Treaty Network Research Articles

Mandatory Arbitration of International Tax Disputes: A Solution in Search of a Problem

This article is based on the author's S.J.D. thesis.Improving the resolution of international tax disputes has witnessed recent developments. The Organization of Economic Development and Cooperation (“OECD”) amended its Model Convention and Commentary to include mandatory and binding arbitration of tax disputes between two treaty countries that have been unsuccessful in resolving the disputes through negotiations between their tax authorities. The United States has amended its income tax treaties with Belgium, Canada, Germany and France to include mandatory and binding arbitration of unresolved tax disputes. These amendments are undoubtedly an important step toward improving the resolution of international tax disputes. Nevertheless, the Article argues that these amendments fail to achieve this goal. By their terms, the amendments enable countries to avoid the arbitration. There is a risk these amendments will damage previously existing resolution methods that have generally been successful. The arbitration, as currently proposed, can be used by taxpayers to achieve abusive and undesirable tax results. The Article argues that these amendments will not serve the two primary goals income tax treaties aim at achieving which are preventing double taxation as well as double nontaxation (i.e., escaping taxation).In Part one of the Article I present a brief overview of major contributions to the literature in this field. I set forth an evaluation methodology that focuses on two questions: First, does a mandatory arbitration provision fit in the overall network of tax treaties? Second, can the mandatory and binding arbitration provision actually resolve disputes? I argue that when we are able to answer positively to both questions, a recommendation to adopt such a provision will follow.In Part two I focus on the OECD proposal for mandatory and binding arbitration aimed at improving the resolution of international tax disputes. I conclude that under the current proposed structure, a negative answer to the above evaluation questions is more likely to be given than a positive one. I address certain policy issues related to the proposal, structural deficiencies embodied in it as well as possible negative consequences it may have. I conclude that the proposal should be reexamined.In Part three I examine the mandatory and binding arbitration provisions that were adopted recently in a few income tax treaties to which the United States is partner. I conclude that the United States expresses a position aimed at limiting the application of mandatory and binding arbitration.Part four is a summary of the work. I explain that I generally do not oppose the adoption of mandatory and binding arbitration. Nevertheless, I offer some considerations regarding the circumstances accompanying the application of the proposed provisions as well as their structure. I suggest that the proposals should be reexamined because they lack features that are major and crucial for successful mandatory and binding arbitration and because of the risk that they will negatively affect pre-existing dispute resolution mechanisms.

Tax Treaty Obstacles in Implementing the Pillar Two Global Minimum Tax Rules and a Possible Solution for Eliminating the Various Challenges

This article addresses the interaction between the global anti-base erosion rules (GloBE rules, namely, the income inclusion rule, IIR, and the undertaxed payments rule, UTPR) with tax treaties. In particular, the article analyses potential limitations to the application of the IIR by the provisions of article 9 of tax treaties. Further, the article investigates possible obstacles to the application of the IIR to tax treaties that contain tax sparing clauses. The article then conducts a similar analysis with respect to the UTPR, which is assessed from the perspective of article 9 and the non-discrimination provisions of article 24. Furthermore, the article explores whether importing article 9(1) into the list of exceptions to the saving clause would be appropriate, and the related consequences. Thereafter, the article gives an insight into the problem of tax treaty overrides which may arise if the Pillar Two rules are implemented in national legislation without making relevant changes to tax treaties. Moreover, this contribution also explores the dispute resolution instruments available to solve potential tax disputes that could arise when “taxation not in accordance with the convention” is detected, as well as other tax disputes that could arise from inconsistent application of the GloBE rules. The authors also highlight possible ramifications under non-tax agreements for such situations. In light of the strong arguments made in this article which indicate that conflicts could indeed arise and treaty overrides could occur, the authors put forth a solution in the form of a safeguard clause – as opposed to a saving clause or interpretative MAPs – that policymakers can incorporate in their treaty network to ensure that the GloBE rules can be applied without triggering frictions with tax treaty law. On the other hand, if such a clause is not inserted into tax treaties, then there is a concrete risk that an unforeseen obstacle of considerable magnitude could arise on the path of the Pillar Two initiative. Of course, the Pillar Two rules should be applied within the boundaries of the safeguard clause and if a state goes beyond its authorization, a conflict with the provisions of the treaty could once again arise. This could then possibly give the taxpayers access to MAPs for misapplication or inconsistent application of the Pillar Two rules. Needless to say, such a clause needs to be implemented through a Multilateral Agreement, which the authors discuss in this contribution. Finally, the authors also analyse selected treaty law-related discrimination issues linked to domestic minimum taxes that are being contemplated by several jurisdictions.

