Introduction Estate planning is primarily about the transmission of wealth. However, it should be about much more. Many people don’t want to delve into family skeletons or tackle emotionally charged issues. …
April is financial literacy month and the month-long celebration often comes with appeals to low-income and marginalized communities that suggest the silver bullet to their financial woes is financial literacy–and it’s …
Today marks the final day of March and the conclusion of Women’s History Month. This month is a time to recognize the women who served as trailblazers, and inspire those that are blazing new trails for the next generation. While the progress of women in history is clear, that progress has stalled in the absence of changes in the gender wage gap over the past two decades.
The gender wage gap is the difference between the earnings of men and women for the performance of the same work. Our nation has tracked the statistics on pay disparity between men and women for over a century. The US Government Accountability Office (GAO) reports women earned about $.82 for every dollar men earned in 2022. These results are similar to where the wage gap stood 20 years earlier. In 2002 it was reported women earned $.80 for every dollar men earned. In 20 years, we have only moved 2 cents closer to pay equity. At this pace, the wage gap will not close until 2111. Rather than wait another 88 years, here are 3 things we can do now.
Address The Impact of Imposter Syndrome
Imposter syndrome is commonly defined as unfounded feelings of inadequacy and self-doubt that occur in high achievers who attribute their success to luck rather than their skill. It’s often coupled with the worry that a perceived incompetence will be discovered and result in job loss. A behavioral psychology study published by Deloitte reports 70% of the global workforce experiences imposter syndrome in the workplace at one time or another. The study notes women are significantly more likely to be impacted by imposter syndrome and women reported that it commonly holds them back from pursuing pay raises and promotions. A resulting impact of imposter syndrome is a continuing gap in pay equity.
Employers can proactively accept the responsibility to reduce the impact of imposter syndrome in the workplace. Providing women with greater access to mentorship and professional development programs serves to counteract imposter syndrome. When these programs are led by women leaders, for aspiring women leaders, studies show it helps reduce self-doubt and imposter syndrome in the workplace.
Engage In More Workplace Conversations
For most employees, leaning over to ask a co-worker how much they’re paid falls well outside of their comfort zone. It certainly is not the best way to make friends at work, and compensation has always been a taboo topic for discussion. However, pay disparity persists because employees do not have these conversations. Under the National Labor Relations Act (NLRA), employees have the right to communicate with other employees at their workplace about their wages.
Employees can support pay equity when they proactively connect with one another to foster pay transparency. Approaching these conversations requires a strong level of trust between coworkers. Making it clear that the goal is to share salaries for the mutual benefit of ensuring all workers know their value is key to making these conversations productive. Plus, being up front about fostering pay equity can lessen the discomfort that can arise from talking about compensation.
Develop salary transparency policies
In recent years, a number of states have enacted laws that require transparent pay reporting and salary disclosure. According to CNBC, a salary transparency movement is underway, and nearly 25% of the nation’s workers are currently covered by salary transparency laws. These laws require employers to disclose salary information for online job postings and provide the pay scale to an employee upon request.
While lawmakers play a key role, employers can proactively develop pay transparency policies to support pay equity. Many economists cite upfront disclosures on compensation as key step to closing the wage gap. The Harvard Business Review examined wage transparency in Danish companies before and after the introduction of the country’s Act on Gender-Specific Pay Statistics. The results of their study showed the gender pay gap shrank by 7% in five years for companies governed by mandatory pay transparency. This study evidences that pay transparency can accelerate the rate at which the wage gap can be narrowed.
An All Of The Above Approach
The path to establishing meaningful and sustainable improvement to pay equity will require a comprehensive effort from employers, employees, and lawmakers. Working together, we can consider put two cents of the past two decades in the rearview mirror, and create a future that erodes the gender wage gap completely.
Hush money sounds dirty or illegal, but many businesses pay it on occasion. There are important tax rules at play, and everyone in business should know the key rules. Let’s start with the fact that just about every kind of payment has tax consequences, to both the recipient and to the one who paid the money.
1. Hush Money is Income. If you get paid hush money, is it income you have to report on your taxes? Yes, the IRS says almost everything is income, and that certainly applies to hush money, whatever the circumstances. In fact, almost all legal settlements are income. There are a few exceptions, mainly for compensatory personal physical injury damages. But the IRS is strict about what qualifies as physical.
Unless the money is a payment for physical injuries or physical sickness, it is taxable. To prove physical sickness, the plaintiff should have evidence of medical care, and evidence that she claimed the defendant caused or worsened the condition. Some plaintiffs claim the harassment gave them post traumatic stress disorder, and PTSD is arguably physical for tax purposes. But the IRS taxes most lawsuit settlements, exact wording matters, and taxes can make a huge difference in how much a plaintiff gets to keep after legal fees.
2. Defendants Deduct It. Businesses routinely settle legal claims of all sorts to keep claims and amounts quiet. No business wants bad publicity, and lawsuits are bad for business. Even settlements can be bad for business, especially if amounts are publicized, and settlements that become public can encourage other claims to be brought. As a result, nearly every legal settlement agreementrequires confidentiality. You can say that the business is paying the claim or paying for silence, and it might be a bit of both. If the company paying the money is in business, it is almost always tax deductible, except for the exception discussed below in #4.
3. Individual Defendants Usually Can’t Claim a Write-off. Companies routinely pay hush money. Individuals do so less frequently, even though individual conduct at companies probably leads to most of the liabilities the hush money is intended to cover up. To claim a write off, an individual would have to be conducting a trade or business. Plus, the hush money would have to relate to that trade or business. For an individual, that can be a tall order.
4. Hush Money for Sexual Harassment or Abuse. Starting in 2018, the tax law says that businesses and individuals can no longer write off confidential legal settlements for sexual harassment or abuse. These restrictions only apply if confidentiality is required. So if you just pay hush money but do not expressly call for nondisclosure or confidentiality, companies can still write it off. Some companies settle without requiring confidentiality to get around the new rules. For example, it was reported that Fox settled some suits without confidentiality.
However, most companies are willing to forgo a tax deduction to keep the settlement quiet. Then again, some companies want to have their cake and to eat it too by splitting the money into several parts. It works like this: In a $1M settlement, how about saying that only $50,000 is for sexual harassment, and the other $950,000 is for other employment claims? In some cases, there is an argument that you can still write off the bulk of confidential sexual harassment settlements in that way. No one know yet whether these workarounds will actually work. On the plaintiff side, legal settlements with tax indemnities are on the rise.
5. Legal Fees Can Be a Problem. For businesses, legal fees are almost always tax deductible, even if the legal fees arevery expensive. They are just one of numerous business expenses. But since 2018, if you are paying hush money for sexual harassment or abuse, and if you require confidentiality, not even the legal fees can be deducted. But even bigger tax problems can await plaintiffs. As they face IRS taxes on their legal settlements, they are often searching for some way to deduct their legal fees under the new tax law.
First, the good stuff. The proposal would extend full refundability permanently, allowing even very low-income families to receive the full benefit of the CTC. Full refundability is critical to reducing child poverty, especially among Black and Hispanic children. Under current law, about 19 million children in low-income families fail to get the maximum credit because their parents don’t earn enough money.
As in 2021, younger children would qualify for larger benefits than older children – an idea backed by research. This would last through 2025.
Most families would have the option to receive a monthly benefit. Many households received half their CTC in monthly payments from July to December 2021. Urban Institute analysis showed that 45 percent of families liked the option, 28 percent had no preference, and 27 percent preferred an annual benefit. A monthly benefit likely explains at least part of the observed drops in food insecurity after 2021’s enhanced credit.
