United in Paralysis

Bradley Willis

On April 1, 2017, the armed forces of Syrian President Bashar al-Assad launched a chemical weapon attack on a Syrian hospital.[1]  Unfortunately, this attack is not the first instance of chemical warfare in the Syrian Civil War.[2]

Raging for the past six years, the Syrian Civil War has claimed the lives of hundreds of thousands of men, women, and children.[3]  In 2012, then-President Barack Obama drew the non-infamous “redline”, claiming it would “change my calculus” if chemical weapons were used in the Syrian War. [4] While the Obama Administration appeared to be heading towards another intervention in the Middle East, the administration soon reversed itself, placing its hopes on a deal reached with the Russian Federation.  In this 11^th hour deal, the Russians were to oversee the destruction of President Assad’s chemical weapons.[5]

While the United States may well have avoided another Middle Eastern quagmire and may well have ceded prestige and influence to the Russians, the world largely watched the horror unfold as thousands of Syrian citizens were rendered helpless by chemical nerve agents.  The world was horrified at the effects of the nerve agents, and yet the world continued with business as usual.

Just as then-President Obama was torn between military intervention in the Syrian Civil War and non-intervention, President Trump is torn between intervening in a years-long war and remaining on the sidelines.  Even though candidate Trump campaigned on an “American First” platform, consistently claiming he was against the Second Iraq War from the beginning, the President must understand that America must stand for the non-use of chemical or biologic weapons against citizens, or even on the battlefield.

America, from its founding, has stood for the universal rights of freedom and self-determination, enshrined in our Declaration of Independence from George III, chief among them, life, liberty, and the pursuit of happiness.  While, like all nations, the history of the United States is tainted with horrific episodes, the United States stands for human rights.  In the history of the world, the United States is one of the only, if not the only, nation that fought a brutal civil war to set other men free from bondage.

Furthermore, the United States, and its allies, fought two World Wars under the principles of self-determination and freedom from tyranny, persecution, and genocide.  From the ashes of the Second World War rose the United Nations.  That institution too, seems incapable of stopping Assad’s gas attacks.

     Protected by the Chinese and Russian veto, the Syrian government will probably never pay for its gross violation of international law and the laws of war.  This then begs the question: if the United Nations is no longer an institution capable of protecting the innocent, then what is its purpose in its current form?  What would make this institution capable of truly bringing violators to justice and face the consequences of their actions?

There has been some discussion on reforming the United Nations Security Council.  In what form would such an arrangement take?  Would there be any permanent members removed from their permanent positions?  Who would take their place?  In the event present permanent members are not removed, what members would receive permanent membership?  Finally, how would that affect the veto powers?

Some have offered the addition of the “BRIC(S)” as permanent members to the Security Council, minus the already-permanent members of Russia and China.  As the leading emerging economies Brazil, India, and South Africa would receive permanent status as well as a veto.

As the largest country in South America, Brazil would add diversity to the Council, as it would be the only permanent member from South America.  As another emerging economy with a large population, and a democracy, India would be a leading candidate to receive permanent status.  However, given various geopolitical concerns, China would likely vocally oppose any such appointment to the Security Council’s permanent members.  Pakistan, India’s longtime rival, would oppose such an appointment as well.  Given the absence of an African voice on a permanent basis, South Africa would probably receive the veto and permanent status.  But the question would then turn to the following: given the dilution of the veto, what would be its power? 

Would the United Nations determine that since there would be as many as eight members, would any veto require just one permanent member to halt a resolution, or would two members be necessary?  Could this body become more democratic, with “majority rule” be the rule?  If that is the case, how would the decidedly non-democratic states of Russia and China respond?  They could, one could plausibly foresee, cut back on their involvement in the Security Council, deciding that they no longer have as much of a stake in the body.

