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Global Policy Watch

Key Public Policy Developments Around the World From Covington & Burling LLP

Jean Claude Juncker and the “Luxleaks”

Posted in EU Law and Regulatory

Jean Claude Juncker, the new President of the European Commission whose term started on 1 November, wanted his institution to become more “political”. This wish was fulfilled earlier than he expected.  The same week, the world press published a detailed inquiry by the International Consortium of Investigative Journalists, on extraordinary tax breaks offered by the Finance Ministry of his country, Luxembourg, to multinational companies with headquarters there.

The scandal was called “Luxleaks” because the information came from files “leaked” from a Luxembourg office of PricewaterhouseCoopers (PWC); they related to ‘rulings’ negotiated between these companies and the Luxembourg tax authorities between 2002 and 2010. The way they were presented to the general public generated an immediate uproar: reckless multinationals manage to avoid paying taxes at the time when the ordinary citizen is the victim of austerity policies “imposed” by the European Commission – whose new President was the initiator of these tax breaks in his country of origin!

Luxembourg is indeed a well-known fiscal paradise and by far the richest country in the European Union. Jean Claude Juncker, who was Prime Minister for 18 years, is credited for this success. His zeal in defending his country’s tax regime was well known by his colleagues in the European Council. When the G 20 advocated for tax transparency during the financial crisis, with support from Austria, he stubbornly resisted for years the application at the EU level of the principle of automatic exchange of information between tax authorities.

Curiously, this weakness did not prevent the major political groups in the European Parliament from endorsing him as their candidate for President of the Commission. But ghosts of the past always come back to haunt politicians. Juncker, ‘poacher turned gamekeeper’, should have expected this. Instead, he apparently suffered so much emotionally from the attack that for a number of days he disappeared from the public eye. But when he came back, on 13 November, he managed to regain the initiative by making proposals to address the problem, which were immediately supported by the major political groups in the European Parliament, thus demonstrating that he is a good politician.

‘Rulings’ are a well-known and perfectly legal practice used by tax authorities in many countries to inform (wealthy) taxpayers of the amount of  taxes they will have to pay in order to help them anticipate it in their accounting. The problem is that they also have become a way for skilled intermediaries – like PWC – to negotiate the most attractive tax arrangements on behalf of their clients.

The information leaked from PWC exposes, among other evidence, how the ‘rulings’ were used to confirm transfer pricing arrangements between a firm and its subsidiaries, resulting in a very low rate of taxation for the Luxembourg subsidiary where the tax was levied.

But this was not really news. The EU Commission had already started to investigate some of these schemes in 2013, used to the benefit of four companies in three different Member States: Apple in Ireland, Fiat and Amazon in Luxembourg and Starbucks in the Netherlands. 

What will be the consequences of the “Luxleaks”?

From a political point of view, 76 MEP from the extreme right (including UKIP, Cinque Stelle and Marine Le Pen’s Front National) presented a ‘motion of censure’ in the European Parliament against the European Commission, which will be voted on Thursday 27 November. It stands no chance of reaching the two thirds majority required, but it will allow the populist Eurosceptics to mobilize attention, a day after Juncker will have presented his famous 300 billion euro investment plan aimed at reviving the EU economy. The extreme left did not want to join the motion presented by the extreme right, but will undoubtedly also make its voice heard.

Juncker himself announced, when he came back from his short ‘escape’, that the Commission will soon propose a directive on the automatic exchange of information regarding tax rulings negotiated between national administrations and multinationals. It will be presented in January by Commissioner Moscovici, in charge of tax issues.

Juncker also promised that the Commission would rework its proposal for a common consolidated corporate tax base (CCCTB). The proposal, presented in 2011, has since been  ‘bogged down’ in the Council (according to the Commission’s spokesman) but, even revised, has little chance of being approved due to the unanimity rule still applicable to tax matters in the EU.  

An effective way of dealing with the problem is to address it through the EU rules on state aid, as the Commission has already started to do.

Indeed, EU law provides that any selective advantage granted by an EU Member State to an individual company is prohibited – and needs to be reimbursed – if it distorts competition in the European internal market.

