International Tax Regime Research Articles

The Entitlement to Tax

As a result of the significant need for additional discussions on the inequality which currently shape international tax matters, Copenhagen Business School hosted a conference concerning inequality within the international tax regime in September 2020. The conference brought together researchers at the forefront of their respective fields to identify, discuss, and to underline future challenges associated to inequality in the international tax context. This special issue is an outcome of papers presented at the conference and concerns the relationship between developing and developed states with an emphasis on present shortcomings when allocating taxing rights in a fair and sustainable manner.

Serenity Now! The (Not So) Inclusive Framework and the Multilateral Instrument

The Article demonstrates, based on publicly available data and using a variety of indicators that the most salient initiatives to promote inclusivity within the international tax regime (Country-by-Country Reporting, the Multilateral Instrument, and the Inclusive Framework) have at best done little to increase the meaningful participation of non-OECD countries in the regime, and at worst been disingenuous. The opacity of the examined initiatives and the difficulty of measuring inclusivity dictated this indirect methodology, yet the picture it portrays is unambiguous. The article finally explain why the OECD invited non-Member States to join these initiatives, and why the latter have nominally joined, using Hirschman’s exit and voice framework. Based on this analysis, It concludes that the problems that led to the initiation of inclusive fora within the international tax regime will not “go away” with such nominal inclusivity, and that only meaningful inclusivity has the chance to stabilize the international tax regime.

The International Tax Regime at 100: Reflections on the OECD's BEPS Project

This essay will consider the outcome of Pillars One and Two in light of the history of international taxation since the foundation of the international tax regime in 1923. Specifically, it will consider how Pillar One fits with efforts to redefine the source of active income in light of the digital revolution, and the ways in which Pillar Two implements the single tax principle, which can be traced back to the first model treaty from 1927. Both of those ideas were already articulated and developed in my own early writing on international taxation from the 1990s, when the Internet was in its infancy.

L’Accord sur le taux d’imposition minimum des multinationales et la taxation des entreprises numériques : une étape supplémentaire vers la constitution d’un ordre fiscal international autonome

Almost a century from its foundation, the international tax regime intended as a set of principles and rules governing cross-border income taxation is on the brink of unprecedented change. Due to the evolution in the ways MNEs conduct their business, on the one hand, and the proliferation of aggressive tax planning schemes and excessive tax competition, on the other, on 8 October 2021 more than 130 jurisdictions participating in the OECD Inclusive Framework have agreed to the OECD Two-Pillar Solution to address the tax challenges of the digital economy. Indicatively, the OECD Pillar One aims at reallocating taxing rights among countries by means of a new connecting factor (or nexus) based on the role that markets play in the modern economic context (hereby seeking to keep up with the evolution of digital companies’ business models). The approach of allocating taxing powers to states relying on the physical presence criterion [ permanent establishment] has become anachronistic given the possibility for (digital) companies to derive profits in a jurisdiction without tangible production factors located therein. The OECD Pillar Two, instead, introduces a 15% minimum global taxation to limit excessive tax competition among states and purports to promote a better allocation of investments at the global level, ideally enlarging residence states’ taxing powers. Noticeably, the second pillar also represents a major step forward in terms of harmonizing the computation of corporate taxable base. This contribution, after shortly describing the fundamental notions of international tax law from an international public law angle, traces the crucial steps that eventually led to the 2021 reform and presents an overview of the functioning of both the OECD Pillars.