Delivering a monthly benefit requires some way to protect families with low incomes from being at risk of repaying overpayments. Not doing so could undermine take-up. Overpayments can happen because of income or family composition changes. Income changes are much more common. But the proposal would actually protect many higher income families, presumably less of a concern.
The proposal would allow a person to calculate their credit based on the lowest AGI from two years ago, one year ago, or the current year. That way, if payments were advanced based on prior year information, families wouldn’t risk having to pay the credit back if their income increased enough to cause their credit to phase down. But that would direct resources toward higher, not lower, income families, and it could be quite costly. A simpler solution would be to not advance the full credit or, start advancing the credit halfway through the year when families know more about their short-term finances, as I proposed here.
If the administration is worried that full refundability will not pass but monthly payments will, then they could design the provision to protect exclusively people whose credit drops in response to a drop in earnings – and ideally limit the safeguard to low-income families as in other parts of the tax code.
Finally, the proposal would allow the benefit to move with the child. This provision will likely break the $400,000 pledge for some families but could ensure the person most likely to spend the money on the child will receive it. It also can reduce the risk of overpayments but likely comes with considerable record keeping complexity for households in which children move in and out throughout the year.
All-in-all, the CTC proposal will benefit many families. And it starts an important conversation about how to better match credit timing to need and support families whose circumstances change throughout the year. Policymakers and researchers should work with the lived experience of real families to understand how those goals can be met, while still maintaining a tax code that seeks to be fair and efficient.
As taxpayers and politicians argue about the impact of additional IRS funding, the Supreme Court is taking a look at the rules for collecting financial and other information without notice to taxpayers.
Who is entitled to notice when the IRS seeks to track down the assets of delinquent taxpayers?
At a time when some taxpayers and politicians are already concerned about billions in funding for stepped up IRS collection and enforcement activities—and what that might mean for related privacy issues—Polselli is raising questions about the IRS’ right to collect financial and other information without giving taxpayers notice that it’s happening.
The facts of the Polselli case are not in dispute. Remo Polselli underpaid his federal taxes for many years, resulting in an outstanding balance of more than $2 million. The IRS moved to collect, and eventually sought and was granted an order for Polselli to produce certain financial and business records.
Sometime later, the IRS still hadn’t been paid, so it issued administrative summonses to banks where Polselli’s wife, Hanna Karcho Polselli, and his lawyers had accounts. A summons is typically a demand to hand over specific information–in this case, financial records. The reason for the summonses, according to the IRS, is that the information they were requesting might help them collect what Remo had already been determined to owe.
The IRS did not notify Polselli’s wife or his lawyers about the summonses that were issued to the banks, relying on the exception in section 7609(c)(2)(D)(i) of the Tax Code, which excludes from the notice requirement summonses issued “in aid of the collection” of tax assessments.
IRS Seeks Assets
Here’s why that happened. According to court documents, during his investigation, IRS Revenue Officer Michael Bryant was led to believe that Remo “often uses other entities to shield his assets from the Internal Revenue Service.” Bryant also suspected that Remo might have access to and use bank accounts held in his wife’s name, suggesting that they might be the equivalent of nominee accounts. As a result, summonses were issued to several banks to collect information about accounts in Hanna’s name.
Bryant also learned, as part of his investigation, that Remo was a long-time client of the law firm Abraham & Rose, P.L.C. The IRS wanted to know how Remo had been paying the law firm, so Bryant served them with a summons. The law firm, in turn, claimed attorney-client privilege and also represented that the firm did not retain any of the documents that the IRS requested. To get around those issues, Bryant issued identical summonses against the banks where the law firm and a related law firm, Jerry R. Abraham, P.C., had accounts, seeking any financial records related to the law firms concerning Remo.
The IRS claims that the summonses were intended solely to locate assets to satisfy Remo’s “existing assessed federal tax liability, and not to determine additional federal tax liabilities.” The latter, of course, was a concern since Remo had previously been a target for his unpaid taxes for a period of several years.
The IRS did not tell Hanna Polselli or the law firm about the summonses—but the banks did. Once Hanna and the law firms found out, a flurry of petitions to quash–meaning void–the summonses followed, claiming that the IRS had failed to provide the required notice.
The district court did not quash the summonses. Instead, the court concluded that under the plain language of the statute, Polselli’s wife and lawyers were not entitled to notice. Specifically, the court found “[t]hat section unequivocally provides that the IRS may summon the third-party recordkeeper of any person without notice to that person if (1) an assessment was made or a judgment was entered against a delinquent taxpayer and (2) the summons was issued “in aid of the collection” of that delinquency.”
So how did it end up at the Supreme Court? An earlier Ninth Circuit decision found that “when the IRS issues a summons to a third-party-recordkeeper, it must give notice to the person identified in the summons unless the delinquent taxpayer owns or has a similar legal interest in the summoned records.” In that case, Ip v. United States, the IRS summoned bank account information of a third party without notice to aid in its investigation of another taxpayer. Under the Ip rule, the IRS only need not issue notice when the assessed taxpayer has a recognizable legal interest in the summoned records. The Ninth Circuit rejected the premise that the IRS did not have to issue notice when issuing a summons for the records of a person who has no outstanding tax liability and who has no legal relationship with the assessed taxpayer.
That was a different result from this Sixth Circuit decision and a similar Seventh Circuit decision. The Supreme Court agreed to hear the matter to resolve the split.
The argument before the court isn’t about whether notice is always required, but rather when an exception might apply. The tax code typically requires the IRS, when it serves a summons for records about a person “identified in the summons” to give that identified person notice. So, for example, if the IRS issues a summons directing a bank to produce an account holder’s records, it must generally notify the account holder. And under section 7609, that person is entitled to ask the court to quash the summons—the IRS may not examine the records before that legal process plays out.
The right of a taxpayer to intervene in IRS requests was codified when section 7609 was signed into law in 1976. It was intended to protect the public’s privacy interests by allowing taxpayers the right to challenge IRS summons. In 1982, the law was amended to allow taxpayers the right to seek to quash the summons.
The IRS doesn’t take issue with the general notice requirements but is, instead, focusing on an exception in the statute. That carve-out, they say, was the result of a concern by Congress that giving notice of a summons in some instances—when the IRS is trying to locate assets, for example—could result in the taxpayer moving those assets before the government could act. The additional language that was written into the statute was intended to prevent that result, the IRS argues, and means that they don’t have to provide notice of “any summons … issued in aid of the collection of (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or (ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).”
The key words the government relies on: in aid of the collection.
The Sixth Circuit acknowledges that a notice requirement applies to many summonses issued in aid of IRS functions outside of collections. But, the Ninth Circuit decision, they reasoned, “overlooked the other functions of the IRS and read too much into Congress’s intent to notify taxpayers of third-party recordkeeper summonses.”
Balance Of Interests
Where is the balance between giving the IRS tools to collect delinquent taxes and protecting the privacy interests of innocent (third) parties? The district court noted that it was “sympathetic to worries that the IRS may be able to access information regarding blameless third parties without notice” but ultimately found that those “conjectural fears” did not defeat Congress’s prerogative to prioritize the IRS’s collection efforts over taxpayer privacy.
Oral arguments were heard on March 29, 2023, and lasted about 50 minutes. Shay Dvoretzky of Skadden, Arps, Slate, Meagher & Flom LLP argued for the petitioners. In his opening statement, he claimed that the IRS’ interpretation is inconsistent with the statute’s text, context, and purpose. It would, he said, create the same opportunity for abuse the Congress sought to eradicate. He argued, “The IRS says ‘trust us, we police ourselves’ but Congress repudiated that approach when it enacted Section 7609’s privacy protections for innocent third parties.” Instead, he claims that the interpretation held by the Sixth Circuit and the IRS would nullify most of what Congress intended.