Two weeks before the leaks were published, Covington circulated an alert on this issue. 

The new Commissioner in charge of competition, Danish Margrethe Vestager, told the press on 20 November that she “admired the journalistic work” on this issue and that the Commission considered the Luxleaks as “market information” and would “evaluate whether or not it will lead us to opening new cases”.

As mentioned above, several cases – Apple in Ireland, Starbucks in the Netherlands, Fiat and Amazon in Luxembourg – are already under investigation by the European Commission. The four investigations relate to tax rulings validating transfer pricing agreements (‘advance pricing agreements’ or APAs). These are agreements on the prices charged for commercial transactions between parts of the same corporate group. The investigation centers on the calculation methods for these APAs and their compatibility with internationally agreed standards. The OECD Transfer Pricing Guidelines will be used as the reference point to assess potential state aid.

Vestager insisted that bringing these four cases to a conclusion will remain a priority and that the decision could come by spring of next year. But the Commission has also asked for detailed information on other cases from the authorities of several EU countries: “we don’t want every single tax ruling but we do want to look at a list if there are certain patterns in the use of tax rulings”, said Vestager.

This signals a quick start for Vestager, who was chosen for the competition post because of her record as Minister for the Economy in Denmark.

President Obama Announces Executive Action on Immigration, while Congress Considers its Response

Posted in Congressional Action, Immigration Law

In remarks last night, President Obama announced his long-planned executive actions to reform the U.S. immigration system.  The President will sign the first of such orders today, despite intense opposition from Republicans in Congress, who believe that the President’s actions are outside the law and contrary to Congress’s authority to legislate federal immigration policy.  In his address to the nation, the President argued that executive actions are appropriate and legally justified, and that they are necessary because of Congress’s inaction since the Senate passed a bipartisan, comprehensive reform bill in June 2013.

The President outlined three components of his plan.  The most controversial aspect of the program will expand the administration’s deferred action policy, which promises illegal immigrants that they will not be deported if they meet certain criteria and come forward to apply for deferred action.  The new program will permit deferred action for immigrants who have been in the United States for at least five years, have children who are citizens or legal residents, pass a background check, and pay a “fair share” of taxes. 

The deferred action program, while significant, is far from full legalization for undocumented immigrants currently in the United States.  The program would not grant citizenship to undocumented immigrants or even create lawful permanent resident authorizations (i.e., green card).  Perhaps most significantly, because the President’s actions are being done under his executive authority, a future president could fully reverse the policy and leave immigrants in the deferred action program – who will have necessarily acknowledged their undocumented status to the federal government – in significant legal limbo.

The other two components of the President’s announced plan would strengthen border enforcement and increase visa access for highly skilled workers.  The increased visa access for highly skilled workers has long been a key priority for the business community.  A White House fact sheet indicates that the changes primarily relate to regulation of H-1B visa portability, investment visas, training visas for STEM workers, and intracompany L visas.  The President, however, was unable to address the single greatest barrier for high-skilled workers – the annual H-1B visa cap – because changes to the cap would require legislation.

As we have previously written, the next big question is Congress’s response.  Republicans gained the Senate and strengthened their majority in the House in the last election, and Congress could pass legislation in response to the President’s actions.  Congress has significant power to steer the actions of the administration, including blocking executive action with appropriations riders or holding up nominations until the President changes course.  Congress will have difficulty seeking to defund the specific actions that the President announced because the U.S. Citizenship and Immigration Services, the agency that would implement many of the changes, is self-funded through fees.

President Obama continued to call on Congress to legislate on immigration.  To his critics, he said, “I have one answer:  Pass a bill.”  Some Republicans have suggested that Congress should reassert its authority over immigration by passing legislation that enacts Congress’s view of reform.  Others have suggested a lawsuit to challenge the President’s authority, similar to the lawsuit filed today regarding his executive actions implementing the Affordable Care Act.  At present, Republican leaders have warned against suggesting impeachment or a government shutdown, although keeping all Members on message will be difficult.