International Tax Law and its Influence on National Tax Systems

In this paper it is controversially suggested that international tax law is broader than the traditional view of most academics. In addition to domestic laws that cover cross-border transactions and double taxation agreements (or their multilateral counterparts) there is a special consensus international tax law (CITL) based on the institutions, instruments and interpretation implemented by international consensus. It is essential to understand how international laws and norms shape national tax systems and whether they constrain domestic taxation choices? In other words, are there limitations on States introducing domestic rules which cut across the obligations designed to make the international tax regime coherent? Also, to achieve fundamental, consensus-driven change, such as that in the area of the taxation of the digital economy requires significant cooperation by States. Understanding these parameters will inform whether, how, and why, States should get involved in the design and structure of the international tax architecture. International tax law has components drawn from different areas of law, some parts of which are peculiarly domestic or sovereign in the sense that they are the exclusive decision of a state to impose taxation. In contrast, other parts reside in public international law because they deal with the rules, norms, and standards generally accepted in relations between nations. This dual dynamic is central as to why international tax law is influential on national tax systems. States impose taxes and deal with their citizens (or for most countries their residents) on their worldwide income, and non-residents in respect of income sourced in their jurisdiction. It is precisely because of this residence and source taxing matrix and the resultant double taxation that States need to deal with other States to make the international tax regime more coherent and fair. In respect of public international law, most focus has been on the part of international tax that relates to bilateral and multilateral treaties. In contrast, the area of law focusing on international law from other sources, such as customary international law (CIL), receives less consideration. This paper explores what is meant by international tax law. The focus then shifts to that part of tax law which is public international law. Clearly, bilateral and multilateral treaties have a direct impact on the legal systems of participating States. Treaties are not the only source of international law even though in the tax arena they clearly are by far the most important. So important that some suggest they are “perhaps the source, of international law”. Other highly respected scholars suggest that CIL has a part to play in influencing national tax systems. This suggestion is controversial, and the weight of opinion does not support the view that CIL presently creates any binding tax obligations on States. This paper proposes that there is, however, an emerging system based on common understandings, with the legal duties of cooperation and underpinning expectations of implementation which should be recognized as creating obligations upon States even though it does not constitute CIL. CITL is highly influential on national tax systems and is a phenomenon that recognises both the sovereignty and politics of national tax laws, as well as the need for harmonisation and reasonableness in international dealings with other States and their tax systems.

The Allocation of Taxing Rights under Pillar One of the OECD Proposal

Pillar One is a proposal by the OECD Secretariat to address changes in the allocation of taxing rights of business profits at an international level. It comes as a reaction to the tension generated by the inadequacies of the international tax regime that are significantly exacerbated by the digitalization of the economy. The proposal aims at achieving a long-standing, consensus-based solution. Notably, the rationale of Pillar One is in opposition to long-standing standards on the allocation of taxing rights of business profits, such as the requirement of physical presence to allow source taxation or the arm’s length standard as a profit allocation mechanism. This contribution addresses Pillar One and its compromise-based rationale from a normative standpoint, and its feasibility in reshaping the future of the international tax regime. The present draft was completed on November 9th, 2021 and incorporates the components of the 2021 October Agreement reached by 137 jurisdictions.

International Tax Law- Status Quo, Trends and Perspectives

This chapter will argue that developments in the past decade have significantly bolstered the International Tax Regime, so that it does a much better job in protecting PIT and CIT from erosion due to cross-border tax evasion and avoidance than it did before 2010. Specifically, the adoption of FATCA and the consequent development of Automatic Exchange of Information (AEI) and the Common Reporting Standard (CRS) have significantly protected PIT, while the OECD BEPS project has significantly improved CIT, especially if the current BEPS 2.0 effort is successfully concluded.

Taxation of Digital Services Under Trade Agreements

ABSTRACT The digitalization of the economy combined with sophisticated tax planning has enabled some multinationals to avoid paying almost any income tax in most market jurisdictions from which they earn substantial profits. Faced with financial and political pressures to act, market states have sought to expand their tax bases so that these multinationals, especially those providing internet advertising and digital intermediation services, pay their ‘fair’ share of tax. The failure to reach an agreed outcome among Organisation for Economic Co-operation and Development and Group of Twenty members has led to an increasing number of states to take unilateral measures. In doing so, states need to navigate their obligations under double taxation agreements and trade agreements. An examination of typical double taxation agreements, the General Agreement on Trade in Services, and recent preferential trade agreements shows that states have limited options to expand their tax bases in compliance with their international obligations. Here, the imposition of an appropriately designed digital services tax has political and legal advantages. The growing volume of cross-border digital services and data flows suggests that greater engagement between the international tax and trade regimes is likely in the future, including in the negotiations of disciplines on electronic commerce.

