030FT Justice International Tax Law
030FT Justice International Tax Law
A Normative Review
of the International Tax Regime
Peter Hongler
IBFD
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Table of Contents
Preface xix
Abbreviations xxi
Part I
Introduction and Methodology
Chapter 1: Introduction 3
2.2. Structure 35
2.2.1. Part I 35
2.2.2. Part II 36
2.2.3. Part III 39
2.2.4. Part IV 40
v
Table of Contents
Part II
The International Tax Regime
3.1. Overview 47
vi
Table of Contents
vii
Table of Contents
viii
Table of Contents
x
Table of Contents
Part III
Political Philosophy as a Normative Reference Point
Introduction 285
xi
Table of Contents
xii
Table of Contents
Part IV
Normative Review of the International Tax Regime
xiv
Table of Contents
xv
Table of Contents
xvi
Table of Contents
References 527
xvii
Preface
A further thank you goes to the entire Academic Team at IBFD for taking
the time to discuss some of the most fundamental questions in international
tax law. Moreover, I greatly appreciated the inputs of all the participants
in round tables hosted at the Max Planck Institute in Munich, at IBFD in
Amsterdam and at the University of Zurich.
My most special thanks must go to my loving family – Eva and Basil, you
are simply the best! – and to my parents, who have supported me all these
years.
xix
Abbreviations
AG Argentina
AL Albania
AT Austria
ATAD Council Directive (EU) 2016/1164 of 12 July 2016 laying
down rules against tax avoidance practices that directly
affect the functioning of the internal market
BE Belgium
BEPS Base erosion and profit shifting
BGE Amtliche Sammlung der Entscheidungen des Schweizeri
schen Bundesgerichts
BRICS Brazil, Russia, India, China and South Africa
CARICOM Caribbean Community
CCCTB Common Consolidated Corporate Tax Base
CFA Committee on Fiscal Affairs
CFC Controlled foreign company
CH Switzerland
CHF Swiss Franc
CMAATM Convention on Mutual Administrative Assistance in Tax
Matters (2011)
CRS Common Reporting Standards
DE Germany
ECJ Court of Justice of the European Communities
ECOSOC United Nations Economic and Social Council
ECR European Court Reports
ES Spain
EU European Union
FATCA Foreign Account Tax Compliance Act
FFI Foreign Financial Institutions
FHTP OECD Forum on Harmful Tax Practices
FIFA Fédération Internationale de Football Association
GATS General Agreement on Trade in Services (1994)
GATT General Agreement on Tariffs and Trade (1947)
GDP Gross Domestic Product
GOP Grand Old Party (Republican Party)
HS Holy See
IBFD International Bureau of Fiscal Documentation
ICJ International Court of Justice
ICJ Reports International Court of Justice Reports
xxi
Abbreviations
xxii
Abbreviations
xxiii
Part I
Introduction
The starting point of modern international tax cooperation lies in the early
20th century and late 19th century. The double tax treaty1 between Prussia
and Austria and Hungary is generally known as the first double tax treaty
ever signed.2 The aims of international tax cooperation have, since the
beginning of such international (and in the meantime, not only bilateral)
cooperation, changed significantly. The work of the League of Nations in
the early 20th century and the later work of the UN and the OECD in the
second half of the 20th century had a focus on the avoidance of juridical
double taxation. In particular, the consecutive publications of the OECD
Model Convention (OECD MC) and the UN Model Convention (UN MC)
have been of major importance when it comes to the allocation of taxing
rights between two or more states and, therefore, the avoidance of interna-
tional juridical double taxation. Hundreds – even thousands – of double tax
conventions have been signed mainly based on these model agreements.3
1. In the following we will use the terms “double tax conventions”, “double tax trea-
ties” and “double tax agreements” simultaneously, even though the term “convention”
often indicates that an international agreement is a multilateral agreement and not only a
bilateral agreement. Nevertheless, in international tax law the term “double tax conven-
tions” is commonly used to describe bilateral agreements as well.
2. For further details about the development of the current network of double tax
treaties, see Braun & Zagler, p. 243 et seq.
3. Currently, more than 3,000 treaties have been signed. For further details see sec. 4.2.3.1.
4. See, with further references, Happé, p. 538.
5. OECD, Report on Harmful Tax Competition (OECD 1998).
3
Chapter 1 - Introduction
Not only have the goals of international tax law changed, but also the legal
instruments. Most of the aforementioned tax coordination has been and still
is rendered by signing double tax agreements and other bilateral tax agree-
ments. Recently, multilateral conventions have more often been employed.
Moreover, compared to the early work of the OECD and the League of
Nations, the most recent BEPS Project by the OECD and the work of the
Inclusive Framework not only suggests model provisions for double tax
conventions, but recommendations on the design of domestic tax rules have
also been published.
The OECD BEPS Project has indeed shifted international tax coordination
to another level. States are generally still sovereign regarding the levy and
enforcement of taxes; however, the BEPS Project seems to lead to a cer-
tain degree of harmonization with regard to domestic rules, and not only
with regard to the allocation of taxing rights according to double tax trea-
ties. Therefore, international tax policy is at a crossroads, as international
tax cooperation has reached a new stage and, depending on the success,7
policymakers might further follow such a path toward (partial or full) tax
harmonization or refrain from further cooperation projects. Enhanced tax
cooperation, however, requires that international tax policy considers the
interests of all involved and affected individuals and states. In this respect,
terms such as “justice” and “fairness” must be at the forefront of an inter-
national debate.8
6. There is much literature about the BEPS Project, but it is best to refer to the website
of the OECD, which provides all necessary documents for an in-depth understanding
of the content of the BEPS Project (see http://www.oecd.org/ctp/beps.htm, last visited
29 Nov. 2018). For further details about such recent developments, see also sec. 4.2.3.2.
For an intermediate analysis of the impact of the BEPS Project, see Christians & Shay,
p. 17 et seq.
7. The term “success” here should not indicate that harmonization is, per se, a wishful
result from a normative perspective. The latter question will be addressed in Part IV of
the present study.
8. The present study, as indicated in the title, mainly refers to the term “justice”, but
the terms “fairness” and “justice” are intertwined as, for instance, according to the Oxford
Dictionary (https://en.oxforddictionaries.com/, last visited 11 Feb. 2019), fairness means
“impartial and just treatment or behaviour”, whereas justice means “the quality of being
fair”. There is an intense debate among philosophers on the difference between the two
terms. An important discussion was, for instance, triggered by the fact that Rawls in his
4
Justice – Terminology and origin
The present study should be understood as a jigsaw piece of this very com-
plex debate about justice in international tax law at a crucial moment in
the potential crystallization9 of a more integrated international tax regime.
Although the term “justice” might not directly provide for very concrete
guidance on how a certain policy should be drafted, a debate about justice is
essential, particularly one that considers the various (contemporary) philo-
sophical studies about justice within a global world order and their fascinat-
ing findings. Moreover, such debate is vital, considering the lack of refer-
ence to demands of justice within (international tax) law in general.13 As
masterpiece A Theory of Justice (Rawls, 1999a, p. 1 et seq.) uses the subtitle “justice
as fairness”. In sec. 6.2.1. we will briefly outline the reasons why Rawls uses the term
“justice as fairness” in his theory of justice. For more details on the different aspects to
be considered when rendering a comprehensive distinction between the two terms, see
also Sen, 2009, p. 72 et seq. One reason for using the term “justice” instead of “fairness”
in the title of this work is that fairness in international law is sometimes used in a broad
manner with reference to procedural fairness. However, as the focus of the present study
is on the substantive content of fairness (see sec. 2.1.6.), the term “justice” better suits
our needs (see, for example, Franck, 1997, p. 7, who distinguishes between two aspects
of fairness – i.e. the substantive [distributive justice] and procedural [right process]).
9. This term is owed to Brauner, 2003, p. 259 et seq., who of course used it for other
purposes at a different development stage of the international tax regime. However, it seems
that the term is more useful than ever to describe the stage of the current international
tax regime, which is about to become more integrated and even harmonized. For a more
recent perspective, see Brauner, 2016, p. 1 et seq.
10. See generally Höffe, p. 26 et seq.; Finnis, p. 161.
11. See, for example, Radbruch, 1945. The interaction between legitimacy and justice
has triggered an entire debate in international law and will not be fully explored in the
present study (see generally Buchanan, 2004, p. 1 et seq.).
12. Kelsen, 1957, p. 1 et seq. and p. 43. See also Kelsen, 1960, p. 57 et seq.
13. See also advocating for an enhanced use of justice considerations within legal
studies and legal education Thürer, 2015, p. 357.
5
Chapter 1 - Introduction
It is indeed true that the available theories on defining a just global (tax)
order are manifold and can also be misused by policymakers in order to
achieve (unjust) results under the protection of justice. While justice may
not have a universal appearance, it is still essential to try to understand its
content and impact on tax policy. Tipke, with reference to Kant, has rightly
stated that if justice should not play any role in tax law, we should give up
our profession as tax lawyers or academics, respectively.17 The same must
be true for international tax law. The present study is not the beginning
of such a debate,18 but should provide new ways of thinking about justice
within the international tax regime.
6
Justice – Terminology and origin
First of all, it is crucial to understand that Aristotle drafted his ideas of jus-
tice with reference to various areas of relations.24 Commutative justice in
the Aristotelian understanding is often understood as justice between equal
parties,25 whereas distributive justice refers to subordination and, therefore,
justice among unequals.26 Commutative justice could, for instance, mean a
“victim of wrongdoing to be compensated equally, regardless of merits.”27
Nowadays, however, it is often referred to in order to claim justice or injus-
tice in an exchange process, such as a contract or a physical barter.28 In this
respect (i.e., in a situation of exchange), the “just is intermediate between
a sort of gain and a sort of loss.”29 Therefore, commutative justice “ignores
the differences in rank and worthiness [footnote omitted] of the persons
involved [footnote omitted].”30
22. See, inter alia, Mahlmann, p. 204 et seq.; Radbruch, 2006, p. 36; Senn, p. 54 et seq.
From a tax perspective, see, with further references, Tipke, 2000, p. 260 et seq. See also
Koller, 2014, p. 14, who outlines in detail the core elements of the term “justice”, which
have not changed over time and seem to be valid in very different societies.
23. For more details about the historical development of the term “distributive justice”,
see Fleischacker, p. 1 et seq.; Koller, 2014, p. 11 et seq. On the different varieties in
terminology, see Arnold, p. 32 et seq.
24. See generally Böckenförde, p. 113 et seq.
25. See, for example, Radbruch, 2006, p. 36. On these two terms, see Koller, 2014,
p. 17 et seq.
26. See, with further references to the work of Aristotle, Chroust, p. 140.
27. Fleischacker, p. 19.
28. See, for example, Senn, p. 55; Wiederkehr, 2008, p. 394. See also Gordley, p. 1590,
with further details on the application of commutative justice on both tort and contract in
the understanding of Aristotle.
29. Aristotle, 1132b para. 18 et seq.
30. Chroust, pp. 120 and 136.
31. Gordley, p. 1589.
7
Chapter 1 - Introduction
8
Justice as a domestic tax policy guideline
Studies about tax justice generally aim at answering the question of what the
appropriate allocation of tax burdens within a society is or how much each
member of a society should contribute. Different views have been developed
that have been based on different philosophical and political concepts, such
as libertarian approaches, including the proposal of Nozick,45 liberal ideas,
such as the idea of justice as fairness according to Rawls,46 more egalitar-
ian views, such as the theory of Marx or socialism in general, or utilitarian
39. This is influenced by the introduction of Rawls on the subject of justice. He argues
that his understanding of justice is related to the basic structure in a society, whereas
Aristotle did not deal with the specific requirements, but this means that there is not a
conflict between their understanding of the term, as they applied it to different accounts
(Rawls, 1999a, p. 9 et seq.).
40. See, with further references on the understanding of justice as a virtue, Arnold,
p. 27 et seq. We will also not deal with the interaction of justice with interpretation.
41. See also the persuasive introduction of Rawls, 1999a, p. 6 et seq.
42. OECD, OECD Guidelines for Multinational Enterprises, 2011 Edition (OECD
2011), p. 1 et seq.
43. For more information about the ten principles of the UN Global Compact, see
https://www.unglobalcompact.org/what-is-gc/mission/principles, last visited 19 Jan. 2019.
44. See chapter 2.
45. Nozick, p. 1 et seq.
46. For more detail see sec. 6.2.
9
Chapter 1 - Introduction
47. Mill, 2004, p. 85 et seq.; Mill, 2016, p. 1 et seq. Even though a consequent utilitarian
understanding is difficult to align with justice considerations as the final aim of maximiz-
ing the utility of all, as intended by utilitarian ideas, does not answer the question of how
to allocate the utility among all members of a society (Höffe, p. 39). In sec. 11.4.3.2. we
will deal with some of the critics of utilitarian views.
48. Bentham, p. 14 et seq.
49. For an overview on the different normative underpinnings of the domestic tax
system, see Leviner, p. 95 et seq.
50. The term “socialist” is intentionally used instead of the term “Marxist” because it is
unclear whether Marx was indeed a defender of distributive duties or whether he believed
an abolishment of capitalism would automatically lead to an abundance of goods and the
needs of distribution. For further details of the different understandings of Marx in terms
of distributive justice, see Fleischacker, p. 96. Of course, there is no clear definition of
what socialism means, but for the limited purpose of the present comparison, using the
term without further defining its content seems justified.
51. See, for example, Nozick, p. 1 et seq.
52. Gordley, p. 1589.
53. See Tipke, 2000, p. 241, who states that the understanding of tax justice is neither
absolute nor definitive. On fairness and tax law and the variations depending on the
underlying philosophical understanding, see Holmes, 2000, p. 14 et seq. For a historical
overview see Koller, 2014, p. 11 et seq.
10
Justice as a domestic tax policy guideline
highlight two elements of justice in domestic tax systems that are currently
agreed on by persons in most states.
First of all, there is wide agreement that in domestic situations, i.e. in a cer-
tain basic structure,54 taxation should follow equality considerations.55 This
means that members of a society should be treated equally to one another.
To be more precise, this means that if two citizens have the same income
and if they are in the same social situation (i.e., marriage, children, etc.)
there seems to be wide agreement that they should be treated identically
from a tax perspective. The latter understanding is often based on constitu-
tional principles of (horizontal) equality or equal taxation,56 but it seems at
first glance also valid from a normative perspective, following the idea that
human beings are to be treated equally by state institutions. In Part IV we
will deal further with this equality principle from a normative perspective
and its scope of application at an international level.57
Second, in a domestic situation, most people would agree that certain distrib-
utive measures are required as the market, following a libertarian approach,
would lead and has led to unjust inequalities.58 Currently, many countries
have implemented progressive income tax rates in order to achieve a certain
distributive effect. However, the extent of the need for redistribution highly
depends on the underlying political concept. Furthermore, as highlighted
by Matteotti with reference to Murphy & Nagel, even progressive taxation
does not guarantee a distributive effect, as the distributive effect highly
depends on the spending policy of a state.59 The work of Murphy & Nagel
is indeed a seminal example of how justice considerations and tax policy
interact. Their approach follows the idea that ownership or pre-tax income
is a myth in the sense that pre-tax income or ownership is not generated
and secured without any help from the government. Therefore, discussions
about justice and tax law should focus on the question of the distribution of
54. The term “basic structure” will often be used in the following. Our understanding
of what a basic structure means will be defined in sec. 8.3.
55. See, for example, with further references Matteotti, 2007, pp. 14 and 38. See also the
many citations in Tipke, 2000, pp. 284 and 290 et seq. The equality principle is sometimes
referred to as the prototype of justice (Wiederkehr, 2006, p. 40, with further references to
Kaufmann, Richli and Tschentscher).
56. See, for instance, article 14 of the Spanish Constitution or specifically regarding
taxation article 127(2) of the Swiss Federal Constitution.
57. See sec. 11.2.
58. See, with references to the theories of Nozick and von Hayek, Matteotti, 2007,
p. 41 et seq.
59. Matteotti, 2007, p. 43 et seq. See, on the interaction between the distribution of
income and equal taxation based on the ability-to-pay principle, Kaufman, 1998, p. 159
et seq.
11
Chapter 1 - Introduction
the after-tax income within a society, i.e., about the outcomes and not the
burdens.60 Or in other words, according to Murphy & Nagel, the distribution
of welfare by the market is not per se just, and, therefore, “we can no longer
offer principles of tax fairness apart from broader principles of justice in
government”.61 This means that tax justice cannot be separated from the
more general discussion about the distribution of governmental benefits.62
As we will see, the remarks on justice in the international tax regime are
not limited by these two demands, as the term “justice” might also contain
further components or elements that are crucial when rendering a normative
review of the international tax regime.63
12
Justice and the international tax regime – Some preliminary remarks
However, later in his book on tax justice, Tipke states that international tax
law should also be based on consequent and appropriate rules in order to
qualify as law.68 Yet, Tipke does not further develop how such rules would
look and whether the international tax regime in place in the early 1980s
actually followed these principles. Things have changed significantly in
the last 38 years, as states are not the only entities to claim just treatment
with respect to cross-border tax issues, but international organizations, such
as the OECD, also render projects based on fairness and justice consid-
erations.69 Furthermore, NGOs have played an important role by running
awareness campaigns on injustices within the international tax regime.70
However, the term “justice”, as we will develop it in the present study and
66. See Koller, 2009, p. 188, who uses the terms “transactional justice” and “correc-
tive justice”, which are both linked to the term “commutative justice”, depending on the
understanding. The term “corrective justice” is sometimes used as a synonym – especially
in the Anglo-American discussion – but there is no common understanding of the term
(see, for example, Arnold, p. 32 et seq.).
67. Tipke, 1981, p. 120.
68. Id., p. 186.
69. See the introduction to the BEPS Action Plan, OECD, Action Plan on Base Erosion
and Profit Shifting (OECD 2013), p. 7 et seq.
70. See, inter alia, Christian Aid, The Shirts off Their Backs, How tax policies fleece
the poor, September 2005, available at http://www.christianaid.org.uk/images/the_shirts_
off_their_backs.pdf, last visited 12 Jan. 2019; Oxfam, Tax Havens, Releasing the Hidden
Billions for Poverty Eradication, 2000, available at http://www.taxjustice.net/cms/upload/pdf/
oxfam_paper_-_final_version__06_00.pdf, last visited 19 Dec. 2018; Tax Justice Network,
tax us if you can, 2nd ed., 2012, available at http://www.taxjustice.net/cms/upload/pdf/
TUIYC _2012_FINAL.pdf, last visited 14 Sept. 2017.
13
Chapter 1 - Introduction
We will further deal with these different demands of justice in Parts III and
IV, and we will try to align these different demands of justice with the exist-
ing philosophical theories and ideas of justice.
14
Why is the international tax regime considered to be unjust?
As the following remarks will show, the international tax regime is consid-
ered to be unjust in various ways.76 No single reason is available to support
the popular opinion that the international tax regime is unjust. Different
elements have led scholars, NGOs, business representatives and politicians
to the conclusion that the international tax regime is unjust.
76. Of course, the claim that the international tax regime is unjust should ideally be
supported by an empiric study, but the mere fact that we did not find a single statement
that the international tax regime is considered to be just shows that it contains justice
deficiencies.
77. See, with further remarks on why the international tax regime is considered to be
unfair, Burgers & Mosquera Valderrama, p. 767 et seq.
78. OECD/G20, Measuring and Monitoring BEPS, Action 11: 2015 Final Report (OECD
2015), p. 102.
15
Chapter 1 - Introduction
The claim that multinationals do not pay their fair share due to the inter-
national tax regime is not only made with respect to the global tax situ-
ation, but also with respect to a specific country’s perspective. For instance,
Rachael Le Mesurier, a representative of Oxfam, with respect to New
Zealand, argued the following:
When there is so much inequality and poverty, it is utterly unacceptable that
large corporations like Apple don’t pay their fair share of taxes. The company
is making hundreds of millions of dollars here in New Zealand, but appears to
be paying a tax rate of just over one percent. That can’t be right, and must be
fixed.80
A third justice deficiency that was both discussed in public and highlighted
by scholars is that certain rules of the international tax regime seem to
have been implemented without the consent of states, which is perceived
to be unjust. Therefore, the sovereignty of states is infringed upon by for
cing certain states to follow certain international guidelines.82 For instance,
a Member of the Swiss Parliament has, in a debate on the corporate tax
reform III in Switzerland, held that tax legislation is a major element of state
sovereignty, and she implicitly concluded that the fact that states are forced
to change their laws due to international pressure is not driven by justice
considerations, but by the self-interest of other states:
„Wir befinden uns ja in einem bedeutenden Souveränitätsbereich des National
staates, nämlich der Steuerhoheit. Dass bei den internationalen Vorgaben und
79. OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), p. 8.
80. See Apple New Zealand must pay fair share of tax, says Oxfam, following European
ruling, published online at https://www.oxfam.org.nz/news/apple-new-zealand-must-pay-
fair-share-tax-says-oxfam-following-european-ruling, last visited 20 Apr. 2019.
81. Stiglitz & Pieth, p. 22. See also Henry, p. 43, who speaks of a “rise of a vast new
gray zone of quasi-legal economic activity”.
82. See Ring, 2008, p. 190 et seq., with many (official) statements with respect to the
OECD work on harmful tax competition.
16
Why is the international tax regime considered to be unjust?
Linked to such justice deficiency is the argument that not all states are
indeed on “equal footing”, as stated multiple times by the OECD.85 As a
result, there is currently no equality of states in international tax law, as
some strong economies have dominated the design of the international taxa-
tion realm.86
A fourth justice deficiency is that the current international tax regime under-
mines the sovereignty of states, as it triggers under-funding and must, there-
fore, be considered unjust:
Moreover, Base Erosion and Profit Shifting (BEPS) undermines the integrity
of the tax system, as the public, the media and some taxpayers deem reported
low corporate taxes to be unfair. In developing countries, the lack of tax revenue
leads to critical under-funding of public investment that could help promote
economic growth. Overall resource allocation, affected by tax-motivated be-
haviour, is not optimal.87
Or, “We are taking actions to ensure the fairness of the international tax
system and to secure countries’ revenue bases.”88
83. Keller-Sutter Karin, Swiss Parliament, State Council, Amtliches Bulletin (2015),
p. 1258 et seq.
84. Essers, p. 65.
85. In just the brief explanatory statement, the term “equal footing” is used 10 times
(OECD/G20, Explanatory Statement, 2015 Final Reports, p. 1 et seq.).
86. See, for example, Mosquera, 2015, p. 372 et seq. This is not an international tax
law-specific claim, but it has found reception in international law in general (see the
references in Altwicker & Diggelmann, p. 81 et seq.).
87. OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), p. 8.
88. G20, G20 Leaders’ Communiqué Brisbane Summit, 15 -16 November 2014, para. 13.
17
Chapter 1 - Introduction
A fifth group specifically argues that the international tax regime harms the
developing world, certain specific states or certain people:
Developing countries lose around US$100bn in tax revenues each year as a
result of corporate tax avoidance schemes that route investments through tax
havens. This does not include the full set of tax avoidance schemes used by mul-
tinational companies nor the billions of dollars that corporations gain because
of overly generous tax incentives.89
These injustices are part of a broader claim that the current world is highly
unjust as poverty and hunger still exist and inequalities are significant. It
is also argued that human rights deficits are caused by the international tax
regime, as argued by Pogge & Mehta:
Clearly, massive reductions in existing human rights deficits could be achieved
by allowing poor countries to collect reasonable taxes from MNCs and from
their own most affluent nationals, assuming the resulting revenues were ap-
propriately spent [footnote omitted].91
In more general terms, it is argued that the current international tax regime,
which (still) tolerates tax havens, fuels inequalities at a global level:
89. Blog Post, SwissLeaks: Why Corporate Tax Scandals Won’t go Away, Oxfam,
8 February 2016, written by Claire Godfrey and available at https://blogs.oxfam.org/
en/blogs/16-02-08-swissleaks-why-corporate-tax-scandals-wont-go-away, last visited
14 Sept. 2017, or see, for instance, AllianceSud, Global Volume 63 (2016), p. 4. Many
similar studies are mentioned by Pogge & Mehta, p. 4. See also Brock & Pogge, p. 2, who
claim that “tax abuse [footnote omitted] causes especially grave harm to development and
democracy in poorer countries”. Cf. Grinberg, 2016a, p. 15. The presumed detrimental
impact on developing countries is also mentioned by Henry, p. 32, and he combines his
arguments with a more general globalization and/or capitalism critic (see p. 34 et seq.).
See also Magalhães, p. 499 et seq.
90. Oxfam Media Briefing, Turn the Tide: The G20 must act on rising inequality,
starting with fairer global tax reform, 14 November 2014, p. 2.
91. Pogge & Mehta, p. 4. See also Christians, 2009a, p. 211 et seq.; International Bar
Association, p. 1 et seq. Similar concerns are raised in the following study UN, Human
Rights Council, Interim study by the Independent Expert on the effects of foreign debt
and other related international financial obligations of States on the full enjoyment of all
human rights, particularly economic, social and cultural rights, Juan Pablo Bohoslavsky,
10 February 2015, A/HRC/28/60.
18
Why is the international tax regime considered to be unjust?
Inequality rises when tax rules are unfair. When corporations pay less tax, prof-
its increase, and these profits accrue overwhelmingly to the top 10% and 1%
richest people especially. In the US, for example, about 80% of corporate in-
come is held by households in the top fifth of the income scale, and about 50%
is held by the top 1% [footnote omitted].
Governments make up shortfalls by levying higher taxes on other, less wealthy
sections of society. This is particularly unjust because corporations depend on
“public goods” that have been paid for by taxes, like educated and healthy
workforces and infrastructure like roads and ports.92
A sixth group of arguments implies that the international tax regime has led
to unfair competition. For instance, the OECD states the following:
Fair competition is harmed by the distortions induced by BEPS.94
Lastly, and likely the origin of injustices in the international realm, is the
claim for double or over-taxation in cross-border situations. Double taxation
has not vanished and is still considered to be unfair in both the public and
academic debate.95 Regarding the potential double taxation of multinationals,
a representative of a business association held, for instance, the following:
As a result, European companies already subject to tax in their home country
are now being asked to write a second cheque to American states. This double
tax is not only inconsistent with US tax treaties and international norms, but
also a violation of basic fairness.96
92. Oxfam Media Briefing, Turn the Tide: The G20 must act on rising inequality,
starting with fairer global tax reform, 14 November 2014, p. 5 et seq.
93. Tax Justice Network, Henry James S., The Price of Offshore Revisited, July 2012,
p. 45.
94. OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), p. 8. Again,
the OECD does not argue that the legal regime harms competition, but the statement implies
that the international regime enables BEPS and therefore leads to unfair competition.
95. However, very few authors discuss why double taxation is unfair. One could, for
instance, claim that it is unfair because it would lead to “over-taxation” (Matteotti, 2015/2016,
p. 55), but what “over-taxation” means and whether there is a moral difference between
the situation in which income is taxed twice at a rate of 10% or twice at a rate of 30%
is unclear. We will further discuss the application of the single taxation principle at an
international level in sec. 11.2.3.4.
96. McLernon Nancy, America’s unfair double taxation, Financial Times, 15 April 2010.
19
Chapter 1 - Introduction
20
Chapter 2
The scientific problem to be solved relates to the fact that the current inter-
national tax regime is considered to be unjust for several reasons.97 However,
before hastily running into a discussion about how to enhance justice in the
international tax regime, it is essential to define the methodology and outline
the structure in order to allow the reader a more stringent understanding of
the achieved results.
Some legal studies focus on the application of a specific positive legal rule
or several legal rules. These dogmatic studies deal, for instance, with the
question of how a certain fact pattern ought to be treated under an existing
legal regime. Such area of legal research is dedicated to the question of the
interpretation and application of legal norms de lege artis. In order to apply
and interpret a legal regime or a legal rule, lawyers around the world know
different, but often similar, methodologies that are habitually highly influ-
enced by the case law of a supreme court or which are – as is the case in
international law – influenced by contractual or customary guidelines, such
as the VCLT. Such dogmatic legal scholarship is part of the present study.
As we will outline in more detail, most legal rules of the international tax
regime derive their validity from the consent of states and, therefore, inter-
national dogmatic law studies need to apply rules that are based on inter-
state interaction. However, even in such traditional dogmatic methodology,
moral theory cannot be ignored.98
21
Chapter 2 - Structure and Methodology
A second part of legal research focuses on the question of what law ought
to be and not how it ought to be applied. An important task of legal science
is indeed to question an existing legal regime or specific rules in order to
review whether the positive legal system is indeed just and whether it serves
the purpose of justice or other moral claims.99 Justice, therefore, should also
play a major role in legal science.100 However, in order to answer the men-
tioned “ought to be” question, reference to other disciplines than law might
be necessary, as traditional legal methods seem insufficient to cope with
the need for a substantive and value-based analysis. Lawyers must consider
the limits of their expertise and methodology.101 In other words, by using
dogmatic methods, we might not be able to answer the question of whether
a certain rule or legal regime is just. This is – and we will demonstrate this
in the following section – particularly true with respect to international law.
99. Wissenschaftsrat, p. 27; from an international law perspective see Peters, 2013,
p. 548. Such a task is often linked to the discipline of “legislation” or “Gesetzgebungslehre”
bzw. “Rechtssetzungslehre”. See the seminal and comprehensive work of Noll, p. 1 et seq.
100. On the tasks of legal science arguing in a similar manner, see Thürer, 2015, p. 357.
101. Noll, p. 68.
102. For a detailed analysis on when reference to philosophy might be justified in a legal
analysis, see von der Pfordten, p. 128 et seq. See also Wissenschaftsrat, p. 27.
103. See Grundmann, p. 696; Peters, 2016, p. 26.
104. This will be reviewed in Part II of the present study.
105. Regarding international law in general, see Peters, 2007, p. 754.
22
Why refer to political philosophy?
of the core theses of the present study is indeed that the current international
tax regime lacks an underlying theory of justice and an in-depth understand-
ing of its main design principles.
23
Chapter 2 - Structure and Methodology
110. Peters, 2007, p. 754. See also Ratner, 2011, p. 159, who argues that “international
lawyers are engaging in debates about world order that parallel those among philosophers
concerned with global justice”.
111. Peters, 2013, p. 545 et seq.; Peters, 2016, p. 24.
112. See, for example, from a Swiss perspective, Richli, p. 123 et seq. See also, with
respect to legal philosophy, Seelmann, p. 59.
113. We will outline in detail the most recent and rapid changes in international tax law
in sec. 4.2.3.2.5. At the same time, as others have argued, interdisciplinarity has not been
replaced by other disciplines, but other disciplines have made legal studies richer and
more exciting (Balkin, p. 970). This means that by rendering an interdisciplinary study,
we will not question “our” legal discipline.
114. Peters, 2007, p. 743. See also Peters, 2013, p. 546. See also Besson & Tasioulas,
p. 4, who argue that, “the most pressing questions that arise concerning international law
today are arguably primarily normative in character”.
24
Why refer to political philosophy?
length principle in a very technical and dogmatic manner, if any, but legal
science should also review the justifications for an international tax regime
that is highly dependent on the arm’s length principle.115 In order to do
so, reference to other disciplines, such as political philosophy, is essential.
Therefore, the complexity of a legal order such as the international tax
regime does not necessarily increase the complexity of defining justice for
such an order but requires a higher level of abstractness.116
Fourth, when international rules are negotiated, very different legal sys-
tems collide with each other and very different cultures must interact. This
triggers the question of what is the lowest common denominator when it
comes to morality or ethical principles.117 In this respect, political philoso-
phy has already developed a more substantive understanding of what moral-
ity requires in an international realm in order to be appreciated by very
different legal systems and cultures. This might justify a detailed reference
to political philosophy, as it helps us to better frame such a lowest common
denominator of values and morality at an international level.
25
Chapter 2 - Structure and Methodology
this study.121 From our perspective, it seems unavoidable that at least parts
of legal research refer to moral theory, such as political philosophy, in order
to assess whether a legal regime indeed leads to justice. Political philosophy
as philosophy generally helps, moreover, lawyers to approach the truth in a
circumstance with no or not sufficiently worded positive rules.122
International tax law has also been interdisciplinary in the sense that schol-
ars argue that it is essential to outline the international law background or
framework before discussing new concepts within international tax law.
26
Why refer to political philosophy?
Besides international law and economics (or public finance), other disci-
plines such as sociology, international relations, anthropology, political the-
ory, moral theory and political philosophy have played minor roles in recent
decades and for the overall development of the international tax regime.132
However, in recent years, these studies have gained some momentum among
lawyers through authors like Benshalom,133 Christians,134 Dagan,135 Peters,136
Ring137 and Valta.138,139 This triggers the question of why international tax
law scholars should focus on moral theory or political philosophy.
The idea of focusing on political philosophy and tax law as one of the afore-
mentioned disciplines was triggered by the BEPS Project itself. Indeed, the
BEPS Project has generated an impressive number of publications from
(mainly) tax lawyers or economists arguing what would be necessary in
order to achieve a just, fair, and/or legitimate global tax system. The dis-
cussion about fairness and justice in these documents, however, is often
arbitrary, because the underlying concepts used are arbitrary. The latter does
not, as we will describe later in this study, mean that these publications
are not of importance for the discussion about justice in international tax
law. They are indeed valuable, but we are of the opinion that international
tax lawyers, policy advisors and academics should extend their horizon by
at least partly focusing on political philosophy, as international tax policy
130. In the following, we will use the term “international law”, as “international public
law” seems to be outdated (Besson, 2010, p. 168).
131. See sec. 4.1.2.
132. But see Richman (Musgrave), 1963, p. 22 et seq. Or, partly, Vogel, 1988c, p. 393
et seq.
133. Benshalom, p. 1 et seq.
134. Christians, 2009b, p. 99 et seq.
135. Dagan, 2017, p. 1 et seq.; Dagan, 2018, p. 1 et seq.
136. Peters, 2014, p. 1 et seq.
137. Ring, 2008, p. 156 et seq.
138. Valta, p. 1 et seq.
139. In alphabetical order. There are further contributions that should be mentioned.
See, for example, Essers, p. 34 et seq.; Gutmann, p. 27 et seq.
27
Chapter 2 - Structure and Methodology
Moreover, not referring directly to political philosophy, Singer has made the
following persuasive remark:
There is no alternative but to make arguments that elaborate fundamental hu-
man values and that express our considered commitments to judgments about
morality and justice. As budding lawyers, this is something law students must
understand. Judges partially base decisions on such considerations, and the
ability to make sophisticated arguments about justice and morality is a skill
all lawyers need.141
140. Rawls, 1999b, p. 128. See also Kleinbard, 2015, p. 27, who argues that “[a]ny
coherent fiscal policy ultimately is an exercise of moral philosophy”.
141. Singer, 2009, p. 904.
142. There is wide discussion in international law as to why states obey international law
obligations, even though there is no central body of enforcement. An interesting discussion
has occurred on whether the institutional improvements or improvements in the quality of
international law will improve compliance (see generally Koh, p. 2599 et seq.).
143. Sen, 2009, p. 413. See also Seelmann, p. 61, or Ratner, 2011, p. 171, who high-
lights the “analytic rigour” of philosophers, which might help lawyers better understand
or question some basic assumptions.
28
Why refer to political philosophy?
Benshalom even uses the term “alarming” to describe the gap among econo-
mists, policymakers and normative philosophers.145 It seems that philoso-
phers dealing with justice and legitimacy mainly focus on other fields, such
as international environmental law, trade law or in a more general way on
human rights. However, tax law itself is one of the core reasons for inequality
among societies or within a society, while also being one of the key instru-
ments to resolve such inequalities. Philosophers are themselves aware of their
importance also from a practical perspective. Tax scholars (and economists),146
on the other hand, are very reluctant to use normative theory in order to jus-
tify a certain provision of international tax law.147 In this respect, we do, as a
concluding remark, agree with Cohen & Sabel that the current changing tax
world order requires particular reference to political philosophy:
In times of transformation of fundamental human relations, political philosophy
can tell us where, in the space ranging from humanitarian obligation to egalitar-
ian justice, to look for answers, and can suggest what we might find.148
29
Chapter 2 - Structure and Methodology
We are, of course, not of the opinion that tax lawyers should attempt to
develop their own theories of justice, because our legal methodology is not
able to cope with the need for a philosophical theory of justice. Moreover,
scholars should be careful not to generalize both disciplines and merge them
into one non-defined realm, as this would weaken both disciplines.150
The importance of tax law from a philosophical perspective is that tax law
can have an enormous distributive impact both in a domestic and interna-
tional setting if one claims – as certain philosophers do151 – that there are
distributive duties among individuals living in different jurisdictions. Tax
law might even be the most suitable instrument to achieve such a goal at an
international level. However, we would be reluctant to propose new world-
wide taxes, such as Piketty,152 Pogge153 or Nussbaum154 in order to achieve
such distributive effects.155 The reason is that we already have a global tax
regime, so before introducing a new tax, it should be analyzed whether
and how the current international tax regime could be amended in order
to achieve distributive justice.156 In this respect, it might be our task as tax
lawyers to develop new ideas for amending the current tax system, rather
than simply asking for new worldwide taxes, such as the Pikettian wealth
tax or the Poggian worldwide dividend (i.e. tax) on resources. Or, as held
in more general terms by Ratner:
[L]awyers offer the base of knowledge of the process of international law-
making, the substance of current norms, and the role of international institutions
in formulating and implementing norms.157
30
Why refer to political philosophy?
Crucially, some philosophers have already dealt with international tax law
and its normative concepts.158 These authors have already referred to the
international tax regime as a legal regime and, therefore, there is already an
exchange between lawyers and philosophers. The present study should fur-
ther enhance such an interdisciplinary way of thinking and must be under-
stood as an attempt to lower the fences between the two disciplines, without
minimizing either discipline.
In his book The Law of the Peoples, Rawls refers to a realistic utopia in
which he develops a system of principles of justice. There are not just –
from his perspective ideal – liberal democracies in the world, but that same
world also consists (and will likely in the long term consist) of so-called
decent, but not liberal, societies, outlaw states and burdened societies. The
distinction between these different societies is essential in order to under-
stand Rawls’ The Law of Peoples.161 From Rawls’ perspective, only liberal
and decent societies are well ordered.162 Decent peoples might also be non-
liberal societies that meet some “specified conditions of political right and
justice” and, therefore, their citizens obey some sort of just law for the
society of peoples.163 On the contrary, an outlaw state is, according to Rawls,
created when a “state’s policies threaten [the other non-outlaw states’]
158. See Brock, p. 161 et seq.; Cappelen, p. 97 et seq.; Dietsch, 2015, p. 1 et seq.; Dietsch
& Rixen, p. 150 et seq.; Ronzoni, 2009, p. 229 et seq.; Ronzoni, 2014, p. 1 et seq.; Van
Apeldoorn, p. 1 et seq. Or see the contributions in the special issue 2014/1 of the journal
Moral Philosophy and Politics, or see the contributions in Pogge & Methaen, Global Tax
Fairness.
159. See, with some examples, Ratner, 2015, p. 32 et seq.
160. Rawls, 1999b, p. 11. See regarding the term “realistic utopia” as understood by
Rawls, Tasioulas, 2002, p. 368.
161. In his theory, there is even a fifth category of societies, i.e. societies that follow
benevolent absolutism. These are, however, not of interest for the present study (for further
details see Rawls, 1999b, p. 4).
162. Id.
163. Id., p. 3 (n. 2).
31
Chapter 2 - Structure and Methodology
security and safety, since they must defend the freedom and independence
of their liberal culture and oppose states that strive to subject and dominate
them.”164 Burdened societies as a last category are, according to Rawls,
societies that are burdened by unfavorable conditions.165 These societies are
not aggressive, but they lack crucial elements, such as resources, know-how
and human capital to become well-ordered peoples. Therefore, Rawls seeks
principles of justice at an international level that apply, notwithstanding the
fact that some states might domestically not follow a just state’s system
according to his liberal understanding within A Theory of Justice.166
This is also the goal of the present study, since we aim to challenge rules
and principles of the international tax regime by attempting to achieve a
just international tax regime that could be applied and considered as just,
even though one might argue that certain states being a part of such an
international tax regime do not domestically apply principles of justice in
a sufficient manner.167 This is already reflected in the current international
tax regime, as some states forming part of the international tax regime are
oppressing people and are generally considered to have an unjust domestic
political system in place.168 Therefore the results of the present study could
influence the design of the international tax regime, even though the domes-
tic political structure of the involved states that are part of an international
tax regime are manifold, i.e. some states might know a larger distributive
structure than others, some might be dictatorships, and others might be
democracies. We believe it is crucial to develop ideas “which may have the
power of transforming international relations, and which therefore contrib-
ute to ‘realizing utopia’ [footnote omitted]”.169
32
Why refer to political philosophy?
Therefore, the present study does not develop a just institutional system as
a world order based on ideal principles. We prefer to leave such incredibly
difficult work to philosophers. The most prominent limitation relates to
the fact that the current world order, with several sovereign states, will not
change into a one-single state or one-single institution order, i.e., as men-
tioned by Rawls “reasonable plurism limits what is practicably possible here
and now.”171 This means, however, that if the facts change, it might have an
impact on the normative claim. For instance, if we did not have a multistate
order in the Westphalian sense, but rather a single-state world, the normative
ideas of justice would change. Normative reasoning requires, therefore, a
precise analysis of the “apparent constraints”, as a normative concept would
otherwise be chosen due to the wrongful assumption of infeasibility.172 The
existing constraints might change over time. This is true from an interna-
tional tax law perspective. Reddy defines these constraints in the following
persuasive manner:
A constraint faced by an agent is a feature of the world that can reasonably be
judged to have the property that the agent cannot change it without substantial
cost or difficulty, if at all.173
Within the present study, the focus from a political philosophy perspective
is on the time after 1975, or more precisely, the time after Beitz’s work
on political theory and international relations.174 This time can be seen as
the latest important wave of philosophical studies about cosmopolitanism
and global justice, or of “ethics and international relations”.175 One may
even think of shifting the starting point to Rawl’s publication of A Theory
of Justice in 1972, as his book actually triggered the debate about global
justice, which was also within the work of Beitz and later contributors,
170. Benshalom, p. 22, with reference to Reddy. This is also brought forward in the
writing of Dagan, 2017, p. 15 et seq., who emphasizes the focus on the feasibility of
policy considerations. See also Rawls, 1999b, p. 83.
171. Rawls, id., p. 12.
172. Reddy, p. 119.
173. Id., p. 121.
174. Beitz, 1975, p. 1 et seq.
175. See, with further references, Cheneval, p. 24.
33
Chapter 2 - Structure and Methodology
The reason why reference is made in the present study to modern contem-
porary theories of political philosophy is their accessibility for “outsiders”
and their rather concrete proposals, which can conveniently be aligned with
the existing international tax regime, as will be described in Part II of the
present work. Nevertheless, in some instances, reference will also be made
to more classical philosophical studies, such as the work of Hobbes, Locke,
Mill or Kant. In particular, the work of Mill on utilitarianism and Kant’s
work on perpetual peace are also essential within the current debate about
the international tax regime, in general, and the allocation of income among
jurisdictions, in particular.
176. See sec. 6.2. For a more precise discussion of the development of the theory of
global or international distributive justice, see Beitz, 2005, p. 12 et seq.
177. Such a distinction relates to the debate about input and output legitimacy, as dis-
cussed and developed by Scharpf, p. 1 et seq.; see also Franck, 1997, p. 7 et seq. See,
from a tax perspective, Mosquera, 2015, p. 351 et seq. On the question of (tax) justice
within the legislative procedure at an international level, see Brauner, 2016, p. 6 et seq.;
Essers, p. 54 et seq.; Magalhães, p. 499 et seq.; Peters, 2014, p. 1 et seq. See generally
Thürer, 2009a, p. 21, who uses the term “democratic justice”. See also Marti, p. 103 et
seq., who argues that distributive justice also requires an analysis of how, for instance,
power is distributed internationally. The question of legitimacy is more closely linked to
legal sociology than to legal philosophy or philosophy in general. On legitimacy as one
task of legal philosophy see, for instance, Rehbinder, p. 23 et seq.
34
Structure
of Habermas and others.178 That being said, the question of deliberation and
institution building at an international level in order to enhance morality and
justice is a highly interesting and very relevant topic in international law, in
general,179 and international tax law, in particular.180
2.2. Structure
2.2.1. Part I
178. Habermas, 2009a, p. 1 et seq. See generally Tschentscher, p. 1 et seq.
179. See generally Kadelbach, 2004, p. 15 et seq.
180. See Mosquera, 2015, p. 344 et seq.
181. Ratner, 2015, p. 433.
182. See, however, the remarks on constitutionalism in sec. 4.4.
183. See Peters, 2007, p. 754 et seq.
35
Chapter 2 - Structure and Methodology
This means that when a study, such as the present one, aims at analyzing
whether a certain rule or principle within a legal regime, such as the inter-
national tax regime, is just or not and how to advance justice, we must use
strategies outside traditional legal methods, which has already been high-
lighted above in the present Part I.
2.2.2. Part II
36
Structure
188. See, e.g., Franck, 1997, p. 3 et seq. In his seminal work on fairness in international
law, he deals with environmental law, development and trade law, and investment law but
not tax law. Or see the treatise, International Law (Oxford University 2014), edited by
Evans, which has several chapters on the application of international law (i.e., the law
of the sea, international environmental law, international investment law, international
criminal law, international human rights law, the law of armed conflict), but tax law is not
referred to. See also the book on international law (Völkerrecht, C.H. Beck 2014) as edited
by Ipsen, which has a specific chapter on international economic law, but international
tax law is not mentioned. Although some topical analyses in the field of international law
already refer to the specifics of international tax law (see, for example, Lepard, p. 285 et
seq.; Meng, p. 441 et seq.). In particular, studies on jurisdiction in international law often
deal with international tax law (see, for example, Mann, 1964, p. 1 et seq. and Mann,
1984, p. 1 et seq.).
189. For a first overview on the relation between moral considerations and international
law, see Ratner, 2011, p. 155 et seq.
190. The term is used by Peters, 2013, p. 552. See also Altwicker & Diggelmann, p. 74
et seq.
37
Chapter 2 - Structure and Methodology
38
Structure
2.2.3. Part III
Part III discussed some of the recent and most relevant ideas and theories of
global justice or distributive justice in an international circumstance. Among
political philosophers, the terms “global justice” or “international distrib-
utive justice” have been used, inter alia, to describe the potential moral
duties among individuals worldwide. As the present study aims to demon-
strate whether international tax policy is indeed bound by certain duties,
and whether these duties have an impact on a potentially just international
tax regime, it is essential to better understand the underlying philosophical
concepts or normative theories.
Part III will start with Rawls’ A Theory of Justice and his later work The
Law of the Peoples, in which he develops principles of a just international
order.191 We will refer in detail to his principles of justice applicable at an
international level and, furthermore, we will demonstrate some of the weak-
nesses of the approach taken by Rawls. The latter task requires a detailed
analysis of left institutional and pure egalitarian ideas, such as those pro-
posed by Pogge, Beitz and Caney, but we will also refer to (other) right
institutional approaches, as developed by Nagel, Risse and Blake. Referring
to Rawls’ ideas as a starting point seems justified, inter alia, because his
A Theory of Justice was the decisive trigger for the current contemporary
debate about global justice or international distributive justice. Furthermore,
Rawls’ writings are of particular interest, as he develops principles of justice
in a domestic framework, as well as at an international level, which might
help tax lawyers to better frame the different demands of tax justice in a
domestic and international setting, if any.
191. See sec. 2.1.6. We mentioned that the starting point of the contemporary debate
about global justice was Beitz with his 1975 publication, but as it was also argued, his
work was highly influenced by Rawls’ domestic theory of justice. This is why we will
start with A Theory of Justice published by Rawls in 1972, even though the focus is on
contemporary theories published since 1975.
39
Chapter 2 - Structure and Methodology
a certain principle or rule is just and not how an ideal system should be
designed. The idea of justice of Sen might be more attractive and of par-
ticular interest for the present study, as Part IV is dedicated to an analysis
of whether some of the most fundamental principles and rules of the inter-
national tax regime should be considered just. The present study does not
aim to develop the perfect or ideal international tax structure, but it should
help to better understand – by referring to political philosophy – whether a
certain policy principle or rule indeed has a normative value, in the sense
that it increases justice at a global level.
Therefore, the goal of Part III is to develop guidelines that can help lawyers
to decide whether a certain policy, and derived from that whether a certain
rule or a certain principle, is just or whether justice requires to change or
amend a certain policy, principle or rule. This does, however, also mean that
we cannot ignore the transcendental theories of justice, as these theories
might also provide us with some guidance, for instance, to better frame
our argumentation as an analytical tool to decide whether a certain rule or
principle is indeed just.192
2.2.4. Part IV
In Part IV, we will first analyze if and how the different ideas or theories of
justice have been received within international tax law. We will demonstrate
how and why tax scholars have referred to one or several of the existing
theories of justice. Based on these remarks, some of the most fundamental
principles of international tax law will be outlined and it will be reviewed
whether these principles indeed have a normative value. Inter alia, the prin-
ciples of inter-nation equity, the ability-to-pay principle, the source prin-
ciple, the benefit principle and the principle of neutrality will be reviewed.
Furthermore, after a review of the most important principles that guide in-
ternational tax policy, we will refer to some central rules within the inter-
national tax regime, as outlined in Part II, and analyze whether these rules
indeed lead to a just tax system, or whether they do not have a normative
value. A selection was made based on their recent importance within the
discussion about improving the international tax regime.193
192. See sec. 7.7.2.2., which deals with the question of whether transcendental ideas of
justice are still relevant, even though one follows the idea of justice according to Sen.
193. For further details about the selection of the rules, see sec. 11.1.2.
40
Structure
As will be justified in detail, the present study will mainly rely on The Idea
of Justice according to Sen. The instruments of “normative reasoning” and
the “impartial spectator viewpoint” will be used to demonstrate whether a
certain principle or rule is indeed required to achieve a just international
tax regime or not. Such analysis will also contain remarks on how these
principles and rules ought to be understood in case they can indeed be seen
as a guideline for achieving a just international tax regime. As mentioned,
the methodology, in order to achieve appropriate results, is to use normative
reasoning and the various ideas and theories of global justice and interna-
tional distributive justice developed in Part III. Normative reasoning means,
as stated by Michels, to ask the deep questions about “justice, fairness, and
value that underlie our ordering of society”, or for the purpose of the pres-
ent study, that underlie the international tax structure.194 Normative reason-
ing as a method to analyze what justice indeed requires often boils down
to the question of “why?” Why should we apply a certain principle? Why
should a certain principle be based on a reason and why is such a reason
being considered to be normative? We will refer to questions such as: Why
should the international tax regime be neutral? Why should we only treat
persons resident in the same jurisdiction equally from a tax perspective and
not also persons in different jurisdictions? Why should there be equality of
states and what does it mean? Why is taxation where value creation occurs
considered just? And is it just to have a distributive tax system domestically,
but not internationally?
41
Chapter 2 - Structure and Methodology
If one uses normative reasoning and if one aims to develop rather definite
results, there is a considerable risk of not being impartial.196 However, as
we will demonstrate with reference to Sen, impartiality and determinacy are
not mutually exclusive. Lastly, the present study is not sufficient to develop
a detailed understanding of how a principle should be interpreted or how a
certain rule should be drafted, but the present study should at least provide
the foundation for further work in this respect.
42
Part II
In the following, we will outline the legal content of the international tax
regime. This means that we will mainly refer to rules stemming from the
sources of international law mentioned in article 38 of the ICJ Statute.
Reference to article 38 of the ICJ Statute has the advantage of a categoriza-
tion of the existing sources of international law, but it also has the disadvan-
tage of not being comprehensive enough. As we will develop below, we will
therefore use a broader understanding of the sources of international law
that regulate the international tax regime.201 The international tax regime, in
this respect, consists of binding and non-binding rules, which are the out-
come of international deliberations, and not simply the outcome of domestic
legislative procedures. Therefore, the distinction between national and inter-
national law for the purpose of the present study relates to the law-making
process, which is either a mere domestic or an inter-state process.202 For
the present study, transnational law such as domestic tax provisions cover-
ing cross-border fact patterns are not part of the international tax regime.203
Therefore, for instance, the (worldwide) well-known Aussensteuergesetz in
197. See Tipke, 1981, p. 44, even though he uses the term “order” instead of “regime”.
198. Krasner, 1982, p. 185.
199. From an international law perspective, see Crawford, p. 15 et seq.
200. With respect to the term “systematic” from a tax perspective, see Tipke, 1981, p. 47
et seq. From an international law perspective, there have also been certain ambiguities
with respect to the use of the term “international law system” (see, for example, Kohen,
p. 139 et seq.).
201. See sec. 3.2.
202. Besson, 2010, p. 167.
203. However, there will be a specific chapter on CFC rules (see sec. 12.3.) which are
technically speaking not part of the international tax regime.
45
The International Tax Regime – Scope of Research
Germany is not part of the international tax regime and is not part of the
analysis.204 A broader understanding of the international tax regime, how-
ever, would also require the inclusion of domestic tax rules with a reference
to cross-border or foreign fact patterns.205
The international tax regime consists of rules that regulate the taxation of
cross-border income, such as corporate income or individual income. We
will not specifically deal with other rules of the international tax regime
dealing with other taxes, such as VAT, inheritance or gift taxes, or any other
taxes or levies. The reason is that the international income tax regime is
the most diverse with respect to the rules regulating it, and secondly, the
international income tax regime seems to require more intense cooperation
than the other parts of the international tax regime. However, many results
of the present study might also be useful when reviewing the international
VAT regime or other international tax regimes, such as the international
inheritance tax regime.
The following analysis is, as far as it can be observed, the first comprehensive
outline of the international law framework of the international tax regime.
46
Chapter 3
3.1. Overview
Part II of the present study looks at the legal content of the international tax
regime. This means that this part of the study will analyze the actual sources
of international tax law and rules derived from these sources in more detail.
The international tax regime is not limited to double tax treaty law, i.e.
the allocation of taxing rights between two states by using a contractual
and consensual instrument, but it also consists, inter alia, of human rights
provisions, tax rules in non-tax agreements, customary international (tax)
law provisions, general principles of law and rules of soft law, as published
by international organizations. The aim of these rules and principles is to
regulate the international tax regime. The need for rules of international tax
law has obviously increased in recent years due to globalization, as inter-
national trade has consistently and significantly increased since World War
II. If there were no cross-border business, there would basically be no need
for international tax law.
The core part of the following analysis relates to the discipline of interna-
tional law. International law is understood as the law covering the relation-
ship between states, but also other bodies of international law (i.e. ius inter
potestates and not ius gentium).207 Nowadays, international law, however,
is regulating not only the inter-state relation but also, for instance, the func-
tioning of international organizations, areas beyond territorial sovereignty
(e.g. space law), or the duties and rights of individuals.208
207. See, with further details about historical development of the term “international
law” (Völkerrecht), Verdross & Simma, § 1 et seq.
208. Kälin et al., p. 6.
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Chapter 3 - The Theories and Development of International Law
as the need for a regulatory framework at the international level exists even
without a centralized power.209 We will render a concluding section on the
question of whether the international tax regime is indeed primitive.210
Moreover, and this goes beyond the present study, the question of whether
“something” is indeed law depends, of course, on the definition of what
law is; various positions have been brought forward, some with a particular
focus on international law.211 For the purpose of the present study, we indeed
agree with the statement of Franck that international law has reached a point
at which its existence as law can no longer be questioned.212 However, this
does not help in answering the question of why certain rules of international
law are valid. The validity of international law is traditionally derived from
two main justifications, i.e. naturalism and positivism. These two concepts,
which might overlap, will be described below.213 Before doing so, we will
discuss what the term “sources” means for the purpose of the following
analysis.
3.2.1. General remarks
209. With further reference, see Ipsen, in: Ipsen, § 1 para. 18 et seq.
210. See sec. 5.
211. See, for example, Hart, p. 213 et seq.
212. Franck, 1997, p. 6.
213. See sec. 3.3.
214. From an international law perspective see Boas, p. 45; Kolb, 2006, p. 1 et seq.;
Degan, p. 1 et seq. On the notion of “source of international law” see Besson, 2010, p. 169
et seq.
215. Von Savigny, p. 11: “Wir nennen Rechtsquellen die Entstehungsgründe des allge
meinen Rechts.”
48
The term “sources”
49
Chapter 3 - The Theories and Development of International Law
225. See, for example, regarding the good faith principle in international law, Müller,
p. 263 et seq.
226. See Boas, p. 45. For further details on this topic see Verdross, 1973, p. 98.
227. See, with further references, Peters, 2014, p. 70.
228. See sec. 4.3.3.
229. But see Thürer, 2009c, p. 171: “It seems to be more appropriate to consider soft law
acts as indications of the meaning behind, or the stages in, the development of international
law, rather than as international law itself.”
50
Naturalism and positivism
51
Chapter 3 - The Theories and Development of International Law
and Francisco Suarez, but also later to the work of Grotius and Pufendorf.
Naturalism, as a general (domestic) legal theory, has a much longer history
than it has in international law.233
52
Naturalism and positivism
For instance, Kelsen further outlined the idea of positivism in his book on
the pure theory of law. However, as demonstrated by others,245 Kelsen, being
a positivist,246 also refers to a “Grundnorm” as a hypothetical foundation of
all positive rules, i.e. a rule beyond a positive rule. This does not mean that
Kelsen refers to natural law, but it does show that the fundaments of law are
logically not based on a positive provision, as this would lead to a circular
argument.247 Obviously, the question of the source of source is delicate and
linked to inevitable logical problems in a positive judgment. For instance,
Onuf raised the question of the source of custom and concluded that there
is currently no answer available.248
53
Chapter 3 - The Theories and Development of International Law
legal act. Agreeing on a certain rule of international law could mean that
a state needs to consent to a specific rule in order to be bound by that
law.250 Therefore, in order to implement a binding international law provi-
sion, states must consent to such rules.251 However, consent as the basis for
international law also has a weakness, as there might not be genuine consent
due to economic pressures.252
Positivism in its raw form denies the validity of peremptory rules, such
as ius cogens. Therefore, positivism denies the possibility that interna-
tional law can be created without the power of sovereign forces.253 In other
words, positivism stricto senso denies any metaphysical justification of law.254
Following an extreme position, this would mean that states could agree on
a valid treaty, even though such a treaty would infringe on the dignity of
mankind. One could also derive from positivism that morality and law are
clearly separated. Therefore, it might be the case that a rule was created
through a proper process and is consequently applicable, yet still immoral.
Does the international law regime therefore follow naturalism or positiv-
ism?
250. However, for further details on consent and legal positivism in international law
see Besson, 2016, p. 289 et seq.
251. Friedrich, p. 381.
252. See sec. 4.2.1.5.2. See Tasioulas, 2007, p. 313, who outlines the shortcomings of
positivism as a concept to enhance the legitimacy of international law.
253. Crawford, p. 8.
254. Scheuner, p. 569. From a tax perspective see Tipke, 1981, p. 29.
255. Scheuner, p. 556 et seq. See also the reference to Justice Jackson’s Opening at the
Nuremberg trials mentioned by Boas, p. 13. See also the references in Marro, p. 331. A
second wave of what is called a “turn to ethics” was triggered by the Kosovo intervention
in 1999 (see, with further details, Peters, 2013, p. 548).
