TAXATION • TECHNOLOGY & INNOVATION
RETHINKING TAX FOR THE DIGITAL ECONOMY AFTER COVID-19
Tarcísio Diniz Magalhães and Allison Christians1Dr. Tarcísio Diniz Magalhães, Professor of Tax Law, University of Antwerp Faculty of Law; Allison Christians, H. Heward Stikeman Chair in the Law of Taxation, McGill University Faculty of Law. Thanks to Jodie Côté-Marshall for research assistance, to the participants in the “Indiana/Leeds Summer Tax Workshop Series” (July 2, 2020) at Indiana University Bloomington Maurer School of Law/University of Leeds School of Law, the Brazilian Study Group on International Tax (GETI) (July 16, 2020), the “Purdy Crawford Business Law Workshop: Business Regulation and the Digital Economy” (Sep. 25–26, 2020) at Dalhousie University Schulich School of Law, the Brazilian Institute of Tax Law (IBDT) (Apr. 15, 2021), as well as to Stephen Shay and Christine Kim for reviewing a prior draft and this journal’s editors. This research is supported by grants from the Ford Foundation and the Social Sciences and Humanities Research Council (SSHRC) of Canada.
Before COVID-19 arrived, policymakers from around the world were busy working on the makings of a new global tax consensus to reflect structural changes in the world economy as a result of the rise of digitalization. The pandemic disrupted this process by delivering a shock that resulted in major contractions for most firms even as it created enormous windfalls for others, prompting some to call for excess profits taxes, usually associated with wartime economies, as a corrective. But an excess profit or windfall tax designed during the world war period is not effective in today’s globalized and digitalized economy. To address effectively the fiscal crisis and tackle the challenges of the digital economy in a sustainable way, the world needs a “global excess profits tax”—a GEP tax. This article demonstrates that the vocabulary, the technical tools, and the political determination that were being built for the digital economy can and should be adapted to formulate a GEP tax. We establish the core elements of such a tax and demonstrate its compatibility with currently evolving thinking about how to tax highly digitalized firms.
LEGAL & REGULATORY COMPLIANCE • CORPORATE LAW & GOVERNANCE
PATENT ENFORCEMENT, SHAREHOLDER VALUE, AND FIRM INNOVATIONS: EVIDENCE FROM THE SUPREME COURT RULING IN TC HEARTLAND (2017)
Andy Law, Buhui Qiu, and Teng Wang2Andy Law is affiliated with the Board of Governors of the Federal Reserve System, Constitution Ave, N.W., Washington, DC 20551, USA; Email: andy.law@frb.gov. Buhui Qiu is affiliated with the University of Sydney, NSW 2006, Australia; Email: buhui.qiu@sydney.edu.au. Teng Wang is affiliated with the Board of Governors of the Federal Reserve System, Constitution Ave, N.W., Washington, DC 20551, USA; Email: teng.wang@frb.gov. We are greatly indebted to Annie Zhou for her great help with the patent data collection. The views expressed in this article are the authors’ alone and do not necessarily reflect the views of the Federal Reserve Board or the United States government.
This paper studies the impact of patent enforcement on shareholder value and firms’ innovation patterns. Using the landmark U.S. Supreme Court case TC Heartland LLC v. Kraft Foods Group Brands LLC (2017), which significantly constrained forum shopping practices in patent litigation, we find that the weakening of patent holders’ ability to enforce intellectual property protection leads to more negative stock return reactions for firms that are more innovation-intensive before the ruling. We further find that weakened enforcement of patent protection shifted firms’ innovation patterns. While innovation-intensive firms do not reduce their overall R&D investment, they choose to keep their innovation outputs as trade secrets and apply for patents significantly less frequently. Our findings shed new light on the current debate on intellectual property protection.
INVESTING & ASSET MANAGEMENT • ENVIRONMENTAL, SOCIAL, & GOVERNANCE
CAN BLACKROCK SAVE THE PLANET? THE INSTITUTIONAL INVESTORS’ ROLE IN STAKEHOLDER CAPITALISM
Giovanni Strampelli3Full Professor of Business Law; Director of the PhD in Legal Studies, Bocconi University, Milan.