Tax Treaty Negotiations: Myth and Reality

Tax treaties are the building blocks of the international tax regime. There are currently over 3000 tax treaties that regulate the lion’s share of cross-border investment. They are largely fashioned after a single model reflecting an increasing convergence of international tax norms. Despite this convergence, and despite the passing of nearly a century from when the first modern tax treaties were formalized into a model, there remains a great many unanswered fundamental questions about their application, interpretation, and effectiveness. The importance of these questions was clearly exposed in the recent global displeasure with the norms of the international tax regime, displeasure which has eventually led to perhaps the single most extensive reform initiative for that regime, known as the BEPS project. Much effort and energy were spent on the study of tax treaties before, during, and in the aftermath of this project. Yet surprisingly, almost no effort has ever been made to study the actual making of tax treaties and their negotiation. This Article aims to begin filling this void with a pioneering survey of tax treaty negotiators that documents the process and launches a discourse over its implications for the interpretation and reform of international tax law around the world.

Where’s the Source? Ambiguities in the Principles of International Taxation

The starting points in international taxation, as used by countries around the world to establish and divide tax jurisdiction and as the basis for the charge to tax income, embed an idiosyncrasy of analytic indistinctness. The residence and source principles are geographically geared in the same direction, towards the supply side of income and the country of origin. At the same time, however, the source principle is also geographically geared in the opposite direction, towards the demand side and the country of destination. This creates a world of smoke and mirrors, where a veil of apparent universal consensus on the principles of international taxation disguises deep underlying antagonisms between countries and regions when it comes to dividing entitlements to tax international income. In a time of isolationism and unilateralism, such divides are problematic. A political solution to the problem of how to geographically distribute tax base among countries is not (or not yet) available for the e-profits of tech giants, for example, or for dividing taxing rights on portfolio investors’ capital income between richer and poorer countries. The author believes that it would make a difference if we were to cease our troubled ‘residence-versus-source thinking’ and instead to direct the debate to what it is really about: tensions in the international tax regime as a result of a growing geographical divergence between the supply side and the demand side of income creation.

A General Income Inclusion Rule as a Tool for Improving the International Tax Regime – Challenges Arising from EU Primary Law

The overall concept of the OECD’s Global Anti-Base Erosion Proposal is to develop a coordinated set of rules to address ongoing risks from profit shifting and to curb international tax competition. Two important components of the proposal are the income inclusion rule and the switch-over rule and, in this article, these components are examined in consideration of EU primary law. Depending on the final design of the rules, it is concluded that the proposed income inclusion rule – however, probably not the switch-over rule – may end up restricting the fundamental freedoms by treating comparable situations differently. Against that background, a number of policy options for designing the income inclusion rule in accordance with primary EU law requirements are presented, and pros and cons of these design options are discussed. Global anti-base erosion proposal (GloBE), EU tax law, fundamental freedoms, tax avoidance, tax competition, tax policy

Shifting Design Paradigms: Why Tomorrow's International Economic Law May Look More Like the Tax Regime than the WTO

Rampant unilateralism, insistence on national sovereignty, a wariness of multilateral institutions and third-party adjudication — for international trade lawyers, this is the stuff of nightmares. For international tax lawyers, these are the normal operating parameters of the international tax regime. In fact, the same forces that are currently unraveling the World Trade Organization (WTO) are simultaneously enabling pragmatic and creative reforms of international tax law. Ruth Mason's account of the Transformation of International Tax invites us to draw broader lessons on how international economic law could adapt to survive and even thrive in a political environment increasingly hostile towards WTO-style multilateral-ism.

COVID-19 and Fiscal Policies: Unnecessary and Yet Harmful: Some Critical Remarks to the OECD Note on the Impact of the COVID-19 Crisis on Tax Treaties.

The COVID-19 pandemic has restricted freedom of movement and imposed forced, or at least unplanned, displacement. Insofar as the International Tax Regime continues to be based on the physical presence of individuals, this has led to unexpected and often undesirable tax consequences. The reaction of the OECD Secretariat to this situation has been to issue a note claiming, in essence, that everything remains the same. This article critically approaches that note by exposing its general methodological flaws and analysing each of the four specific aspects to which it refers: Permanent Establishments (PEs), Place of Effective Management (POEM), Cross-Border Workers and Residence of Individuals. Double taxation conventions, COVID-19, residence, permanent establishment, agents, services-permanent establishment, place of effective management, cross-border workers, tie-breaker rules.