256. Friedmann, p. 75 et seq. See also Scheuner, p. 556 et seq.; for further details see
also Neff, p. 158 et seq.
54
Naturalism and positivism
It seems that the dispute between positivism and naturalism as two different
legal philosophical accounts is less “diametrical than it is alleged to be”.259
Moreover, neither positivism nor naturalism is a single justification for the
validity of the current system of sources of international law. On the one
hand, for instance, the usability of treaty law is clearly a sign of voluntarism
or positivism within international law, while on the other hand, the general
principles of law260 according to article 38(1)(c) of the ICJ Statute or ius
cogens seem to be a sign of natural law in international law.261 It seems,
further, that naturalism has recently gained some relevance as radical posi-
tivism has been replaced.262 Natural law, however, is not formulated in the
sense of a God-given law system, but in the sense that the current world
order as a system of equal and sovereign states requires that certain rules are
55
Chapter 3 - The Theories and Development of International Law
obeyed, even though these rules are not codified.263 As we will show, inter
alia, with respect to the term “fiscal sovereignty”, naturalism as a founda-
tion for legal rules is also relevant from a tax perspective.264 However, both
naturalism and positivism require that policymakers and academics refer
to normative reasoning either to demonstrate the validity of a rule within
naturalism or to use normative understanding in order to shape positive
rules.265 The latter, in particular, is the task within the present study, i.e. to
use normative reasoning in order to define how principles and rules within
the international tax regime should be designed. Therefore, normative rea-
soning might have other purposes in naturalism and positivism.
To conclude, international law has developed over recent centuries and has
passed through several schools of legal philosophy. These have significantly
influenced the current understanding of the sources of international law, but
they have also led to a system of sources with some unsolved theoretical
ambiguities. From an international tax law perspective, as a relatively young
subdiscipline of international law, these issues have not yet been given the
necessary attention.
56
The historical development of the current world order
the French Age (1648-1815), the English/British Age (1815-1919), the Age
between World War I and World War II (1919-1945) and the Age of the UN
(1945-).271
For the present study, the focus should be on the development of states
as sovereign bodies of international law.272 Through the Spanish Age until
1648, the European continent was marked by a fight over the secular au-
thority of the Emperor and the Pope, and the world was far from territorial
stability. Therefore, the principle of sovereignty over a certain territory was
a rather weak concept that changed after the Peace of Westphalia in 1648,
as accordingly, each state shall have the single power to govern its territo-
ry.273 Yet, others argue that the Peace Treaties of Münster and Osnabrück,
as the main content of the Peace of Westphalia, did not yet provide for the
principles of the modern law of nations, but at least they helped in creating
the necessary conditions for development of the new world order.274 Despite
the dispute about the actual importance of the Peace of Westphalia for the
development of the current world order, composed of approximately 200
sovereign states, there seems to be a variety of arguments showing that the
Peace of Westphalia must at least partly be seen as the starting point of the
modern international law order.275 The Peace of Westphalia is even consid-
ered one of the main origins of the current world order. However, this is
sometimes also referred to as an aetiological myth.276
271. Grewe, p. 1 et seq. See, with a different outline, Neff, p. 1 et seq. On the periodiza-
tion of the history of international law see generally Diggelmann, p. 997 et seq., who
reviews Grewe’s periodization on p. 1004.
272. For further details on the term “state’s sovereignty and fiscal sovereignty” see
sec. 4.1.
273. Lewicki, p. 43 et seq.; Tomuschat, 1993, p. 220 et seq.; Verdross & Simma,
§ 76. Regarding the development of peremptory norms after the Peace of Westphalia see
Hannikainen, p. 25 et seq. For an overview of the content of the Peace of Westphalia see
Schrijver, p. 66 et seq.
274. Lesaffer, p. 129 et seq. On this topic, see also Koh, p. 2607 et seq.
275. See Boas, p. 8.
276. Beaulac, 2004, p. 181 et seq.
277. The term “international community” has already been used and analyzed by many
scholars, also with respect to its relation to the term “constitutionalism” (see Tomuschat,
1993, p. 222, or for a more recent overview see Villalpando, p. 381 et seq.). Some even
use the term “international community school” (Fassbender, 2009, p. 54) to describe the
approach of Tomuschat and others who outline that there are certain constitutional rules
at an international level that regulate the “international community”. We will deal with
community interests and constitutionalism in particular in sec. 4.4.3.2.3.
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Chapter 3 - The Theories and Development of International Law
Age between 1648 and 1815 was of great importance in this respect, par-
ticularly the use of peace treaties among states in Europe in the post-West-
phalian world, is a sign that somehow a balance of power among states – at
least – in Europe had emerged.278 The decades after the Peace of Westphalia
further enhanced the development of law among states. One sign of such
development is that states have begun to sign international treaties among
themselves not in the name of an emperor, but on behalf of a state.
278. Grewe, p. 332 et seq., with a detailed analysis of the historical development. See
also Lesaffer, p. 129 et seq. For a more global approach toward the history of international
law see the regional contributions in Fassbender Bardo & Peters Anne (eds.), The Oxford
Handbook of the History of International Law (Oxford 2012).
279. Verdross & Simma, § 77 et seq.
280. See sec. 4.2.3.2.2.
281. Verdross & Simma, § 85.
282. From an international law perspective see Ipsen, in: Ipsen, § 2 para. 17. et seq.
283. See sec. 4.1.
284. De Wet, 2006, p. 54 et seq.; Tomuschat, 1993, p. 221.
285. Art. 103 UN Charter.
286. See art. 2(4) UN Charter.
58
The historical development of the current world order
international law. Moreover, during the time since World Word II several
international conventions to protect human rights have been implemented.
We will further deal with more recent developments in section 4.4.3. while
discussing the potential constitutional framework at an international level.
59
Chapter 4
4.1.1. State sovereignty
4.1.1.1. Overview
287. From a fiscal perspective see Cavelti, 2016, para. 251 et seq.; Simonek, 2010,
p. 552.
288. We do not see any disadvantage of not specifically focusing on what a state is in
order to further discuss the principle of fiscal sovereignty. Cavelti, 2016, para. 251, raises
the concern that a discussion about the relationship between the state and sovereignty
might end in a chicken-or-egg puzzle. The latter would mean that there is a causality
dilemma regarding the question of what was first − state or sovereignty. However, state
and sovereignty are logically not causally related. Both have developed in parallel, as
compared to the chicken and the egg dilemma. From our perspective, reference to state-
hood is therefore not crucial for a discussion of sovereignty.
289. See sec. 3.2.
290. For more details about the distinction between rules and principles, see sec. 11.1.1.
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Chapter 4 - The International Tax Regime
In order to define whether there are any rules or principles of general in-
ternational law292 derived from peremptory norms, such as the principle of
sovereignty, it is first of all essential to discuss the development of the term
“sovereignty” within political philosophy and political science.
291. Instead of legal precondition, one could also argue that sovereignty is an “a priori
consequence of … statehood” (Mills, 2014, p. 192). See, however, on the interaction
between statehood and sovereignty, supra n. 288.
292. In the following we will use the term “general international law” to describe the
non-treaty-based residual international law regime. For an in-depth analysis of the terms
“general” and “particular international law”, see Gourgourinis, p. 993 et seq.
293. See, with further details about the origins of the term “sovereignty”, Wildhaber, p. 425
et seq. Wildhaber (p. 427) states that Bodin’s definition of sovereignty “still dominates
the discussions in present-day public international law”. On the historical development,
see also Mann, 1964, p. 24 et seq.
294. Bodin, in particular, livres I, chapter 10.
295. Hobbes, in particular, part IV. On the differences between the three authors see
Wildhaber, p. 428 et seq. Of course, there are many further authors that should be added.
In particular, Rousseau’s work on sovereignty has been of great importance for the de-
velopment of a modern understanding of sovereignty.
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Sovereignty and jurisdiction – Key elements of the international tax regime
no positive international law exists and the relation between states reflects
mere co-existence based on a naturalist understanding of international law.296
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Chapter 4 - The International Tax Regime
4.1.1.3. Legal content
Many methods are feasible to approach and outline the content of the term
“sovereignty” from a legal perspective. In the following sections, we will
focus on internal and external sovereignty311 in order to better frame the dif-
ferent elements of state sovereignty as a legal rule, even though these terms
(internal and external sovereignty) are interconnected and even overlap one
another. Therefore, the purpose of splitting up the chapter on the content of
the sovereignty principle is to avoid a too-narrow analysis of the subject and
the aim is not to derive specific legal results from the distinction between
internal and external sovereignty.
305. Regarding fiscal sovereignty or the term “jurisdiction-to-tax” see Englisch & Krüger,
p. 519; Kaufman, 1998, p. 167 et seq.; Valta, p. 47 et seq. See also with further details
Gadžo, sec. 2.1.4.
306. On the requirements of customary international law see sec. 4.3.2.
307. From a tax perspective, it is self-evident to argue that fiscal sovereignty is an ac-
cepted principle, as there are more than 3,000 double taxation conventions.
308. For further details about the general principles of law as a source of international
law, see sec. 4.3.3. From a tax perspective concerning the principle of territoriality see
Opel, p. 15 et seq.
309. See, for example, the opinion of the PCIJ (PCIJ, Lotus, p. 18 et seq.).
310. With further reference on the ius cogens character of the principle of sovereign
equality see Efraim, p. 88, or sec. 4.4.3.
311. The terms are used by Epping, in: Ipsen, § 5 para. 138; Wildhaber, p. 435 et seq.
With further references see also Cavelti, 2016, para. 264 et seq.
64
Sovereignty and jurisdiction – Key elements of the international tax regime
4.1.1.3.1.
Internal sovereignty
312. Epping, in: Ipsen, § 5 para. 258. See also on the content of internal sovereignty
Wildhaber, p. 435 et seq. However, in recent decades the so-called “domaine réservé” has
been narrowed and restricted due to manifold developments such as human rights treaties
or environmental law. These developments cannot be fully outlined in the present study.
For further details see Ziegler, para. 1 et seq.
313. The term “citizens” is purposely not used, as we will further discuss in sec. 8.3.2.
who should be part of a coercive state system.
314. Crawford, p. 245.
315. Reports of International Arbitral Awards II (1928).
316. Epping, in: Ipsen, § 5 para. 138.
317. See sec. 4.2.2.
318. For a more profound distinction between the terms “sovereignty” and “jurisdic-
tion,” see Mann, 1964, p. 16. However, for the purpose of the present study, jurisdiction
is understood as an ingredient of sovereignty (Mann, 1984, p. 20).
319. Crawford, p. 456; Müller & Wildhaber, p. 373; Staker, p. 312 et seq. From a tax
perspective, inter alia, Picciotto, 1992, p. 308. The term “jurisdiction” is often used to
define the limitations of sovereign powers in international law (Mills, 2014, p. 194).
Therefore, these two terms (i.e. “sovereignty” and “jurisdiction”) are intertwined.
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Chapter 4 - The International Tax Regime
mer means, inter alia, the power to legislate, while the latter refers to the
power to take executive action.320
In the Lotus case, the PCIJ had to decide whether the flag state had the
exclusive criminal jurisdiction regarding criminal offenses on the high seas.
Turkey argued that such a rule had not become part of customary interna-
tional law at that point. The PCIJ held, inter alia, the following:
[T]he first and foremost restriction imposed by international law upon a state
is that – failing the existence of a permissive rule to the contrary – it may not
exercise its power in any form in the territory of another state. In this sense
jurisdiction is certainly territorial; it cannot be exercised by a state outside its
territory except by virtue of a permissive rule derived from international custom
or from a convention.323
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Sovereignty and jurisdiction – Key elements of the international tax regime
The PCIJ in the Lotus case held that states are allowed to exercise
jurisdiction in its own territory, in respect of any case which relates to acts
which have taken place abroad, and in which it cannot rely on some permissive
rule of international law. Such a view could only be tenable if international law
contained a general prohibition to States to extend the application of their laws
and the jurisdiction of their courts to persons, property and acts outside their
territory, and if, as an exception to this general prohibition, it allowed States to
do so in certain specific cases. But this is certainly not the case under interna-
tional law as it stands at present.324
In the Lotus case, the PCIJ reviewed whether there is any international rule
which would explicitly limit the jurisdiction of Turkey. It argued, inter alia,
that the rule according to which the criminal jurisdiction lies only with
the flag state is not part of customary international law. The outcome was
mainly based on the non-existence of the opinio iuris. Or, in the words of
the PCIJ:
Even if the rarity of the judicial decisions to be found among the reported
cases were sufficient to prove in point of fact the circumstance alleged by the
Agent for the French Government, it would merely show that States had often,
in practice, abstained from instituting criminal proceedings, and not that they
recognized themselves as being obliged to do so.326
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4.1.1.3.2.
External sovereignty
In the Palmas decisions in 1928, Max Huber as the sole arbitrator famously
held the following:
Sovereignty in the relations between States signifies independence.
Independence in regard to a portion of the globe is the right to exercise therein,
to the exclusion of any other State, the functions of a State. The development
of the national organisation of States during the last few centuries and, as a
corollary, the development of international law, have established this principle
68
Sovereignty and jurisdiction – Key elements of the international tax regime
of the exclusive competence of the State in regard to its own territory in such a
way as to make it the point of departure in settling most questions that concern
international relations.339
With regard to the term “external sovereignty”, reference is often also made
to the individual opinion of Judge Anzilotti in the Austro-German Customs
case:
Independence as thus understood is really no more than the normal condition
of States according to international law; it may also be described as sovereignty
(suprema potestas), or external sovereignty, by which is meant that the State has
over it no other authority than that of international law.
The conception of independence, regarded as the normal characteristic of States
as subjects of international law, cannot be better defined than by comparing it
which the exceptional and, to some extent, abnormal class of States known as
“dependent States”. These are States subject to the authority of one or more
other States. The idea of dependence therefore necessarily implies a relation
between a superior State (suzerain, protector, etc.) and an inferior or subject
State (vassal, protege, etc.); the relation between the State which can legally
impose its will and the State which is legally compelled to submit to that will.
Where there is no such relation of superiority and subordination, it is impossible
to speak of dependence within the meaning of international law.340
Building upon these ideas, it has been shown above341 that since the Peace
of Westphalia, the world order has developed into an international regime
containing various sovereign and independent actors (i.e. states). It has also
been demonstrated that the current international regime follows certain
unwritten, although peremptory, norms that guarantee the long-standing
existence of the regime itself, or norms that are a logical precondition of
the current world order. Therefore it is a crucial part of such an international
framework that sovereignty and fiscal sovereignty are indispensable,342 and
that the state’s sovereignty will still be essential with respect to the future
of international law.343
One part of external sovereignty is that all states are equal from a legal
perspective. In this respect, reference is also made to Goebel,344 who stated
in 1923 that “[n]ot only from the point of view of historical development
69
Chapter 4 - The International Tax Regime
but also from that of analytical jurisprudence the principle of the equality
of states stands forth as a useful and indispensable principle of interna-
tional law.” Or, as already mentioned by de Vattel: “Un nain est aussi bien
un homme, qu’un Géant: Une petite République n’est pas moin un Etat
souverain que le plus puissant Roïaume.”345 Furthermore, de Vattel makes
valid remarks on the basis of international law, which will also be relevant
in terms of the current status of international tax law and coercion mea-
sures among states. He argues that states might be forced to accept certain
unjust and objectionable outcomes, given that they are obliged to obey each
state’s liability, as states would otherwise endanger the natural international
community:
Il est donc nécessaire, en beaucoup d’occasions, que les Nations souffrent cer
taines choses, bien qu’injustes & condamnables en elles-mêmes, parce qu’elles
ne pourroient s’y opposer par la force, sans violer la liberté de quelqu’une &
sans détruire les fondements de leur Société naturelle.346
However, one does not need to render a detailed historical analysis to dem-
onstrate that factual equality among states has never been achieved in an
absolute manner.347 There have always been stronger and weaker states that
have less power to steer the development of international law, and this has
already been an important topic of international relations theory.348 From
a normative perspective, we will again refer to the principle of equality of
states when discussing the principle of “inter-nation equity”.349
Lastly, sovereignty does not mean that a state must not conform to gen-
eral international law and its peremptory norms. This finds support in
Kelsen’s opinion, who states that a subject’s freedom within a legal order
is limited by the equality of the subjects within the same order: “[E]ine
Rechtsgemeinschaft, in der die Freiheit der Subjekte (Staaten) durch ihre
grundsätzliche rechtliche Gleichheit beschränkt wird [footnote omitted].”350
In other words, the legal sovereignty of one state is somehow limited by
its participation within the international community or the world, as such.
Therefore, the current world order with equal states requires that each
state respects the other states’ sovereignty, and each shall be in principle
70
Sovereignty and jurisdiction – Key elements of the international tax regime
independent and equal.351 On one hand, this means that a state shall not
interfere in another state’s territory, while on the other hand, states shall
respect the jurisdiction of other states.352 The former, i.e. the prohibition of
intervention, is also referred to as the “key element” or the “Grundnorm” of
the sovereignty principle.353 We will, moreover, dedicate a particular chap-
ter to the question of whether an international constitutional framework has
developed which would systematically limit the traditional understanding
of sovereignty.354
4.1.2. Fiscal sovereignty
351. Mann, 1964, p. 15, with reference to the limitations of jurisdiction in the interna-
tional realm. See also the UN, Declaration on Principles of International Law concerning
Friendly Relations and Co-operation among States in accordance with the Charter of the
United Nations, A/RES/25/2625. See also Cohen, p. 269 et seq.
352. Crawford, p. 447; Wildhaber, p. 438. On the former point see Epping, in: Ipsen,
§ 5 para. 261. See also Mann, 1964, p. 28, with reference to a statement of the US Supreme
Court Justice Story in 1824: “The laws of no nation can justly extend beyond its own
territories, except so far as regards to its own citizens.”
353. Krasner, 1999, p. 20, with reference to Jackson.
354. See sec. 4.4.
355. Graetz, p. 277. For further details about the terms “tax sovereignty” or “fiscal
sovereignty” see also Postma & Schwarz, p. 786 et seq.; Ring, 2008, p. 156 et seq. See,
at least with respect to direct tax competences of a state, Steichen, p. 43.
356. See, for example, Oberson, 2014, p. 1. Some authors also distinguish between
a principle of territoriality (“Territorialitätsprinzip”) and a principle of personality
(“Personalitätsprinzip”), see Englisch & Krüger, p. 515.
357. See Albrecht, p. 145, who states that the right to tax (i.e. jurisdiction-to-tax) is
an “aspect of sovereignty”. Or later in his seminal article he states that the “right to tax
aliens is a prerogative of the sovereign state” (p. 185). See Griziotti, p. 18 (“Le droit de
71
Chapter 4 - The International Tax Regime
lever l’impôt a nécessairement son origine et son fondement ou titre juridique dans la
souveraineté de l’État, laquelle s’exerce sur quiconque appartient à l’État”). See also
Martha, p. 15; Monsenego, p. 46; Schoueri, p. 691.
358. Martha, p. 64. See also McLure, 2001, p. 328 et seq.
359. See sec. 4.1.1.3.1.
360. Hellerstein, 2014, p. 346 et seq. On this terminology see Mann, 1964, p. 13.
361. See sec. 4.1.1.3.1. From a tax perspective see, for instance, on the question of
whether the embassy of Bosnia and Herzegovina was allowed to levy taxes from the
diaspora resident in Switzerland, with further references see Kälin et al., p. 200.
362. Martha, p. 18 et seq. See also Albrecht, p. 145 et seq., who does not mention the
realistic or empirical theory as its own category. Reference to these studies is also made
by Peters, 2014, p. 72 et seq. Furthermore, the work of Griziotti, p. 5 et seq., and Allix,
1937, p. 35 et seq., are ground-breaking studies in this respect. The distinction between
the four categories is not crystal clear as, for instance, the contractual theory could also
be understood as an ethical theory.
363. See Albrecht, p. 148, with reference to Griziotti.
364. See for further details sec. 11.6.
365. With reference to further variances on the contractual understanding see also Albrecht,
p. 146 et seq. See also Griziotti, p. 31, with reference to the work of Saredo.
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Sovereignty and jurisdiction – Key elements of the international tax regime
relevant for Part IV, when discussing the normative validity of some of the
most important design principles of international tax law, such as the benefit
principle and the source principle. However, as stated by Albrecht, the right
to tax (aliens) “is justified in international law essentially as an attribute to
statehood or sovereignty”366 (i.e. the sovereignty theory). Therefore the legal
claim to tax someone’s income is, as already indicated, indeed a legal claim
derived from the sovereignty principle.
Several authors have then further made a distinction between fiscal sov-
ereignty based on personal, territorial or functional elements in order to
describe the extent of fiscal sovereignty, i.e. the right to tax, in a more com-
prehensive manner.367 In simplified terms,368 personal sovereignty relates to
nationality or residency as a potential justification for tax jurisdiction of a
state on its people. Territorial sovereignty means that a state has the right to
levy taxes on foreigners if they are present in a certain territory or if part of
their income was created in a certain jurisdiction; functional sovereignty is
relevant if there is stateless income or an international organization with no
territory, but government-like competences. In principle, we share the view
that fiscal sovereignty can legally be based on different elements, but the
third element of sovereignty, i.e. functional sovereignty, is not a persuasive
category in our perspective. As will be developed below, the “genuine link
doctrine” better suits the need to comprehensively outline the scope of fiscal
sovereignty as a legal rule, and we do not see a specific need to make the
mentioned categorization. From our viewpoint, the genuine link doctrine is
better aligned with other understandings of jurisdiction in other fields of in-
ternational law. However, the practical difference in the results of a threefold
approach, as suggested by Martha,369 or following the genuine link doctrine
might be minimal or even nonexistent.
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also in line with the case law of the ICJ, inter alia, in the mentioned Diallo,
Nottebohm and Barcelona Traction cases.371
4.1.2.2.1.
Preliminary remarks
Many tax law scholars have argued that fiscal sovereignty means that a state
has the right to tax a certain income or person, so long as there is a genuine
link to its territory.372 Or, as also stated by Lang in a negative manner, “[i]t
is only when neither the person nor the transaction has any connection with
the taxing state that tax cannot be levied.”373 This means – and this has also
been confirmed by several courts – that a person, be it an individual or a
corporation, shall not be taxed if it does not have any link to a certain coun-
try.374 In other words, as mentioned by Rivier, fiscal sovereignty is actually
limited by the fact that it is linked to a certain territory: “La souveraineté
fiscale est limitée par le fait qu’elle est rattachée à un territoire.”375
371. The Nottebohm case seems to be the leading decision (ICJ, Nottebohm Case, p. 23
et seq.).
372. Douma, 2006, p. 523 et seq.; Englisch & Krüger, p. 512 et seq.; Locher, 2005,
p. 56 (n. 15) and with further references Lehner, in: Vogel & Lehner, 2015, Grundlagen
para. 11, who uses, with reference to a German Supreme Court decision, the German term
“sachgerechte Anknüfungsmomente”. See also Oberson, 2014, p. 1 et seq., who refers to
the French term “lien suffisant”. Furthermore, Simonek, 2010, p. 556, with further refer-
ences, speaks of a meaningful and actual link (“sinnvolle und tatsächliche Anknüpfung”).
See also Dahm & Hamacher, p. 126; Martha, p. 46 et seq.; Schoueri, p. 690 et seq.; Valta,
p. 45 et seq.
373. Lang, 2013, para. 2.
374. See, for example, IN: Income Tax Appellate Tribunal (India), Metro & Metro v. ACIT,
I.T.A. No.: 393/Agra/2012, 1 Nov. 2013, § 15. See also Van Raad, p. 19, or with further
references, also Peters, 2014, p. 72 et seq. See also the various references in Englisch &
Krüger, nn. 36 and 37.
375. Rivier, p. 31.
376. See sec. 4.1.2.2.3.
377. See sec. 4.1.2.2.4.
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Sovereignty and jurisdiction – Key elements of the international tax regime
4.1.2.2.2.
The meaning of “genuine link” from an international law
perspective
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instance, to claim that a state has per se jurisdiction over its nationals in all
areas of law. In certain areas, it would infringe general international law
obligations if a state claimed jurisdiction based on nationality.385
385. See Mann, 1984, p. 24 et seq., who, for instance, argues that it would be too far-
reaching if Britain would oblige all its nationals to sell whiskey at a certain minimum
price, even beyond its borders.
386. Relativity in two senses: (i) the connecting factors might deviate, depending on
the area of international law, and (ii) the connecting factors might change over time.
387. See US: Court of Appeals for the Second Circuit, United States v. Aluminum Co.
of America et al., 148 F.2d 416, 12 Mar. 1945. For an overview, see Staker, p. 318 et seq.
388. With reference to further cases with a less strict application of the effects doctrine
see Crawford, p. 479. See for further details Alford, p. 1 et seq.; Scott, p. 92 et seq.
389. For further details with respect to opposing positions see Crawford, p. 480.
390. See, for example, with further references Schultz, p. 811 et seq.
391. For a detailed study see Alford, p. 27 et seq.; Scott, p. 87 et seq.
392. ICJ, Barcelona Traction, Light and Power Company, Limited, p. 42.
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Sovereignty and jurisdiction – Key elements of the international tax regime
Moreover, the genuine link doctrine might be refined from time to time due
to technological progress. For instance, the digitalization of the economy
has triggered the need for new connecting factors, such as digital presence.
To conclude, even though there is no consent about the quality of the genu-
ine link, it is generally accepted among international law scholars that a
certain link (i.e. personal, territorial or any other) is required.393 As general
international law needs to regulate very different areas, it makes sense, how-
ever, that there is no single definition of what a genuine link is.394 Therefore,
general international law does not provide for clear guidance on the ques-
tion of jurisdiction, except in a few cases which have been decided by the
ICJ, such as the mentioned Nottebohm, Barcelona Traction or Diallo cases.
4.1.2.2.3.
The meaning of “genuine link” from an international tax law
perspective
It should again be highlighted that the genuine link doctrine is, according
to our understanding, based on a peremptory rule derived from state sover-
eignty and not based on customary international law or a general principle
of law.395 In other words, the genuine link doctrine is a legal precondition of
the current world order. Infringing on such a principle would question the
entire legal system, which is based on the equality of states.
As there are different areas of tax law, the question of whether there is
a genuine link might require a subject-related analysis in order to justify
jurisdiction. Each area of tax law might require different links. In particular,
regarding criminal tax law, specific guidance might exist.396 Another ex-
ample would be financial transfer taxes (or non-personal taxes, in general),
as the context in which such taxes operate might trigger different genu-
ine links.397 However, for the purpose of the present study, the focus is on
393. See, for example, Boas, p. 246, who speaks of a “real link”.
394. See id., who mentions the following example: “[T]he mere presence of tourists
within the state’s territory for a few days might represent a sufficient connection to support
a requirement to register with police, but not to allow them to be conscripted for military
service [footnote omitted].”
395. From a tax perspective see Schön, 2015, p. 280. See also Martha, p. 43, who argues
in a similar manner: “Still one basic rule remains – which for some is a customary rule
[footnote omitted] but should rather be envisaged as an a priori presupposition stemming
from the very concept of international law – that must serve as the most fundamental and
basic test in matters of international taxation: A state may only fiscally attach those facts
that are subject to its supremacy (sovereignty).”
396. For further details see Crawford, p. 457 et seq.; Müller & Wildhaber, p. 386 et seq.
397. Englisch & Krüger, p. 513 et seq. See also Dahm & Hamacher, p. 123 et seq.
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the genuine link as a justification for income taxation, i.e. either personal
income or corporate income taxation. In this respect, it is decisive to con-
sider the result and the purpose of a presumed genuine link. For instance,
a certain link might only justify limited tax liability, whereas another link
might justify unlimited tax liability (i.e. taxation of worldwide income). As
mentioned above, a link must always be justified in relation to its purpose:
the purpose of creating unlimited tax liability might require a different link
quality than for the justification of only limited tax liability.
Many authors have explicitly dealt with the question of genuine link and
fiscal sovereignty. For instance, it is the opinion of Hinnekens that the
link of a person that justifies taxation can be manifold if it is sufficiently
close.398 However, he does not further discuss what “sufficiently close”
means. Monsenego even states that, “[c]onsequently, although one may
instinctively support the view that some connection should be required
by international law, the impossibility to objectively define it impedes this
view.”399 Other authors have used categories in order to visualize the various
issues at stake. For instance, Martha, as previously mentioned, distinguishes
between personal sovereignty, territorial sovereignty and functional sover-
eignty when discussing the question of jurisdiction-to-tax. However, he also
admits that these categories are “three modalities of one genus”.400 From our
perspective, such a distinction might indeed help to better understand the
entire scope of application of the genuine link doctrine. However, as men-
tioned, the categories used by Martha as such have no legal value.401 From
an international law perspective, the link itself might indeed be a personal,
territorial or functional link, or even another link that is not covered by the
categories of Martha.
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Sovereignty and jurisdiction – Key elements of the international tax regime
402. Avi-Yonah, 2004, p. 489; Monsenego, p. 36 et seq. See, with many references,
Martha, p. 1 et seq.
403. IN: SC, GVK Industries Ltd. & Anr. v. ITO, Civil Appeal No. 7796, 1 Mar. 2011,
para. 40.
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This means from a general international law perspective that a state has, for
instance, the right to tax part of the income of a sportsman if such a sports-
man only spends a few hours in a jurisdiction due to a competition.406 Or,
as we have argued at another instance,407 the requirement of a fixed place
of business in order to create a permanent establishment (PE), according to
article 5 of the OECD MC, does not form part of general international law;
therefore, it would be compatible with general international law if a state
taxes business income based on a virtual or digital presence, i.e. if an enter-
prise generates income in a state without being physically present.408 As a
consequence, a state could tax an enterprise that has no physical presence
in its state. However, it once again remains a question whether states ought
to have a taxing right in these circumstances from a normative perspective.
404. See secs. 11.5. and 11.6. See Staker, p. 329, who questions whether there is indeed
a clear theoretical answer to the problem of defining the link that justifies jurisdiction in
general.
405. Schön, 2009, p. 92.
406. In this sense, see UK: House of Lords, Agassi v. Robinson [2006] UKHL 23,
17 May 2006. I owe this reference to Monsenego, p. 57.
407. For more details see Hongler & Pistone, p. 16.
408. For more details see id., p. 19 et seq.
409. See the seminal work of Mann, 1964 and 1984, p. 1 et seq., who aims at finding a
general description of the threshold for jurisdiction.
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Sovereignty and jurisdiction – Key elements of the international tax regime
4.1.2.2.4.
Individuals: Citizenship as a sufficient genuine link
Individuals are generally taxed in the current international tax regime if,
inter alia, a person has his domicile in or is a resident of a jurisdiction, a
person owns immovable property in a certain jurisdiction, or if the income
of a person stems from a source in a jurisdiction. In all these cases, there
seems to be consent that general international law does not prohibit taxa-
tion, as that represents a sufficient link to the territory of a certain state.410
However, bearing in mind that only the United States refers to citizenship as
the triggering criteria for taxation,411 it is worth briefly discussing whether
citizenship reflects a sufficient genuine link from a general international
law perspective in order to justify taxation. Many scholars have argued that
citizenship indeed justifies taxation and no limitation exists from a gen-
eral international law perspective.412 The underlying reason why citizenship
seems to justify taxation relates to the benefit principle, at least as argued
by the US Supreme Court in Cook v. Tait in 1924:413
In other words, the principle was declared that the government, by its very
nature, benefits the citizen and his property wherever found, and therefore has
the power to make the benefit complete. Or, to express it another way, the basis
of the power to tax was not and cannot be made dependent upon the situs of
the property in all cases, it being in or out of the United States, nor was not and
cannot be made dependent upon the domicile of the citizen, that being in or out
of the United States, but upon his relation as citizen to the United States and
the relation of the latter to him as citizen. The consequence of the relations is
that the native citizen who is taxed may have domicile, and the property from
which his income is derived may have situs, in a foreign country, and the tax
be legal, the government having power to impose the tax.
Even though one can question whether a citizen living abroad indeed has
access to enough benefits to justify taxation,414 it is still, legally speaking,
allowed from a general international law perspective to implement a tax
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Sovereignty and jurisdiction – Key elements of the international tax regime
Many countries have in recent decades followed the example of the US and
implemented CFC rules according to which, in simplified terms, a state
can tax the income of a low-taxed foreign company if it is controlled by
a domestic taxpayer. Currently, approximately a fourth of all states have
implemented CFC rules.423 The US enacted the so-called Subpart F rules in
1962 to challenge the accumulation of profits in foreign-controlled compa-
nies.424 It was not a coincidence that the CFC safari started in the US, as (i)
it is the largest economy, and (ii) it decides based on the place of incorpora-
tion (and not, for example, on the place of effective management) whether
a company qualifies as a foreign company.425 As we will see in Part IV of
the present study, there seems to be a correlation between the size of an
economy and the likelihood of knowing CFC rules.
420. For a more detailed and comprehensive discussion on the jurisdiction-to-tax corpo-
rations and with further references see Marian, p. 1613 et seq. From an international law
perspective see, with further details, Muchlinski Peter T., Corporations in International Law,
Max Planck Encyclopedia of Public International Law, para. 1 et seq. (available online at
http://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1513,
last visited 20 Apr. 2019).
421. See Schön, 2009, p. 91.
422. See sec. 12.3.
423. For some number crunching see sec. 12.3.3.3.
424. For further details see Picciotto, 1992, p. 111 et seq.
425. See also Avi-Yonah, 2007, p. 24 et seq. See, on the spread of CFC rules worldwide,
Picciotto, 1992, p. 144 et seq. However, case law of the ECJ has led to a trend toward
weaker CFC rules, at least within the EU, and there is even pressure on the United States
to refrain from its current Subpart F rules (see, with further details, Picciotto, 2013,
p. 1107).
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The OECD within the BEPS Project asked for a strengthening of these rules
in order to avoid base erosion and profit shifting.426 It also outlined the dif-
ferent design options for CFC rules. In general, in order for the domestic
CFC rules to apply, and consequently, for income to be (partly) allocated to
the parent company, it is required that:427
If CFC rules apply, it means that the (passive and/or active) income of the
foreign company is (partly or entirely) taxable at the level of the foreign
parent company, even if no distribution occurs between these two entities.432
The question of whether such taxation is in line with general international
law has often been limited to the question of whether CFC rules are in
line with double tax treaty law or whether such rules are compliant with
EU law.433 Considering the above-mentioned prohibition of extraterritorial
taxation and the genuine link doctrine, the only way by which CFC rules
would be in line with general international law is for a genuine link to exist
between the income of the CFC and the country of taxation.
426. OECD/G20, Base Erosion and Profit Shifting Project Designing Effective Controlled
Foreign Company Rules, Action 3: 2015 Final Report (OECD 2015), p. 1 et seq.
427. For an overview on the Chinese CFC rules see, for instance, Li, 2014, p. 536 et
seq.; on the Polish CFC rules see van Doorn-Olejnicka, p. 395 et seq., or on the UK CFC
rules see Smith, 2013, p. 127 et seq.
428. See, for example, art. 7(1)(b) ATAD.
429. For more details on the existing options in this respect see OECD/G20, Base
Erosion and Profit Shifting Project Designing Effective Controlled Foreign Company
Rules, Action 3: 2015 Final Report (OECD 2015), p. 23 et seq.
430. For more details on the existing options in this respect see id., p. 43 et seq.
431. For more details see id., p. 33 et seq.
432. See, for instance, the options according to art. 8 ATAD.
433. With respect to the compatibility of the German CFC legislation and double tax
treaties, see Schaumburg, § 10.19 et seq., with further references. With respect to the
compatibility of CFC rules and EU law, see Smit, 2014, p. 259 et seq.
434. With reference to Park, see Picciotto, 1992, p. 145.
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Sovereignty and jurisdiction – Key elements of the international tax regime
In order to support his doubts that CFC rules are indeed in line with general
international law, he referred to cases with respect to the application of in-
ternational sanctions in an extraterritorial manner.437 However, Avi-Yonah
then seems to conclude that CFC legislation might still be legal, as these
rules developed into customary international law.438 One of his main argu-
ments is that CFC states would have the right to tax the income of the CFC
and, therefore, CFC rules do not harm the right to tax the income of the
source country (“first bite at the apple rule”).
435. On the effects doctrine see sec. 4.1.2.2.2. Or see also the opinion of the ICJ in the
Barcelona Traction case in which it was held that control is not sufficient for diplomatic
protection (ICJ, Barcelona Traction Light and Power Company, Limited, p. 42). But again,
as mentioned above in sec. 4.1.2.2.2., each area of law has different genuine links. See
also Kaufmann et al., p. 1 et seq., who in detail review whether violations of human rights
by a company can trigger legal consequences in the parent state (e.g. p. 63). However,
the latter requires a detailed study of the different existing human rights conventions and
domestic regulations.
436. Avi-Yonah, 2004, p. 488 et seq. For more details about the effect of control from
an international law perspective, see Mann, 1984, p. 56 et seq.
437. Avi-Yonah, 2004, p. 489.
438. Id., p. 489 et seq.; Avi-Yonah, 2007, p. 26.
439. See sec. 12.3.3.3.
440. See on our understanding of the requirements of state practice and opinio iuris
sec. 4.3.2.
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However, the problem is not only that the link to the parent state is rather
limited, but that the influence on the sovereignty of the other state is consid-
erable, as such a state might be forced to raise its tax rate in order to avoid
the application of the foreign CFC rules. Bearing in mind the argument that
sovereignty also means independence, it would not be far-fetched for courts
to come to a different conclusion and argue that CFC rules are indeed an
infringement of general international law.
As we will outline in Part IV, there are persuasive reasons to argue that the
tax rate in the other state should, from a normative perspective, not influ-
ence the decision of whether a country attributes the income of a foreign
subsidiary to the parent company, i.e. whether CFC rules should apply.
However, again, it is important to distinguish between the questions of what
is in line with general international law and how a justification-to-tax rule
should be drafted from a normative perspective. In other words, the level of
taxation should, from a normative perspective, basically not influence the
decision of whether a country attributes the income of a foreign subsidiary
to the parent company, i.e. whether CFC rules should apply. However, from
a general international law perspective, there might still be a sufficient link
to the parent state justifying taxation and a distinction based on the tax rate
in the CFC state seems in line with general international law.
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Sovereignty and jurisdiction – Key elements of the international tax regime
4.1.2.3.1.
Preliminary remarks
After having discussed the question of when states have jurisdiction over
persons, in the present section we will analyze whether general international
law contains a limitation with respect to the extent of jurisdiction-to-tax.
Such a question is vital for the present study, as we will in Part IV review
whether, following a normative analysis, tax systems should be designed as
worldwide or territorial systems.444 Related to such a question is, obviously,
the never-ending discussion of source versus residence.
4.1.2.3.2.
Taxation of residents and citizens
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Thus, this means that general international law allows the taxation of extra-
territorial income if a person is a resident in a state. We are not suggesting
that the taxation of residents and citizens ought to be structured in such a
manner, but we are arguing that general international law sets no limits
regarding the taxation of residents. Again, it is important to distinguish the
question of legality (i.e. what is in line with general international law) from
the question of how jurisdiction should be understood based on, inter alia,
justice considerations.
know a partial territorial system (i.e. for active income only). See, with further references
to case law, in particular, in the United States, Monsenego, p. 47 et seq.
449. See Hinnekens, p. 284 et seq. See also Lehner, in: Vogel & Lehner, 2014, Grundlagen
para. 13; Schön, 2009, p. 91; Monsenego, p. 47 et seq. With further details, see also
Martha, p. 48 et seq.
450. On the functioning of international tax treaties see sec. 4.2.3.3.
451. Meng, p. 450: “Die Erörterung ausgewählter Konfliktfälle und Regelungsmaterien
aus der Praxis hat gezeigt, dass eine reine Auslandsanknüpfung, soweit sie nach der
vorgegebenen Definition extraterritoriale Jursdiktion darstellt, von Einzelfällen im
Aussenwirtschaftsrecht abgesehen, überwiegend nur im Steuerrecht vorkommt.”
452. This is of course, again, a normative claim that there “ought to be” an allocation
of income in order to avoid double taxation. We will specifically deal with such a claim
in sec. 11.2.3.4.
453. Christians, 2009b, p. 108. See also Monsenego, p. 42 et seq. From an international
law perspective, see Mann, 1964, p. 10. Overlapping jurisdictions, however, is not par-
ticularly related to tax law, as it also exists in other areas of law (see Staker, p. 329).
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Sovereignty and jurisdiction – Key elements of the international tax regime
4.1.2.3.3.
Taxation of non-residents
So far, the focus has been on the question of to what extent a state can tax
its residents and citizens according to general international law. We have
seen that general international law does not provide for a limitation that a
state shall only tax domestic-sourced income. However, the missing legal
limitations of worldwide taxation in general international law (i.e. besides
the genuine link doctrine as a justification for taxation)454 could also mean
that there is no limitation of source taxation and source states could legally
also tax foreign income, i.e. income that is not sourced in the source state.455
This would mean that a state could, for instance, tax the entire income of a
foreigner, even if such a person only owns real estate in a state and has not
been physically present in that jurisdiction. It also means that the state of
the PE could also tax the income of the foreign headquarters. This question
has not yet attracted the necessary attention among tax scholars, as it is
sometimes thoughtlessly concluded that general international law limits the
rights of source states to tax domestic (i.e. source) income.456 Monsenego
is an exception in this respect and he concludes after detailed analysis that,
“international law does not prohibit the taxation of non-residents on foreign
income.”457 Yet, his conclusion, which we generally share, needs some fur-
ther specifications.
From a legal perspective, it seems at first glance that the genuine links trig-
gering source taxation are generally not sufficient to create a worldwide tax
liability. Mann claims that this reflects a “sensible doctrine of international
jurisdiction.”458 For instance, Mann holds that the state of the PE “does
not thereby become so closely connected with the enterprise as a whole as
to justify it in assuming jurisdiction over the foreign enterprise’s conduct
abroad.”459 This indeed seems to be a rule of general international law fol-
lowed by all states. At least, as far as it can be observed, there is no state
taxing the worldwide income of an enterprise due solely to the fact that
such an enterprise has a PE or, as far as it can be observed, there is no state
actually taxing the worldwide income of an individual resident in another
state only because that person owns immovable property in another state,
or based on another mere source connection, such as the fact that a person
receives income from a source in a state.
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Chapter 4 - The International Tax Regime
However, we would agree with Monsenego that this does not mean the
source states are not allowed to tax any foreign income, although source
taxation in practice often means a territorial tax base.460 The OECD MC
itself indicates that a source state might be allowed under general inter-
national law to tax foreign income just as, for instance, the state of the PE
might tax foreign-sourced dividends according to article 21(2) of the OECD
MC if these dividends are effectively connected to the PE.461 In other words,
the taxing rights of the source state do not seem to be limited to income
sourced in the same territory, and general international law does not oblige
states, in the case of a source-connecting factor, only to tax a territorial tax
base. This leads us to the following initial observations.
4.1.2.3.4.
Source vs residence from a general international law
perspective
We have not yet answered the question of how to define source and resi-
dence. However, the latter is a necessary condition for our conclusion. In
other words, it would not be sufficient to argue that general international
law allows taxation to a different extent depending on whether a source
or residence link is given, if it is not defined what source and/or residence
mean. It seems that the source and residence concepts are blurred, as they
trigger different legal limitations from a general international law perspec-
tive (i.e. worldwide vs [more or less] territorial systems), but they are not at
all well-defined concepts. The main issue is that these concepts are domestic
concepts and states are generally free to define what source and residence
is, considering potential treaty obligations, of course. A treaty might further
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Sovereignty and jurisdiction – Key elements of the international tax regime
limit the taxing right of a state and further narrow the terms “source” and
“residence”, but if no treaty exists, a state seems – from a general inter-
national law perspective – free to define what source and what residence
mean. In fact, these concepts might even overlap, as the following example
will show:
If a state has a very low residence threshold, the question is whether this
could be seen as an infringement of general international law, as de facto,
such a residence is only a source connection and, therefore, taxes should
not be levied on a worldwide tax base following the considerations above.
To be more concrete, according to Swiss domestic law, residence taxation is
already triggered if a person spends more than 30 days in Switzerland and
has employment in Switzerland.462 No one has questioned the compatibility
of such a rule with general international law, but it demonstrates the blurred
concept of jurisdiction-to-tax and, in particular, the blurred distinction
between residence and source from a general international law perspective.
Would it, for instance, still be in line with general international law if a state
sets the residency threshold at the level of 10 days spent in such a jurisdic-
tion? Or would a physical presence of only 10 days not justify residency?
These questions are often answered with normative arguments, for instance,
with reference to the ability-to-pay principle or the benefit principle.463 It
could, for instance, be argued that in this case (i.e. a 10-day rule), the ben-
efits obtained by a person are not sufficient to justify worldwide taxation,
but if a person stays 30 days in a country, unlimited taxation is justified.
Yet, this is a normative analysis and again shows the weak international
law framework, as general international law does not provide us with any
guidance on how fiscal jurisdiction should be drafted in order to be con-
sidered just, nor how we should distinguish between source and residence.
Moreover, while rendering such a normative analysis, we would even sug-
gest refraining from using the terms “residence” and “source” in order to
justify certain taxation, be it either worldwide or territorial. In a normative
review, it is crucial that the underlying normative reasons are disclosed for
such purposes and it needs, therefore, to be disclosed why a link should
trigger worldwide or only territorial taxation, and reference to these blurred
concepts is not sufficient.
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These remarks show that the concepts of source and residence are arbitrary
from a general international law perspective, as source might actually be
residence, depending on the domestic definition of residence. Moreover,
these concepts do not combine the quality of the genuine link and the tax
consequences. The source and the residence approach provide for an overly
simplified binary answer to the complex question of jurisdiction-to-tax from
an international law perspective. General international law does not sug-
gest such a binary categorization between personal and economic links,
and general international law, in particular, does not provide a defined line
between personal and economic links or between source and residence,
respectively. The concepts of source and residence have no common legal
understanding around the globe, as each state applies different definitions
of source and residence.465
These ambiguities again disclose the diffuse guidelines that can be derived
from general international law, revealing the need to refer to an outside
discipline in order to review how jurisdiction ought to be defined in order
to be considered just. Therefore, we are not (yet) suggesting that the distinc-
tion between source and residence corresponding to the distinction between
worldwide and territorial taxation is causing justice deficiencies, but we
argue that general international law, per se, does not help us in solving the
source vs residence dilemma, as general international law does not address
these concepts, and does not provide us with detailed guidelines in which
circumstance territorial or worldwide taxation is justified.
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Sovereignty and jurisdiction – Key elements of the international tax regime
Some authors rightly argue that with respect to international income allo-
cation for tax purposes, the genuine link doctrine does not provide for a
solution.466 There is no legal basis to claim that income taxation should
be limited to territorial income. General international law, besides the few
mentioned limitations, indeed does not provide for detailed rules on how
income relating to cross-border activities should be allocated among dif-
ferent countries.467
Income allocation among various states is a political task and the result of
such allocation negotiations is very open and unsure.468 However, we will
show below that justice considerations or a normative analysis might at least
suggest certain allocation principles.469 The latter would also influence the
question of how residency and source should be defined.470 Therefore, the
current allocation system (mainly the arm’s length principle)471 is not based
on any principles or rules of general international law, but is instead the
result of inter-state negotiations. In other words, if the world would again
be required to negotiate the applicability and the design of the allocation
rules within the UN MC and the OECD MC, the outcome might be different
than the current state of the art. Such a conclusion is undermined by two
strong statements.
The first one relates to von Schanz, who developed a system of cross-
border income allocation before the League of Nations started its work in
this respect, i.e. in a “pre-double-tax-treaty-world”. According to him, the
source state should receive three quarters of the total income of an enter-
prise.472 Although we will not discuss the details of his idea, his normative
claim seems not at all to be reflected in the current international tax regime473
and, therefore, is a clear sign that income allocation rules – as they are
currently drafted – are a matter of political strength and negotiation skills,
rather than the result of a crystal-clear legal analysis. The second statement
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The issue was, for instance, already relevant more than 90 years ago, when
Switzerland and Liechtenstein signed a (terminable) agreement on a cus-
toms union in 1923.475 By doing this, Switzerland and Liechtenstein have
not refrained from their sovereignty, but they did shift certain competences
to another state.476 Another example is the EU, which has also led to a shift
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Sovereignty and jurisdiction – Key elements of the international tax regime
Two more recent examples should further illustrate the shift of fiscal com-
petences. The first one relates to Rubik agreements, which introduce an
extraterritorial levy of taxes. According to Rubik agreements, banks resident
in one participating state will levy income taxes on behalf of the other state
regarding non-disclosed bank accounts.478 This means that the actual levy
of taxes occurs abroad and part of the competence to levy income taxes is
shifted to foreign banks. The second example is more theoretical and relates
to the option to implement an in-depth cooperation regarding the taxation
of the digital economy. In this respect, it has been proposed that when one
agrees that enterprises of the digital economy should pay income taxes in
a state, even though they do not have a physical presence there, the state
of residence should levy income taxes on behalf of other states, and should
then distribute the collected taxes among the involved countries.479 Such a
shift of fiscal competence would be in line with general international law.
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Importantly, these remarks reflect the outcome of a legal analysis and not
a normative one. This means we reviewed the legal framework of interna-
tional law in which a domestic tax system may operate. As was already
indicated, we would not support all of the genuine links currently sufficient
for triggering worldwide taxation following a normative review. In particu-
lar, CFC rules seem to be an extreme example of fiscal jurisdiction, as the
link to the parent state might be very limited in order to potentially create
unlimited tax liability. The legal principle of fiscal sovereignty does not,
moreover, provide for sufficient guidance on the inter-state allocation of
income. Or, as stated by Bird and Wilkie in an extreme manner: “There are
no rules of international taxation.”480
4.2.1.1. Preliminary remarks
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Treaty-based rules of the international tax regime
4.2.1.2. Binding obligation
4.2.1.2.1.
In general
483. For the purpose of the present study, such subjects are states, but also international
organizations (such as the OECD and the UN).
484. E.g. Degan, p. 357. See, with further details, Heintschel von Heinegg, in: Ipsen,
§ 10 para. 1; Verdross, 1973, p. 40, et seq.; Verdross & Simma, § 534. See also the defini-
tion in art. 2(1)(a) VCLT.
485. See sec. 4.2.1.5.2.
486. See sec. 4.2.5.
487. Heintschel von Heinegg, in: Ipsen, § 10 para. 3. For further details, see Verdross
& Simma, § 545.
488. See, inter alia, with further references to international case law, Chinkin, p. 230
et seq. For a detailed analysis of the demarcation line between soft law and international
treaties, see Giersch, p. 73 et seq.
489. For further details see Crawford, p. 371. See also Boas, p. 54; Verdross, 1973, p. 42;
Verdross & Simma, § 536.
490. ICJ, Maritime Delimitation and Territorial Questions (Qatar v. Bahrain), p. 122.
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4.2.1.2.2.
Some examples from a tax perspective
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Treaty-based rules of the international tax regime
countries. The wording497 of the joint declaration does not oblige the UK in
a way that it would be required to amend its existing (domestic) IP regime
within a certain time frame. It seems more to be a mere commitment by
the UK and Germany to follow the mentioned path and to abolish domestic
regimes, if any, which are not in line with the stated joint declaration. One
could also use the term “pledge” in order to describe the quality of the
joint declaration and to distinguish it from a binding contract.498 Therefore,
contracts create a legal obligation, while pledges only establish a moral
or political obligation.499 Furthermore, no other statements of the parties
would lead to a different conclusion that the proposal qualifies as a binding
treaty.500 Therefore the joint declaration does not have the same legal force
as a treaty.501
“The FHTP further agrees that any legislative process necessary to make
this change must commence in 2015.”506
497. For further details on the importance of the wording of a document for the question
of whether the parties are legally bound, see Giersch, p. 208 et seq.
498. See Raustiala, p. 581 et seq., who refers to the terms “contract” and “pledges” in
order to describe the different quality between binding and non-binding.
499. Id., p. 586. The article of Raustiala and the discussion among international lawyers
has much more depth than the remarks within the present study. However, it would go
beyond the present study to provide for a comprehensive distinction between binding and
non-binding treaties. See, e.g., Klabbers, 1996, p. 1 et seq.
500. For further references on the behavior of the parties for the creation of a legal
obligation, see Giersch, p. 209 et seq.
501. See also Hollis, p. 33 et seq.
502. OECD/G20, Action 5: Agreement on Modified Nexus Approach for IP Regimes
(OECD 2015).
503. However, the nomenclature is not a decisive element in order to qualify a document
as an international treaty (Chinkin, p. 229 et seq.).
504. OECD/G20, Action 5: Agreement on Modified Nexus Approach for IP Regimes
(OECD 2015), p. 3.
505. Id.
506. Id., p. 4.
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Therefore, the participating states within the FHTP clearly indicate that
there is an agreement and that the states “must” act. The wording seems
to suggest that the states are of the opinion that they are bound by such
agreement. This would mean that states would have the (international law)
obligation to change their domestic IP regimes in order to align with the
agreed (modified) nexus approach. It must not necessarily be a bilateral or
multilateral contractual document outside an international organization.507
507. See also Giersch, p. 83, who, however, follows a narrow understanding of what
kinds of resolutions might qualify as a treaty.
508. It is a common understanding within international law that only the Head of State,
the Head of Government and the Minister of Foreign Affairs are deemed to represent a
state (without any explicit authority). None of these were part of the FHTP and the repre-
sentatives therein also did not have a specific authority to bind their states. See for further
details, for instance, International Law Commission, Guiding Principles, applicable to
unilateral declarations of States capable of creating legal obligations, with commentaries
thereto, 2006, p. 372 et seq.
509. See, with respect to the OECD Report on Harmful Tax Competition, Christians,
2007, p. 331. See also, as an example of the influence in Switzerland, Hongler, 2016,
p. 103 et seq.
510. For the definition of soft law for the purpose of the present study, see sec. 4.3.4.1.
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Treaty-based rules of the international tax regime
Accordingly, one could conclude that the parties are actually bound by the
interpretation within the memorandum of understanding, i.e. that they have
created a legal obligation to interpret article 12 of the double tax convention
in a certain manner. However, as will be shown by the following quotation,
which is part of the MoU, it seems that the memorandum of understand-
ing is more a letter of intent than an international treaty, creating a binding
obligation in the sense of the aforementioned definition:
It is also my Government’s view that as our Governments gain experience in
administering the Convention, and particularly Article 12, the competent au-
thorities may develop and publish amendments to the memorandum of under-
standing and further understandings and interpretations of the Convention.512
511. US/IN: Convention between the Government of the United States of America and
the Government of the Republic of India for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income, 12 Sept. 1989, Notes of
Exchange III, 12 Sept. 1989.
512. Id.
513. See Aust, 2012, p. 46 et seq. For more details about MoUs see Aust, 2013, p. 28
et seq. See also Hollis, p. 28 et seq.
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Therefore, it is persuasive, given the wording of the latter sentence, that the
Swiss Federal Council only intends, i.e. pledges, to do something, but is by
no means obliged in the sense of a contractual obligation to do something.
The joint statement is not an international treaty.
4.2.1.2.3.
Unilateral statements
514. CH/EU: Joint Statement between the Representatives of the Governments of the
Member States of the EU and The Swiss Federal Council, 14 Oct. 2014, sec. 2(II).
515. Id., sec. 3.
516. See Cedeño Victor Rodriquez & Torres Cazorla Maria Isabel, Unilateral Acts of States
in International Law, Max Planck Encyclopedia of Public International Law (available at
http://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e14
96?rskey=Wl5QQI&result=1&prd=EPIL, last visited 14 Sept. 2017).
517. E.g. Chinkin, 242 et seq.; Thirlway, 2014, p. 45.
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Treaty-based rules of the international tax regime
When it is the intention of the State making the declaration that it should be-
come bound according to its terms, that intention confers on the declaration the
character of a legal undertaking, the State being thenceforth legally required to
follow a course of conduct consistent with the declaration.518
Besides the case law of the ICJ, the International Law Commission pub-
lished in 1996 “Guiding Principles applicable to unilateral declarations
of States capable of creating legal obligations”, which addresses the legal
nature and potential impact of unilateral statements. According to article 1
of these guidelines, the following needs to be considered:
Declarations publicly made and manifesting the will to be bound may have the
effect of creating legal obligations. When the conditions for this are met, the
binding character of such declarations is based on good faith; States concerned
may then take them into consideration and rely on them; such States are entitled
to require that such obligations be respected.519
Unilateral declarations are only binding to the extent that they were made
by a competent authority.520 This means that a representative of a state’s
tax authority cannot bind a state by his declarations, as long as he is not
competent to do so. Another aspect to be considered is the circumstance in
which a unilateral statement occurred.521 Therefore an analysis of whether
a certain unilateral statement creates a binding obligation requires a review
of the moment and location or premises in which a certain statement was
made. For instance, regarding the BEPS Project, several states have pub-
lished unilateral statements in order to, inter alia, demonstrate their commit-
ment to the BEPS Project. For instance, on 6 February 2015 the Swiss State
Secretariat for International Financial Matters (“SIF”) published a unilateral
declaration with the following wording:
As all other 43 BEPS participating states, Switzerland endeavors to follow the
transfer pricing documentation recommendations of the OECD. Switzerland
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522. Own translation. “Wie alle anderen 43 Länder, die sich am BEPS- Projekt beteiligen, ist die
Schweiz bestrebt, die Empfehlungen der OECD bezüglich der Verrechnungspreisdokumentation
zu befolgen. Die Schweiz wird eine Rechtsgrundlage schaffen, die die betroffenen Unternehmen
verpflichtet, die erforderlichen Unterlagen zu erstellen und den Steuerbehörden einzu
reichen.” (Stellungnahme SIF zu den Publikationen der OECD im Rahmen des Projekts
zur Gewinnverkürzung und Gewinnverlagerung [Base Erosion and Profit Shifting, BEPS],
6 Feb. 2015).
523. Webb, p. 567, mentions, for instance, that the UN is party to at least 1,500 inter-
national treaties. See also Hollis, p. 22 et seq.
524. For more details see Hongler, 2012b, p. 778 et seq.
525. However, a body of international law and another private contractual party may
opt (explicitly or implicitly) for the application of international law to a specific contract
(Kälin et al., p. 17).
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Treaty-based rules of the international tax regime
the sense of a binding tax ruling between a state and a taxpayer is not an
international law treaty. Another example from a tax perspective would be
an agreement between the FIFA and a host state of an international competi-
tion, such as the World Championships.526 Such an agreement is an agree-
ment between a private association, according to Swiss law (i.e. FIFA), and
a state; therefore, it is not governed by international law.
526. See Von Heinegg, in: Ipsen, § 11 para. 12. See generally Verdross & Simma,
§ 374 et seq. Albrecht, p. 147, mentions another (older) agreement between the Imperial
Government of Persia and the Anglo-Persian Oil Company Ltd., which would likely fall
in the same category.
527. Sussman & Lu, p. 164 et seq.
528. IT/HS: Agreement between the Holy See (Vatican City State) and Italy for the
Exchange of Information on Tax Matters, 1 Apr. 2015.