While the United Nations has been unable to protect the innocent in conflicts like Rwanda, the Sudan, Syria, or Eastern Ukraine, the UN must reevaluate its work.  The United Nations appears paralyzed and incapable of living up to providing for peace and prosperity for all nations.  Perhaps a remedy for this apparent paralysis could include more permanent members of the Security Council while revising the current rules regarding the veto powers of the permanent members.  

While the United Nations expressed outrage as from this most recent chemical weapons attack against an innocent civilian population, the UN has not taken any concrete actions against Bashar al-Assad.  While President Trump campaigned on an “America First” platform, the president’s most recent actions[6] are polar opposites of such a course.  United Nations Ambassador Nikki Haley stated that, regime change in Syria is “inevitable.”[7]

It appears that President Trump is evolving in his new role as commander in chief and as leader of the free world.  From campaigning on an “America First” platform to his strikes against Syria, and the dispatching of the USS Carl Vinson strike group to the Korean Peninsula, President Trump has shown he is willing to use military force to further the interests of the United States in the absence of United Nations action.[8]

Bradley Willis is a 3L at the University of Baltimore School of Law.  He graduated from the University of Delaware (2014) with a Bachelor of Arts in Political Science and minors in History and French and studied abroad in Caen, France.  His areas of interest are international relations, history, politics, and the laws of war.  Bradley spent a semester externing with the Hermina Law Group, researching and writing sovereign immunity issues as well as embassy law.  Last year, he participated in the Philip C. Jessup Moot Court Competition.  He is currently a law clerk for the Law Office of David B. Love, P.A.

[1] http://www.cnn.com/2017/04/09/middleeast/syria-missile-strike-chemical-attack-aftermath/index.html

[2] https://www.washingtonpost.com/world/national-security/nearly-1500-killed-in-syrian-chemical-weapons-attack-us-says/2013/08/30/b2864662-1196-11e3-85b6-d27422650fd5_story.html?utm_term=.4ada9a3de471

[3] https://www.nytimes.com/2016/02/12/world/middleeast/death-toll-from-war-in-syria-now-470000-group-finds.html?_r=0

[4] https://www.washingtonpost.com/news/fact-checker/wp/2013/09/06/president-obama-and-the-red-line-on-syrias-chemical-weapons/?utm_term=.598421a987c9

[5] http://www.bbc.com/news/world-middle-east-23876085

[6] Fifty-nine Tomahawk missiles were launched from two American destroyers in the Mediterranean Sea against the airfield the Syrian armed forces launched their chemical attack

[7] http://www.cnn.com/2017/04/09/middleeast/syria-missile-strike-chemical-attack-aftermath/index.html

[8] http://www.cnn.com/2017/04/09/politics/navy-korean-peninsula/

Donbass Passports: The Russian Itinerary for Certain Individuals

 

John Rizos

Russian Prime Minister Vladimir Putin signed an executive order on Saturday, February 18, 2017 in which he declared recognition of identification documents issued by eastern Ukrainian separatist authorities.[1] The order allows Ukrainian citizens and stateless persons who live in certain parts of the Donetsk and Lugansk regions of Ukraine to enter Russia without a visa or a visa application[2] by presenting civil registration documents issued by rebels in eastern Ukraine.[3] Documents include identification documents, diplomas, birth certificates, marriage certificates, and vehicle registration plates,[4] which would allow people to not only enter and travel to Russia, but also to work and study in Russia.[5] Ukrainian separatist authorities began distributing passports in January 2017.[6] It is estimated that 48,000 passports have been distributed in the region.[7]

Ukrainian forces have been fighting pro-Russia and Russia-backed separatist rebels in the Donbass area of eastern Ukraine since May 2014[8], following a referendum vote in favor of self-autonomy from the area’s two main regions, Donetsk and Lugatsk, to be recognized as the Donetsk People’s Republic (DPR) and the Lugansk People’s Republic (LPR)[9].

