The legitimacy of international taxation

Prof. Dr. Pasquale PistoneAcademic Chairman

The remote past of international tax law and tax treaties

• Tax treaties had a significant development from 1920 onwards• Some limited examples of multilateral treaties in tax matters in the early days of

international taxation– Multilateral treaty after dissolution of Austro-Hungary Monarchy

• Failed attempts to introduce multilateralism in international taxation – 1923-1928 - League of Nations Models– After WW II: OEEC and OECD consolidated the trend

• Limited role of international customary law, due to absoluteness of tax sovereignty• From territoriality to worldwide taxation => the birth of international double taxation

An evolutionary analysis of the structure of international taxation

• Limits to tax sovereignty negotiated bilaterally through treaties (package deals)• Bilateralism in tax treaties, subject to growing influence of Model conventions• Gradual removal to trade barriers through multilateral non-tax international treaties• Unlike many international treaties, tax treaties do not exclude national law, which

integrates their clauses with a view to more effectively countering double taxation• International Model Conventions became the core of international taxation. Their

three functions:1. Avoid loopholes across the bilateral tax treaty network and thus structurally

reduce tax arbitrage2. Ensure consistency with goals of international tax policy, stability and flexibility3. Provide with technical explanations, which allow to prevent or solve conflicts

related to the interpretation and application of tax treaties

From bilateralism to multilateralism

• Legal positivism in tax matters erected fences at national boundaries, which could only be addressed through uni- and bilateralism, but that have long prevented the formation of worldwide standards and multilateralism

• Each State is free to arrange the boundaries of its tax sovereignty and the limits to it• Tax treaties are an example of guided bilateralism: the outcome of package deals,

negotiated in line with policy goals, but significantly influenced by Model Conventions• From the late 1990s: countering harmful tax competition in international taxation• Government, individual taxpayers and business are harmed by the way in which

MNEs exploit disparities across national sovereignties in the framework of international tax planning

• Tax treaties coordinate the exercise of taxing jurisdictions at bilateral level, but are vulnerable to action pursuing exploitation of disparities

• Isolated action no longer suffices: if MNEs act global, a global coordination of tax sovereignty is indispensable to achieve a fair and sustainable tax system

The path towards international tax coordination

• From internationally accepted tax practices to a coherent international tax standard• G20 perceived the need for a shift to multilateralism in international taxation

– Fiscal transparency (GFFT)– Base erosion profit shifting (BEPS)

• Non-Member States of OECD are invited to formally express their position• Instrument for soft building up of a global international tax order• A latent democratic deficit face to problems of non-OECD countries: can the

coordinated bilateralism be carried out without adjustments?• The internationally accepted tax practice develops along the lines of interpretation

provided by the OECD and its commentaries• Coordinated bilateralism influences interpretation of tax treaties: global standard for

interpreting bilateral treaties despite the limited importance of multilateral instruments

Bilateralism vs multilateralism in areas of international taxation

Bilateralism• Allocation of taxing rights• Methods for relieving double taxation

Multilateralism• Global fiscal transparency• Fight against aggressive tax planning

and BEPS• Harmful tax competition• Use of taxes for non-fiscal goals?• Arbitration• Protection of human rights

Categorising multilateralism in tax matters

• Regional multilateralism based on hard law and regional economic integration– European Union, Mercosur, East African Community, ASEAN– In tax matters

• Nordic tax treaties• East African Multilateral Tax Treaty

• Interregional multilateralism– Council of Europe/OECD (63 signatory States)– Relations of EU with third countries > tax implications– Joint negotiations of tax treaties (Baltic countries in early 1990s)

• Global multilateralism– In selected areas

Four steps to move towards multilateralism in taxation

1. Identification of desirable global goals2. Political consensus and mandate

– G20 Saint Petersburg – September 2013– The issue of national sovereignty and the problems of soft building up of

global international tax law3. The concrete implementation

– OECD > global forum for fiscal transparency, BEPS, …– The United Nations– EU and developing countries on good tax governance

4. Remove the inconsistencies in exercise of sovereignty– Strong protection when acting as State of residence, but aggressive approach

to attract international tax capital– Can the existing international rules be enough?