529. Epping, in: Ipsen, § 9 para. 1 et seq.
530. Degan, p. 364.
531. Verdross & Simma, § 541.
532. E.g. CH: Gegenrechtsvereinbarung zwischen den Kantonen Wallis und Zürich
betreffend die Befreiung von der Erbschafts- und Schenkungssteuer für Zuwendungen
an gemeinnützige oder kirchliche Zwecke [Mutual agreement between the cantons of
Valais and Zurich concerning the exemption from inheritance and gift tax for donations
to charitable or religious purposes] [author’s translation], 30 Aug./5 Oct. 1978.
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4.2.1.5.1.
Overview
In the following, the focus is on (iii), the relation between coercion and inva-
lidity. The reasons that coercion attracts special attention are that coercion is
of particular importance from a global justice perspective, as philosophical
theories might attach particular significance to coercion,537 and one of the
presumed injustices is that the recent development of an international tax
regime seems to be led by strong economies, and other weaker states are
likely to accept or have already accepted rules proposed by other states due
to international pressure or coercion, respectively.538
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Treaty-based rules of the international tax regime
Injustice is not per se a reason for invalidity. Even a highly unjust treaty is
valid from an international law perspective.539 International law does not
provide for a detailed framework according to which treaties must be well
balanced. We will further deal with this aspect in section 4.2.5.
Invalidity because of coercion can be derived from two aspects that are dealt
with in articles 51 and 52 of the VCLT. Article 51 of the VCLT refers to coer-
cion against a state’s representative while negotiating or signing an agree-
ment. This is, however, not of great relevance for the present work. Instead,
we focus on the question of invalidity in relation to coercion of the state
itself, according to article 52, which is part of customary international law:540
A treaty is void if its conclusion has been procured by the threat or use of force
in violation of the principles of international law embodied in the Charter of
the United Nations.541
The ratio legis of article 52 of the VCLT is rather obvious: A state shall
not be bound if there is no consent on a certain agreement, as one of the
states did not sign an agreement voluntarily, but rather based on coercion.542
The wording of article 52 of the VCLT is quite specific in the sense that
only military coercion leads to invalidity, not economic or political pres-
sure.543 To be more precise, this means a treaty is void in the case of the use
or threat of force in an illegal manner. It contains a direct link to the UN
Charter and article 2(4) of the UN Charter, respectively.544 Furthermore, a
military threat, as such, must be concrete and not only vague, as stated in
the Fisheries Jurisdiction Case of the ICJ:
There can be little doubt, as is implied in the Charter of the United Nations and
recognized in Article 52 of the Vienna Convention on the Law of Treaties, that
under contemporary international law an agreement concluded under the threat
or use of force is void. It is equally clear that a court cannot consider an accusa-
tion of this serous nature on the basis of a vague general charge unfortified by
evidence in its support.545
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During the Vienna Congress, certain states were of the opinion that art-
icle 52 should be extended and not only cover military coercion.547 There
was, however, no consent in this respect and the participating states agreed
on a declaration condemning the use of political and economic pressure in
a treaty-negotiating scenario.548 According to such a declaration, the partici-
pating states condemned:
[T]he threat or use of pressure in any form, whether military, political, or eco-
nomic, by any State, in order to coerce another State to perform any act relat-
ing to the conclusion of a treaty in violation of the principles of the sovereign
equality of States and freedom of consent.549
Even though the declaration is clear in its wording and was adopted by
102 votes to none, it does not create a binding obligation on states, which
means that a state cannot claim the invalidity of a treaty based on economic
or political pressure. This means from a tax perspective that even though a
state faces significant economic pressure, such as the risk of being black-
listed if it does not consent to a treaty, it does not lead to the invalidity of
an international agreement that a state signed only to mitigate or abolish
existing economic pressure.
For instance, Switzerland was essentially forced to sign the agreement with
the United States on the request of information regarding UBS accounts in
2009,550 as it would have otherwise risked a collapse or at least a signifi-
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Treaty-based rules of the international tax regime
cant financial crisis of its domestic economy due to political and economic
pressure. Another example is the Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent BEPS. The political pressure to sign the
agreement is enormous and, even if a state (at least a member country of
the OECD) does not sign such an agreement, it will likely face detrimental
economic impacts, it is still a valid agreement. Political and economic pres-
sure is not covered by article 52 of the VCLT.
Not only in international tax law, but also in international law, in general,553
treaties have become the main source of international law. Globalization,
particularly cross-border trade, has further enhanced the development of
a significant international treaty network. Currently, there are more than
3,000 double taxation conventions in force.554 We will dedicate a specific
section to the development and content of such a network of international
double tax agreements.555 However, this is not the end of the story as, inter
alia, the following treaties have been signed in the past, which are them-
selves tax treaties or contain tax rules:
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Third, Rubik agreements have been signed by a few states. The term
“Rubik” is not an official denomination, but initially, even governmen-
tal bodies in Switzerland, Germany and Austria used the term. Officially,
these specific agreements are called “Agreements on the Cooperation
in the Area of Taxation”.561 In the German speaking area, the term
“Quellensteuerabkommen”, i.e. “Source Tax Agreements” or “Withholding
Tax Agreements”, has also been used. As far as can be observed, only
Switzerland (with the UK and Austria) and Liechtenstein (with Austria) have
signed Rubik agreements as source states with other countries. Originally,
Switzerland intended to implement a further agreement with Germany, but
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Treaty-based rules of the international tax regime
the German parliament did not approve the already signed agreement.562 The
application of the Rubik agreements is not only governed by the agreements
themselves, but Switzerland and Liechtenstein have also implemented spe-
cific domestic laws on the implementation of these agreements.563 In sim-
plified terms, Rubik agreements implement a system in which one of the
contracting states and financial institutions collects taxes on behalf of the
other contracting state with respect to taxpayers resident in the latter state
owning bank accounts in the former state. As a consequence, these agree-
ments also prevent international tax evasion, not necessarily by improving
fiscal transparency, but rather by ensuring taxation. The purpose of these
agreements is indeed to ensure effective taxation in one of the contracting
states564 by levying a one-time tax payment on existing accounts and a final
withholding tax on future income on such accounts in the other contracting
state. These agreements will likely be terminated or have already been ter-
minated through the introduction of an automatic exchange of information.565
Fourth, several trade agreements contain provisions that are relevant from
a tax perspective. It is not only the agreements within the WTO umbrella,
such as GATT, GATS, SCM and ITA that have an impact on the international
tax regime, but also bilateral or multilateral trade agreements. These agree-
ments generally do not have a direct effect on taxpayers, in the sense that a
taxpayer could claim a remedy under a WTO agreement in order to avoid
or mitigate taxation.566 Nevertheless, even though only states have access to
the dispute resolution mechanism, the impact of the WTO on tax law is still
significant. The case law of the bodies of WTO law has so far been focused
on the trade of goods, even though GATS would also provide for certain
measures to affect the taxation of services. The three most important tax fea-
tures within trade agreements are most-favored-nation (MFN) rules,567 the
national treatment provisions568 and the prohibition of subsidies.569 The aim
of these provisions is to lower trade barriers in order to raise standards of
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living to ensure “full employment and a large and steadily growing volume
of real income and effective demand, and expanding the production of and
trade in goods and services”.570 The procedures within the WTO framework
led to the abolition of certain domestic tax regulations that were not in line
with trade law agreements, such as GATT, GATS, SCM or the ITA.
The trade agreements have major income tax carve-outs, such as the rule
that potential infringement of the MFN or the national treatment provi-
sion due to the application of double tax treaties is not covered by trade
agreements. Article XIV(d) GATS also states that discrimination of foreign
suppliers is justified if it is necessary to ensure equitable taxation.571 From
a conceptual point of view, both trade law and international tax law intend
to enhance international trade in order to increase global growth, but as an
important difference, tax law also needs to ensure that sufficient financing
of public goods occurs. Trade barriers could be lowered to zero at a global
level, but taxation cannot be reduced to 0% without jeopardizing the current
world order based on sufficiently financed sovereign states. These differing
goals might be one reason why tax law and trade law have taken different
paths in the past.572 Such a conceptual difference is also one reason why
states are reluctant to agree on more fundamental cooperation within inter-
national tax law, such as through the implementation of global mandatory
arbitration. Although some cases of the Panel and the Appellate Body of the
WTO have had a significant impact on national legislation,573 it is gener-
ally agreed that fiscal sovereignty is not endangered by WTO rules, even
though it provides certain limitations, particularly with respect to indirect
taxes.574 Trade law has had the greatest impact on tax competition through
(tax) subsidies and, therefore, some authors conclude that the WTO law
framework would be the better place to deal with tax competition.575 We
conclude with Farrell that, “WTO should be recognized as an integral ele-
ment of the multi-governance of international tax law, and that its impact
should not be underestimated.”576
Fifth, many further non-tax agreements contain tax rules. A non-tax agree-
ment in the sense of the present section is an agreement between two bodies
570. Preamble of the Agreement Establishing the World Trade Organization, 15 Apr. 1994.
571. For more details see Cockfield & Arnold, p. 142 et seq.
572. With further references, see id., p. 144. See also the interesting remarks of McLure,
2001, p. 328 et seq., on the potential development of a GATT for taxes.
573. See the most comprehensive study by Farrell, p. 29 et seq.
574. See Farrell, p. 224.
575. Avi-Yonah, 2005, p. 129.
576. Farrell, p. 247.
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Treaty-based rules of the international tax regime
This makes sense, as few people are generally sent to the sending state,
as the intention of an aid and development agreement is to support the
577. See the contributions in Lang et al. (eds.). See also with respect to tax rules in
non-tax treaties, Norr, p. 443 et seq.
578. See Knechtle, p. 144.
579. Allie & Brauner, p. 891 et seq., with an overview on US status of forces agreements.
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4.2.3.1. Preliminary remarks
In the following, after some preliminary remarks, we will first focus on the
historical development of the current double tax treaty network,582 and then
we will outline the content of double tax treaties in an overview section.583
These two sections are essential in order to understand and analyze the
current international tax regime from a normative perspective as intended
in Part IV of the present work. Double tax conventions have been the main
element of the international tax regime not only in recent decades, but for as
long as international tax cooperation has existed.584 As already mentioned,
more than 3,000 double tax conventions have been signed between states.
The main driver behind such an impressive development has been globaliza-
tion and the aim of abolishing cross-border trade obstacles, such as interna-
tional juridical double taxation.
In the following, we will highlight a few empirical facts about the interna-
tional treaty network, which we mainly owe to Braun & Zagler, and which
are of particular interest for the present study. First of all, a shared colonial
past has a positive impact on the likelihood of a double tax convention
580. E.g. CH/VN: Agreement between the Government of the Swiss Confederation and the
Government of the Socialist Republic of Vietnam Concerning Development Cooperation,
7 June 2002.
581. Exceptions are the Vienna Convention on Diplomatic Relations and the Vienna
Convention on Consular Relations, as these agreements grant tax exemptions in a recipro-
cal manner.
582. See sec. 4.2.3.2.
583. See sec. 4.2.3.3.
584. See Knechtle, p. 143.
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Treaty-based rules of the international tax regime
between two jurisdictions.585 This means that if there were a colonial rela-
tionship, for instance, between the UK and India, it is more likely that a
treaty exists than in a situation with no colonial past, e.g. between Sweden
and the Philippines. Second, the same language being spoken in two states
has a positive impact on the likelihood of a double tax convention. This
means that it is more likely for Spain to have treaties with South American
countries than with Asian countries. Third, the distance between two coun-
tries has an impact on the likelihood of a treaty between them. Fourth,
Zagler & Braun demonstrate that the amount of official development as-
sistance from an OECD country to a developing country has a positive
impact on the likelihood of a double tax convention between these two
jurisdictions.586
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4.2.3.2. Historical background
There are many ways of exploring the history of tax treaties. We chose to
focus on the different institutional players who have influenced the current
international and mainly treaty-based regime. After an overview of their
development before 1920, we will separately discuss the work of the League
of Nations between 1920-1945, the work of the UN after 1945, the work
of the OECD/OEEC between 1956-2012 and the latest work of the OECD
and the G20 since 2012.
4.2.3.2.1.
International tax law until 1920
591. See, for example, at least regarding exchange of information, the agreement regarding
UBS accounts between Switzerland and the United States, CH/US: Agreement between
the Swiss Confederation and the United States of America on the request for Information
from the Internal Revenue Service of the United States of America regarding UBS AG,
a corporation established under the laws of the Swiss Confederation, SR 0.672.933.612,
19 Aug. 2009.
592. Lehner, p. 1149 et seq., with references to the roots of international tax law, in
general, within Biblical law and Talmudic law.
593. Earlier treaties existed with respect to inheritance taxes. See, with reference to an
agreement between the Swiss Federal Council on behalf of the canton of Vaud and the
UK signed in 1872, as mentioned by Knechtle, p. 202 et seq. Or see the references of
Bühler, p. 50, to the agreement regarding cross-border assistance between the Netherlands,
France, Belgium and Luxembourg. On this topic see also Holmes, 2014, p. 60. See also
Musgrave & Musgrave, p. 64 et seq.
594. Von Roenne, p. 24.
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Treaty-based rules of the international tax regime
double tax agreements were signed among states with a very close relation-
ship or even those within the same federation.595
4.2.3.2.2.
The work of the League of Nations (1920-1945)
After World War I, the steady growth of the economy, along with the
need for fiscal revenue in order to recover the war costs-triggered deficits,
led to an increasing amount of cross-border double taxation and further
enhanced the development of an international double tax treaty network.600
The approaches for how to tackle cross-border double taxation deviated
significantly in the beginning among many countries. Some (even capital-
exporting) states were reluctant to sign double tax treaties at all, as they
believed that their state would not actually benefit from such agreements.601
Other states quite actively started to sign tax treaties.
595. Lehner, in: Vogel & Lehner, Grundlagen para. 32. See also Vogel & Rust, in: Reimer
& Rust, Introduction para. 20; Vogel, 1997, p. 278.
596. See Von Roenne, p. 24 et seq. See also Hemetsberger-Koller, p. 13 et seq.
597. Oeser & Bräunig, p. 2 et seq.
598. See, for instance, the seminal work of Harding, p. 1 et seq. Or from a later perspec-
tive see Hellerstein, 2012, p. 245 et seq.
599. For an overview of the development of intercantonal tax law in Switzerland, see
Simonek, 2012, p. 221 et seq.
600. Lenz, p. 9; Vogel & Rust in: Reimer & Rust, Introduction para. 20 et seq.
601. See, for example, the reference to the treaty practice of the UK in Graetz, p. 293.
See also Vogel, 1997, p. 278.
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Chapter 4 - The International Tax Regime
Inter alia, following the study of the four economists, a model conven-
tion was published in 1933 that contained 13 articles and was sent to the
involved states for comment. Among others, the draft contained article VI,
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Treaty-based rules of the international tax regime
which introduced the arm’s length principle as the leading transfer pricing
principle still in use today.611 An important driver of the introduction of the
arm’s length principle into the model was a study by Carrol, who com-
pared the allocation rules in 27 countries, particularly the legal framework
of the United States at that time.612 The 1933 draft was never approved by
a higher authority. It contained significant deviations from the current in-
ternational tax regime, as it was, for instance, suggested that non-residents
should be exempt and taxation should remain solely with the resident state.613
Remarkably, the draft focused on a bilateral tax treaty, but the League
of Nations at that time also dealt with a potential multilateral tax treaty.
However, the idea was not pursued further in the following years.
The Fiscal Committee continued its work and held regional conferences,
inter alia, in Mexico in the early 1940s. Compared to the first draft published
by the Fiscal Committee in 1933, the so-called Mexico Draft, which was
published in 1943, was beneficial for developing countries, as the taxing
rights were shifted to the source state.614 The Mexico Draft was again revis-
ited in 1946 and the taxing rights were again shifted back to the residence
state in the so-called London Draft in 1946.615 The League of Nations was
replaced after World War II by the UN in 1946. The tax work of the UN will
be outlined in the following section.
4.2.3.2.3.
The work of the UN (1946-)
After World War II, several states signed double tax treaties based on the
Mexico and/or London Draft, and the newly formed Fiscal Commission of
the UN, the predecessor of the Fiscal Committee of the League of Nations,
further worked on drafting a model convention. However, compared to other
areas of international law, such as international trade law, the development
of a more integrated tax world order has stopped in these years, even though
the interaction with the work of the UN on international trade law has never
been as close as it was within the first ten years following World War II.616
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Chapter 4 - The International Tax Regime
As states started to sign a large number of tax treaties based on the draft
model convention of the OECD in 1963, which will be discussed in the
following section, developing states launched an initiative within the UN,
according to which a model convention should be developed that also suits
the needs of the developing world.617 The reason for this was that the 1963
draft of the OECD was mainly driven by the interests of developed states.
4.2.3.2.4.
The work of the OECD/OEEC (1956-2012)
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Treaty-based rules of the international tax regime
resident state and contained both a credit and an exemption method arti-
cle.623 Another important feature of the first model was that it also contained
a commentary in order to provide further guidance. Since then, member
countries have been able make reservations and observations if they do
not agree with part of the content of the OECD MC or the OECD Comm.,
respectively.624
After the publication of the first draft in 1963, it took another 14 years
until the first final version of the OECD model convention was adopted
in 1977.625 In the following years, the OECD has published several new
(updated) model conventions and commentaries, namely in 1992, 1994,
1995, 1997, 2000, 2003, 2005, 2008, 2010, 2014 and 2017, and with respect
to the exchange of information, also in 2012.626 One of the most influential
changes was made in 2005, as the new article 26 on the exchange of infor-
mation was introduced as an answer to the work of the OECD on harmful
tax practices.627 Another standout amendment that is of particular interest
for the present work was made in 2008, as a new paragraph on arbitration
was introduced in article 25 of the OECD MC.628 Moreover, the 2017 ver-
sion contains in article 29 an anti-abuse provision.
From a transfer pricing perspective, the years from 1972 to the present are
essential, as they reflect the age of globalization and, therefore, the increas-
ing relevance of transfer pricing within the international tax regime. Not
surprisingly, the first OECD transfer pricing guidelines were published in
1979. The guidelines were highly influenced by transfer pricing regulation
in the US.629 Besides that, and of interest for the present study, the OECD
introduced the authorized OECD approach in 2010, which meant that for the
purposes of allocating income and capital to a PE, the PE must be treated as
a separate entity, also regarding internal dealings.630
623. See on the latter topic Bühler, 1964, p. 53, with further details.
624. Lehner, in: Vogel & Lehner, Grundlagen para. 35.
625. Holmes, 2014, p. 62. Vogel & Rust, in: Reimer & Rust, Introduction para. 34.
626. A draft of the 2017 update was published in July 2017 (http://www.oecd.org/ctp/
treaties/oecd-releases-draft-contents-2017-update-model-tax-convention.htm, last visited
23 July 2017).
627. See Lehner, in: Vogel & Lehner, Grundlagen para. 35a.
628. Art. 25(5) OECD MC.
629. For more details, see Li, 2002, p. 859 et seq.
630. OECD, 2010 Report on the Attribution of Profits to Permanent Establishments
(OECD 2010).
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harmful tax competition, base erosion, profit shifting and the potential par-
tial harmonization of domestic tax laws.631 The Harmful Tax Competition
Report marked a cornerstone, as since then the work of the OECD has also
influenced domestic tax legislation, and not only double tax treaties. Such
influence mainly occurred by using soft law instruments. Below, we will
dedicate a specific section to the importance of soft law instruments within
the international tax regime.632
In June 2012, the leaders of the G20 stated in their declaration that they
“reiterate the need to prevent base erosion and profit shifting and [the G20]
will follow with attention the ongoing work of the OECD in this area.”638
Thereupon, the G20 mandated the OECD to draft a report about the problem
of base erosion and profit shifting. In early 2013, the OECD published its
report on addressing base erosion and profit shifting.639 The launch of the
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Treaty-based rules of the international tax regime
Following on from this, the OECD issued the Action Plan on Base Erosion
and Profit Shifting in July 2013 at the G20 Meeting in Moscow.641 The final
reports were approved by the CFA on 21-22 September 2015.642 These
reports were submitted to the OECD Council on 1 October 2015 and were
published on 5 October 2015.643 The reports were endorsed by the G20
finance ministers at a meeting on 8 October 2015.644 As this brief introduc-
tion shows, a major difference between the former work of the OECD and
the new age is the intense interaction between the G20 and the OECD.
Moreover, the fact that international tax policy has risen from a topic dis-
cussed among technicians, as representatives of the fiscal authorities, to
the top of the policy agenda is also of significance. These developments
must be seen as a considerable change in the institutional framework of the
international tax regime.645
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Chapter 4 - The International Tax Regime
Another important difference between the most recent work of the OECD
regarding the design of double taxation is the increased attention given
to non-OECD states, such as – but not exclusively – BRICS states.648
Furthermore, the BEPS Project of the OECD/G20 intended to revamp the
work rendered in the years before 1998 and following the publication of the
Report on Harmful Tax Practices in 1998. Within the BEPS Project, the fight
against harmful tax practices is unsurprisingly also a major aim; in particu-
lar, Action 5 covers the issue.649 The term “harmful tax practices” mainly
relates to preferential regimes that lead to ring-fencing or other distortions
leading to double non-taxation or very low taxation. Or, in the words of the
OECD, the “current concerns may be less about traditional ring-fencing, but
instead relate to across the board corporate tax rate reductions on particu-
lar types of income.”650 Furthermore, the OECD states that “(t)he work on
harmful tax practise is not intended to promote the harmonisation of income
taxes or tax structures generally within our outside the OECD.”651 Therefore,
the OECD intends to define a certain level playing field, as domestic mea-
sures are limited when combating harmful tax practices.
In the months after the publications of the final BEPS reports, the OECD
member countries and the G20 states have developed the so-called “Inclusive
Framework”.652 It aims at reviewing and monitoring the implementation of
the results of the BEPS project. Prima facie, the Inclusive Framework has
similar goals with respect to anti-BEPS measures as the Global Forum has
with respect to cross-border transparency. As the Inclusive Framework
has more than 100 participating states, its impact goes far beyond the OECD
member countries.653 The same is true for the Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting, which was signed by more than 100 states.654
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Treaty-based rules of the international tax regime
4.2.3.2.6.
Implications for a normative review?
The current model tax conventions of the OECD and UN have many simi-
larities. This is not surprising, as both of their roots lie within the work of
the League of Nations in the 1920s and 1930s.655 The latter is also vital to
consider when rendering a normative review of the international tax regime,
as all the existing double tax treaties have been highly influenced by the
work of the League of Nations. For instance, the arm’s length principle,
which is the most influential allocation principle, has its roots in this age.
However, we have also seen that drafters of the first model convention did
not follow a single design principle, and this is still reflected in the cur-
rent models. In particular, the arm’s length principle seems to be the result
of compromise, and not derived from mere theoretical consideration. It is
somehow a “product of history”.656
Moreover, as argued, the current international tax regime was mainly devel-
oped in the 1920s and 1930s. At that time, the world was very different; in
particular, the relation between developing and developed countries has
changed and global trade was by no means existent as it is on today’s scale.
The publications of the annual World Trade Report by the WTO657 and the
publication of the World Investment Reports of the UNCTAD658 show the
impressive evolution of global trade and cross-border investments at least
within recent years. This is material for a normative review. As was already
demonstrated in the introduction, the structure of the global society might
have an impact on the applicable justice principles; consequently, a nor-
mative review of the international tax regime must always be understood
in its context. The context for the present study is a highly integrated and
globalized society.
Lastly, a more integrated tax world through the creation of the Inclusive
Framework and the Global Forum might have repercussions for the appli-
cable justice principles. In particular, the fact that coercive measures have
been used to achieve a certain harmonization or level playing field will be
relevant in Part IV of the present study. Coercion, per se, is an element in a
legal regime that might trigger specific moral considerations.
655. See generally de Wilde, 2015, p. 438. See also Graetz, p. 262.
656. The term is used by Sadiq, p. 276, with reference to Langbein.
657. The reports are available at https://www.wto.org/english/res_e/reser_e/wtr_e.htm
(last visited 15 Sept. 2017).
658. The reports are available at http://unctad.org/en/pages/DIAE/World%20Investment
%20Report/WIR-Series.aspx (last visited 15 Apr. 2019).
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4.2.3.3.1.
Some preliminary methodological remarks
It would go beyond the scope and purpose of the present study to discuss the
content of double tax conventions in detail. Many commentaries have been
published in recent years focusing on the application and interpretation of
double tax conventions. Nevertheless, in order to understand the impact of
the current international tax regime on the allocation of taxing rights and
in order to render a normative review of the international tax regime in Part
IV of the present study, it is important to understand at least the main rules
provided for in a double tax convention.
In the following, reference is made to the OECD MC and not to the UN MC.
The wording of the OECD MC and the UN MC is – besides certain specific
rules in favor of developing countries659 – very similar. Such methodology,
i.e. not referring to actual double tax conventions, also seems justified, as
the clear majority of rules contained in double tax conventions follow these
models. Avi-Yonah, Sartori and Marian660 concluded that 80% of the wording
of the existing double tax treaties is identical, which demonstrates that states
rely highly on these two models. Although the OECD only has 34 member
countries, the OECD MC has not only influenced double tax treaties among
OECD member countries, but also between a member country and a non-
member country, and even between two non-member countries.
4.2.3.3.2.
General rules (scope of convention and definitions)
659. For further details about the differences between the OECD MC and the UN MC
see Daurer, p. 53 et seq.; Lennard, 2009, p. 4 et seq.
660. Avi-Yonah, Sartori & Marian, p. 150. See also Brauner, 2016, p. 4, who states with
further references that the OECD Model “dominates the current tax treaty law”.
661. See art. 3(2) OECD MC.
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Treaty-based rules of the international tax regime
the purpose of the application of a double tax convention and must be under-
stood in connection with article 1 of the OECD MC, as the definition of
the personal scope of the application of tax treaties relies on residency of a
taxpayer in one of the two contracting states.
At this stage, it should be highlighted that double tax conventions are reci
procal. This means that the protection of the double tax convention applies
at least from a legal perspective to residents in both jurisdictions. However,
from a factual perspective, depending on the economic interdependence of
two states, the income flow that receives treaty protection might mainly be
in one direction.662
4.2.3.3.3.
Allocation rules and method articles
The allocation rules generally reduce the tax rate applicable in the source
state or even oblige the source state to not tax certain income. It is essential
to note at this stage that double tax treaties do not only have the purpose
of avoiding or mitigating double taxation, but these agreements also aim at
reducing source taxation, as the income taxation is shifted to the resident
country.663 This is an important fact of the current international tax regime.
Generally speaking, the OECD MC follows the approach that active busi-
ness income should be taxed in the source country and passive income in
the resident country.664 However, the taxing rights of the source country are
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Chapter 4 - The International Tax Regime
also reduced with respect to active income, as the taxing right of the source
country is limited to cases in which an enterprise meets the PE threshold in
the source country.
The most important allocation rules for the purpose of the present study
include article 7 of the OECD MC, which limits the taxation of the source
country with respect to active business income to cases in which the foreign
enterprise meets the PE threshold. Furthermore, article 9 of the OECD MC
is crucial, which requires the application of the arm’s length principle in an
intra-group situation.665 Articles 10-13 of the OECD MC reflect, besides
articles 7 and 9 of the OECD MC, the core allocation rules with respect to
the income of corporations. Following these, the OECD MC articles 10-13
aim at lowering the taxing right of the source country with respect to divi-
dends (article 10), interests (article 11), royalties (article 12) and capital
gains (article 13). Articles 15-20 of the OECD MC relate to the taxation of
the income of individuals, such as ordinary employment income (article 15),
directors’ fees (article 16), artists and sportsmen (article 17), pensions (art-
icle 18), government service (article 19, and students (article 20). Article 21
of the OECD MC covers any other income that does not qualify for one of
the aforementioned income allocation rules.
4.2.3.3.4.
Transfer pricing
Transfer pricing is the core issue of the international tax regime668 and, as
already mentioned, article 7(2) and article 9(1) of the OECD MC, almost
identical provisions, are its legal base. The arm’s length principle has two
important functions; it determines that (i) the income of a PE should be
calculated according to the arm’s length principle following the authorized
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Treaty-based rules of the international tax regime
OECD approach (article 7(2) OECD MC)669 and, that (ii) the remuneration
for the sale of a good or a service among related parties should follow the
arm’s length principle (article 9(1) OECD MC).670
The arm’s length principle is by far the most widely applied income alloca-
tion mechanism worldwide; it is fair to say that nearly all countries follow
the arm’s length principle to allocate income between treaty jurisdictions.
One of the only states that significantly deviates in this respect is Brazil.676
Other states do apply the arm’s length principle internationally, but they
follow a formulary system domestically in order to allocate the income to
various states in a federation.677 Below, we will further analyze whether the
arm’s length principle has become part of customary international law.678
669. For more details see OECD, 2010 Report on the Attribution of Profits to Permanent
Establishments (OECD 2010), p. 13 et seq.
670. E.g. Lang, 2013, para. 472 et seq. For more details see OECD, Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations (OECD 2017), para. 1.1
et seq.
671. E.g. Lang, 2013, para. 266 et seq.
672. OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
(OECD 2017), para. 1.33.
673. The OECD distinguishes between the comparable uncontrolled price method, the
resale price method, and the cost-plus method (OECD, Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations [OECD 2017], para. 2.12 et seq.).
674. The OECD distinguishes between the transactional net margin method and the
transactional profit split method (OECD, Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations [OECD 2017], para. 2.62 et seq.).
675. For more details on the so-called source principle, see sec. 11.5.
676. For further details on the methodology in Brazil see De Sá, 2015, p. 22 et seq.
677. See, for instance, the system in the US (Mayer, p. 65 et seq.) or the system in
Switzerland (id., p. 124 et seq.). For further details, see also sec. 12.2.
678. See sec. 4.3.2.8.5.
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4.2.3.3.5.
Special provisions
These special provisions are critical for the purpose of a normative analysis,
as these rules not only reveal crucial limitations of international cooperation
due to international law restrictions, but they also cover important features
of the current international tax regime. Below, we will analyze whether the
implementation of such a provision is required to enhance justice in the
international tax regime.681
4.2.3.3.6.
Final provisions
The OECD MC contains, as the final provisions, rules on the entry into force
of the treaty682 and a termination clause.683 The termination clause is not just
of theoretical importance, but within international tax practice, some double
tax treaties have been cancelled.684 For the purpose of the present study, it
is vital to note that tax agreements are not signed for an indefinite period
of time. This means that having a double tax convention is not self-evident,
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Treaty-based rules of the international tax regime
but rather, it relies on real consent and many states have not yet reached an
agreement.
4.2.4. Enhanced multilateralism?
4.2.4.1. Preliminary remarks
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Chapter 4 - The International Tax Regime
Regarding their legal nature, multilateral treaties might not only create an
obligation between states, but multilateral conventions could also have
a law-making effect. For instance, a multilateral convention may pro-
vide for the creation of an international organization, such as the OECD.
Consequently, the contracting states agree that the newly established inter-
national body shall have the rights to render decisions or even publish guide-
lines or regulatory documents, i.e., to act as a “quasi-legislator”. Depending
on the actual underlying multilateral convention, such resolutions can have
a binding or non-binding effect. The actual legal basis for such binding or
non-binding resolutions remains the multilateral convention and, therefore,
as mentioned by Thirlway, the concept of international legislation relates to
an underlying multilateral agreement.693
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Treaty-based rules of the international tax regime
If a multilateral tax convention has one particular purpose and if that pur-
pose is not the avoidance of double taxation, it would be qualified as a spe-
cial purpose multilateral tax convention. If a multilateral convention aims
at harmonizing domestic tax systems, it would be qualified as a multilateral
harmonization tax convention, compared to a multilateral double tax con-
vention, which aims at mitigating the risk of double taxation in cross-border
circumstances. A potential fourth category would be the aforementioned
conventions incorporating an international organization, such as the UN
Charter and the OECD Convention.
With respect to the second category, it would be possible that the taxing
rights, compared to the existing predominant instrument of bilateral double
tax convention, are allocated through a single multilateral convention signed
by dozens of countries. There have been several attempts to partially replace
the existing system of hundreds or even thousands of double tax treaties.
However, even within the EU, as a highly integrated market, attempts to
implement a multilateral double tax convention have not proven to be
699. Even though the qualification has no legal consequences, it allows for a better
understanding of the scope of multilateral conventions within the international tax regime.
700. For more detail see Pross & Russo, p. 361.
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Chapter 4 - The International Tax Regime
It allocates the income differently than the OECD MC and the UN MC,
as the taxing right is with the source state. For instance, according to art-
icle 12(1) of the CARICOM, “[i]nterest arising in a Member State and paid
to a resident of another Member State shall be taxed only by the first-men-
tioned State”, whereas the tax rate in the source state shall not exceed 15%.706
This means the taxing right of the resident state is not even residual. Further
differences exist compared to the OECD MC and UN MC, which might not
only trigger difficult interpretation issues, but might also lead to complexi-
ties when signing a double tax treaty with a non-participating state.707 The
exclusive source taxation concept seems to have the advantage that it is
easier to administer, as a taxpayer does not need to apply a complicated
credit or exemption method,708 and it also seems to consider the potential
benefit of source taxation for developing countries.709 Reference to such an
agreement is necessary, as it demonstrates that residual residence taxation
is not carved in stone as the only available allocation mechanism.
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Treaty-based rules of the international tax regime
role. Obviously, the development of tax law within the EU and its project
on the CCCTB has shown that, at least in an internal market, there seems
to be a need for a partial harmonization through multilateral instruments.710
However, the legislative background within the EU is different than at the
international level. At that international level, formal harmonization agree-
ments have not yet been signed, but the use of model conventions at an
international level (i.e. fuzzy multilateralism) might have already led to a de
facto harmonization of part of domestic tax law. In other words, by provid-
ing standard clauses in international tax treaties, states might have trans-
formed certain concepts from treaty law into domestic law. For instance,
states might align their domestic PE definition to the treaty definition.
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Chapter 4 - The International Tax Regime
just system.715 Certain treaties, however, are not reciprocal but can still be
considered just.716 Therefore, depending on the agreement, fairness does not
necessarily require reciprocity, but reciprocity of duties and rights is often
key to achieving a fair and just agreement.
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Treaty-based rules of the international tax regime
718. A striking example is Mongolia, which recently terminated several double tax
treaties (i.e. with Luxembourg, Kuwait, the Netherlands and the UAE). This has led to an
intense debate in the Dutch parliament regarding the question of what kind of tax treaties
should be signed with developing states (see for an overview Schrievers & Vogel, p. 202).
On this topic see also Meyer-Nandi, p. 36 et seq.
719. See sec. 1.2.
720. Koller, 2009, p. 192.
721. See, in particular, Canaris, p. 1 et seq.; Arnold, p. 1 et seq.
722. See, for example, sec. 11.3.2.
723. Arnold, p. 16, with reference to Von Hayek and Flume. See also, on the question
of justice in international treaties, the remarks of Nagel as outlined in sec. 7.4.1.
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Chapter 4 - The International Tax Regime
138
Non-treaty-based rules and principles
claim that rules in an international treaty are just simply because it was in
the free will of the states to consent to such an agreement.
4.3.1. Preliminary remark
The main rules of the international tax regime stem from written treaties
between states. However, in order to render a normative review of the inter-
national regime, it is vital to prove the existence or non-existence of non-con-
tractual rules within the international tax regime.726 In the following, we will
focus, in particular, on customary international law and general principles of
law according to article 38 of the ICJ Statute in order to develop a compre-
hensive understanding of the legal content of the international tax regime.
4.3.2. Customary law
4.3.2.1. Preliminary remarks
139
Chapter 4 - The International Tax Regime
as the terms “general practice” (i.e. “state practice”) and “accepted as law”
(i.e. “opinio iuris”) indicate.730
730. E.g. Degan, p. 143 et seq.; Von Heinegg, in: Ipsen, § 17 para. 2.
731. See generally Boas, p. 73, who states with reference to Jennings & Watts that
customary international law is the oldest source of international law. See, with a brief
overview on the origin of customary international law, Trachtman, p. 172 et seq.
732. This was already stated by Verdross & Simma, § 533.
733. See, for instance, the remarks on the tax exemption of diplomatic agents in sec. 4.3.2.8.4.
734. E.g. Lepard, p. 3 et seq.
735. Thirlway, 2014, p. 62. And courts often seem not even to apply the twofold defini-
tion (for more details see Choi & Gulati, p. 117 et seq.).
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Non-treaty-based rules and principles
4.3.2.2.1.
Some preliminary remarks
Due to the lack of consistent opinions among states (judges and scholars),
the concept of customary international law has also been under scrutiny.737
D’Amato, for instance, speaks of a “tremendous amount of disagreement”.738
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4.3.2.2.2.
Voluntarism or positivism743
742. For an overview on other opinions see Degan, p. 144 et seq.; Verdross, 1969, p. 635
et seq.
743. It goes beyond the present study to provide a full and sophisticated distinction
between voluntarism and positivism in the area of customary international law. See on
this topic, for instance, Besson, 2016, p. 289 et seq.
744. This seems to be the oldest theory to justify the validity of customary international
law (Verdross, 1969, p. 636).
745. See generally Lauterpacht, p. 360. Further references are also mentioned by D’Amato,
p. 187 et seq. or with reference to the opinions of some of the fathers of international law
(Grotius, de Vattel, Wolff) see Verdross, 1969, p. 636; see concerning such theory Müller,
p. 78 et seq.; Verdross, 1973, p. 96.
746. Kelsen, 1967, p. 453 et seq. With further remarks to the position of Kelsen, which
is not a consensual theory in a strict sense, see Verdross, 1969, p. 639 et seq.
747. Wolfke, p. 160 et seq. See also Thirlway, 2014, p. 12 et seq.
748. De Vattel, Préliminaires, § 27.
749. Verdross, 1969, p. 636 et seq., with further references.
750. Thirlway, 2014, p. 54. However, the term “tacit agreement” already indicates that it
is a strict consensual theory, as consent is only “tacit”. On the latter point, with reference
to the opinion of Anzilotti, see Verdross, 1969, p. 638.
142
Non-treaty-based rules and principles
Also, in the Lotus decision itself, the ICJ refers to the will of states as the
underlying justification for international law in general:
The rules of law binding upon States therefore emanate from their own free
will as expressed in conventions or by usages generally accepted as express-
ing principles of law and established in order to regulate the relations between
these co-existing independent communities or with a view to the achievement
of common aims.752
4.3.2.2.3.
Good faith, reasonable expectations or trust in a certain
behavior
751. ICJ, North Sea Continental Shelf Cases (Federal Republic of Germany v. Denmark
and Netherlands), p. 44 et seq.
752. PCIJ, Lotus, Permanent Court of International Justice, The Case of the Lotus S.S.,
France v. Turkey, p. 18.
753. Lepard, p. 17; Verdross, 1969, p. 637; Verdross, 1973, p. 96. For further details
about the consent theory see Kammerhofer, p. 533 et seq.
754. Tasioulas, 2007, p. 313.
755. Kammerhofer, p. 533, with reference to Byers.
756. With reference to the Lotus and Nottebohm decisions, see Verdross & Simma,
§ 555. See, with an empirical analysis, Choi & Gulati, p. 117 et seq.
143
Chapter 4 - The International Tax Regime
se, but rather the justified trust in certain actions of another state that cre-
ates a legal obligation.757 The consistent state practice could therefore be
understood as a sign of certain expectations among states that other states
will also behave in a certain way in the future. Such an approach can be
understood as being supplementary to cases in which it is obvious that state
consent on a certain rule is binding by customary international law.758 If one
follows such rationale, it is essential to elaborate when and due to what rea-
sons trust in a certain behavior of a state should be protected. Two aspects
are of preeminent importance.
Secondly, the past and consistent behavior of states regarding the alloca-
tion of state interest, for instance, with regard to natural resources, shall
not become void by a one-sided refusal of one state.760 This means that it
should not be in the discretion of a single state to object to a long-standing
international consistent practice. Or, in more general terms, a state cannot
undermine the legal validity of a customary rule by persistently objecting to
it. The latter might only lead to a denial of the application of the presumed
customary rule in relation to such a state, but not question the validity of
the customary rule, per se.761
757. Müller, p. 85: “Es ist nicht das spekulative Moment einer nicht weiter erklärbaren
opinio iuris, sondern das gerechtfertigte Vertrauen in die die Konstanz fremden Verhaltens
in rechtlich relevanten Handlungsbereichen, das die Verbindlichkeit einer Übung begründen
kann.”
758. Id., p. 80: “Die Lehre vom Vertrauensschutz vermag nun insbesondere jenen Bereich
der Gewohnheitsrechtsbildung zu erhellen, in dem es sich nicht um ausdrückliche, sondern
stillschweigende, aus den Umständen zu schliessende Anerkennung einer Übung als Recht
handelt.”
759. Id., p. 91.
760. Id., p. 90.
761. See also Besson, 2016, p. 315.
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Non-treaty-based rules and principles
4.3.2.2.4.
Morality or ethical values
Related to a theory based on good faith is the claim that morality and ethics
are relevant for justifying the validity of a rule of customary international
law. This would mean that morality or ethical values could be the basis for
the recognition of customary international law. Therefore, both prerequi-
sites (i.e. state practice and opinio iuris) of the traditional understanding of
customary international law would not be required.
Some authors argue that there are moral reasons for recognizing customary
international law as a potential source of international law.762 Some authors
and, according to Lepard, also the ICJ,763 do not base a rule of customary
international law on moral or ethical principles, but rather argue that ethical
values might “tip the balance” in favor of customary law.764
762. See the references stated by Akehurst, p. 34 et seq. See also the references men-
tioned by Petersen, p. 264 et seq. See as an example, Tasioulas, 2016, p. 95 et seq., and
his “moral judgment-based account (MJA) of customary international law”.
763. Lepard, p. 142 et seq.
764. Id., p. 143.
765. Id., p. 114.
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To sum up, Lepard at least partly refers to ethical values in order to justify
the validity of rules of customary international law. A distinct approach
is taken by Tasioulas, who uses the term “interpretive conception” for his
account of customary international law. In simplified terms, he detaches
opinio iuris from the state practice and, in principle, he does not require that
both elements are fulfilled in order to create customary international law.768
Moreover, he takes into account the opinio iuris of non-state actors in order
to achieve more legitimacy in international law and to achieve enhanced
global justice. The core of his concept, however, is that both state practice
and opinio iuris are “raw data”, as he calls it, and it “will be a matter for
the interpreter’s independent ethical judgment”769 to determine how morally
attractive a rule as a customary rule is.
146
Non-treaty-based rules and principles
legal practice – also has some major disadvantages. For instance, as high-
lighted by Tasioulas,
The danger in accepting this idea is that custom becomes, not a source of legal
norms the existence and content of which is robustly independent of anyone’s
viewpoint on contestable ethical and political issues, but either a political battle-
field in which indeterminancy is rampant or else the puppet of some arbitrarily
privileged ideological standpoint.771
However, for the purpose of the present study, it is our understanding that
moral reasons cannot by themselves create customary international law, as
the two traditional requirements, “state practice” and “opinio iuris” must
be evident. However, of course, the question of whether an opinio iuris is at
hand is influenced by moral considerations, but customary international law
cannot be given if there is no state practice in which such a rule is reflected.
This means that many moral or ethical principles and rules will not fulfill
the requirements of customary international law.772 In the following, we will
discuss in more detail these two traditional requirements for the creation of
customary international law.
4.3.2.3. State practice
4.3.2.3.1.
What is state practice?
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One disputed issue is whether a claim of a state without an actual act of such
a state qualifies as practice in the sense of the customary law definition.775
It is, for instance, unclear whether a claim within a legal procedure can
also be seen as state practice.776 However, the distinction between a mere
claim and an actual state action seems, from a tax perspective, not of great
importance, as the existence of mere claims is rare, as states tend to indeed
tax (or explicitly not tax) an income and not just claim that a certain income
should (or should not) be taxed. Or, in other words, from a tax perspective,
a claim generally aligns with an actual action of a state, i.e. the taxation of
an item of income.
Another issue relates to the question of the spread and duration777 of a cer-
tain state practice. Regarding the necessary duration for the creation of
customary international law, Villiger778 mentions that most authors agree
that customary international law can also be created within a short time
frame and, therefore, the duration of a certain practice is a relative require-
ment. Concerning the required spread of state practice, under certain cir-
cumstances, even local or regional customary international law can emerge.779
According to some authors,780 the disputed practice does not need to be
applied by all countries. However, it needs to be analyzed in each individual
case whether a certain practice is applied (and supported) by a sufficient
number of countries.781 Often, reference is also made in this respect to the
North Continental Shelf Cases, in which the ICJ held the following:
Although the passage of only a short period of time is not necessarily, or of
itself, a bar to the formation of a new rule of customary international law on
the basis of what was originally a purely conventional rule, an indispensable
requirement would be that within the period in question, short though it might
be, State practice, including that of States whose interests are specially af-
fected, should have been both extensive and virtually uniform in the sense of
the provision invoked.782
148
Non-treaty-based rules and principles
The ICJ sometimes even seems to approve the existence of customary law
without proving that there is indeed sufficient state practice.783 The practice
must not be uniform and infringements of a certain rule might not necessar-
ily be a sign of the non-existence of a rule.
4.3.2.3.2.
Resolutions of international organizations
783. Thirlway, 2014, p. 221 (n. 102) with further references. See also Choi & Gulati,
p. 117 et seq.
784. OECD/G20, Addressing the Tax Challenges of the Digital Economy, Action 1: 2015
Final Report (OECD 2015), para. 277 et seq. See also the proposal brought forward by
Hongler & Pistone, p. 1 et seq.
785. See Boas, p. 76, with reference to the Asylum case.
786. See the references mentioned by Lepard, p. 23 et seq.
787. See generally Giersch, p. 120 et seq., or with further references Payandeh, p. 258
et seq. Or see the contribution of Van Hoof, p. 182 et seq.
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Chapter 4 - The International Tax Regime
788. Thirlway, 2014, p. 79. See also Boas, 2012, p. 88 et seq.; Giersch, p. 120 et seq.
789. See generally Giersch, p. 122 et seq.
790. OECD, The Application of the OECD Model Tax Convention to Partnerships (OECD
1999), p. 63 et seq.
791. OECD/G20, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2:
2014 Deliverable (OECD 2014), p. 139 et seq. See also art. 3 MIL.
792. See, however, for a more distinct analysis Akehurst, p. 11. On the question of the
importance of a resolution of an international organization for the creation of state practice
see also Doehring, para. 308.
150
Non-treaty-based rules and principles
4.3.2.3.3.
Treaty provisions
4.3.2.4.1.
Some general remarks
The opinio iuris as the subjective requirement means that, according to the
case law of the ICJ, the relevant rule reflects a “belief that this practice is
rendered obligatory by the existence of a rule or law requiring it.”797
151
Chapter 4 - The International Tax Regime
iuris requirement following the case law of the ICJ.798 Furthermore, the ICJ
held within the same judgment that:
The frequency or even habitual character of the acts is not in itself enough.
There are many international acts, e.g., in the field of ceremonial and proto-
col, which are performed almost invariably, but which are motivated only by
considerations of courtesy, convenience or tradition, and not by any sense of
legal duty.799
The opinion was further confirmed, inter alia, in the case concerning mili-
tary and paramilitary activities in and against Nicaragua.800
Even though scholars generally agree that the opinio iuris is essential
in order to create customary international law, there is still an intense
debate on how to prove that there is indeed an opinio iuris. According to
Kammerhofer, the opinio iuris requirement is actually “the most disputed,
least comprehended component of the workings of customary international
law”.801 However, it is inherent that the subjective element of an opinio iuris
is challenging – if not impossible – to demonstrate.802
798. Boas, p. 80; Crawford, p. 27; Heintschel von Heinegg, in: Ipsen, § 17 para. 12;
Thirlway, 2014, p. 57; Verdross, 1973, p. 104.
799. ICJ, North Sea Continental Shelf Cases (Federal Republic of Germany v. Denmark
and Netherlands), p. 44.
800. ICJ, Case concerning military and paramilitary activities in and against Nicaragua
(Nicaragua vs. the United States of America), p. 98.
801. Kammerhofer, p. 533.
802. See Müller, p. 82 et seq. On this topic previously, Verdross & Simma, § 563;
Verdross, 1973, p. 104 et seq.
803. See sec. 4.3.2.2.2.
804. See sec. 4.3.2.2.3.
805. This is, in simplified terms, the opinion of Mendelsohn, p. 206 et seq. He also
mentions further authors, such as Kelsen, Guggenheim and Kopelmanas.
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Non-treaty-based rules and principles
For the purpose of the present study, it is important to note that justice
and fairness are not key factors in order to decide whether an opinio iuris
exists according to the case law of the ICJ. It is essential to demonstrate
that there is a necessity for a certain rule (“opinio iuris sive necessitatis”),
and not whether a specific rule is fair from the perspective of the taxpayer.
For instance, one could argue that it is unfair if the profit of an enterprise is
taxed twice in two jurisdictions (i.e. juridical double taxation). However, we
are not of the opinion that there is an opinio iuris among states that juridical
double taxation should be avoided.810 Therefore, customary international
law is not about figuring out whether a rule ought to exist, but whether a
rule does indeed exist.811 Or, vice versa, it is possible that an opinio iuris
exists and that a certain rule is required, even though this leads to an unfair
or unjust result.
In the following, two specific aspects of the evidence of an opinio iuris will
be discussed. These are also of particular interest from a tax perspective.
First of all, we will deal with the question of how and whether recommen-
dations, resolutions or other decisions of an international organization can
be seen as a sign of an opinio iuris; secondly, we will demonstrate how
806. Kammerhofer, p. 533. See also with reference to Oppenheim, Finnis, p. 238 et seq.;
Tasioulas 2009, p. 320 et seq. See Lefkowitz, p. 201, on dissolving such a chronological
paradox in customary international law foundation.
807. Such an opinion is brought forward in a persuasive manner by D’Amato, p. 74 et
seq.
808. Villiger, 1997, p. 47 et seq.
809. Heintschel von Heinegg, in: Ipsen, § 17 para. 15.
810. For further details see sec. 4.3.2.8.3.3.
811. Thirlway, 2014, p. 78.
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Chapter 4 - The International Tax Regime
treaties and customary law interact and whether a treaty can be a sign of an
existing opinio iuris.
4.3.2.4.2.
Resolutions of international organizations as a sign
of an opinio iuris
With respect to the state practice requirement, it has already been shown812
that a resolution of an international organization, such as the OECD, can
indeed be a sign of an existing state practice, but reluctance is required.
The present section aims to further discuss the validity of resolutions of an
international organization in order to create customary international law
with respect to the opinio iuris requirement.
From a tax perspective, one could derive from such case law that a resolu-
tion of an international organization, such as the UN or the OECD, could be
a sign of an existing opinio iuris, although the ICJ is reluctant to accept such
an opinio iuris if negative votes and abstentions exist regarding a concrete
decision of an international organization. Also of interest is the Nicaragua
154
Non-treaty-based rules and principles
case of the ICJ. In this case, decided in 1986, Nicaragua claimed that the US
infringed on the obligation to refrain from the threat or use of force as part
of customary international law. It is of particular interest that article 2 of the
UN Charter provides for an explicit prohibition of the threat or use of force.
However, due to procedural reasons, the Court could only rely on customary
international law (and not treaty law) as a potential legal base. With respect
to the validity of the claim of Nicaragua, the Court stated the following:
The Court has however to be satisfied that there exists in customary interna-
tional law an opinio juris as to the binding character of such abstention. This
opinio juris may, though with all due caution, be deduced from, inter alia, the at-
titude of the Parties and the attitude of States towards certain General Assembly
resolutions, …. The effect of consent to the text of such resolutions cannot be
understood as merely that of a “reiteration or elucidation” of the treaty com-
mitment undertaken in the Charter. On the contrary, it may be understood as an
acceptance of the validity of the rule or set of rules declared by the resolution
by themselves.817
817. ICJ, Case concerning military and paramilitary activities in and against Nicaragua
(Nicaragua v. the United States of America), para. 188.
818. See, with further details on the reasons for a non-protest, Lepard, p. 188. See also
Boas, p. 88.
155
Chapter 4 - The International Tax Regime
4.3.2.4.3.
The importance of treaty provisions
156
Non-treaty-based rules and principles
The second example of interaction between treaty law and customary law
has also triggered the attention of courts and several authors. The ICJ con-
firmed in North Sea Continental Shelf Cases that it is indeed possible that
rules within a treaty or an international convention might become customary
international law and, therefore, bind parties that have not been parties of
such a convention.827 It seems indeed persuasive to argue that rules provided
for in a treaty can be a statement of customary international law.828 However,
it is important to consider that a provision in a bilateral treaty might be less
of a sign of an existing customary rule of international law, as compared to a
rule provided in a multilateral convention signed by dozens of jurisdictions.829
The amount of participating states might generally influence the validity of
the argument that a treaty provision creates customary international law.830
In the case of several dozen or even hundreds of bilateral agreements con-
taining the exact same provisions, this might indeed reflect the existence
of a rule of customary international law.831 However, it is also important to
824. See, on the relation between treaties and custom, Crawford, p. 33; Thirlway, 2014,
p. 139.
825. Doehring, para. 314 et seq.
826. ICJ, Case concerning Gabčíkovo-Nagymaros Project (Hungary v. Slovakia), p. 38.
827. ICJ, North Sea Continental Shelf Cases (Federal Republic of Germany v. Denmark
and Netherlands), p. 41.
828. See generally D’Amato, p. 160 et seq. Further opinions are mentioned by Lepard,
p. 32.
829. E.g. ICJ, Case concerning the Continental Shelf (Lybian Arab Jamahiriya v. Malta),
p. 29 et seq.
830. Baxter, p. 275 et seq.
831. See generally about the interaction between multilateral treaties and custom, id.
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Chapter 4 - The International Tax Regime
consider that a treaty itself does not play a constitutive role, in the sense that
a treaty practice, which is reflected in dozens or even hundreds of treaties, is
automatically a sign of an existing opinio iuris.832 However, there is a lack
of clear guidance about such an interaction of treaty law and customary
law and it needs to be decided in an individual case whether a certain treaty
network has led to the creation of customary international law.833
From a tax perspective, the question could be whether the signing of thou-
sands of double tax conventions containing mainly identical provisions has
led to the creation of customary international law within international tax
law. To be more precise, one could, for instance, argue that the 183-day rule
according to article 15(2) of the OECD MC or article 15(2) of the UN MC
is part of customary international law, as it seems to be the practice of most
states in a cross-border situation to exempt the income of a person in simpli-
fied terms if such individual is resident in a treaty country and works less
than 183 days in the other country for an employer that is not resident in the
latter country. Therefore, a taxpayer could claim non-taxation in a certain
state, as he could apply the 183-day rule as part of customary international
law, even in concrete circumstances where no double tax treaty is in place.
However, we would disagree with such a position for the following two
(non-exhaustive) reasons.
First of all, double tax treaties do not cover or, at least in the past, have not
covered offshore states. This means that there is an impressive network of
existing provisions that are very similar in every double taxation convention,
but certain states have not yet signed one of these treaties. The latter is not a
sign that these states do not agree on these provisions in a double tax treaty,
but that the other (onshore) jurisdictions have or had no interest in signing
these agreements with offshore havens. Or, as stated by Villiger:
Yet even a series of such [identical bilateral] treaties cannot per se offer conclu-
sive evidence of a customary rule, or the opinion, since States may be ratifying
such treaties precisely because they believe that no customary rules exist, or
will exist, on the matter.834
This is indeed true with regard to the 183-day rule, as states are not of the
opinion that the income of such a cross-border worker should not be taxed
in the recipient state, per se, but rather that if they agree on a double tax
convention, that the 183-day rule seems a rather practical solution in ap-
plication.
158
Non-treaty-based rules and principles
4.3.2.5. Persistent objector
159
Chapter 4 - The International Tax Regime
The ICJ has also used the argument of coordination as a reason for estab-
lishing a rule of customary international law. It has stated in the Gulf of
Maine Case:
A body of detailed rules is not to be looked for in customary international law
which in fact comprises a limited set of norms for ensuring the co-existence
and vital co-operation of the members of the international community, together
with a set of customary rules whose presence in the opinion juris of States can
be tested by induction based on the analysis of a sufficiently extensive and
convincing practice, and not by deduction from preconceived ideas.844
It might also even be the case that constitutional principles and/or domestic
case law explicitly prohibits the creation of a tax liability based on (inter-
national) customary law,845 or one could argue that the principle of “nullum
841. For some contemporary views on the suitability of customary law as a source of
international law in the current global environment, see the contributions in Bradly (ed.).
842. E.g. Bill of Rights, 1698: “That levying money for or to the use of the Crown by
pretence of prerogative, without grant of Parliament, for longer time, or in other manner
than the same is or shall be granted, is illegal; ….”
843. Bühler, p. 36. See also Knechtle, p. 156.
844. ICJ, Case concerning Delimitation of the Maritime Boundary in the Gulf of Main
Area (Canada vs. United States of America), p. 299.
845. See, for example, the case of the Swiss Federal Supreme Court, CH: BGE 94 I 305,
15 May 1968, cons. 3.
160
Non-treaty-based rules and principles
tributum sine lege” in a strict sense could even be part of customary inter-
national law and, in this way, a conflict could arise. Therefore, depending
on the relation between customary international law and domestic (con-
stitutional) law, it might not even be possible that a tax liability (or a tax
exemption) can be based (or granted) on customary international law. The
fact that customary international law is often not dependent on a domestic
ratification process not only limits the usability of customary international
law as a law-making source, but is also a concern of democratic legitimacy.846
Although, from an international law perspective constitutional law cannot
prohibit the creation of customary international law, but it can prohibit its
application domestically.
Further limitations can be derived from the work of Trachtman850 who, inter
alia, showed, based on an empirical analysis, that (i) most rules of custom-
ary international law are already codified, (ii) the pedigree of treaties and
the likelihood of compliance are better than for customary international law
and (iii) in general, customary international law is obsolete in the current
international legal framework. He mentioned the following disadvantages
of customary international law, which we will also refer to from a tax per-
161
Chapter 4 - The International Tax Regime
These disadvantages are also of particular interest for the present work. The
following should be highlighted from a tax perspective:
851. Trachtman, p. 180, mentions further areas, such as international trade law or inter-
national food safety law, which contain complexities that are difficult to be covered by
customary international law.
852. See OECD/G20, Preventing the Artificial Avoidance of Permanent Establishment
Status, Action 7: Final Report (OECD 2015).
162
Non-treaty-based rules and principles
– Due to the importance of the legality principle within tax law, it is in-
deed a major disadvantage that, as mentioned under (v) and (vi) above,
the legislative process according to domestic law is not required for the
853. See Finnis, p. 244, who argues that custom is authoritative, as it indeed enables
the solving of coordination problems, but tax law might be too technical for an area of
coordination compared to, for instance, border conflicts.
854. On the issues of change in international law and the disadvantages of customary
international law, see Tasioulas, 2007, p. 308 et seq.
855. See Trachman, 2016, p. 184, who mentions one of the most symmetric rules that
developed as customary international law: “[Y]ou protect my diplomats, and I will protect
yours.”
163
Chapter 4 - The International Tax Regime
164
Non-treaty-based rules and principles
bound by it. Custom must not in all cases be based on explicit consent,
as states might also be bound if they have not explicitly shown their
consent to a certain rule. Therefore, customary international law does
not require an explicit agreement, as compared to treaty law.859
– Third, state practice is essential for the creation of customary law. This
means that customary law cannot exist solely based on an opinio iuris.