On September 5, 2014, the Ukrainian Government and the pro-Russian separatists signed the Minsk Protocol in order to implement a resolution and a ceasefire agreement under the auspices of the Organization of Security and Cooperation in Europe (OSCE). The Protocol was comprised of 12 objectives, including an immediate bilateral ceasefire, withdrawal of illegal armed groups, decentralization of power and local elections in Donetsk and Lugatsk, OSCE monitoring, and continuation of national dialogue.[10] On September 19, 2014, there was follow-up agreement for the removal of heavy artillery from a certain area and the continued OSCE monitoring.[11] However, the Protocol was a failure as intense fighting and violations continued from both sides.[12]

On February 12, 2015 Vladimir Putin, Angela Merkel, Francois Hollande, Petro Poroshenko signed the Minsk II agreement in order to implement and to add onto the measures from the Minsk Protocol.[13] The measures were similar to the Protocol, however, they also included a renewed ceasefire to be implemented by February 15, 2015, constitutional reforms and decentralization from Donetsk and Lugatsk by the end of 2015, safe delivery of humanitarian aid based on an international mechanism, withdrawal of all foreign-armed formations, full social and economic restoration in affected areas, and full Ukrainian control over conflict-zoned Russian border[14]. The leaders also agreed, under a joint declaration, that they were committed to Ukraine’s sovereignty and territorial integrity.[15] The UN Security Council adopted Resolution 2202 in February 17, 2015, in which it endorsed the ceasefire agreements and the full implementation of the Minsk II agreement.[16]

The Minsk II stalemate was eventually disrupted by resurgences from both sides,[17] mainly due to the failures by Ukraine to adapt to the DPR’s and the LPR’s political and economic changes, specifically, regarding constitutional reforms.[18] The Russian Foreign Ministry stated that the order is temporary[19] and based on humanitarian grounds[20] until the Minsk deal and the Ukrainian obligations towards Donetsk and Lugansk have been implemented.[21]

Although the order has been well-received by the DPR and the LPR, Ukrainian and US officials have declared it contradictory to any peace agreements between Russia and Ukraine. Ukraine President Petro Poroshenko has labeled the order as a violation of international law[22] and the Minsk agreements[23]. Ukraine Foreign Minister Pavlo Klimkin stated that the Russian order is an intentional military and humanitarian escalation.[24] The US Embassy to Ukraine stated that it contradicts the agreed-upon goals of the Minsk Agreements.[25] Following a meeting with US Vice President Michael Pence, Poroshenko rejoiced in the US’s support of Ukraine.[26]

Further, German and EU officials have stated that they will not recognize any documents issued by the separatist authorities[27] as they, alongside Russia’s order, contradict the Minsk Agreements by undermining Ukrainian unity and territorial integrity.[28] The OSCE also declared that the order and the distribution of documents contradict any peace-settlement objectives between Ukraine and Russia.[29] The OSCE Chairmanship declared that documents, such as the passports, are only valid on a sovereign territory, such as Ukraine, if they are issued by internationally recognized authorities.[30] The unilateral actions of document distribution and recognition jeopardize peaceful resolution, especially if they are not finalized under the auspices of the OSCE.[31] Such actions “chill” relations among the parties involved, which result into difficult implementation of the objectives in the Minsk Agreements.[32]

Russian Foreign Minister Sergey Lavrov does not believe that the order violates international law, since the law “does not prohibit the recognition of documents needed to implement the rights and freedoms guaranteed by the authorities which are not internationally-recognized.”[33] Contrarily, Lavrov rebutted accusations of international law violations by OSCE Secretary-General Lamberto Zannier by stating that the DPR and the LRP authorities and leaders were actually recognized parties to the conflict by signing the Minsk Agreements, which had been approved by the UN Security Council.[34]

Kremlin Spokesman Dmitry Peskov agreed that the order does not violate international law as it is merely “the de jure alignment of the situation that existed de facto.”[35] The spokesman indicated that the order is based solely on humanitarian grounds instead on grounds for recognizing statehood by claiming that the embargo on the Donbass by Kiev prohibits persons in the DPR and LPR from renewing and/or acquiring necessary documents to seek refuge or asylum in another county.[36]