The creation of BEPS

• The shift from G8 to G20 contributed to broadening the base for international coordination in decision making:– BRICS and more countries admitted to the driving seat– EU States are gradually losing power

• G20 reflects the position of the most powerful countries, but lacks a sufficiently wide legitimacy to dictate its rules to the world

• Yet the G20 mandate to OECD on BEPS took place in 2013 at an extremely favourable moment, since:– The first phases of implementation of fiscal transparency have been successful– A large number of countries endorsed the reaction to excess of arbitrage by MNEs– Public opinion was very favourable to act for coordinating international taxation– MNEs were scared of potential boycotts, threatened by several NGOs

GFFT, BEPS and the creation of oligopolistic multilateralism

• The BEPS project marks a historical moment in the evolution of the history of international taxation:– Evolution of international coordination: from designing the internationally accepted

tax practices and the internationally correct standards for interpreting tax treaties, to designing the boundaries and substance of tax sovereignty

– Emptying of the substance of national tax sovereignty, while preserving its form• Fiscal transparency and BEPS are the first examples of global tax multilateralism

– Fiscal transparency is the outcome of oligopolism in decision-making, coupled with a multilateral monitoring in the implementation

– Broader basis in setting BEPS rules characterise it as the outcome of oligopolistic political mandate with a multilateral decision-making and implementation

• BEPS has the potential of changing more essential aspects of corporate taxation in less years than EU regional integration did in several decades. Yet synergies can arise!

BEPS in a nutshell

• The BEPS project is essentially about – removing international tax arbitrage through a coordinated exercise of sovereignties– Taxing powers remaining aligned with substance of value production

• BEPS action plan - 15 actions around three main pillars: – The coherence of corporate tax at the international level– A realignment of taxation and substance– Transparency, coupled with certainty and predictability

• Further targeted work on digital economy and a multilateral instrument to implement measures developed under the action plan

• Timeline: 2013 (start) to 2015 (end) - deliveries in September 2014 and September 2015• Legal nature: Soft coordination of international tax law based on the dynamics of best

practices and minimal standards• BEPS can steer legal positivism towards a new form of international tax jusnaturalism

Multilateralism in international taxation: OECD and non-OECD

• Can the OECD influence bilateral treaties with/between non-OECD countries?• Lack of participation in working groups and lack of democratic representation? A problem of

legitimation• OECD as best international tax treaty standards? Maybe, but for what countries? OECD tax

treaty policy must not necessarily reflect priorities of non-OECD countries• The position expressed by non-OECD countries: their function, similarities and differences

with reservations on Articles and observations on Commentaries by OECD MSs• Are OECD MSs truly obliged to follow the OECD MTC?

– The nature of the Model and OECD recommendations• …but when they voluntary adapt its clauses to OECD, what are the consequences? • …and what is the value of the commentaries in the light of the VCLT? And later• When an OECD patterned DTC is concluded with a non-OECD country, are non-OECD at

all obliged to follow the technical interpretation?• And when two non-OECD countries are involved?

Conclusions

• The shift from bilateralism to multilateralism requires more than an induced coordination of national sovereignty in tax matters

• It requires broad legitimacy in drafting the rules and conditions that are then to be implemented at national level. This is especially a problem for developing countries

• GFFT is a first attempt to shift international taxation towards multilateralism and can prove very effective, also overcoming the unilateral implications of measures otherwise pursued in the world, such as FATCA

• BEPS is the second attempt to shift internatioanl taxation towards multilateralism. It will certainly prove effective when adopted, but will need to broaden its consensus in order to achieve a true shift towards coordinated multilateralism

• Bilateral treaties and national tax sovereignty will not disappear (except for issues related to tax information exchange), but their substance will be affected by multilateralism

Thanks for your attention!

p.pistone@ibfd.org