The main argument for such a position is that the term “custom” itself
requires practice, habit, usage, etc. The term “dialectic of practice”, as
used by Allott, is a suitable description.860
– Fourth, the opinio iuris has an important limiting function that should
be highlighted by referring to the case law of the ICJ. First of all, the
opinio iuris is decisive to distinguish between rules of customary law
and mere rules of courtesy. Or, in the words of Akehurst: “[O]pinio
juris is also needed in order to distinguish legal obligations from non-
legal obligations, such as obligations derived from considerations of
morality, courtesy or comity [footnote omitted].”861 Second of all, the
opinio iuris requirement is necessary to distinguish between situations
in which a certain act of a state does not create a legal obligation and a
situation in which states can actually create trust in the behavior of a
state in the sense of a binding obligation. Therefore, the opinio iuris
might also be understood as a negative requirement to exclude certain
state practices from customary international law.
4.3.2.8.1.
Preliminary remarks
165
Chapter 4 - The International Tax Regime
the ICJ has stated that certain privileges of diplomatic and consular rela-
tions belong to customary international law.862 As will be shown below,863
this also has an impact on the international tax law regime. The following
sections will refer to specific examples of potential rules of customary in-
ternational tax law that have been mentioned in the literature. Reference, in
particular, is made to the work of Avi-Yonah864 and Lepard865 in this respect,
but also to older German or Swiss literature, such as Knechtle866 or Bühler.867
There are also other authors who referred to customary international tax
law in their writing.868
4.3.2.8.2.
Excursus: Prohibition of extraterritorial taxation and
CFC legislation
862. ICJ, Case concerning the Arrest Warrant of 11 April 2000 (Democratic Republic
of Congo v. Belgium), p. 21.
863. See sec. 4.3.2.8.4.
864. Avi-Yonah, 2004, p. 483 et seq.; Avi-Yonah, 2007, p. 1 et seq. See also Christians,
p. 326 et seq.
865. Lepard, p. 285 et seq.
866. Knechtle, p. 142 et seq.
867. Bühler, p. 34 et seq.
868. E.g. Albrecht, p. 169 et seq.
869. See sec. 4.3.2.2.
870. On the distinction see sec. 4.1.1.
871. Schaumburg, para. 3.13, with further references. See also Avi-Yonah, 2004, p. 498.
166
Non-treaty-based rules and principles
for further details about the question of whether there is indeed a sufficient
state practice and an opinio iuris that would justify the existence of cus-
tomary international law. Prima facie, it seems persuasive to argue that a
sufficient state practice is given and that taxation indeed requires a genuine
or sufficient link, and that such a rule is undermined with an opinio iuris
that there is a law requiring it. The opinio iuris could, for instance, be sup-
ported by the benefit theory, which actually states that a person should only
be subject to taxes in a specific jurisdiction if that person benefits from the
services or the infrastructure of that state. As demonstrated, this was also
the approach taken in the Cook v. Tait decision of the US Supreme Court.872
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4.3.2.8.3.
Prohibition of juridical double taxation
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Non-treaty-based rules and principles
First, many states do not grant full relief from foreign taxes if no double
tax treaty is in place. For instance, if a person residing in State A works in
State B for 20 days, the salary might be taxable in states A and B, and both
states might not grant a relief mechanism if no treaty is signed between
them. This is the case, for instance, in Switzerland, as it does not provide
comprehensive unilateral relief if a resident person works abroad for a short
period and is taxed on the resultant income. However, in such a situation,
some states do allow at least a deduction of foreign taxes, but will not grant
a full tax credit, but as consequence, juridical double taxation is not avoided.
claims that the prohibition of confiscatory taxation forms part of customary international
law. The latter could be the case if double taxation occurs (e.g. if two states tax an income
at a rate of 40% each).
880. Meng, p. 450 et seq., with further references.
881. See sec. 4.3.2.2.
882. See, for instance, the complicated limitation rules within the former US foreign
tax credit system (for more details see Kochman & Rosenbloom, p. 221 et seq.).
883. Art. 23 B(1) OECD MC.
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Based on these brief remarks, we would also deny the validity of a rule
according to which states are obliged to consider the interest of other states
when taxing a certain income. If this had been the case, the MAP procedure
would require that states act not on the request of taxpayers, but indepen-
dently, if it appears that the taxation of an income might infringe on the
interests of another state. Therefore it does not seem to reflect the opinion
of the states to consider the interest of the other state in the case of a double
tax convention and, therefore, such potential obligation is also not part of
customary international law.
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Non-treaty-based rules and principles
4.3.2.8.3.4. Conclusion
4.3.2.8.4.
Non-taxation of diplomatic and consular personnel
in the residence state
A conference held by the Institute for Austrian and International Tax Law
in 2011, on tax rules in non-tax agreements, explicitly dealt with the non-
taxation of diplomatic and consular personnel, as provided for in the con-
ventions on diplomatic relations and consular relations.888 The convention
on diplomatic relations, which is the focus of the present section, widely
reflects customary international law.889
However, whether the tax privileges, such as the income tax exemption of a
diplomatic agent according to article 34 of the VCDR, are part of custom-
ary international law is disputed.890 Some argue that these privileges were
granted as a matter of courtesy, but others state that these fiscal privileges
indeed belong to customary international law.891 In the following, it is dem-
onstrated whether (i) state practice and (ii) opinio iuris, as the requirements
for customary international law, are fulfilled.
886. See, on the single tax principle with further references, de Wilde, 2011, p. 64.
887. Mann, 1964, p. 10: “In the field of taxation numerous … treaties have been con-
cluded and in due course they will perhaps lead to the acceptance of a rule of customary
international law establishing exclusivity of tax jurisdiction.”
888. The results are published in Lang et al. (eds.).
889. See, with further details also on the development of the VCDR, Denza, p. 1 et seq.
890. Denza, p. 292 et seq. See also Smit, 2012b, p. 3 et seq.
891. See the references stated by Denza, p. 292 nn. 1 and 2. See also Lyons, p. 307 et
seq.; Pijl, 2012, p. 6.
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4.3.2.8.4.2. State practice
172
Non-treaty-based rules and principles
as a family member, whereas another state would argue that a fiancé is not
yet part of the family.
For the purpose of the present chapter, which aims to analyze whether the
fiscal privileges of diplomatic agents have become part of customary inter-
national law, it is vital to understand why these privileges were granted to
diplomatic and consular personnel.
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And later in the judgment, the court confirmed the understanding that the
immunities are granted in order to allow the effective performance of the
functions:
In customary international law, the immunities accorded to Ministers for
Foreign Affairs are not granted for their personal benefit, but to ensure the
effective performance of their functions on behalf of their respective States.897
Therefore, concerning the exemption of the salary of the head of the mis-
sion, it is not persuasive to argue that such a privilege is only a matter of
courtesy. The reason is that it is not granted solely to be polite or to dem-
onstrate generosity, but because there also, based on the aforementioned
court decision of the ICJ, seems to be a rule requiring such treatment of
diplomatic agents (i.e. opinio iuris sive necessitates). Such a rule is required
to ensure effective functioning of the diplomatic system.898 The latter is par-
ticularly true due to two reasons. First, it would be difficult to tax diplomatic
personnel in their state of residence, considering the fact that such persons
change their host state on a regular basis. Second, and more importantly,
the tax could potentially not be enforced at the level of the employer, as
the employer is another state and, therefore, the host state would clearly
infringe on the principle of sovereignty by enforcing such taxes.899
4.3.2.8.4.4. Conclusion
896. ICJ, Case Concerning the Arrest Warrant of 11 April 2000 (Democratic Republic
of the Congo v. Belgium), p. 21.
897. ICJ, Case Concerning the Arrest Warrant of 11 April 2000 (Democratic Republic
of the Congo v. Belgium), p. 22.
898. See Villalpando, 2010, p. 395, who speaks of collective interest.
899. See sec. 4.1.2.2.
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Non-treaty-based rules and principles
Before doing so, it is vital to define the actual scope of application of such
a potential unwritten customary law provision. One option would be to
argue that such a rule applies both for the allocation of income between an
enterprise and its foreign PE, as provided for in article 7 of the OECD MC.
Or one could argue that the arm’s length principle has become part of cus-
tomary law for the determination of transfer prices between two companies
within the same group. This would basically mean that either both or one of
the following rules has become part of customary international law:
Article 7(2) OECD MC
For the purposes of this Article and Article [23 A] [23 B], the profits that are
attributable in each Contracting State to the permanent establishment referred
to in paragraph 1 are the profits it might be expected to make, in particular in its
dealings with other parts of the enterprise, if it were a separate and independent
900. See, on the limitations of customary international law in the field of tax law, sec. 4.3.2.7.
901. See sec. 4.3.2.3.
902. Lepard, p. 285 et seq.
903. Avi-Yonah, 2004, p. 500. Further references are stated by Lepard, p. 268 et seq.
Contra, Schön, 2015, p. 275, who states that customary international law does not contain
an allocation of income rule.
904. Avi-Yonah, 2004, p. 500.
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enterprise engaged in the same or similar activities under the same or similar
conditions, taking into account the functions performed, assets used and risks
assumed by the enterprise through the permanent establishment and through
the other parts of the enterprise.
Article 9(1) OECD MC
Where
a) an enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the other Contracting State,
or
b) the same persons participate directly or indirectly in the management, control
or capital of an enterprise of a Contracting State and an enterprise of the other
Contracting State,
and in either case conditions are made or imposed between the two enterprises
in their commercial or financial relations which differ from those which would
be made between independent enterprises, then any profits which would, but
for those conditions, have accrued to one of the enterprises, but, by reason of
those conditions, have not so accrued, may be included in the profits of that
enterprise and taxed accordingly.
4.3.2.8.5.2. State practice
Prima facie, it seems indeed true that the arm’s length principle reflects a
worldwide state practice, as it is contained in most international double
taxation treaties. This has been shown by others in a persuasive manner.905
To be more precise, this means that most double tax treaties contain a provi-
sion similar906 to article 7(2) of the OECD MC and article 9(1) of the OECD
MC or the respective articles in the UN MC.907
However, even though the vast majority of tax treaties follow the arm’s
length principle, there are still some doubts on whether sufficient state prac-
tice exists in order to create customary law, particularly with respect to the
application of the arm’s length principle to allocate income between the
headquarters and the PE (i.e. article 7(2) of the OECD MC). The following
facts do not support the thesis that sufficient state practice exists:
905. Thomas, p. 123 et seq. Lepard, p. 298 et seq., with further references.
906. Due to significant changes to art. 7 of the OECD MC in 2010, many treaties still
follow the old wording of the OECD MC. This, however, does not change the argument
that most treaties follow the arm’s length principle.
907. Arts. 7(2) and 9(1) UN MC.
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Non-treaty-based rules and principles
However, also with respect to the rule in article 9(1) of the OECD MC, there
are reasons why the state practice is not sufficient:
908. E.g. art. 7(4) of the CH/AT: Convention between the Swiss Confederation and
the Republic of Austria for the Avoidance of Double Taxation with respect to Taxes on
Income and Capital, 30 Jan. 1974: “Insofar as it has been customary in a Contracting
State to determine the profits to be attributed to a permanent establishment on the basis
of an apportionment of the total income of the enterprise to its various parts, nothing in
paragraph 2 shall preclude that Contracting State from determining the profits to be taxed
by such an apportionment, as may be customary; the method of apportionment adopted
shall, however, be such that the result shall be in accordance with the principles of this
Article.”
909. E.g. art. 7(4) of the NL/DE: Convention between the Federal Republic of Germany
and the Kingdom for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income, signed 12 April 2012: “Where an enterprise of
one of the Contracting States has a fixed place of business in the part of a cross-border
economic area belonging to the territory of the other Contracting State, the place of busi-
ness shall not, for the taxation of the profits of the enterprise, be deemed to be a permanent
establishment. Article 14 shall remain unaffected.”
910. This, however, depends on the exact design of the CFC rule. For further details see
sec. 12.3.1.
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To sum up, at first glance, there are reasons to agree that the arm’s length
principle is reflected in a sufficient state practice, which could justify the
existence of customary international law. However, we have also seen that,
in practice, many important exceptions exist that lead to a different conclu-
sion. In particular, because states do not domestically exempt the income of
foreign permanent establishments in non-treaty situations and many states
have CFC rules, we tend to support the position that no sufficient state prac-
tice exists with regard to both elements of the arm’s length principle (i.e.
articles 7(2) and 9(1) of the OECD MC). However, even if the first require-
ment of a customary international law did exist, it would still be required to
prove that the opinio iuris is given.
Within the present study, the opinio iuris requirement, as shown above,912
is understood in line with the case law of the ICJ as being necessary to
distinguish between rules of courtesy and rules that are actually required in
the sense of customary international law. We see various arguments demon-
strating that there is no law actually requiring a taxation following the arm’s
length principle. For the purpose of stringency, it would again be required
to distinguish between the arm’s length principle as a principle to allocate
income between the headquarters and a PE (i.e. article 7(2) of the OECD
MC) and the arm’s length principle as a rule to determine the applicable
transfer price for transactions among related (but legally separate) parties
(article 9(1) of the OECD MC).
However, as the following reasons will demonstrate, there are valid argu-
ments denying both the opinio iuris regarding the arm’s length principle,
according to article 7(2) and with regard to article 9(1) of the OECD MC.
We would argue that there is no opinio iuris that the income between a
headquarter and a foreign PE should be allocated following the arm’s length
principle. The same is true for the arm’s length principle as a determinant
for intra-group transfer prices, due to the following reasons:
911. See, for instance, the legislative measures in Italy (Banfi & Brambilla, p. 67 et
seq.).
912. See sec. 4.3.2.4.
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Non-treaty-based rules and principles
– The BEPS Project has also shown that with regard to certain enterprises,
it might be more appropriate to use formulary apportionment in an in-
ternational framework. In other words, the discussion concerning a re-
definition of the PE threshold within Action 7 of the BEPS Project was
essentially triggered by the authorized OECD approach, intending to
follow the arm’s length principle.
913. See, on the distinction between a formulary system and the arm’s length principle
with further references, sec. 12.2. Of course, the allocation system both in the US and
in Switzerland are not identical and, in particular, Switzerland does not follow a pure
formulary system (see for more details about the existing domestic systems Mayer, p. 63
et seq.).
914. See sec. 4.2.3.2.2.
915. See Lepard, p. 302.
916. Id., p. 303.
917. For more details see sec. 4.3.2.2.4.
918. Lepard, p. 301.
919. Id., p. 300.
920. See sec. 12.2.
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justice does not require a single allocation key aligning to the arm’s length
principle.
4.3.2.8.5.4. Conclusion
Such a conclusion is true regarding the arm’s length principle in both art-
icle 7(2) and article 9(1) of the OECD MC. The impact of such a result
is manifold. Firstly, it should still be up to the states within their bilateral
negotiations to decide whether they want to follow the arm’s length prin-
ciple.924 This means that states are free to conclude, for instance, a double
tax convention that allocates the income of a PE in the other state based on
a formula and not based on the arm’s length principle and the authorized
OECD approach. Second, in a domestic situation in which no treaty is appli-
cable, a state is free to tax the income of a foreign PE, even though this leads
to double taxation. Third, even in an intra-group circumstance, a state is not
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Non-treaty-based rules and principles
obliged to apply the arm’s length principle in order to define the appropriate
transfer price between domestic and foreign corporations.
4.3.2.8.6.
The “no harm” principle
4.3.2.8.6.1. Preliminary remarks
In simplified terms, the “no harm” principle in international law means that
no state shall harm another state or individuals living in another state. In
the following, we will outline whether and to what extent such a principle
has the quality of customary international law and whether it is relevant for
the international tax regime. We will not deal with the question of whether
the “no harm” principle could also qualify as a general principle of inter-
national law.925
The Trail Smelter case was decided in 1938 and 1941 by an arbitration
tribunal. The facts were as follows: Trail Smelter was a smelter in British
Columbia, Canada. Fumes from the smelter caused damage in the territory
of the United States.928 The question was whether Canada was liable for
such damages (i.e. the damages caused by a private corporation). It was
proven that the damages in the United States were caused by the fumes. The
court applied a “no harm” principle in the following manner:
[U]nder the principles of international law, as well as of the law of the United
States, no State has the right to use or permit the use of its territory in such
a manner as to cause injury by fumes in or to the territory of another or the
properties or persons therein, when the case is of serious consequence and the
injury is established by clear and convincing evidence.929
The court, inter alia, made reference to the following statement of Eagleton:
“A state owes at all times a duty to protect other States against injurious
925. See, for example, Bäumler, p. 29 et seq. Of course, if the “no harm” principle is
part of an international treaty, it becomes treaty law (see, for example, art. 5 SCM).
926. ICJ, The Corfu Channel Case, p. 4 et seq.
927. Reports of International Arbitral Awards III (1941), p. 1905 et seq.
928. For further details, see also Bäumler, p. 75 et seq.
929. Reports of International Arbitral Awards III (1941), p. 1965.
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acts by individuals from within its jurisdiction.”930 This meant that Canada
was obliged to refrain “from causing any damage through the fumes in
the State of Washington.”931 One of the main justifications was that states
must respect the territory of other states (i.e. territorial sovereignty shall
be protected).932 The decision contains two important limitations:933 (i) evi-
dence for the harm is necessary and (ii) the damages must be serious.
In the Corfu Channel case, it was proven that a minefield in the Corfu
Channel was laid by the Albanian government or at least that the mine-
field was laid with the connivance of the Albanian government. The United
Kingdom lost two Navy ships after striking two of these mines.934 The
question arose as to whether or not Albania should compensate the United
Kingdom for the losses suffered. The ICJ held that there is an “obligation
not to allow knowingly its territory to be used for acts contrary to the rights
of other states.”935 In other words, the application of the “no harm” principle
is a sign of mutual respect of sovereignty in international law.936 Therefore,
the “no harm” principle was upheld by the court. However, the court is not
clear in its remarks about the legal justification of such a legal duty937 (i.e.
whether it is indeed based on customary grounds, whether it is derived
from the sovereignty principle, or whether it is a general principle of law).
There are more decisions in which the court confirmed that there is a “no
harm” principle in international law, mainly in relation to environmental
protection.938
The “no harm” principle – and this seems true notwithstanding whether it
is derived from the sovereignty principle, whether it is a general principle
of international law, or whether it has customary validity – is a principle
that is very much influenced by moral considerations. It seems wrong per
se that a state would harm the territory of another state. Traditionally, cases
referring to the “no harm” principle deal either with harm caused to the
territory or assets of another state. Another issue is whether there is a “no
harm” principle toward common goods or common areas (e.g. concerning
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Non-treaty-based rules and principles
the pollution of the high seas). The argument is that it is justified to extend
the “no harm” principle to such common goods because all states should
have the same right to use these common goods (i.e. resources).939 It indeed
seems to reflect the current understanding that the “no harm” principle also
applies to international territories, such as international waters or airspace.940
However, taxes are not a common good of the global community, as they
belong to the people of separate states. Therefore, the latter discussion is
not of relevance for the present study.
For the present legal analysis, we will focus on harmful tax competition
as this is the area where other authors have already discussed the potential
application of the “no harm” principle. We will assume that the “no harm”
principle has customary quality. Therefore, we do not need to prove whether
there is sufficient state practice or an opinio iuris, but we do need to prove
whether the “no harm” principle as an existing customary rule prohibits
states from implementing harmful tax practices.
It is important to note that the “no harm” principle, like other customary
rules, has no precise contours. The few existing international cases do not
provide for detailed guidance and are highly controversial.943 Nevertheless,
some conclusions seem possible.
First, both in the Trail Smelter case and the Corfu Channel case, courts dealt
with the liability of a state for actual damages. Therefore, a certain damage
must be at hand. It is clear that damages to the environment of another state
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or damage to ships or other assets of a state are covered by the “no harm”
principle.944 Concerning tax competition, there is no actual damage, but the
damage consists of a future loss in tax revenues. There is no evidence in the
case law of international courts that the no harm principle would also apply
to such future losses.945 If it were to apply, it would have the consequence
that other competitive measures of states could also be affected by the “no
harm” principle. For instance, if a state lowers employee protection laws in
order to be more attractive to businesses, this could harm the other state as
certain functions might be relocated to the former state. This would not be
persuasive, however. It is our understanding that the “no harm” principle
should not apply to these situations, as it has traditionally developed as a
principle protecting territorial integrity, such as in the Trail Smelter case
or the Corfu Channel case. It would be too far reaching and would also
not reflect current international practice if it were to prohibit competitive
measures in general.
Third, particularly in the Trail Smelter case, causation was “far more
attenuated”948 as in the case of tax competition. It would be impossible to
draw precise causation between a change in tax policy and the amount of
revenue lost in another state due to such a tax policy change. This is true
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Non-treaty-based rules and principles
Why do authors suggest the application of the “no harm” principle in rela-
tion to harmful tax practices?
Bäumler had already dealt with the question of whether a certain tax policy
of a state might collide with the “no harm” principle as it is understood
in international law. She states that if a state is no longer able to decide
upon the level of its taxes because of the policy of another state, it must be
understood as a blatant infringement on the sovereignty of the former state.
Or, in her words:
Diese Überlegung ebnet den Weg für die Anwendung des Schädigungsverbots
im Steuerrecht: wenn ein Staat aufgrund der Steuerpolitik eines anderen
Staates faktisch nicht mehr in der Lage ist, selbst über die Höhe seiner Steuern
zu entscheiden, dann berührt das Handeln des anderen Staates in eklatanter
Weise die effektive Souveränität des betroffenen Staates.949
Bäumler is, however, reluctant to then actually apply the “no harm” prin-
ciple to tax matters. In other words, it cannot be derived from her study to
what extent a certain tax policy would infringe upon the “no harm” principle
and, therefore, international law. That being said, she at least states that it
is not absurd to think about a “no harm” principle applying in international
tax law.950 The argument of Bäumler seems to be that the harm is caused
because states are no longer able to define the tax rates as there is com-
petitive pressure, and, therefore, their sovereignty is infringed. Implicitly,
it also means that the “no harm” principle is infringed as states are not able
to decide what level of distribution they want to achieve as tax competition
might de facto limit their legislative leeway. Therefore, the political will of
the people is limited.
If the latter is indeed the argument in favor of the legal prohibition of harm-
ful tax practices, it would also mean that there is a legal duty to support
poor states. This is true as these states – even through higher taxes – would
certainly not have the same amount of revenue available as rich states and
would not be able to decide upon their level of distribution. The legislative
leeway of poor states is far more limited than the legislative leeway of rich
states facing competitive pressure. This is a strong argument that we will
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Chapter 4 - The International Tax Regime
also use while discussing the normative value of the “no harm” principle,
but it also proves to be relevant for the legal question of whether the “no
harm” principle in international law is relevant for tax law.951
In conclusion, we do not see a case for the application of the “no harm”
principle prohibiting harmful tax competition or harmful tax practices, as
there are strong arguments against it that are derived from the existing case
law; while the existing arguments in favor of its application in tax matters
are not persuasive.
4.3.2.8.7.
Interpretation principles according to article 31 VCLT
This means that these principles are also relevant for interpreting double tax
conventions between states that have not ratified the VCLT, such as the US.
Furthermore, it means that these principles are also applicable with regard to
treaties already existing at the time the VCLT was ratified in a specific state.955
The interpretation methods are a good example of a rule of customary inter-
national law that are not affected by the conceptual limitations of custom-
ary international law, as mentioned above in section 4.3.2.6. In particular,
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Non-treaty-based rules and principles
4.3.2.8.8.
Fiscal transparency
First of all, an analysis of the state practice requirement shows that fiscal
transparency reflects the treaty practice of most states, but if there is no
treaty, even the most progressive states do not exchange information with
other states. In other words, with regard to fiscal transparency, it is not the
case that the increase of treaty provisions with respect to the exchange of
information reflects a codification of an existing customary law provision,
but it is merely the result of negotiations among the various jurisdictions.
Second of all, the opinio iuris cannot (at least currently) be demonstrated,
as the current system of a rather transparent tax world has been achieved
through coercive measures, which should not lead to the conclusion that
there is a law requiring a transparent global tax world. Otherwise, it would
not have been necessary to use coercive instruments, such as blacklisting
or threatening the termination of double tax treaties, in order to achieve a
transparent tax world. Former offshore tax havens, as well as other states
like Austria, Switzerland or Luxembourg,959 were basically forced to imple-
ment a transparent cross-border system. The latter would not have been
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necessary if there were indeed a belief that there is a need for a rule requir-
ing fiscal transparency – at least within these jurisdictions. Furthermore,
moral considerations are, according to our view, not of crucial importance
in order to create customary international law.960
As has been shown above, a new rule of customary international law is cre-
ated in a long-lasting process and, compared to treaty law, is not a source
of law that is able to react quickly to international developments. The result
might be different if one follows another understanding of the concept of
customary international law, for instance, one in line with the theory devel-
oped by Lepard, i.e. focusing more on the moral reasons for a certain rule.961
Moreover, we have also demonstrated that morality and justice are, from
our perspective, not of decisive importance for the validity of a rule as cus-
tomary international law. Therefore, compared to others, we would deny
Tax Battles, The dangerous global Race to the Bottom on Corporate Tax, 12 Dec. 2016,
available at https://www.oxfam.org/en/research/tax-battles-dangerous-global-race-bottom-
corporate-tax (last visited 15 Sept. 2017).
960. See sec. 4.3.2.7.
961. See sec. 4.3.2.2.4.
962. Avi-Yonah, 2007, p. 1 et seq.
963. Bühler, p. 1 et seq.
964. Knechtle, p. 1 et seq.
965. Lepard, p. 285 et seq.
966. The result of such negotiations can be treaties as well as soft law, which is also
highly relevant and effective from an international tax perspective (see sec. 4.3.4.).
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Non-treaty-based rules and principles
4.3.3.1. General remarks
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Chapter 4 - The International Tax Regime
The categories “general principles of law” and “customary law” are not
exclusive. This means that a qualification as customary law does not lead
to a denial of the qualification of a rule as a general principle of law. As the
categorization does itself not create a legal order, it seems inappropriate to
strictly qualify each unwritten rule or principle as either a customary law
or a general principle of international law. In some cases, the term “general
international law” might indicate that a rule fulfills the requirements of both
973. Crawford, p. 34 et seq., with reference to Oppenheim. See, with respect to the
historical development of these general principles of law in international law, Verdross
& Simma, § 599 et seq.
974. Thürer, 2000, p. 600.
975. Marro, p. 40 et seq.
976. Boas, p. 105; Heintschel von Heinegg, in: Ipsen, § 18 para. 6; Thirlway, 2014, p. 93
et seq. However, certain authors believe the risk of a non liquet situation is not evident
(Guggenheim, p. 140, or in a similar manner Verdross & Simma, p. 607). See the many
references brought forward by Kolb, 2000a, p. 46 et seq.
977. Jennings, p. 71.
978. Kolb, 2006, p. 9.
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Non-treaty-based rules and principles
sources.979 The case law of the ICJ has shown that the line between a general
principle of international law and customary international law is vague.980
It is, for instance, argued that the ICJ might qualify a rule more frequently
as customary international law, as it is generally reluctant to apply general
principles of international law.981
It is disputed whether the general principles of law are valid due to a wide-
spread application in the domestic laws (in foro domestic)982 of several states
(i.e. a more positive approach983) or whether these are principles that apply
to legal relations in general. The latter would mean that certain principles
are self-evident for all legal relations and are somehow given by nature.984
The latter more natural law approach would also mean that a court is not
required to render a detailed comparative study, but it could instead rely on
equity and justice in order to prove the validity of a certain general principle
of law. Both lines of argument find their support and a clear underlying
979. For more details see Lepard, p. 163. See for our understanding of the term “general
international law” supra n. 292.
980. Lepard, p. 28 et seq.; Rentsch, p. 113; Thirlway, 2014, p. 100 et seq.
981. Thirlway, 2014, p. 101 et seq.
982. Tomuschat, 1993, p. 312, with reference to the drafting history of art. 38(1)(c) ICJ
Statute.
983. However, this more positive approach does not mean that there is consent among
the states regarding the application of a certain principle, since states have only applied
these principles in a domestic circumstance, but not yet necessarily at an international
level (Payandeh, 2010, p. 301).
984. See the various opinions demonstrated by Degan, 1997, p. 14 et seq., or for further
references see also Cheng, 1987, p. 2 et seq.; Marro, p. 165 et seq.
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One of the reasons for these ambiguities concerning the legal nature of the
general principles of law is related to the fundamental distinction between
naturalism and positivism as two underlying and potentially intertwined
concepts of international law.986 A strict voluntarist would argue that the
validity of a rule depends only on the will (or consent) of the states, which
is demonstrated by the application of a certain principle within the munici-
pal law of various states.987 In order to elaborate whether a certain rule or
principle indeed forms part of these general principles of international law,
one would therefore need to develop an international comparative study in
order to elaborate whether a principle is indeed inherent in most municipal
systems.988 Moreover, such general principles of international law would
need to be part of the domestic system that follows a certain rule of law. This
seems well-argued, as in article 38(1)(c) of the ICJ Statute reference is only
made to general principles “recognized by civilized nations.” Nowadays, it
is generally accepted that “civilized nations” means all Member States of
the ICJ Statute or all UN Member States, respectively.989
985. Marro, p. 162 et seq., with further references. See also the references to authors
following a more naturalistic approach in Marro, p. 326 et seq. For a positive understand-
ing, see Doehring, 2004, para. 412.
986. See Ellis, 2011, p. 953 et seq.; Ratner, 2011, p. 157; Simma, 1995, p. 47 et seq.;
Thirlway, 2014, p. 96 et seq.
987. For more details about a potential positive justification of the validity of general
principles of law, see Ellis, 2011, p. 953. Concerning international tax law, this seems to
be the position of Matteotti, 2005, p. 342, with reference to Lauterpacht: “The qualification
of a maxim of jurisprudence as a general principle of international law is the result of an
enquiry comparing the way in which the law of states representing the main systems of
jurisprudence regulates the problem in the situation in question”; Matteotti, 2003, p. 295.
988. Rentsch, p. 112, with further references. Even though, according to Boas, courts
tend to cite only a few large Western legal systems (Boas, p. 108). Boas (p. 106) further-
more uses the term “deduction” in order to visualize the interaction between domestic
principles and art. 38(1)(c) of the ICJ Statute.
989. Crawford, p. 34, n. 88; Heintschel von Heinegg, in: Ipsen, § 18 para. 2; Verdross &
Simma, § 602. On the unsatisfactory wording of art. 38 of the ICJ Statute, see Rentsch,
p. 108. For further details about the term “recognized by civilized countries” see Degan,
p. 68 et seq.
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Non-treaty-based rules and principles
From our perspective, and this reflects the approach taken in the following
analysis, it seems indeed persuasive, as suggested in the latter position, that
some principles are indeed valid in every legal relation based on equity
or justice considerations. This means that, from a procedural perspective,
it is not in any case necessary to actually render an empiric, comparative
study on the application of a certain principle within dozens of jurisdictions
in order to prove their validity as a general principle of law according to
article 38(1)(c) of the ICJ Statute.992 We would agree with Ellis that, “the
validity of a general principle would have to be grounded in the soundness
and persuasiveness of a legal argumentation rather than in claims about the
objective nature of law or implicit state consent”.993 The reference to domes-
tic law, however, could still be necessary as a guide to develop or frame an
applicable principle in a concrete proceeding.994 Some rules might even be
self-evident, such as certain collision rules,995 as a legal regime without col-
lision rules would not work.
However, this does not mean that any moral values can justify the existence
of the general principles of law. For instance, some claim that protecting
fairness or justice requires that double taxation be prohibited in cross-border
circumstances, but such a claim is obviously not sufficient for its validity as
a general principle of law.996 This means that there is no general principle
of law prohibiting cross-border double taxation. Otherwise, the general
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4.3.3.3.1.
Preliminary remarks
According to Thirlway,1003 so far neither the ICJ nor its predecessor court
has based a ruling entirely and directly on general principles of international
law. Nevertheless, in a changing world in which justice seems to play a
more vital role in the international realm, some authors claim that general
principles of law should play a greater law-forming role.1004 In the follow-
ing, reference is made to certain examples that could form a part of the gen-
eral principles of international law according to article 38(1)(c) of the ICJ
Statute and which could have or have already had an impact on international
tax law, i.e. which are part of the international tax regime.
194
Non-treaty-based rules and principles
4.3.3.3.2.
Abuse of law
1005. Onuf, p. 73; Verdross, 1973, p. 130 et seq., with references to several cases.
1006. Kolb, 2000a, p. 1 et seq.; Kolb, 2006, p. 1 et seq. See, for example from a tax
perspective, Schaumburg, para. 3.14.
1007. See Crawford, p. 36. See also Heintschel von Heinegg, in: Ipsen, § 18 para. 4.
1008. Doehring, para. 410; Heintschel von Heinegg, id.
1009. Cheng, p. 1 et seq. See generally Marro, pp. 221 et seq. and 434 et seq.; Guggenheim,
p. 144 et seq.
1010. Ipsen, in: Ipsen, § 28 para. 46, mentions, for instance, Italian and English law.
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First of all, is the abuse of law principle indeed valid in international law?
Second, does it receive its validity from being a general principle of law
according to article 38(1)(c) of the ICJ Statute? And third, and this goes
beyond the present study, if one agrees that the abuse of law principle is
valid from an international law perspective, what is its exact content?
With respect to the first question, it is not necessary to reinvent the wheel,
as others have impressively analyzed the application and the validity of
the abuse of law principle within international case law and referred to by
international law scholars: Kolb mentions more than 70 scholars who are of
the opinion that a prohibition of abusive acts exists within international law.1011
Furthermore, he adds dozens of judgments of the ICJ and other international
courts, along with separate opinions arguing in favor of the applicability of
the abuse of law principle within international law as a principle derived
from the good faith principle.1012 After having also referred to the (few)
deviating opinions, Kolb concludes that even the principle of sovereignty
as the anchor of international law is more questioned than the principle of
abuse of law:
Paradoxalement, si l’on met les choses en proportion, probablement la notion
de souveraineté, cette pierre angulaire du droit international [footnote omit-
ted], est plus contestée que le principe de l’abus de droit [footnote omitted].1013
First of all, the abuse of law principle as a general principle of law is not
based on a treaty, even though some treaties might contain explicit anti-
abuse provisions.1016 Second, it is unlikely that the abuse of law principle
1011. Kolb, 2000a, p. 442 et seq. See also Cheng, p. 121 et seq.
1012. Kolb, id., p. 445 et seq.
1013. Kolb, 2000a, p. 450.
1014. E.g. Crawford, p. 562, who opposes the qualification of the abuse of law principle
as a general principle of law. See also, from a tax perspective, sec. 4.3.3.3.2.
1015. E.g. Cheng, p. 26.
1016. See the many existing anti-abuse provisions in tax treaties. For more details see
OECD/G20, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances,
Action 6: 2015 Final Report (OECD 2015).
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Non-treaty-based rules and principles
Yet, this does not help in defining the abuse of law principle, as there seems
to be some uncertainty with respect to the actual content. However, refer-
ence is again made to Kolb, who in his seminal work outlines a broad variety
of application cases in international law.1018 Therefore, it is not detrimental
that there is no single definition of what abuse of law is in international law
and it seems that the vagueness is a strength of the abuse of law principle, as
it is able to avoid very different highly unequitable or non liquet situations.
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The Swiss Federal Supreme Court did not refer to article 38(1)(c) of the
ICJ Statute, but the use of the term “general principle of law” (“allgemeiner
Rechtsgrundsatz”) could lead to the conclusion that the Court understands
the abuse of law principle as applied in this case, as a general principle
of law according to article 38(1)(c) of the ICJ Statute. It seems clear that
the Court derives such a principle from international law and not from a
domestic legal source, as the Court also mentions the application of such
a principle at the European level. Also, its remark that the abuse of law
principle is derived from the good faith principle as an internationally valid
principle suggests that the Court referred to a principle that was understood
as a general principle of law.1023 Another argument in favor of such an under-
standing is that the Swiss Federal Supreme Court refers to Vogel’s article in
198
Non-treaty-based rules and principles
The discourse on whether an abuse of law principle would allow the non-
application of a double tax treaty, even though the formal requirements
for the application of the treaty are met, has intensified in recent decades.
Some authors, such as Vogel,1026 argue that the abuse of law principle forms
a general principle of law and, as a consequence, such general principle of
law should also be applicable to tax treaties, notwithstanding the parties
of a specific treaty. Other authors are also of the opinion that a double tax
treaty contains an unwritten anti-abuse rule, but without further discussing
the actual international law base and/or constitutional base.1027 Some other
tax scholars argue that the abuse of law principle does not form a general
principle of international law according to article 38(1)(c) of the ICJ Statute:
De Broe1028 states that there is no unanimity and no case law “that character-
izes the concept of abuse of rights” as a general principle of international
law. Matteotti denies the validity of the abuse of (tax) law principle as a
general principle of law, as he seems to follow a positive understanding
of article 38(1)(c) of the ICJ Statute by arguing that states should only be
bound by a general principle of international law if the relevant rule or the
relevant principle is applied in most or all states in the world:
Da somit selbst hochentwickelte Rechtsordnungen von OECD-Mitgliedstaaten
kein allgemeines steuerliches Rechtsmissbrauchsverbot kennen, das im Einzelfall
eine Rechtsfindung contra legem zulassen würde, muss bereits die Existenz
eines allgemeinen völkerrechtlichen steuerlichen Rechtsmissbrauchsverbot in
nerhalb der OECD verneint werden.1029
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200
Non-treaty-based rules and principles
of the ICJ Statute and not in what circumstances a tax planning structure
indeed is abusive.
We have previously stated that an important cause for the existing dispute
about the actual content of the general principle of international law
according to article 38(1)(c) of the ICJ Statute and its validity relates to the
underlying concept of international law as being either caused by positivism
or naturalism. This is also reflected (though not explicitly) in the position
taken by the aforementioned tax scholars (i.e. De Broe and Matteotti).
It was shown that the general principles according to article 38(1)(c) of
the ICJ Statute should not be understood by following a strict voluntarist
approach. We must instead consider that certain principles are necessary in
order to achieve a fair judgment if an interpretation according to article 31
et seq. of the VCLT would lead to a highly inequitable situation or if these
principles are necessary in order to avoid non liquet situations. The abuse of
law principle, as such, does qualify as a general principle of law according
to article 38(1)(c) of the ICJ Statute, derived from the good faith principle,
and we do not foresee any reason why this should not be true from an
international tax practice perspective. This is also in line with the ICJ
case law, as the ICJ, for instance, with respect to the estoppel principle,
has also not rendered a comparative study on the validity of the estoppel
doctrine in civilized nations, which would be required by a more positive
methodology.1034
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4.3.3.3.3.
Estoppel
Furthermore, in the Fisheries Case, the ICJ implicitly applied the estoppel
principle. The question brought to the ICJ related to the delimitation of
the coastline of Norway. The ICJ held that the delimitation mechanism by
Norway was consistently applied and the United Kingdom (as the appealing
party) had not contested it for more than 60 years.1040 Consequently, Norway
could rely on its delimitation system. The Court did not explicitly refer to
1036. Müller, p. 10 et seq. See also Verdross & Simma, § 615.
1037. Thirlway, 2008, p. 29 et seq.
1038. See generally Ovchar, p. 1 et seq. See also Müller, p. 13 et seq. For instance,
regarding the Legal Status of Eastern Greenland case, see Degan, p. 57.
1039. ICJ, Case concerning the Temple of Preah Vihear (Cambodia v. Thailand), p. 32 et seq.
1040. ICJ, Fisheries Case (United Kingdom of Great Britain and Northern Ireland v.
Norway), p. 116 et seq.
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Non-treaty-based rules and principles
the principle of estoppel, but the line of argument used by the ICJ resulted
in an application of an estoppel doctrine:
The notoriety of the facts, the general toleration of the international community,
Great Britain’s position in the North Sea, her own interest in the question, and
her prolonged abstention would in any case warrant Norway’s enforcement of
her system against the United Kingdom.
The Court is thus led to conclude that the method of straight lines, estab-
lished in the Norwegian system, was imposed by the peculiar geography of
the Norwegian coast; that even before the dispute arose, this method had been
consolidated by a constant and sufficiently long practice, in the face of which
the attitude of governments bears witness to the fact that they did not consider
it to be contrary to international law.1041
Obviously, these remarks do not provide for a precise frame of the estoppel
principle. There is nothing particularly weak about the estoppel principle;
however, vagueness is an overall concern with respect to general principles
of law. It is exactly the purpose of these general principles to provide judges
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The principle of estoppel has recently gained some momentum within in-
ternational tax law, as Engelen argued that the OECD Comm. must be seen
as a binding instrument for interpretation, at least for OECD member coun-
tries, due to the principle of estoppel.1048 Furthermore, Engelen claimed that
by not issuing any observations on the Commentary, an OECD member
country is actually bound by estoppel. He draws an analogy to the Temple
of Preah Vihear case:
Insofar as the OECD Member countries have not made an observation on
the interpretation of the provisions of the OECD Model as set out in the
Commentaries thereon and, when concluding or revising their bilateral tax trea-
ties, conformed to those provisions, as recommended by the Council in accord-
ance with Art. 5(b) of the OECD Convention, it is clear that the circumstances
of the negotiations were such as called for some reaction if the parties wished to
disagree with or had any serious question to raise regarding that interpretation.1049
204
Non-treaty-based rules and principles
However, if one considers that the estoppel principle has in the past been of
particular importance with respect to territorial sovereignty in general, or in
particular with respect to boundary conflicts, it could be of relevance from a
tax perspective in similar circumstances.1053 The following example could,
for instance, require reference to the estoppel principle in order to resolve
a potential tax dispute at the level of a domestic or an international court.
Example
A famous restaurant for tourists is located at the top of a mountain pass, which
is at the same time the border between A and B. In the past both states were of
the opinion that the restaurant as such was still on the territory of State A and,
therefore, State A levied corporate income tax on the income of the restaurant.
However, due to a necessary reconstruction of the street that connects the two
states, an engineer of State B found older maps actually demonstrating that the
restaurant is in the territory of State B; therefore, State B retroactively taxed the
income of the restaurant.1054 In this case, a court would need to review in detail
whether State B has not lost its right to tax the restaurant based on the principle
of estoppel, as it was aware that State A taxed the income of the restaurant and
assumed that it was in its territory.
1053. We already mentioned above the Temple of Preah Vihear case (see supra n. 1039)
and the Fisheries case (see supra n. 1040). Further border disputes also refer to the principle
of estoppel (see for instance ICJ, Delimitation of the Maritime Boundary in the Gulf of
Main Area, p. 246 et seq.).
1054. The fact pattern is loosely based on a case decided by the Swiss Federal Supreme
Court (with no reference to tax issues). See CH: SC, BGE 106 Ib 154, 2 July 1980.
1055. For more details on the taxation of oil pipelines also in a cross-border scenario,
see Olsen, p. 1 et seq.
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4.3.3.3.4.
Collision rules
Not only in international law, but also within domestic law, these principles
are categorized in various ways. In an overview, Vranes1056 referred to at
least ten different options, such as, inter alia, (i) general principles of law,
(ii) methods of interpretation, (iii) presumption rules, (iv) subjective rules or
(v) customary law. One might even wonder whether these principles do not
have peremptory character or whether these collision rules are not an immi-
nent part of international law. A detailed analysis would require a separate
study, but, prima facie, some persuasive arguments tend to favor the result
that these collision rules are to be understood as a general principle of law
according to article 38(1)(c) of the ICJ Statute.
First of all, collision rules such as lex specialis and lex posterior are logi-
cally necessary, as otherwise non liquet situations might arise. As shown
above, the aim of the general principles of law according to article 38(1)(c)
of the ICJ Statute are, inter alia, to avoid any situation in which the judge
cannot find any precise solution based on the customary international law or
treaty law. Secondly, these collision rules are found in many domestic laws
and also, following a more voluntarist or positive understanding of gen-
eral principles of law,1057 their validity seems indeed justified. Thirdly, and
closely linked to the first argument, it seems that collision rules are inherent
in all legal systems, at least in legal systems with non-exclusive rules.
1056. Vranes, p. 391 et seq. See also Simma & Pulkowski, n. 10, with further references.
1057. On the dispute between a positive and a more ethical understanding of the general
principles of law, see sec. 4.3.3.2.
206
Non-treaty-based rules and principles
From a tax perspective, Bühler already stated in 1964 that the lex specialis
and the lex posterior rules qualify as general principles of (tax) law.1058 The
lex specialis and lex posterior rules, due to the variety of existing treaty
provisions within the international tax regime, have an important role. It
might, for instance, be that a non-tax agreement1059 is in conflict with a
double tax convention1060 or that a provision in a multilateral tax convention
is not in line with a provision in a bilateral tax convention. Furthermore,
there might be a conflict between a domestic tax rule and a treaty provision,
which would also require the application of collision rules. However, the
latter question is or might be governed by domestic (constitutional) law and
not (only) by international law.1061 It might even be that two rules within the
same treaty are in conflict.
The lex specialis rule, for instance, is relevant from a tax perspective, as
one could argue that article 3(2) of the OECD MC is a lex specialis inter-
pretation method compared to the VCLT, as it requires a court to follow
the methodological approach of article 3(2) of the OECD MC.1062 The lex
posterior rule could apply, for instance, when there is a conflict between
a status of forces agreement (SOFA)1063 and a double tax treaty that was
signed after the conclusion of the SOFA.1064 For instance, the conflict could
occur if, according to the SOFA, the sending state could tax the salary of a
soldier and the receiving state could claim taxing right under the double tax
convention between the two jurisdictions. Another example of a potential
application of the lex posterior rule is if states have signed both a double
tax convention and a multilateral convention with deviating rules on the
exchange of information. In this case, lex posterior would suggest that the
rules in the later agreement should prevail. Many other examples demon-
strate the importance of collision rules in the field of international tax law.
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4.3.3.3.5.
Statute of limitation or extinctive prescription
Many scholars are of the opinion that the statute of limitation is a general
principle of international law.1065 The statute of limitation is – as far as other
studies have shown1066 – inherent in all or most legal systems.1067 Apparently,
there is no consent with regard to the exact length of a statute of limitation
worldwide.1068 As an example, it is not even clear (and there is a lot of confu-
sion) how long the duration of an unwritten statute of limitation provision
is within Swiss domestic tax law.1069 Therefore, it also seems difficult to
develop a defined statutory limitation period within international law, as
there is a lack of institutionalization at an international level.1070 Based on
natural law and not based on the instrument of general principles of law in
article 38(1)(c) of the ICJ Statute, de Vattel already stated that there is no
exact prescription duration:
Il est impossible de déterminer en Droit Naturel, le nombre d’années requis
pour fonder la Prescription. Cela dépend de la nature de la chose, dont la
propriété est disputée, & des circonstances.1071
International courts have also dealt with the question of extinctive prescrip-
tion. Often mentioned in respect of a statute of limitation within interna-
tional law is the Gentini case,1072 in which the Mixed Claims Commission
explicitly stated that the principle of prescription is a general principle of
international law:
On examining the general subject, we find that by all nations and from the earli-
est period, it has it been considered that as between individuals an end to dis-
putes should be brought about by the efflux of time. Early in the history of the
Roman law, this feeling received fixity by legislative sanction. In every country
have periods been limited beyond which actions could not be brought. In the
1065. With further details, also on the historical development, see Marro, p. 222 et seq.;
Dahm, Wolfrum & Delbrück, p. 64.
1066. Müller, p. 74 et seq. (n. 270).
1067. As was shown above, we do not, however, necessarily require that the applic-
ation in all or most states is proven in order to qualify as a general principle of law (see
sec. 4.3.3.2.).
1068. See Marro, p. 226 et seq.
1069. See Oesterhelt, p. 821 et seq.
1070. Müller, p. 67.
1071. De Vattel, livre II, § 142.
1072. Italy/Venezuela Mixed Claims Commission, Gentini Case, Italy v. Venezuela, p. 551
et seq. See, with further references on older cases that deviate from the Gentini case,
Jackson, p. 133 et seq. See also Verdross & Simma, § 614, who refer to an arbitration
procedure based on the French–Hungarian Peace Treaty of 1919.
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Non-treaty-based rules and principles
opinion of the writer, these laws of universal application were not the arbitrary
acts of power, but instituted because of the necessities of mankind, and were the
outgrowth of a general feeling that equity demanded their enactment; for very
early it was perceived that with the lapse of time, the defendant, through death
of witnesses and destruction of vouchers, became less able to meet demands
against him, and the danger of consequent injustice increased, while no hard-
ship was imposed upon the claimant in requiring him within a reasonable time
to institute his suit. In addition, another view found its expression with relation
to the matter in the maxim “Interest republica ut sitfinis litium.”
The universal opinion of publicists and lawgivers has been that the statutes of
prescription or “limitation”, as they have come to be called, were equitable and
the outgrowth of a general desire for the attainment of justice.1073
This means that if a state asks for the payment of a claim based on an
international treaty, the other party of such treaty may revoke a statute of
limitation, even if the relevant treaty does not contain such a provision.
However, as already mentioned, international law does not provide for pre-
cise prescription duration.1074 Or, as stated in the aforementioned Gentini
case of the Mixed Claims Commission:
The umpire, while disallowing the claim, expresses no opinion as to the number
of years constituting sufficient prescription to defeat claims against govern-
ments in an international court. Each must be decided according to its especial
conditions. He calls attention to the fact that under varying circumstances the
civil-law period is ten, twenty, and thirty years; in England, for many years - for
contracts, six years; in the United States, on contracts with the Government,
six years, and in the several States, on personal actions, from three to ten years.
It is sufficient to say that in the present case the claimant has so long neglected
his supposed rights as to justify a belief in their nonexistence.1075
One could argue that the statute of limitation does not form a particular
principle of international law, but is instead derived from the principle of
estoppel or acquiescence. Indeed, if one agrees that the statute of limitation
itself is a general principle of international law, but no specific statute of
limitation can be derived from international law, meaning that one would
need to determine and decide in an individual case what the statute of limi-
tation is, there seems no difference between claiming the limitation based
1073. Italy/Venezuela Mixed Claims Commission, Gentini Case, Italy v. Venezuela, p. 557.
1074. For further details see Cheng, p. 373 et seq.; Marro, p. 226 et seq. See also Guggenheim,
p. 146.
1075. Italy/Venezuela Mixed Claims Commission, Gentini Case, Italy v. Venezuela, p. 561.
209
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4.3.3.3.6.
Excursus: Pacta sunt servanda
210
Non-treaty-based rules and principles
There has been a long-lasting dispute among scholars regarding the legal
base or the foundation of pacta sunt servanda.1085 In the present section, it
should be briefly analyzed whether it can be derived from an international
treaty, from customary international law, or whether it reflects a general
principle of international law.
1080. Crawford, p. 450. See also Thirlway, 2014, p. 7, and with more details p. 31 et seq.
1081. On the topic of pacta sunt servanda from an international tax law perspective, see
Matteotti & Krenger, paras. 57 et seq. and 108.
1082. See generally Schoueri, p. 682 et seq.
1083. The question of the compatibility of CFC rules and double tax treaties is disputed
and many different opinions among scholars and courts exist. For an overview, see, for
instance, the contributions in Lang et al. [eds.] (2004).
1084. See Villiger, 2009, Article 26 para. 4.
1085. See Binder, p. 17 et seq.; Degan, pp. 72 et seq. and 394 et seq.; Fischer-Lescano,
p. 726; Thirlway, 2014, p. 31 et seq.
1086. Binder, p. 21, with reference to Verdross; Schmalenbach, Article 26 para. 1. See
also Tomuschat, 1993, p. 211.
1087. Verdross, 1969, p. 642, para. 38, with further references. See also Boas, p. 58;
Degan, p. 396. With reference to Kelsen, see Kammerhofer, p. 584 et seq., who highlights
that such opinion would lead to the conclusion that customary international law and treaty
law are not two distinguished sources of international law.
1088. Villiger, 2009, Article 26 para. 10. See also the references stated by Binder, p. 24
et seq.
1089. Schmalenbach, Article 26 para. 21 et seq.
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From our perspective, pacta sunt servanda is a logical precondition for the
world order since the Peace of Westphalia, as a system with equal sover-
eignty, requires that the treaty obligations be obeyed.1091 Actually, the word
“treaty” itself requires the “sunt servanda” obligation. One could call this a
natural law, a peremptory norm of the current world order, or a fundamen-
tal principle of international law.1092 The term “legal precondition” indeed
seems suitable to describe its relevance in international law. Yet, it is per-
suasive to argue that aligned to the development of the current world order,
the pacta sunt servanda principle developed simultaneously.1093 In a similar
way, it was already stated by de Vattel that the tranquility, joy and security
of humans requires that the obligations to other parties be obeyed:
Toute la tranquillité, le bonheur & la sûreté du Genre-humain reposent sur la
Justice, sur l’obligation de respecter les droits d’autrui.1094
The acceptance of the current world order requires that certain rules be
obeyed as legal preconditions, and one of these few rules is pacta sunt ser
vanda. The latter has also been stated by Lesaffer in a very persuasive way:
What then were the features opposing sovereignty, which allow for an assess-
ment of the modern States system as a dualistic system? First, the European
order could only function if two basic rules were commonly accepted: pacta
sunt servanda as a basis for the validity of treaties and the right to defend one’s
own legitimate claims, if necessary with violent means.1096
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Non-treaty-based rules and principles
For the purpose of the present study, this means that the general principles
of law as a source of international law are by no means sufficient to mitigate
1097. Cf. Kolb, 2006, p. 2 et seq., with some evidence that general principles of law can
indeed create new rules. He moreover states that: “They [i.e. the general principles of
law] then serve to free the legal actor from the constraints of positive law and to seek in
more lofty and general areas a satisfactory solution for the single case submitted to him”
(p. 34).
1098. See sec. 1.5.
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the justice deficiencies perceived in the international tax regime. They are
not a sufficient reference point as an orientation tool to render a normative
review of some of the most important principles and rules of the interna-
tional tax regime. Therefore, an analysis of the general principles of law
has not overthrown our initial thesis that, for a normative review of the
international tax regime, reference to a non-legal discipline, such as political
philosophy, is necessary.1099
4.3.4. Soft law
There is no unanimity on what soft law means and whether the term “soft
law” is indeed appropriate to suit its purpose.1100 Prima facie, the terms
“soft” and “hard law” indicate that the effect of both categories is different:
a rule might either have a hard or soft effect. In other words, for the purpose
of categorization, it is decisive whether a rule is binding or non-binding.1101
Binding could mean that a rule is enforceable, although a rule of hard law
might have a binding character, yet might not be enforceable. This is par-
ticularly true in the international realm, where (cross-border) enforceability
is generally rather weak.1102 For instance, no one would question the hard
law value of a double tax treaty provision, although not in every jurisdiction
may a taxpayer, in any case, refer to the benefits granted by a treaty due to
a treaty override.1103 Therefore, the treaty benefit might not be enforceable.
Binding means rather that the breach of a binding provision leads to legal
responsibility.1104 One could also argue that soft law has less of an impact
on states than treaties, as treaty obligations are more likely to influence the
behavior of states.1105
On the other end of the spectrum, it derives from the term “soft law” that
an act or a publication should at least have a certain effect and not only
be considered as “no law”. The distinction between no law and soft law is
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Non-treaty-based rules and principles
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Chapter 4 - The International Tax Regime
216
Non-treaty-based rules and principles
We will further deal with these varieties of soft law, but before going into
more detail, it is vital to understand the functioning of the UN and the
OECD as the two most important bodies of international tax policy.1122 In
this respect, we will also focus on the impact of these two organizations on
tax policy as such (including domestic tax policy). We have already high-
lighted the importance of these two organizations regarding hard law, i.e.
double tax conventions.1123 We will not specifically focus on the G20 and its
position within international tax policy.1124
1119. See the remarks on estoppel and application of the OECD Comm. in sec. 4.3.3.3.3.
1120. See, for example, ICJ, Advisory Opinion, Legal Consequences for States of the
Continued Presence of South Africa in Namibia (South West Africa) notwithstanding
Security Council Resolution 276, p. 26 et seq. See also Thürer, 2009c, p. 164 et seq.
However, there is an extensive discussion on the exact value of publications of international
organizations for interpretation purposes. Regarding the publications of the OECD, see
sec. 4.3.4.4.3.
1121. See sec. 4.3.4.4.
1122. We will not discuss the question of whether, from an institutional perspective, a
WTO should be incorporated (see, for example, Cockfield, p. 178 et seq.; Tanzi, p. 256
et seq.).
1123. See sec. 4.2.3.2.
1124. For more details see Christians, 2010, p. 19 et seq.
1125. See sec. 4.3.4.1.
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not even required to qualify as soft law that a certain rule is recommended
by an international organization. It is sufficient if a few states consider that
a certain rule should be obeyed. For instance, the Germany-UK joint state-
ment on new rules for preferential IP regimes published in December 2014
has a soft law character, as other legislators might follow such guidance
when designing their domestic IP box.1126
In order to better understand the interaction between soft law and the in-
ternational tax regime, per se, it is necessary to outline the current work of
the UN and the OECD as the two most important soft law-issuing bodies of
international tax law. It was already shown above that recent developments
have also brought forward new bodies of international law, such as the
Global Forum or the Inclusive Framework, which have issued or will issue
soft law provisions. Moreover, of course, the G20 might also publish soft
law, which could be of relevance from a tax perspective.1127
4.3.4.3.1.
In general
218
Non-treaty-based rules and principles
Moreover, other bodies of the UN have published soft law concerning in-
ternational tax law. We will focus in particular on the results of the con-
ferences on financing for development in Monterrey, Doha, and Addis
Ababa. Moreover, tax policy was also of relevance in the recent debate
about strengthening the protection and enhancement of human rights. In
particular, the work of the Independent Expert on the effects of foreign
debt and other related international financial obligations of states on the full
enjoyment of all human rights – particularly economic, social, and cultural
rights – must be highlighted.1132 Of particular importance are the recently
amended Guiding Principles on human rights impact assessments of eco-
nomic reforms.1133 Therein, the importance of tax policy in general and
domestic revenue mobilization is stressed as it enables states “to overcome
the disadvantaged situation of the population in situations of social vulner-
ability (the poor, minorities and women, among others) and other priority
219
Chapter 4 - The International Tax Regime
care groups, notably older adults, children and persons with disabilities.”1134
Therefore tax policy is understood as a means to protect human rights,
particularly economic, social, and cultural rights. As will be shown, this
is very much in line with the results of the conferences on financing for
development. We will not address the work of the Independent Expert and
UN Human Rights Council in a separate chapter, but we will refer to his
reports at several instances in the following sections.
4.3.4.3.2.
The Committee of Experts on International Cooperation
in Tax Matters
1134. Id., Report of the Independent Expert on the effects of foreign debt and other re-
lated international financial obligations of states on the full enjoyment of human rights,
particularly economic, social, and cultural rights, 19 Dec. 2018, A/HRC/40/57, para. 11.4.
1135. Lennard, 2008, p. 24. See also UN, ECOSOC Resolution 2004/69 on the Committee
of Experts on International Cooperation in Tax Matters, 11 Nov. 2004.