Most Favoured Nation Clauses in Tax Treaties: Comparative Analysis and Main Issues

Over time, the use of most favoured nation clauses has seen widespread adoption in double tax treaties, especially in those agreed with developing countries. The use of such clauses, however, does not appear to have been supported frequently by tax policies and/or careful ad hoc analysis, e.g. on the structure, wording and consequences of these provisions in the relevant tax treaty networks. The lack of a model clause in the OECD and UN Model Conventions, and the proliferation of many variants could have played a role in this regard. Because of this, the application of this clause still today triggers many issues that can prevent, for example, its clear and correct interpretation and application and the enjoyment of legitimate treaty benefits by taxpayers or may entail challenges for treaty negotiations. These issues may relate mainly to the nature of such clauses and the policies behind them, as well as to the lack of a clear wording that can facilitate their application in different ways. In light of the above, the purpose of this article is to outline certain critical situations that could occur when applying such clauses. The analysis was conducted after assessing the historical background of most favoured nation clauses and carrying out a comparative analysis through the different variants used in the Chilean, Indian and Italian tax treaty network to assess if different approaches have been adopted so far by countries with different economic, legal and tax backgrounds.

Initiator conditions and the diffusion of digital trade-related provisions in PTAs

ABSTRACT Digital trade has become an important driver of global commerce and accounts for an increasing share of many countries’ economies. While progress in digital trade-related discussions at the World Trade Organization has been limited until fairly recently, the topic has gradually been gaining importance in preferential trade agreements (PTAs) since the early 2000s. As we also observe that digital trade governance has become increasingly politicized, we know little about these provisions’ origins and diffusion in PTAs. This research note discusses novel data and analyzes 91 digital trade-related provisions and 347 trade agreements signed between 2000 and 2019. In this note, we focus primarily on the initiator conditions and how these might lead to differences in diffusion patterns. We find that almost half of digital trade-related provisions were initially introduced by PTAs in which the United States was a signatory. Using negative binomial regressions, we find no evidence, however, that these provisions diffuse relatively more often than provisions first introduced by other countries. Our analysis shows that the diffusion of digital trade-related provisions is influenced by original trade interests and the existence of domestic digital policies at the initiator stage. Interestingly, we find that the initial degree of legalization of the provisions themselves matters for a more substantial diffusion, which contradicts the established view that soft law provisions are the preferred approach for new trade topics. This research note highlights the need to factor in the extent to which new international law obligations are adopted through the treaty networks as a result of initiator conditions addressing a certain blind spot in the diffusion literature. By focusing on the initiating states, we also speak to the literature on how international agreements serve to diffuse leading states’ preferred policy options.

Tax Treaties: What Are We Going to Do with Them?

This article charts the historical development of thinking about tax treaties, the issues raised by the current treaty network and the many new ideas from the past decade and pleads for careful consideration of the way in which treaties are employed in the future as instruments of international tax law.

Rebus sic stantibus as a Stabilizing Doctrine in the Climate Crisis

Abstract In the face of massive, unanticipated and even disjunctive changes, the balance of the respective interests of the state parties to existing treaties may no longer survive the changed—or changing—climate landscape. While, ideally, the co-contracting states to such treaties could mutually agree to terminate or revise their treaty obligations to accommodate such changes and redress the now imbalance of interests in the treaty, some scenarios are bound to be contentious. In such cases, is there any other procedure that can provide for an orderly and fair adjustment of treaties so as to avert a breakdown of the network of treaties and a destabilization of world order? This article proposes that the rebus sic stantibus doctrine may function as a stabilizing doctrine for maintaining and possibly adjusting treaty regimes in an orderly fashion. Unlike the doctrine of necessity or many explicit treaty carve-outs, such as the security exception of the US Model Bilateral Investment Treaty, the doctrine of rebus sic stantibus may allow for both an objective test and also one that must be pleaded before a third-party arbiter. For this reason, rebus operates within controlled limits. Rebus offers an international tribunal the opportunity to set out a fair termination or revision of a climate-impacted treaty. I trace the evolution of rebus as a stabilizing doctrine and illustrate the potentialities of its application to the climate crisis.