The Supreme Court and the Affordable Care Act: Round Two

Posted in Health Issues

In what many consider to be an unusual move, the Supreme Court agreed to hear a high-stakes case about the legality of premium subsidies for low- and moderate-income individuals enrolling in health coverage offered under the Affordable Care Act (ACA).   

The Court will review a unanimous decision by a Fourth Circuit panel in King v. Burwell.  That panel upheld the Internal Revenue Service’s (IRS) interpretation of the ACA to permit premium subsidies for individuals enrolled in health plans offered through “federally facilitated exchanges” (FFEs).  On the very same day, the D.C. Circuit reached a contrary conclusion in Halbig v. Burwell.  The panel there held that the text of the ACA “unambiguously forecloses” the IRS’s interpretation and “limits the availability of premium tax credits to state-established Exchanges.”  The full D.C. Circuit later vacated this decision and agreed to rehear the case in mid-December sitting en banc (though the Circuit has now removed Halbig from its calendar pending a ruling in King).

Commentators, and even the government, have argued that the Supreme Court’s grant of certiorari in King is unusual.  At the time of the grant, there was no circuit split, lower courts were still actively considering the relevant legal question, and the D.C. Circuit had scheduled en banc review.  However, the Rules of the Supreme Court permit the Court to grant cert to consider “an important question of federal law that has not been, but should be, settled by [the] Court.”  Additionally, by the customary “Rule of Four,” the Court will review a case on cert if four Justices vote in favor of granting.

Stakeholders on both sides of the question in King agree that the Supreme Court’s decision could have enormous implications.  Many assert that a ruling striking down the IRS interpretation would jeopardize the overall framework of the ACA in several key ways: 

Affordability of Coverage.  Most obviously, striking down premium subsidies would likely make coverage unaffordable for millions of Americans.  As of mid-2014, an estimated 5.4 million people had purchased health coverage through an FFE.  Of these enrollees, almost 90% received subsidies due to their low or moderate incomes. 

Impact on Individual Mandate.  Individuals who “cannot afford coverage” are exempt from the penalty for failing to comply with the individual mandate.  Because premium subsidies help determine whether coverage is “affordable,” low- and moderate-income individuals without access to subsidies might be effectively exempt from the mandate.  This would create a greater risk of “adverse selection,” or the tendency for only the sickest individuals to enroll in health coverage, and thus drive up premiums. 

Effect on Employer Mandate.  Similarly, the employer mandate is only effective against employers if at least one full-time employee is enrolled in coverage for which premium subsidies are allowed.  Thus, the mandate would no longer operate against employers whose employees reside exclusively in affected states.

Uncertain Application for States.  It is also unclear how a ruling vacating the federal rule would affect the 37 states that participate in some way in the FFE.  According to HHS, fifteen of these 37 states have hybrid “partnership” exchanges in which States and the federal government share exchange responsibilities.  Another three states have State-based exchanges that rely on the federal exchange’s information technology platform to perform certain functions.  It is uncertain whether the Court will consider these eighteen exchanges to have been “established by the State” under the key statutory text.  It is also unclear whether affected States that have tightened Medicaid eligibility standards since passage of the ACA would risk losing federal Medicaid funding as a result of an ACA provision that prevented such tightening until after “an Exchange established by the State . . . is fully operational.”  Finally, it is unclear whether States could circumvent any of the various impacts of a ruling striking down the premium subsidy rules by establishing “shell” or bare-bones exchanges that rely on the federal exchange to perform most functions. 

A Supreme Court ruling in King is expected by late June 2015.  The Court will be grappling with a difficult question of statutory interpretation.  If the decision rejects the IRS position, a prolonged period of uncertainty will result with serious consequences for millions of people. 

FAA Can Regulate and Fine Drone Operators, the NTSB Says

Posted in Drones

Individuals who operate drones are subject to FAA regulations that prohibit careless and reckless operation of an aircraft, the National Transportation Safety Board ruled on November 18, 2014.  In reaching its conclusion, the NTSB overturned a closely watched ruling by an administrative law judge, who previously held that regulations for “aircraft” did not apply to drones.

