worldwide formulary apportionment would not be appropriate since the for-profit could easily arrange for all of its apportionment factors to be in a low-tax country. In such a case, the for-profit itself should not be subject to tax but the income of the for-profit should be taxed on a "flow-through" basis (or, if the for-profit is publicly traded, stock in the for-profit should be annually marked to market). 

  17 See "Relevance of Financial Accounting to Host Country Taxable Income," 32 Tax Mgmt. Int'l Forum (June 2011). 

  18 For this purpose, "earnings and profits" would instead be called "earned value" and would be defined simply as accumulated after-tax taxable income (determined on a pre-apportionment basis).

  19 §1221.

  20 This is also a recommendation of the 2005 Panel report at p. 126. 

  21 §864(b)(1).  In addition, the foreign employer and employee may be subject to FICA taxes and the foreign employer to FUTA taxes.

  22 The complexities involved are discussed in more detail in Bouma, "Income and Employment Tax Ramifications of Sending Corporate Personnel to Host Country - U.S. Perspective," 32 Tax Mgmt. Int'l Forum 111 (September 2011).

  23 A special rule could be provided for high-income individuals who have taken up residence in a low-tax country (which is the case sometimes with professional athletes and entertainers). 

  24 If a sole proprietorship were engaged in international operations, its owner would be taxed on a residency basis, with a deduction given for foreign income taxes.  If the individual wished to have its business income taxed on the basis of worldwide formulary apportionment, he would need to conduct his business through a tax unit (consisting of one or more entities).

Under this residency proposal for individuals, nonresident individuals would no longer be subject to withholding taxes on U.S.-source fixed or determinable annual or periodical income that is not effectively connected with a U.S. trade or business (FDAP).  There is already a substantial exemption for interest (§871(h)) and dividend distributions from a for-profit would be exempt. Since the two largest income categories would be exempt, in the interest of simplicity withholding taxes would be eliminated for all categories.  Withholding taxes on FDAP would also be eliminated for for-profits since they would be taxed on the basis of worldwide formulary apportionment.

The current Code and regulations contain a complex, arbitrary, and arcane set of rules for determining if a particular item of income is U.S.-source or foreign-source. These rules are used to determine FDAP, to determine foreign-source taxable income for purposes of the foreign tax credit, and to determine income effectively connected with a U.S. trade or business. Assuming withholding taxes no longer applied to FDAP and for-profits were taxed on the basis of worldwide formulary apportionment, the sourcing rules would be eliminated. 

  25 The Global Forum on Transparency and Exchange of Information for Tax Purposes, which includes 116 advanced, emerging, and developing countries, announced at its meeting in Cape Town, South Africa, on October 25-27, 2012, that 50 of its members had either signed the OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters or had signed letters of intent to sign it. The Convention "was opened to all countries in 2011 in an effort to make it a more effective tool for battling tax avoidance and evasion." Mitchell, "OECD Tax Transparency Forum Plans Rating System; Critics Express Skepticism," 216 Bloomberg BNA Daily Tax Report I-1 (11/08/12). 

  26 The term "FATCA" is being used here to refer to §§1471-1474 of the Code. These sections were added by §501(a) of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147 (3/18/10). Sections 501-541 of the HIRE Act are often referred to as the Foreign Account Tax Compliance Act. 

  27 §1471(d)(5). 

  28 §1471(d)(2). 

  29 Elliot, "IRS Officials Offer Preliminary Details of FATCA Registration Process," 2012 TNT 194-1 (10/5/12). See statement therein by William Holmes, Director (International Data Management), Large Business & International Division, IRS, estimating that 600,000 foreign FIs would be registering with the IRS by June 30, 2013. 