1136. Lennard, 2009, p. 11. A reason was that most developed states rejected the proposal
in order to defend the leading role of the OECD in tax matters (see Mosquera Valderrama,
Lesage & Lips, p. 11).
1137. See UN, ECOSOC Resolution 2004/69 on the Committee of Experts on International
Cooperation in Tax Matters, 11 Nov. 2004, decision (d) (iv).
1138. A list of the current members is accessible at http://www.un.org/esa/ffd/tax-committee/
tc-members.html (last visited 15 Sept. 2017).
1139. Lennard, 2008, p. 24.
1140. For an overview, see UN, ECOSOC, Further strengthening the work of the Committee
of Experts on International Cooperation in Tax Matters, E/2015/51, 22 Apr. 2015, p. 6.
1141. For more information about the subcommittee see http://www.un.org/esa/ffd/tax-
committee/tc-subcommitte-beps.html (last visited 15 Sept. 2017).
220
Non-treaty-based rules and principles
4.3.4.3.3.
The publications of the Committee of Experts on International
Cooperation in Tax Matters and their impact
There have been two (or possibly three) important studies of the IBFD about
the UN MC in practice, i.e. its impact on the treaty policy of UN and OECD
221
Chapter 4 - The International Tax Regime
states.1148 Among others, the authors of the study demonstrate that it takes
a number of years before a new provision in the model finds its way into
treaty practice. This is not only true with regard to the UN MC, but also
with regard to the OECD MC. However, the studies also show that there
is a significant impact of the UN MC on the treaty practice between devel-
oping and developed states. However, Wijnen & de Goede, the authors of
the study, even argue that the UN MC has gained importance as a standard
among OECD countries. This means that OECD countries, even when sign-
ing a treaty with another OECD member country, more frequently refer to
the UN MC than in the past. One reason might be that some provisions of
the UN MC have also been introduced into the OECD MC.1149
4.3.4.3.4.
UN Conferences on Financing for Development
4.3.4.3.4.1. Introduction
As we will see in the following sections, tax policy has become an important
pillar of the debate on how to achieve sustainable development in the world.
The goal of the following sections is to demonstrate what the reasons are for
such an inclusion of tax policy into the financing for development debate
and to explore the current status of such a debate. We will not, however, spe-
cifically focus on the techniques to achieve development goals through tax
1148. Wijnen & de Goede, p. 118 et seq.; Wijnen & Magenta, p. 524 et seq. See also
Wijnen, de Goede & Alessi, p. 27 et seq.
1149. See Wijnen & de Goede, p. 144.
1150. See sec. 4.3.4.4.
1151. See, however, UN Handbook on Selected Issues in Protecting the Tax Base of
Developing Countries (UN 2015).
1152. For more details see http://www.un.org/esa/ffd/topics/capacity-development-tax-
cooperation.html (last visited 10 Jan. 2019).
222
Non-treaty-based rules and principles
4.3.4.3.4.2. Monterrey Consensus
1153. An intense debate exists over how developing states should design their tax systems
in order to spur development (i.e. whether it is most effective to implement a broad-based
VAT and a low-rate corporate income tax). Such debate has mainly been led by economists
(e.g. Bird & Zolt, p. 73 et seq.; Keen & Mansour, p. 1 et seq.; Tanzi & Zee, p. 1 et seq.).
See for a broader perspective Stewart, 2003, p. 160 et seq.
1154. Many academics have advised other countries on how to improve their domestic
tax system to spur development. This was already the case in the post-World War II and
the post-Colonial phase (see, for example, the work of Prof. Shoup, a U.S. academic
who advised Japan on their tax system after World War II). For a more comprehensive
overview on the existing cross-border advice toward developing countries, see Stewart,
2003, p. 151 et seq.
1155. Fomerand & Dijkzeul, p. 665.
1156. UN, Resolution adopted by the General Assembly, 8 Sept. 2000, A/55/L.2.
1157. UN, Report of the International Conference on Financing for Development, 18-
22 Mar. 2002, A/CONF.198/11, para. 10 et seq.
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Chapter 4 - The International Tax Regime
For our purpose, reference should again be made to the action on mobilizing
domestic financial resources as using tax policy to enhance development
is part of such a measure. Here, the Doha Declaration states that signatory
states “will continue to undertake fiscal reform, including tax reform, which
is key to enhancing macroeconomic policies and mobilizing domestic pub-
lic resources.”1161 Moreover, tax systems should be made more pro-poor.1162
Also, importantly, the tax base should be broadened, and tax evasion should
be combatted.1163
However, it is also held that each country is responsible for its tax system,
but international cooperation should be supported.1164 The suggestions for
tax policy changes were not the core of the Doha Declaration but rather an
integral part of the chapter on increasing domestic resources, and the refer-
ence to tax policy is slightly more detailed than in the Monterrey Consensus.
224
Non-treaty-based rules and principles
A next step was the Addis Ababa Action Agenda, which was the outcome
of the third conference on financing for development and was held in
Addis Ababa in 2015. The final text was also endorsed by the UN General
Assembly.1165 The Addis Ababa Action Agenda refers to the 17 Sustainable
Development Goals aimed at ending poverty and hunger by 2030. These
Sustainable Development Goals were finally approved a few months after
the conference by the UN General Assembly on 25 September 2015.1166
They must be understood as the post-2015 goals replacing the Millennium
Development Goals,1167 and they should guide the work of the UN in the
area of development in the years 2015-2030.1168 Importantly, the Sustainable
Development Goals are more comprehensive than the Millennium
Development Goals, and they understand development as a “universal rather
than a North-South project”.1169
In Addis Ababa, the heads of state, government leaders, and high repre-
sentatives reaffirmed the results of the Monterrey Consensus and the Doha
Declaration.1170 The Addis Ababa Action Agenda outlines action areas to
achieve the Sustainable Development Goals. These actions, in a broad
sense, do not deviate from the previous ones in the Doha Declaration.
1165. UN, Addis Ababa Action Agenda of the Third International Conference on Financing
for Development (Addis Ababa Action Agenda), Resolution adopted by the General
Assembly, 27 July 2015, A/RES/69/313.
1166. For the precise content of the Sustainable Development Goals see the Annex to the
Resolution A/RES/69/315. The Sustainable Development Goals were also included in the
Resolution “Transforming Our World: The 2030 Agenda for Sustainable Development”,
A/RES/70/1, 25 Sept. 2015. The Conference in Addis Ababa happened at the final state of
the broader negotiations on the Sustainable Development Goals (see the comprehensive
overview of Dodds, Donoghue & Roesch, p. 1 et seq.).
1167. For some historical background, see Fukuda-Parr, p. 764 et seq.
1168. UN, Transforming Our World: the 2030 Agenda for Sustainable Development,
Resolution by the General Assembly, A/RES/70/1, 25 Sept. 2015, para. 21. It has also
been argued that the consensus on Sustainable Development Goals has also led to “greater
alignment” between the work of the UN in the area of financing for development and the
Bretton Woods Institutions, such as the World Bank or the IMF (see Murphy, p. 366).
The present study does not specifically deal with the tax work of the IMF and the World
Bank. Their recommendations toward developing countries have been of great importance
for development policies in general (see Stewart, 2003, p. 156 et seq.). For evidence on
how the Bretton Woods Institutions cooperate with the other UN bodies in tax matters,
see Grau Ruíz, p. 83 et seq.
1169. Fukuda-Parr, p. 777.
1170. UN, Addis Ababa Action Agenda of the Third International Conference on Financing
for Development (Addis Ababa Action Agenda), 13-15 July 2015, endorsed by the General
Assembly in its resolution A/RES/69/313 on 27 July 2015, para. 1.
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Chapter 4 - The International Tax Regime
For instance, it is stated that the countries “will work to improve the fair-
ness, transparency, efficiency and effectiveness of [their] tax systems.”1171
Moreover, nationally defined domestic targets and timelines for enhancing
domestic revenues are welcomed.1172 The countries also agreed to redouble
their efforts in order to reduce illicit financial flows in the coming years.
This includes combating tax evasion through international cooperation.1173
Countries should work together to strengthen transparency. This specifi-
cally includes country-by-country reporting for multinational enterprises.1174
Moreover, states should advance toward the automatic exchange of infor-
mation to assist developing states, particularly the least developed states.
States agreed that in order to end harmful tax practices, they can engage in
voluntary discussions concerning tax incentives.1175 Such international tax
cooperation “should be universal in approach and scope and should fully
take into account the different needs and capacities of all countries.”1176 This
is according to the Addis Ababa Action Agenda particularly true for the
least developed countries, landlocked developing countries, small island
developing states, and African countries.1177 The signing countries, more-
over, welcomed the efforts of the Global Forum and also took into account
the work of the OECD and the G20 on base erosion and profit shifting.1178
The Addis Ababa Action Agenda shows that developed states are willing to
improve the fiscal capacity of the least developed states.1179 However, the
Addis Ababa Action Agenda does not contain any suggestions for signifi-
cantly reallocating taxing powers between source and residence countries.
226
Non-treaty-based rules and principles
states agreed on the so-called Addis Tax Initiative, which will be briefly
outlined in the following section.
The Addis Tax Initiative was signed by 41 states during the Financing for
Development conference in Addis Ababa. Moreover, several organizations
have also supported the initiative. By signing the Addis Tax Initiative, the
participants “declare their commitment to implement the Addis Ababa
Accord in the leading action of raising domestic public revenue, to improve
fairness, transparency, efficiency and effectiveness of their tax systems.”1180
In particular, they agreed to the following three commitments:
– collectively doubling technical cooperation in domestic revenue mobi-
lization;
– enhancing domestic revenue mobilization so as to spur development;
and
– ensuring policy coherence.
The Addis Tax Initiative is not a binding international treaty but a soft law
(i.e. a political commitment by the participating states). In order to join the
initiative, countries must sign a letter of intent.1181
The Addis Tax Initiative has been joined by development partners, partner
countries (i.e. developing states), and supporting organizations. Whereas
partner countries have a strong interest in receiving technical assistance,
development partners and supporting organizations, inter alia, share good
practices and past experiences with these partner countries.1182 Such inte-
grated cooperation reflects the general working scheme of the Addis Tax
Initiative. This brings us to the content of the three (partly overlapping)
commitments.
The first commitment aims at more coordination between the partner coun-
tries and the development partners. The participating providers of support
commit to collectively double their support for technical cooperation by
1180. Addis Tax Initiative, Financing for Development Conference, The Addis Tax Initiative
– Declaration, p. 2.
1181. The letter is available online at https://www.addistaxinitiative.net/documents/
ATI_Letter-of-Intent_EN.docx (last visited 18 Feb. 2019).
1182. Addis Tax Initiative, Fact Sheet, p. 3 et seq.
227
Chapter 4 - The International Tax Regime
1183. Addis Tax Initiative, Financing for Development Conference, The Addis Tax Initiative
– Declaration, p. 2. See for further details about how the support of the development
partners is calculated Addis Tax Initiative, ATI Monitoring Report 2015, p. 28 et seq.
1184. Addis Tax Initiative, Financing for Development Conference, id.
1185. Id., p. 3.
1186. See with reference to the report “From Billions to Trillions” of the Joint Ministerial
Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Reals
Resources to Developing Countries, DC2015-002.
1187. See for further details Addis Tax Initiative, Financing for Development Conference,
The Addis Tax Initiative – Declaration, p. 2.
1188. Id., p. 3.
1189. Id., p. 2.
1190. In sec. 4.3.4.3.1. we highlighted the work of the Independent Expert on the effects
of foreign debt and other related international financial obligations of states on the full
enjoyment of all human rights – particularly economic, social, and cultural rights. There
are obviously mutual goals between the work of the Independent Expert in relation to
protecting and enhancing human rights and attaining the Sustainable Development Goals,
as intended by the Addis Tax Initiative. One reason is that the Sustainable Development
Goals were approved in order to realize human rights. This is indicated in the Preamble
to the 2030 Agenda (UN, Transforming Our World: the 2030 Agenda for Sustainable
Development, Resolution by the General Assembly, A/RES/70/1, 25 Sept. 2015). For a
seminal analysis concerning the interaction of development goals and the protection of
human rights, see Darrow, p. 55 et seq.
228
Non-treaty-based rules and principles
1191. See, for example, Addis Tax Initiative, ATI Monitoring Report 2015, p. 48. However,
it is disputed whether the tax-to-GDP ratio is indeed an appropriate measure for the level
of development (see Stewart, 2003, p. 175 et seq.).
1192. Addis Tax Initiative, Financing for Development Conference, The Addis Tax Initiative
– Declaration, p. 4.
1193. Id., p. 5.
1194. See id., p. 4. It is therefore not so much aiming at policy coherence between several
state bodies, but more between the private sector and the state.
1195. Id. See also Meyer-Nandi, p. 12.
1196. OECD, OECD Guidelines for Multinational Enterprises, 2011 Edition (OECD
2011), Chapter XI. Taxation, para. 1.
1197. Commentary to the OECD Guidelines for Multinational Enterprises, 2011 Edition
(OECD 2011), para. 100.
1198. Id. As mentioned in sec. 1.2., the present study does not deal specifically with the
question of what the normative obligations are of corporate representatives. Sec. 12.5.
specifically reviews the question of whether anti-abuse measures have a normative validity.
Such measures would partly prohibit these transactions.
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Chapter 4 - The International Tax Regime
These rather general remarks do not yet answer the question of how the part-
ner countries should fulfill their commitments most effectively. However,
it would go beyond the present study to develop detailed guidelines. Issues
such as taxpayer registration, taxing strategic sectors and risk management
are some of the most relevant topics.1200 Moreover, we will not discuss how
development partners may adapt their tax treaty policy (including their pol-
icy regarding exchange of information) in order to fulfill their commitments
under the Addis Tax Initiative.1201
4.3.4.3.4.6. Intermediate conclusions
It is obvious that the debate on fiscal transparency at the level of the Global
Forum and on base erosion and profit shifting at the level of the OECD/G20
in the years after the financial crises has had a significant influence on the
debate of enhancing sustainable development. In parallel, in the introduc-
tion, we highlighted the work of the Independent Expert on the effects of
foreign debt and other related international financial obligations of states
on the full enjoyment of all human rights – particularly economic, social
and cultural rights.1203 In his work, a similar development can be moni-
1199. The UN Global Compact is a voluntary code of conduct for multinational enter-
prises committing to act with universal principles on human rights, labor, environment
and anti-corruption. More information is available at https://www.unglobalcompact.org
(last visited 19 Jan. 2019).
1200. For further details, see Addis Tax Initiative, ATI Monitoring Report 2015, p. 8.
1201. See, for instance, from a Swiss perspective, Matteotti, 2017/2018, p. 680 et seq.
1202. Even before these conferences, tax policy was considered to be an important piece
of development policy at the level of the UN. Stewart traces these approaches back to the
1950s (Stewart, 2003, p. 155 et seq.).
1203. See sec. 4.3.4.3.1.
230
Non-treaty-based rules and principles
4.3.4.4.1.
In general
The main bodies of the OECD are the Council, the Secretary-General, the
Secretariat and many committees and working groups.1207 The Council
consists of the representatives of all member countries (including a
1204. See UN, Guiding principles on human rights impact assessments of economic
reforms, Report of the Independent Expert on the effects of foreign debt and other re-
lated international financial obligations of states on the full enjoyment of human rights,
particularly economic, social, and cultural rights, 19 Dec. 2018, A/HRC/40/57, para. 9.3.
1205. See, with further details about the development of the membership of the OECD,
Woodward, p. 1 et seq.
1206. Art. 1 OECD Convention.
1207. See generally Woodward, p. 43.
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Chapter 4 - The International Tax Regime
From a tax perspective, the Centre for Tax Policy and Administration is
a department of particular interest. It currently consists, inter alia, of the
Committee on Fiscal Affairs (CFA) and several sub-groups. The Committees
issue various policy advisories and other instruments that could have the
character of soft law.1210 These Committees are created by the Council based
on article 9 of the OECD Convention. Non-member countries of the OECD
are not part of the Council, but they might take part in the work of several
of the committees and other bodies. The focus of the following section is
on the CFA, one of the most important designers of the international tax
regime.1211
4.3.4.4.2.
The CFA
As mentioned above, the CFA consists of many working and advisory groups.
Some of these are highly important with respect to international tax policy.
For instance, Working Party 1 on tax conventions and related questions was
created in 1971 in order “to act as a forum for the discussion of issues re-
lated to the negotiation, application and interpretation of tax conventions, to
examine proposals for the modification of the OECD Model Tax Convention
and to draft appropriate recommendations for dealing with the issues it has
examined and for periodic updates to the Model Tax Convention.”1212
In order to describe the objective and methods of the CFA, as the most
important committee within the OECD, it is vital to refer to the underlying
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Non-treaty-based rules and principles
legal documents. The CFA draws its competence from a delegation decision
(i.e. a mandate) of the Council, which has the following wording:1213
a) The overarching objective of the Committee on Fiscal Affairs (hereinafter
called “The Committee”) is to contribute to the shaping of globalisation for the
benefit of all through the promotion and development of effective and sound tax
policies and guidance that will foster growth and allow governments to provide
better services to their citizens. Its work is intended to enable OECD and non-
OECD governments to improve the design and operation of their national tax
systems, to promote co-operation and co-ordination among them in the area of
taxation and to reduce tax barriers to international trade and investment.
b) In light of this objective, the Committee shall:
1. facilitate the negotiation of bilateral tax treaties and the design and adminis-
tration of related domestic legislation;
2. promote communication between countries and the adoption of appropriate
policies to prevent international double taxation and to counteract tax avoid-
ance and evasion;
3. encourage the elimination of tax measures which distort international trade
and investment flows;
4. promote a climate that encourages mutual assistance between countries and
establish procedures whereby potentially conflicting tax policies and adminis-
trative practices can be discussed and resolved;
5. support domestic tax policy design through the development of high quality
economic analysis of tax policy issues, comparative statistics and comparisons
of country experiences in the design of tax systems;
6. improve the efficiency and effectiveness of tax administrations, both in terms
of taxpayer services and enforcement. Support the integration of Partners into
the international economy by strengthening policy dialogue with them to in-
crease their awareness of and contribution to the Committee’s standards, guide-
lines and best practices.1214
As we will demonstrate in the second and third parts of the present work,
many of these objectives seem to be valid also from a normative perspective.
For instance, the most interesting is probably objective 1 above, i.e. “support
the development of efficient and equitable tax systems.” The CFA, accord-
ing to such regulation, should therefore enhance equitable tax systems.
We need to discuss what this means in more detail below.1215 Regarding
1213. OECD, Resolution of the Council C(2008)147 and C/M(2008)20, item 285. The
resolution is also published in OECD, Directory of Bodies of the OECD, id., p. 253 et seq.
1214. OECD, Resolution of the Council C(2008)147 and C/M(2008)20, item 285. The
resolution is also published in OECD, Directory of Bodies of the OECD, id.
1215. See chapter 11.
233
Chapter 4 - The International Tax Regime
4.3.4.4.3.
The publications of the OECD in tax matters and their impact
It is important to note that the purpose of the OECD is to advise and con-
sult, and not to issue directives or similar documents.1218 According to art-
icle 3(b) of the OECD Convention, member countries are obliged to consult
each other on a continuing basis. This system of consultations, surveillance
and peer review, as mentioned by Woodward, does “not lead to overnight
resolutions but over a long period of time the values, ideas, and principles
agreed at the OECD become norms which percolate the national and inter-
national policymaking circuitry.”1219 Besides, if the member countries are
1216. OECD, Resolution of the Council C(2008)147 and C/M(2008)20, item 285. The
resolution is also published in OECD, Directory of Bodies of the OECD (OECD 2012),
p. 255.
1217. See Peters, 2015, p. 375 et seq.
1218. See Woodward, 2009, p. 62.
1219. Woodward, 2009, p. 81.
234
Non-treaty-based rules and principles
of the opinion that certain areas should be regulated formally, they have the
opportunity to sign a binding agreement.
Moreover, the OECD publishes several hundred reports a year, but it does
not have any reward and sanction system to enforce any of its suggestions.
Nevertheless, the OECD has had a significant influence as an international
tax policy institution. The most important publications, from a tax perspec-
tive, are the OECD MC and OECD Comm. These documents have been
updated regularly and, as we have shown already,1222 these publications have
a great influence on actual double tax treaties and their interpretation. In
fact, they are the backbone1223 of most double tax treaties. Furthermore, the
OECD Transfer Pricing Guidelines are widely applied in many jurisdictions
worldwide.1224
From a tax perspective, the OECD has also launched specific projects with
an influence on domestic tax policy, and not only with the aim of affecting
the existing double tax treaty network. The most important initial projects in
this respect were the publication of the Report on Harmful Tax Competition1225
and the publication of the Partnership Report.1226 Both reports intended to
align domestic tax policies in order to avoid harmful tax competition and to
align practices with respect to the treatment of partnership in order to avoid
qualification conflicts. These reports and, in particular, the entire project on
1220. See art. 5a) of the Convention on the Organisation for Economic Co-operation and
Development, 14 Dec. 1960.
1221. We will not specifically deal with interpretation methodology. Our opinion with
respect to the importance of the OECD Comm. as an interpretative means was already
outlined in another instance (see Hongler, 2012a, p. 212 et seq.).
1222. See sec. 4.2.4.
1223. Brauner, 2003, p. 317. See also Christians, 2010, p. 20. See, for example, regarding
the impact of the first OECD MC of 1963 and its impact on the Swiss tax policy, Locher,
2005, p. 68.
1224. See sec. 4.2.3.3.4. See for a recent overview Rocha, p. 28 et seq.
1225. OECD, Tax Competition, An Emerging Global Issue (OECD 1998).
1226. OECD, The Application of the OECD Model Tax Convention to Partnerships (OECD
1999).
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The latest and thus far most important tax project is the BEPS Project. In
order to demonstrate its impact on domestic tax measures, some empiri-
cal studies would be necessary to determine how the domestic legislation
process is influenced by soft law published by the OECD. This would go
beyond the present study, although the OECD/G20 has had a considerable
influence on domestic tax policies in various countries.1228 With respect to
this author’s home country, the impact of the BEPS Project was significant,
as the entire corporate tax reform III project, in particular, was aligned to
the publications within the BEPS Project, and further legislative projects
were launched based on the BEPS outcome.1229 Of course, the influence in
some countries might be minimal, as these countries are the actual policy
drivers or “norm makers” at the level of the OECD and not “norm takers”.
Therefore, these countries might already have certain BEPS-related regula-
tion and might not be forced to further change their domestic tax code.1230
One important reason for implementing soft law and not binding hard law
is that the implementation of a rule through a non-binding instrument is
significantly faster, so the long-lasting process of deliberating, signing
and ratifying of, for instance, a multilateral convention can be avoided.1231
1227. E.g. Switzerland abolished the administrative practice with respect to service
companies and has since then basically followed the OECD Transfer Pricing Guidelines
(Locher, 2005, p. 82, with further references).
1228. See, for example, most famously, the publication and implementation of the ATAD
within the EU. See http://europa.eu/rapid/press-release_IP-16-159_en.htm (last visited
10 Feb. 2019).
1229. E.g. for a detailed overview on the impact of the BEPS Project in Switzerland see
Hongler, 2016, p. 100 et seq.
1230. For further details from a Chinese perspective see Li, 2015, p. 355.
1231. Blokker, p. 17 et seq., or regarding soft law within the EU see Gribnau, p. 76. These
questions are obviously not limited to tax law. E.g. regarding international environmental
236
Non-treaty-based rules and principles
Soft law might also allow more experiments and creative solutions than
binding instruments,1232 and soft law is used if the international organiza-
tion lacks the competence to issue binding instruments. From a mere pecu-
niary perspective, the costs to implement (and negotiate) hard law might
also be higher than the costs of agreeing on soft law.1233 Moreover, from a
sovereignty perspective, soft law has the major advantage that states do, in
principle, not lose their authority.1234 Therefore, states might choose soft law
instead of hard law in order to avoid a domestic ratification process. Soft
law might also be used as a matter of “compromise between groups seeking
a treaty and those seeking to avoid any commitment.”1235
law see Friedrich, p. 135, or with regard to the work of the WIPO see Kwakwa, p. 179 et
seq. On the flexibility argument see Guzman, 591 et seq.
1232. Thirlway, 2014, p. 164, with further references. See also Guzman, p. 591 et seq.
1233. Abbott & Snidal, p. 50 et seq. See also Christians, 2007, p. 332.
1234. See generally Abbott & Snidal, p. 52 et seq. See also Guzman, p. 592.
1235. Guzman, p. 593.
1236. See Cockfield, p. 181.
1237. For further details from a tax perspective see Dean, p. 537 et seq.; Ring, 2010b,
p. 649 et seq. See also Grinberg, 2016a, p. 19 et seq.
1238. See, with regard to soft law within the EU, Gribnau, p. 71.
1239. See Brodzka & Garufi, p. 400.
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used to achieve new rules instead of preserving the existing ones.1240 Or,
according to Pistone,1241 soft law has actually become the “main conveyor
of international tax coordination around the world.”
At first glance, soft law is by no means as effective as hard law due to the
lack of obligation toward the involved parties and the lack of credibility.
Nevertheless, if soft law is used in a way that it requires not de jure, but de
facto certain behavior of state actors, it might have the same impact as hard
law. This can be true for various reasons.
First of all, soft law can be combined with direct coercive measures taken
by other bodies of international law if a state does not implement the recom-
mended rule, i.e. is not compliant.1242 For instance, assuming that several
states agree that cross-border fiscal transparency is necessary, and these
states publish a recommendation on the design of domestic and treaty law
to achieve such a goal, such recommendations to implement measures to
achieve fiscal transparency would qualify as soft law and could be combined
with the threat of blacklisting countries that are not compliant. The non-
compliant states might be forced to follow such a soft law rule due to the
detrimental effect of the blacklisting on its economy. This has been the case
regarding the implementation of cross-border exchange of information, as
the G20 agreed to take measures against non-cooperative tax havens, or in
the words of the G20:
We stand ready to deploy sanctions to protect our public finances and financial
systems. The era of banking secrecy is over. We note that the OECD has today
published a list of countries assessed by the Global Forum against the interna-
tional standard for exchange of tax information.1243
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Non-treaty-based rules and principles
Secondly, compliance with soft law is also achieved through other factors,
such as the pressure of public opinion or, positively speaking, soft law can
be effective due to participation incentives.1245 Therefore, a state might be
forced to follow, for instance, a recommendation of the UN in the field
of humanitarian law due to the pressure by its citizens or public opinion,
respectively. Therefore soft law may not create a legal, but rather a moral
obligation.
Fourth, soft law might be more effective if the affected persons or states are
participating within the negotiation process of new rules of international
soft law, such as an international standard.1247 This might create a moral
obligation to implement a certain recommendation, as a state was part of
the development of such a recommendation. In this case, there might be a
commitment among states or other bodies of international law that a certain
rule should be implemented. States are not legally bound through their com-
mitment, but they are somehow indebted to the other states, as these could
at least have certain expectations regarding the behavior of the committing
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Chapter 4 - The International Tax Regime
state.1248 Of course, soft law is also more effective if the “preferences align
and distributive problems are largely absent”.1249 In other words, if the
involved states have the same interests, soft law might be more effective.
To sum up, soft law seems to have several advantages, but compared to
hard law, it is presumably less effective due to the lack of a legal obligation.
If soft law is combined with either direct or indirect coercive measures,
however, it can nevertheless have a similar impact as hard law. The latter
finds further support if soft law is worded precisely and published by the
competent and legitimate authority.
As was shown earlier, soft law is not a binding source of international law
and, therefore, we do not see any specific validity reasons, such as the con-
sent of states or morality. Consent among states is not required to create
international soft law, as even drafts of recommendations of international
organizations can qualify as soft law.1250 Moreover, moral or ethical values
are not of constituting importance for the validity of soft law, as even highly
unjust soft law would still qualify as soft law based on our understanding of
the term “soft law”.1251 However, of course, this has no direct legal impact,
as soft law is not binding and states are generally not obliged to follow
such presumably unjust provisions. Nevertheless, as was shown, soft law
that follows ethical values and moral principles might be more effective in
terms of state obedience.1252
From a tax perspective, it was shown that the OECD and the UN, together
with a few related bodies, such as the Global Forum or the Inclusive
Framework, are the main issuing bodies of international soft tax law. We
have also shown that both the OECD and the UN’s constituting conventions
suggest that the organizations have normative goals, such as the protection
of peace as the main goal of the UN and, inter alia, “to achieve the highest
sustainable economic growth … and rising standard of living” in the case of
the OECD.1253 Moreover, the specific committees might have further goals,
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Non-treaty-based rules and principles
First of all, the underlying goals of both the OECD and the UN are not
sufficiently outlined in order to render a final judgment of whether and
how justice is enhanced within the international tax regime by these goals.
For instance, the protection of peace as the main goal of the UN might not
provide for detailed guidance on how the international tax regime should
be drafted in order to protect international peace. Moreover, the support of
developing countries as intended by the work of the UN Tax Committee
but also as intended by the conferences on financing for development might
not necessarily lead to more justice in the international realm, unless it is
further outlined why this is indeed the case. Prima facie, it seems obvious
that developed states should support developing states, however, we will
in Part IV further deal with the question of whether there is (and to what
extent) indeed a moral duty to support developing states in the quest for
justice or whether global justice does not, per se, require a general support
of developing states by developed states.1254
Secondly, the recent soft law projects, particularly those of the OECD, lack
a reference to the ultimate and value-based goals of the organizations. This
means that it is not clear, for instance, whether the recommendations of the
OECD within the BEPS Project will indeed lead to a higher standard of
living and whether they will at the same time help “to achieve the highest
sustainable economic growth”, as the goals of the OECD would require. In
other words, it is not guaranteed that the soft law recommendations of the
UN and the OECD indeed fulfill one of their value-based goals, as the pub-
lications of these organizations are often silent in this respect. However, the
publications of the UN might sometimes be more detailed on the question
of how they are indeed in line with the value-based aims of the UN, such
as, in particular, the support of developing states as a major aim of the tax
work of the UN is often outlined in detail before a certain recommendation
is made.1255 However, the OECD publications are often silent when it comes
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Chapter 4 - The International Tax Regime
Additionally, we have shown that the use of soft law combined with direct
or indirect coercive elements might even be a cause for the presumed per-
ception that the international tax regime is unjust, i.e. it reflects one of the
outlined justice deficiencies.1258 Moreover, soft law does not necessarily
help to resolve the mentioned justice deficiencies of international law.
Neither judicial decisions nor legal writings are formal sources of inter-
national law, but they can be evidence of law or material sources of law.1259
Judicial decisions are mentioned as one potential source of international
law in article 38(1)(d) of the ICJ Statute. Accordingly, the ICJ shall apply
“subject to the provisions of Article 59, judicial decisions and the teachings
of the most highly qualified publicists of the various nations, as subsidiary
means for the determination of rules of law.”
1256. See, for example, the BEPS Action Plan as the core steering document in the last
decade, which in its introductory remarks is more or less silent regarding the question
of whether the suggested BEPS actions will indeed achieve the goals of the OECD, for
instance, to increase the general well-being (see OECD, Action Plan on Base Erosion and
Profit Shifting [OECD 2013], p. 7 et seq.).
1257. See sec. 2.1.6.
1258. See sec. 1.5.
1259. With respect to judicial decision, see Boas, p. 110; Crawford, p. 37.
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Non-treaty-based rules and principles
Article 59 of the ICJ Statute mentions, however, that the decisions of the
ICJ are not binding beyond the parties of a specific case. Furthermore, the
ICJ itself acknowledges that depending on the reason, it can deviate from
earlier decisions.1260 Another question relates to the kinds of decisions that
qualify as court decisions according to article 38(1)(d) of the ICJ Statute.
Decisions of the ICJ, as the highest authority within international law, are
covered.1261 Furthermore, national decisions can also be a (material) source
of law according to article 38 of the ICJ Statute.1262
From a tax perspective, and thinking beyond the scope of the ICJ Statute,
decisions of foreign courts have and will continue to play an important role
with respect to the interpretation of double tax treaties and beyond. This
is true if, inter alia, courts face the issue of interpreting a term within a
double tax treaty that should be understood autonomously, i.e. independent
from domestic law.1263 In this case, the court must develop an interpretation
detached from a domestic understanding. However, the goal of the present
study is to determine how to enhance justice within the international tax
regime and not how to enhance justice in a judicial process. However, in
Part IV we will also approach the question of whether justice would require
the implementation of a mandatory arbitration system within the interna-
tional tax regime.1264
4.3.6. Equity
1260. ICJ, Case concerning the Land and Maritime Boundary between Cameroon and
Nigeria, p. 21.
1261. Thirlway, 2014, p. 120.
1262. Boas, p. 110 et seq.; Crawford, p. 41.
1263. In German-speaking countries, the term “Entscheidungsharmonie” is sometimes
used (see generally Hongler, 2012a, p. 201 et seq.).
1264. See sec. 12.4.
1265. Thirlway, 2014, p. 104. However, see ICJ, Case concerning the Frontier Dispute
(Burkina Faso v. Republic of Mali), p. 17 et seq.
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Chapter 4 - The International Tax Regime
praeter legem. If a situation indeed occurs in which the law does not pro-
vide for a solution, equity praeter legem might not be a specific source of
law, but rather a general principle of international law, as provided for in
article 38(1)(c) of the ICJ Statute.1266
As has been shown above,1269 the modern system of sovereign states has
developed since and before the Westphalian Peace without a formal inter-
national constitution-like document, even though some authors refer to the
UN Charter and highlight its constitutional features.1270
In the previous sections, we outlined the content and validity of the differ-
ent sources of the international tax regime, per se. However, this still seems
insufficient to render a normative review and conclude that the international
244
The international tax regime and its constitutional content
tax regime as a legal regime does not provide for sufficient guidance on
how to enhance justice and how to mitigate the presumed justice deficien-
cies. More legal guidance could be derived from an analysis of whether
the international tax regime consists of constitutional elements that have
not been captured in the previous sections. With particular reference to the
historical analysis of international law in general,1271 and considering the
potential transformation of the world into a more integrated international
legal community,1272 the following sections focus on the content of such a
potentially constitutional international framework. Particular reference is
made to the so-called international tax or fiscal constitution. The thesis for
the following section is that the international tax regime has shifted from a
mere coordinative system into a more constitutive regime considering, inter
alia, certain individual rights and community interests.
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Chapter 4 - The International Tax Regime
For the purpose of the present study, the terms “constitutionalism” or “in-
ternational constitution” are used for descriptive and analytical purposes in
order to develop an in-depth understanding of whether the outlined inter-
national tax regime contains constitutional elements that could guide our
normative review of the international tax regime, aiming at achieving a just
system. Furthermore, it will be vital to discuss whether the economic and
social developments in recent decades have led to a new international legal
regime implying certain constitutional elements.1276 At least three reasons
justify such methodology.
1275. For an innovative approach see Diggelmann & Altwicker, p. 623 et seq.
1276. For a similar justification for the usage of constitutionalism in international law
see Payandeh, p. 51. See also Kälin, p. 43 et seq.
1277. See Peters, 2005, p. 549; Simma, 1994, p. 217 et seq.; Werner, p. 349.
1278. See, with a similar definition, Peters, 2010, p. 12, with reference to Kadelbach &
Kleinlein.
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The international tax regime and its constitutional content
247
Chapter 4 - The International Tax Regime
In the following, we will also not use or misuse the term “constitutionalism”
in order to suggest the development of a more integrated international law
system.1283 By contrast and as mentioned, reference to potential constitu-
tional rules and principles is necessary, as it is not sufficient to outline the
existence of treaty-based or non-treaty-based rules as part of the interna-
tional tax regime. In other words, it helps us to better understand whether
international tax negotiations are only a mere power play between different
states with no legal constraints or whether states when redesigning the in-
ternational tax regime need to operate within an international constitutional
framework. Therefore in the present section we will suggest neither more
integration nor fragmentation of the international tax regime.
1283. See, with some critical thoughts on the use of the term “constitutionalism” in the
international law realm, Biaggini, 2000, p. 459 et seq. See also Altwicker & Diggelmann,
p. 91; Kälin, p. 43 et seq. This would be a normative task, i.e. how the world ought to be
regulated, which is dealt with in Part IV of the present study (see also, on the analytical
and normative component of studies about constitutionalism, Thürer & Zobl, p. 194).
1284. Of course, such analysis cannot be comprehensive. However, the following sec-
tions should be understood as a first approach to discuss the topic of international fiscal
constitutionalism. We will therefore need to “cherry-pick” some rules in a few constitutions,
as it is impossible to render a comprehensive comparative constitutional study within the
present project on justice in international tax law.
1285. This seems, for instance, the method taken by Kühne, p. 1 et seq. See also Paulus,
2009, p. 90 et seq., on whether domestic constitutional principles can be fulfilled by the
international legal order.
1286. See generally Kühne, p. 23 et seq.
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The international tax regime and its constitutional content
From a mere tax perspective, there is, as far as can be observed, no detailed
study about international constitutionalism or about an international fis-
cal constitution (“Finanzverfassung”). Very few authors have used the term
“constitutionalism” in studies on international tax law.1287 The discussion
is generally limited to the content of the domestic fiscal constitution or the
domestic rule of law and its impact for international tax purposes. Yet, there
has been an intense discussion about constitutionalism in international law,
and we will utilize these studies in the following sections.1288 Moreover,
international tax law has not been of major importance for international law
scholars dealing with constitutionalism.1289
In order to judge whether the international tax regime contains rules or prin-
ciples that are constitution-like, it is important to first briefly review what
the functions and the purpose of a constitution are. A constitution, for the
purpose of the present section, is understood as a collection of fundamental
rules and principles according to which a legal system (such as a state or,
in the present case, the world order) is governed.1290 Therefore, the validity
of an entire legal order or regime is derived from a constitution.1291 Both
the legislator and courts shall act within a constitution. The purpose of a
constitution is furthermore to outline the main organizational rules of states,
such as checks and balances between the different state powers. A further
goal of a constitution is to structure the competences within a state, such
as between Member States and the federation, and not only between the
judicial, legislative and executive bodies. Therefore, the constitution as such
1287. See, as one of a few, Reimer, p. 2. See also, at least on constitutional pluralism,
Kofler & Pistone, p. 14 et seq.; Vanistendael, 2011, p. 185 et seq.
1288. See De Wet, 2006, p. 51 et seq.; Diggelmann & Altwicker, p. 623 et seq.; Fassbender,
2003, p. 115 et seq.; Fassbender, 2005, p. 837 et seq.; Fassbender, 2009, p. 1 et seq.;
Kleinlein, p. 1 et seq.; Kühne, p. 1 et seq.; Thürer, 2009b, p. 113 et seq.; Peters, 2005,
p. 537 et seq.
1289. We already argued above that international tax law has mainly been neglected
in international law studies. Regarding constitutionalism, see generally Kühne, p. 1 et
seq., who deals with international human rights protection, international law of peace,
international humanitarian law and international environmental law, but not international
tax law.
1290. For more details about the term “constitution” see Fassbender, 2007, p. 22 et seq.;
Kühne, p. 13 et seq.; Peters, 2005, p. 338 et seq.
1291. For a broader overview on the functions of a constitution, see Biaggini, 2015, § 7
para. 7 et seq.
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Chapter 4 - The International Tax Regime
1292. E.g. from a Swiss perspective, Belser, para. 43, with reference to Tschannen.
1293. See Belser, id.
1294. See, for example, the tax justice principles (“Steuergerechtigkeitsprinzipien”) in
art. 127 et seq. of the Swiss Federal Constitution (see generally Matteotti, 2007, p. 14 et
seq.; Matteotti & Aebi, p. 106 et seq.).
1295. For instance, the German Constitution contains the equality principle in art. 3
Grundgesetz, from which scholars and courts derive several specific tax justice principles
(e.g. Hey, § 3 para. 110 et seq.).
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The international tax regime and its constitutional content
4.4.3.1. Organizational rules
4.4.3.1.1.
Legislative, judicial and executive bodies
1296. The term is used by Thürer, 1996, para. 17. See also Thürer, 2000, p. 597 et seq.
1297. See generally Fassbender, 2009, p. 94 et seq. He also mentioned the adjudication
of legal claims as a third element of global governance (i.e., the judicial element).
1298. See generally Kühne, p. 25 et seq.
1299. See Thürer, 2000, p. 601 et seq.
1300. See Kühne, p. 27 et seq., with further references.
1301. See Peters, 2004, p. 23.
1302. Fassbender, 2009, p. 131.
1303. See Fassbender, 2009, p. 95, with reference to Tomuschat.
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Chapter 4 - The International Tax Regime
252
The international tax regime and its constitutional content
4.4.3.1.2.
Other organizational rules and principles
Although the current world order does not have a single executive, legislative
and judicial body, as compared to domestic constitutional order, some orga-
nizational rules and principles have a constitutional or peremptory character.
These rules and principles can be derived from different sources, such as
treaties, customary law or general principles of law.1314 However, as already
outlined with reference to the principle of sovereignty,1315 some rules might
be valid, as they are legal preconditions, such as the principle of sovereignty
or the right of peoples to self-determination.1316 One could also call these
peremptory norms juristic inevitabilities of a world order with several equal
states, as developed since (and before) the Peace of Westphalia.1317 Or, as
stated by Hannikainen: “The absence of peremptory norms would constitute
at least a potential threat to the international legal order.”1318 In this respect,
the ICJ held in the North Sea Continental Shelf cases the following:
In its fundamentalist aspect, the view put forward derives from what might be
called the natural law of the continental shelf, in the sense that the equidistance
principle is seen as a necessary expression in the field of delimitation of the
accepted doctrine of the exclusive appurtenance of the continental shelf to the
nearby coastal State, and therefore as having an a priori character of so to speak
juristic inevitability.1319
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Chapter 4 - The International Tax Regime
The current world order,1320 i.e. a world order based on sovereign (and equal)
states, requires that some fundamental structural or organizational rules are
obeyed. These rules are legal preconditions for the international system or
the international regime that is currently in place. This also means that if a
state infringes these fundamental rules, it questions the current world order.
Such preliminary remarks might sound rather abstract, but if one considers
the following concrete rules, the importance of these peremptory (organi-
zational) rules becomes obvious.
The first and most basic rule is the principle of sovereignty, as mentioned
earlier. The current international legal system requires that states obey the
sovereignty of other states, since otherwise, the entire system is questioned
and the world would fall back to its state before the Peace of Westphalia.1321
Secondly, and derived from the sovereignty principle, is the principle of
equality among states.1322 This means that all states have the same rights
and duties in the current world order and no state shall be dominated by
another state. Yet, this does not mean that economic inequalities between
states are illegal. Thirdly, it is persuasive that the co-existence of states
without having one state as the leading state requires that the principle of
good faith (i.e. bona fides) be followed. If states cannot trust in good faith in
the behavior of another state, the entire world order would be questioned.1323
The bona fides principle is also mentioned by many international lawyers
as a general principle of international law in the sense of article 38(1)(c)
of the ICJ Statute, as was discussed above.1324 Fourth, and related to the
good faith principle and the sovereignty principle, the pacta sunt servanda
principle is also of a constitutional character and was also discussed in
more detail above.1325 The pacta sunt servanda principle is indeed valid in
order to maintain the current world order. Or, in other words, the develop-
ment of the current world order was linked to the development of the pacta
sunt servanda principle. The pacta sunt servanda principle is a rule that is
necessary to regulate international lawmaking and, therefore, these rules are
necessary, as they are necessary for any sort of governance, or as Tomuschat
calls them “meta-rules”.1326
1320. On the historical development of the current legal world order, see sec. 3.4.
1321. See id.
1322. See Epping, in: Ipsen, § 5 para. 248 et seq.; Tomuschat, 1993, p. 220 et seq. See
also sec. 4.1.1.3.2.
1323. Verdross & Simma, § 60. See also Kohen, p. 148, who refers to the jurisprudence
of the ICJ and states that good faith (together with equity) should guarantee stability and
foreseeability as “two of the main objectives of any legal system.”
1324. See sec. 4.3.3.3.2.
1325. See sec. 4.3.3.3.6.
1326. Tomuschat, 1993, p. 216.
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The international tax regime and its constitutional content
4.4.3.2.1.
Some general remarks
Furthermore, each area of law has its own substantive rules that could form
part of an unwritten international constitution. Also, a domestic constitution
is often split into different parts governing different areas of law such as, for
instance, environmental law, education policy, military or, as important for
the present study, the fiscal order of a state. Each part may contain specific
1327. The present opinion is mainly based on the writings of Verdross (see Verdross,
1969, p. 649).
1328. See Keller, 2007, p. 633, who argues that the most important merit of a constitutional
approach at an international level is the recognition of the universal validity of human
rights. See also Paulus, 2009, p. 88 et seq.
1329. Kühne, p. 33.
1330. German literature uses the term “Verrechtlichung”, i.e. “juridification”, in order to
show that certain ethical or moral rules have developed into legal claims at an international
level (see Kühne, p. 33).
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Chapter 4 - The International Tax Regime
4.4.3.2.2.
Protection of individual rights
1331. See, with further details on the discussion of the content of the unwritten interna-
tional constitution with respect to environmental law, Kühne, p. 243 et seq.
1332. See sec. 4.4.3.2.2.
1333. See sec. 4.4.3.2.3.
1334. See Peters, 2010, p. 13.
1335. See, in particular, the UN Agreements on Human Rights, such as the Universal
Declaration of Human Rights, 10 Dec. 1948, but also the European Convention on Human
Rights, 21 Sept. 1970.
1336. E.g. Boas, p. 95; Thirlway, 2014, p. 35 et seq. Or for further details, see Heintschel
von Heinegg, in: Ipsen, § 16 para. 37 et seq.
1337. E.g. Tomuschat, 2006, p. 425.
1338. See, on the argument that certain rules are necessary in order to protect the survival
of the human race, Thürer & Zobl, p. 195.
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The international tax regime and its constitutional content
provisions.1339 These rules are valid due to their content, as these provisions
are superior, since they are necessary for “upholding peace and justice in
the world.”1340 This means that they are not necessarily based on one of the
sources of international law outlined above.1341
4.4.3.2.3.
Protection of community interest
The remarks on ius cogens and the global protection of individual rights
have shown that certain fundamental individual rights have become part
of an international constitution-like framework in which international and
domestic law must operate. These rights are indeed limiting state sover-
eignty and they have led to a transformation of international law from a
system of co-existence to a more integrated and coordinated value-based
regime. Another (but connected1347) limitation of sovereignty is that the pro-
1339. See, for example, Conklin, p. 837 et seq. See also Boas, p. 100.
1340. Tomuschat, 1993, p. 223, with further references. See also Werner, p. 335 et seq.
1341. However, this is disputed in international law. See, for example, Kolb, 1998, p. 69
et seq., with further references.
1342. Kadelbach, 2006, p. 22.
1343. Hannikainen, p. 155.
1344. See, for example, Paulus, 2009, p. 88. He also mentions further potential candidates
to be qualified as ius cogens.
1345. See, for example, Hannikainen, p. 716 et seq.
1346. Kühne, p. 36, with reference to Raffainer.
1347. The distinction between “individual rights” and “community interests” at an inter-
national level is not beyond reproach as, for instance, the protection of some fundamental
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These community interests are interests that can only be protected by inter-
national coordination and such interests are concerns of basically all states.1349
The international community might have an interest in a coordinated solu-
tion if, for instance, a threat is not only affecting a specific state’s territory,
but mankind at large.1350
human rights (such as the prohibition of slavery) is also in the interest of the interna-
tional community (see Simma, 1994, p. 242). See also on this topic Fassbender, 2002,
p. 242 et seq. The same is true for the prohibition of genocide (see on the protection of
such community interests ICJ, Case concerning the Barcelona Traction Light and Power
Company, Limited (Belgium v. Spain), p. 32).
1348. See, with reference to the Barcelona Traction case, Simma & Paulus, p. 267. The
usage of the term “community” already implies that there are certain interests common
to the members of the international world order (id., p. 268).
1349. Scheyli, p. 204, with further references.
1350. Payendeh, p. 91.
1351. See id., p. 99.
1352. Simma, 1994, p. 233.
1353. This was already outlined in detail by id., p. 217 et seq.
1354. ICJ, Case concerning the Barcelona Traction, Light and Power Company, Limited
(Belgium v. Spain), p. 32.
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4.4.4.1.1.
Legislative, judicial and executive bodies
It seems clear that due to the importance of treaties as the main source of
international tax law,1369 states are still the main force and legislative power
within the international tax regime.1370 However, considering the impact of
become part of ius cogens, see Kadelbach, 2004, p. 12, with further references. On the
protection of the environment as a community interest, see also Payandeh, p. 115 et seq.;
Scheyli, p. 215 et seq.
1362. See Paulus, 2009, pp. 93 and 105 et seq., who refers, inter alia, to the German
constitution. He concludes that: “[t]hus, international solidarity as a right has not quite
entered the operational phase” (id., p. 106).
1363. See, for instance, Simma, 1994, p. 235, who speaks of “an equitable solution to
North-South economic problems” and of North-South solidarity (p. 237).
1364. Payandeh, p. 121.
1365. Thürer & Zobl, p. 196.
1366. See Payandeh, p. 100 et seq.; Simma, 1994, p. 236.
1367. For an overview on the content of these interests see Payandeh, id. p. 122 et seq.
1368. See id., p. 122.
1369. For further details see sec. 4.2.
1370. Kühne, p. 29; Tomuschat, 1995, p. 9.
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The international tax regime and its constitutional content
the BEPS Project, as well as the work of the Global Forum, it seems that
quasi-legislative international bodies have indeed emerged to limit state
sovereignty – at least de facto and not de jure.
It goes beyond the present study to render an empiric study on the impact
of the BEPS Project in domestic law, but the widespread implementation
of country-by-country reporting1373 or the creation of domestic provisions
allowing for a spontaneous exchange of tax rulings1374 are just two of the
many clear signs of the actual impact of the BEPS Project on domestic
legislation.1375 The use of minimum standards has narrowed the domestic
legislative leeway. Another example is the developments with respect to
international fiscal transparency, particularly the mechanism of black or
gray-listing of certain jurisdictions, which has been an important driver of
shifting the tax-related legislative power and its surveillance to an interna-
tional body. However, there is no underlying constitution or similar frame-
work that would provide for certain legislative or quasi-legislative pow-
ers for global institutions. Besides, it is important to note that peer-review
processes at an international level have increasingly been used to achieve
an alignment of domestic provisions or practice with international recom-
mendations. The most important example are the peer-review processes of
the Global Forum and the Inclusive Framework, which aims at analyzing
1371. See, for example, art. 104a et seq. of the German Constitution. See also art. 13(1)
of the Austrian Constitution and the Fiscal Constitutional Act (Finanzverfassungsgesetz).
1372. See sec. 2.1.4. with reference to Piketty and Pogge.
1373. See OECD/G20, Transfer Pricing Documentation and Country-by-Country Reporting,
Action 13: 2015 Final Report (OECD 2015), p. 11 et seq.
1374. See OECD/G20, Countering Harmful Practices More Effectively, Taking into Account
Transparency and Substance, Action 5: 2015 Final Report (OECD 2015), p. 45 et seq.
1375. See for an intermediate analysis of the global impact of the BEPS Project Christians
& Shay, p. 17 et seq.
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Not only with international tax law, but also, as already shown above,1379 in
other areas of international law, no central executive body exists in order to
execute existing international tax rules.1380 Moreover, no global limitations
regarding the spending of taxpayer money exist, as compared to domestic
constitutions, which sometimes state the purposes for which governments
may use taxes. This is important as, for instance, there are no rules at an
international level regarding whether states should use funds for global dis-
tributive purposes or whether states should only spend their tax revenue
domestically. International tax rules are executed by domestic bodies, such
as the tax administration or other governmental bodies. The executive ele-
ment of an international (unwritten) tax constitution is rather weak or even
nonexistent, although the mentioned peer-review processes could also be
understood as an executive measure to supervise the implementation of the
(quasi-) legislative proposals. Furthermore, the collection of taxes remains
a central domestic competence, even if states might agree on cross-border
cooperation with respect to the collection of taxes (i.e. article 27 of the
OECD MC).1381 Therefore, tax rules are executed almost entirely by domes-
tic bodies.
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The international tax regime and its constitutional content
4.4.4.1.2.
Other organizational rules and principles
The mentioned organizational rules, such as the pacta sunt servant principle
or the equality of states and the good faith principles, are also relevant from
an international tax law perspective.1385 We have already dealt with their
importance in the international tax regime1386 and will further refer to these
rules and principles when rendering a normative review of the international
tax regime in Part IV.
1382. See, for example, Baker, p. 211 et seq. See also Kofler & Pistone, p. 3 et seq.
1383. See OECD/G20, Making Dispute Resolution Mechanisms More Effective, Action 14:
2015 Final Report (OECD 2015), p. 1 et seq.
1384. See, for example, on constitutionalism, judicial protection and trade law, Cottier,
p. 54.
1385. See sec. 4.4.3.1.2.
1386. See, inter alia, secs. 4.1.1.3.2. and 4.3.3.3.6.
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4.4.4.2.1.
Protection of individual rights
Prima facie, it seems obsolete from a tax perspective to deal with substantive
rules and the protection of the rights of individuals as part of an international
constitution. This seems particularly true with respect to ius cogens, such as
the prohibition of torture, slavery or genocide. These are not important from
an international tax perspective, although cynics (and libertarians) would
claim that a high-tax burden might be seen as torture and taxation is slavery,
per se. Yet certain (very few) rules can be considered to be part of an unwrit-
ten international fiscal constitutional framework from which states cannot
deviate. From a tax perspective, in particular, certain procedural rules that
are part of multilateral human rights declarations could be seen as part of
an international constitution and might limit the sovereignty of states. For
instance, the right to a fair trial also affects domestic tax law procedures.1387
1387. See, with further details, the references mentioned supra in n. 1382.
1388. See, for example, from a legal perspective, Monsenego, p. 61 et seq.
1389. See art. 127(3) Swiss Federal Constitution.
1390. See also for further details sec. 11.2.3.4.
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The international tax regime and its constitutional content
4.4.4.2.2.
Protection of community interests
Derived from such a statement and following the entire development of in-
ternational tax law in recent decades, we see at least three major streams of
the international tax agenda that were triggered by (presumably) community
interests.
First of all, the work of the Global Forum focusing on a global extinction of
tax evasion seems to align with the interests of the international community.
Or, as held by Kosie Louw, the former Chair of the Global Forum:
Given the change that AEOI will bring, implementing this standard is undoubt
edly a big challenge for all of our members. Nonetheless, I am confident that
given the progress we have made this year, it will be implemented on schedule.
It is critical that we meet the timelines we have mutually committed to so that
the message goes out loud and clear that there will soon be nowhere left for tax
evaders to hide [emphasis added].1393
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Now, this does not mean that any measures are justified in order to enforce
global transparency, but it indicates that there indeed seems to be a
community interest to achieve fiscal transparency. In Part IV, we will further
deal with the question of whether global transparency is indeed a normative
goal that can and should be enforced by coercive measures.1399
1394. See the Preamble of the Convention on Mutual Administrative Assistance in Tax
Matters, 1 June 2011.
1395. Stiglitz & Pieth, p. 15.
1396. Id.
1397. Id.
1398. Id., p. 22.
1399. See sec. 12.6.
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The international tax regime and its constitutional content
One other important argument of why the fight against tax avoidance is
indeed a community interest in the current debate is the argument that mere
unilateral measures would lead to chaos, and this is an important criterion
when evaluating community interest in international law. As an example, the
OECD/G20, particularly with regard to countering harmful tax practices, is
of the opinion that a coordinated approach is necessary to stop the assumed
“race to the bottom”:
Countries have long recognised that a “race to the bottom” would ultimately
drive applicable tax rates on certain sources of income to zero for all countries,
whether or not this is the tax policy a country wishes to pursue, and combating
1400. We will not try to answer the extremely difficult and fuzzy question of how the
terms “tax avoidance” and “base erosion and profit shifting” interact, i.e. whether every
measure to erode the tax base or to shift profits to a low tax jurisdiction is tax avoidance.
In the following, we will use the term “tax avoidance” in order to circumscribe the behav-
ior of somehow aggressive tax planning, which has triggered some recent international
legislative projects, such as the BEPS Project.
1401. OECD, Action Plan on Base Erosion and Profit Shifting, p. 10 et seq.
1402. Vanistendael, 2011, p. 193. See, on the issues of partial coordination and its nega-
tive impact, with reference to several studies of economists, International Monetary Fund,
Policy Paper, Spillovers in International Corporate Taxation, 9 May 2014, p. 44.
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Therefore, there seems not only a community interest to fight tax avoidance,
but also to regulate tax competition.1404
1403. OECD/G20, Countering Harmful Tax Practices More Effectively, Taking into Account
Transparency and Substance, Action 5: 2015 Final Report (OECD 2015), p. 12.
1404. See Brauner, 2016, p. 6, who argues that the international tax regime “evolved with
the apparent sole aim of perfecting such competition [i.e., following market theory], rather
than curbing it.”
1405. See sec. 4.3.2.8.3.
1406. See generally Payandeh, p. 120.
1407. Peters, 2005, p. 542 (not focusing on tax law). And for the sake of completeness,
we are not necessarily claiming that considering community interests must be understood
as progress (for more details about the progress debate in international law see Altwicker
& Diggelmann, p. 87 et seq., with further references).
1408. For further details from a tax perspective see Essers, p. 54 et seq.
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The international tax regime and its constitutional content
The discussion on the international tax regime has also shown that recent in-
ternational quasi-legislative projects have focused on community interests,
e.g. that multinationals pay their fair share and it is of less interest in which
states the taxes are paid. Aligned with such development, the international
tax world has recently seen an initial wave of what Peters calls “World
Order Treaties”.1411 These treaties, such as the MCAA, have a “quasi-uni-
versal membership” and regularly contain something like “public interest
norms”.1412 These treaties consider the community interest, and not only the
interest of every individual state. Surprisingly, the community interests are
also realized and considered through rules between states, so it therefore
seems that from a legal perspective, it is still an international community
of states and not of individuals.1413 It is not a surprise that the increased
relevance of assumed community interest aligns with the increased use of
multilateral treaties in international tax law. Multilateralism is indeed an
effective to tool to foster community interest.1414
4.4.5. Conclusion
1409. See, with further references on democratic legitimacy and tax law, Ring, 2008,
p. 172 et seq.
1410. See, for example, sec. 12.6.2.1.
1411. Peters, 2005, p. 542.
1412. Id., p. 542 et seq., with further references.
1413. See generally Ratner, 2011, p. 162 et seq., who draws the link to cosmopolitanism
in political philosophy (see for more details sec. 7.5.).
1414. Simma, 1994, p. 324.
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1415. See, for example, on the (missing) protection of human rights in the international
debate on fiscal transparency, Pistone & Baker, p. 17 et seq.
1416. The “first wave” is not a technical term, but might entail the work of the League
of Nations before World War II (for more details see sec. 4.2.3.2.2.).
1417. See Peters, 2005, p. 540, from an international law perspective: “I have some doubts
as to whether we can find a constitution in this value-loaded sense on the international
plane. [footnote omitted].”
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Regime
just.1420 This would be the first overall conclusion of why the international
tax regime is primitive compared to a domestic comprehensive legal regime.