When Dvoretzky mentioned limiting language, Justice Thomas asked him to clarify, eventually saying, “The only problem — the problem is that the limiting language that you’re asking about isn’t there.”
Ephraim McDowell, assistant to the solicitor general in the Department of Justice, argued on behalf of the IRS. He argued that the statute was already a compromise and disputed the petitioners’ claims that limitations are needed to impose a check on the IRS’s summons authority. “[M]ultiple other checks exist,” he said, “including the prospect of a challenge by the recipient of the third-party summonses.”
McDowell took issue with Dvoretzky’s characterization of an assessment as a “bookkeeping notation,” arguing that an assessment only happens “after a very long process” with opportunities to challenge and appeal liabilities. Towards the end of his time, Justice Kagan specifically asked McDowell to walk her through the process before the IRS makes an assessment. After his explanation, she noted, “So, at this point, we can say, if we’re going to be trusting courts at all, he owes money.”
McDowell replied, “Exactly. And I think that’s a critical point because the only time we’re in this situation, when this provision comes into play, is when there is someone who has adjudicated or assessed liability and he’s refusing to pay that liability and likely deliberately evading tax collection.”
Justice Sotomayor noted that “[t]here’s a whole lot about the IRS collection mechanism that has been criticized and continues to be criticized by the world, including me.” She later said that she could understand not giving the taxpayer notice because of concern that they might hide assets. But why, she wondered, would you impose secrecy on an innocent third party?
As part of his closing, McDowell commented that the “IRS has long faced a persistent problem of tax collection evasion.” He cited data from the IRS website about the tax gap, which estimated that between 2014 and 2016, there were $428 billion in uncollected taxes for each of those years.
“So we’re dealing with a very difficult problem,” he said, arguing that “Congress was acting against that backdrop” when it crafted the law. He closed by emphasizing that this law was aimed at those who “are refusing to pay those liabilities and likely deliberately evading the collection process.”
Dvoretzky countered, in his rebuttal, “I think everybody is agreeing here today that “in aid of collection” is not limitless, that it can’t just be a shot in the dark.”
If a limit exists under the statute, and what it might be, remains a question—at least until an opinion is issued.
You can read the transcript of the arguments here.
The Supreme Court is not expected to issue an opinion for months, but the arguments come at a crucial time for the IRS. Last year, the Inflation Reduction Act gave the IRS a significant boost—nearly $80 billion in additional funding over the next ten years. That amount has been criticized by those who fear it might increase audits and collections on lower-to-middle-income taxpayers, a move that Danny Werfel, the newly appointed IRS Commissioner, has promised to ensure doesn’t happen.
Still, there are concerns about potential heavy-handedness even from those who generally support additional funding. On March 30, 2023, the American Institute of CPAs, which has publicly advocated for “funding that supports an effective and efficient tax administrative system,” sent a letter to the Department of the Treasury and the IRS, again raising concerns about the allocation of funds between enforcement and service.
Facebook’s tax dispute over the pricing of transactions with an offshore subsidiary marks the first time an important anti-profit-shifting regulatory regime has been challenged in court, and the outcome will have …
Facebook’s tax dispute over the pricing of transactions with an offshore subsidiary marks the first time an important anti-profit-shifting regulatory regime has been challenged in court, and the outcome will have major consequences.
During a lengthy Tax Court trial, Facebook has vigorously contested the IRS’s valuation of intellectual property and other intangible rights contributed to a cost-sharing arrangement (CSA) with an Irish subsidiary in 2010.
Facebook argues that the IRS’s $21.15 billion valuation of the company’s contributions to the CSA was nearly $15 billion too high, and the difference reflects stark disagreements concerning the variables and assumptions used in the IRS’s valuation method.
But Facebook’s arguments also challenge the general validity of the IRS’s valuation method itself, the income method, which was one of the signature features of a regulatory scheme introduced in 2009. The method targets cases in which a U.S. participant contributes valuable self-developed intangibles and an offshore “cash box” participant simply cuts checks to fund its share of the U.S. participant’s development activities.
Plugging Old Holes
In a CSA, each participant bears the costs of developing intangibles in proportion to the future economic benefits it expects to receive in its territory. This often begins with an initial contribution of intangible property to serve as the foundation for developing future intangibles.
To illustrate, assume that a U.S. parent company with a self-developed software application contributes version 1.0 to a CSA with a foreign subsidiary. If sales of future versions of the application in the U.S. parent’s territory are expected to account for 40 percent of the global total, the parent must bear 40 percent of the development costs and the subsidiary must bear the remaining 60 percent.
To make the U.S. tax base whole for its loss of expected future income, the cost-sharing regulations require that the parent in the example charge its foreign subsidiary an amount — referred to as a “buy-in payment” by earlier versions of the regulations — that reflects the value of the initial contribution.
The reason CSAs became the IP offshoring vehicle of choice for many U.S. tech multinationals was that the pre-2009 regulations arguably allowed taxpayers to exclude from the buy-in payment the value of goodwill, going concern value, and other residual business assets. The Ninth Circuit endorsed this interpretation in Amazon AMZN .com Inc. v. Commissioner, 934 F.3d 976 (9th Cir. 2019), aff’g148 T.C. No. 8 (2017), resulting in the invalidation of the IRS’s valuation method.
The risk that courts would read the regulations in this way prompted Treasury and the IRS to overhaul the cost-sharing regulations, which led to the release of temporary regulations in 2009 and final regulations in 2011. The amended regulations mooted the question of what does and what doesn’t constitute an intangible by relying on entirely different terminology. They also recognized a set of valuation methods that incorporate residual business asset value and established standards for evaluating methods’ reliability.
The income method was one of these new valuation methods, and the regulations favor its use when one party makes all the unique contributions and the other is a cash box.
The Facebook Test
According to the Ninth Circuit panel that decided Amazon, there was “no doubt” that the IRS’s position would have been correct if the 2009 temporary regulations had been in force. However, the amended cost-sharing regulations, including the provisions relevant to the income method, had not been tested in court — until now.
One of Facebook’s primary criticisms of the income method is that it deprives the foreign participant of any return for its participation in the CSA, and that this brings the regulations into conflict with other regulatory provisions and with IRC section 482.
The income method gives a cash-box cost-sharing participant a return on its investment commensurate with the risk of the intangible development activity, which in the Facebook case corresponds to a discount rate of 14 percent (as the IRS argues), 19 percent (as Facebook argues), or somewhere in between.
When Facebook complains that the income method denies a cost-sharing participant returns on its participation, it’s really claiming that a cash box deserves even more than the discount rate. However, it’s unclear why a cash box should expect to earn more than a risk-adjusted return on its cash investment.
Facebook also argues that the income method inappropriately allocates returns attributable to the parties’ future intangible development costs to the initial intangible contribution. But a cash box contributes only cash, and a risk-adjusted investment seems an appropriate reward for its contribution.
The other prong of Facebook’s attack on the income method attempts to resurrect the semantic defect that led to the IRS’s loss in Amazon by claiming that section 482 contained the same defect until it was amended in 2017. This argument is odd, considering the Amazon opinion’s observation that the IRS would have won under the 2009 regulations and its exclusive focus on a regulatory definition.
But Facebook’s claim that the vague wording of section 482 implies that Congress never intended to authorize the income method is outright bizarre. Under Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984), an agency’s interpretation of an ambiguous statutory provision must be upheld as permissible unless it is arbitrary, capricious, or manifestly contrary to the statute. This means that the vague wording of section 482 makes it even harder for Facebook to establish the impermissibility of the income method regulations.