The NTSB found that unmanned aircraft systems (UAS) are “aircraft” for purposes of federal regulations because they met both the statutory and regulatory definitions of aircraft.  “An aircraft is any device that is used for flight,” the NTSB stated.[1]

Although the decision is limited to the interpretation of the “careless and reckless” rule, the NTSB provided insight into its thinking on drones.  For example, the Board noted that the FAA has adopted specific operating limitations for special types of aircraft – kites, rockets, and moored balloons – while excluding these types from the full set of regulations applicable to aircraft.  The decision could prompt the FAA to take a similar approach for UAS.

The regulation of drones has been undergoing a dramatic shift in recent years.  In 2012, Congress tasked the FAA with integrating drones into the national airspace system by September 2015, and the FAA has indicated that it will issue an initial set of regulations this year.  The FAA has long maintained that it has authority to regulate UAS activity, and it has repeatedly sought to enforce its general prohibition on the use of UAS in commercial operations (unless an operation is specifically approved).  The FAA’s authority was thrown into doubt, however, in March 2014, when an NTSB administrative law judge concluded that the lack of specific FAA regulations on drones precluded the FAA from imposing a fine on Raphael Pirker for flying a drone at the University of Virginia.  By overturning that decision, the NTSB’s ruling reinforces the FAA’s authority to regulate UAS.

Interestingly, the Board declined to address constitutional arguments filed by a coalition of news organizations in an amicus brief in support of the drone operator.  The news organizations argued that the FAA’s overly broad drone policy “has an impermissible chilling effect on the First Amendment newsgathering rights of journalists.”  The NTSB limited its decision to the regulatory interpretation of “aircraft” and specifically declined to address constitutional issues.

The Pirker case is headed back to the FAA.  Although the NTSB upheld the FAA’s authority to regulate careless and reckless UAS operations, the Board also remanded the case to the administrative law judge for a determination of whether the operator, in fact, operated the drone in that manner.  In addition, the drone operator could appeal the NTSB’s decision to a U.S. Court of Appeals. 


 

[1]Huerta v. Pirker, Order No. EA-5730, at 6 (NTSB Nov. 18, 2014) (internal quotations omitted).

The Republican Senate Take-Over: Implications for the Affordable Care Act

Posted in Congressional Action, Health Issues

The mid-term election brings an historic changing of the guard in the health care leadership in Congress.  Republicans will take control of the Senate in January and gain key chairmanships.  Senior Democrats like Senators Harkin and Rockefeller, and Representatives Dingell and Waxman, who have been leaders on health policy issues for decades, are retiring.  Congress is losing a deep well of institutional and health care policy expertise, but new leadership may open up opportunities that did not exist previously.

Republicans’ top health care goal is to repeal the Affordable Care Act (ACA), but given Senate rules, the Presidential veto power, and internal divisions within the Republican party, these efforts may produce relatively modest results. 

Soon-to-be Senate Majority Leader McConnell said the day after the election that he would prefer to repeal the “deeply unpopular” law, but that he does not have the 60 votes necessary to do so.  An estimated ten million previously uninsured individuals have gained health care coverage over the past year, and the health care industry, seems to be faring fairly well under the law.  Some Republicans are wary of full repeal because of the challenge of how to “replace” that coverage. 

In response to pressure from the conservative wing of the Republican Party, Senator McConnell will likely schedule a symbolic vote for full repeal early in the session.  President Obama made it clear the day after the election that he would veto a repeal bill in the unlikely event that Congress sent him one. 

Republicans could have greater success changing the ACA with a piecemeal approach pursued through budget reconciliation or by including amendments in must-pass appropriations bills.  Reconciliation requires only a majority vote, but even reconciliation will be complicated by the need to comply with the Byrd rule, which requires provisions to have a meaningful budgetary impact.  Likely ACA amendments include: 

  • A repeal of the 2.3% medical device tax;
  • Limiting the employer mandate by changing the definition of full-time employment from 30 to 40 hours a week; and
  • Creating additional exemptions from the individual mandate.