Russia’s order seems dubious. The Foreign Minister is playing “fence politics” by switching Russia’s legal argument for recognizing separatist authorities in order to not upset the international lawmakers or to divert them from investigating the possibility that Russia is providing actual support to the separatists. Further, basing the order on humanitarian grounds is a contrived effort for persuading the rest of the world that the order is necessary, instead of damaging to Ukraine’s integrity and beneficial to Russia’s stance. The order is in violation of the peace agreements and of international law, as it is enforced unilaterally by Russia, without accordance to the Minsk Agreement. It also demonstrates recognition of competent authorities, which is an indicator of recognition of statehood, without consultation of the agreed-upon self-autonomy Minsk objectives. Since the UN Security Council, which operates on international law, has adopted and endorsed the Minsk Agreements, the violations also violate UN law and, thus, international law.

John Rizos is a 3L at the University of Baltimore School of Law with a concentration in International Law. He has an interest in human rights and international criminal law. In addition to being a CICL Fellow, John has served as the Secretary for Phi Alpha Delta Law Fraternity and has completed HarvardX’s online course, “Humanitarian Response to Conflict and Disaster.” In June 2016, John was a member of the Fellows team that, under the supervision of Professor Moore, assisted in drafting an amicus brief to the Extraordinary Chambers in the Courts of Cambodia, which was later approved and published. John graduated with honors from Towson University with a BA in International Studies (2013). He has interned at the Press Office of the Greek Embassy in Washington, D.C. and the International Civil Advocacy Network (ICAN), a non-profit organization advocating for women’s rights in the Middle East. John currently serves as a MD Rule 19 Student-Attorney with the Juvenile Justice Project at the University of Baltimore.

[1] http://english.cctv.com/2017/02/19/ARTIBZihT9cbzHu5jM3SPOSW170219.shtml

[2] http://english.cctv.com/2017/02/19/ARTIBZihT9cbzHu5jM3SPOSW170219.shtml

[3] http://www.euronews.com/2017/02/20/russia-defends-decision-to-recognise-rebel-passports-in-eastern-ukraine

[4] http://www.globaltimes.cn/content/1033802.shtml

[5] http://www.globaltimes.cn/content/1033802.shtml

[6] http://www.globaltimes.cn/content/1033802.shtml

[7] http://www.euronews.com/2017/02/20/russia-defends-decision-to-recognise-rebel-passports-in-eastern-ukraine

[8] http://www.euronews.com/2017/02/20/russia-defends-decision-to-recognise-rebel-passports-in-eastern-ukraine

[9] https://www.theatlantic.com/international/archive/2014/05/referendum-on-self-rule-in-ukraine-passes-with-over-90-of-the-vote/362062/

[10] http://uk.reuters.com/article/ukraine-crisis-summit-idUKL5N0VK2C520150210

[11] http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/573951/EPRS_BRI(2016)573951_EN.pdf

[12] http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/573951/EPRS_BRI(2016)573951_EN.pdf

[13] http://www.europarl.europa.eu/EPRS/EPRS-Briefing-548991-Minsk-peace-summit-FINAL.pdf

[14] http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/573951/EPRS_BRI(2016)573951_EN.pdf

[15] http://www.europarl.europa.eu/EPRS/EPRS-Briefing-548991-Minsk-peace-summit-FINAL.pdf

[16] https://www.un.org/press/en/2015/sc11785.doc.htm

[17] http://uk.reuters.com/article/uk-ukraine-crisis-documents-russia-idUKKBN15Z1N5

[18] https://www.rt.com/news/378032-peskov-passports-ukraine-east/

[19] http://www.euronews.com/2017/02/20/russia-defends-decision-to-recognise-rebel-passports-in-eastern-ukraine