  30 Bouma, "11 Reasons Why FATCA Must Be Repealed," 41 Tax Mgmt. Int'l J. 651 (12/14/12). 

  31 In a 6/21/13 letter to Treasury and the IRS from the Securities Industry and Financial Markets Association (SIFMA), SIFMA also stated that "foreign financial institutions are caught in major uncertainty because many governments are still negotiating IGAs with the United States that would allow information exchange between taxing authorities. Institutions are waiting to learn if they will be subject to an IGA and if so, how they can comply." Bennett, "FATCA Withholding Deadline Could Hurt Financial Markets, SIFMA Tells IRS, Treasury," Bloomberg BNA Daily Tax Rpt. G-1 (6/25/13). 

  32 See Bennett, "Multilateral Automatic Information Exchange Propelled by FATCA, Top OECD Official Says," 115 Bloomberg BNA Daily Tax Rpt. G-6 (6/14/13).  See also "A Step Change in Tax Transparency: OECD Report for the G8 Summit, Lough Erne, Enniskillen, June 2013," 2013 WTD 117-29 (6/18/13); "Remarks by President of the European Council Herman Van Rompuy ahead of the G8 summit in Lough Erne," 2013 WTD 117-20 (6/18/13), in which President Van Rompuy stated, "The EU - who was and continues to be at the forefront on the automatic exchange of information between tax authorities - will be happy to bring its expertise to help designing and developing a global standard"; and the communique´ of the G8 Summit in Lough Erne (June 17-18, 2013), 2013 WTD 118-21 (6/19/13), in which the G8 stated, "We commit to establish the automatic exchange of information between tax authorities as the new global standard, and will work with the Organisation for Economic Cooperation and Development (OECD) to develop rapidly a multilateral model which will make it easier for governments to find and punish tax evaders." 

  33 In similar fashion, on November 12, 2012, the European Commission announced that the European Union Emissions Trading Scheme, which would have applied to foreign airlines, was being suspended for one year in order to give an opportunity for "a global solution" to be developed. WTD Doc. 2012-23353 (11/14/12); Stewart, "EU Delays Airline Participation in Emissions Trading," 2012 WTD 220-1 (11/14/12). 

  34 §894(a). 

  35 For a given set of n units, the formula for determining the number of combinations involving r units is as follows:[Image]

  36 Kroh, "OECD Official Calls for Mechanism to Quickly Implement BEPS Tax Changes," 2013 TNT 104-3 (5/30/13). See also similar remarks by Pascal Saint-Amans, Director, CTPA. Mitchell, "OECD Tax Leader Says BEPS Project Could Produce New Multilateral Treaty," Bloomberg BNA Daily Tax Rpt. I-3 (5/31/13). 

  37 As stated in the BEPS report, "major progress towards transparency has been achieved over the past four years." BEPS report, pp. 49-50. Even a number of so-called tax havens have been climbing onboard the "transparency" bandwagon. See, e.g., Pruzin, "Swiss Government Ready to Discuss Global Rules on Automatic Information Exchange," Bloomberg BNA Daily Tax Rpt. I-3 (6/17/13); Bennett, "Cayman Islands Unveils New Plan to Crack Down on Tax Evasion," Bloomberg BNA Daily Tax Rpt. I-2 (6/25/13). 

  38 One of the main provisions could be the Model Apportionment Formula. Commentary could discuss situations where divergences from the Model Provisions might be appropriate.

Some may argue that this approach would constitute "unilateral disarmament" by the countries following the Model International Tax Provisions since they would eliminate their withholding taxes while other countries would retain theirs. Hopefully, however, the combination of "peer pressure" plus leading by example would cause most countries to implement the Model International Tax Provisions and the number of "rogue nations" would be few. 

  39 I must admit, when I was an Attorney-Advisor in the International Branch of the Legislation & Regulations Division of the IRS Office of Chief Counsel, I enjoyed a treaty trip as much as the next guy. However, the approach of Model International Tax Provisions is a much more efficient way to proceed. 

  40 Learned Hand, "Thomas Walter Swan," 57 Yale L.J. 167, 169 (1947). 

  41 For possible definitions, see Bouma, "Suggested Core Principles for Accounting (and Also for Income Taxation)," Bloomberg BNA Daily Tax Rpt. J-1 (3/24/06).