* ‘Fat tax’ proposed to cut obesity. Andrew Stack – The Financial Times. The UK needs to impose a “fat tax” of at least 20 per cent on unhealthy foods to have any significant impact on rising levels of obesity. A report published in the British Medical Journal drawing on obesity research from around the world argues that taxing a wide range of foods and subsidizing healthier options was likely to have the greatest effect. Link

* Boehner draws line in sand on debt. Damian Paletta – The Wall Street Journal. House Speaker John Boehner said Tuesday that any increase in the government’s borrowing limit must be accompanied by spending cuts and other budget savings of greater value, and he rejected tax increases as part of any deal to reduce the federal deficit. Democrats have called for a mix of tax increases and spending cuts to reduce the deficit and Republicans have called for spending cuts and overhauls of entitlement programs like Medicare. Link

* Higher taxes on wealthy unite Democrats. Paul Kane – The Washington Post. Even with signs of an economic recovery feeding optimism about President Barack Obama’s reelection chances, congressional Democrats continue to run highly individual reelection campaigns independent of the president’s record and agenda. Except on the issue of higher taxes for the wealthy, where they appear solidly unified across the political spectrum. Link

* State income up in April, but may not be enough. Lisa Lambert and Karen Pierog – Reuters. Personal income tax collections in states in April might have grown an average of more than 7 percent, but for some the increase may not be enough to ease budget crises. Reuters found that the average increase of personal income tax collections in April 2012 from April 2011 for the 20 states for which data are available was 7.3 percent. A handful of states that were lulled into a false sense of security from last year’s surge in collections, when the average April increase was 18.5 percent, are now wondering if revenue is growing enough to cover their spending plans. Link

* Tax increase would spare California of cuts. Jim Carlton – The Wall Street Journal. California Gov. Jerry Brown said the state’s projected budget deficit widened to $16 billion from about $9 billion, and he warned that the state would need deeper cuts to services such as education if voters don’t pass a tax-increase measure he is championing. The Democratic governor on Monday is set to release his revised 2012-13 budget. That measure would temporarily raise sales taxes, to 7.5 percent from 7.25 percent for four years, and it would boost income taxes by as much as three percentage points for seven years on individuals making more than $250,000 a year or households making more than $500,000. Link

* Firms urge delay in IRS offshore tax dodger rules. Patrick Temple-West – Reuters. Financial institutions from around the world called for delay and changes to soften proposed U.S. rules to combat offshore tax evasion at an Internal Revenue Service hearing on Tuesday. Government tax officials gave no indication about how they would respond to the businesses’ requests and said the final rules were on track to be ready within three to four months. With just months to go before implementation of the Foreign Account Tax Compliance Act, representatives from a range of businesses complained that FATCA’s rules would cause confusion and reporting errors that could destabilize markets. Link

* Allstate agent group seeks audit after pay errors. Erik Holm – The Wall Street Journal. An association of insurance agents is calling on Allstate Corp’s board to hire outside auditors to examine accounting procedures after the company admitted to errors in compensation reports and tax forms earlier this year. The error in the tax documents affected about half of the company’s agents. The other two errors were caught before payments were sent to agents, but set off an uproar among Allstate’s sales force, where some agents were already up in arms about plans to cut their base pay. Link

* When a spending cut can be like a tax increase. Casey Mulligan – The New York Times opinion. Sometimes Republicans and Democrats are like Coke and Pepsi: a lot more different in marketing than they are in substance. Both Republicans and Democrats cut net benefits (or raise net taxes) more for higher-income beneficiaries than for low-income beneficiaries. Putting more of the burden on higher-income beneficiaries is sometimes described as fair or equitable, but it also adds to the penalty for having a high income and, equivalently, subtracts from the burden of having a low income. That results in more people with low incomes, because incomes are determined in part by effort, which is affected by costs and benefits. Link

* HP loses $190 million tax case against IRS. Lynnley Browning – Reuters. Hewlett-Packard Co on Monday lost a battle with the U.S. Internal Revenue Service for more than $190 million in tax refunds tied to a Dutch tax shelter designed by the derivatives arm of American International Group. The ruling turns a spotlight on an aggressive tax-cutting strategy created last decade by AIG Financial Products and bankrolled by several European banks. The strategy involved trading derivatives with the aim of generating capital losses and foreign tax credits for large corporations, like HP, which then used them to try to lower their U.S. tax bills. Link