[20] http://uk.reuters.com/article/uk-ukraine-crisis-documents-russia-idUKKBN15Z1N5

[21] http://english.cctv.com/2017/02/19/ARTIBZihT9cbzHu5jM3SPOSW170219.shtml

[22] http://english.cctv.com/2017/02/19/ARTIBZihT9cbzHu5jM3SPOSW170219.shtml

[23] http://www.euronews.com/2017/02/20/russia-defends-decision-to-recognise-rebel-passports-in-eastern-ukraine

[24] http://en.interfax.com.ua/news/general/404643.html

[25] http://www.globaltimes.cn/content/1033802.shtml

[26] http://www.globaltimes.cn/content/1033802.shtml

[27] http://www.euronews.com/2017/02/20/russia-defends-decision-to-recognise-rebel-passports-in-eastern-ukraine

[28] http://uk.reuters.com/article/uk-ukraine-crisis-documents-russia-idUKKBN15Z1N5

[29] http://en.interfax.com.ua/news/general/404643.html

[30] http://en.interfax.com.ua/news/general/404643.html

[31] http://en.interfax.com.ua/news/general/404643.html

[32] http://en.interfax.com.ua/news/general/404643.html

[33] http://www.euronews.com/2017/02/20/russia-defends-decision-to-recognise-rebel-passports-in-eastern-ukraine

[34] https://dninews.com/article/russian-mfa-dpr-and-lpr-leadership-recognized-signing-minsk-agreements

[35] https://www.rt.com/news/378032-peskov-passports-ukraine-east/

[36] https://www.rt.com/news/378032-peskov-passports-ukraine-east/

All’s Fair in Love and Cyberwar

Elizabeth Hays

A United States drone strikes a car near a gas station in Syria.[1] Inside that car, Junaid Hussain lays lifeless.[2] Though a seemingly normal 21-year-old British man with an education and a wife, Junaid possessed exceptional computer hacking skills and ties to ISIS’s cyber division.[3] Instead of the United States sending a sniper to take out Junaid, a person used his or her trigger finger to direct the drone strike from a computer miles away from the gas station.[4] Throughout history, technology has drastically changed warfare. The advances in cyberspace technology are no exception and the law is struggling to keep up.

While country-on-country cyber-attacks have made headlines in the 21^st century, such attacks can be dated as far back as the Cold War.[5] In June 1984, a United States satellite detected a large blast in Siberia.[6] That blast turned out to be an explosion on a Soviet gas pipeline.[7] A malfunction in the computer-controlled system that the Soviets stole from a firm in Canada caused the explosion.[8] Unware to them, the CIA caused the malfunction by tampering with the software, resetting  the pump and valve settings to produce pressures far beyond the capabilities of the pipeline welds, which  ultimately resulted in destruction.[9]

The most recent and controversial cyber-attack resulted in WikiLeaks publishing a series of confidential emails exchanged between several key members of the Democratic National Committee.[10] The release negatively impacted the Democratic Party in the public eye and resulted in the call for resignation from the DNC chairperson, the CEO, the CFO, and the Communications Director.[11] Despite President Trump’s initial accusation, these hackers are not just 400 pound guys in a basement; they are sophisticated and, potentially, dangerous adversarial governments.[12]

The United States accused Russian President Vladimir Putin of ordering an “influence campaign” aimed at weakening Hilary Clinton’s campaign and strengthening Donald Trump’s.[13] The campaign consisted of hacking Democratic groups and individuals and releasing that information via third party websites, including WikiLeaks.[14]  Intelligence agencies concluded with high confidence that Russia had intended to undermine American faith in the electoral system by hurting Hilary Clinton’s chances of winning.[15] As a result, in December 2016, America responded with what was arguably its strongest response yet to a state sponsored cyberattack.[16] “All Americans should be alarmed by Russia’s actions” stated Former President Obama.[17] While there is partisan disagreement about the scope and intent of the Russian cyber-attack on the 2016 United States Presidential Election, 77% of Americans from a wide variety of political backgrounds believe that cyber-attacks against computer systems in the United States are a serious threat.[18] Meanwhile, 63% of Americans believe that the United States is not adequately prepared to deal with these cyber threats.[19]