Regardless of whether Facebook prevails on other grounds, the Tax Court should reject these general attacks on the income method’s validity. By restricting the offshore participant’s profit to a return commensurate with the risk associated with the relevant intangible development activity, the income method prevents — or at least limits — multinationals’ ability to shift an outsize share of the returns attributable to U.S.-developed intangibles to lower-tax jurisdictions.
If the Tax Court invalidates the method, the IRS’s ability to prevent profit shifting in other cost-sharing cases will be significantly weakened.
The collapse and federal takeover of Silicon Valley Bank (SVB VB ) and Signature Bank is generating worries about where the next bank failures might occur. Will they hit smaller banks with high commercial real estate (CRE) exposure, as the CRE sector faces persistent economic challenges? And why do we continue seeing periodic financial sector crises?
Concerns over small bank risks gained a lot of attention recently, when Goldman Sachs’ Richard Ramsden, the firm’s leader of the Financial Group in Global Investment Research, wrote a widely quoted cautionary note. Ramsden said he expects banks to “pull back on commercial real estate commitments” as they become “more focused on liquidity.”
Ramsden’s worries are especially striking because he was positive on US banks last year, saying in a Bloomberg interview that the “fundamentals within the US banking system today, they’re actually remarkably good.”
So why the alarm now? It’s smaller banks’ exposure to CRE—specifically commercial offices, which continue lagging financially due to high and perhaps permanent new levels of working from home.
As downtown offices remain empty or underutilized, office building values are falling. And many smaller banks have a large share of those assets. The Fitch Ratings agency says the biggest banks only have about 6% of their assets in CRE compared to around 33% for many smaller banks. Fitch’s Julie Solar says “commercial real estate has always been the domain of small banks, and it’s why small banks fail.”
A recent Goldman Sachs report underscores the pressures on these small banks and the attendant risks to the economy. Banks are under increased pressure to tighten credit standards while also managing their declining CRE portfolios. The Goldman report estimates tightening credit standards resulting in less lending “would have the same impact on growth as roughly 25-50 basis points of (interest) rate hikes” by the Fed.
And the Fed’s relentless interest rate increases raise additional worries. CRE leases often are long term, so the decline in office occupancy hasn’t fully hit the sector yet. But many CRE loans are coming due in the next few months, so new lending and refinancing will be challenged both by reduced rental revenues and also higher interest rates for borrowing and refinancing.
The even bigger worry is how these risks might hurt the entire economy. Economists get guidance here from the late Hyman Minsky, whose work emphasized how “financial fragility” in a capitalist economy threatens not only financial firms and sectors, but potentially the entire economy.
For Minsky, investors (especially financial agents) become overly optimistic during growth periods, taking on increasing risks. These can spread through financial markets and also infect the real economy of goods and services through a process of “contagion” where other firms join in the speculative boom, increasing the risks to the entire economy.
Periodic financial subsector crises spread through contagion to other sectors, sometimes causing deep pain across the economy. In our time, we’ve seen crises erupt from savings and loans, developing country debt, energy finance speculation, Japanese asset bubbles in the 1980s, the “dot-com” bubble that burst in 2000, and of course the mortgage and securities crisis of 2008 that threatened not only financial decline but a global depression.
Minsky saw these recurrent risks as endemic to the system. He memorably said “stability leads to instability,” as financial “innovators” seeking high profits will “always outpace regulators; the authorities cannot prevent changes in the structure of portfolios from occurring.”
So we might be in for another “Minsky moment”—a financially driven crash tied to risky lending and contagion—driven this time by small banks and CRE lending. The FDIC can handle individual bank failures. The worry is that we’ll see system-wide contagion revealing risks in other parts of finance that aren’t apparent now. (Remember that no one seemed to think SVB presented risks to the overall financial system until suddenly it looked like it might.)
SVB and the growing concerns about smaller banks show we need tighter regulation and supervision of all financial institutions, including smaller and regional ones. Systemic financial and economic risks don’t just come from the biggest banks.
We probably can’t prevent individual firm or even sectoral financial risks; they’re built into the system. But we need to be much more alert to their destructive potential, acting quickly and aggressively when the next bubble pops up somewhere—as it could in smaller banks and commercial real estate.
Whether expected or not, the upheaval of job loss gives you much to think about. Don’t forget any stock options or restricted stock units (RSUs) that you were granted and are still available to you. Too many departing employees forfeit valuable potential gains from their equity awards because they were unaware of the post-termination rules, or even the vesting dates, of their grants.
The danger is real. Sudden layoffs have recently erupted at many companies, including corporate tech giants such as Amazon, Google, Meta, and Microsoft. You want to be sure you take as much extra compensation for the road as you can. After all, you earned it during your time at the company.
In a myStockOptions.com webinar that I moderated, a panel of financial, tax, and legal advisors came together to discuss various topics on negotiating equity comp in hiring offers, protecting it at employment termination, and avoiding big mistakes when leaving a job with outstanding stock grants. Below are highlights of what they had to say about equity comp in job termination.
1. Keep All Documents Related To Equity Comp And Employment
The first and most important point in job loss is to know what equity awards you have, what their vesting status is, and the company policies and rules that apply when you’re laid off.
For that, you need to have all of the documents related to your equity awards and your employment in general. Be sure you keep all of these during your employment. If you don’t have them, contact the person or department in charge of stock plan administration at your company. You want to avoid getting caught without them in a sudden job loss.
“You need to obtain all the documents before employment termination occurs,” asserted webinar panelist Arthur Meyers, the founding attorney of Meyers Law Firm in Naples, Florida. “You have to understand how many awards you hold, what the terms are, whether there are any restrictive covenants such as noncompete clauses, and so on.”
Arthur listed some of the key items to keep in your possession, ideally before job termination:
grant agreements and any separate grant notice for each award
the stock plan itself
information about all your grants from the company’s online stock plan portals: both your company’s intranet and the website of its designated brokerage firm or transfer agent
Alert: Confirm you can continue to access the websites to view your outstanding stock grants, and the procedures for making exercises and stock trades, after you leave the company.
Don’t count on your company to provide this information after you’ve left. “It is often surprising to find out how little information you can actually get from your employer,” cautioned panelist AJ Ayers (CFP, EA, CEP), a co-founder of Brooklyn FI in New York City. “Sometimes more mature public companies will have robust finance departments and equity ‘ninja squads.’ But recently public companies or private companies typically don’t have those departments.” Unfortunately, as a result you may end up having “to beg them for this information,” she warned.
2. Understand Your Post-Termination Rules
With your documents, check what equity awards you have, what the vesting status is for each grant, and any special treatment for “involuntary layoff” in the documents. “Confirm not only the award type but also the terms of the exit,” said AJ.
In general, you have rights only to stock options and restricted stock/RSUs that have already vested by your termination date. While the typical timeframe for exercising options after job loss is 90 days from your official end date, your period for exercise will be dictated by the company’s plan and your grant agreement. Make sure you know the date from which the post-termination exercise period (PTEP) is calculated.
Alert: Companies strictly follow PTEP rules, do not give you a grace period for missing the deadline, and have no legal obligation to notify you of upcoming expiration dates.
Usually, to get a different treatment, you’d have to negotiate at hire for the continuation or acceleration of vesting (or have enough clout or justification to do so in any separation agreement). The PTEP can also vary according to the reason for the job termination, AJ continued. “Sometimes if it is a ‘for cause’ firing, we’ve seen all equity being forfeited. But if it is an amicable separation, there is often room for moving the termination date back or forward, depending on when a particular grant may vest.”
These rules can also vary by industry and your level in the company, along with your ability to negotiate them at hire, observed panelist Beata Dragovics (MSFP, CFP, CEP), who advises many clients in the biotech industry with Freedom Trail Financial in Boston.
