A Tax Professor Feels a Little at Sea

Credit: https://nameourship.nerc.ac.uk

Last Thursday, Tulane Law School held its annual faculty scholarly retreat, which basically means we cloistered ourselves in a downtown conference room and workshopped eight papers over the course of a day. ’twas a nice end-of-semester opportunity to appreciate and engage with everybody’s work. I got to be discussant on a paper by my colleague, Martin Davies, Cross-Border Insolvency and Admiralty: A Middle Path of Reciprocal Comity, a working version of which was recently published in the Comité Maritime International 2015 Yearbook.  Martin is the Director of Tulane’s Maritime Law Center, and he has kindly given me permission to blog the paper here.

Warning: This blog post discusses areas of law that are only marginally related to tax law, which some may find unsettling. On the other hand, the paper implicates some interesting jurisdictional and distributional issues that parallel some of those found in international tax.

The paper addresses the conflict that arises when maritime and cross-border insolvency law meet. Insolvency law generally reflects the principle of preserving the value of a distressed business as a going concern by paying off creditors (or renegotiating debts) in an orderly manner. Cross-border insolvency takes universalism as a central organizing principle, in order to ensure an orderly and unified reorganization across jurisdictions. This calls for courts in various countries to coordinate with courts in the “main” insolvency jurisdiction (the debtor’s “center of main interests” or COMI) to ensure an orderly distribution, by recognizing the COMI insolvency proceeding as a foreign main proceeding (FMP). Under the UNCITRAL Model Law on Cross-Border Insolvency, enacting countries will stay (pause) any local collection proceedings once the existence of proceedings in the debtor’s COMI is recognized. The intuition is that we don’t want residual outstanding claims in various jurisdictions to compromise the ability of the distressed debtor to reorganize in a unified fashion.

Enter maritime law.

When there are maritime claims in a cross-border insolvency, this raises special issues because maritime law does things a bit differently from everyone else. Under maritime law,[fn1]  a secured creditor may proceed against the ship’s assets by seizing the ship in an in rem action, notwithstanding the existence of insolvency proceedings in the debtor’s home country. Maritime law “personifies” the ship by treating the ship as the entity that incurs the debts, which reflects the law’s development at a time before GPS and satellite technology—the in rem action against the ship and its personification served to protect maritime lienholder interests, because if the ship got away, it might never be seen again. (Obviously not so much a concern these days.)

Anyway, where a maritime debtor is involved in a cross-border proceeding, this raises the question of whether existing maritime creditors may arrest the ship in rem per usual or whether the maritime procedures should cede to the cross-border insolvency proceeding and if so on what terms. Here, Martin proposes a system of “reciprocal comity” under which maritime law should recognize the primacy of the insolvency procedures in the debtor’s COMI, but the maritime claimant should be granted the same secured status in the insolvency proceeding as it would have under maritime law in the country of arrest as a matter of substantive rights.

This strikes me as an elegant solution to what otherwise might prove an intractable problem. But the devil (as we tax people know) is in the details–it seems to me that the biggest question in all of this is how to rank or prioritize the maritime claims in relation to the other COMI insolvency claims. Insolvency law cares very much about how to rank claims in relation to each other, and if a creditor’s claim has priority, this generally means that that claim must be paid off first before claims of a lower priority are paid.

The problem that arises when maritime law meets cross-border insolvency is that maritime law takes a pretty different view of who constitutes a “secured creditor” than insolvency law. Maritime law treats maritime lien claims as secured claims, with some preferred maritime liens (which include seamans’ wages as well as tort claims and trade claims for “necessaries”) taking priority over preferred ship mortgages. See Kristen van de Biezenbos, A Sea Change in Creditor Priorities, 48 Mich. J. L. Ref. 101 (2015) for an in-depth discussion of how the maritime creditor priority scheme deviates from the one under US law. This maritime priority scheme may sometimes be almost completely upside down compared to the priority scheme in non-maritime insolvency proceedings. For example, tort creditors would not line up ahead of (or even beside) security interest or mortgage holders in a US bankruptcy proceeding. So the big ticket question is: once the secured status of these maritime lien claims has been recognized, where exactly will these maritime claimants line up alongside other (non-maritime) secured claimants in the main insolvency proceeding?  This question, which I appreciate is immensely complicated, raises concerns about fairness, distortion, coordination, and potential arbitrage.

Of course, this little detour into the maritime/insolvency law intersection brought to mind immediate parallels with cross-border taxation. In both contexts, there are two important concerns. First, each setting must establish coordination procedures that permit core goals to be achieved. In the maritime/insolvency context, a workable resolution of claims can’t really be managed without granting some central control over the claims process to one country or court. Likewise, in international tax, the broadly shared ideal of avoidance of double taxation (or double non-taxation) imposes a need to coordinate “priority” of taxing jurisdiction. This is often achieved through domestic law mechanisms (e.g., via the foreign tax credit or exemption of foreign source income) and bilateral treaties. Resolution of this single-tax ideal has been relatively successful over time, at least in theory. But some coordination efforts that have floundered a bit. For example, the EU has been exploring the idea of a Common Consolidated Corporate Tax Base (CCCTB) for years. The CCCTB would establish a single set of rules for businesses operating in the EU to use in calculating profits. Using the CCCTB, businesses could file a single consolidated return for all of their EU business activity. The individual member states would still be able to tax their share of the group’s profits at the individual member country’s own tax rate, but the process for calculating taxable income would be streamlined. In June 2015, the European Commission sought to “re-launch” efforts to promote the CCCTB and plans to issue a new CCCTB proposal in 2016. But this attempted re-launch takes a gradual approach, prioritizing establishment of the common base first and leaving the “consolidation” part of the process for later.

The second concern facing both the maritime/insolvency intersection and by international tax involves the potential distributive effects of procedural and administrative rules. Martin’s proposal generates questions about how a decision to grant the insolvency proceedings some measure of primacy could produce notable distributional effects (for example, as between maritime secured creditors and other secured creditors, or between maritime tort claimants and non-maritime ones in the insolvency proceeding). So too with international tax coordination. For example, one of the more prominent concerns with CCCTB is the limits it imposes on a Member State’s ability to creatively use its tax system to attract business and capital, which may lead to distributive impacts between and within countries.

[fn1] Maritime law may be broadly characterized as common law in flavor but with a high degree of harmonization and some degree of private international law.

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