While President Trump has repeatedly stated that the Russian hacking had no influence on the outcome of the election, it is becoming clear that cyber-attacks are becoming more prevalent and powerful.[20] Intelligence agencies reported that the Russian election intervention is an old-fashioned Soviet-style propaganda campaign made more powerful by the tools of cyberage.[21] While it may seem like this was a onetime event and new attack, it was actually a part of a campaign that went undetected for years.[22]

The same international laws apply to cyberspace as they do to traditional warfare domains. Yet, cyber-attacks are difficult for the international community to analyze due to their complexity and secrecy. In response to this challenge, the NATO Cyber Centre wrote the Tallinn Manual on the International Law Applicable to Cyber Warfare.[23] Applying the principles of the international law of war in cyberspace, the manual has been the primary guide for armed conflicts.[24] According to the principles in the manual, the Russian cyber-attacks on the DNC are below the threshold of an armed conflict.[25] On the other hand, if Russia had destroyed America’s cyber infrastructure, it would likely be enough to be a use of force and thus a violation.[26]

Yet others experts, such as the chairman of the U.S. Naval War College’s international law department Michael Schmidt, believe that the DNC hack was in fact a violation of international law.[27] For example, the hack could have threatened U.S. sovereignty.[28] The hackers attempted to intervene into the internal fairs of the United States affairs, which includes running elections.[29] However, there would need to be proof that Russia not only stole information but used the information to manipulate election results.[30]

Therefore, the DNC hacks still lie in a legal gray zone. While the Tallinn Manual provides excellent guidance on applying international law in cyberspace, the Tallinn Manual 2.0 is in the works to expand upon it.[31] The goal of this additional manual is to examine how international law applies to cyber-attacks below the threshold on an armed conflict.[32] Until then, clever nations will continue to use cyber-attacks, like the DNC hack, to cause harmful effects but not cross the line that would trigger an armed response.[33]

 

Elizabeth Hays is a third year law student at the University of Baltimore School of Law. She completed her undergraduate studies at the University of Baltimore, where she majored in Jurisprudence. Her legal interests include administrative law, national security law, and maritime law. Elizabeth has previously interned with the U.S. Army JAG Corps and the U.S. Coast Guard JAG Corps. Additionally, she participated in the winter study abroad program in Curaçao in 2015/16. She is currently the Co-President of University of Baltimore Students for Public Interest (UBSPI) and a Staff Editor for University of Baltimore Law Forum.

[1] Nick Gutteridge, ISIS Top Hacker Dead: British Jihadi Junaid Hussain Blown up in US Drone Strike in Syria, Express, (Aug. 27, 2015).

[2] Id.

[3] Id.

[4] Id.

[5] War in the Fifth Domain, The Economist (Jul. 1, 2010).

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Harold Stark, How Russia Hacked Us in 2016, Forbes (Jan. 24, 2017).

[11] Id.

[12] Scott Shane, Russian Intervention in American Election Was No One-Off, N.Y. Times (Jan. 6, 2017).

[13] Jill Dougherty, U.S. Election Hacking: Russia Hits Back at ‘Unfounded’ Allegations, CNN Politics (Jan. 15, 2017).

[14] Id.

[15]Paul Krugman, Russia’s Hand in America’s Election, N.Y. Times (Dec. 11, 2016).

[16] David E. Sanger, Obama Strikes Back at Russia for Election hacking, N.Y. Times (Dec. 29, 2016).

[17] Id.

[18] Sarah Dutton, Most Americans Think Russia Tried to Interfere In Presidential Election, CBS News (Jan. 18, 2017).

[19] Id.

