The legitimacy of international taxation
Prof. Dr. Pasquale Pistone
Academic Chairman
The remote past of international tax law and tax treaties
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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
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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 arbitrage
2. Ensure consistency with goals of international tax policy, stability and flexibility
3. Provide with technical explanations, which allow to prevent or solve conflicts
related to the interpretation and application of tax treaties
From bilateralism to multilateralism
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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
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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
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Bilateralism
Allocation of taxing rights
Methods for relieving double taxation
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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
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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
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Identification of desirable global goals
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 law
The concrete implementation
– OECD > global forum for fiscal transparency, BEPS, …
– The United Nations
– EU and developing countries on good tax governance
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
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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
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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
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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
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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 nonOECD at all obliged to follow the technical interpretation?
And when two non-OECD countries are involved?
Conclusions
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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!
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