Some of these changes will be expensive.  The Congressional Budget Office estimates that the 40 hour workweek change would cost $46 billion over 10 years and eliminating the medical device tax would cost about $29 billion.  Republicans will have to decide whether and how to pay for these changes.

Look for health care to be a focus in the Senate next year. The critical question is whether anything significant will result, or whether there will be lots of wheel spinning that will divert the world’s greatest deliberative body from other pressing matters.

Executive Action on Immigration

Posted in Congressional Action, Immigration Law

Following my recent post about the midterm elections and prospects for immigration reform, I was interviewed by LexBlog TV’s Colin O’Keefe about the impending executive action on immigration coming from the White House.  In the interview, I explain President Obama’s strategy for unilateral executive action and how Congress will likely respond:

The Road to Paris 2015: Contrasting Media Perspectives on the US-China Accord on Climate Change and Clean Energy

Posted in China, Energy Law, Environmental Law, EU Law and Regulatory

As has been widely reported, on November 12 President Obama and China’s President Xi Jinping released a joint announcement on climate change and clean energy cooperation.  Beyond the announced greenhouse gas emission targets—for the U.S., to reduce emissions 26-28% below 2005 levels by 2025; for China, (i) to peak CO2 emissions by around 2030, with the intention to try to peak earlier, and (ii) to increase the non-fossil fuel share of primary energy consumption to around 20 percent by 2030—we note the following.

Differing reporting in the U.S. and China.  The climate announcement received starkly different emphasis in U.S. and Chinese media.  In the United States, the announcement was the lead or among the lead news stories in all major outlets we surveyed, including The New York Times, The Los Angeles Times, The Washington Post, The Wall Street Journal and USA Today.  In China, People’s Daily led with Obama’s and Xi’s talks generally, with the two parties reaffirming their goal, expressed at the Sunnylands Summit in 2013, of developing a “new pattern of major power relations” between the two counties—but placed news of the emissions announcement in a separate story on page 2.  Jiefang Daily gave similar treatment to the announcement.  Cankao News, which has a conservative reputation, likewise discussed the emissions targets on the second page of the lead story.  And Beijing News, which is considered more liberal, mentioned the climate announcement in the lead’s subtitle, but only discussed its substance on the third page of coverage of the talks, on page 8 of Thursday’s edition.  (Links to Chinese editions.)

The contrasting coverage reflects different economic and political contexts in the two nations.  Beyond the substance of the agreement and fact that China is for the first time publicly stating a specific goal to peak emissions, the story’s heightened newsworthiness in the United States also likely reflects the American media’s sense of surprise, the back story of secret climate negotiations, economic tension between federal mandates and free markets, the chronically polarized politics of U.S. climate and energy policy, and the currently heightened executive vs. legislative branch posturing following last week’s elections.  By contrast in China, secrecy and surprise of policy announcements are common, national economic planning with detailed, prescriptive goals is a foundation of the economy, and divided government and partisan politics are non-existent.  To the extent that the announcement was important inside China, it seemed important for instrumental reasons—because, together with the broader dialogue of mutual cooperation, it demonstrated China’s stature in the bilateral relationship—not primarily because action on climate change is important for its own sake.

Implications for Paris 2015.   The joint announcement has been described as an important break-through leading-up to next year’s global climate talks.  With the world’s largest carbon emitters staking out goals to reduce carbon emissions, lesser emitters will find it more difficult to resist similar commitments.  More significantly, the joint announcement has served to establish China as standard-setter, together with the United States.  Its stature already established, China should be less inclined to oppose the United States in Paris for the sake of demonstrating its influence in multilateral negotiations.

Ashwin Kaja of Covington & Burling LLP contributed to this post.

 

Momentum on Trade Policy

Posted in Congressional Action, International Strategy, Trade Agreements

Both here and abroad, developments are occurring on the trade policy front.  In the United States, the mid-term elections have increased hopes that Congress will pass Trade Promotion Authority (TPA) early next year if not in the lame-duck session.