Within a context of increasing concentration of ownership, where the Big Three –BlackRock, State Street and Vanguard– now hold over 20% of the shares in S&P500 companies, the spotlight now falls more than ever on institutional investors, which are being increasingly called upon to play a major role in favoring the shift towards stakeholder capitalism by pursuing environmental and societal objectives. These expectations are reinforced by leading institutional investors’ commitments –such as those included in Larry Fink’s last annual letter– to do well by doing good. In spite of this however, while the incorporation of ESG issues into investment policies is surely intended –perhaps above all– to attract an increasing share of clients that place central attention on those aspects, institutional investors’ commitment to pursue sustainability objectives face several limitations. First, promoting more virtuous conduct by investee companies entails significant costs, thereby impairing institutional investors’ returns. Secondly, even though portfolio value maximization objectives may, to some extent, favor the incorporation of ESG factors into investment and stewardship policies, the dissemination of passive funds (i.e. portfolios that track a particular benchmark equity index) is a factor that can impinge upon the effective capacity of institutional investors to encourage the adoption by investee companies of policies that pursue sustainability objectives. Against this backdrop, this article shows that it is illusory to assume that institutional investors can be charged with the task of pursuing objectives of general interest, such as fighting climate change (thus essentially acting in place of the state), where such a task is not aligned with their clients’ and their own interest in improving risk-adjusted returns.
BANKRUPTCY & RESTRUCTURING
ESTIMATING THE NEED FOR ADDITIONAL BANKRUPTCY JUDGES IN LIGHT OF THE COVID-19 PANDEMIC
Benjamin Iverson, Jared A. Ellias, and Mark Roe4BYU Marriott School of Business; University of California, Hastings College of the Law; and Harvard Law School. The authors thank Jacob Barrera, Denise Han, Jessica Ljustina, Spencer Kau, Victor Mungary, Julia Staudinger, and Sara Zokaei for research assistance. We earlier, at the very beginning of the COVID-19 crisis, wrote a report on the potential pressure on bankruptcy judicial capacity due to the Covid-19 crisis, on which this document is based. That report was endorsed by a group of bankruptcy academics and then forwarded to Congress. For recent Congressional action related to our report, see infra note 8.
In this Article, we present the first effort to use an empirical approach to bolster the capacity of the bankruptcy system during a national crisis—here, the COVID-19 crisis. We provide two analyses, one using data from May 2020, very early on in the crisis, and another using data from September 2020, closer to the publication of this Article. Our analysis is based on an empirical observation: Historically, an increase in the unemployment rate has been a leading indicator of a rise in bankruptcy filings. If this historical trend continues to hold, the May 2020 unemployment rate of 13.3% would have predicted a substantial increase in bankruptcy filings and the lower September 2020 level would still predict noticeably increased filings. Clearly, governmental assistance, the unique features of the COVID-19 pandemic, the possibility of a quick economic recovery, and judicial triage are likely to reduce the volume of bankruptcies and increase the courts’ capacity to handle those that occur. It is also plausible that the recent unemployment spike will be short-lived—indeed, by September 2020, the rate had declined to 7.9%. Further, medical solutions to the underlying pandemic—such as the recent initial distribution of an effective vaccine—would further reduce the pressure on the bankruptcy system. Yet, even assuming that the worst-case scenarios are averted, our analysis suggests that a substantial investment in the bankruptcy system resources should be considered, even if only on a standby basis.
LEGAL & REGULATORY COMPLIANCE
GE ENERGY V. OUTOKUMPU: NON-SIGNATORIES CAN NOW ENFORCE INTERNATIONAL COMMERCIAL ARBITRATION AGREEMENTS ON EQUITABLE ESTOPPEL GROUNDS
Tamar Meshel5Assistant Professor, University of Alberta Faculty of Law
The recent unanimous decision of the United States Supreme Court (“Supreme Court” or “Court”) in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC (“Outokumpu”) resolves a relatively straightforward question: whether a non-signatory to an international commercial arbitration agreement can enforce it on the basis of the equitable estoppel doctrine. The United States Courts of Appeals for the Eleventh and Ninth Circuits had categorically ruled out the availability of equitable estoppel in this context. In contrast, the First and Fourth Circuits had applied the doctrine to enforce international commercial arbitration agreements by or against non-signatories. Answering the question in the affirmative and reversing the Eleventh Circuit, the Supreme Court has now resolved this split among the circuit courts. Its decision also brings much-needed clarity and predictability to the enforcement of international commercial arbitration agreements in the United States. However, in its narrow judgment the Supreme Court left unresolved two related and equally contentious questions: first, whether international commercial arbitration agreements must be signed to be valid and enforceable in the United States, and second, how the equitable estoppel doctrine is to be formulated in this context and whether state or federal law governs its application.