The Case for Tax Integration and Current-Base Taxation

The U.S. tax system has many distortions, but two triumph them all. The first is debt-over-equity. Under the current corporate double taxation mechanism, C corporations are incentivized to borrow rather than issue equity, because interest is deductible, and dividends are not. The second is foreign-over-domestic investment. Under the current U.S. international tax regime, U.S. multinationals are subject to a reduced tax rate, and in certain occasions are also exempt from U.S. tax on their foreign earnings, while their domestic earnings are subject to full corporate tax rate. In this Article, I call for the adoption of a Dividends-Paid Deduction form of tax integration and for current-base taxation of foreign earnings. The already reduced corporate tax rate (21%), combined with tax integration, will provide a significant relief from the relatively high burden of corporate double taxation, allowing U.S. multinationals to better compete in the global economy. It will eliminate (or substantially reduce) the debt-over-equity bias and the inefficient penalty on business activities carried through C corporations. Current-base taxation will eliminate the current incentive to invest and shift income abroad, while providing a very important source of revenue. It will also obliterate the need to distinguish between domestic and foreign earnings and as such will facilitate the adoption of tax integration, because all distributions of earnings that were previously taxed will give rise to the benefits of tax integration. Finally, in order to avoid a potential revenue loss as a result of this new dividends-paid deduction, a non-refundable full-rate withholding tax, or a new compensatory tax, equal to the rate of the corporate tax, should be introduced and implemented.

Designing International Tax Reform: What Went Wrong?

With the passage of the most significant change to the international tax rules since the early days of the income tax in the 1910s, the debate as to the merit of these changes has been ongoing. Academic commentary on the law known as the Tax Cuts & Jobs Act (TCJA) has been largely negative, with the law being criticized for reducing equity, benefiting wealthier business owners at the expense of individuals in the long term (while also increasing the deficit) and adding to complexity and tax planning opportunities. These critiques give rise to the question of how best, and under what criteria, to evaluate the changes brought about by the tax law. This paper analyzes the tax law changes adopted in the TCJA that impact cross-border investment by measuring them under a “second best” approach – one that acknowledges that any international tax regime will necessarily involve a trade-off in maximizing different goals and making a choice between the inefficiencies introduced by any set of rules to allow for a more measured and realistic consideration of the benefits of the new law relative to the possible alternatives. The analysis indicates that many of the international tax law changes introduced by the TCJA closely followed proposals made by economists in the years leading up to the law’s passage. The divergence between the theory of what the law was intended to do and its results to date provides lessons for economists engaging in policymaking.

Toward a Neutral Corporate Tax for the Transportation Industry – Rethinking the Transportation Industry Formula of the Common Consolidated Corporate Tax Base Directive Proposal under EU Law

This paper explores how the Common Consolidated Corporate Tax Base (CCCTB) Directive Proposal under the EU law should be designed to allocate cross-border income earned from MNE taxpayers of the transportation industry. The transportation activity is mobile in nature, and thus creates the difficulty of designing the relevant tax law. Allocating sovereign States’ taxing rights on the cross-border income of the transportation industry is inherently disputed. The OECD Model Convention, as an important starting point for negotiating bilateral tax treaties, has established the ‘effective place of effective management’ (POEM) as the criterion for allocating the primary taxing rights to one single State, where a taxpayer‘s effective place of effective management (POEM) is found. It is an all-or-nothing rationale. Formulary Apportionment (FA) follows an opposite rationale other than the all-or-nothing mentality, by using a formula consisting of different weighting factors to allocate taxing rights for all jurisdictions involved. Taking the metaphor of cross-border taxable income as a pie, a formula would be a knife. At the sub-regional level, such as States of the US, FA is widely adopted. The CCCTB Proposal is the EU’s attempt to transplant FA from the US. Some jurisdictions also adopt a formula in their national corporate tax law for the shipping industry. To our surprise, the CCCTB proposal follows the POEM criterion established in the international tax regime and excludes the shipping and airline industry from its scope of application. Therefore, this paper further discusses if the shipping industry provision under the current CCCTB Proposal is still rational. This paper compares the CCCTB to experiences from OECD and US to seek an answer to this question. In conclusion, since the CCCTB has adopted formulary apportionment as its basic setting, it does not need to follow the traditional international tax regime’s approach of ‘POEM’ adopted by OECD, or the residence criterion adopted by the US, because neither of them can reflect the mobile (while highly-integrated) feature of the international transportation industry or address the old tax-planning scenarios. Instead, this paper argues that the CCCTB should include the transportation industry in the scope of application, and uses both ‘departure’ and ‘arrival’, being equally weighted, for the sales factor of the transportation industry.