In a domestic circumstance, a legislator can derive certain guidelines on
what is considered just by a society from, for instance, substantive rules in
a constitution or from the rule of law. In the following, to summarize the
present Part II, we will highlight four further specific aspects of why the
international tax regime is primitive:
– blurred jurisdiction-to-tax and its detrimental impact;
– bilateralism, “fuzzy multilateralism” and primitive international tax
legislation;
– the (biased) protection of community interests and individual rights;
and
– the primitiveness of the traditional sources of international tax law.
First of all, the taxation of the worldwide income of residents is in line with
international law and has been applied by many countries, as residence
seems to be a sufficient link to tax the entire income of a corporation or an
individual from an international law perspective. This means that general
international law does not limit taxing rights of states to income that was
created within the territory of a certain state in cases of residence as a link.1421
Second, it has been shown that CFC rules, i.e. taxing the income of a for-
eign-controlled company due solely to the fact that such company is taxed at
a low rate and controlled by a company in another state, seems to be in line
with international law, or at least there is no opposing case law available.
This is true, although the link to the parent state might be very minimal, or
272
Blurred jurisdiction-to-tax and its detrimental impact
even incidental, in some cases, particularly if CFC rules do not solely apply
in abusive situations in which no substance is at hand in the CFC state.1422
Third, the remarks regarding citizenship taxation have shown that US courts
assumed that taxation based on citizenship is in line with international law,
even though a certain citizen might not live or stay in its citizenship state.
Considering the Cook v. Tait case, we argued that the benefit principle might
be an important anchor to justify citizenship taxation from a normative
perspective. However, the latter is a mere moral argument. The legal argu-
ment behind the genuine link doctrine is the principle of sovereignty as a
peremptory norm of the current world order, which seems to allow states
to tax their citizens.1423
Therefore, the link to justify taxation can be very limited. However, the
actual cause for overlapping jurisdictions is not necessarily the limited link
itself, but the fact that a link can trigger broad jurisdiction through the ap-
plication of worldwide tax systems. This means that the international tax
regime is primitive, as it (i) does not only not define what a genuine link is,
but worse, it does not (ii) limit the extent of taxation if certain connecting
factors, such as residence and/or citizenship, are given. As a consequence,
compared to a domestic system, exclusive jurisdiction is not defined at all
in international law. In a domestic scenario, a constitution might regulate,
for instance, which state body is competent in which area of tax jurisdic-
tion. Therefore, the primitiveness of the international tax regime can be
highlighted by the following statement from Martha:
However, note that general international law – paradoxically – “causes” double
taxation, which leads to situations prompting the creation of particular inter-
national fiscal law (tax treaties) through international law creating processes.1424
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Regime
for instance, prohibiting double taxation per se. Again, we are neither sug-
gesting that there ought to be a legal prohibition of double taxation at an
international level, nor arguing in the opposite manner. The goal of Part II,
however, is to demonstrate the weak or primitive legal framework in which
the international tax regime operates.
Moreover, general international law does not contain any effective measures
to disallow unbalanced or even unjust treaties. In a sense, this is also primi-
tive, but as a comparison, reference would need to be made to civil law and
the protection of parties to a civil law contract. Prima facie, the available
remedies of the parties of an international treaty seem to be fewer than the
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Bilateralism, “fuzzy multilateralism” and primitive international tax legislation
parties of civil law contracts, but a final judgment would require a separate
study.1428
1428. For instance, in international law, there is nothing like unconscionability, which
is common in civil or contract law and would, for instance, protect a party in the case of
an exploitation of weaknesses by the other contractual party (see, for example, art. 21 of
the Swiss Code of Obligations, 30 Mar. 1911).
1429. See, on the validity of international treaties, sec. 4.2.1.5.
1430. See sec. 4.2.3.3.1.
1431. See sec. 1.5.
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Regime
276
The (biased) protection of community interests and individual rights
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Chapter 5 - Conclusions: The International Tax Regime – A Primitive Legal
Regime
The argument is that cross-border tax evasion and tax avoidance can only
be resolved by global and coordinated measures. Therefore, it seems that
the international tax regime has, at least in this respect, lost its status as a
mere coordinative and primitive system that is only steered by the strongest
players.
1438. See, from an international law perspective, Ratner, 2011, p. 168. See also Steichen,
p. 48 et seq., who argues that direct tax harmonization would not necessarily lead to
individual justice. The same must be true with respect to a partial harmonization, such as
the one intended by the BEPS Project.
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The primitiveness of the traditional sources of international law
Therefore it seems fair to say that the international tax regime is primitive,
as it does not provide us with any guidance on which individual rights
and community interests should be protected by global tax legislation. For
instance, in a domestic situation, a constitution might at least provide certain
guidance. Yet, it is crucial to consider that these remarks are still based on
a legal analysis of the international tax regime, and we have not yet made
any normative claim, such as, for instance, that there should be a distribu-
tive element in the international tax regime. We have not yet developed our
normative understanding of how the international tax regime ought to be
designed in order to be considered just. This will be one of the decisive tasks
for Parts III and IV of the present study. The normative question of whether,
for instance, the international tax regime should contain cosmopolitan dis-
tributive elements to support the poorest on the planet, or whether we should
“share the pie” at a global level, cannot be answered by referring to rules
or principles contained in the international tax regime as an international
law regime.
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Regime
Treaties are by far the main source of international tax law. As many oth-
ers have shown, a system of thousands of double tax treaties with a non-
harmonized national tax system leaves room for tax planning that might
– as famously claimed by the OECD – lead to presumably unjust base
erosion and profit shifting.1440 It has also been demonstrated that the net
of double tax treaties is far from comprehensive, as only approximately
3,000 have been signed. With respect to treaties, we have further shown
that even a highly unjust treaty is valid from an international law perspec-
tive and that there is basically no legal requirement to sign non-reciprocal
or highly unfair and unbalanced treaties. As a logical consequence, this
also means that treaties can cause unjust results within the international
tax regime. Compared to a domestic tax act, which must generally be in
line with constitutional values, an international treaty must not generally1441
conform to any value-based framework. This brings us to the other sources
of the international tax regime.
We have seen that the development of customary international tax law faces
practical and legal constraints, because on one hand, customary interna-
tional law is a rather weak source concerning very technical disciplines,
such as international tax law, and on the other hand, customary international
tax law, due to the application of the legality principle in tax law, might not
be able to function as an important legal source in the area of international
taxation.1442 Furthermore, we opined that customary international law must
be understood as a positive legal concept and morality or justice consider-
ations should not play a crucial role when reviewing the question of whether
a rule or principle has become customary international law. Therefore, with
respect to the validity of a rule as customary international law, justice or
other moral arguments do not play a crucial role, which on the other hand
would also mean that unjust customary international law could theoretically
emerge, even though the requirement of both state practice and opinio iuris
might make it a less fragile source of international law regarding justice,
as unjust rules of customary law are less likely to be developed than unjust
treaty rules.1443
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The primitiveness of the traditional sources of international law
281
Part III
The present part will lay the groundwork for the later normative assessment
of some of the most important principles and rules of the international tax
regime. It will be vital to develop an in-depth understanding of the philo-
sophical debate over global justice. The global justice debate was mainly
triggered by the enhanced globalization following World War II and from
an academic perspective by the publication of Rawls’ A Theory of Justice
in 1972. As we will see in various instances, however, some of the more
classical works about justice are still of great importance for the contem-
porary discussion.1446 The following chapter will start with references to
Rawls’ ground-breaking work. We will then refer to his reception among
other philosophers before we finish Part III with some concluding remarks.
There are many more ways to structure the part about the different theories
of global justice to develop a reference point for our later normative review.
One could follow the historical development, but one could also try to group
the existing theories. As mentioned, we will refer to Rawls as a starting
point and we will outline the reception of his work in a separate chapter.
Such a structure allows us to focus on Rawls’ work, but simultaneously
develop a rather comprehensive overview, as many later authors refer to
him. We will dedicate the following section 6.1. to outline in detail why we
chose Rawls as a starting point.
As argued above,1447 the term “justice” in international tax law has long
been neglected and the specifics of a justice debate in international tax law
have been ignored. In this respect, even among philosophers, the aspect of
global justice has been omitted or neglected when theories of justice were
discussed.1448 Yet, in recent decades – since the publication of Rawls’ A
Theory of Justice – ideas of global justice have gained importance. The
more recent writings of authors like Beitz, Pogge, Sen and Nussbaum, as
well as those of Blake, Caney, Nagel and Risse, should be used as reference
points when designing the international tax regime.
1446. See Kant’s (Kant, p. 1 et seq.) work on perpetual peace as a key for the understanding
of the later theories on global justice. And, of course, Kant’s work in general was highly
influential on all contemporary theories of justice.
1447. See sec. 1.4.
1448. See Höffe, p. 96, who mentions Kant’s work on perpetual peace (i.e. Kant, p. 1 et
seq.), however, as an exception among the classics of philosophy.
285
Introduction
286
Chapter 6
In several instances in the present Part III and in the following Part IV, we
will justify our reference to Rawls for rendering a normative review of the
international tax regime. Rawls seems to be the perfect starting point. This
is based on several reasons, some of which will be highlighted in the present
introductory section.
Rawls’ principles of justice should help tax lawyers in the current frame-
work of discussing a redefinition of the international tax regime to recon-
sider their arguments. For instance, the original position construct, which
will be discussed in detail below1449 and which is a core element of Rawls’
theory, could serve as an instrument to measure whether the current rules
are indeed just. This has already been highlighted by Christians:
The contractarian approach [of Rawls] thus provides a structure for thinking
about duty in tax system design that is already implicitly at play in the at-
tempts of OECD officials to create an international consciousness regarding
tax policy.1450
Therefore, even though, and this will be discussed in detail in the following
sections, one might not agree with Rawls on his principles of justice among
states (i.e. The Law of Peoples),1451 his method of using a veil of ignorance
and the original position seems to be a very strong procedure to decide
between several claims, which is not uncommon among lawyers.1452 In this
respect, we will further discuss the impact of a plurality of reasons as part
of a debate about justice with reference to Sen’s Idea of Justice, who again
was also highly influenced by the writings of Rawls.1453
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Chapter 6 - John Rawls’ Ideal Theory of Inter-State Justice
Rawls’ work on justice and international law or the global order, as such,
which will be one of the most important points of reference in the follow-
ing, is strongly related to his masterpiece A Theory of Justice, which was
published in a first version in 1972 and in a revised version in 1999. To
understand his later work on the law of peoples, it is essential to first outline
his theory of justice as fairness.
288
A theory of justice as fairness
He had not yet developed principles of justice for structuring the world
order, but the latter was discussed by Rawls in The Law of Peoples, which
will be discussed in section 6.3. Some authors, however, have used his A
Theory of Justice to discuss the idea of global justice or the concept of a just
global structure. As we will see below, this has led to others, such as Beitz1466
or Pogge,1467 coming to a very different outcome than the one provided later
by Rawls in The Law of Peoples.
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Chapter 6 - John Rawls’ Ideal Theory of Inter-State Justice
This means that in such an original position, the parties try to reach the
basic terms of justice in their society if there is freedom and equality of all
persons.1473 Importantly, according to Rawls, the parties are under a veil of
ignorance, which means that the parties do not know what their position will
be within the society. The veil of ignorance allows Rawls to demonstrate
that the agreed upon principles are considered to be just1474 and it “ensures
that no one is advantaged or disadvantaged in the choice of principles by
the outcome of natural chance or the contingency of social circumstances.”1475
It has similar features as an impartial spectator approach, which we will
discuss further below with reference to Sen.1476 Due to the veil of ignorance,
1468. As rightly pointed out by Nussbaum, 2004, p. 4, Rawls is not a strict contractualist,
as he combines moral elements (of Kant) and the idea of a social contract. However, for
further details on Rawls’ own understanding of what social contract theory means, see
Rawls, 1999a, p. 14 et seq.
1469. See, on contractualism as an approach for contemporary theories of justice, Sen,
2012, p. 101 et seq.
1470. See Rawls, 1999a, p. 10.
1471. Id., p. 11. Such procedural considerations on how to achieve principles of justice in
a society might lead to the conclusion that Rawls aims at developing procedural fairness
(see, for example, Senn, p. 182) as he aims at demonstrating how members of a society
could agree on certain principles of justice. However, as Rawls in a rather precise manner
demonstrates how these principles should be designed, his theory is of great interest for
the present study focusing on results-oriented justice considerations.
1472. Rawls, 1999a, p. 102.
1473. See Pogge, 2004b, p. 1739.
1474. See Rawls, 1999a, p. 118.
1475. Id., p. 11.
1476. See, on the difference between an impartial spectator approach and the original
position of Rawls, Sen, 2009, p. 134 et seq.
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A theory of justice as fairness
the parties of the original position do not know whether they are going to be
rich, poor, strong or weak members of the society.1477 Therefore, they would
agree on principles that suit all members of the society, as they run the risk
of being any member – even the worst off – of the society.
According to Rawls, justice is what free and equal people would agree to
as basic principles of cooperation within a society under conditions that
are fair for this purpose. The use of an original position helps us develop
principles that are based on unanimous decisions, as such results are only
feasible to the extent that the parties do not know which parties they are rep-
resenting.1478 Therefore, “the original position is the appropriate initial status
quo which insures that the fundamental agreements reached in it are fair.”1479
Moreover, this explains why Rawls calls his theory “justice as fairness”, as
he dedicates significant importance to the (fair) circumstances in which the
members of a society would agree on certain principles of justice.1480 As a
consequence, Rawls’ principles of justice are closely linked to questions of
social choice, as the people within the original position render their deci-
sion on which principles should be agreed upon based on rational choice.1481
Or, as stated by Rawls: “The theory of justice is a part, perhaps the most
significant part, of the theory of rational choice.”1482
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First Principle
Each person is to have an equal right to the most extensive total system of equal
basic liberties compatible with a similar system of liberty for all.
Second Principle
Social and economic inequalities are to be arranged so that they are both: (a)
to the greatest benefit of the least advantaged, consistent with the just savings
principle, and (b) attached to offices and positions open to all under conditions
of fair equality of opportunity.1484
The principles are chosen by the parties within the original position, as
these “protect their basic rights and they insure themselves against the worst
eventualities.”1485 These principles are lexically ordered (some authors also
use the term “serially”), in the sense that the first principle (i.e. basic liber-
ties) shall not be infringed as a result of obeying the second principle. This
means that the first principle “can be restricted only for the sake of liberty”.1486
Additionally, none of the principles may be infringed to achieve higher
aggregated goods. This means, as mentioned already, that Rawls clearly
opposes utilitarian ideas according to which – in simplified terms – a system
is just if there is an overall tendency to promote the highest amount of hap-
piness.1487 He, therefore, also denies the suitability of a single principle of
justice, as suggested by utilitarianism. According to Rawls, members of a
society would not agree on a utilitarian concept, as everyone would run the
risk of being oppressed and not treated with human dignity.1488 Or, as stated
in the very beginning of A Theory of Justice, he argues that each member
of a society has “an inviolability founded on justice that even the welfare of
society as a whole cannot override.”1489
Within the first principle, Rawls would claim the following rights: freedom
of thought and liberty of conscience; the political liberties and freedom of
association, as well as the freedoms specified by the liberty and integrity of
the person; and finally, the rights and liberties covered by the rule of law. As
a liberal, he does not argue that further social economic rights are essential
in his theory of justice. There is a tremendous amount of literature concern-
ing such a principle and its justification, but this principle is not in the scope
of the present study, since the question of justice in the international tax
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The second principle consists of two parts. The second part requires equal
opportunities within a society, while the first part refers to the famous “dif-
ference principle”, which we will refer to in many instances in the follow-
ing. The difference principle means that inequalities within a society are
permitted to the extent that they are for the benefit of the worst off within
a society. It is a modern definition of what distributive justice means or
could mean. As we have seen above, Aristotle’s use of the term “distributive
justice” was not as precise and also differs from the use of the principle of
distributive justice or the difference principle by Rawls.1490
However, the gifted members of the society should use their talents, as long
as the less endowed also benefit from these abilities. This leads to a certain
balance of the existing talents within a society, which reduces the inequal-
ity within a society and, therefore, also enhances the cohesion of a society.
According to Rawls, the difference principle should allow a long persistence
of society, or else great disparities among the members of the society would
be created and threaten the stability of a society.1492
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First, it is crucial to highlight that by publishing his book on the law of peo-
ples, Rawls admits that justice is applicable at an international level. This
seems to be self-evident, but if one follows a strict understanding of Hobbes
as another contractualist, one could argue that, as there are no shared inter-
ests at an international level and no central coercive power, there are no or
very minimal considerations of justice at an international level.1494
Secondly, it shall briefly be discussed why Rawls uses the title The Law of
Peoples and not Law of the States. He dedicates a separate chapter on this
question1495 and seems, therefore, to assign great importance to this differ-
entiation. Rawls understands peoples as a group of persons with their own
state.1496 Nevertheless, the terms “peoples” and “states” are not identical,
as Rawls emphasizes two major differences between states and peoples.1497
First, peoples do not have an unlimited sovereignty as states would have in
the current world order. Secondly, a difference between states and peoples,
according to Rawls, lies in the fact that a state does not have the autonomy
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to deal with its own citizens in its own full discretion or, in other words, to
have an “unrestricted internal autonomy”.1498 Many arguments question the
usefulness of the term The Law of Peoples instead of Law of the States or
Interstate Law, as pointed out by several authors.1499 For instance, as Pogge
rightly highlights,1500 it is not persuasive to use the term “Peoples”, as it does
not reflect the reality that borders are drawn identically to where peoples are
factually separated. Or, considering the flow of migrants in recent decades,
it is obvious that the term “Peoples” has nearly no reference in the current
world order.1501 For the purposes of the present study, however, it seems
appropriate to utilize the terms “law of peoples” and “law of states” simul-
taneously, or to conclude with Buchanan:
So it is appropriate to describe the principles of Rawls’s Law of Peoples as in-
terstate principles, so long as we keep in mind Rawls’s distinction between peo-
ples (as politically organized into states with limited sovereignty) and states as
traditionally conceived (where these limitations on sovereignty were lacking).1502
A third preliminary remark relates to the fact that Rawls did not have the
intention to develop a just international system in an ideal world, but he
instead focused on developing the most important principles in the frame-
work of the existing world order, i.e. a realistic utopia.1503 Furthermore, his
principles among different peoples do not primarily aim at developing a
just system, but these principles are important to ensure peace among dif-
ferent states.
Fourth, it should be highlighted that Rawls argues that there is no need for
cooperation by states as a natural or conceptual duty. This means – com-
pared to a situation among persons in a society – Rawls argues that states
will only cooperate if they receive a benefit from it. However, it is obvious
that most peoples will cooperate.1504 International tax law is a persuasive
example to demonstrate that a presupposed duty for cooperation among
states does not exist. Many of the so-called tax havens had not signed a
single tax treaty until very recently, as these states have been of the opinion
that they are better off by not having any cooperation with other states when
it comes to tax matters.
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Fifth, Rawls’ intention in The Law of Peoples was not to develop principles
for a (liberal) foreign policy, but indeed to apply his theory of justice at an
international level1505 or, in other words, The Law of Peoples “is an exten-
sion of a liberal conception of justice for a democratic regime to a Society
of Peoples”.1506
This means that Rawls assumes that the necessary basic fairness in inter-
national law is secured, as the peoples or states are represented equally in
their original position, i.e. the veil of ignorance.1508 Therefore he used a
second original position at an international level, in the sense that in the
second original position, citizens are the representatives of their societies
being equal and rational.1509 These representatives would choose principles
for the law of peoples. Importantly, the representatives of the peoples act
in the interest of their clients,1510 i.e. their people and not in their own inter-
est. Their aim is “to preserve the equality and independence of their own
society”.1511 Therefore, it is their goal “to guarantee their security, territory,
and the well-being of their citizens”.1512 The latter is essential for the under-
standing of Rawls’ theory from a tax perspective.1513
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develops the principles that would be agreed upon by liberal peoples and
demonstrates that in a second step, decent but non-liberal peoples would
agree on the same principles. Therefore, he ensures that the developed prin-
ciples are also reasonable from the perspective of decent non-liberal states.1514
Consequently, Rawls implies that liberal states ought to tolerate non-liberal
but decent states as equal members of the society of states.1515
1514. Rawls, 1999b, p. 10. See also Tasioulas, 2002, p. 371 et seq.
1515. See Nussbaum, 2004, p. 9.
1516. See id., p. 5 et seq.
1517. Rawls, 1999b, p. 32.
1518. See sec. 7.2. See also Sadurski, p. 6.
1519. Pogge, 2004b, p. 1740. See in support of Rawls, Risse, p. 113 et seq.
1520. For further details about the difference in methodology see Sadurski, p. 13 et seq.
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For the present analysis concerning justice in international tax law, the sec-
ond original position is an extremely important instrument to potentially
judge whether the current rules of international tax law are just. However,
it is crucial to understand why the original position, as such, is used as
a mechanism to justify interstate cooperation. First, within a society and
within a group of states, different doctrines exist to decide on whether rules
are just or not: “The society in question, however, is one in which there is
a diversity of comprehensive doctrines, all perfectly reasonable.”1521 The
original position helps to find common principles for the interaction of
states, even though justice consideration domestically might deviate sig-
nificantly among the participating states. Furthermore, the veil of ignorance
or the original positions are methodological models. Such models can be
used to demonstrate whether a system, such as the current international
tax regime, is more or less just. It is essential, as mentioned, to decide on
“what we would regard – you and I, here and now [footnote omitted] – as
fair conditions under which the parties, this time the rational representatives
of liberal peoples, are to specify the Law of Peoples, guided by appropriate
reasons.”1522 Therefore, following Rawls’ understanding of reasonable and
rational states (respectively, peoples), they can offer “fair terms of political
and social cooperation”.1523
In his book, Rawls develops eight traditional principles of the law of peoples.
These eight principles are the moral law binding all peoples.1524 Importantly,
these principles are valid even though non-democratic peoples are involved
in the international order – as long as these peoples are decent. This means
that Rawls is of the opinion that the representatives of decent hierarchical
(i.e. non-liberal) peoples would choose the same eight principles that the
representatives of liberal peoples would adopt.1525 These eight traditional
principles of justice among free and democratic peoples are the following:1526
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(1) Peoples are free and independent, and their freedom and independence
are to be respected by other peoples.
(3) Peoples are equal and are parties to the agreements that bind them.
(5) Peoples have the right of self-defense, but no right to instigate war for
reasons other than self-defense.
(8) Peoples have a duty to assist other peoples living under unfavorable
conditions that prevent their having a just or decent political and social
regime.
Many authors have argued that these principles reflect most of the famil-
iar principles of the current international law framework.1527 However, as
pointed out by Macedo,1528 in the real world, the duties owed by a state to
another state might go beyond the mentioned principles, for instance, due to
their historical relationship (e.g. between the Netherlands and Indonesia as
its former colony).1529 However, Rawls discusses an ideal theory of justice
without considering existing wrongdoings between states and, therefore,
his theory does not specifically deal with what could be called restorative
justice.
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guidelines from an international tax law perspective. We will not discuss all
the principles in detail, but we will focus on the most important ones for the
purposes of the present study.
The first principle, according to which states shall be free and independent
(“Peoples are free and independent, and their freedom and independence
are to be respected by other people.”)1531 could be understood in an extreme
manner. For instance, Franck argues (but only with references to A Theory
of Justice and not to The Law of Peoples) that this would mean in a strict
sense that even if a genocide were to occur, that other states could not invade
another state. Or in other words:
Thus rational governmental representatives would agree upon an absolute prin-
ciple of non-intervention; and they would agree because the negotiators would
have the shared moral perspective of governments. It is the special self-interest
of governments – all governments – to protect their authority against external
intervention, and to prefer order above other virtues.1532
A further principle of The Law of Peoples that is linked to the first principle
is the principle of pacta sunt servanda. According to Rawls – notwithstand-
ing the fact of whether a state is liberal or decent but non-liberal – pacta
sunt servanda must be followed, which means that peoples are to observe
treaties and undertakings. According to my understanding, this is linked
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to the general need that the principles of The Law of Peoples must satisfy
reciprocity. This is most obviously true regarding the principle of pacta
sunt servanda.1535
Some claim that the list is rather thin, as it “explicitly omits more than half
the rights enumerated in the Universal Declaration.”1537 According to Rawls,
this consent is found even though some hierarchical (non-democratic) soci-
eties might be part of such a negotiation round.1538 Others oppose such an
outcome as being unrealistic. Pogge is of the opinion that human rights
are not essential to hierarchical societies as they are for liberal societies,1539
which means that it is doubtful that the representatives of hierarchical soci-
eties would choose to commit to obey human rights regulations at an inter-
national level.
Besides, Pogge argues that liberal states, on the other hand, would likely ask
for more than the most essential human rights,1540 as suggested by Rawls.
Moreover, Tasioulas rightly points out that the reason for such a rather lim-
ited human rights collection in Rawls’ writing is that Rawls understands
human rights as being linked to the morality of intervention.1541 This means
that an intervention by another state is not permissible if these basic human
rights are honored. Again, this shows how much importance Rawls attri-
butes to toleration of both liberal, but also decent but hierarchical states.
According to Rawls, human rights within the law of peoples “restrict the
justifying reasons for war and its conduct, and they specify limits to a
regime’s internal autonomy.”1542
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6.3.3.4. Duty of assistance
The duty of assistance requires that well-ordered peoples (i.e. liberal peo-
ples or decent peoples)1546 should assist burdened societies until these states
reach a certain level at which they are capable of running their state affairs.1547
Burdened societies, according to Rawls, and as already mentioned, are soci-
eties that “lack the political and cultural tradition, the human capital and
know-how, and, often, the material and technological resources needed to
be well-ordered.”1548 However, the duty does not exist with respect to what
Rawls calls outlaw states, as these states do not have the intention to indeed
ensure a just international structure.
1543. See, for example, Baker & Pistone, p. 21 et seq. See also International Bar Association,
p. 1 et seq.
1544. See, for example, sec. 8.4.
1545. Rawls, 1999b, p. 37.
1546. See sec. 2.1.5.
1547. Rawls, 1999b, p. 106 et seq. See also Macedo, p. 1726.
1548. Rawls, id., p. 106.
1549. Id.
1550. See Kreide, p. 108.
1551. Risse, p. 95.
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ance should support the burdened societies to install just and functioning
institutions.
Prima facie, following the mentioned principles of the law of peoples, Rawls
does not argue in favor of the need for intensive international cooperation,
nor does he state that states should avoid any cooperation, as he argues, for
instance, that regulation on free trade could be to everyone’s advantage.1552
Yet, he follows Kant, and clearly rejects the idea of a world state.1553
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Rawls argues that the economic wealth of two states is different because
one state has spent its entire (or a significant part of its) savings in the past
and the other has not.1565 Rawls argues that in this case, it is unacceptable
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that the saving state would be required to transfer parts of its wealth to the
other state. This means that Rawls is of the opinion that inequalities among
states are generally homegrown.1566 Or, as Macedo puts it: “the substance of
justice is held hostage to the brute facts of global diversity.”1567
Rawls is aware of the argument that depending on the definition of the duty
for assistance, the outcome of a more cosmopolitan understanding of global
justice and his approach would be nearly the same, besides practical matters
such as taxation and administration.1574 What Rawls tries to emphasize, how-
ever, is that even in the case of an extensive duty of assistance, his law of
peoples would still require strong sovereign states and he would, inter alia,
disagree with the need for a centralized world state or very strong global
institutions with coercive power.
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Chapter 7
7.1. Preliminary remarks
The Law of Peoples has not received much approval among contemporary
philosophers1580 of the various disciplines; already, the first publication of a
shorter version of The Law of Peoples has triggered many critical reviews.1581
A considerable disagreement already exists with regard to the title used,
The Law of Peoples instead of The Law of the States.1582 Additionally, many
scholars have discussed the potential incoherence between A Theory of
Justice published in 1972 and The Law of Peoples published several years
later. In the following, the focus is firstly on two specific aspects of the
criticism. On one hand is the argument that The Law of Peoples lacks refer-
ence to the rights and duties of individuals, while on the other hand is the
non-inclusion of a kind of difference principle at an international level. In
particular, the latter discussion might help to develop a different view on
the international tax regime – one that has not been given the necessary
attention in recent decades.
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Some authors argued that The Law of Peoples falsely ignores the importance
of international principles of justice that apply to individuals.1585 The lat-
ter means that Rawls limits his principles of justice only to the law among
states, and does not consider that certain principles of justice should apply
to individuals at a global level. The individual has somehow “disappeared”1586
in the second original position following Rawls’ The Law of Peoples. It is
1583. The same categorization is made by Blake & Smith, International Distributive
Justice, Stanford Encyclopaedia of Philosophy (available at http://plato.stanford.edu/
entries/international-justice/, last visited 20 Jan. 2019).
1584. See id., sec. 3.
1585. See, for example, Nussbaum, 2004, pp. 6 and 11; Pogge, 2004b, p. 1752 et seq.;
Wenar, p. 86 et seq. But see Macedo, p. 1724.
1586. Kreide, p. 96. See also Pogge, 2004b, p. 1756.
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Missing out on international distributive justice
In a similar manner, some authors argue that Rawls only refers to a very
limited set of human rights within his principles of The Law of Peoples, even
if individuals being part of a global negotiation would require a compre-
hensive catalog of human rights to be applicable at an international level.1590
The question of the application of principles of justice to an inter-state rela-
tion or following a more human-centered approach is closely linked to the
difference between left and right institutionalism.
Closely linked to the question of why Rawls did not apply an original posi-
tion at a worldwide level in which individuals participated directly, without
using a second layer of state’s representatives, is the question of whether
an international distributive duty indeed exists. From a political philosophy
perspective, the question of validity of a distributive duty at an international
level is one of the most disputed questions in recent decades. We will not
mention any empirical numbers in the present study related to wealth and
income distribution among individuals worldwide, as it is obvious that the
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7.4. Right institutionalists
7.4.1. Nagel
Nagel is one of the most extreme or one of the most consequent1597 (right)
institutionalists who in principle denies claims for distributive justice in an
international framework outside the state setting. He presented his opinion
in an article on global justice in 2005.1598 To understand his approach, it is
1591. See, for example, Pogge & Mehta, p. 1 et seq.; Thürer, 2009a, p. 18. See also the
insightful statistics published online at https://ourworldindata.org/ (last visited 20 Jan. 2019).
1592. This term is used by Benshalom, p. 12.
1593. See sec. 7.1.
1594. Garcia, 2001, p. 664, with further references.
1595. Or at least a very minor redistribution from the rich to the poor countries.
1596. Brown, p. 127.
1597. The term “extreme” might trigger a negative connotation, which is not the intention.
This is why the term “consequent” is also used in order to appropriately describe Nagel’s
positions.
1598. Nagel, p. 113 et seq.
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Right institutionalists
After such clarification, Nagel continues to discuss the meaning of the term
“justice” and applies a so-called associative obligation in the sense that
we owe justice through shared institutions.1600 This means that only within
the boundaries of states do individuals owe (full) justice to each other,
even though the boundaries might indeed seem arbitrary.1601 Therefore the
state as such is normatively significant.1602 However, he also highlights that
“some conditions of justice do not depend on associative obligations.”1603 In
principle, he agrees that certain human rights are valid even without any
special form of association. Basic human rights are not protected due to
social interaction, but we owe these to everyone in the world, independent
of an institutional membership, i.e. even in a pre-political1604 condition.1605
However, socioeconomic justice, to which Nagel refers, requires a certain
political society, as we owe such duties only to other members of the same
society or state.1606
It seems that the position – at least the result – is rather similar to Rawls’
concept argued in The Law of Peoples. However, Nagel disagrees with
Rawls and is against a strong personification of peoples, as argued by
Rawls in the second original position.1607 Therefore he is against the under-
standing of states (or peoples) as moral units, but instead emphasizes that
“[p]eople engaged in a legitimate collective enterprise deserve respect and
noninterference, especially if it is an obligatory enterprise like the provision
of security, law, and social peace.”1608 Or, as he states at another instance:
1599. Id., p. 119. One could also speak of natural duties in this respect (Klosko, pp. 247
and 250).
1600. Nagel, p. 121.
1601. Id. p. 121 et seq.
1602. See Cohen & Sabel, p. 150.
1603. Nagel, p. 126.
1604. The term is used by id., p. 127.
1605. Id., p. 131.
1606. Id., p. 127.
1607. For further details see sec. 6.3.2.
1608. Nagel, p. 135.
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Justice applies, in other words, only to a form of organization that claims politi-
cal legitimacy and the right to impose decisions by force, and not to a voluntary
association or contract among independent parties concerned to advance their
common interests.1609
His idea of an associative obligation triggers, for the purposes of the present
study, the question of whether the current highly integrated world economy is
not a sufficient associative order so that Nagel’s idea of intra-society justice
would not apply globally. Nagel includes this question in his article, however,
denies such a line of argumentation. According to him, international institu-
tions have not yet reached the same level of statehood as is found in a domes-
tic setting, mainly referring to the absence of sovereign authority at the inter-
national level.1610 He furthermore argues that “[m]ere economic interaction
does not trigger the heightened standards of socioeconomic justice”.1611 One
important argument within Nagel’s article is that international rules are not
enacted by coercive means, but are instead developed through a bargaining
process between “mutually self-interested sovereign parties”.1612 Therefore,
the current international order does not create socioeconomic justice among
citizens of different states. Moreover, Nagel mentions that there is a relevant
distinction between voluntary association at an international level (i.e. a more
integrated system) and coercive authority at a domestic level.1613
Not in the main focus of the present study is the manner of how to achieve
global justice according to Nagel. As he requires a central body with coer
1609. Id., p. 140. For further details on whether institutions may indeed help to resolve
coordination problems and whether this triggers specific duties, see Follesdal, p. 49 et
seq.
1610. Nagel, p. 137 et seq. See also Cohen & Sabel, p. 155 et seq.; Sangiovanni, 2007,
p. 14 et seq.
1611. Nagel, p. 138.
1612. Id.
1613. Id., p. 140.
1614. For further details on Blake see sec. 7.4.2.
1615. For more details about the justification see Sangiovanni, 2012, p. 88. He also
develops a critical analysis of such a line of argumentation (p. 103 et seq.).
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Right institutionalists
Nagel’s work is not only very fruitful for the discussion about the relevance
of global justice, but also regarding justice and international treaties. He is
of the opinion that international agreements are of a different moral content
than agreements among individuals within a sovereign state. It is his thought
that international treaties are treaties with no reference to justice.1618 One
of the reasons of such moral difference between international treaties and a
treaty among a self-interested people within a state is that the people in the
latter case might be part of a system in which, inter alia, property and tax
law is collectively embedded.1619 In other words, an “embedded tax law” in
a society is one important aspect triggering specific moral duties among the
involved parties. According to Nagel, however, international treaties have
the following moral content:
They are “pure” contracts, and nothing guarantees the justice of their results.
They are like the contracts favored by libertarians, but unless one accepts the
libertarian conception of legitimacy, the obligations they create are not and
need not be underwritten by any kind of socioeconomic justice. They are more
primitive than that.1620
7.4.2. Blake
Blake deals explicitly with the question of whether the current world order
with different – and in principle sovereign – states triggers distributive duties
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among different states and under what circumstances. His approach, inter
alia, relates to the moral significance of coercion in a system. To be more
precise, according to Blake, a system of distributive justice only applies
in a system of coercion, i.e. a “coercion theory of distributive justice.”1621
However, he also states that other justice considerations (besides distributive
justice) apply at an international level.1622
His understanding of Rawls’ idea of coercion is that a state might coerce its
citizens, but this is justified, as the state follows principles that cannot be
rejected by its citizens.1623 The coercive power of the state, therefore, derives
from the consent of the people, which actually leads to the legitimation of
a state. In general terms, Blake links the term “coercion” with autonomy
by arguing that coercion as such limits (or violates) the autonomy of an
individual (following a liberal theory) to choose different options.1624 This
is based on the understanding that coercion infringes on the autonomy of
each person and is therefore wrong, as long as it is not justified by the
aforementioned reason.1625
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Right institutionalists
more real example, i.e. the US and Iran, which have, at least trade-wise,
been without any link in recent years. Burduria has developed much better
due to more sophisticated techniques, but also due to better soil. Syldavia
is poorer than Burduria, but it is also expected to provide its citizens with
a decent life with sufficient food production. At one point in time, the rep-
resentatives of Syldavia reached the country of Burduria and realized the
economic differences. As a matter of fact, they asked the government of
Burduria to transfer payments to Syldavia in order to mitigate the economic
inequalities. Blake is of the opinion that Burdurians do not have to honor
such a request from a moral perspective.1628
Blake then proceeds with hypothecating that the two countries begin inten-
sive (trade) cooperation. As result of such cooperation, the poorer country of
Syldavia is slightly better off than in its state of autarky, but Burduria ben-
efits significantly more from the inter-state trade. The question then posed
by Blake is whether such inter-state trade changes the moral judgment of
potential cross-border distributive payments. Does the trade create distribu-
tive justice between the two states? Blake denies that intense trade should
influence the moral judgment, arguing that the start of trade was not trig-
gered by coercive measures, but was at the full discretion of both states. As
there is no coercion in the trade relation afterwards, the relationship between
a citizen of Burduria and Syldavia is not comparable to the relationship
between two persons within the same (coercive) society.1629
The ongoing coercion that is present in a state does not, according to Blake,
exist at an international level between two states.1630 However, of particular
interest for the present thesis is the moral importance that Blake allocates
to the fact that strong states might indeed force weak states to implement
certain rules. His understanding is that such a coercive system at an in-
ternational level does not itself trigger the same distributive duties as in a
domestic situation, but “global circumstances ought to be altered so as to
prevent its possibility.”1631 His approach is either to justify coercion or to
eliminate it entirely.1632 In an international setting, he seeks for an elimina-
tion of coercion, as there is no justification for coercion compared to in a
domestic situation:
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The coercion of marginal states by stronger states is not a necessary part of the
institutional makeup of our world; the ideal would be not a particular vision of
this coercion, but the absence of that coercion itself.1633
He does not, furthermore, ignore the fact that the current international order,
such as the WTO umbrella, forces states to participate by coercion as “[f]ull
autarky tends to lead to exceptional difficulties.”1634 However, he assumes
that there is a difference between a vertical coercion system, such as within
a state, and a horizontal coercive system, such as at an international level.1635
In a domestic situation, coercion is justified, as most of us would agree that
certain institutions, such as states with coercive power, are necessary.
7.4.3. Risse
Risse, who also argues in favor of a right institutional approach, i.e. not
advocating for a cosmopolitan understanding of distributive duties, refers
to coercion within a society as the crucial reason why distributive duties
should generally not apply between states. His line of argumentation is
similar, although not identical, to the one demonstrated by Blake.1636
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Left institutionalists
does not argue that coercion as such creates distributive duties, but coercion
with respect to property rights does.
7.5. Left institutionalists
7.5.1. Beitz
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states) as the only units for moral concern. His book, Political Theory and
International Relations, was published in 1979,1647 i.e. between the publi-
cation of the two books of Rawls, i.e. A Theory of Justice and The Law of
Peoples. The book has three chapters; Part Two on the autonomy of states
and Part Three on international distributive justice are of particular impor-
tance for the present study. Beitz dedicates his first part to skepticism in
international relations, which is not the focus of the present study.
One of the main innovations of the early writings of Beitz is that he applied
the first original position of Rawls, according to the theory of justice, to the
entire world.1648 Or in the words of Beitz:
My claim is that, if one finds Rawls’ theory plausible, then the facts of con-
temporary international relations require that the theory be reinterpreted in the
ways suggested here.1649
1647. See, Beitz, 1999, p. 1 et seq. with a new afterword by the author.
1648. Nussbaum, 2004, p. 10 et seq. See also Wenar, p. 82. See on the first original posi-
tion sec. 6.2.2.
1649. Beitz, 1999, p. 129.
1650. Nussbaum, 2004, p. 11.
1651. See also, on the difference between Rawls and Beitz, Klosko, p. 246 et seq.
1652. Beitz, 1999, p. 153.
1653. Beitz, 1975, p. 373.
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Left institutionalists
Even though the early Beitz does not provide for a precise definition of the
threshold of interdependence that must be met in order for the difference
principle to apply, he does give some guidance on why the current interna-
tional world is sufficiently interdependent. Beitz argues, for instance, that
poor or economically weak countries are forced to sell their resources due
to higher market prices paid by foreign purchasers, and some societies are,
according to him, better off due to global trade, whereas other societies do
not significantly increase their level of development. As a consequence, the
global economy leads to a loss in political autonomy.1657 In other words, the
international system as such is not voluntary, in the sense that states can
freely choose whether they, for instance, want to become a WTO member
or not. Or as he states:
The existence of a nonvoluntary institutional structure, and its pervasive effects
on the welfare of the cooperators, seem to provide a better indication of the
strength of the appropriate distributive requirements.1658
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Therefore, according to the later Beitz, “this world contains institutions and
practices at various levels of organization – national, transnational, regional
and global – which apply to people largely without their consent and which
have the capacity to influence fundamentally the courses of their lives.”1668
Beitz rightly states that there are even “transnational networks of state offi-
cials also performing global governance functions.”1669 We have seen above
that this is particularly true from a tax perspective.1670
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Left institutionalists
7.5.2. Pogge
The most intense debate about The Law of Peoples was likely triggered
by several contributions from Pogge. In his articles and books on global
justice,1672 Pogge, as a former doctoral student of Rawls, often uses Rawls’
A Theory of Justice and the incoherencies with The Law of Peoples as an
important reference point for his ideas and theoretical approaches.1673 The
starting point of his conception was his book on Rawls’ concepts, i.e.
Realizing Rawls, which he then extended to an international perspective
with a second book, World Poverty and Human Rights,1674 and several art-
icles.
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To object to the opinion of Rawls,1683 Pogge refers to the example of the per-
formance of students at different universities. By arguing that global factors,
such as classroom quality, teaching times, reading materials, etc., may play
an important role in the performance of students, he disproves the claim that
only the students are responsible for their performance.1684 Therefore, we as
individuals are not solely responsible for our standard of living, but other
(global) factors also have an important influence.
Pogge, who opposes the idea of having a second (abstract) negotiation ses-
sion (i.e. a second original position with a second negotiation round)1685 at
an international level in order to agree on the principles of justice among
peoples, has nevertheless also tried to theorize the outcome of such a second
negotiation round at an international level:
The incoherence might be displayed as follows. Suppose the parties to the first,
domestic session knew that the persons they represent are the members of one
society among a plurality of interdependent societies; and suppose they also
knew that a delegate will represent this society in a subsequent international
session, in which a law of peoples is to be adopted. How would they describe
to this delegate the fundamental interests of their society? Of course they would
want her to push for a law of peoples that is supportive of the kind of national
institutions favored by the two principles of justice which, according to Rawls,
they have adopted for the domestic case. But their concern for such domestic
institutions is derivative on their concern for the higher-order interests of the
individual human persons they themselves represent in the domestic original
position. Therefore, they would want the delegate to push for the law of peoples
that best accommodates, on the whole, those higher-order interests of individu-
als [footnote omitted]. They would want her to consider not only how alterna-
tive proposals for a law of peoples would affect their clients’ prospects to live
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Left institutionalists
under just domestic institutions, but also how these proposals would affect
their clients’ life prospects in other ways - for example through the affluence
of their society.1686
Furthermore, Pogge is one of the most influential critics of the current world
trade system, arguing that the current setup actually harms individuals in
developing countries.1687 As a consequence, besides his former position of
the need for a global distributive justice, he later argues that there should
at least be a duty not to harm any other state through domestic policies.
Consequently, he is one of the most influential cosmopolitans, but at the
same time, he introduced the duty not to harm other states and by doing
so delivered a more non-utopian idea of how to achieve more justice at an
international level.1688 Furthermore, Pogge opposes the idea of a world state,
as brought forward by other authors.1689
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who make more extensive use of our planet’s resources should compen-
sate those who, involuntarily, use very little.”1693 The GRD would apply to
resources that are extracted by a state. For instance, Iran would be obliged
to pay the GRD on the oil extracted from its soil. The revenue from such
a tax would be used “toward assuring that all have access to education,
health care, means of production (land) and/or jobs to a sufficient extent
to be able to meet their own basic needs with dignity and to represent their
rights and interests effectively against the rest of humankind: compatriots
and foreigners.”1694 Therefore this would require payment from the richest
countries to the poorest ones. However, Pogge also states that poor states
might not gain access to the funds if they reveal a misuse of the funds.1695
It is interesting to read that Pogge argues that the funds from the GRD could
actually be used in the poorer countries, inter alia, to lower tax rates or
implement higher tax exemptions.1696 He also highlights certain tax provi-
sions that are problematic, from his point of view. For instance, he argues
that the deductibility of bribes paid in developed countries might encourage
oppression and corruption in developing countries.1697
7.6. Pure egalitarianism
7.6.1. Caney
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Pure egalitarianism
Caney further deals with normative approaches based on coercion and reci-
procity, such as those followed by Nagel and Blake. He demonstrates by
using two societies, one with a centralized coercive system and the other
being anarchic, that the power of the normativity of distributive justice is
the same, i.e. it cannot be derived from the fact that there is coercion in a
society that triggers distributive justice.1701 This does not, however, mean
that coercion does not trigger any questions of political legitimacy, but he
instead argues that the question of international distributive justice as such
is not linked to the question of coercion.1702 He states, however, that coer-
cion in a society triggers the need for legitimate decision-making within a
society. A member of a society should be involved in designing coercive
instruments that can be essential when enforcing the responsibilities of each
member of the society.1703
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Of great importance for the present work is that Caney disagrees with dis-
continuity with respect to associational accounts. This means that he argues
(compared to Nagel1705 and Blake)1706 that it is wrong to state that a society
must reach a certain degree of either coercion or reciprocity to create dis-
tributive duties, and if such a level is reached, distributive duties apply in the
same manner, notwithstanding the significance of coercion or reciprocity,
i.e. an “all or nothing approach”.
7.7.1. Preliminary remarks
Another theory or, to be more precise, idea of justice that is highly attractive
for the present task of questioning some of the main principles and rules of
the existing international tax regime is The Idea of Justice, published by Sen
in 2009. As with all of these fundamental treatises of political philosophy
about the idea or theory of justice, it is barbarism1707 – but a necessary task
– to summarize his theory.
Sen – based on, inter alia, Adam Smith1708 – follows a more realization-
focused approach that denies the suitability of the aforementioned transcen-
dental or ideal theories in order to judge whether a certain rule or principle
at an international level should indeed be considered just or unjust. He
opposes the theory of justice of Rawls, who focuses on the development
of the perfect ideal institutional structure of society (or, of the world in his
book The Law of Peoples). Or in his words: “[W]e have to seek institu-
tions that promote justice, rather than treating the institutions as themselves
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The idea of justice of Amartya Sen
His idea of justice is particularly interesting for the present study, as its aim
is to “clarify how we can proceed to address questions of enhancing justice
and removing injustice, rather than to offer resolutions of questions about
the nature of perfect justice.”1710
As the goal in the following is to review some of the main principles and
rules of the international tax regime, and not to develop the perfect interna-
tional tax regime, an in-depth reference to the work of Sen seems justified,
as his work might indeed be helpful to enhance justice or remove injustice.
For a better understanding of Sen’s idea of justice, the terms “reasoning”
and “impartiality”, which are vital in Sen’s theory, are described in more
detail. Before doing so, we will highlight why the use of transcendental
theories faces such application difficulties.
7.7.2.1. Overview
The aforementioned theory of Rawls and the dispute between left and right
institutionalists mainly reflect a dispute between ideal theories of justice
demonstrating the structure of the ideal governing institutions worldwide.
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First of all, when looking for a change within the international tax regime,
practical constraints need to be considered. This is the main reason, for
instance, why a cosmopolitan approach might, on one hand, reflect a consis-
tent application of the original position methodology, as brought forward by
Rawls, but also faces the difficulty or the impossibility of implementation.
The application of a global difference principle as suggested would require
a strong central governmental body at an international level, which is not
feasible in the current world.1714 Therefore, even though an ideal theory of
justice based on a cosmopolitan theory might be more persuasive from a
theoretical perspective, it is not helpful in deciding whether a certain rule
or principle is more just than another rule or principle, because practical
constraints might not be considered within an ideal theory.
Second, even the most persuasive ideal theory lacks absolute truth regarding
some of its features. As an example, while I fully appreciate the impres-
sive theory of Rawls in A Theory of Justice, we have no guarantee that his
two principles of justice indeed reflect the sole principles for a just basic
structure of a society.
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The idea of justice of Amartya Sen
Therefore we would agree with Sen that transcendental theories are not suf-
ficient to make a comparative assessment of justice.1717 However, this still
requires an analysis of whether these transcendental theories are necessary
for a comparative assessment of justice.
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We share many of the views of Sen, but on this point, we would disagree
with him. The disagreement is not a severe disagreement, but might be trig-
gered by the different intention of his The Idea of Justice and the present
study, and it is mainly based on the practical experience gained through the
present study.
1718. Sen, 2009, p. 102. See also Sen, 2006, p. 221 et seq.
1719. Sen, 2009, p. 101.
1720. See Robeyns, p. 159 et seq.
1721. See secs. 7.7.3. and 7.7.4.
1722. See, for example, regarding tax competition, Ronzoni, 2016, p. 201 et seq.
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The idea of justice of Amartya Sen
tax world – to refer to ideal theories, because these theories help to better
understand why we have moral duties. Furthermore, a review of those exist-
ing moral duties (and the related dispute among philosophers) helps us to
shape our argumentation as to why Principle A or Principle B or Rule A or
Rule B better aligns with justice requirements.
Therefore we would agree with Sen that a comparative theory of justice does
not require that we answer the question of what a just society is. However, a
transcendental theory of justice might nevertheless help us from a practical
perspective in developing our reasons for whether Principle A or B is more
just or leads to more justice.1723 This is particularly true if the research con-
cerns a principle related to the question of whether we have moral duties to
other individuals. For instance, if we ask the question of whether the ability-
to-pay principle should apply and how it should apply in a cross-border
circumstance, it seems necessary to refer to ideal theories, as these theories
help to better understand who should be treated equally and based on what
reasons.1724 Therefore, from our perspective, ideal theories could help to
better frame a standard for global justice, which could help as a guiding
orientation when reviewing a certain international legal regime, such as the
international tax regime. Other international lawyers have followed a similar
approach when appraising some of the core norms of international law.1725
7.7.3. Reasoning
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Another crucial point is the need for precise articulation and reasoning.1729
This also allows the contribution to identify a potential axiomatic basis of
an argument. As we will see in several sections below, this is of great impor-
tance from an international tax perspective, as some of the principles are
derived from axioms that can be scrutinized. In a similar manner, it is crucial
that we facilitate re-examinations of presumably axiomatic principles or, in
the words of Sen:
Another feature of some importance is the way social choice theory has persis-
tently made room for reassessment and further scrutiny. Indeed, one of the main
contributions of results like Arrow’s impossibility theorem is to demonstrate
that general principles about social decisions that initially look plausible could
turn out to be quite problematic, since they may in fact conflict with other gen-
eral principles which also look, at least initially, to be plausible.1730
Again, international tax law might also consist of principles and rules that
“initially look plausible”, but could indeed lead to rather unjust results.
Importantly, the following sections will disclose that the question of whether
a certain principle or a certain rule within the international tax regime is just
might require balancing various reasons. We will not find a single reason
to evaluate whether a certain development in international tax law must be
considered as just. However, to reach a conclusion, we will have to prioritize
the various values and reasons. This is, of course, a personal decision and as
highlighted by Sen, might include “partial rankings” of the different values
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The idea of justice of Amartya Sen
and reasons.1731 There might be cases, however, in which a person may not
find a conclusion and clear hierarchy of the existing reasons and values.
Importantly, Sen mainly uses the term “public reasoning” instead of “rea-
soning”. In this respect, he draws the relevant link between democracy and
reasoning by highlighting that “public reasoning” is crucial within his idea
of justice, as democracy means public reasoning. For the purpose of the
present study, it is sufficient, however, to use the term “reasoning” because
we have shown above1732 that we do not refer to questions of improvement
of democracy or, in more general terms, improvements of procedural justice
within the present study. The focus, however, is on the question of whether
a certain principle or rule is just, and reasoning is a key element for such
analysis. Therefore, we would agree with Sen that it is crucial that we use
manifold arguments and in-depth reasoning to judge whether a certain prin-
ciple or rule is just or not or, in his words:
When we try to determine how justice can be advanced, there is a basic need
for public reasoning, involving arguments coming from different quarters and
divergent perspectives. An engagement with contrary arguments does not, how-
ever, imply that we must expect to be able to settle the conflicting reasons in
all cases and arrive at agreed positions on every issue. Complete resolution
is neither a requirement of a person’s own rationality, nor is it a condition of
reasonable social choice, including a reason-based theory of justice.[footnote
omitted].1733
7.7.4. Impartiality
Vital in Sen’s idea of justice is that the analysis of whether a certain prin-
ciple or rule is just must follow the viewpoint of an impartial spectator
– a concept referred to already by Adam Smith.1734 In several instances,
Sen highlights the weaknesses of the contractarian ideas, such as Rawls’
A Theory of Justice, as the results of an original position negotiation are
limited to an imperfect group that formed part of the negotiation. However,
Sen himself highlights the argument that impartiality is somehow linked
to the original position of Rawls and his theory of justice as fairness. Or,
in his words: “The deliberations in this imagined original position on the
principles of justice demand the impartiality needed for fairness.”1735
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According to Sen, we should ask for an “open impartiality” that also scruti-
nizes local values.1736 This, however, is a difficult task, as we as researchers
need to overcome our “positional perspectives”, which might have grown
over the course of decades. Sen further draws the link between rationality
and impartiality, arguing that rationality is based on reasoning, which can
sustain a critical scrutiny, and such a critical scrutiny is best achieved by
an unbiased impartial approach. From an international tax law perspective,
this means in simplified terms that one should not be biased when analyz-
ing whether a certain principle or rule at an international level is just. To
be more concrete, we should leave our position of academics, tax com-
missionaires, tax consultants or in-house counsels when discussing justice
within international tax law. We should also leave our position as members
of large or small economies and of high- or low-tax jurisdictions, or else
there is a risk of unjustified self-justifying. Or, as Singer puts it: “It is easy
to slip into a self-justifying stance, convincing ourselves we are right when
we are actually wrong.”1737
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The idea of justice of Amartya Sen
In his idea of justice, Sen is mainly concerned with grave injustices caused
by, for instance, slavery or famine, but is his approach indeed helpful when
reviewing principles and rules of the international tax regime that might
likely not reflect grave injustices?1741 In this respect, Sen assumes a person
might be able to reason against slavery, but this does not necessarily indi-
cate that the same person must be able to decide between an income tax
rate of 39% and 40%.1742 This leads Shapiro to conclude that Sen’s idea
of justice compared to Rawls does not provide for a criterion on how to
decide between a tax rate of 70% and 35%.1743 In general, Shapiro argues
that Sen’s theory does not say how to get the comparisons right or how to
rightly decide between two options.1744
It is clear that Sen, compared to Rawls, does not provide for concrete princi-
ples on how to design a society in order to achieve justice. It is indeed more
convenient to refer to Rawls to answer the question of whether a 70% or
35% income tax rate is just, since in Rawls’ understanding we could at least
link our line of argumentation to the difference principle and, therefore,
further elaborate which inequalities are justified, given that the domestic tax
system better suits the needs of the least advantaged in a society. However,
when discussing justice within the international tax regime, Rawls’ ideas
are less helpful, as they often do not provide for guidance on how to decide
between two policy options, as his principles developed in The Law of
Peoples are only partly helpful. From our perspective, Sen’s emphasis on
reasoning and the “impartial spectator” methodology are more useful and
might be sufficiently detailed for a study on justice in international tax law.
Therefore, Sen’s The Idea of Justice will be the most important reference in
the normative analysis in the following sections.
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The capabilities approach, as brought forward by Sen, has its roots in the
writings of Marx and Adam Smith, but also Aristotle.1745 However, the
formal starting point of the capabilities approach lies in the work of Sen
itself.1746 The capabilities approach has not directly been developed in order
to build up a just world order, but it does provide guidelines in order to
evaluate the richness of human beings and to evaluate the development of
the well-being of peoples over a longer period.1747 One could also call it an
“outcome-oriented approach”, as compared to a procedural approach, such
as contractualism, according to Rawls.1748
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The idea of justice of Amartya Sen
When discussing justice beyond the borders of a state, Sen argues that jus-
tice, as such, does not stop at a certain border for two reasons. First, deci-
sions in one country might have an effect in another country. Sen mentions,
inter alia, the reaction of the US after 9/11 and its impact on other jurisdic-
tions, or the importance of the development of medicines against AIDS in
one country for infected persons in another country. Second, Sen argues that
injustice in one country can lead to injustice in another country, as it might
spread beyond the borders of a certain state.1756
Nussbaum refers to the theories of Rawls in order to develop her own under-
standing of justice at a global level. Inter alia, she highlights the weaknesses
of Rawls’ position on the moral significance of states per se, arguing that the
second original position by Rawls does not provide for a solution as to why
nation states are morally significant, since Rawls assumes their existence as
a starting point and does not question the state structure as such.1757
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The idea of justice of Amartya Sen
For the present study, it is of great interest that Nussbaum also accepts the
importance of nation-state sovereignty, as it is a way to protect the human
autonomy of organizing a society.1773 In simplified terms, this means that
respecting nation states, as such, is derived from the need to respect individ-
uals.1774 Nussbaum further states that it might be a good solution to assign
one’s own responsibility in this sense to an institution, such as the state at
a domestic level. There might even be the need to form institutions, as it is
otherwise likely that individuals might neglect their duty.1775
At a global level, she therefore opposes the idea of a world state,1776 but she
supports the idea of a thin and decentralized global public sphere, including
a world criminal court and “a set of global trade regulations that would try
to harness the juggernaut of globalization to a set of moral goals for human
development.”1777 She is also in favor of “some limited forms of global taxa-
tion that would affect transfers of wealth from richer to poorer nations (such
as the global resource tax suggested by Thomas Pogge).”1778 These structural
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Chapter 7 - Reception of Rawls among Political Philosophers
(5) “The main structures of the global economic system must be designed
to be fair to poor and developing countries.” In particular, she high-
lights the fact that ethical reflections should play a more important role
when debating the global economic system.1783
(6) “We should cultivate a thin, decentralized, yet forceful global public
sphere.”
(7) “All institutions and individuals should focus on the problems of the
disadvantaged in each nation and region.” This means, inter alia, that
the world community should focus on persons with a particularly low
quality of life.
1779. Nussbaum, 2007, p. 315 et seq. See also Nussbaum, 2004, p. 16 et seq.
1780. Nussbaum, 2004, p. 16.
1781. Id.
1782. Id.
1783. Id.
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The idea of justice of Amartya Sen
(8) “Care for the ill, the elderly and the disabled should be a prominent
focus of the world community.”
(9) “The family should be treated as a sphere that is precious, but not
‘private’.”