* In Republicans’ push for tax overhaul, popular deductions on the block. Donna Smith – Reuters. Republicans have not touched hundreds of tax breaks in tax laws, fearing that doing so could be called a tax hike. That could be changing. They’re not advertising it, but Republicans in Congress, along with a few Democrats, are exploring the idea of limiting or ending some of Americans’ most sacred tax breaks. They include deductions on contributions to 401(k) retirement accounts and possibly those on home mortgage interest, each of which save millions of Americans thousands of dollars each year. Link

* Brown warns Californians: Taxes or cuts. Jim Carlton – The Wall Street Journal. California Gov. Jerry Brown laid out a revised budget plan that relies on deeper spending cuts and higher taxes to bridge a projected state deficit that has widened to $15.7 billion from $9.2 billion since January. The Democratic governor said Monday he had no choice but to cut even deeper into social services to help close a budget gap that has shot up due to lower-than-expected tax revenue and delays and court-ordered impediments to spending cuts. Brown proposes to nearly double spending cuts to $8.3 billion for fiscal year 2012-13 from a January estimate that $4.2 billion of reductions were needed. Link

* Hollande faces budget shortfall test. Hugh Carnegy – The Financial Times. There will be none of the “bling-bling” that accompanied Nicolas Sarkozy’s entry to the Elysée palace five years ago when François Hollande is inaugurated as France’s new president on Tuesday. To finance his campaign promises — estimated at 20 billon euros over five years — and to cut the deficit, Hollande has laid out a raft of new tax measures. These include repealing a range of tax breaks for companies and households, raising corporation tax on big companies to 35 percent from 30 percent, a surtax on banks and an increase in wealth taxes, inheritance tax, capital gains taxes and income taxes — including a marginal rate of 75 percent on incomes above 1 million euros. Link

* California ugly. The Wall Street Journal editorial. It looks as if that Facebook IPO may not be enough to save California’s fiscal crisis after all. Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship to move to Singapore, which has no capital gains tax. And now we learn the Golden State’s budget deficit will come in at $16 billion, up from a merely awful $9.2 billion estimate in January. California Controller John Chiang reported last week that April tax collections were a gigantic 20.2 percent, or $2.44 billion, below 2012-13 budget projections. You have to admire Mr. Chiang’s capacity for understatement as he noted that “revenues disappointed.” Yes, and J.P. Morgan’s whale trade was a $2 billion rounding error. Link

* Saying no to state bailouts. Kevin Brady and Jim DeMint – The Wall Street Journal opinion. States that have followed Europe’s economic policy model of unbridled spending are getting Europe’s economic results: low growth and looming fiscal catastrophe. Higher taxes called for by California Gov. Jerry Brown to help pay for an “unexpected” 74 percent increase in the state’s budget shortfall this year, and Illinois’s recent income tax hikes of 67 percent on individuals and 30 percent on businesses, have done and will do nothing to stem the flood of people and businesses out of those states. It is becoming clear that the only way to force recalcitrant states to put fiscal reform on the table is for Congress to take state bailouts off of it. Link

* Jerry Brown vs. Chris Christie. William McGurn – The Wall Street Journal opinion. On the “millionaire’s” tax, Jerry Brown says that California desperately needs to approve one if the state is to recover. The one on California’s November ballot kicks in at income of $250,000 and would raise the top rate to 13.3 percent from 10.3 percent on incomes above $1 million. Again in sharp contrast, when New Jersey Democrats attempted to embarrass Chris Christie by sending a millionaire’s tax to his desk, he called their bluff and promptly vetoed it. Link

* How Facebook’s elite skirt estate tax. Laura Saunders – The Wall Street Journal. Tax specialists are paying attention to how half a dozen of Facebook’s luminaries, including founder Mark Zuckerberg, appear to be using a perfectly legal maneuver called a grantor-retained annuity trust, or GRAT, to avoid at least $200 million of estate and gift taxes on their own Facebook shares. Facebook’s prospectus cites eight separate “annuity trusts” set up by insiders. All told, these trusts hold about 22 million shares that will be worth more than $690 million if Facebook goes public at $31.50 a share, the middle of its projected range. Link

* Brown pushes tax hike as California’s money woes deepen. Jim Christie – Reuters. California Governor Jerry Brown was elected in 2010 on a promise to fix the state’s chronic fiscal crisis. His weekend announcement of a much bigger-than-expected shortfall in the state budget signals how far he still has to go. In an unusual move that underscored the highly politicized nature of the state budget, Brown took to YouTube on Saturday to deliver the bad news: the state’s projected budget deficit for the fiscal year starting July 1 is now $16 billion, up from the $9 billion anticipated in January. Link 

