Switzerland and Lichtenstein, for instance, used to be 'tax havens" in the sense that they would not report anything to taxing authorities, allowing taxpayers to commit tax fraud by hiding assets and income in Swiss banks.  As noted above, this has mostly changed, and it is also unrelated to the current issue.

 

Another kind of "tax haven" would be the Channel Islands, Saudi Arabia, and other places with little or no income/asset tax, where individuals move for retirement to maximize the benefit of their retirement savings.  This is perfectly legal and remains so.  My grandparents moved to Lanzarote for their retirement, in part because of taxation and general cost of living.  This also in unaffected by the current issue.

 

The current issue deals purely with corporate taxation of multinational corporations.  International tax is a hideously complex issue, as it features the interaction between the tax laws of at least two countries (which often have entirely different taxation systems) and usually also a treaty or two.  To give you a sense of the complexity involved, the single most expensive attorney in our entire (very large) firm is our top international tax guy.  Not the firm CEO, not the IP lawyers, not the M&A guys - the international tax guy.  He is also one of the very smartest people I have ever known.  I am not that guy.  As a result, my post is based on my very incomplete understanding of international tax issues.

 

A central purpose of international tax policy is to minimize two opposing problems:  tax avoidance and double taxation.  The basic idea is that if country A taxes something, then country B should not - but if country A does not tax something, then country B should be free to do so.

 

The loophole in question in not some self-serving gift to the rich - it benefits only US corporations with significant foreign operations (and some foreign corporations in the US).  This loophole is the result of an effort to avoid double taxation, resulting from an interaction between US tax law and the laws of many other countries.  The basic US rule is that all income earned in the US is taxed in the US; and income earned anywhere by a "US person" is taxable in the US.  Part of what makes a corporation a "US person" is their "domicile," which is defined in part by their headquarters.  This has allowed some US corporations with significant foreign income to shuffle some operations around, including their HQ, and thereby not being "US persons."  This is not illegal in the least, but has resulted in significant revenue loss to the IRS from corporations that were intended to be covered by the Internal Revenue Code.  Only corporations with very specific characteristics can take advantage of this loophole, but these few corporations are by definition very large and profitable, so the lost tax revenue is significant.

 

My understanding is that the current change simply tweaks the definition of "US person" to limit the ability to stop being a US person simply by moving some office space around.  Maybe they are messing with the definition of "substantial presence" - I don't know.

 

As tallen noted, there is an increased risk of double taxation resulting from this - but right now there is rather significant undertaxation.  This is a well-known and longstanding loophole.  I don't see any real risk of significant negative effect on foreign investment or anything else of the kind.  This has nothing to do with salaries or labor standards.  There is a risk that some foreign companies will get swept into being "US persons," which would not be intended, but that number would be very small, and that loss would be overcome many times over by the increased tax revenue to the IRS from actual US corporations.

 

Separately - I disagree completely that the IRC is poorly drafted.  To the contrary, the IRC is one of the best-drafted laws we have.  Along with the Bankruptcy Code and the UCC, the IRC is an example of code drafted  by the actual experts in the field instead of elected amateurs.  It is extremely complex and difficult to understand, but it is very exact, non-contradictory, and in general excellent.

 

 

I agree with both of those statements.  But that has nothing to do with the drafting.

 

How is it important, or even relevant, that the average American understand the Code?  It does not exist for reading entertainment.  You might as well criticize computer code for being hard to read to the average American.

 

The code does a far better job of accomplishing its purpose than most laws.

 

Laws are the computer code of the judicial system.  Not the user manual.

 

The tax code gives the same result when given the same data.  That's what I mean that it is well drafted.  Poorly drafted code either gives unpredictable results or simply crashes.  The IRC hardly ever crashes. 

 

That cannot be said for many other laws.  Most notably, laws drafted by legislators to be "easy to understand" are almost always fuzzy, vague, and give unpredictable results.

 

You want to simplify the tax code?  Great - but that requires Congressional action.  It has nothing to do with the drafters of the Code.  Your beef is with policy, not with the implementation.  The implementation (the Internal Revenue Code) is excellent.  It just happens to excellently implement a policy that you think is too complex.

 

The tax code gives the same result when given the same data.  That's what I mean that it is well drafted.  Poorly drafted code either gives unpredictable results or simply crashes.  The IRC hardly ever crashes.    That cannot be said for many other laws.  Most notably, laws drafted by legislators to be "easy to understand" are almost always fuzzy, vague, and give unpredictable results.

Most of those laws aren't used by a couple hundred million people every year, and should probably be as complex and well defined as tax code is now.  The nitpicky difference between the law and the actual tax code (if there is any -- I don't know and it's not significant to this argument because it...) is silly.  This country spends thousands of dollars per high school student to teach them about drug and driving laws, almost of all of which are very easy to understand, as long as you're literate.  I don't understand why something as integral to a family's finances as taxes is made so complicated to the point that the only people who can make it work for them are the very rich.

 

You want to simplify the tax code?  Great - but that requires Congressional action.  It has nothing to do with the drafters of the Code.  Your beef is with policy, not with the implementation.  The implementation (the Internal Revenue Code) is excellent.  It just happens to excellently implement a policy that you think is too complex.

Unless I'm confused, this is absolutely Obama's plan.  If he's come up with another way to implement legislation (and I doubt an executive order would cover this one), I would call up the Justice department because he happens to be in the wrong branch for that bit of work.