7.7.6.3. Intermediate conclusion
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Chapter 8
Essential Conclusions
Before we review some of the most important principles and rules of the
international tax regime, it is essential to (further) develop and outline our
opinion with respect to the different existing normative theories on global
justice, which were outlined in the previous chapters. This is essential for
an analysis of whether a certain rule or principle leads to a just international
tax regime and to develop a stringent result. Some arguments were already
stated, but the following concluding sections should allow a more concise
understanding of the main elements of our position. We have shown above
in detail with references to the persuasive work of Sen that ideal theories of
justice aiming at developing the perfect institutional framework at a national
or international level might not provide for very concrete guidance on how
to improve the current international tax regime to enhance justice.1785 We
support such a position based on two main arguments.
The first reason is that these ideal theories might face practical constraints.
For instance, the implementation of an institutional system following a
global difference principle is not feasible. Therefore, the claim for cross-
border payments to fulfill (cosmopolitan) distributive duties is weak, unless
there is indeed a feasible international structure allowing that the allocation
of such payments indeed follows these distributive duties. Currently, such
an international structure is nonexistent at an international level and its
development is very unlikely. Therefore, a claim for a certain moral duty
as a policy guideline is not persuasive if practical constraints disallow that
such a duty is fulfilled.
A second important reason, which was highlighted above, relates to the fact
that ideal theories do not guarantee that the outcomes of such an institution-
alized world are as such just. Therefore, one could argue in favor of certain
principles, as these seem to reflect the persuasive ideal approach, but we
have no guarantee that when these principles are applied, they will indeed
lead to a just result. For instance, if we were to agree on an international
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Chapter 8 - Essential conclusions
distributive duty, it is not certain that the result of adherence to such a duty
would lead to a result that is presumed to be just by the people affected.
1786. See, on the importance of some ideal standards for the purposes of a comparative
theory of justice, sec. 7.7.2.2.
1787. See, for example, with an interesting example from a tax perspective, Van Apeldoorn,
p. 17.
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Normative reasoning and impartiality
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Chapter 8 - Essential conclusions
While doing so, it is crucial that we take the position of an impartial specta-
tor, as also essential within The Idea of Justice by Sen. This means that we
should set aside our position as academics, tax commissionaires, in-house
tax counsels, and representatives of a strong economy, a small state, a tax
haven or a high-tax country. This is an extremely difficult task, but one that
is essential for a study about justice in international tax law. Not surpris-
ingly, it was already claimed by international law scholars that “objectivity
remains the central regulatory idea at which research in international law
can and should be oriented.”1795 Of course, our views are influenced by
our personal experience and such views might unconsciously impact our
reasoning. Nevertheless, despite knowing that it seems extremely difficult
to apply a fully neutral and objective view, it is still worthwhile and neces-
sary to try as much as possible to apply an impartial perspective. Science
in general and law as an academic discipline should be without prejudice
and should not be driven by a political agenda.1796 Impartiality per se might
be an important instrument to extract potential non-academic and political
considerations from a study.
It has been shown that there are various theories among (liberal)1797 politi-
cal philosophers as to whether an international distributive duty exists and
1793. Such a missing legal or constitutional framework has been described in sec. 4.4.
1794. See Peters, 2007, p. 746 et seq. We already explained in secs. 2.2.4. and 7.7.3. why
we use the term “normative reasoning” instead of Sen’s terminology “public reasoning”.
1795. Peters, 2016, p. 27. See also Ratner, 2015, p. 55 et seq., who highlights the needs
for impartiality in a theory of justice for international law purposes. He mainly refers
to Barry. See also, from an international tax perspective, Lamberts, p. 49 et seq., who
highlights the need for an objective standard of fair taxation.
1796. See generally Popper, 2015, p. 88 et seq.
1797. See sec. 2.1.6. on the limited reference to political philosophy in the present study.
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International distributive justice – Assessment
First, we will outline our reasons why we deny the existence of a global
difference principle following a cosmopolitan concept of global justice, as
argued by authors like Pogge and Beitz.1799 Second, we will demonstrate
our own so-called “continuous approach” regarding the creation of a basic
structure triggering intra-society principles of justice.
First, we believe that one of the crucial reasons for the existing dispute
between left and right institutionalists is triggered by the uncertainty regard-
ing apparent constraints of the current world order and the empirical facts
upon which the different normative claims are based. It is indeed persua-
sive, at least in the current global political structure, to argue that a cos-
mopolitan world order with a single-state system (or a strong international
governmental body with distributive powers) is not feasible in the coming
decades.1800 In other words, we would disagree that there is currently or will
soon be something like a basic structure at an international level requir-
ing cross-border distributive duties, such as Rawls’ difference principle.1801
However, this does not mean that the ideas of left institutionalists are not
at all persuasive; rather, there are significant practical constraints to hypo-
thetically fulfill our moral duties following a cosmopolitan understanding of
global justice. One could also argue that justice at an international level can
only be guaranteed by changing the international institutional framework
1798. See sec. 7.2. See also Barry & Valentini, p. 485 et seq.; Caney, 2011, p. 507.
1799. See Pogge (sec. 7.5.2.) and Beitz (sec. 7.5.1.).
1800. And it might even be a dangerous development of a world state. See the arguments
of Rawls in sec. 6.3.
1801. We cannot fully explore in the present study how the basic structure could be
defined (for a comprehensive analysis see Abizadeh, p. 318 et seq.).
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Chapter 8 - Essential conclusions
1802. See Ronzoni, 2009, p. 243. See also Dietsch, 2015, 94 et seq.
1803. The term will be further referred to in sec. 12.6.2.4. Such an approach is highly
influenced by Wenar, 2006, p. 95 et seq., who argues that a cosmopolitan understanding
cannot meet the requirement of (democratic) legitimacy. In other words, the prevention
of value imperialism protects (democratic) legitimacy.
1804. See Walzer, p. 1 et seq.
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International distributive justice – Assessment
Third, we argue that the result of some of the existing ideal theories, with
respect to the distributive effect, might not be so different. Bearing in mind
the realization-based approach of Sen,1805 it is essential to focus on the
results of certain measures to evaluate whether it is a just or unjust measure.
For instance, Rawls argues for the duty to assist burdened societies; Nagel,
however, argues in favor of a humanitarian duty, while Pogge and Beitz
seem to suggest a global difference principle. However, depending on the
exact design of these different claims, the outcome might not be so differ-
ent. It shows that both left and right institutionalists agree that the rich on
this planet have a certain moral duty toward the poorest or the worst off,
even at a global level. This is also our position, as we would argue that we
– from a moral perspective – have a duty to support the worst off on this
planet, but only as a humanitarian duty as it will be defined in section 8.3.3.1806
Therefore, there is no egalitarian claim at an international level, as morality
does not require that we treat all humans equally regarding principles of
socioeconomic justice; rather, morality requires that we treat all humans
with humanity.1807
In case one agrees that coercion, association and/or cooperation are mor-
ally significant, in the sense that an increased international integration and
a global coercive framework might indeed trigger additional duties among
the individuals in the participating states, it seems persuasive to follow what
we call hereinafter “a continuous approach”.
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Chapter 8 - Essential conclusions
A continuous approach means that not only the cooperation, but also the
level of coercion and association, continuously create a basic structure trig-
gering additional duties and that there is no lexical gap system according to
which, for instance, all intra-society duties of justice are triggered if coer-
cion, association and/or cooperation have reached a certain level. The main
reason for following a continuous approach is that it seems illogical to claim
that a certain cooperation or coercion threshold needs to be met to create
several comprehensive principles of intra-society justice. For instance, the
“shared institutions” argument of Nagel does not seem to require an all-or-
nothing approach.1808 In other words, the more institutions we share with
individuals in another country, the more duties we owe each other. Or, the
more coercive elements there are between two states, the more duties we
create following Blake’s coercive theory of justice in a continuous manner.1809
Therefore, it might indeed be the case that if two states share several insti-
tutions and if those two states are subject to the same coercive structure,
that intra-society duties of justice exist between individuals living in these
two states, even though these states might still formally be independent.
Of course, these remarks can be questioned, as we have not outlined a full-
fledged theory of global justice, but rather weighed the different existing
theories in a more judicial manner. Nevertheless, some present and past
institutional developments seem to support our continuous approach.1810
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International distributive justice – Assessment
In this respect, we believe that the existence of a coercive structure that oper-
ates in the name of the inhabitants is indeed a crucial element for triggering
distributive duties. The main reason is that such a coercive system signifi-
cantly influences the lives of its inhabitants and, therefore, creates duties,
such as a duty for equal treatment and distributive duties, respectively. We
1811. For instance, the Swiss Federal Supreme Court was until 2004 reluctant to apply
a comprehensive principle of non-discrimination between individuals living in the same
canton but with one of them owning real estate in another canton, as it disallowed the
inter-cantonal offset of losses. However, the case law changed in 2004. Therefore, the
court is nowadays of the opinion that the non-discrimination prohibition prevails over
the autonomy of cantons to tax income from immovable property. For more details see
Simonek, 2012, p. 233 et seq.
1812. See sec. 4.
1813. See sec. 5.3.
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Chapter 8 - Essential conclusions
agree, however, with Nagel1814 that there is currently still a significant dis-
tinction between coercion within a state and globally, which might indeed
create different levels of duties. Regarding the criteria of cooperation, we
are of the opinion that social cooperation or physical proximity are both
stronger than mere economic cooperation. This means that international
trade as such is unlikely to create distributive duties, but direct social inter-
action, for instance, the free movement of persons is a strong factor to cre-
ate cross-border duties. The latter will be further highlighted below with
references to the Schumacker case of the ECJ.1815 Additionally, the claim
that membership in or association with a certain legal (and coercive) system
triggers more egalitarian duties seems persuasive. This is also a reason why,
for instance, neighboring areas of two states might have higher economic
interaction compared to two areas in the same jurisdiction, but the existing
duties with the same state might still be stronger than in the cross-border
circumstance.1816
To sum up, from a tax perspective, this means that if the (tax) world becomes
more integrated, “the more moral importance we may attach to the value
of global equality”,1817 along with a more cosmopolitan understanding of
society. However, we would currently deny the existence of cross-border
distributive duties beyond humanitarian duties, with the exception of states
belonging to the same supranational organization with coercive power, such
as the EU.1818 Therefore, we would disagree with Follesdall that the global
basic structure is not so different from the domestic basic structure.1819 The
global basic structure is still rather fragmented compared to the domestic
basic structure, triggering a comprehensive list of moral duties or principles
of intra-society justice.
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International distributive justice – Assessment
I assume there is some minimal concern we owe to fellow human beings threat-
ened with starvation or severe malnutrition and early death from easily prevent-
able diseases, as all these people in dire poverty are. Although there is plenty of
room for disagreement about the most effective methods, some form of humane
assistance from the well-off to those in extremis is clearly called for quite apart
from any demand of justice, if we are not simply ethical egoists.1820
353
Chapter 8 - Essential conclusions
1825. It would require a separate study to outline the details of which human rights ought
to be protected and what is to be understood as inhumane living conditions. From a tax
perspective, reference is made to a report of the International Bar Association providing
a rather comprehensive analysis of the impact of tax policies and human rights protection
(see International Bar Association, p. 1 et seq.). Of particular interest are human rights
that cannot be protected due to a lack of fiscal revenue (e.g. the right to water and sanita-
tion or the right to adequate food and nutrition) and not necessarily human rights that
are purposively infringed on by a state due to political reasons (right to equal protection
before the law or the right to privacy).
1826. See sec. 4.1.
1827. See sec. 4.1.2.
1828. See sec. 8.4.2.
1829. Further arguments were outlined above when developing the different concepts of
right institutionalists, such as Rawls, Nagel, Blake or Risse (see chapter 7).
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The principles of sovereignty and fiscal self-determination – Assessment
However, this is only true because the world today consists of several sov-
ereign states. Therefore, a one-state world could theoretically be considered
as the ideal structure; however, such a state will not appear in the coming
decades and, therefore, a practical theory of justice – also a theory of justice
within international tax law – must consider the existence of a world order
with several sovereign states.1832 Moreover, even the ideal claim for a world
state seems weak, as was argued in detail by Rawls, with reference to Kant’s
work on perpetual peace.1833 Consequently, we still see valid reasons why
the Westphalian order is crucial to achieve a just international regime.
1830. See Rawls, 1999b, p. 36, with reference to Kant. On the importance of peace as a
standard of global justice in international law, see Ratner, 2015, p. 65 et seq. The claim
for peaceful cooperation is almighty in international law, see, for example, the Preamble
of the VCLT, 23 May 1969.
1831. Rawls, 1999b, p. 34.
1832. See Dietsch, 2015, p. 32.
1833. See secs. 6.3.4. and 6.3.5.
1834. See secs. 7.4.1. and 7.4.3. See also Dietsch, 2011, p. 2114. Therefore, states should
have the capacity “to secure a just distribution of advantages between their citizens” (Van
Apeldoorn, p. 4).
355
Chapter 8 - Essential conclusions
356
The principles of sovereignty and fiscal self-determination – Assessment
Valid reasons could be that such a policy is necessary to protect the well-
being of persons living in their own territory. However, we would not argue
in a traditional utilitarian way that if a policy increases the well-being of
four domestic individuals, but decreases the well-being of three individuals
living abroad by the same amount, such a policy is justified. We also believe
1839. See Dietsch, 2015, p. 168, who uses, with reference to Krasner, the term “Westphalian
sovereignty” to describe a situation in which “states are free from external constraints”.
1840. See Garcia, p. 664 et seq. For more details about ius cogens, see sec. 4.4.3.2.
1841. See Dietsch, 2011, p. 2115. See also Dietsch, 2015, p. 140 et seq.
1842. See sec. 4.3.3.3.6.
1843. See sec. 7.2.
1844. The OECD/G20 uses similar wording when discussing base erosion: “[I]t poses a
threat in terms of tax sovereignty” (OECD, Addressing Base Erosion and Profit Shifting
[OECD 2013], p. 47). Or see Dagan, 2017, p. 4, regarding tax competition: “Thus, in
conditions of tax competition, justice is under constant threat”.
1845. As was shown in sec. 4.3.2.8.6., from a legal perspective states should refrain from
harming other states. However, the scope of application of such “no harm” principle is
limited and does not include potential harm through tax competition.
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Chapter 8 - Essential conclusions
We mentioned that states only have a duty to refrain from a policy if such
policy has a severe negative impact on the well-being of persons living
abroad. Severe could mean that a policy would go against humanitarian
duties, as outlined above. A severe impact is given if a policy in one state
triggers inhumane living circumstances in another state or if a policy in one
state leads to an infringement of essential human rights in another state.
Reference to the term “severe” is necessary, as it would otherwise not be
possible to sustain the current system of a state’s independence, in general,
since many policy decisions can have a negative impact on individuals liv-
ing in another state, but such policies must not be understood as a detri-
mental infringement of the sovereignty of another state as a moral duty, but
rather as a mere result of justified competition among states.
For instance, if a state supports its domestic industry with subsidies, it might
have a negative impact on persons living abroad, since this might potentially
lead to unemployment in other states. However, as long as such impact
has no severe consequences on individuals living in other states, the state
paying the subsidies should not have a moral duty to refrain from doing so
unless, of course, international trade law does not allow it. In this respect,
we are not referring to harmful tax competition, but to states’ competition in
general. Therefore, only in the case where a state policy has a severe nega-
tive impact on individuals living in another state does the first mentioned
state have a moral duty to refrain from implementing such a policy. We are
not suggesting that competition as such is for the benefit of all or that tax
competition as such leads to a more efficient system that would increase
well-being globally, but we do argue that states’ competition is a necessary
1846. Such a claim seems to be made by Dagan, 2017, p. 34: “It is – I argue – unjust for
a state to promote domestic justice at the expense of justice in other states.”
1847. See generally Dietsch, 2015, p. 140.
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The principles of sovereignty and fiscal self-determination – Assessment
result of the current world order containing several sovereign states and that
the principle of sovereignty has a normative value in our theory of global
justice, as outlined above. Or in other words, if one limits states’ competi-
tion too much, one risks the stability of the current international regime and
also risks that the sovereignty of states is weakened, which would again
endanger our understanding of international justice requiring that state sov-
ereignty protects international peace and enables domestic justice.1848
As with all other principles, the validity of the principle of fiscal self-deter-
mination is essentially connected to its exact understanding. In other words,
all of us could agree that fiscal self-determination should be protected, but
opinions might differ the more details we attach to the understanding of
what fiscal self-determination means.
359
Chapter 8 - Essential conclusions
able to fulfill the needs of its citizens. We believe, however, that this is too
far-reaching. Justice does not require the protection of such a broad under-
standing of fiscal self-determination. In other words, the protection of fiscal
self-determination to achieve international tax justice cannot mean that it is
required that each state be able to define its level of domestic distribution
and that each state must have access to sufficient tax revenue to decide upon
its domestic level of redistribution.
If this were the case, i.e. if there were indeed a duty to protect fiscal self-
determination in the mentioned broad manner, we would agree with the
distinct analysis of Van Apeldoorn that this would require redistribution at
an international level, even if one does not follow a cosmopolitan approach.
The core argument of Van Apeldoorn is that currently, the differences
between the amount of levied taxes (i.e. the “tax take”) in low-income and
high-income countries is so significant that the protection of a broad under-
standing of fiscal self-determination requires redistribution at an interna-
tional level to achieve equality of fiscal self-determination. Otherwise, poor
states (or low-income states) are not at all able to decide upon the level of
domestic distribution due to a lack of fiscal revenue, which is a key element
following the above-mentioned broad definition of fiscal self-determination.
From a normative perspective, this would, moreover, mean that right and
left institutional approaches would overlap, as a right institutionalist, who
requires broad protection of fiscal self-determination, would consequently
be supportive of global redistribution following a cosmopolitan approach.
Or, in the words of Van Apeldoorn:
Finally, I have shown that revised principles of tax justice, based on an interna-
tionalist conception of justice that is concerned with securing the effective sov-
ereignty of independent polities, may need to prescribe the creation of globally
redistributive institutions. The paper accordingly suggests that it is possible to
establish a greater consensus among internationalists and cosmopolitans about
the necessary reforms of the international taxation regime.1852
This again shows how the different ideal theories of global justice might
lead to similar results, depending on the exact understanding and imple-
mentation of duties derived from a more cosmopolitan or more institutional
understanding of global justice. However, we have not yet outlined how we
understand the principle of fiscal self-determination for the purposes of the
present study. What would be an appropriate understanding?
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The principles of sovereignty and fiscal self-determination – Assessment
First, territorial sovereignty is crucial to avoid wars and ensure peace, and
it enables international stability, which again enhances global justice. This
requires territorial integrity, which again means that states should have the
right to tax income created within its borders, but which also requires that
states should not tax income that was not created within their territory. The
latter claim is not self-explanatory and we will further outline our position
below when discussing the source and benefit principle.1856 It should also
be at the discretion of states how and to what extent they want to tax in-
come created within their territory. Second, the protection of sovereignty is
important, as strong domestic institutions are essential to achieve domestic
justice, inter alia, through the protection of freedom and equality. Following
the latter argument, the principle of sovereignty requires that domestic fiscal
institutions can levy taxes within a state’s territory to achieve a just domestic
system through strong institutions. Institution building as such is crucial for
domestic justice, and the protection of fiscal self-determination is crucial for
institution building, but also vice versa.
1853. As mentioned above under the heading “The International Tax Regime – Scope
of Research”, this study mainly deals with income taxes. Other taxes might require an
amended definition of what fiscal self-determination means from a normative perspective.
We cannot explore, for instance, what fiscal self-determination ought to mean regarding
financial transaction taxes or carbon taxes. However, the missing comprehensive defini-
tion does not harm or weaken our position, but it is a sign that further research might be
required with respect to specific other non-income taxes.
1854. Dietsch, 2015, p. 80 et seq.
1855. See sec. 8.4.1.
1856. See sec. 11.5. (source principle) and sec. 11.6. (benefit principle).
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Chapter 8 - Essential conclusions
A review of the existing literature reveals that at least two arguments are
made in favor of regulating tax competition to enhance justice in the inter-
national tax regime.1857,1858
The first is that tax competition leads to injustice as states, due to tax compe-
tition, no longer have access to sufficient revenues in order to freely decide
upon a certain distribution policy (i.e. tax competition is limiting the dis-
tributive leeway of states).
The second argument is that tax competition prevents states from taxing all
of their constituents, and, therefore, tax competition leads to unjust results
within a society as very mobile taxpayers are able to shop their tax juris-
diction and might therefore receive beneficial treatment compared to their
compatriots.
We will discuss these two main arguments in the following. With respect to
the first argument, Dagan states:
1857. There is a third argument for why tax competition can be unjust or unfair. The OECD
argues that tax competition is unfair if it has a distortionary influence on the location of
mobile activities (see OECD/G20, Countering Tax Practices More Effectively, Taking
into Account Transparency and Substance, Action 5: 2015 Final Report [OECD 2015],
p. 11). We will, however, dedicate a specific section to the interaction between justice
and efficiency concerns at an international level (see sec. 11.4.). Similar arguments can
be found in documents of the EU; see EU, Code of Conduct (1997): Conclusions of the
ECOFIN Council meeting on 1 December 1997 concerning taxation policy, 1 Dec. 1997,
98/C2/01, para. 2.
1858. A fourth argument is that tax competition challenges equal treatment of foreign
multinationals and local business (see, for example, Burgers & Mosquera Valderrama,
p. 773). Or, in other words, foreign suppliers of goods and services should not receive
beneficial treatment compared to domestic suppliers. We will discuss the question of equal
treatment of foreign and domestic residents in sec. 11.2.
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The principles of sovereignty and fiscal self-determination – Assessment
This leaves us with the second claim, that tax competition prevents states
from taxing their constituents, which leads to unjust results. There is a
strong position in this regard. Again, Dagan states the argument as follows:1863
Because of competition and the loss of the state’s monopolistic power over
its taxation system, redistribution has ceased to be a discretionary mechanism
for promoting justice and equal participation in a democratic society and has
1859. Dagan, 2018, p. 201. See for a similar argument with references to the work of the
EU Commission in 1996, Schön, 2003, p. 9 et seq.
1860. The argument is not, however, that regulating tax competition would enhance
global welfare. The latter claim has also been made by the OECD (OECD, Harmful Tax
Competition [1998], para. 4) but was challenged by other authors (Littlewood, p. 411 et
seq.). We will specifically deal with the concerns of using the term worldwide welfare or
global welfare in sec. 11.4.
1861. See sec. 8.4.3.
1862. See sec. 8.3.
1863. We are mainly referring to Dagan as her recently published book is the most pro-
found analysis in respect of tax competition, international tax policy, and global justice
(see Dagan, 2018, p. 1 et seq.).
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Chapter 8 - Essential conclusions
increasingly become a price some states are able to charge from high-ability
individuals and businesses.1864
It is true that in an open economy, states have lost their monopolistic power
over their constituents in the sense that in a globalized world, there are few
obstacles to leaving a country and taking up residence in another country.1865
Therefore globalization provides “fertile grounds”1866 for tax competition.
This is particularly true as certain citizens are extremely mobile, and in
the case of an adverse tax policy decision, these citizens might leave the
country. By doing so, they might be able to shop around for different tax
systems and escape the tax jurisdiction of their state of origin. However,
constituents leaving a country are no longer in the same basic structure, so
there is a moral difference between someone living abroad and a domestic
citizen. Therefore, a person leaving a country is not necessarily a justice
concern for a state, unless such person is de facto still part of the basic struc-
ture of his state of origin. We showed above that coercion, association and
cooperation are the crucial elements of a basic structure that trigger justice
concerns among its members.1867 Therefore, the international tax regime
would be unjust if states are prohibited from taxing individuals that are
part of their basic structure. Only to that extent should states regain their
monopolistic power to tax their constituents (i.e. individuals belonging to
the same basic structure).1868
This brings us back to our underlying line of reasoning, that tax competi-
tion is not considered unjust if fiscal self-determination is still protected.
Consequently, we would disagree that there is a moral duty to refrain from
competitive measures if these measures do not harm our understanding of
fiscal self-determination.1869 If tax competition leads to a situation in which
a state is no longer able to tax what happens in its territory, then it might be
considered unjust, and there would be a moral duty of justice not to pursue
tax competition. The following example should help to develop a better
understanding of when a moral duty of justice requires a state to refrain
from competitive measures.
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The principles of sovereignty and fiscal self-determination – Assessment
If a state applies strict secrecy rules, this might lead to a situation in which
individuals residing in another state are hiding their revenue abroad; by
doing so, the former state undermines the fiscal self-determination of the
other state as the latter state is no longer able to tax what happens in its
jurisdiction. Or, in other words, one state encourages “noncompliance with
the tax laws of the other countries.”1870 Therefore fiscal intransparency, as a
competitive measure, is unjust, and states should refrain from implementing
such rules.1871 This will be discussed further in section 12.6. However, if a
state uses tax incentives to attract individuals or enterprises, it is generally
not yet an infringement of fiscal self-determination, even if certain taxpay-
ers relocate to such a state. The other state (i.e. the state of origin) is still
able to tax what happens in its territory, meaning that fiscal self-determina-
tion is still guaranteed. The same is true if one state lowers its tax rates and
certain taxpayers relocate. The other states are generally not prohibited from
taxing what happens in their territory.
1870. OECD, The OECD’s Project on Harmful Tax Practices, The 2001 Progress Report,
p. 4.
1871. This is, for instance, regularly highlighted in the reports of the Independent Expert
on the effects of foreign debt and other related international financial obligations of states
on the full enjoyment of all human rights, particularly economic, social, and cultural
rights, as intransparency might disallow states from protecting certain human rights. See,
for instance, in the Report of the Independent Expert on the effects of foreign debt and
other related international financial obligations of states on the full enjoyment of all hu-
man rights, particularly economic, social, and cultural rights, on his visit to Switzerland,
15 Mar. 2018, A/HRC/37/54/Add.3, p. 8.
1872. Dagan, 2018, p. 24.
1873. In some cases, developing states have granted tax incentives with devastating effects
(see, for example, the case of Sierra Leone, as outlined in Christian Aid, Losing Out, Sierra
Leone’s massive revenue losses from tax incentives, Apr. 2014, available at https://www.
christianaid.org.uk/resources/about-us/losing-out-sierra-leones-massive-revenue-losses-
tax-incentives, last visited 14 Feb. 2019). However, tax competition seems not to have
been the main reason but rather intransparent approvals of tax incentives and corruption.
1874. This would require, in particular, a review of the various legal measures that are
mentioned as potentially harmful tax competition (see for a still valid overview OECD,
Harmful Tax Competition, An Emerging Global Issue [OECD 1998], para. 61 et seq.).
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Chapter 8 - Essential conclusions
against limiting harmful tax competition, but the argument is that justice,
particularly distributive justice, in a basic structure does not require that
competition is limited and that states refrain from competitive policies. This
is not an old-fashioned approach toward regulating tax competition, but tax
competition is not per se unjust, although there are other valid reasons to
limit tax competition, as it might, for example, have mutual benefits for all
of the involved states.
8.4.5. Intermediate conclusion
366
Part IV
The question of just rules is closely linked to the question of whether a rule
is legitimate. Or, in the words of Rawls: “[O]ne conception of justice is
more reasonable than another, or as justifiable with respect to it, if rational
persons in the initial situation would choose its principles over those of the
other for the role of justice.”1875 Various studies have shown that unfair taxa-
tion triggers resistance among citizens and consequently weakens the coop-
eration between taxpayers and their state.1876 Therefore a tax system seems
to be more legitimate and more accepted by the people if it is assumed to
be just and fair by the citizens. Academic discussions about fairness and
justice in the framework of domestic taxation have therefore long played
an important role within tax law scholarship.1877
However, not all authors agree that tax fairness or tax justice has an inde-
pendent normative status as, for instance, Murphy and Nagel1878 argue that
tax fairness derives its validity from the overreaching goal of distributive
justice. In this sense, it would be impossible to judge whether a tax system
or tax regime is fair without considering any other elements of the existing
order, such as social security and (other) distributive measures. However,
we would agree with Dodge that we should accept that the tax system can
be judged as being just, as it also reflects the reception among individuals
that a tax system as such can be fair or unfair.1879 Often mentioned as an ex-
ample that people actually matter in the decision of whether a tax system is
just, is the replacement of a property tax by a per person community charge
by Margaret Thatcher, which had a detrimental effect on her government.1880
Therefore, we would argue that a compartmentalized way of thinking is
justified with respect to international tax law, even though injustices in other
fields of international law might equalize injustice in international tax law.
In the following we will use the achieved results from Part III to challenge
some of the most important principles and rules of the international tax
regime. We will, in particular, refer to our understanding of cross-border
369
Preliminary Remarks
370
Chapter 9
9.1. Overview
One of the central questions that has been and will be referred to in many
instances within the present study relates to potential distributive duties
among states or individuals worldwide. We showed by distinguishing
between theories of left and right institutionalists that there is a lively debate
about the potential existence of cross-border distributive duties in political
philosophy. The question of whether rich states indeed owe monetary duties
to poor countries is a very controversial question. We developed our own
understanding of this issue in section 8.3. We showed that there are indeed
distributive duties at an international level to the poorest on the planet, but
these are understood as humanitarian duties. However, we disagreed that
there is a distributive duty comparable to Rawls’ difference principle at an
international level. Before starting with a detailed analysis of the interna-
tional tax regime in this respect, we need to discuss whether tax law, as such,
would be a valid and efficient instrument to fulfill these distributive duties,
or whether other (law) instruments would provide a more accurate solution.
Prima facie, it is clear that the international tax regime deals with the alloca-
tion of tax revenue and consequently with the international distribution of
income. Therefore the international tax regime has the potential to fulfill
international distributive duties.1884 Nevertheless, a more detailed analysis
is necessary, and is included in the following section.
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Chapter 9 - Distributive Duties and International Tax Law – Some Preliminary
Thoughts
These authors argue that “any regime with an inefficient legal rule can be
replaced by a regime with an efficient legal rule and a modified income tax
system designed so that every person is made better off”.1886 The reason is
that with a modified income tax system, all individuals are equally as well
off as with the inefficient legal rule, but the government receives a surplus,
as the inefficient legal rule was replaced by an efficient legal rule. Another
argument to be considered relates to the questions of feasibility and accu-
racy. In this respect, Kaplow and Shavell assume that income taxes allow
for a redistribution from all rich to all poor, which is not feasible through
a change of other legal rules that might only affect a particular group of
people.1887
First of all, other legal measures to achieve distributive effects are not eas-
ily available at a global level. The reason is that there is no central gov-
ernmental-like body at a global level that could implement and survey the
working of new albeit non-tax legal measures. In this respect, the current
international tax regime, which is built on domestic enforcement, seems to
provide for the necessary (although non-ideal) instrument to achieve dis-
tributive effects. The system is not ideal, as it would still require consent
372
Is tax law the right instrument to achieve global distributive justice?
among states and, as the debate within the BEPS Project has shown, it is
currently rather unlikely that the international community of states would
agree on an international tax regime that consists of significant distributive
elements or that the community of states would agree on a more fundamen-
tal change of the international tax regime, in general. Secondly, we assume
that the implementation of a new tax, such as a global resource tax, as
proposed by Pogge, triggers other inefficiencies and is not an appropriate
alternative. The same is true, for instance, for the proposed global wealth
tax of Piketty.1890 The problem with global taxes on wealth or resources is
that these taxes require an actual redistribution of the collected taxes, which
would create new opportunities for corruption and increase bureaucracy,
whereas a system based on the existing income and corporate income tax
regime would not face such disadvantages, as (most) states already have a
more or less functioning bureaucratic structure to levy income and corporate
income taxes.
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Thoughts
which wealth is more equally distributed. Oxfam mentions the use of tax
havens by multinationals, but also by individuals, as the most important
factor for the growth of global inequalities. According to Oxfam:
World leaders need to commit to a more effective approach to ending tax havens
and harmful tax regimes, including non-preferential regimes. It is time to put
an end to the race to the bottom in general corporate taxation. Ultimately, all
governments – including developing countries on an equal footing – must agree
to create a global tax body that includes all governments with the objective of
ensuring that national tax systems do not have negative global implications.1895
Benshalom also argues, with reference to Kaplow and Shavell, that interna-
tional taxation could be a valuable option to achieve distributive effects at an
international level. In his seminal article about relational-distributive duties
between states, Benshalom pleads for a modification of the international
tax regime in order to stimulate his ideas of relational-distributive claims.1897
Such claims are, according to Benshalom, triggered by (unfair) trade rela-
tionships between states. Although one might disagree with the approach
of Benshalom with respect to relational duties, his arguments as to why
international tax law could be the instrument to achieve either relational
distributive justice or global distributive justice are valid and relevant in the
framework of the current post-BEPS debate. Benshalom answers such a
question in the affirmative, arguing that the allocation of taxing rights would
be the most effective instrument to achieve relational-distributive justice:
In comparison to those mechanisms, fulfilling relational distributive duties
through the ITR [international tax regime] would provide a crude and more
administrable macro price-correction mechanism. Rather than making sure that
importers of coffee pay a fair price to farmers, the developing country would
retain a greater right to tax the profits of this transaction. It could then use the
extra revenues generated to provide better services to their low-wage citizens.
Money is fungible, and once it is allocated to a developing country, there is no
way to trace whether it has reached the farmers. Tax revenues, however, will
serve to raise living standards and government services in a way that should
also benefit the farmers.1898
374
Is tax law the right instrument to achieve global distributive justice?
Or:
ITR arrangements are superior to any type of alternative arrangements and the
modifications required by them do not undermine the underlying premises of
our political reality. They do not require the abolition of states or the regulation
of commerce in foreign countries, and developing countries cannot view them
as unjustified imperialist interventions in domestic matters.1899
375
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10.1. General remarks
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not in the main focus of the present study, but we will discuss a few aspects
when reviewing the normative value of cross-border transparency.1907
Benshalom develops the idea of relational duties and, by doing so, relies
on neither pure left or right institutionalism.1911 To be more concrete, he
argues that global trade could potentially lead to relational-distributive duties
between states, particularly considering the fact that globalization has con-
nected persons who were formerly not related due to domestic borders.1912 He
demonstrates such duties with a very tangible example of a shoe company in
Indonesia employing children and the question of who has a duty to mitigate
these outrageous working conditions: the company employing the children
and the Indonesian government, or additionally the consumers and other
stakeholders of the company potentially living abroad?1913 For an understand-
ing of his approach, it is crucial to understand that Benshalom (as others)
argues that many attributes of international trade are (empirically) unfair.1914
It would go beyond the scope of the present study and is also not neces-
sary to analyze in detail the question of whether international trade indeed
leads to unfair results. However, it is crucial to understand that, according to
Benshalom, these unfair terms of the international trade regime might trigger
378
Valta’s justification-to-tax theory
1915. We would prima facie agree that international trade has led to some very unjust
results.
1916. Benshalom, p. 64. See also id., p. 69 et seq.
1917. Id., p. 61.
1918. See id., p. 76.
1919. Valta, p. 54 et seq.
1920. See secs. 7.7.6.2. and 7.5.2.
1921. See Valta, p. 74.
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Valta argues that the extended benefit principle should allow for just taxa-
tion from an international perspective.1923 He is of the opinion that it is the
task of justice in international tax law to achieve a just allocation of taxing
rights in a horizontal manner. And such allocation should follow the overall
benefits provided by the states within the value-creation process:
Die Gerechtigkeitsaufgabe des Internationalen Steuerrechts besteht folglich
darin, … horizontal für die gerechte und die autonomiewahrende Verteilung
der Besteueurungsanteile anhand des Beitrags der jeweiligen staatlichen
Gesamtleistung an der wirtschaftlichen Wertschöpfung zu sorgen.1924
Therefore, following his approach, states even share the responsibility for
just taxation:
Aufgrund dieser Begrenzung gerechter Steuerhebung im vertikalen Verhältnis
müssen die besteuernden Staaten ihre Besteuerungszugriffe im horizontalen
1922. See id., p. 47. See also, on Schanz’ understanding of economic allegiance, Hongler
& Pistone, p. 19 et seq.
1923. For further details see Valta, p. 47 et seq.
1924. Id., p. 74.
1925. Id., p. 44.
1926. Id., p. 45.
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Valta’s justification-to-tax theory
For the moment, we will not review the approaches of Valta and Benshalom,
but we will, in several instances in the following, highlight discrepancies
or similarities between our understanding of how to achieve justice in the
international tax regime and the approaches of Benshalom and Valta.
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11.1. Preliminary remarks
Legal theory and legal philosophy deal in detail with the delimitation
between principles and rules.1928 A further distinction is made between
rules and standards.1929 For the purpose of the present study, however, it is
not crucial that a stringent theoretical line between the terms “principles”,
“rules” and “standards” be drawn. This is particularly true, as the present
Part IV is the only part that refers to the distinction between principles and
rules. This part does not provide for a legal analysis of such a distinction,
but follows a philosophical line of argumentation and challenges the norma-
tivity of some existing principles and rules of the international tax regime.
Therefore, the necessary distinction (from a legal perspective) between a
principle and a rule is obsolete for the purpose of the present part, as the
distinction is only made to achieve a more stringent structure for the fol-
lowing normative analysis.
Rules are understood as norms that have a legal source, such as domes-
tic law, international treaties or some other source of international law.
Principles are understood in a very broad manner as both legal principles
and policies with no legal source at an international level. Another option to
distinguish between rules and principles would be to rely on the precision
and specification. This means that a principle would require a case-by-case
analysis, whereas a rule would provide clear requirements for triggering cer-
tain legal consequences.1930 Such delimitation between rules and principles
is not distinct, and overlaps between the two categories do exist. Some of
the selected principles might also qualify as rules. For instance, the ability-
to-pay principle also finds a legal base in some jurisdictions, even though
it is also used as a policy to propose certain amendments within the current
international tax regime. And vice versa, some rules in the following might
383
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384
Preliminary remarks
1933. We will deal with the principle of reciprocity in sec. 11.3. on inter-nation equity,
and with the principle of non-discrimination in sec. 11.2. on the ability-to-pay principle.
1934. Graetz, p. 261 et seq.
1935. Peters, 2014, p. 1 et seq.
1936. Graetz, 2001, p. 269.
1937. See sec. 4.2.3.2.2.
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principle1938 was inherent in all of the transfer pricing actions,1939 but also
in Actions 1 and 7 of the BEPS Project. CFC rules1940 were in the focus of
Action 3, and different anti-abuse measures were outlined within Action 6
of the BEPS Project.1941 Moreover, the inclusion of mandatory arbitration
provisions was discussed in Action 14.1942 Lastly, exchange of information1943
was intensively debated within Actions 12, 13 and 15 of the BEPS Project.
Therefore the rules covered by our analysis were all of particular importance
during the BEPS Project.
It could, moreover, be argued that the present study, which reviews certain
rules and principles on a selective basis, lacks a comprehensive understand-
ing of the term “justice”. For instance, it could be claimed that it is impos-
sible to discuss whether the arm’s length principle is just if one does not
consider that it often aligns with non-discrimination provisions, as sug-
gested in article 24 of the OECD MC, as these two rules are implemented in
most double tax treaties. Or, in more general terms, one could argue that it
is impossible to discuss whether a rule within an international treaty is just
if one does not analyze the full context in which the rule operates.
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Principle 1: The ability-to-pay principle
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Taxpayer equality has indeed been part of the core debate of fairness and
justice in domestic tax law. However, it is highly disputed how to measure
the ability of each taxpayer1954 and what tax rate system would be required
domestically in order not to infringe the ability-to-pay principle. As an ex-
ample, there has been an intense debate in Switzerland whether a cantonal
tax act providing for declining tax rates (“degressive Steuersätze”) is in line
with the ability-to-pay principle stated in the Swiss Federal Constitution.1955
The Swiss Federal Supreme Court denied it and stated rather clearly that
declining tax rates must be seen as an infringement of the ability-to-pay
principle.1956
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Principle 1: The ability-to-pay principle
There are many similar disputes in other jurisdictions regarding the actual
content and interpretation of the ability-to-pay principle.1957 Furthermore, it
is essential to mention the challenges triggered by the definition of income
as a measurement (of several possible) of the ability of each taxpayer in
an income tax system. In the present study, we cannot further discuss the
existing ambiguities and disputes that have been debated concerning the
term “income” relating, inter alia, to the Schanz-Haig-Simons definition
of income.1958
1957. See, for example, from an Austrian perspective, Gassner & Lang, p. 8 et seq. See
also Schön, 2009, p. 71 et seq. See also the references in supra n. 1948.
1958. See, for example, Kaufman, 1998, p. 156 et seq.; Matteotti, 2007, p. 32 et seq.
1959. For a detailed analysis from a US perspective, see Fleming, Peroni & Shay, p. 299
et seq. Another example is Navarro, p. 351 et seq., who seems to apply the ability-to-pay
principle without questioning its application in cross-border circumstances. Some authors
refer to the term “inter-individual equity”, but from a material perspective the discussion
about the ability-to-pay principle and inter-individual equity are very similar (see, with
further references, Peters, 2014, p. 92 et seq.). For further existing opinions on the ap-
plication of the ability-to-pay-principle at an international level, see sec. 11.2.2.
1960. See sec. 3.2.
1961. See sec. 4.3.2.8.3. regarding the non-customary quality.
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Dodge also mentions that the ability-to-pay principle could be the basis
for fair international taxation.1967 In his view, this would first require hav-
ing an international tax base in line with the ability-to-pay principle, and
in a second step, each country would calculate its tentative tax base on the
1962. Tipke, 2000, p. 522 et seq. But see Tanasoca, p. 154, who argues that if an individual
is a dual citizen, a mitigation of double taxation could even lead to unfair results as “[t]he
dual citizen can enjoy the full benefits [of two states] while contributing less than his fair
share.”
1963. Vogel, 1994, p. 374. See also Valta’s opinion in sec. 10.3. See Musgrave, 2001b,
p. 1338 et seq., who makes a distinction between equity in “national” and “international”
terms.
1964. Fleming, Peroni & Shay, 2008, p. 61. See also Fleming, Peroni & Shay, 2001,
p. 306 et seq.; Fleming, Peroni & Shay, 2014, p. 19.
1965. Fleming, Peroni & Shay, 2008, p. 62 et seq. See also Herman, p. 130, and Opel,
p. 207 et seq.
1966. Fleming, Peroni & Shay, 2001, p. 311 et seq.
1967. Dodge, p. 460 et seq. See also Valta’s position in sec. 10.3.
390
Principle 1: The ability-to-pay principle
worldwide tax base. In a third step, each country would calculate its part
based on the presence of the person in its jurisdiction relative to the presence
in the other states. Also, by referring to the ability-to-pay-principle, Bruins
et al. state that single taxation would reflect the ideal solution:
The ideal solution is that the individual’s whole faculty should be taxed, but that
it should be taxed only once, and that the liability should be divided among the
tax districts according to his relative interests in each. The individual has certain
economic interests in the place of his permanent residence or domicile, as well
as in the place or places where his property is situated or from which his income
is derived. If he makes money in one place he generally spends it in another.1968
Schön states that taxation aiming at catching the full ability-to-pay tends
toward residence taxation, as the source of an income is not decisive for
measuring the ability-to-pay of a taxpayer.1969 Furthermore, he emphasizes
that the roots of the ability-to-pay principle are in the domestic relationship
between the government and a taxpayer, and he highlights the connection
of the ability-to-pay principle with worldwide taxation.1970 Moreover, he
mentions, with reference to the Schumacker decision of the ECJ, the dif-
ficulty of collecting the relevant information in the source country in order
to measure the ability-to-pay, and concludes that the “[a]bility to pay helps
to define the cake, but it does not help to slice it.”1971 Therefore, he sees a
need to make use of the ability-to-pay principle to measure the relevant tax
base, but not as an allocation principle.
391
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1975. Mason, p. 211. See also Spiro, p. 125, who emphasizes the “difficulty of using
citizenship as a platform for redistribution”.
1976. De Wilde, 2010, p. 281 et seq.; de Wilde, 2011, p. 62 et seq.; de Wilde, 2015, p. 438
et seq.
1977. De Wilde, 2010, p. 287. See, on the potential application of the ability-to-pay
principle at an international level, Li, 2002, p. 827.
1978. De Wilde, 2010, p. 291.
1979. See de Wilde, 2015, p. 439.
1980. See Knechtle, p. 19.
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Principle 1: The ability-to-pay principle
11.2.3. Normative review
In the present section, it will, inter alia, be analyzed whether the statement
that individuals or corporations should be treated in the same way follow-
ing the ability-to-pay principle at a global level, notwithstanding their place
of residence and/or the source of their income, is valid from a normative
perspective. The following example, taken from Fleming, Peroni and Shay,
seems highly illustrative and sufficiently simple, but also sufficiently com-
plex to discuss the topic in an understandable but in-depth manner:1981
A & B are both residents in State X. A receives income of USD 50,000 from a
source in State X. B on the other hand also receives USD 50,000 from a source
in State X, but additionally she receives USD 1mln from a source in State Y.
C on the other hand is a resident in State Y and earns USD 1,050,000 from a
source in State Y. X is a high-tax jurisdiction and Y is a low-tax jurisdiction, or
even a tax haven with no income taxes.
Concerning such a scenario, Fleming, Peroni and Shay argue that a com-
parison should be made between A and B to decide whether the taxation of
residents of State X follows the ability-to-pay principle. This would mean
that a credit system (or residence-country taxation)1982 would better suit the
need to have taxation in line with the ability-to-pay principle, as compared
1981. For further details see Fleming, Peroni & Shay, 2001, p. 314 et seq. See for a similar
example Debelva, 2018, p. 575 et seq.
1982. See Roin, p. 1761.
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11.2.3.2.1.
Existing ideal theories
If one wants to apply the ability-to-pay principle at a global level, one could
compare a taxpayer to another taxpayer in the same jurisdiction (A and B
1983. Fleming, Peroni & Shay, 2001, p. 314. See also Opel, p. 211, who argues that the
equality principle only has an impact within a certain society (state or municipality).
This basically means that we cannot compare a domestic resident person with a person
resident abroad. However, such a line of argumentation likely relates to a (biased) legal
understanding of the application of the equality principle and not how the equality principle
ought to be understood.
1984. See chapter 7.
1985. See sec. 11.2.1.
394
Principle 1: The ability-to-pay principle
A right institutionalist would likely argue that different tax rates in different
states, even if they deviate significantly, are morally non-problematic. As
an example, if B is taxed at 40% in State X on her worldwide income and
C is taxed at 5% in State Y, but both have the same income, such unequal
treatment is not unjust per se because these persons belong to different
coercive societies and/or cooperative structures. Therefore the unequal taxa-
tion of B and C, despite having the same income, is morally justified. Other
right institutionalists would argue that there is an associative obligation
within a state, but not at an international level, so we therefore owe differ-
ent duties. Also, the equality principle would potentially apply differently
to our compatriots than to foreigners, as we, for instance, do not share the
same institutions with persons living abroad.1987 This would also mean that
we do not necessarily need to treat foreigners equally (i.e. apply the same
1986. See the cosmopolitan ideas in sec. 7.5. and on egalitarianism see sec. 7.6.
1987. See the concept of Blake in sec. 7.4.1.
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tax rate and the same deductions) unless they belong to the same association
with shared institutions.
11.2.3.2.2.
Our position
To shed some further light on what this means from a tax perspective and to
demonstrate the importance of such philosophical reasoning from a practi-
cal perspective, we will refer to some ECJ case law in the following section.
11.2.3.2.3.
Reception in case law
396
Principle 1: The ability-to-pay principle
397
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in which it has its seat or in another Member State would seriously undermine
a balanced allocation of the power to impose taxes between the Member States
concerned (see, to that effect, Oy AA, paragraph 55).1995
Moreover, the ECJ has stated in many further cases that residents and non-
residents are in general not in a comparable situation.1996 This means that the
ability-to-pay principle is not applicable to all cross-border situations. This
triggers the question of why the ECJ does not apply a full-fledged ability-to-
pay principle, but instead limits its application to a few very specific cases,
such as the case of a quasi-resident in the aforementioned Schumacker case.
Theories of political philosophy might be helpful to better understand the
underlying reasoning of the ECJ.
It is our understanding that the ECJ struggles with the philosophical ques-
tion of exactly when and for what reason equal treatment is required, and
in which situations the national boundaries are still morally significant and
unequal treatment is justified.1997 For instance, with respect to a cross-border
commuter, the ECJ seems to assume that in such a situation (maybe due
to social cooperation in the employer’s state?), a foreign resident should
be treated equally to domestic residents. Therefore the underlying philo-
sophical concept could be that association and social cooperation trigger
moral duties. However, the ECJ is not referring to any of the philosophical
theories.
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Principle 1: The ability-to-pay principle
11.2.3.3. Practical constraints
This section deals with the question of whether there are any practical con-
straints that would disable the application of the ability-to-pay principle at
an international level as a policy guideline either following a cosmopolitan
understanding or following our approach, i.e. a continuous approach. By
referring to both ideal theories (i.e. the right and left institutional approach),
we try to develop a concise and comprehensive argumentation either in
favor of or against the application of the ability-to-pay principle as an in-
ternational policy principle.
11.2.3.3.1.
Cosmopolitan understanding
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harmonization of tax rates and tax base, given that equal treatment in the
resident state might lead to unequal treatment in the source state. The under-
lying assumption is that if we apply a cosmopolitan view, it is necessary to
compare a person both to other residents and to other persons not resident
in the same country, as the national boundary is not morally significant. The
following example is again used to demonstrate the issue:
A & B are both residents in State X. A receives income of USD 50,000 from a
source in State X. B on the other hand also receives USD 50,000 from a source
in State X, but additionally receives USD 1mln from a source in State Y. C on
the other hand is a resident in State Y and earns USD 1,050,000 from a source
in State Y. X is a high-tax jurisdiction and Y is a low-tax jurisdiction.
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Principle 1: The ability-to-pay principle
11.2.3.3.2.
Our understanding
On the one hand, in the example above, we ought to compare the ability of
A to B from the perspective of State X, because both taxpayers are presum-
ably members of the same society and the same basic structure, i.e. the same
coercive, cooperative and associative regime. However, we also need to treat
B and C equally from the perspective of State Y, because C is resident in
State Y and B receives a significant amount of income from a source in State
Y. If B, for instance, commutes daily to Y and receives his income from the
source in Y due to such employment, we could claim that B is also part of
the coercive and associative regime of State Y (implicitly the opinion of the
ECJ in the Schumacker case).2005 Therefore both X and Y would need to treat
B equally as a resident in their state from a moral perspective.
Globalization has led not only to a very integrated global economy, but
also to the fact that many individuals are no longer part of only one society
and one basic structure, but of several societies and basic structures, which
disables a self-consistent application of a non-cosmopolitan understanding
of the ability-to-pay principle. As a logical consequence, we cannot achieve
equal treatment unless the tax rates and governmental benefits are harmo-
nized. This is true for the following reasons: if State X grants B a credit on
the income taxes paid in State Y, in order to achieve equal treatment with
A, State Y could not treat B in the same manner as C because C would pay
very few taxes and B would pay high taxes on USD 1,050,000 due to the
credit system in State X. If State X exempts the foreign source income,
the treatment of A and B in State X would differ because the two taxpay-
ers would pay the same amount of taxes, even though B has significantly
more income. The same is also true in some federal states with limited
the resident state can – by granting a credit – not guarantee equal taxation, as the credit
will likely be limited to the taxes due in the source state, due to a provisio safeguarding
progression. See generally Ratner, 2015, p. 419.
2004. See chapter 8.
2005. See sec. 11.2.3.2.3.
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2006. It is not surprising that the equality principle reaches its limits regarding the taxa-
tion of international facts, as several comparables might exist. See Rosenbloom, p. 64:
“It has been a mistake to disregard the case for rough justice. The argument can always
be made that no two cases stand equally before the tax laws. It is also true, however, that
at some level, no two cases are relevantly different.” See also the dissenting opinion of
Judge Ginsburg in Maryland v. Wynne, who struggled with a similar problem that it is
impossible to achieve intra-state equality by at the same time avoiding inter-state double
taxation (see US: SC, No 13-485, 18 May 2015).
2007. As an example, all of the major shareholders of the “Swiss bank” UBS reaching a
threshold of 3% in recent years were non-Swiss investors. Therefore it is doubtful to speak
of UBS as a “Swiss-owned bank” or a “Swiss bank” (see https://www.ubs.com/ global/de/
about_ubs/investor_relations/share_information/significant.html#par_textimage_14667120,
last visited 10 Feb. 2019). The same is true with most multinational enterprises that are
publicly traded.
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Principle 1: The ability-to-pay principle
11.2.3.3.3.
Intermediate conclusion
Following our remarks above, it does not reflect a normative claim to support
a single taxation principle at an international level. This means that there
is no normative need to mitigate double taxation and double non-taxation.2010
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In other words, double taxation and double non-taxation are not detrimental
to our understanding of global justice. This might be a major deviation from
traditional approaches to enhancing justice in the international tax regime,
arguing that both double taxation and double non-taxation are unjust.
One argument for such a position was outlined above, stating that single
taxation at an international level, i.e., a situation in which income is only but
at least taxed once does not necessarily lead to global equal treatment, since
single taxation could mean facing very different tax rates and very different
governmental benefits. Therefore, the argument that the principle of equality
(or the ability-to-pay principle) requires single taxation is not true, unless tax
rates and governmental benefits are harmonized, as an application of a global
equality principle is currently impossible. A claim for single taxation based
on a cosmopolitan application of the ability-to-pay principle is, therefore,
weak, as the ability-to-pay principle is defective as an international tax pol-
icy principle, given different tax rates and different governmental benefits.
2011. See, for example, the position of Valta, 2014, p. 74 et seq. See also sec. 10.3. See
for a similar claim Debelva, p. 581 et seq.
2012. Only in very specific circumstances might such a duty exist in a non-cosmopolitan
understanding. See the remarks regarding the Schumacker case in sec. 11.2.3.2.3.
404
Principle 1: The ability-to-pay principle
basic structure exists, triggering global equal treatment in line with the
ability-to-pay principle beyond national borders. Moreover, a consequent
application of the presumed requirement of states to consider the ability-to-
pay, even of taxpayers that are members of another society, would obviously
require significant payments from rich to poor states to come closer to such
global equal treatment.
In other words, it does not make sense to require a poor state to consider
the ability-to-pay of an individual resident in a rich state that receives in-
come from a source in the poor state (and therefore potentially refrains from
taxation to achieve single taxation), unless the rich state has an obligation
to achieve equality at a global level through considerable fiscal transfers to
poor states. Why should a poor state have a duty to share income with a rich
state to ensure that a resident of the rich state is not taxed twice, but at the
same time, the rich state would not have a duty to ensure that the inequalities
between individuals in the rich and poor states are reasonable and aligned
with a global difference principle? We do not see a persuasive argument in
this respect. It seems self-evident that a poor state would only agree that
there is such a duty to consider the ability-to-pay of a resident of a rich state
if the rich state ensures that inequalities between individuals resident in the
poor and rich states are lowered to an agreeable extent, following a cosmo-
politan understanding of Rawls’ liberal principles of justice. This is also one
reason that, in federal states, single taxation is only considered just because
there are fiscal transfers from richer to poorer member states, such as the
cantons in Switzerland.2013 The integration of nation-states into fiscal unity
is an illustrative example to demonstrate what is required to achieve a just
(and potentially more integrated) international tax regime, if arguments are
made in favor of a more integrated and harmonized international tax regime.
11.2.4. Intermediate conclusion
2013. The Swiss Federal Constitution contains a prohibition of double taxation (art. 127(3))
and the Swiss Federal Supreme Court has ruled in dozens of inter-cantonal taxation con-
flicts. At the same time, Switzerland has a fiscal transfer system (Finanzausgleich), which
requires the richer cantons to support poorer cantons (art. 135 Swiss Federal Constitution).
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Such a position also finds implicit support in the case law of the ECJ. The
Court ruled in the Schumacker case that residents and quasi-residents should
be treated equally.
Moreover, we showed that the claim for single taxation is weak if tax rates
are not harmonized and we demonstrated that authors claiming that justice
requires single taxation (i.e. no double taxation and no double non-taxation)
follow a cosmopolitan path, which would require a significant fiscal transfer
from rich to poor states in order to achieve global equality in a presumed
global basic structure. Therefore, authors like de Wilde, Valta or Tipke, who
claim that there is actually a responsibility of states to share the income of
taxpayers to achieve taxation in line with the ability-to-pay principle, would
in a consequent manner also need to support global distributive payments,
at least following a liberal theory of cosmopolitan global justice.
406
Principle 2: Inter-nation equity
The term “inter-nation equity” has often been mentioned by tax scholars
when discussing the allocation of income between countries. Instead of the
term “inter-nation equity”, sometimes the terms “inter-nation justice”, “eco-
nomic justice among states”, “inter-country equity” or “inter-jurisdiction
equity” have been used identically or in a similar manner.2016 However, as
we will demonstrate, the principle of inter-nation equity has often been mis-
used and misunderstood in the debate about redesigning the international
tax regime.
The principle of inter-nation equity has, inter alia, been referenced to justify
a certain income allocation, such as source taxation or residence taxation. In
other words, inter-nation equity is used as a principle to achieve a fair allo-
cation of income.2017 Or, as stated by the OECD/G20: “[I]nter-nation equity
is concerned with the allocation of national gain and loss in the international
context and aims to ensure that each country receives an equitable share of
tax revenues from cross-border transactions.”2018
In a similar manner, statements like the following from Sadiq are common
in international tax law literature:
It is generally accepted that the overall aim of the international tax regime,
and therefore the transfer pricing regime, is to achieve inter-nation equity, in-
ternational equity and international taxpayer equity,[footnote omitted] or what
Musgrave described as taxpayer equity, locational neutrality and inter-nation
equity.[footnote omitted].2019
Inter-nation equity, however, has no legal base, neither in domestic law nor
in international law. It is not contained in a treaty, nor is it a rule of custom-
ary international law or a general principle of law.2020 The most prominent
and first advocates of inter-nation equity were Musgrave and Musgrave.
Inter-nation equity, as understood by Musgrave and Musgrave, relates to the
2016. E.g. Brooks, 2009, p. 471; Gutmann, p. 37; Herman, p. 131 et seq.; Ring, 2008,
p. 179.
2017. See Douma, 2011, p. 105, with references to Jefferey. See also Kaufman, 1998,
p. 153 et seq.; Peters, 2014, p. 98.
2018. OECD/G20, Addressing the Tax Challenges of the Digital Economy, Action 1:
2014 Deliverable (OECD 2014), p. 31.
2019. Sadiq, p. 282. See also Juusela, p. 25; Pinto, p. 270 et seq.
2020. On the sources of international tax law, see chapter 4.
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Peggy Musgrave has made many more contributions on the issue of inter-
nation equity,2027 but she has not fundamentally deviated from the afore-
mentioned position. She later stated that neither formulary apportionment
nor a separate entity approach could be understood as an objective answer
2021. Musgrave & Musgrave, p. 69. See also de Wilde, 2010, p. 287; Kaufman, 1998,
pp. 153 and 189. For a comprehensive review of the position of Musgrave & Musgrave
see Brooks, 2009, p. 471 et seq.
2022. Musgrave & Musgrave, p. 68 et seq.
2023. Id., p. 71.
2024. Id., p. 78. See also Musgrave, 1995, p. 59.
2025. See also the conclusion: “Ultimately, the only satisfactory solution … would be
the taxation of such income on an international basis with subsequent allocation of pro-
ceeds on an apportionment basis among the participating countries, making allowance
for distributional considerations” (Musgrave & Musgrave, p. 85).