* Arrest is warning on secret offshore accounts. Laura Saunders – The Wall Street Journal. In a fresh warning to U.S. taxpayers who haven’t confessed secret offshore accounts, the U.S. Attorney for the Southern District of New York and the Internal Revenue Service announced the arrest of Michael Little, a British investment adviser who allegedly helped several members of a prominent American family conceal more than $10 million in Swiss bank accounts for 11 years. According to the charges, Little advised the family members to set up Swiss accounts that would nominally be controlled by him and a Swiss lawyer. Link 

* Japan opposition leader hints at extended tax hike debate. Alexander Martin – The Wall Street Journal. The leader of Japan’s main opposition party on Monday suggested that an extension to the current parliamentary session may be necessary to debate the government’s proposed consumption tax hike, in a sign that he may be leaving the door open for compromise ahead. The opposition party LDP may be willing to give Prime Minister Yoshihiko Noda more time to reach a compromise on a bill that would double the country’s 5 percent consumption tax to 10 percent by 2015. Link

* Americans feel defriended over perceived Eduardo Saverin tax dodge. Rene Lynch – The Los Angeles Times. Eduardo Saverin, the Facebook co-founder who renounced his U.S. citizenship in what many have seen as a move to avoid paying federal taxes, has managed to unify many Americans behind Uncle Sam’s outstretched hand. Many in the online world this week are outraged at the perception that Saverin is trying to dodge the tax man. Saverin made his riches off Facebook-loving U.S. taxpayers and is now defriending the country that made him rich. Link 

* Should carried interest be taxed as ordinary income, not as capital gains? The Wall Street Journal opinion. In the private-equity business, carried interest is the share of the profit from the sale of a company that goes to the managers of the firm that bought and then sold the company. Michael Graetz, a professor of tax law at Columbia Law School, wants carried interest taxed as ordinary income. David Tuerck, executive director of the Beacon Hill Institute and a professor and chairman of the economics department at Suffolk University in Boston, believes it should be taxed as capital gains. Link 

* Sunday dialogue: Making taxation fairer. The New York Times opinion. In letters to the editor, Times readers offer ideas for tax reform but doubt it will happen. Link

“Pretty much everybody on our tax staff is doing tax reform,” Ray Beeman, tax counsel to Representative Dave Camp, told lawyers at an American Bar Association meeting in Washington.

“We want to put ourselves into the best position we can be in, in the lame duck in the event that the focus turns to tax reform as a way of getting out of this fiscal cul-de-sac,” he said.

That “fiscal cul-de-sac” refers to the expiration of lower rates on individual and investment income enacted under former President George W. Bush and renewed by President Barack Obama and scheduled across-the-board spending cuts, among other fiscal deadlines converging at year’s end.

Camp wants a comprehensive plan to serve as a “jumping off point” for movement on the issue in 2013, Beeman said.

No one believes a broad revamp of the tax code will happen before, or in the brief period after, the elections before the deadlines. But some say the need to get a deal on these issues could push tax reform front and center – perhaps putting language into any deal that could force action.

Such language could set a date by which a plan to revamp the tax code must be forged, making it painful for both Democrats and Republicans if they fail to act.

Camp has a collegial relationship with his counterpart on the Senate side, Senator Max Baucus, chairman of that body’s finance committee.

Asked if that bond could help lawmakers get past the partisan rancor that has halted progress on most things in the current Congress, Beeman said it remains to be seen.

Baucus and Camp served together on various deal-making committees put in place to avoid fiscal crises over the past year, including the so-called bipartisan “supercommittee.”

“When you think of what has happened over the past year they’d have to have a good relationship or they probably would have killed each other,” he said.

 * Watchdog calls foul on IRS whistleblower office. Patrick Temple-West – Reuters. A Republican senator advocating for whistleblowers called on President Barack Obama to “light a fire” under the Internal Revenue Service’s whistleblower office after a new report highlighted concerns about the program. The comments, on Thursday, came shortly after a watchdog for the IRS criticized the agency’s whistleblower program, saying it may produce inaccurate data and that deadline goals are not strong enough. Link to Reuters.  