[20] Jill Dougherty, U.S. Election Hacking: Russia Hits Back at ‘Unfounded’ Allegations, CNN Politics (Jan. 15, 2017).

[21] Scott Shane, Russian Intervention in American Election Was No One-Off, N.Y. Times (Jan. 6, 2017).

[22] Id.

[23] Jill Dougherty, NATO Cyberwar Challenge: Establish Rules of Engagement, CNN Politics (Nov. 7, 2016).

[24] Id.

[25] Id.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] Id.

[33] Id.

Getting Global Tax into Top Gear: Part II Formulary Apportionment in the Context of Transfer-Pricing Regimes

Julia Brent

In my first post, I defended a much-criticized theory of tax reform,[1] called “formulary apportionment (FA),” by examining two tax dynamics in the oil industry in Russia.  My conclusion was that the potential for market distortion when implementing a tax regime is so high that to cite that possibility as a weakness of FA is an over-generalized attack, and therefore invalid.  I also pointed out that the industry chose to reinvest in low-return crude oil rather than investing in refinery upgrades during the time taxes had been lowered on crude oil exports.  This example of “short term thinking” supports the premise of FA, namely that multi-national corporations (MNCs) gravitate to low-tax areas, even against their own long term interests.  This week, I address another attack leveled at FA: that FA is weak in comparison with a solid modificaiton of the current system that allows transfer pricing.  There are two variations of this critism, first in the form of a scholastic opinion from Professors at the University of Michigan Law. They say if the current system of residual taxation in the U.S. were properly applied, FA would not hold its own when stacked up against a “properly applied” worldwide regime.[2]  The second variation is in the form of an actual proposal by the OECD, which makes recommendations to modify, but still keep, the current separate entity approach based in transfer pricing.[3]  Credible advocates of FA cite the weakness of both the “properly applied” plan and the OECD proposal as efforts to ‘tweak’ a system that will still support aggressive profit-shifting.  Interestingly, some believe that implementation of the OECD proposal will actually result in an eventual adoption of FA.[4]

A few readers may be aware of the groundswell toward international reform driven by the highly-distortive market effects of transfer pricing.  If you aren’t, here is short version.  Business dealings across boundaries raise the question—what income will be taxed by which government? The current system for most MNEs is to employ “the arms-length” method, which permits transactions between parent and subsidiary companies (“transfer-pricing”), though located in different countries as independent, taxable events.

Tax credits to prevent double taxation would apply in accordance with the applicable international treaties, and the tax bases can be aggressively affected as corporations seek to maximize after-tax profits by constructing the transactions in such a way that income shows up in low or zero tax countries.[5]  FA, a “unitary” system, regards a company as a single unit, and then formulates  a top-down division of its income into countries based on agreed-upon factors.[6]  The goal of the reform is to prevent base erosion and eliminate complexity.

Some scholars claim that if the U.S. had proper enforcement and clarity in the law regarding its residual tax, the value of low-taxed foreign-source income would be neutralized.  U.S. residual tax is the liability applied to the balance of income not covered by a foreign tax credit.  At present, deferral and cross-crediting features of the U.S. system allow its residual tax to be eliminated or substantially reduced.   Ideally, tax would be imposed on low-taxed foreign income of U.S. residents as the income was earned, thus removing the impetus to defer the repatriation of foreign income.  While still seeing some distortion, it cancels FA as a unique solution, since both (the well-enforced system and FA) would run about neck-in-neck with negative, distortive effects of base eroding deferrals and cross-crediting.[7]   A properly applied system, it is argued would make the U.S. a true “territorial” regime, whereas with deferrals, cross-crediting, and other features of the U.S. system make it so badly flawed that it is not a true worldwide regime.