Two Accounts of International Tax Justice

The contemporary international tax regime has been increasingly criticized over the years from varied perspectives, particularly as to the unfairness it produces for developing countries. Some commentators argue it is unjust due to the lack of participation of developing countries in the policymaking process on an equal footing. Others suggest the international tax regime was designed by affluent countries to respond to self-interested goals. Some note that its current institutional design creates opportunities for tax competition and avoidance, which more seriously affect developing economies due to their relative dependence on corporate income tax and their greater vulnerability to capital mobility. Others specifically criticize how taxing rights, that is, the entitlement of countries to tax cross-border transactions, are currently allocated between home and host countries and how they disfavour capital-importing, developing countries.

Place of Effective Management in the Digital Economy

Tax residence is one of the essential elements of an international tax regime that is based on a network of tax treaties. In the traditional economy, the identification of the place of tax residence of companies usually does not create interpretative problems. However, the dynamic development of the digital economy raises questions as to whether the concept of the place of effective management (POEM) is also an appropriate instrument for companies. It is used as a tie-breaker rule and national residence test based on the axiom of one location of the place where major decisions are made that affect the functioning of the enterprise as a whole. However, due to the growing importance of data collection, processing, and monetization processes – with the intensive use of advanced algorithms and artificial intelligence – it changes hierarchical, linear management models and implements an approach based on decentralization and dispersion of decision-making processes. The considerations contained in this article also pertain to the issue of the desirability of developing a tax connector other than the POEM from the perspective of examining the nature of the economic relationships of ‘digital companies’ with the state for the purposes of tax law.

Literature Review: Justice in International Tax Law – A Normative Review of the International Tax Regime, Peter Hongler, IBFD, 2019

Literature Review: Justice in International Tax Law – A Normative Review of the International Tax Regime, Peter Hongler, IBFD, 2019

Taxation Untapped: The Potential of the UN Sustainable Development Goals to Promote Progressive International Tax Reform

Taxation is a unique and valuable method to create a significant and sustainable source of domestic and international public finance for the public goods essential to the realisation of the UN’s Sustainable Development Goals (SDGs). However, current proposals for reform of the international tax regime to address tax avoidance by high-profit multinational corporations (MNCs) are deeply flawed. This contribution explores the potential of Goal 17 of the SDGs to mandate and articulate a progressive international tax reform agenda based on two pillars. The first makes recognition of the real harms done by massive tax evasion by MNCs central to any reform agenda, and proposes that taxation be reconceptualised as an institution representing a public compact between a government, its people and MNCs in a public-oriented state. The second pillar proposes the concept of Global Wealth Chains (GWCs) as the basis for exploring a more effective, transnational tax governance regime. In the following paragraphs I highlight the estimated funding gap to meet the SDGs, and describe the size and harmful effects of the ‘tax gap’ from tax evasion and avoidance, in particular for poorer countries. I then show how the flagship international tax reform agenda led by the Organisation for Economic Co-operation and Development (OECD) and G20 - the Base-Erosion and Profit-Shifting (BEPS) project - is based on a flawed understanding of the governance of MNCs’ profit-generation activities. I conclude with a proposal for the need to think systematically, historically and strategically about international tax governance, in order to articulate and promote an equitable and effective international tax reform agenda.