* Panorama to highlight Luxembourg tax role. Vanessa Houlder – The Financial Times. A BBC investigation is set to highlight the role played by Luxembourg in the tax structures of big British companies, in the latest sign of intensifying scrutiny on corporate tax planning. Next Monday’s Panorama is based on confidential documents said to show how companies including GSK, the pharmaceutical group, and Northern and Shell, the media company, used Luxembourg subsidiaries to lend money to their British operations. The investigation is the latest in a series of examinations of big companies’ tax planning which has triggered a public fightback from the CBI, the employers group. Link to The Financial Times. 

* Many Americans abroad surprised by tax code’s nasty bite. Brian Knowlton – The New York Times. As Americans abroad chafe under sharply increased U.S. pressure to declare foreign holdings and catch up on back tax filings, one group with tenuous ties to America and the benefits of citizenship is feeling particular pain and unease. After lifetimes abroad, many in this group, whose total size is impossible to estimate, had believed that because exemptions left them owing no U.S. income tax they had no obligation to file returns; many have been tripped up by a requirement that they still declare their foreign bank and financial accounts. Link to The New York Times. 

* Jerry Brown submits tax-hike petitions. Marisa Lagos – The San Francisco Chronicle. Gov. Jerry Brown and backers of his tax initiative submitted petitions Thursday to county elections officials they said contain nearly twice the number of signatures needed to qualify for the November ballot, but the governor acknowledged the measure isn’t a cure-all and warned he will unveil “severe” new cuts to state spending next week. Link to The San Francisco Chronicle. 

* The case for global accounting. Floyd Norris – The New York Times. Last week, the American government reaffirmed its commitment to common accounting rules, something that Timothy Geithner, the Treasury secretary, has argued was necessary for common global regulation of banks, among other things. Ideally, comparable accounting around the world would make markets more efficient by letting investors compare companies from different countries. But that would be true only if the standards were of high quality and applied in a consistent manner. Link to The New York Times. 

* ObamaCare’s killer device tax. Henry Miller – The Wall Street Journal opinion. Medical device manufacturing is one of the nation’s most dynamic and vibrant industries. Yet instead of protecting this paragon of American ingenuity and innovation, the Obama administration and Congress have viewed the industry as a cash cow from which they could milk profits to help pay for the president’s health law. So they added to the Affordable Care Act a 2.3 percent excise tax on medical devices that will take effect at the beginning of 2013. This tax is especially pernicious because it is assessed on sales, not profits. Link to The Wall Street Journal.

* China orders “Big Four” auditors to restructure. Koh Gui Qing and Rachel Armstrong – Reuters. The world’s top four accounting firms will have to bring in Chinese citizens to run their operations in China and end the dominance of foreign partners under new rules announced by the Finance Ministry on Thursday. The Big Four auditors – Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG – must start to convert their practices this August and comply with all the new rules by the end of 2017. The changes come at a difficult time for the Big Four as they grapple with the fall-out from a string of accounting scandals at Chinese companies listed in the United States that has left investors questioning the quality of auditing in China. Link to Reuters. 

* Obama threatens to veto Republican’s shield of defense cuts. David Lawder – Reuters. President Barack Obama threatened on Wednesday to veto a Republican bill that would partially replace looming automatic budget cuts and protect military spending at the expense of food stamps and other social programs. The House of Representatives on Thursday is expected to vote on the Republican plan. A Democratic plan would raise revenues by implementing the “Buffett rule”, a new minimum tax rate for those with incomes above $1 million. Ending tax breaks for the five largest large oil producers and cuts to crop subsidies would be the next largest savings contributors. Link to Reuters. 

* Reid issues threat on defense cuts. Janet Hook – The Wall Street Journal. Raising the stakes in the congressional budget debate, the Senate’s top Democrat Tuesday threatened to allow deep defense spending cuts to take effect at year’s end unless Republicans were willing to accept a broader budget deal that includes tax increases. Senate Democratic Leader Harry Reid said Democrats would insist on a more “balanced approach” to deficit reduction that includes tax increases, as well as cuts to both domestic and defense programs. Link to The Wall Street Journal. 

* EU court says France’s UCITS dividend tax rules breach EU law. Laurence Norman – The Wall Street Journal. French tax rules that slap a 25 percent tax on dividends earned by non-residents from investments in collective investment schemes breach European Union law, the European Court of Justice said in a ruling Thursday. In a case brought by 10 Undertakings for Collective Investment in Transferable Securities, or UCITS, against the French government, the court said the French rules breach the free movement of capital guaranteed by EU law. Link to The Wall Street Journal. 

