International trade, direct taxation and bilateral tax treaties: Should there be a change? Is the inclusion of a Most-Favoured-Nation (MFN)-type clause in bilateral tax treaties a plausible solution?

Abstract

This paper argues that the international trade regime does not concern itself enough with tax restraints on international trade, while the international tax regime allows impediments to international trade. Tax restraints may arise not only from the unequal treatment of foreign and domestic goods for tax purposes which is prohibited by international trade law but also from the taxation of income and capital encompassed by bilateral tax treaties and the international tax system as a whole. Different tax rates applied to income by the source countries, certain deductibility provisions, and other income tax provisions aimed at nonresidents are examples of unequal treatment. This may distort investment decisions and place similar traders in different economic positions. Therefore, the international tax regime has to be adjusted to correspond better to the needs of the international trade system. Possible adjustments are a multilateral tax treaty, reconcilement of the international tax and trade regime, grafting of a Most-Favoured-Nation (MFN)-type clause in bilateral tax treaties. Considering the history, nature and underlying principles of the international trade and tax regimes and their role and significance, the best option for now is the inclusion of an MFN-type clause in bilateral tax treaties.