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Territorial-based Income Taxation as International Ostracism

Taxes not only serve to raise public revenues but also to shape the behavior of taxpayers, and thus of the economy as a whole.  The tax neutrality of Adam Smith is, therefore, the most hypocritical aspiration of any tax policy.  Importantly, governments today not only seek to shape the behavior of its residents, but also of the foreigners who interact with the country—thereby transforming the territoriality of tax jurisdiction into another hypocrisy.  And the effects of this phenomenon have an increasing impact on international politics, as well as certain trade policies did in other not so far times.

On October 26, 2011, the Committee on Ways and Means of the U.S. House of Representatives issued a discussion draft for a “comprehensive tax reform” of the U.S. international taxation system.  The issuance’s purpose is to seek feedback from interested professionals and stakeholders in order to improve the proposal.  And this proposal, usually called “The Camp Tax/Territorial Proposal” due to the fact that Congressman Dave Camp presides the Committee on Ways and Means, is very important to be ignored.  This reform, in fact, posits a modification that we could consider a kind of “revolution” in the U.S. income tax system.  It proposes a change from a “worldwide tax system” to a “territorial tax system,” and offers a reduction of the corporate tax rate (from 35% to 25%) and, as an accompanying and instrumental benefit, a “repatriation tax holidays.”

In a few words, a worldwide tax system (also know as residence-based tax system) imposes taxes on any income regardless its physical origin (source), both domestic and foreign.  Instead, a territorial system only taxes the domestic (residence) source income while exempting the foreign one.  In both scenarios, the income is typically taxed first in its source country and, in a cross-border arrangement, afterwards in the taxpayer’s residence country.  So, to alleviate the contingent double taxation, the worldwide system grants a credit for foreign taxes paid (the so-called “foreign tax credit,” which operates as an advance of domestic taxes) whereas the territorial system simple exempts the foreign source income.  Also, in a worldwide system such as the U.S. system, taxation on foreign income derived from business (“active income”) is normally deferred until brought to the U.S. (“repatriation”) whereas foreign income derived from investments (“passive income”) is generally taxed as soon as it is earned through a number of quite complex mechanisms, such as the U.S. Subpart F rules (Controlled Foreign Corporations or “CFC”) and others.  The accompanying benefit to this reform, the “repatriation tax holidays,” attempts precisely to incentive U.S. investors to rapidly repatriate their active income earned abroad through a very appealing tax treatment, which consists basically in a reduced tax rate along with a comfortable installment period to pay the taxes (for details, click here).

Although at a first sight (and as many are today arguing), this reform would favor allocating of U.S. investments abroad through exempting foreign source income, a more thoughtful consideration reveals the contrary.  Importantly, the first goal at hand is to repatriate U.S. investments currently invested abroad, and that is actually an objective with empirical support from the experience of other countries which have implemented a territorial tax system such as The Netherlands and notably, the U.K. (for further information, see links below).  On the other hand, nothing in this proposal indicates that the Committee on Ways and Means attempts to decrease the U.S. revenues by exempting foreign source income that, as argued, would be generated by U.S. investments that would move abroad by virtue of this reform.  To the opposite, the reform also aims to increase the U.S. tax revenues just as it has happened in The Netherlands and U.K.  So, this policy has actually worked so far.  Consequently, we may conclude that the proposed reform assumes that, in the long-term, the income generated by U.S. investments will then be produced only in the U.S. and not abroad.  Why?

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The Alien Tort Statute and Corporate Liability: Looking Ahead to the Supreme Court Decision in Kiobel

By: Maria Florencia Librizzi[*]

The Supreme Court will soon decide the fate of litigation seeking to hold U.S. corporations accountable under the Alien Tort Statute (ATS) for aiding and abetting human rights abuses overseas. In September 2010, the Second Circuit held in Kiobel v. Royal Dutch Petroleum that the statute did not apply to corporations.[1]  Since then, several other circuits have ruled otherwise, leading the Supreme Court to grant certiorari in Kiobel in October 2011. Oral argument is scheduled for Tuesday, February 28.[2]

The outcome of this case will be profoundly important. If the Court affirms the Second Circuit’s majority opinion, alien victims will no longer be able to sue corporations under the ATS. In many cases corporations will be free to profit from overseas human rights violations, while safeguarding their assets against compensation claims.[3]

Looking ahead to the Court’s decision, I summarize below the evolving jurisprudence of the ATS, including the circuit split over the statute’s applicability to corporations and the mens rea standard for aiding and abetting liability. If the Court limits itself to the Questions Presented in the certiorari petition, it will decide only whether the ATS applies to corporations. However, the Court may also resolve other points of contention among the circuits, including the mens rea standard for aiding and abetting liability. After reviewing the case law, I conclude with several arguments—instrumental, descriptive, and policy—in favor of recognizing corporate liability under the ATS.

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The prohibition of surrogate motherhood in France

The French prohibition of surrogate motherhood, resting on moral and ethical considerations, raises complex issues of private international law.

Surrogate motherhood has been prohibited in France since 1991, under a decision by the Cour de cassation (France’s highest court), (Cass. Ass. plén., 31/05/1991). This prohibition was confirmed in the bioethics law of 1994, and is codified in article 16-7 of French Civil Code (“Civil Code”). Article 16-9 of the Civil Code makes this a prohibition of public order (In France, prohibitions of ordre public or public order are mandatory rules created unilaterally by the state to protect fundamental values of the society, and from which parties have no freedom to derogate. A foreign law applicable under a conflict of laws analysis would be evicted if contrary to a mandatory rule). A surrogacy contract is null and void, and violations are punished by civil and criminal sanctions (civil sanctions are described in articles 311-25, 325 and 332-1 of the Civil Code and criminal sanctions at articles 227-12 §3 and 227-13 of the Penal Code).

The prohibition is justified by different moral and ethical concerns: to prevent children from becoming commodities traded as merchandise between infertile couples and surrogate mothers; to protect the interest of children who are psychologically at risk in such transaction; and to prevent the exploitation of surrogate mothers who must relinquish parental rights to the child after giving birth. Surrogate mothers are usually from lower economic strata and are economically exploited in this transaction. Statistically there is an inherent social division in this practice. This is evinced by the fact that most surrogacy contracts require compensation because very few women would bear someone else’s child for free. This social division is not new – surrogate mothers were slaves in the days of the Bible and Ancient Rome.

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