* Vale wins injunction barring Brazil tax debt payment. Guillermo Parra-Bernal and Eduardo Simões – Reuters. Brazil’s highest court suspended on Wednesday the payment of about 24 billion reais ($12.4 billion) in back taxes by mining company Vale, handing the world’s largest iron ore producer a temporary victory in a dispute with the government. Vale is fighting four actions by the Brazilian Federal Revenue Service, which claims the mining firm has avoided paying levies on profits obtained at some of its foreign subsidiaries. Link to Reuters. 

* India tax rules still baffle foreign investors. Shefali Anand – The Wall Street Journal. Foreign investors are not convinced by Indian Finance Minister Pranab Mukherjee’s recent attempts to clarify how some proposed tax rule changes would affect them. Earlier this week, Mukherjee announced the government would delay the implementation of the so-called General Anti-Avoidance Rules for taxation by one year. While everyone has welcomed these clarifications, there are plenty of unanswered questions. Link to The Wall Street Journal.

Good day and welcome to the top tax and accounting headlines from Reuters and other news sources.

* A tax loophole opposed by conservatives now divides the Senate. Jennifer Steinhauer – The New York Times. Republicans took to the Senate floor Tuesday to denounce a bill proposed by Democrats that would freeze student loan rates by closing a loophole that allows wealthy individuals to avoid paying Social Security and Medicare taxes on some of their income. The bill would pay for the $5.9 billion loan rate freeze by preventing individuals with incomes exceeding $250,000 who file their taxes as a small business to avoid paying Social Security and Medicare payroll taxes on some of their income. Democrats have referred to the bill as the Edwards bill, as it targets the tax strategy that former Senator John Edwards was criticized for using. In the past, however, many conservatives have dinged the same tax loophole that Democrats now seek to close. Link to The New York Times.  

* No tax reform plan yet: Obama aide. Kim Dixon – Reuters. President Barack Obama’s nominee to be the top tax official at the U.S. Treasury Department said on Tuesday that the administration is not actively working on a plan to revamp the tax code, frustrating some of Obama’s fellow Democrats. “At this point there is no plan that has been developed,” Mark Mazur, Obama’s nominee for Treasury’s top tax job, said at a Senate panel hearing on his confirmation. Tax reform was going to be a tougher slog than it was in 1986, when reform was “revenue neutral,” neither raising nor lowering the overall federal tax take. “We are going to need to modestly increase revenue, unlike in 1986,” Mazur said. Link to Reuters. 

* Empire State Building IPO change may help pay tax. Ilaina Jonas – Reuters. The controller of the Empire State Building has offered investors the opportunity to sell some of their shares and relieve some of the expected tax burden if a proposed initial public offering is approved before the end of the year, according to a federal filing on Tuesday. But that may not be enough to help the 2,824 investors pay what could be a tax liability somewhere between $50,000 and more than $100,000 depending on the pricing of the IPO shares and where the investor lives. Link to Reuters. 

* U.S. IRS missed billions in ID fraud claims: watchdog. Patrick Temple-West – Reuters. The watchdog for the U.S. Internal Revenue Service said the agency failed to stop the issuance of billions of dollars in fraudulent tax refunds in 2010 to thieves who stole taxpayers’ identities. After checking employment records, the Treasury Inspector General for Tax Administration (TIGTA) said it found more returns may have been sent to tax filers using stolen identities than the IRS initially estimated. Link to Reuters. 

* India may hit Vodafone with $3.75 billion tax bill. Dow Jones Newswires. India plans to demand about $3.75 billion in taxes from Vodafone Group PLC if Parliament approves a law to retroactively tax overseas mergers that have an underlying Indian asset, a senior government official said Wednesday. The demand will include basic tax of about $1.48 billion, a penalty of a similar amount and interest charges of about $790 million, R.S. Gujral, secretary at the Department of Revenue in the Ministry of Finance, said on television. Link to The Wall Street Journal. 

* Swedish finance minister halts tax proposal. Jens Hansegard – The Wall Street Journal. Sweden’s Finance Minister Anders Borg has decided to stop a much-criticized tax law proposal regarding the taxation of partners in private equity companies, Swedish news agency TT reported Wednesday. The Swedish tax authorities have since 2010 investigated a number of private equity companies and retroactively raised taxes for private equity company partners. The Swedish tax authorities state that carried interest is a performance bonus and thus a form of income, and not capital gains, which incurs a lower tax rate. Link to The Wall Street Journal. 

