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Of Great Fears and Greater Hopes: The GPH-MILF Framework Agreement on the Bangsamoro

By: Celeste Marie R. Cruz[*]

Prologue

Peace and economic development have long remained elusive to the conflict-torn region of Muslim Mindanao in the Philippines. Since the late 1960s, the Conflict in Mindanao, led by a secessionist independence movement of the Islamic minority in a predominantly Catholic country,[1] has led to an enormous loss of life and suffering, claiming an estimated 120,000 lives and displacing more than 2 million people.[2] The ongoing peace process between the Government of the Republic of the Philippines (GPH), under President Benigno Aquino III, and the Moro Islamic Liberation Front (MILF) reached a significant milestone with the signing of the Framework Agreement on the Bangsamoro[3] (Framework) last October 15, 2012. The Framework seeks to establish a “federal” type of sub-state in the said region[4] that is currently under the jurisdiction of the Autonomous Region in Muslim Mindano (ARMM).

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Fate of the Unilateral Option Clause Finally Decided in Russia

By: Yelena E. Archiyan[*]

For years, arbitration courts in Russia have upheld over and over again the validity of the so called unilateral option clause (“UOC”). But everything changed on June 19, 2012, when the Presidium[1] of the highest arbitration court of the Russian Federation[2] held in Russian Telephone Company v. Sony Ericsson Mobile Communications Rus that such clauses are invalid and unenforceable.[3] In 2009, Russian Telephone Company (“RTC”) entered into an agreement with the Russian subsidiary of Sony Ericsson, Sony Ericsson Mobile Communications Rus (“Sony Ericsson”) for the distribution of Sony Ericsson phones.

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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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