A few companies, such as Square, Pinterest, and Quora, have extended PTEPs for vested stock options as a feature to make their grants more attractive in recruiting and retaining talented employees.
In a large layoff, some companies will extend the post-termination exercise period beyond what was in the initial grant, perhaps to the full term of the option. Employees are then not rushed into exercising their stock options. In a private company, this extension of the exercise window is an especially beneficial feature, as a private company’s shares have no liquidity to provide the funding for the exercise. Should the company go public or be acquired in the future, the options could become very valuable.
With restricted stock and restricted stock units (RSUs), you almost always forfeit whatever stock has not vested at the time of your termination, unless your grant specifies another treatment or the company decides to continue or accelerate vesting. Therefore, if you are planning to leave your job, you may want to stick around long enough to get any valuable chunk of restricted stock/RSUs that may vest in the near future.
Sometimes the end of your time as an employee does not trigger forfeiture/termination provisions if you will continue to perform services for the company in some way, whether working part-time or as a consultant. “If you’re not going to a new position immediately,” suggested Arthur Meyers, “you may want to explore the opportunity to be a consultant for the company and continue vesting in your existing awards.”
Alert: While this article is focused on the standard job-loss situation, for other life and company events the rules that apply may be different, e.g. in retirement, early retirement, disability, death, or an acquisition of the company (“change of control”). Check your grant agreement and stock plan.
3. Understand The Tax Impact
You also need to understand the tax impact that leaving the company has on your equity compensation. Even for terminated employees, companies withhold taxes upon exercises of nonqualified stock options (NQSOs) and the vesting of restricted stock/RSUs. The income and withholding are typically still reported to you on Form W-2, even if the option exercise occurred after your employment ended—but not always.
“We have seen cases in which a client departs a public company where typically an exercise of nonqualified stock options would show up in their paycheck,” noted AJ Ayers. “Welp, the client does not work there any more, so there is no longer a paycheck. Where is that stuff getting reported?” She urges clients to keep a contact at the employer in the accounting or HR department so that there is someone to reach out to. “Often with tax-return deadlines approaching, we still have issues with getting W-2s from the company.”
AJ went on to note that sometimes companies do not withhold taxes on NQSO exercises by former employees, raising another set of concerns. “It can depend on the staffing in their accounting departments.” If taxes are not withheld and you instead receive a 1099-NEC, which can happen for grants that vest only after you terminated, you need to decide whether to pay estimated taxes for that quarter or wait until your tax return for the year to pay what you owe.
Be Extra Careful With Incentive Stock Options
Special tax issues arise with incentive stock options (ISOs). Under the federal tax code, you have only 90 days to exercise ISOs after a standard job termination and still retain the special tax treatment that ISOs offer (it’s 12 months with disability, and there’s no limit with death). However, if your company’s post-termination exercise period is shorter than 90 days, that is the specified period you have until expiration and forfeiture.
After 90 days from termination, ISOs become nonqualified stock options, which have a different tax treatment.
Alert: If your company allows more than 90 days to exercise ISOs after your termination date, you need to be aware that your type of option—and thus your tax treatment—will change if you wait beyond the 90-day point to exercise.
“Be sure you are well versed on those tax consequences,” urged AJ Ayers. “We have seen in many cases where a client will log into their equity portal and it will actually still say that the options are ISOs when we know that they are not because the client left the company years ago. Watch out for that and be sure you understand the rules.”
The webinar in which these panelists spoke, which also extensively covers ways to negotiate equity compensation at hire, is available on demand. At myStockOptions.com, the section Job Events has abundant educational resources on equity comp in job search, negotiation, hire, termination, and consultant/contractor situations.
A handful of extremely wealthy US taxpayers holds trillions of dollars in foreign accounts, much of it in tax havens and through partnerships, according to a new study based on data reported to the IRS by foreign financial institutions.
Since 2015, the Foreign Account Tax Compliance Act (FATCA) has required foreign banks, investment funds, and other financial intermediaries to report information about accounts controlled by US taxpayers. Using confidential administrative data reported under FATCA, the researchers estimated about 1.5 million US taxpayers held roughly $4 trillion in foreign accounts in 2018, about five% of the roughly $80 trillion in total reported US financial wealth.
Who Owns Foreign Accounts?
The study found two very different groups of overseas account holders. The vast majority are immigrants to the US or Americans working abroad. They generally hold relatively small accounts that rarely are in tax havens.
But most of the money is controlled by just a handful of very wealthy taxpayers, often through partnerships with accounts in tax havens such as Switzerland, Luxembourg, and the Cayman Islands. Only about 14% of foreign accounts were held in those low- and no-tax countries in 2018. But they represented about half those overseas assets, or nearly $2 trillion.
Ownership of offshore assets was highly concentrated among a small number of very wealthy households. About one-in-five of those in the highest-income 1% held assets overseas, increasing to more than 60% for households in the top 0.01%. And that very small group controlled roughly one-third of the assets in overseas accounts.
For context, in 2018, the Tax Policy Center defined those in the top 0.1% as households making about $775,000 or more annually, while the top 0.01% made at least $3.3 million.
The Role Of Partnerships
In addition, an outsized share of this wealth was held by partnerships. While only about 1.4% of offshore accounts were owned by these entities, they held nearly one-third of all offshore assets of US taxpayers.
Three-quarters of these overseas partnership assets were held in tax havens, and nearly all the partnerships were finance-related such as hedge funds, private equity firms, and investment partnerships. About 43% of these partnership were owned by US taxpayers.
By contrast, the half of accounts directly owned by individuals held only about 16 percent of total assets. About 1% of accounts and 14 percent of US-owned foreign assets were owned by C corporations and other entities.
FATCA reporting appeared to initially reduce the amount held in these foreign accounts, but the effect was small and only temporary. By 2018, the value of assets sitting in these overseas accounts had returned to pre-2015 levels.
Other studies have found similar, or even higher concentrations, of foreign assets. See here and here. But this was the first with access to detailed administrative data, including all FATCA reports, rather than having to make assumptions from small samples of foreign accounts.
The study was conducted by a team of economists who have researched these issues for many years: Niels Johannesen of the University of Copenhagen, Daniel Reck of the University of Maryland, Max Risch of Carnegie Mellon University, Joel Slemrod of the University of Michigan, and John Guyton and Patrick Langetieg of the IRS. The paper will be presented at the Tax Policy Center-IRS joint research conference in June.
While the new study advances an important discussion about assets held in foreign accounts, FATCA reporting remains flawed. Some financial institutions may have failed to fully report US owners and others may erroneously have misidentified some foreign owners as Americans. The authors were unable to identify about one-in-five owners of partnership assets and could not link 42% of individual accounts that held 38% of wealth to specific tax returns.
Some critics of the study say FATCA reporting distorts the amount of wealth in overseas accounts by conflating foreign accounts held directly by US investors with holdings by US individuals in domestic funds that, in turn, own interests in offshore funds.
Despite those significant gaps, this paper provides a compelling look at both the magnitude of assets held overseas and the characteristics of their US owners. And the authors conclude that a relative handful of very rich Americans stashed trillions of dollars in wealth overseas principally to avoid US taxes.
There still is much we don’t know. Researchers need to fill in missing information, through perhaps that will only be possible if FATCA reporting is improved. And future studies may tell us whether FATCA is accomplishing its goal of increasing tax compliance.
Grace Perez-Navarro discusses her long career at the OECD Centre for Tax Policy and Administration and what’s next after her retirement.
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: graceful exit.