* Minister hits back in charity tax row. Sarah Neville – The Financial Times. A government minister has hit back in a row over plans to limit tax relief on charitable donations, suggesting most of the voluntary sector would be unaffected by the controversy over “the tax affairs of a very small group of rich people”. Nick Hurd, minister for civil society, acknowledged that the proposal to cap tax relief at 50,000 pounds ($80,700), or 25 percent of income if that was higher, was “the elephant in the room”, as the issue threatened to overshadow Tuesday’s government-sponsored “giving summit”. Link to The Financial Times.

($1 = 0.6196 British pounds)

* Private equity defends business-debt deductions. John McKinnon – The Wall Street Journal. A private-equity group will release a report on Tuesday that attacks one of the central tenets of many tax-overhaul plans in Washington – the idea of curbing deductibility of business debt. Limiting debt deductibility could raise the effective tax rate on new investment and could well stifle growth, said the Private Equity Growth Capital Council, a trade group. The group says that a limit on deductibility of interest expenses in exchange for a 1.5 percentage point reduction in the corporate rate, “would increase the marginal effective tax rate on new corporate investment from 31.0 percent to 33.1 percent. Link

* House bill shields defense from cuts. Janet Hook and Damian Paletta – The Wall Street Journal. House Republicans, seeking to prevent defense-spending cuts at the end of the year, advanced a plan that would instead reduce spending on health-care programs, food aid and other major domestic initiatives of the Obama administration. Democrats agree that the arbitrary cuts should be replaced with a more carefully calibrated budget agreement, but they want a mix of defense cuts, tax increases and domestic spending cuts. Many Republicans oppose any tax increases and want to avoid the $55 billion in scheduled defense cuts next year and partially replace them with cuts in domestic entitlement programs such as Medicaid. Link

* Brazil’s secret fiscal weapon: the tax “lion.” Alonso Soto – Reuters. In Brazil, groups of armed agents fly around the country by helicopter, pounding on doors and instilling fear in the hearts of those who break the law. They’re not the police – they’re from the tax agency. The Federal Revenue Service will be one of the most important keys to Brazil’s economic prospects in 2012. President Dilma Rousseff is counting on the agency’s tax-collecting prowess to help her government meet ambitious budget targets without smothering the country’s suddenly brittle economy. Link

* Could dividend tax policy knock 30 percent off stocks? It’s complicated. Jonathan Cheng – The Wall Street Journal. We haven’t seen much of a drop-off in investor interest in dividend payers, or stocks generally. There has already been an odd pick-up in stock prices after the weekend’s European elections. If anything, dividend payers have been surging lately, as part of an increasingly noticeable shift in weight towards safer, steadier dividend payers. Telecommunications stocks, a steady dividend-paying group, are among the day’s best performers and have been the strongest stocks so far this month, together with favorites consumer staples and utilities stocks. Link

* Tax planning: Global crackdown on avoidance forces wealthy to be transparent. Elaine Moore – The Financial Times. The UK government’s announcement this year that it would crack down on aggressive tax planning has prompted some of the country’s wealthiest individuals to reconsider their financial arrangements. The emphasis on closing tax loopholes has led to a rise in the number of clients who wish their affairs to be structured in a more transparent and holistic way. Authorities in Europe and the United States have also been taking increasingly tough stances on tax avoidance and financial secrecy over the past few years, forcing national and international investors to disclose more information. Link

* Of course 70 percent tax rates are counterproductive. Alan Reynolds – The Wall Street Journal. President Obama and others are demanding that we raise taxes on the “rich,” and two recent academic papers that have gotten a lot of attention claim to show that there will be no ill effects if we do. The first paper, by Peter Diamond of MIT and Emmanuel Saez of the University of California, Berkeley, appeared in the Journal of Economic Perspectives last August. The second, by Mr. Saez, along with Thomas Piketty of the Paris School of Economics and Stefanie Stantcheva of MIT, was published by the National Bureau of Economic Research three months later. Both suggested that federal tax revenues would not decline even if the rate on the top 1 percent of earners were raised to 73 percent to 83 percent. Link