Bilateral Investment Treaty and Foreign Direct Investment in India

India has one of the largest Bilateral Investment Treaty (BIT) networks with other counties around the world. The BITs is to promote foreign investment by increasing investor confidence, empowering individual private parties to take international arbitral proceedings against the threat of appropriation by the government of the host country. This paper analyses the effect of BITs on FDI inflows in India using panel data for 76 countries for the time period 2000-2016 applying a dynamic panel generalised method of moments instrumental variable estimation method. The differenced GMM and system GMM estimates show a significant negative effect of bilateral investment treaties on the FDI inflows in India. While the lagged FDI has a significant positive effect, the financial openness of the source nations is reducing FDI inflows to India. The POLCON index shows that the countries with lesser political constraints have positive FDI outflow towards India. As opposed to domestic variables, the Chinn-Ito and POLCON indices have a greater share of change in FDI inflows to India. It seems that the BITs is not efficient enough to create investor confidence to invest in India.

Is Argentina Ready for the New International Tax Era?

We are facing a new era in the international tax system. Even though we have achieved consensus in many areas, adopting multilateral solutions or standardizing by establishing minimum standards, we are also facing unilateral measures due to a lack of consensus in other very sensitive areas. Argentina’s approach toward the international tax system has always been very dependent on the local politics. In very recent years, the objective of becoming a member of the OECD has made Argentina its best student. But it has not always been this way. To understand if Argentina is ready to face the new era that the international tax system is going through, we will review four relevant—and capriciously chosen—aspects of Argentine international tax rules, taking into account the evolution, current situation, and effects. We will analyze the tax treaty network, transparency policy, CFC rules, and taxation of digitaleconomy.

How Often Do OECD Member Countries Update Their Tax Treaties?

In this article, the authors report on the findings and the implications of their study on the time taken by the (founding) OECD member countries to update their treaty networks and align such networks with the (most recent version of the) OECD Model.

Navigating optimal treaty-shopping routes using a multiplex network model.

The international tax treaty system is a highly integrated and complex network. In this system, many multinational enterprises (MNEs) explore ways of reducing taxes by choosing optimal detour routes. Treaty abuse by these MNEs causes significant loss of tax revenues for many countries, but there is no systematic way of regulating their actions. However, it may be helpful to find a way of detecting the optimal routes by which MNEs avoid taxes and observe the effects of this behavior. In this paper, we investigate the international tax treaty network system of foreign investment channels based on real data and introduce a novel measure of tax-routing centrality and other centralities via network analysis. Our analysis of tax routing in a multiplex network reveals not only various tax-minimizing routes and their rates, but also new paths which cannot be found by navigating a single network layer. In addition, we identify strongly connected components of the multiplex tax treaty system with minimal tax shopping routes; more than 80 countries are included in this system. This means that there are far more pathways to be observed than can be detected on any given individual single layer. We provide a unified framework for analyzing the international tax treaty system and observing the effects of tax avoidance by MNEs.

Uruguayan Tax Residence and the Tax Holiday: Changes Affecting Individuals

This article examines the Uruguayan tax residence regime as amended by the most recent changes that apply from 2020 and 2021. It also describes certain key aspects of this special regime and its effect on Uruguay’s network of tax treaties.

Tax sparing clauses as a policy instrument of developing countries: evidence from the Latin-American tax treaty network

Developing countries frequently grant corporate income tax incentives in order to attract foreign direct investment. To secure the effectiveness of these measures at a cross-border level, tax sparing clauses secure a notional credit at residence, meaning a discount on the taxes due even if no or lower taxes were paid at source. These clauses prevent the home country of the investor from taxing that income, allowing the investor to retain the tax spared by the host country. This contribution examines the rationale of tax sparing and conducts an examination of the issue from the perspective of the Latin-American tax treaty network – comprising more than 250 treaties – to draw relevant conclusions from the analysis of the specific clauses included in these agreements.