Grace Perez-Navarro has been a mainstay of the tax community for three decades, working first at the IRS Office of the Chief Council, and later at the OECD Centre for Tax Policy and Administration (CTPA). She has worked under two separate CTPA directors, and most recently took over for Pascal Saint-Amans after his departure.
But now Grace is set to move on. As her retirement approaches, Tax Notes chief correspondent Stephanie Soong caught up with her to discuss her plans for the future as well as her time in the trenches of tax policy.
Stephanie, welcome back to the podcast.
Stephanie Soong: Thanks for having me.
David D. Stewart: Could you tell us a bit about what you talked about with Grace?
Stephanie Soong: Well, we talked a little bit about her career trajectory: how she started out in Houston, Texas, ended up in Paris, France; the effect her work has had on international tax policy; the future of the OECD as a standard-setting body. We talked about her accomplishments and what she’s most proud of, what she wishes she could have worked on during her tenure at the OECD. We just wanted to get a sense of her final departing thoughts about her career at the OECD.
I’ve been covering her since 2011, like 2012, so it’s been a long time. So it was a really nice conversation. It’s always great to see Grace. She’s always been a very good source and [I] wish her all the best in her future endeavors.
David D. Stewart: All right, let’s go to the interview.
Stephanie Soong: All right, well, thank you so much, Grace, for coming by our studio in the Tax Analysts building. It’s an honor to have you here. Especially since you’re super busy these days. So thank you for coming.
Grace Perez-Navarro: My pleasure. It’s my first time here. Maybe my first time in Falls Church.
Stephanie Soong: Oh, wow. Well, hopefully not your last, but you’re always welcome back. I just wanted to catch you before you leave the OECD, which is really the end of an era. I’ve been covering you since basically when I started in 2011, so a very long time. It will be sad to see you go, but we wanted to ask you a few questions before you leave and get your thoughts on how your career has taken off, where you’re going, what are you doing next? What can we expect from the OECD in the years you’re not there, which is really sad?
Let me just start by asking — your journey to become the head of the CTPA started in Houston, Texas. You were at the IRS’s Chief Counsel Office in the 1990s, and you were working on international tax issues like negotiating tax treaties and information exchange agreements. Tell us more about your career trajectory. Did you ever expect to find yourself where you are now?
Grace Perez-Navarro: No, I guess it depends how far back you go. I’m not sure I would have expected to have become a tax lawyer. But I was talking recently with some other tax lawyers, and we were all talking about how what we loved about tax was the flexibility, the constant change in tax, and how it is not strictly black and white. There’s so many opportunities to play with tax. I think that is what attracted me to it, the complexity of it and the versatility of it. And so I did end up going to the IRS in Houston, working primarily on litigation.
I was very excited to be given the opportunity to go to Washington to work in the — what was then the new — international division because I had always wanted to work on international issues. My litigation background from Houston served me very well. I had been doing some tax shelter litigation there. And then I got to Washington and started working on Brazilian foreign tax credit cases. I’m still working with Brazil, but on different issues. But that was really interesting.
Because I speak Spanish, I started working on the Mexican tax treaty, other tax treaties. And I mean, I loved it. I loved my work in Houston. It was a lot of fun doing litigation. I really liked doing tax treaty negotiations and also the international litigation, which was much harder than the litigation we were doing in Houston, because much more was at stake.
The litigation teams on the other side were much bigger. We were basically like two people. It was much more challenging, but also really fascinating. All of that was great. And then the opportunity arose to go to the OECD for one year, and that ultimately translated into more than 25 years. And, I’ve really enjoyed it.
It’s been a very hard job. It’s had its political ups and downs, depending on who is in not only the White House, but in other leadership roles around the world. But I do think we’ve achieved a tremendous amount at the OECD during my tenure. I mean, when I was hired, one of the big issues, and I think part of the reason Jeffrey Owens hired me, was to work on bank secrecy, which is what I had told him was something that needed to be fixed.
I was very frustrated in Washington when we would get the field auditor saying they can’t get information out of Switzerland, like the trails were leading to Switzerland. And I would say to Treasury, “Please go and terminate that treaty.” And they’d say, “Yeah, yeah,” and come back with a new treaty. It was something that could not be resolved unilaterally. Even though the United States is the number one economy in the world, it still was not able to address this issue alone. I think that is the biggest achievement of the OECD, is being able to bring countries together to facilitate change in fundamental areas, where countries otherwise couldn’t resolve the problem.
So it’s been just a great career for me doing that. Then with the BEPS (base erosion and profit-shifting) project, making so many changes in so many countries and bringing so many countries together to work on these issues. And doing the after-sale service, all the capacity building and support for countries and all the different programs we’ve put in place — like the Tax Inspectors Without Borders, which is really helping developing countries a lot. For every dollar we put in, it’s a $120 return on average. You can’t get that kind of return on anything. So it’s been really wonderful.
I have to say I’ve enjoyed every job. So if I had stayed at the IRS, I think I would’ve been very happy there. But being at the OECD, we’re able to have impact really on a global scale. And that has been very rewarding.
Stephanie Soong: You officially retire at the end of March. Last we talked, you were about to become the director of the CTPA. How has it been for you these past few months? And your tenure, how has it been?
Grace Perez-Navarro: Well, it’s been very challenging. It’s an odd time to become director, for five months before retiring. It’s been a very challenging period. We have not only the pillars to deliver. Getting pillar 2 out the door was a big lift, but we did it. So that was challenging, but we did it.
We still have the multilateral convention to deliver. And that is moving along, but it’s not easy. And then we launched the Inclusive Forum on Carbon Mitigation Approaches, another major initiative where we’re trying to bring over a 100 countries together to work on this issue.
All of that has made it for a very intense period. So I’m definitely not cruising to the finish line.
Stephanie Soong: Yeah, the Inclusive Forum on Carbon Mitigation Approaches, I think, is super important too, especially because of that report from the U.N. saying that we have to make some major progress by 2030-2050 or else we’ll see some really serious environmental effects. So that’s a huge deal.
Obviously you were the first woman to become a CTPA director. How significant was this for you? And how significant is it for you that you’re passing the baton on to Manal Corwin?
Grace Perez-Navarro: Well, I didn’t actually think of it so much as being the first woman, so that didn’t really influence me a whole lot. I am very happy I’m passing it on to another woman. I guess it didn’t matter so much for me because it was a limited tenure, but I am happy to see that we will have a woman at the head of CTPA and also such a capable woman. So I’m really happy about that.
We do have very few women at the top of CTPA. We only have Zayda Manatta, who’s the head of the Global Forum. And we have now Sandra Knaepen, acting as the head of one of the divisions. But we need to do better. And so I’m glad that at least at the very top we have a woman.
I have been struck over the last few months how many young women have come to me and said, “You don’t know how much it’s meant to me to have you there as a role model.” I think for women in leadership roles, we often don’t realize just by being there at a senior position, we give younger women hope and inspiration to aim high.
Stephanie Soong: Speaking of strong women and awesome women, I want to give a shout-out to my colleague, Nana Ama Sarfo, who wrote a really great piece on you when you first became CTPA director. You said during that profile that your priority was finalizing pillar 1 and pillar 2. And you mentioned this a little briefly earlier. Is there anything you can tell us at this stage? Do you feel like that goal has been fulfilled? And can you update us with anything new?
Grace Perez-Navarro: Yes. Well, I can say a few things. One, on pillar 2, I think we are all very satisfied at CTPA that we have delivered the global minimum tax. Obviously, there is more guidance that will be coming out. We’re really ramping up our capacity building. Because so many countries, especially developing countries, want to implement the minimum tax, and we want to make sure they are able to do it and to do it in a consistent manner so that later on when we do peer reviews, we don’t have to go back and have them do more legislation. That has been a tremendous success.