* Will rich people desert the U.S. if their taxes are raised? In recent years, the number of Americans renouncing their citizenship has increased. According to the international tax lawyer, Andrew Mitchel, the number of Americans renouncing their citizenship rose to 1,781 in 2011 from 231 in 2008. Factors including climate, proximity to those in similar businesses and the availability of amenities like the arts and cuisine play a much larger role. Link

PricewaterhouseCoopers CEO Dennis Nally sits between Eli Lily and Company Chairman and CEO John Lechleiter (L) and Singapore's Prime Minister Lee Hsien Loong (R) during the APEC CEO summit in Honolulu, Hawaii November 11, 2011. REUTERS/Chris Wattie

Big audit firms are hoping talks will resolve an impasse between Chinese and U.S. regulators over work papers of the firms’ Chinese subsidiaries.

Auditors landed in the center of an international spat last year when the U.S. Securities and Exchange Commission went to court to force a Chinese arm of Deloitte to hand over audit records on its China-based audit client Longtop Financial Technologies.

Deloitte runs the risk of violating Chinese secrecy laws if it gives audit work papers to the SEC – and so would any other audit firm that finds itself in the same situation.

“This is not about work papers per se; there are bigger policy issues that have to be resolved,” Dennis Nally, global chairman of PricewaterhouseCoopers, the largest of the Big Four accounting firms, told Reuters in an interview. “We’re right in the middle of something we don’t know how to deal with, frankly.”

Nally said PwC has been “engaged” with government officials in China and the United States to make sure they understand the position the firms are in. “This is really a policy-philosophical issue that has to be resolved more from a diplomacy standpoint than from a regulator’s standpoint,” he said.

The head of the main U.S. audit regulator, the Public Company Accounting Oversight Board, participated in annual talks between the United States and China recently, a sign that the audit impasse may have gotten the attention of higher-level government officials.

The Big Four firms certainly hope so. They see China as a crucial market, where the audit business is growing at a healthier clip than in mature markets such as Europe. Late last year, the global head of Grant Thornton, Ed Nusbaum also told Reuters that government officials at the highest levels needed to intervene to resolve the audit issues in China.

The impasse over work papers is not the only problem facing the Big Four. They also are trying to hash out an agreement that will allow them to continue auditing in China after existing joint venture deals expire this year. As the joint ventures expire, China is pushing the Big Four to turn over ownership of their Chinese arms to locally licensed partners.

PwC is participating in the talks, even though its joint venture agreement does not expire until 2017. Nally said the firms are near an agreement with Chinese officials that will provide for a transition period of several years before ownership of the firms has to change.

Some of the Big Four would have trouble finding enough locally licensed senior partners to take over ownership of their firms, but Nally said PwC is in a better position than most.

“We’ve been in China for such a long time that it’s less of an issue for us,” he said. “Our Chinese business is already significantly comprised of Chinese nationals.”

Some important tax and accounting dates in the week ahead:

 Tuesday, May 8

U.S. Senate Finance Committee hearing considering the nomination of Mark Mazur to be an Assistant Secretary of the Treasury, Matthew Rutherford to be an Assistant Secretary of the Treasury, and Meredith Broadbent to be a member of the United States International Trade Commission, to start at 10 a.m. EDT in Room 215, Dirksen Senate Office Building.

Two subcommittees of the U.S. House Ways and Means Committee joint hearing on tax fraud involving identity theft, to start at 10 a.m. EDT in Room 1100, Longworth House Office Building. Steven Miller, IRS Deputy Commissioner for Services and Enforcement, and Patrick O’Carroll, Social Security Administration Inspector General, will be witnesses, among others.

Tax Analysts, the National Association of Enrolled Agents, and Tax.com roundtable discussion on changes to the rules governing practice before the U.S. Internal Revenue Service. IRS Office of Professional Responsibility Director Karen Hawkins will speak.

Wednesday, May 9

IRS hearing on the deduction and capitalization of tangible property, to start at 10 a.m. EDT in the IRS Auditorium.

Thursday, May 10

The IRS Small Business/Self-Employed Stakeholder Liaison will present a one-hour webinar on the difference between employees and independent contractors.

 Thursday, May 10 – Friday, May 11

American Institute of Certified Public Accountants and American Academy of Matrimonial Lawyers conference on divorce, Aria resort & casino, Las Vegas.

Thursday, May 10 – Saturday, May 12

American Bar Association Section of Taxation meeting, to include speakers from the IRS, Department of Treasury, and the Joint Committee on Taxation, among others. Washington, D.C.