The last few days have been very productive on the WTO front as well. Earlier this week, the US and China announced a breakthrough regarding the Information Technology Agreement (ITA) which should pave the way for a significant expansion of the number of technology products that would receive duty-free treatment in participating countries.  Now there has been a breakthrough with India regarding the Trade Facilitation Agreement (TFA). 

The TFA contains provisions for expediting the movement, release and clearance of goods.   It aims to reduce the costly bureaucratic inefficiencies associated with the movement of goods across national borders.  Clarifying the rules and obligations to move goods quickly and transparently offers huge benefits to consumers and producers alike.  It should also reduce the opportunities for graft and corruption in the customs process.  According to the Organization for Economic Development (OECD), the TFA could increase global GDP by almost $1 trillion.

These are welcomed accomplishments and offer much needed hope that the WTO can move not only these two agreements but on a broader agenda for trade liberalization. The WTO Director-General Azevedo, USTR Froman and his counterparts deserve credit for their perseverance in these matters. 

 

What happens next in Washington?

Posted in Congressional Action

On Thursday, November 6, the leaders of Covington’s public policy and government affairs practice group hosted a post-election conference call discussing the agenda for the President and the 114th Congress.  Members of the PPGA team discussed the following:

  • Political implications of the election and leadership changes in Congress.
  • Congress’s relationship with the Administration.
  • Procedural consequences of the change in control of the Senate.
  • Budget, appropriations, and sequestration.
  • Tax policy and reform.
  • Developments in intellectual property.
  • International trade, trade agreements, and trade promotion authority.
  • Healthcare and ACA implementation.
  • The outlook for immigration, energy, and environmental policy.

For those who were unable to join the event, an audio recording of the conference call is available here:  http://www.cov.com/files/upload/PPGA_Agenda_for_the_President_and_the_114th_Congress.wav

India’s Fight Against “Black Money”

Posted in Asia

In the run-up to Prime Minister Modi’s election campaign last year, focus was placed on the fight against corruption and “black money” leaving India. Black money is cash that has not been declared or taxed and is usually held in tax havens, such as the British Virgin Islands, Switzerland and the Channel Islands. It is estimated that Indian nationals hold approximately $500 billion (equivalent to £297 billion) in black money offshore.

Media reports revealed that the identities of over 600 Indian nationals holding bank accounts with an HSBC branch in Geneva in 2011 had been leaked to the previous government by an employee at the bank. However, the government had failed to act on the information.

In May of this year, one of the Modi government’s first actions was to establish a special task force to trace illicit money held by Indian nationals in overseas bank accounts. Last month, the new government offered up the names of seven individuals on the “HSBC list”, though this led to criticism that the government was “drip-feeding” the information and protecting the identities of powerful individuals. The Supreme Court stepped in; ordering the government to provide the names to a special investigative team despite the government’s assertion that disclosing the names would infringe international agreements. Modi has since defended the administration, assuring the public that the government remains committed to getting “black money back to India.” In a speech to the public on November 2, 2014, Modi claimed that efforts to bring back black money were on the right track.

India’s reignited drive to tackle the issue of black money presents an interesting issue for financial institutions. Up until last month, HSBC was able to refuse the Indian government’s request for further information, citing banking secrecy laws and the fact that India was relying on information stolen by a former HSBC employee. However, following negotiations between the Indian and Swiss governments, Switzerland agreed to release information relating to the foreign account holders, in situations where the Indian government conducts an independent investigation and the evidence is compiled in India.

These developments arose despite the fact that India was not one of the countries to sign the Multilateral Competent Authority Agreement (“MCAA”). The MCAA, signed by 51 countries during a meeting of the Organization of Economic Cooperation and Development in October this year, allows for the exchange of information relating to bank accounts, taxes, assets, and income held by persons outside local tax jurisdictions, with the purpose of combating tax evasion at the global level.

Given that India was not a signatory to the MCAA, the country’s continued efforts to bring back black money demonstrates that the MCAA may not be the only avenue for countries wishing to tackle tax evasion. Going forward, governments and financial institutions may come under increased pressure from not only countries signed-up to the MCAA but also countries like India, who continue to address the issue of black money through their own means.