If you think about when I first started at the OECD, I arrived in the middle of 1997, and the harmful tax competition project was underway and being finalized. Back then, you could not have talked about establishing a global minimum tax.
As much as countries were concerned about tax competition, they weren’t able to agree then. They didn’t even talk about a minimum tax. One was talking about, “Well, just zero tax in itself should be considered a harmful tax practice.” But obviously, with only one country supporting that view, that did not win the day. And now we do have a minimum tax that is putting a floor on tax competition to help all countries protect their tax bases. So I think that is a major achievement.
We are making good progress on the other part of pillar 2, the subject-to-tax rule, which in the grander scheme of things is not huge, except it is very important for developing countries that may have negotiated treaties that did not end up being so favorable to them. This is a way to help developing countries protect their tax base. So, that we hope to finalize soon.
Then on pillar 1, we have the multilateral convention. We have been making progress. You have seen all the different public consultation documents we’ve put out. We are heading towards the finish line. We are supposed to finalize it by the middle of the year. We are making progress. There’s still some tough issues to resolve, but I think there is a real determination and goodwill in the inclusive framework to try to get there.
On amount B, people often forget about the simplification of transfer pricing. We are finally making really good progress on that. I think if we nail that, that will be a major, major achievement. Not only for tax administrations that are challenged in administering the transfer pricing rules, which as you know, it’s facts and circumstances. You have to look at this with every case. For developing countries, they often don’t have comparables, and they have limited resources. So it’s a real challenge.
If we can take a big chunk of these fairly routine cases off the table with simplification, that will be a benefit for all, and business is very supportive. So I think it’s a win-win, and it looks like we’ll be able to get there.
I would say it’s a shame it’s not all done. I would’ve liked that. We’re not there yet, but I think we’re getting close. And I think the question will be, can we nail down these difficult issues? Are countries willing to make compromises?
Stephanie Soong: Launching off that a little bit, how do you think the role of the OECD will evolve as a tax standards setter for international tax in the future, after you’ve left?
Grace Perez-Navarro: Well, I think it’s already evolved quite a bit. I think it will just continue along the same path, which is to work with a wider group of countries to develop standards. And then the other important part that we added was the capacity building and support afterwards.
If you go back to when I first arrived at the OECD, we would just set standards. While we did do some consultation of other countries, basically the standards were being set by OECD countries. And then everyone was pretty much left to their own devices to implement. And so, even if you had a beautiful standard, it might get implemented in different ways.
We see that happening, and business always complains about that — that we have set a standard, but then countries aren’t applying it consistently. And so we’ve done, I think, a good job over the years of not only supporting countries in implementation. But also the peer review process, I think, is really important to make sure there is consistency and no sort of slipping backwards and not implementing the standards in the appropriate way.
I think we will just continue on that path. You can already see in the Inclusive Forum on Carbon Mitigation we’re not even trying to set standards. What we’re trying to do is gather data from all the countries about what pricing and non-pricing measures they’re taking, and then mapping those to the emissions they’re trying to target in the different sectors and having a dialogue, allowing countries to talk about what works well, what could help them.
Because as you said, the goals that each country has set for itself will not be met with the measures that they’re currently taking. So more needs to be done. And the question is, what more can be done? Both from a political perspective, which carbon taxes are just not something that many countries can implement. What other alternatives can be used to do that?
I think this data dialogue and, in this case, ultimately leading to decarbonization, my three D’s, is a good model going forward. But I think what we have done already in terms of evolving in how we carry out our work is we’re just putting much, much more emphasis on facilitating implementation and ensuring that it’s consistent.
Stephanie Soong: How do you think the role of the OECD CTPA director will change after you depart?
Grace Perez-Navarro: Well, I think for one thing now, I am being replaced as deputy with two deputies. I’ve already spoken to Manal about that. She needs to think about how she wants to divide up that role and then what her role is in that whole mix. But other than that, I don’t know that it will change that much, because the areas of work that we are doing will remain largely the same.
We now pretty much cover all of tax, domestic and international. The only thing we don’t really cover is customs, because you have the World Customs Organization dealing with that. But so I suppose the role itself may not change that much. Perhaps the areas of emphasis will change.
Stephanie Soong: Well, I look forward to covering whatever comes out next.
What are you most proud of during your time at the OECD?
Grace Perez-Navarro: Well, I do think the elimination of bank secrecy was a major achievement. As I said, I really think that that could not have been done without a global effort, and without the political support that we had from the G-20. This is something I started working on when I first arrived, was working on bank secrecy. We put out a report, which you probably have never seen, called “Improving Access to Bank Information for Tax Purposes.” It was so controversial then that we couldn’t call it the “Bank Secrecy Report.” Some of our secretive countries insisted we may get this very factual title.
We knew what had to be done, but we just didn’t have the political weight. And I think one of the things that the financial crisis taught us was how important getting political backing for major changes in tax policy is needed. Because we had done the work at the technical level, but technical people can only go so far. To have that kind of fundamental change in policy and try to push that in countries where their whole business model depended on it, you needed that political support.
I guess the other thing that I would add to things I’m proud of is the work we are hoping will be done soon on reforming Brazil’s transfer pricing. I think from the day I arrived, and even before when I worked at the Chief Counsel’s Office, one of the things I worked on was the U.S.-Brazil tax treaty, which as you know, does not exist. I worked on the negotiations, and a big part of the challenge was that Brazil’s tax policy in the international area was just so different from the rest of the world.
Having spent the last five years working with Brazil to help them move to the OECD standard, not for the sake of moving, but because they see now that they are losing revenue with their current system, that a lot of multinationals are not paying tax in Brazil for value that has been created in Brazil, I think it will be a major achievement to have taken a country from such a different position to the international standard.
Stephanie Soong: Yeah. That will be huge, yeah. I’m looking forward to seeing that too. What do you think you could have done better? What do you wish you could have accomplished you didn’t get to?
Grace Perez-Navarro: Well, I guess on the substantive side, one of the things that I really wish we had been able to spend more time on is looking at the intersection of tax trade and investment policies. And bringing all those things together because I do think — and we’re seeing it now more than ever, with the minimum tax and what that is doing to tax incentives and what that might mean for the subsidy space. I really think it would’ve been nice to work on that. But we just had so many big other projects; it was hard.
Stephanie Soong: You were a little busy with things.
Grace Perez-Navarro: But I do think that is an area that is definitely worth exploring. On the sort of broader areas of CTPA, not substantive, but I wish I would’ve been able to spend more time developing staff and really helping them reach their full potential. I did do quite a bit of that, but it’s really important in an international organization where you have people coming from different cultures, different work cultures, different languages, different tax systems. I think more support is needed than in the ordinary workplace. But despite those things, I think we have been able to accomplish a tremendous amount.
I will say that one indication of the fact that we have been doing pretty well is that all through the pandemic, we were hearing from other organizations and other parts of OECD, how people were suffering from depression, isolation. And we didn’t really have that in CTPA, because everyone was so focused on delivering the pillars that there was a tremendous sense of purpose. I think that helped keep the team together, and we have a really great team spirit in working on all of these challenging, exciting issues.
Stephanie Soong: I guess that might answer my next question then. What will you miss most about the job?
Grace Perez-Navarro: Oh, well, I will miss the policymaking. It is challenging, and there have been many challenging moments over the last 25 years. But I do miss that. I mean, there’s nowhere else where you can have this kind of impact on global tax policy. So that has been very exciting.
I will miss the people, all the delegates and the staff. Hopefully I’ll see them still after I leave. But no, that has been just really great. Getting to know people from around the world and working with them to improve their tax systems, to improve the overall international architecture. So I think I will miss all of that.