Tax treaties and foreign equity holding companies of multinational corporations

Multinational corporations can organize indirect ownership chains with foreign equity holding companies in countries with low taxes and favorable tax treaties. This paper examines the relationship between tax treaty networks, multinational ownership chains, and effective tax rates by combining ownership and accounting data of multinational corporations with a network analysis of tax treaties. Empirical results suggest that multinational corporations organize direct or indirect ownership chains, consistent with the structure of tax-minimizing routes in a treaty network. The existence of a tax-minimizing direct route is estimated to decrease the probability of using a foreign equity holding company in an ownership chain by 6.2 percentage points. The existence of a tax-minimizing indirect route via a country is estimated to increase the probability of locating a foreign equity holding company in the country by 22.0 percentage points. Furthermore, multinational corporations appear to reduce their effective tax rates by using foreign equity holding companies in ownership chains.

Holes in the Silk: Investor Protection under China’s Belt and Road Initiative

Aiming to improve connectivity by building ‘roads’ that will channel economic development and achieve certain geopolitical and strategic objectives, the Belt and Road Initiative (BRI) is a critical element in China’s more comprehensive strategic play for a new and enhanced role in global economic governance. While often hyped by some as a modern form of the Marshall Plan, the BRI has been built on a weak foundation which threatens the economic and geopolitical objectives of the Initiative. This article focuses on the security of the Chinese international investment regime for private and state-owned investors confronting political and legal risks in BRI projects in various countries. Perhaps the greatest legal risk to Chinese investors is that China’s network of international investment treaties is insufficient to deal with the risks that Chinese investors face. After reviewing specific provisions and jurisprudence stemming from China’s treaties, the article provides possible mitigation strategies and solutions which China and investors can use to mitigate such risks.

‘Sharp Ears to Hear a Thunderclap’? The rise of mediation in the international dispute prevention and settlement system of the belt and road initiative

ABSTRACT The Convention on International Settlement Agreements Resulting from Mediation is one of the newest contributing factors to a virtuous circle upholding the foreseeable rise of mediation in cross-border business and investment disputes. This article analyses how the on-going institutionalization of the international dispute prevention and settlement system of the Belt and Road Initiative (BRI) is both being informed by, and is further contributing to, the global rise of mediation at a time when the international adjudicative system is in turmoil. The BRI is bound to generate a large number of complex international disputes ranging from international trade to investment and commercial disputes. This, in turn, has spurred two notable developments: 1) Chinese and regional arbitral institutions, legal regimes and investment treaty networks are currently adapting to better cater for the growing demand for commercial and investment arbitration in the context of the BRI. 2) The China International Commercial Court, which innovatively integrates ‘litigation, arbitration and mediation’ in its new ‘one-stop’ diversified settlement system, and a series of legal and institutional initiatives, namely the new International Commercial Dispute Prevention and Settlement Organization, are, in turn, paving the way for a greater use of mediation in cross-border business and investment disputes in the context of the BRI. This article examines these developments in the light of China’s broader relationship with international adjudication and elaborates on a number of arguments to help rationalising why mediation is gaining ground in the on-going institutionalization of the International Dispute Prevention and Settlement System of the BRI.

The Network of Bilateral Tax Treaties of the Slovak Republic – Does It Mirror Challenges of the Globalization through Digitalization? A Cluster Analysis Approach

Research background: Globalisations and movement of production factors - especially capital and workforces, call for elimination of double international juridical taxation and consequently for negotiation of bilateral tax treaties. Recently global network of bilateral tax treaties has reached immense size. Purpose of the article: The purpose of this paper is to analyse the network of bilateral tax treaties of the Slovak republic from the point of view of distance and level of development of the Contracting States. Methods: To reach this goal a cluster analysis method is applied where clustering variables are distance between capital cities of the Contracting States and measures of economic development. Findings & Value added: The main finding is that the Slovak republic’s bilateral tax treaties are clustered into 11 clusters, and three of them are the most numerous. This implies, that Slovak republic follows certain pattern when chosing Contracting Party. It is also found, that geographical location and distance have diminishing roles. Instead economic development and atractiveness of the country in terms of GDP per capita and total FDI inflow play more important role. These findings prove, that Slovakia no more follows old-fashioned pattern of chosing Contracting Parties based predominantly on distances, instead it adjust its policy of concluding bilateral tax treaties to globalization through digitalisation trend.

What Does Network Analysis Teach Us About International Environmental Cooperation?

