The legitimacy of international taxation

1. The legitimacy of international taxation Prof. Dr. Pasquale Pistone Academic Chairman

2. 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

3. 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: • Avoid loopholes across the bilateral tax treaty network and thus structurally reduce tax arbitrage • Ensure consistency with goals of international tax policy, stability and flexibility • Provide with technical explanations, which allow to prevent or solve conflicts related to the interpretation and application of tax treaties

4. 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

5. 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

6. 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

7. 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

8. Four steps to move towards multilateralism in taxation • 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?

9. 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

10. 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!

11. 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

12. Multilateralism in international taxation: OECD and non-OECD • Can the OECD influencebilateraltreaties with/between non-OECD countries? • Lack of participation in workinggroups and lack of democraticrepresentation? A problem of legitimation • OECD as best internationaltaxtreatystandards? Maybe, but for whatcountries? OECD taxtreaty policy must notnecessarilyreflectpriorities of non-OECD countries • The position expressed by non-OECD countries: theirfunction, similarities and differences with reservations on Articles and observations on Commentaries by OECD MSs • Are OECD MSstrulyobliged to follow the OECD MTC? • The nature of the Model and OECD recommendations • …butwhentheyvoluntaryadaptitsclauses to OECD, what are the consequences? • …and whatis the value of the commentaries in the light of the VCLT? And later • When an OECD patterned DTC isconcluded with a non-OECD country, are non-OECD atallobliged to follow the technicalinterpretation? • And whentwo non-OECD countries are involved?

13. Conclusions • The shiftfrombilateralismtomultilateralismrequiresmorethan an inducedcoordination of national sovereignty in tax matters • Itrequiresbroadlegitimacy in draftingtherulesandconditionsthatarethentobeimplementedat national level. This isespecially a problemfordeveloping countries • GFFT is a firstattempttoshift international taxationtowardsmultilateralismandcanproveveryeffective, also overcomingthe unilateral implications of measuresotherwisepursued in theworld, such as FATCA • BEPS isthesecondattempttoshiftinternatioanltaxationtowardsmultilateralism. It will certainlyproveeffectivewhenadopted, but will needtobroadenitsconsensus in ordertoachieve a trueshifttowardscoordinatedmultilateralism • Bilateral treatiesand national tax sovereignty will not disappear (exceptforissuesrelatedto tax informationexchange), but theirsubstance will beaffectedbymultilateralism

14. Thanks for your attention! p.pistone@ibfd.org