Stephanie Soong: What won’t you miss?
Grace Perez-Navarro: Oh, I won’t miss working 24/7. It’s been really intense. I don’t think people realize how much we all work. I won’t miss the increasing bureaucracy that we find everywhere. But no, overall, it’s just been a wonderful experience at the OECD. I feel very fortunate that I somehow magically ended up there.
Stephanie Soong: So the big question then is what will you do next? That was one question that you did not answer in that profile.
Grace Perez-Navarro: All right. Well, I still don’t know that I’ll answer it in full. But I will take some time off. I am going to spend two weeks in Italy enjoying the very southern part of Italy. Then afterwards I will do projects of interest. I am not looking for a full-time job.
I’m not actually looking for anything, but I have been approached with a lot of different really interesting opportunities that will be time limited. So I will be doing different things. So that’s it. I’ll just do some interesting projects here and there and enjoy life.
Stephanie Soong: That sounds like a great plan. And I look forward to hearing more when the time comes, what you’ll be doing next. Will you still be in tax you think? Will you be like Pascal and keep a foot in tax?
Grace Perez-Navarro: Yes, definitely. I mean, most of the interesting opportunities that I have been presented are related to tax. But I would like to do something beyond tax, so you’ll have to stay tuned for that.
Stephanie Soong: OK. OK. Well, thanks so much again, and I want to do something really fun, if you don’t mind.
Grace Perez-Navarro: OK.
Stephanie Soong: Do you know the Inside the Actor Studio, that TV show with James Lipton. He’s like the director of the New York University’s Tish School of the Arts? He’d interview celebrities and ask them a questionnaire.
Grace Perez-Navarro: OK.
Stephanie Soong: Really short, really fun. OK, so what is your favorite word?
Grace Perez-Navarro: Favorite word? Oh, yes.
Stephanie Soong: What is your least favorite word?
Grace Perez-Navarro: No.
Stephanie Soong: What turns you on?
Grace Perez-Navarro: Fun in the sun with friends.
Stephanie Soong: What turns you off?
Grace Perez-Navarro: Arrogant people.
Stephanie Soong: What sound or noise do you love?
Grace Perez-Navarro: Oh, the sound of the ocean.
Stephanie Soong: What sound or noise do you hate?
Grace Perez-Navarro: Complaining.
Stephanie Soong: What profession, other than your own, would you like to attempt?
Grace Perez-Navarro: Realistically or in my fantasy world? Architect.
Stephanie Soong: What profession would you not like to do?
Grace Perez-Navarro: Well, I guess pick up the trash, given the situation in Paris.
Stephanie Soong: Is there a strike?
Grace Perez-Navarro: A massive strike. Trash piling up everywhere.
Stephanie Soong: Oh. Oof. OK. If heaven exists, what would you like to hear God say when you arrive at the pearly gates?
Grace Perez-Navarro: Oh, “so glad you finally made it.”
Stephanie Soong: Well, we are very glad you finally made it here to the office. Thank you so much forsitting with me and answering all my questions. And we will truly miss you when you’re gone. But we will stay in touch, and we’re looking forward to seeing what you’re doing next.
This year marks 50 years of VAT in the United Kingdom. Although the VAT implementation date (April 1, 1973) coincided with All Fools’ Day, the Chancellor of the Exchequer at the time, Sir Anthony Barber, was rather serious when he made a bold statement that “VAT will be a simple tax on the supply of goods and services”. Despite the initial intention to keep the VAT system “simple”, it soon became clear that a simple tax might not be well suited to handle complex dealings in the increasingly digitalised and interconnected economy. As the tax was catching up with new business models and commercial practices, the regulatory framework was growing in size and complexity. Nearly 30 years after the introduction of the U.K. VAT system, Lord Justice Sedley summarised it as follows: “Beyond the everyday world … lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted”.
As we celebrate 50 years of VAT in the U.K., it’s worth reflecting on some of the most memorable developments in the history of the tax. There is no better source of VAT idiosyncrasies than the VAT rate system as interpreted in numerous court judgments and rulings. Just like many other countries, the U.K. applies a standard VAT rate (20%) and two reduced rates (5% and 0%) to make basic necessities such as food more affordable for low-income people. However, the way the reduced rates are administered and interpreted feels more like a walk in a “fiscal theme park” than a logically designed system guided by sound principles.
U.K. VAT intricacies
Under U.K. law, VAT on cakes and biscuits is 0%. However, if a biscuit is partly or wholly covered in chocolate, it must be taxed at the standard rate. This weird rule led to a high-profile dispute between the U.K. tax administration (HMRC) and McVitie’s about the classification of Jaffa cakes (spongy cookies layered with jam and coated with chocolate) that McVitie’s manufactured. HMRC unsuccessfully argued that in spite of its name, Jaffa cakes were actually biscuits, and because they were partially covered in chocolate, they should be subject to VAT.
Another weird U.K. VAT rule says that potato crisps are subject to 20% VAT, but maize- and corn-based snacks attract no VAT at all. Procter & Gamble lost an appeal against HMRC when it tried to classify its Pringles crisps as a maize-based product because the Court of Appeal ruled that the potato flour was Pringles’ largest single ingredient. It didn’t matter that the potato content was less than 50%.
Even the size of a product may be crucial for the tax-rate determination. Last year the First-tier Tribunal concluded in an eight-page ruling that oversized marshmallows should be VAT-free, although normal marshmallows are subject to a 20% VAT. The fact that oversized marshmallows were particularly suitable for roasting justified this different treatment. Another court case considered whether protein-rich flapjacks could be treated as cakes and therefore zero rated for VAT purposes, or were a confectionery item and therefore subject to 20% VAT. The court ruled that the flapjacks under consideration were not cakes because they were not baked and contained significant amounts of protein.
It is our policy that there is a difference between flapjacks and cereal bars. This policy development arose because, at the inception of VAT, flapjacks were widely accepted as cakes, and cereal bars were not widely available, if at all… It is difficult to draw a borderline between the two products, as flapjacks could easily be viewed as cereal bars. However, the above policy is, we believe, fair and reasonable.
Fair? Reasonable? The tax treatment of food can be hard to swallow. But nonsensical VAT rules apply not only to food. If you are planning to sell fur items, HMRC has prepared a flowchart that will help you identify which tax rate to apply. Once you answer ten questions, you will know that if your item is made from goatskin, no VAT will apply. However, if the goatskin originates from Mongolia, Yemen or Tibet, you must charge 20% VAT. I doubt whether Mongolian goats are aware of their special status under the U.K. VAT law.
Elsewhere in Europe
The U.K. is not the only country where the VAT rate system defies common sense and is sometimes immune to any logical explanation. E.U. countries have equally bizarre regulations and case law. In Germany, guinea pigs are taxed at 19% but rabbits benefit from a reduced rate (7%). And in the famous “Subway” case, the Irish Supreme Court ruled that the bread used by the restaurant chain Subway wasn’t actually bread and didn’t qualify for the VAT zero rate that generally applies to bread. According to the Court, the key factor that determines whether bread is bread for VAT purposes was the sugar content. And that was too high in Subway’s bread.
VAT was heralded as a “simple tax” when introduced on the All Fools’ Day in 1973, but has proved to be anything but. While VAT has adapted to changing economic conditions, it has also given rise to disputes over marshmallows, spongy cakes and flapjacks. While we all agree that it does not make much sense for courts and tax officials to spend time and taxpayer money discussing how to eat cakes or roast marshmallows, there isn’t any indication that rate-related nonsense will stop anytime soon. As the U.K. VAT enters its second half-century, its idiosyncrasies and weirdness will continue to entertain us.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organisations with which the author is affiliated.