However, Joseph Stiglitz, a Nobel-prize winner and one of the most outspoken critics of global economic inequality recommends scrapping the arms-length principle.  He argues that small tweaks will not prevent aggressive, artificial moves of earnings and profits to low-tax countries.  For example, the evolution of intangibles in a global, digital economy makes the arm-length pricing impossible.  Where the cost of a barrel of oil for the purpose of an arm’s length transaction can be determined using “comparables,”  one cannot fix a comparable for an iPhone in which the camera feature alone has 279 patents.[8]  Another downside, he states, is that countries who lack the ability to keep up with high-stakes profit manipulation are exploited.[9]  It is hard to imagine Eritrea coming out as a winner against a Pfiezer or a Siemens!

Drafters of the OECD current proposal for model rules and treaty creation doubt that FA’s formula-based system would encourage investment decisions that are more efficient and tax-neutral than under a separate entity approach.  The Secretary-General of the OECD states its  proposal will drain the motivation to shift profits by re-aligning taxation with economic activity and value creation and put an end to double non-taxation.[10]  For example, the proposal kicks-off negotiations towards synchronicity within the global network of bilateral tax treaties with the goal of implementing treaty-based BEPS measures.[11]

Source: http://www.bdo.be/en/news/professional-news/2015/beps-sept-2015/

Critics of the OECD proposal argue that “Luxleaks-type” tax avoidance facilitated by tax rulings is still possible.  Implementation of the proposal will not only not eliminate the practice of using secret tax rulings, it will increase the complexity of the international tax system.[12]

Surprisingly, some experts claim that certain approaches called for by the OECD may have an unintended consequence:  specifically, regarding the proposed call for country-by-country reporting for taxpayers and that income be tied to “significant people functions” (a way to apply tax to non-financial services sector).[13]  These experts assert that these OECD proposals will incentivize a formulary approach among multinationals.[14]  To the extent a boots-on-ground implementation of the OECD requirements begins, we may see a move to a formulary system, even absent a comprehensive overhaul.

In my next blog I will discuss how the recent Russian bunker oil pricing continues the global tax reform analysis. Stay tuned!

Julia Brent is a third year law student at the University of Baltimore, focusing on International Tax (candidate for J.D. 2016). Julia graduated from the University of Hawaii with a B.A. in political science. As a CICL student fellow, she is interested in the tax impact of cross-border transactions on medium to large businesses. Julia has extensive experience in the management of high volume cases, including handling distributions related to a multi-million dollar art estate and managing all expert witness contracts for the Savings & Loan (WINSTAR) litigation, a $30 billion dispute involving 125 cases, on-site at the Department of Justice.

[1] J. Clifton Fleming, Formulary Apportionment In The U.S. International Income Tax System: Putting Lipstick On A Pig?, 36 Mich. J. Int. L. 1.

[2] J. Clifton Fleming, Formulary Apportionment In The U.S. International Income Tax System: Putting Lipstick On A Pig?, 36 Mich. J. Int. L. 5.

[3] http://www.oecd.org/ctp/beps-2015-final-reports.htm

[4] http://www.bna.com/voice-formulary-apportionment-b17179891148/

[5] http://www.taxpolicycenter.org/briefing-book/key-elements/international/formulary-apportionment.cfm

[6] http://www.bna.com/voice-formulary-apportionment-b17179891148/

[7] J. Clifton Fleming, Formulary Apportionment In The U.S. International Income Tax System: Putting Lipstick On A Pig?, 36 Mich. J. Int. L. 5.

[8] http://ip-science.thomsonreuters.com/m/pdfs/iphone-report.pdf

[9] http://www.bna.com/voice-formulary-apportionment-b17179891148/

[10] https://euobserver.com/economic/130565

[11] https://www.asil.org/insights/volume/19/issue/24/emergence-new-international-tax-regime-oecd’s-package-base-erosion-and

[12] https://euobserver.com/economic/130565

[13] http://www.pwc.com/us/en/transfer-pricing-strategies/assets/transfer_pricing_and_permanent_establishments_oecd_view.pdf

[14] http://www.bna.com/voice-formulary-apportionment-b17179891148/