Over the past 70 years, the number of international environmental agreements (IEAs) has increased substantially, highlighting their prominent role in environmental governance. This paper applies the toolkit of network analysis to identify the network properties of international environmental cooperation based on 546 IEAs signed between 1948 and 2015. We identify four stylised facts that offer topological corroboration for some key themes in the IEA literature. First, we find that a statistically significant cooperation network did not emerge until early 1970, but since then the network has grown continuously in strength, resulting in higher connectivity and intensity of cooperation between signatory countries. Second, over time the network has become closer, denser and more cohesive, allowing more effective policy coordination and knowledge diffusion. Third, the network, while global, has a noticeable European imprint: initially the United Kingdom and more recently France and Germany have been the most strategic players to broker environmental cooperation. Fourth, international environmental coordination started with the management of fisheries and the sea, but is now most intense on waste and hazardous substances. The network of air and atmosphere treaties is weaker on a number of metrics and lacks the hierarchical structure found in other networks. It is the only network whose topological properties are shaped significantly by UN-sponsored treaties.

Tax Treaty Obstacles in Implementing the Pillar Two Global Minimum Tax Rules and a Possible Solution for Eliminating the various challenges

This article addresses the interaction between the Global minimum tax rules (namely, the Income Inclusion and the Undertaxed Payment Rule) with tax treaties. In particular, the article analyses potential limitations to the application of the Income Inclusion Rule by the provisions of Article 9 of tax treaties. Further, the article investigates possible obstacles to the application of the Income Inclusion Rule to tax treaties that contain tax sparing clauses. The article then conducts a similar analysis with respect to the Undertaxed Payments Rule, which is assessed from the perspective of Article 9 and the non-discrimination provisions of Article 24. Furthermore, the article explores whether importing Article 9(1) in the list of exceptions to the saving clause would be appropriate and its related consequences. Thereafter, the Article gives an insight into the problem of tax treaty overrides which may arise if the Pillar Two rules are implemented in national legislation without making relevant changes to tax treaties, highlighting, in particular, the dimension of State responsibility. Moreover, this contribution also explores the dispute resolution instruments available to solve potential tax disputes where, by effect of the application of the GloBE rules, “taxation not in accordance with the convention” may be detected, also, hinting to possible ramifications under non-tax agreements. Finally, in light of the strong arguments made in this paper which indicate that conflicts could indeed arise and treaty overrides could occur, the contribution puts forth a solution in the form of a safeguard clause - as opposed to a saving clause or interpretative MAPs - that policy makers can incorporate in their treaty network to ensure that the GloBE rules can be applied without triggering frictions with tax treaty law. Of course, the Pillar Two rules should be applied within the boundaries of the safeguard clause and if a State goes beyond its authorization, a conflict could once again indeed arise with the provisions of the treaty. On the other hand, if such a clause is not inserted in tax treaties then there is a concrete risk that an unforeseen obstacle of considerable magnitude could arise on the path of the Pillar Two Initiative.

Protecting Foreign Direct Investment in the Belt and Road Countries

Key Points: - As part of a long-term strategy, China needs to improve investment treaty network to enhance protections for foreign investors. - In the short and medium-term, investors need to carefully consider investment insurance products to protect their foreign investments. - BRI investors need to be aware of existing venues for the solution of BRI disputes, such as the HKIAC, CIETAC, and the newly established CICC. - Mediation is a viable and increasingly effective way to solve BRI disputes.

Compatibility between the OECD’s Hard-to-Value Intangibles Methodology and the Arm’s Length Standard: What Is the Way Forward?

This article studies the compatibility between the hard-to-value intangibles (HTVIs) methodology adopted by the OECD Transfer Pricing Guidelines (OECD TPG) 2017 and the arm’s length standard (ALS). This new methodology provides tax administrations with a useful tool for dealing with the information asymmetry problem in relation to taxpayers when assessing transactions involving intangibles for which the valuation is highly uncertain. However, certain features of this new approach may contradict the ALS as enshrined in article 9(1) of the OECD Model and, consequently, as internalized at a domestic level within the income tax law and tax treaty network of many jurisdictions around the world. In this context, this article provides a comprehensive analysis of the OECD’s HTVIs methodology, from its conception in the United States to its final incorporation within the TPG, the tensions with the ALS that may lead to normative conflicts in different jurisdictions, and, lastly, the possible solutions that could amend this discrepancy.