2026. Id., p. 74.
2027. See Brooks, 2009, p. 480 et seq., with further references. See also Kaufman, 1998,
p. 189 et seq.
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Principle 2: Inter-nation equity
Peters recently argued that the principle of inter-nation equity has faced a
change in the sense that, among scholars, the domestic and international
domains are no longer separated. According to him, the result is a “mingling
of inter-individual equity arguments and inter-nation arguments.”2034 He fur-
ther states that: “Academics are making a whole range of axiological claims
about their desirable interpretation of inter-nation equity. These extra-legal
evaluative perspectives to inter-nation equity have their origin in economics
and political philosophy.”2035 Moreover, Peters concludes that the develop-
ment of an international society of states and individuals might challenge
the validity of the separation between inter-individual and inter-state equity.2036
Brooks, who has rendered the most in-depth analysis of the usage of the
term “inter-nation equity”, inter alia, states that the principle of inter-nation
equity as used by the Musgrave and Musgrave has been “frequently misun-
derstood and inadequately developed by subsequent scholars.”2037 Moreover,
she held that “[i]nter-nation equity is a widely accepted, but undervalued
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11.3.2. Normative review
11.3.2.1. Methodological remarks
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Principle 2: Inter-nation equity
In line with the proposed methodology, mainly following Sen’s The Idea
of Justice, it is again essential to reason why we need inter-nation equity as
a guiding principle of international tax policy, and to evaluate the different
existing methods of how to achieve inter-nation equity. These two ques-
tions, however, might be interconnected, as the first one also depends on the
answer to the second. In the following, we will first refer to the question of
why there should be equity between states and then demonstrate how the
questions of just income allocation and the principle of inter-nation equity
interact. Moreover, a normative analysis requires impartiality, which entails
that we overcome our positions that have been developed over the years.2045
2044. See Devereux & de la Feria, 2014, p. 13, with references to Edgar.
2045. On impartiality and reasoning, see secs. 7.7.4. and 7.7.3., respectively.
2046. Even in their groundbreaking article on inter-nation equity Musgrave and Musgrave
are not developing a clear justification for why there should be equity among states
(Musgrave & Musgrave, p. 63 et seq.).
2047. Schön, 2009, p. 71. See also Gutmann, p. 37.
2048. Peters, 2014, p. 105.
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It is our understanding that states are not protected by the same moral con-
siderations as individuals, such as equal or equitable treatment regarding
the distribution of income or regarding taxation. Of course, the treatment
of states as agents of international law must also follow considerations of
justice and fairness, and we have seen that there is a legal principle of
equality of states. However, drawing a direct link between the allocation
of benefits and burdens among individuals in a society and among states in
the global society is not persuasive. There is, for instance, no central body
at an international level that could force states to treat themselves equitably
in the mentioned manner. However, the latter is not sufficient to question
the normative validity of the inter-nation equity principle. What ought to
be decisive with respect to the principle of inter-nation equity is the equi-
table treatment of individuals as the ultimate normative goal. However, as
we have seen above, the existing philosophical concepts concerning the
equitable treatment of compatriots and non-compatriots are rather differ-
ent.2049 A left institutionalist would claim, on one hand, that there are global
distributive duties, whereas a right institutionalist would, on the other hand,
limit distributive duties to a state’s territory.
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Principle 2: Inter-nation equity
The first position is that due to the principle of inter-nation equity, the exact
same allocation key should be applied for all states worldwide, be it, for
instance, the arm’s length principle or the same formula in a formulary
apportionment system, as this would reflect equity among states. To be
more precise, the allocation key should not have any relation to the eco-
nomic stance of a country or any other country’s specific criteria, such as the
well-being of its inhabitants or the GDP per capita. In this sense, the term
“inter-nation equality” is also suitable. The second position by Musgrave
and Musgrave is that the principle of inter-nation equity requires a distribu-
tive element. This means an allocation system that is, for instance, linked to
the income per capita in different states. Therefore, the allocation key would
not be the same regarding all states, but would deviate depending on specific
characteristics of the involved states. We will start with an analysis of the
first position, i.e. the claim for a uniform allocation key that is detached
from any country-specific characteristics.
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means the argument is weak that inter-nation equity necessarily requires that
all states apply the same allocation key, such as the arm’s length principle
or a formulary system with the same formula, detached from any country-
specific characteristics. There is no valid argument to render such an anal-
ogy, i.e. from inter-individual equality to inter-state equality. Two arguments
seem sufficient to support such a conclusion:
Therefore, we deny that there is indeed a normative claim to treat all states
equally in the sense that the income should be allocated following the same
allocation key, which is detached from any specific characteristics of a state.
The argument that the equal treatment of states is valid is closely related
to questions regarding the usefulness of contractualism as a methodology
to derive the necessary principles of international law. Rawls would argue
that inter-individual equity in a society is achieved if it follows, inter alia,
the difference principle. This means, as shown above,2053 inter alia, that
inequalities are justified if they are to the advantage of the worst off in a
society. However, Rawls would not apply such a principle for an inter-state
relation, as he emphasizes the importance of the principles of sovereignty
and independence resulting from the second negotiation process among
the representatives of states in the original position. This means that Rawls
would also deny the potential analogy of inter-individual equity and inter-
state equity, and he would disagree that justice requires, at an international
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Principle 2: Inter-nation equity
level, that sharing the tax pie should follow the same allocation key for all
states, notwithstanding the specific characteristics of states. This is also
in line with our understanding of the normative value of the principles of
sovereignty and fiscal self-determination as following a right institutional,
but continuous approach.2054
Even if one agrees that the principle of inter-nation equity is valid and
requires an international tax system with a distributive impact, we would
oppose the approach that GDP per capita should be decisive, as suggested
by Musgrave and Musgrave. As we will demonstrate below, and as was
already indicated with references to Infanti and Brooks, there are more
accurate systems to measure poverty at a global level.2059
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11.3.3. Intermediate conclusion
These remarks have demonstrated that there should be justice among states,
or inter-state justice, but in the Aristotelian form of commutative justice.
This, for instance, requires that contractual relations are well balanced and
in general reciprocal. These justice considerations are necessary following
a principle that could indeed be called “inter-nation equity”. Therefore,
there might indeed be a normative claim for an international tax regime that
considers the principle of inter-nation equity, if it is understood in such a
narrow manner. However, we have developed a more distinct position with
respect to the use of the principle of inter-nation equity as an allocation of
income guidance.
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Principle 3: Efficiency and neutrality
versa, that a neutral tax system leads to an efficient tax system.2060 In the fol-
lowing, we will refer to both terms.2061 As the following sections will show,
the principles of efficiency and neutrality have long been used as axiomatic
principles to steer international tax policy. However, as we will demonstrate
in detail, these principles have limited validity as normative guidelines at an
international level. This is a core deviation from more traditional studies on
international tax law that claimed that international tax policy should aim
at achieving a perfectly neutral or efficient international tax regime. Again,
a detailed and comprehensive review is necessary to support our position.
The aim of the present section, however, is not to develop our own ideas for
achieving a perfectly efficient and neutral tax system. We prefer to leave
the latter task to economists. Economists have played an important role in
international tax law, and terms such as “efficiency” and “neutrality” have
been intensively discussed. The terms have been used to steer domestic tax
policy,2062 but these concepts have also been crucial when designing the cur-
rent international tax regime, relying on the allocation of income according
to the OECD MC and the UN MC. It is not a coincidence that some of the
most influential tax (law) scholars of the 21st century have an economics
background.2063
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2067. See, for example. Graetz, p. 285; Kemmeren, 2006, p. 438; Lehner, in: Vogel &
Lehner, Grundlagen para. 24 et seq.; Li, 2002, p. 828; Schön, 2009, p. 78.
2068. For further details see Senn, p. 170 et seq.
2069. For more details see Herman, p. 102 et seq.; Hines, p. 269 et seq.; Kemmeren,
2001, p. 61 et seq.; Schön, 2009, p. 78 et seq.; Smit, 2012a, p. 76 et seq.; Vogel & Rust,
in: Reimer & Rust, Introduction para. 16.
2070. Schön, 2009, p. 78. See also Herman, p. 123 et seq.
2071. See supra under the heading “The International Tax Regime – Scope of Research”.
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Principle 3: Efficiency and neutrality
First, it was argued that exclusive residence taxation is best to avoid det-
rimental tax distortions (i.e. CEN).2073 This would mean that the state of
residence would treat the income from an investment indifferently, whether
it stems from Country A or B, or whether it is sourced in the home (i.e.
resident) country of the investor. Therefore, theoretically, the investment
decision (i.e. country of investment) is not distorted by tax considerations,
as the tax burden is the same whether an enterprise invests domestically
or abroad. In an ideal application of the CEN principle, source taxation
as such would not exist. The abolition of source taxes is also one of the
main arguments against CEN, as it would lead to taxation that is not in line
with the benefit principle2074 and, therefore, one could even consider such
a tax system to be unfair.2075 Furthermore, it would trigger detrimental tax-
planning opportunities, as residence as such can easily (and even artificially)
be shifted to a low-tax jurisdiction.2076
Another contrary position argues that exclusive source taxation would lead
to the least distortions in the source country (i.e. CIN). This means that an
investor in a certain jurisdiction would be treated indifferently, whether
or not he is resident abroad. Consequently, the resident state would, for
instance, exempt the income generated in a foreign PE. Or, as highlighted
by Vogel:
[A] taxpayer who conducts an enterprise in another country – or market – and
thus utilizes the other country’s facilities (public goods) can be sure of being
taxed no more than anyone else who, under the same circumstances, uses these
facilities to the same extent.2077
2072. E.g. OECD/G20, Addressing the Tax Challenges of the Digital Economy, Action 1:
2015 Final Report (OECD 2015), para. 6 et seq.
2073. See on CEN and CIN, for example, Avi-Yonah, 2016, p. 118 et seq.; Ault, 1992,
p. 572 et seq.; Devereux, p. 701; Devereux & de la Feria, p. 6 et seq.; Graetz, p. 270 et
seq.; Kleinbard, 2011, p. 101 et seq.; Knoll, p. 99 et seq.; Smit, 2012a, p. 80 et seq.;
Steichen, p. 70 et seq.; Vogel, 1988b, p. 311 et seq.; with reference to both Richard and
Peggy Musgrave, Vogel, 1997, p. 273. From a German perspective, see Seer, § 1 para. 98.
2074. De Wilde, 2010, p. 295.
2075. For more details on the benefit principle and fairness, see sec. 11.6.2.
2076. Schön, 2009, p. 80; Smit, 2012a, p. 90.
2077. Vogel, 1988b, p. 314. See in this respect Smit, 2012a, p. 86 et seq.
2078. See generally Knoll, p. 107 et seq.
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Lastly, CON requires that the allocation of assets is solely driven by non-tax
reasons. This means, in simplified terms, that the investment decision should
depend on the amount of (pre-tax) return that an investor can extract from
an asset.2083 Against CON, scholars argue that it does not consider that the
goods produced in one country are often not sold in the same country, so
distortions might still occur.2084
One way of resolving such a Gordian knot would be to try to align the three
neutrality concepts, but this seems to be an impossible task.2085 For the pur-
pose of the present study, we would agree with Fleming, Peroni and Shay2086
by stating that the dispute seems to be unresolved and never-ending, in the
sense that all three concepts have deficiencies (and advantages). Moreover,
these concepts are partly based on assumptions that do not exist in the
current world. What is and what should be more essential (not only for
the purposes of the present study) is that scholars or governmental bod-
ies answer the question of whether efficiency has a normative value in the
sense that international tax policy should indeed be guided by efficiency.
This is in line with the methodology of the present study, as we must use
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Principle 3: Efficiency and neutrality
11.4.3. Normative review
11.4.3.1. Preliminary remarks
Singer, moreover, held that, “while economic analysis works from a given
baseline – usually the status quo – and then asks whether changing that
baseline improves things overall, moral and political theorists focus on
defining an acceptable baseline.”2091
As already mentioned,2092 many authors have dealt with neutrality and in-
ternational tax law, but only a few who have used such a principle have
explicitly mentioned an underlying justification for a neutral international
tax system. In other words, it is sometimes taken for granted that the inter-
national tax regime ought to be neutral, or at least as efficient as possible.
The same holds true for governmental publications, in this respect.2093 In
the following, we will challenge some of the existing positions. To do so, it
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Chapter 11 - Review of Fundamental Principles of International Taxation
is crucial to first visualize the actual underlying reasons that are referred to
when arguing in favor of a neutral international tax regime.
11.4.3.2.1.
Setting the framework
Most authors who provide a reason for claiming neutrality refer to world-
wide prosperity or worldwide welfare as the underlying justification.2094 Of
course, this reflects the general goal of optimal tax theory, i.e. welfare
maximization. A second, smaller group refers to the principle of equality
to justify neutrality.2095 These two positions will be distinguished in the
following sections. A third group of tax scholars – such as Graetz2096 or
Peters2097 – have already questioned the normative value of neutrality as a
guiding principle for international tax policy.2098
2094. See, for example, Herman, p. 124 et seq. Other authors – with no reference to the
neutrality principle – emphasize that the international tax system “should be conducive
to global welfare and global trade” (Postma & Schwarz, p. 792).
2095. See sec. 11.4.3.3.
2096. Graetz, p. 282 et seq.
2097. Peters, 2014, pp. 106 et seq. and 364 et seq.
2098. See sec. 11.4.4.
2099. Shaviro, 2007, p. 2.
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Principle 3: Efficiency and neutrality
Kemmeren also seems to argue for a normative basis of worldwide tax neu
trality. At least, the following statement indicates such a conclusion:
The efficiency of the world economy should be maximized by allocating the
production factors to the location where “they” earn the highest return.[footnote
omitted] This will enhance worldwide prosperity,[footnote omitted] although it
depends, of course, on more than the efficient creation of income, e.g., on the
distribution of the income earned.2102
(1) Tax neutrality leads to the most efficient allocation of production factors.
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(3) The ultimate goal of the international tax regime should be to achieve
worldwide prosperity or worldwide welfare.
Concerning the first assumption, it goes beyond the scope of the present
study to question or confirm in detail the impact of tax neutrality on the
allocation of production factors and potential distortions triggered by non-
neutrality. This is a task for economists. However, since we will disagree
with the second assumption in the following, an in-depth analysis of the first
assumption is obsolete, as the second assumption is a conditio sine qua non
for the conclusion that we should aim at achieving a neutral international
tax regime in order to increase welfare.
Regarding the third assumption, whether the sole goal of international tax
policy should be to increase welfare, the answer again depends on how the
term “welfare” is understood. As we will demonstrate in the following,
we could support such an ultimate goal of international tax policy if the
term “welfare” were understood in a broad manner, not only considering
an increase in GDP, but also considering other elements, such as decreasing
inequalities, protection of human rights and the environment. Understood
in such a broad manner, the term “worldwide welfare”, however, overlaps
partly with the term “justice”. This will be discussed further in the follow-
ing sections.
424
Principle 3: Efficiency and neutrality
11.4.3.2.2.
Welfare impact of domestic policy
Deaton has shown that “economic growth is the engine of the escape from
poverty and material deprivation.”2108 However, according to him, “there
is nothing in logic that guarantees an automatic link between growth and
reductions in global poverty”,2109 and “because much of the world’s popula-
tion was left behind, the world is immeasurable more unequal than it was
three hundred years ago.”2110 However, if we look at the number of poor
people in the world, we have seen a significant decrease in recent decades.2111
Therefore we could argue that the impressive growth of the global GDP in
recent decades triggered such poverty reduction. However, as demonstrated
by Deaton, such a decrease was mainly driven by domestic improvements
2105. However, such a claim is disputed even among economists (see generally Stiglitz,
p. 101).
2106. See, on the capabilities approach, sec. 7.7.6.
2107. Singer, 2002, p. 89. Of course, there are many academics who are globalization
critics and who challenge the argument that globalization per se leads to a reduction of
poverty (see, for example, Stiglitz, p. 101 et seq.).
2108. Deaton, p. 327.
2109. Id., p. 41.
2110. Id., p. 23 et seq.
2111. See id., p. 45 (figure 6).
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Therefore, global growth as such might have a positive impact on the well-
being and welfare of the inhabitants of a country, but it is domestic policy
that is decisive for the successful welfare increase from an individual’s per-
spective. An enhancement of domestic welfare does not, therefore, develop
through global policy, but mainly through domestic policy.2113 The claim that
a neutral international system leads to an increase in welfare (i) is weak,
as it ignores the impact of domestic policy, which can hardly be influenced
through global neutrality, and (ii) global neutrality could even be detri-
mental if policymakers aiming at neutrality ignore that certain global poli-
cies might lower the chances of successful domestic policy. For instance, if
someone claims that we should abolish source taxes because this increases
neutrality (through CEN),2114 such a claim might even have the harsh effect
that capital-importing countries are no longer able to implement success-
ful domestic policies, leading to a decrease in domestic welfare, since they
would not have access to sufficient tax revenues.
2112. For more details see id, p. 41 et seq. It is, therefore, not a surprise that the work of
the UN concerning financing for development is as well focusing on improving domes-
tic resource mobilization compared to more traditional cross-border aid payments (see
sec. 4.3.4.3.4.).
2113. See Deaton, p. 312 et seq. Global policy might, however, have both a positive and
a negative impact. The latter is often highlighted regarding the negative impact of global
trade policy on developing states. See the remarks of Pogge in sec. 7.5.2.
2114. See sec. 11.2.2.
2115. World Economic Forum, The Global Risk Report 2017, p. 13, published at https://
www.weforum.org/reports (last visited 10 Feb. 2019).
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Principle 3: Efficiency and neutrality
2116. It would go beyond the present study to fully explore the existing empirical studies
about global inequalities. Several authors have developed seminal studies in this respect,
to which we have already referred. See Atkinson, p. 1 et seq.; Deaton, p. 1 et seq.; Piketty,
p. 1 et seq.
2117. Deaton, p. 262.
2118. Atkinson, p. 42.
2119. See Roser Max, Global economic inequality, published at https://ourworldindata.
org/global-economic-inequality (last visited 10 Feb. 2019). His work is also referred to
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Chapter 11 - Review of Fundamental Principles of International Taxation
in a rather popular manner, “[e]ight men now own the same amount of
wealth as the poorest half of the world”.2120 Therefore, recent decades that
have seen a significant growth of global GDP seem also to have led to a
certain decrease of inequality at a global level, but at the same time, it has
led to higher inequalities in domestic circumstances. It is, therefore, difficult
to draw a precise line of argumentation as to whether global efficiency and
global growth are reducing or increasing inequalities. Inequalities, however,
trigger substantial international risks for worldwide welfare, as outlined in
the abovementioned World Risk Report of the World Economic Forum or
as outlined, for instance, by Stiglitz.2121
For the moment, we will not dig further into the question of the impact of
free trade on global welfare and global inequalities, but it seems important
to highlight that scholars are far from a consensus on the positive impact
of global (free and unlimited) trade with no distortion through tax law or
custom.2122 There is no uniform opinion as to why a country has become rich
or poor, and even more fundamentally, how to measure poverty and human
development.2123 Global growth might have decreased poverty in absolute
numbers, but global growth might also have triggered enhanced domestic
inequalities. Furthermore, globalization through the abolishment of tariffs
and cross-border double taxation might also hinder a decrease of domestic
inequalities due to competitive disadvantages.2124
by the World Economic Forum, The Global Risks Report 2017, p. 11, published at https://
www.weforum.org/reports (last visited 10 Feb. 2019).
2120. Oxfam, An Economy for the 99%, Jan. 2017, p. 2, available at https://www.oxfam.
org/en/research/economy-99 (last visited 10 Feb. 2019).
2121. Stiglitz, p. 1 et seq.
2122. See, for example, the many studies of Deaton on measuring poverty and its relation
to growth (e.g. Deaton, p. 1 et seq.). See also Stiglitz, p. 1 et seq. From a tax perspective
see Dietsch, 2015, p. 111 et seq.; Infanti, p. 236 et seq. See generally Risse, p. 84 et seq.
2123. See the many references stated by Risse, p. 85. From an international tax perspec-
tive see Infanti, p. 209 et seq.
2124. On the topic of whether globalization is indeed limiting state action to reduce
domestic inequality see Atkinson, p. 263 et seq.
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Principle 3: Efficiency and neutrality
neutral international tax regime.2125 This entire debate is linked to the fun-
damental tension between justice and efficiency considerations, which we
will describe, in a more abstract manner, in the following section regarding
what we call the utilitarian bias of traditional welfare economics.
11.4.3.2.3.
Traditional welfare economics and utilitarian bias
This is something that is not only of concern regarding international tax law,
but also might be a weakness of traditional welfare economics aiming at
increasing the overall available utilities or later aiming at a Pareto optimal
situation.2127 It is our understanding that an increase of the available goods
(or utilities) at an international level does not necessarily increase justice
and welfare in the international realm. In this regard, the traditional wis-
dom of welfare economics aiming at an increase of the overall utilities in a
system is not persuasive at an international level.2128 Moreover, aiming at a
Pareto optimal international tax regime is not helpful as there are too many
alternatives available and too many rankings of values involved so a Pareto
analysis will not lead to any persuasive conclusions.2129
2125. See, for example, Dietsch, 2015, p. 111 et seq. On the detrimental impact of glo-
balization on equality see, for example, Stiglitz, p. 89 et seq.
2126. Although a very simplified utilitarian understanding, as will be shown in the fol-
lowing and, in particular, see infra n. 2138.
2127. Welfare economics is a normative discipline, as it aims to demonstrate “what is
good and what is bad” (Feldman & Serrano, p. 1). However, it is sometimes surprising
how overhasty welfare economists disagree with normative theories, such as the one of
Rawls, and tend to use “the more fundamental Pareto criterion” (id., p. 224) for their
methodological approach. An important failure of welfare economics was indeed that the
necessary definition of welfare has been non-existent until recently (Baujard, p. 15). Of
course, if one includes certain fairness elements as utilities to be considered for welfare
maximizations, the delimitation between moral theory and welfare economics becomes
blurred.
2128. But see Keen & Wildasin, p. 259 et seq.
2129. It would go beyond the present study to provide for a detailed analysis of whether
Pareto efficiency is indeed a persuasive guideline both for domestic and international tax
policy. For a general critic see, for example, Sen, 1970, p. 152 et seq.
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Chapter 11 - Review of Fundamental Principles of International Taxation
2130. Sen, 2009, p. 272 et seq., with further references. See also Kaplow & Shavell, 2001,
p. 977 et seq.
2131. Baujard, p. 2 et seq., with further references. See also Sen, 1979, p. 463 et seq.
Already Pareto departed from a utilitarian moral philosophy as he was not aiming at maxi-
mizing the available utilities at any price but argued that a goal is desirable if “everyone
can be made better off, or at least some are made better off, while no one is made worse
off” (Leschke, p. 59).
2132. E.g. Sen, 2009, p. 1 et seq.
2133. Baujard, p. 16. See, as an example, the recommendation of Piketty, p. 479 et seq.,
who focuses on “rights”.
2134. Atkinson, p. 243.
2135. Dietsch, 2015, p. 136. See also id., p. 219 et seq.: “Economic analysis of the ef-
ficiency of tax competition have neither made explicit the normative foundations of their
analysis nor specified how the value of efficiency relates to other normative dimensions
of tax competition such as self-determination or distributive justice.”
2136. See sec. 11.4.3.2.1.
2137. Of course, we refer to a very simplified utilitarian position. Utilitarianism even
from its beginning did not understand utilities as mere available GDP but applied a much
broader understanding of utilities (e.g. Mill, 2016, p. 20 et seq.). On p. 192 Mill states, for
instance, that “[j]ustice remains the appropriate name for certain social utilities which are
vastly more important, and therefore more absolute and imperative, than any others are
as a class.” Even Adam Smith, as one of the first and most important supporters of global
free trade, was not a utilitarian (for a distinct analysis of the moral theory of Smith, see
Fleischacker, p. 1 et seq.). However, the mentioned tax scholars indeed seem to aim at
maximizing the available utilities, i.e. global GDP, and, therefore, the usage of the term
“utilitarian bias” seems justified.
430
Principle 3: Efficiency and neutrality
Also, Nussbaum, for instance, stated that it is critical to question the idea of
mutual advantage as the goal of social cooperation.2139 This is particularly
true from an international tax perspective, as the goal of tax cooperation in
the past has at least formally been mutual advantageous, which seems to
have led to an unjust regime. Taking this into consideration, the position that
we should aim at global growth of GDP is weak, as it is not particularly in
the interest of the worst off on this planet to simply increase growth without
considering, for instance, inequalities or poverty. Moreover, a claim for
unlimited growth at an international level ignores the existence of a world
order consisting of several sovereign states with no or very limited cross-
border distributive mechanisms that could counter-balance a strict utilitarian
global policy. The latter will be further discussed in the following section as
another argument why an efficient international tax regime does not neces-
sarily lead to a just international tax regime.
11.4.3.2.4.
Missing distributive mechanisms
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Given that, de Wilde seems to suggest that all taxpayers should be treated
equally and, therefore, a neutral tax system should be implemented.
Compared to the approach above, it is not worldwide welfare, but equality
that triggers the need for a neutral system.2142 However, in another instance,
he seems to also argue that a neutral system is required because the produc-
tivity of income is the highest if no distortion occurs:
432
Principle 3: Efficiency and neutrality
Such a position would likely be challenged by Rawls and other right institu-
tionalists, as they would argue that equality as such is only morally significant
within a certain basic structure, but not at an international level.2147 It is also
our understanding that there is no normative claim for the equal treatment of
all individuals and presumably all corporations worldwide, at least following
our concept of global justice.2148 Yet even cosmopolitan philosophers or left
institutionalists, such as Pogge and Beitz,2149 would challenge the position of
de Wilde, as a neutral tax system built upon the benefit principle, as proposed
by de Wilde, leads to inequalities, as the benefits to be obtained in poor coun-
tries are rather low. Therefore such an international system would have no (or
even a detrimental) distributive effect, i.e. it would be unfair.
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11.4.4. Intermediate conclusion
Many authors have argued that global tax neutrality would increase world-
wide welfare. Schön refers to such first-best option as being full tax harmo-
nization, and therefore an extinction of any distortive effect.2151 However, he
admits that besides the practical constraints regarding the implementation
of such, even from a theoretical (economists) perspective, tax competition
as such produces some efficiency gains.
We argued in the previous sections, however, that global neutrality (and full
tax harmonization) is by no means a first-best solution, as it does not lead to
a just international tax regime and does not necessarily increase worldwide
welfare. This is a major deviation from traditional positions in international
tax law. Graetz already brought up very strong and persuasive arguments as
to why the neutrality and efficiency of an international tax system should
not be the only drivers of an international tax system:
Tax policy decisions, including decisions regarding a country’s tax treatment of
international income, should be, and inevitably are, decided based on a nation’s
capacity, culture, economics, politics, and history. In democracies, such deci-
sions are determined by the votes of the nation’s citizens and their representa-
tives. Taxation without representation is still tyranny.2152
Or:
As with domestic income taxation, a quest for economic efficiency can nev-
er be more than a partial explanation for international tax policy decisions.
As one economist put it: “Everything is economics, but economics is not
everything.”[footnote omitted]2153
2150. See above for our specific reservations regarding the application of the equality
principle regarding multinational enterprises.
2151. See Schön, 2009, p. 78. But see his concerns on the issue of equity vs efficiency,
id., p. 87.
2152. Graetz, p. 279.
2153. Id., p. 307.
434
Principle 3: Efficiency and neutrality
It is undeniable that a neutral and efficient tax system has its advantages, as
it leads to efficiency gains, which might lead to growth, be it domestically
or internationally. Nevertheless, the need to implement such a neutral tax
system has been emphasized too much within international tax policy. From
a normative perspective, it has been shown that efficiency or neutrality as a
claim in the international tax debate traditionally follows a utilitarian way
of thinking.2159 The latter is a philosophical concept that is mainly rejected
as a normative concept to achieve justice at an international level. Due to the
focus on neutrality, the issues of distribution of income or distributive jus-
tice have, however, often been neglected.2160 Furthermore, the references to
the seminal work of Deaton show that global growth might have indeed led
to a decrease in poverty, but the decrease has mainly occurred in China (and
India); therefore, it might be mainly triggered by domestic policy decisions,
and not by international growth through global efficiency and a lowering
of trade barriers, such as through the avoidance of cross-border juridical
double taxation.
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This is particularly true if we consider that global growth has led to fur-
ther inequalities in domestic situations and has caused other regressions,
such as environmental damage. Therefore, if the goal is to increase world-
wide welfare as part of international tax policy, we should first define what
worldwide welfare means and then discuss how to achieve such a welfare
assumption. The term “worldwide welfare” does not support the claim that
the international tax regime should indeed be neutral. In other words, the
claim for a certain allocation system, e.g. based on the principle of origin
or based on the fractional (global) tax system by using neutrality as a sup-
portive argument, is invalid if worldwide welfare is not defined and if the
suggested policy proposal does not enhance such a welfare assumption.
The source principle, in simplified terms, means that taxation should occur
where value is created.2161 We could link the source principle to the ben-
efit theory in the sense that it would be critical whether the taxpayer has
obtained governmental benefits in the source state for value creation.2162 The
source principle has been one of the most important (at least formal) policy
guidelines within international tax law in recent years. The current inter-
national tax regime, following the arm’s length principle, attributes great
importance to the source principle for income allocation as income should
be taxed where value is created. Many references can be drawn to official
documents in this respect, both from national and international institutions.
For example, the G20 Leader’s Communiqué of the Brisbane Summit in
2014 contains the following statement: “Profits should be taxed where
economic activities deriving the profits are performed and where value is
created.”2163
2161. See, with more details, Hongler & Pistone, p. 17 et seq. However, there are many
further understandings of the term “source”, see, for example, Kane, 2015, p. 311; Kemmeren,
2001, p. 33 et seq.; Vann, p. 298.
2162. See sec. 11.6.2.4.
2163. G20, Leaders’ Communiqué Brisbane Summit, 15-16 Nov. 2014, para. 13.
2164. E.g. OECD/G20, BEPS, Explanatory Statement, 2015 Final Reports (OECD 2015),
§ 1.
436
Principle 4: Source principle
Musgrave, therefore, argues that the source state is “entitled” to tax the
value added within its state territory. Vogel stated in 1997 that not only
from an economist’s perspective, but also considering justice consider-
ations, source taxation as such would be fair or just, as an enterprise resi-
dent in one state that derives income from another state should be treated
equally, with respect to the latter income, to any another enterprise deriving
income under the same conditions, i.e. in the same state.2170 Such a line of
argumentation links the source principle to equality considerations. Another
important argument in favor of the source principle as an allocation rule is
that the benefit principle seems to fail when it comes to an exact calculation
of the benefits obtained.2171
2165. Global Alliance for Tax Justice, Key Points on Tax Issues for G20 Sherpas
Meeting June 2015 G20 and OECD must act to prevent failure of the BEPS project,
12 June 2015, available at https://bepsmonitoringgroup.files.wordpress.com/2015/06/key-
points-on-tax-issues-for-g20-sherpas-meeting-june-2015.pdf (last visited 29 Jan. 2019).
2166. Hongler & Pistone, p. 17 et seq.
2167. One of the fathers of the source principle is Von Schanz with his contribution to
the question of jurisdiction to tax (Von Schanz, p. 365 et seq.). His concept of “economic
allegiance” or “wirtschaftliche Zugehörigkeit” is similar if not identical to the source
principle.
2168. See, for example, Tipke, 2000, p. 523 et seq., who understands the source principle
with reference to the benefit principle, i.e. it should be decisive which state provided the
benefits relevant for the income-generating activity.
2169. Musgrave, 1984, p. 241. See also Musgrave, 2001b, p. 1341 et seq.
2170. See Vogel, 1997, p. 273.
2171. See generally Schön, 2009, p. 75 et seq. See, on the benefit principle as a potential
allocation key, sec. 11.6.2.2.
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The source principle also has major disadvantages, however. The main
problem is that value creation cannot be measured in an unambiguous man-
ner. This is most obvious if one follows the discussion of whether only the
supply side (i.e. the production and development) or also the demand side
(i.e. the customers and the market) of an enterprise contributes to the value
creation.2172 A reliance on the supply side would mean that a state should
have the right to tax income if certain functions or assets of an enterprise
are within its territory. The arm’s length principle follows such a supply-
side understanding of the source principle. If one would implement a more
demand-related understanding, the market state would have a right to tax,
even though no functions or assets of the enterprise are within its territory.
2172. See on this topic Musgrave, 1984, p. 245. See also Kleinbard, 2016, p. 145, who
states with respect to territorial systems that we face the “complete inability in practice
to determine the genuine geographic nexus of much business income”, which seems to
imply that we are unable to calculate value creation. See on the issue of whether value
creation can indeed be measured, Devereux, p. 712 et seq.
2173. This was also a key argument why the US Supreme Court changed its understand-
ing of the commerce clause in relation to digital enterprises (see US: SC, South Dakota
v. Wayfair Inc.).
2174. See generally Kane, 2015, p. 311 et seq.
438
Principle 4: Source principle
i.e. that taxation should occur in the state of value creation? In the follow-
ing, we will only focus on the latter question, i.e. is it just to implement an
international tax regime that follows the source principle? However, in a
later chapter, we will further discuss the normative value of the arm’s length
principle as an allocation key and answer the first question.2175
11.5.2. Normative review
The first implicit argument of the OECD/G20 is that the alignment of taxa-
tion and value creation avoids double non-taxation and, therefore, the in-
ternational tax regime should follow the source principle.2177 Such a line of
argumentation relates to the single taxation principle. However, we have
seen above2178 that the single taxation principle as such is weak as an inter-
national policy goal, as it is to a certain extent based on a global understand-
ing of the equality or the ability-to-pay principle, which finds no support
in the present study. If one indeed claims a global tax regime according
to the single tax principle, according to our understanding, it would trig-
ger distributive payments from the rich to the poor countries.2179 The latter
means that a claim for source taxation must be combined with a claim for
cross-border distributive payments.
A second reason for an alignment of taxation and value creation and, there-
fore, the use of the source principle as an allocation rule, is related to the
benefit principle. The argument is as follows: Value creation requires that
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Chapter 11 - Review of Fundamental Principles of International Taxation
2180. See, with regard to the benefit principle, sec. 11.6. See Green, p. 29, with reference
to Musgrave & Musgrave. See also Benshalom, p. 75 et seq.
2181. See Musgrave, 1984, p. 241. See also Gutmann, p. 39.
2182. See sec. 8.4.
2183. See sec. 8.4.3.
2184. If one follows a broader understanding of the principle of fiscal self-determination,
one would require that states have even sufficient revenues to follow the distributive policy
chosen by its people. However, this is not the understanding in the present study (see
sec. 8.4.3.).
440
Principle 4: Source principle
441
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442
Principle 4: Source principle
2195. See, on the topic of practical constraints, sec. 2.1.5. See, with regard to the source
principle, for instance, Sadiq, p. 278.
2196. For further details, see Hongler & Pistone, p. 19. See also Cappelen, p. 103.
2197. For more details on the arm’s length principle and formulary systems, see sec. 12.2.
2198. See secs. 6.3. and 7.4.1.
2199. See sec. 11.2.3.4.
2200. See, on our understanding of the principle of sovereignty, sec. 8.4.
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444
Principle 4: Source principle
Fourth, Beitz has – without referring to international tax law – dealt with
the question of value creation and its importance regarding distributive
justice. He refers to the argument of Nozick, i.e. a libertarian viewpoint,
that “[o]ne justification [of an international system which does not follow
the difference principle]2206 is on grounds of personal merit, appealing to
the intuition that value created by someone’s unaided labor is properly his,
assuming that the initial distribution was just [footnote omitted].”2207 In
simplified terms, my interpretation of Beitz’ understanding of Nozick is
that if the worldwide distribution of goods follows value creation, such a
system is fair from a libertarian perspective, as taxation is with the states
that created a certain value. Beitz, however, is strictly against such a sys-
tem, primarily based on the argument that natural chances and social
contingencies are arbitrary and, therefore, the allocation based on value
creation is arbitrary and not justified.2208 Beitz namely refers to Rawls’
argument in favor of a “difference principle” at a national level and applies
it at a global level.2209 In simplified terms, and adapted to the interna-
tional tax world, this means that an allocation of income based on value
creation is arbitrary, as the underlying factors to measure value creation
are allocated in an arbitrary manner from an individual’s perspective to
the involved states. In other words, if I were born in a poor country, I
would likely always be disadvantaged from such an allocation key, as my
country has very low productivity, so very little value creation occurs in
my country. Individuals living in poor countries, therefore, have a much
lower chance to benefit from the value creation of some of the largest
multinationals in the world, as these are mainly (i.e. on the supply side)
operating in the strong economies of the world.2210 Again this fourth point,
as already highlighted by the third point, is the potential unfair outcome
of an allocation following the source principle depending on its design.
Therefore, following a cosmopolitan understanding, one might disagree
with the source principle as a just allocation principle, unless it is com-
bined with distributive measures, which would compensate for the detri-
mental impact of an application of the source principle on the distribution
of income and wealth at a global level.
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Chapter 11 - Review of Fundamental Principles of International Taxation
11.5.3. Intermediate conclusion
We do not argue that the need for mitigating double taxation requires an
allocation key, following the source principle, but we argue that the princi-
ples of sovereignty and fiscal self-determination require the non-taxation of
income that was created abroad. As mentioned already in several instances,
double taxation and double non-taxation are not per se unjust and, there-
fore, an allocation key is not necessarily required to achieve justice in the
international tax regime. From a practical perspective, the result is that we
would not require that double taxation be avoided in all cases, but rather that
states should at least refrain from taxing income that was created abroad.
How to define what was created abroad should generally, however, be at the
discretion of states, unless otherwise agreed with other states.2211
446
Principle 5: Benefit principle
One way of defining the benefit principle is that “taxpayers contribute, via
taxation, in proportion to the benefit they derive from government”.2212 In a
more radical manner, the benefit principle would mean that a country would
only charge for the services rendered and not beyond.2213 Closely linked to
the benefit principle is the cost principle or cost theory, according to which
taxes are paid based on the costs of the services performed by the state.2214
From a historical perspective, as demonstrated by Dodge with further refer-
ences, the benefit principle in a mere domestic situation has its roots in the
Enlightenment period.2215
The benefit principle could also be linked to the Aristotelian iustitia com
mutativa.2216 This means that taxes – and this is the underlying justifica-
tion – are the price to be paid for the receipt of public goods.2217 Therefore,
according to the benefit principle, taxation in a strict sense has in principle
no distributive effect, but instead relies on the benefits obtained by each tax-
payer, notwithstanding the taxpayer’s ability to pay. This led to an intense
debate about the compatibility of the benefit principle with liberal ideas,
for instance, that a liberal societal understanding contains a distributive ele-
ment, such as the difference principle of Rawls.2218 Indeed, the benefit prin-
ciple as such is not able to reflect the ability to pay of the taxpayers2219 – at
2212. Murphy & Nagel, p. 16, with further references. See Dietsch & Rixen, p. 157 et
seq., and Dietsch, 2015, p. 80 et seq., who use the term “membership” to describe the
idea that taxation should occur in the state of which an individual is a member. According
to them, individuals and companies should be a member of a state if they benefit from
public services and infrastructure. Therefore their idea of taxation based on membership
is closely linked (but not identical) to the benefit principle. For similar but different ap-
proaches see Bamford, p. 132 et seq., who argues in favor of a “principle of relationship”:
“The principle of relationship focuses on the strength of the relationship that taxpayers
have with the several states with which they have a relationship”.
2213. See, on the topic of benefit taxation in this respect, Musgrave & Musgrave, p. 70.
See Kaufman, 1998, p. 157, with reference to Nozick.
2214. Bruins et al., p. 18.
2215. Dodge, p. 399 et seq.
2216. See sec. 1.2.
2217. See Matteotti, 2007, p. 17 et seq., with further details and references. See also
Dean, p. 565.
2218. See, on this dispute, with reference to the work of Murphy & Nagel, Kordana &
Tabachnick, p. 653 et seq.
2219. See, for example, the decision of the Swiss Federal Supreme Court, CH: SC, BGE
133 I 206, 1 June 2007, cons. 7.1. But see on the so-called membership principle, consider-
ing both the ability-to-pay principle and the benefit principle, Dietsch, 2015, p. 80 et seq.
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There have been many studies about the content of the benefit principle,
from both a legal and an economic perspective.2221 From a legal perspective,
the benefit principle has been of major importance with respect to duties or
levies, and their structure and design in a domestic situation. From a mere
tax perspective, however, the benefit principle has been qualified as “weak”
or “unsubstantial” as a design principle in a domestic framework.2222 The
benefit principle has the weakness that benefits obtained cannot be calcu-
lated and, therefore, taxation based on a strict application of the benefit
principle is not feasible. This is already true in a mere domestic situation,
as it is generally impossible to allocate the utility of the existing public
goods among the members of a society.2223 Furthermore, in a cross-border
situation, many authors have already discussed such practical constraints
of the application of the benefit principle as a potential allocation key at a
global level.2224
11.6.2. Normative review
448
Principle 5: Benefit principle
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Chapter 11 - Review of Fundamental Principles of International Taxation
Example
A Haitian professional boxer earned USD 10,000 in 2012 as a salary, which he
receives from the national boxing federation. He earns very little income from
sponsors. In 2012, he attended the Olympic Games and stayed in London for
3 weeks. The tax rate in London is presumably 30%, but only 10% in Haiti. Let’s
assume that the received benefits in the year 2012 are equal between Haiti
and the United Kingdom, as the security and building of the specific Olympic
premises were very expensive and, therefore, even though he stayed only a few
weeks in London, the UK benefits have the same value as the Haitian benefits
for the rest of the year.2229 This would mean, following the benefit principle as an
allocation principle, that London could tax USD 5,000 at 30%, i.e. USD 1,500
and Haiti could tax USD 5,000 at a rate of 10%, i.e. USD 500. This would be a
strange outcome and clearly opposing cosmopolitan theories of justice, such
as those developed by Pogge and Beitz.2230
Therefore, allocation according to the benefit principle would not fulfill our
duties toward the worst off, following a cosmopolitan understanding, and
such allocation could even lead to detrimental results, i.e. to a higher alloca-
tion of income to the richest states in the world. The general concern with
respect to the benefit principle, therefore, is that the benefits in developed
countries generally have a much higher value due to higher productivity.2231
Of course, the use of a few rather hypothetical examples as such seems weak
to question the applicability of a certain principle. However, the advocates
of the benefit principle as an allocation key have not, vice versa, proven that
the application of the benefit principle would indeed lead to a just allocation
450
Principle 5: Benefit principle
Fourth, another argument brought forward against the use of the benefit
principle as an allocation key is that the benefits obtained are not able to
reflect value creation in a comprehensive manner, as it does not consider the
risks taken by an enterprise that are part of a value creation chain.2234 Prima
facie, this seems persuasive, as the benefits obtained are not in direct rela-
tion to the income generated by an enterprise or an individual. However, this
is only a derivative argument, as it presupposes that the source principle, i.e.
the principle according to which income allocation should align with value
creation, is valid from a normative perspective. However, as we saw above,
we believe that income allocation as such at a global level, in line with the
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Chapter 11 - Review of Fundamental Principles of International Taxation
source principle, does not lead to a just international tax regime. We under-
stand the source principle only as a justification-to-tax and a limitation-to-
tax principle,2235 and we will dedicate a specific section to the interaction
between the source and the benefit principle.2236
452
Principle 5: Benefit principle
One could argue that our position is contradictory, as we stated above that
the benefit principle is not persuasive as an allocation key, yet we simul-
taneously suggest to understand it as both a limitation- and a justification-
to-tax principle. Yet, there is an important difference between these two
positions and the difference relates to the underlying argument. We do not
argue that the need for mitigating double taxation (or the application of a
global ability-to-pay principle) requires an allocation key based on benefits
obtained, but we instead argue that the principles of sovereignty and fiscal
self-determination require a non-taxation of income that was created by
using benefits abroad. From a practical perspective, the result is that we
would not necessarily require that double taxation be avoided in all cases,
but that states should refrain from taxing income that was created by obtain-
ing the benefits of foreign states. However, it should be within the discre-
tion of states to define the threshold for taxation and to define the tax base,
following such an understanding of the benefit principle. Therefore, double
taxation as such might be caused by different interpretations of the benefit
principle as a justification-to-tax principle, but this is not necessarily unjust.
Of course, we still face the issue that the benefits are difficult to calculate.
However, if one understands the benefit principle as a rough reference for
the allocation of income, i.e. as a justification-to-tax or a limitation-to-tax
principle, the issue of calculating the exact income loses some importance.
Therefore, there will be situations of juridical double taxation because two
states would claim that a certain income was created by obtaining the ben-
efits in its state. However, this does not lead to unjust results. It is far more
important that states would follow the benefit principle as a rough reference,
which would require the abolishment of worldwide tax systems. In other
words, justice as a normative guideline does not provide us with an answer
on how to share the income in perfect slices, but it nevertheless provides us
with rather clear recommendations, such as the abolishment of worldwide
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tax systems and the protection of source taxation, as derived from the prin-
ciple of fiscal self-determination. These are key elements in our understand-
ing of global justice.2240
In the present study, it is argued that both the source and benefit principles
must be understood as justification-to-tax and limitation-to-tax principles,
as in such a manner, these principles indeed have a normative value. This
leads us to the question of how these two principles are connected to each
other, i.e. whether they overlap or whether they contradict each other. At
least two results are possible; these different results are caused by the fact
that the benefit principle can be understood in two different ways.
First, only benefits obtained to directly generate the income could be rel-
evant.2241 In this case, both principles would overlap, i.e. the value creation
would be in the same jurisdiction as the benefits obtained to create such
value. Second, benefits that are not relevant for the income generation could
also be relevant. In this case, the principles could partly contradict each
other.
454
Principle 5: Benefit principle
while the resident state could argue that the taxpayer mainly obtains benefits
in the resident state (i.e. infrastructure, legal protection, security). However,
the fact that states would have overlapping tax claims in this situation is a
clear sign that we should not specifically aim at abolishing double taxation
or double non-taxation, but rather at protecting the right of both states in
this example to tax parts (but not the entire) income. Moreover, as we in
the present study are not arguing in favor of a precise allocation according
to the benefit principle, the dispute as such is not an obstacle to achieve a
just international tax regime. Even though, to achieve a stringent policy, we
would recommend aligning the benefit principle with the source principle,
as this is the only way to achieve an overlap between the two. In other
words, it would not be possible to amend the source principle to align with
the benefit principle.
11.6.3. Intermediate conclusion
455
Chapter 12
12.1. Preliminary remarks
12.2.1. Preliminary remarks
The international tax regime heavily relies on the OECD MC and the UN
MC, both of which follow the arm’s length principle to define the price of
goods and services among related parties and to allocate income between a
PE and its headquarters.2242
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To do so, we have collected the main arguments against and in favor of the
arm’s length principle and a formulary system, respectively. Based on these
remarks, it should be assessed whether and which arguments indeed have
a normative value and whether political philosophy could guide us to an
answer to the question of which system ought to be implemented. We will
again use the instrument of normative reasoning and impartiality to develop
a more detailed understanding.2244
12.2.2. Normative review
The discussion about the arm’s length principle and the potential introduc-
tion of a formulary system is intense and ongoing.2245 In particular, the
recent discussion regarding the amendments of the transfer-pricing guide-
lines within the BEPS Project has shown that the technical discussion of
what the arm’s length principle actually means is without limits.2246 The
same is true for formulary apportionment, as many different formulas have
been suggested and have been used domestically, be it, for instance, in
Switzerland or in the United States.2247
We will not further outline the precise design options for a formulary sys-
tem and of the arm’s length principle.2248 However, some of the following
458
Rule 1: Arm’s length principle
The main arguments against the arm’s length principle compared to a for-
mulary system are the following.
First, the arm’s length principle does not produce useful results, as it is
sometimes impossible to create a comparable within a group and between
third parties.2249 Or in other words, an arm’s length price might not always
exist.2250 Second, also denying the suitability of the arm’s length principle,
the principle creates an (unintended) incentive to shift income through legal
and accounting devices, while simultaneously creating distortive effects.2251
Therefore, the arm’s length standard might allow for manipulation or unin-
tended tax-planning opportunities, or what is sometimes called “transfer
mispricing”.2252 The launch of the BEPS Project might be a sign that such
an argument is evident. An important third argument made against the arm’s
length principle is that it is excessively complex and not cost-efficient.2253 In
a similar but positive manner, it is argued that a formulary system would
increase the simplicity of the international tax regime.2254 Fourth, authors
argue that the arm’s length principle favors capital-exporting countries, as
the residual profit is always with the residence country.2255 Fifth, Christians
and Van Apeldoorn are of the opinion that in some cases market prices
may not reflect fair market values as employees are traded for less than a
living wage in comparable transactions and, therefore, a market value com-
parison might have detrimental consequences in relation to poor countries.2256
Lastly, it is suggested that the arm’s length principle allows tax havens to
2249. E.g. Avi-Yonah, Clausing & Durst, p. 510 et seq.; Devereux & Vella, p. 6. See also
Eden, p. 155 et seq.; García Antón, p. 183; Green, p. 37 et seq.; Kleinbard, 2016, p. 131
et seq. In this respect, see also Rosenbloom, p. 65, or Christians & Van Apeldoorn, p. 16.
2250. E.g. McLure, 2002, p. 587. See also Sadiq, p. 276 et seq.; Zucman, 2014, p. 127.
2251. Avi-Yonah, Clausing & Durst, p. 511. See also Dietsch & Rixen, p. 167 et seq.;
Fleming, Peroni & Shay, 2014, p. 53. See also Zucman, 2015, p. 110 et seq.
2252. Brock & Pogge, p. 4. See on “abusive transfer pricing” Eden, p. 154. See also
International Monetary Fund, Policy Paper, Spillovers in International Corporate Taxation,
9 May 2014, p. 12. For an amendment of the arm’s length principle in order to adapt to
the existence of highly integrated global value chains, see Tavares, p. 243 et seq.
2253. E.g. Avi-Yonah & Benshalom, p. 376, with further references; Dean, p. 550 et seq.;
Picciotto, 2013, p. 115.
2254. Avi-Yonah, Clausing & Durst, p. 512; Green, p. 67; Li, 2002, p. 853 et seq.
2255. Li, p. 839.
2256. Christians & Van Apeldoorn, p. 18 et seq.
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First, that it does lead to an arbitrary result, as it does not always reflect the
business activity of an enterprise.2258 Second, that the system is not practical,
as it would require intense (international) cooperation.2259 Third, the imple-
mentation of a formulary system would disrupt the business world, as mul-
tinational enterprises are applying the arm’s length standard for intra-group
transactions, not only driven by tax law.2260 In a similar manner, formulary
apportionment would lead to distortions, as its implementation would trig-
ger a shift of production factors to low-tax jurisdictions.2261 The latter is an
argument brought forward by developed states.2262 Fourth, formulary appor-
tionment has no underlying theoretical concept, such as value creation, as
compared to the arm’s length principle.2263 Fifth, on a technical note, for-
mulary apportionment is not able to deal with exchange rate adjustments.2264
Sixth, depending on the formula, a formulary system might be detrimental
for developing states.2265
2257. Avi-Yonah, Clausing & Durst, p. 511. See also Dietsch, 2015, p. 75 et seq.
2258. McLure, 2002, p. 598; Kleinbard, 2016, p. 146. See also Avi-Yonah & Benshalom,
p. 381; Green, p. 46; Turina, 2018, p. 303.
2259. See Avi-Yonah & Benshalom, p. 383. In a similar manner, see also p. 392 et seq., i.e.
the section on “[F]ormulary apportionment would revoke current international tax arrange-
ments and require unattainable tax coordination”. Notably, Avi-Yonah & Benshalom also
provide for some solutions in this respect. See also McLure, 2002, p. 588. See generally
OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
(OECD 2017), paras. 1.23 and 1.27. Such international cooperation seems not feasible at
the moment (Picciotto, 2013, p. 1114, with references to a statement of Saints-Amans).
See also Eden, p. 169, who highlights the fact that the formulary system might work at a
domestic level, but at an international level, important factors are missing, such as com-
mon currency, monetary, fiscal and trade policies.
2260. See Avi-Yonah & Benshalom, p. 387; Sadiq, p. 277 et seq. See also OECD, Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD 2017),
para. 1.3.
2261. See Avi-Yonah & Benshalom, p. 395. See also Grubert & Altshuler, p. 704 et seq.
2262. See Fleming, Peroni & Shay, 2014, p. 35.
2263. See McLure, 2002, p. 587. See also OECD, Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations (OECD 2017), para. 1.25. In a similar
manner Navarro, p. 354, argues that the arm’s length principle helps to achieve a level
playing field between controlled and uncontrolled situations.
2264. OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administra
tions (OECD 2017), para. 1.26.
2265. See, with respect to a formula based on revenue only, Dietsch, 2015, p. 75 et seq.
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Rule 1: Arm’s length principle
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(fair?) result “if (and only if) the apportionment factors reflect where in-
come originates”.2269 Or as Mayer states:
Having chosen the benefit principle as the fundamental allocation rationale,
I can only state legitimately that I am convinced that the proposed system is
suitable for allocating profits to the Member States in relation to the benefits
enjoyed and costs incurred and in so far satisfies the requirement of interjuris-
dictional equity.2270
Both authors refer to a principle (i.e. the benefit principle (or the source
principle?)2271 in the case of Mayer and the source principle in the case of
McLure) in order to conclude that a system of income allocation is fair,
appropriate or in line with the requirement of inter-state equity.
In line with the methodology in the present study, the claim for a certain tax
rule is not persuasive if the underlying justification is not sufficiently rea-
soned. It is clear that the source principle and the benefit principle are part of
the existing international tax regime, but it was also argued that these cannot
provide for detailed guidance on how to allocate income among states and
that an allocation following either the source or the benefit principle might
even lead to unjust results.2272 This does not mean that the two principles
are not valid, as we would also agree that a state has a claim to tax income
if it is generated in its jurisdiction or if an enterprise receives benefits of a
state in order to generate income.2273 The latter justifies taxation, but not the
allocation of income as such. These two questions have been mixed in the
past and section 11.6.2.2. focused on clarifying these ambiguities.
2269. McLure, 2002, p. 598. See also, in this sense, Dietsch, 2015, p. 75 et seq.
2270. Mayer, p. 270.
2271. He is not fully clear in this respect.
2272. See sec. 11.5.2. (source principle) and sec. 11.6.2.2. (benefit principle).
2273. See, on the interaction between the source and the benefit principle, sec. 11.6.2.4.
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Rule 1: Arm’s length principle
some states will benefit from a certain key and others will lose. Therefore,
in the following, it should be discussed what our own position is regarding
such (distributive) allocation of income, if any, in order to further frame our
position regarding the existing allocation keys.
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464
Rule 1: Arm’s length principle
Second, the international tax regime has failed in the past to consider the
positions of the worst off in this world and the most severe injustices, and
has instead focused on the increase of tax revenue in some of the richest
countries. Evidence can be drawn from the fact that the BEPS Project was
launched by some of the richest countries in the world, i.e. the UK, France
and Germany. The focus when designing a new allocation rule or when
amending the current applicable allocation rules, however, should be – in
line with the OECD convention – on the “increase of general well-being”,2285
and not on the increase of effective tax rates in general. There is a significant
disparity between these two aims. An international tax policy that indeed
aims at improving the situation of the worst off as a humanitarian duty also
enhances the acceptance and, therefore, lowers the need for coercive ele-
ments, as states would face more moral obligations to agree on the terms
and conditions.
The goal should be to design an international tax policy that suits the needs
of the worst off and follows our humanitarian duties. Therefore, the BEPS
Project should have, for instance, contained a specific action on BEPS in
2283. For remarks on the existing negative component of the principle of sovereignty,
see sec. 8.4.2.
2284. See sec. 11.2.3.4.
2285. Preamble, Convention on the Organisation for Economic Co-operation and Develop
ment, 14 Dec. 1960.
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the poorest states on this planet, i.e. how to mobilize domestic resources
in these states.2286 There should have been a specific action on questions of
base erosion in states with a very low human development index, with the
aim of demonstrating how such states could increase their revenue with-
out losing their competitive position, for instance, regarding commodity
extraction. This is not an easy task and we do not know what the outcome
will be of such international negotiations, but as states seem to be able to
find a consensus regarding harmful tax competition, it is not understand-
able that states are not able to find a consensus on the improvement of tax
administration and an increase in tax revenue in some of the poorest states.2287
Such a consensus would indeed help these states to improve the situation
of the poorest on this planet. If we reconsider that the OECD and many
scholars argue that we should achieve a neutral tax system, as this would
increase worldwide welfare, it is difficult to understand why there was, in
fact, no emphasis within the BEPS Project on the actual manner of how to
achieve worldwide welfare.2288 In a similar manner, for instance, Infanti
further states that, “it is rare to find US commentators discussing the idea
that international tax provisions may constitute foreign aid or assistance.”2289
2286. See, however, for instance, the work of the UN in relation to finance for develop-
ment as outlined in sec. 4.3.4.3.4.
2287. We do not argue that the OECD and G20 have not rendered any actions regarding
the improvement of revenue collection in some of the poorest states. In particular, the Tax
and Development Programme of the OECD has been highly influential (about the work
of the Programme see http://www.oecd.org/ctp/tax-global/tax-and-development.htm, last
visited 10 Feb. 2019). Moreover, the work of the UN, the IMF and the World Bank in this
respect is of great importance. See also sec. 4.3.4.3.4.
2288. On the interaction between welfare economics and tax policy in the current frame-
work, see sec. 11.4.3.2.
2289. Infanti, p. 218.
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Sixth, it was shown in detail that the benefit principle and the source prin-
ciple as allocation principles are (i) difficult to apply, as the benefits obtained
in every jurisdiction cannot be calculated precisely, and (ii) it is difficult to
estimate what value creation has occurred. Furthermore, we showed that,
depending on the weighting of the benefits obtained, an assumed allocation
according to the benefit principle might lead to a non-persuasive allocation
of income, as this could lead to unfair results, i.e. a higher allocation to
rich countries. Reference is made to the example of the Haitian boxer men-
tioned above.2295 In a similar manner, with respect to the source principle,
we argued that depending on its understanding, it will not lead to a just
result, but potentially even to an unfair distribution of income among states.2296
12.2.2.3.2. Intermediate remarks
Therefore, the allocation key should be flexible enough to allow a just allo-
cation regarding trade with the least developed states, while at the same time
2293. There is some economic research in this area on what the impact is due to aid pay-
ments to states with rather weak institutions. The levy of taxes on behalf of other states
could have similar detrimental outcomes as aid payments. See, for example, Oechslin,
p. 631 et seq. See also, on aid payments and institution building, Deaton, p. 268 et seq.
2294. See sec. 11.4.3.2.2.
2295. See sec. 11.6.2.2.
2296. See sec. 11.5.2.2.
2297. See, for example, the number in Table I.20 et seq. in World Trade Organization,
International Trade Statistics 2015, p. 59, available at www.wto.org/statistics (last visited
14 Feb. 2019).
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Rule 1: Arm’s length principle
enabling a just allocation, if any, regarding the major part of global trade.
As we will see in the following, and to provide for a more concrete proposal
for an allocation key regarding the major part of international trade, we
suggest a partly destination-based allocation key. For the understanding of
the following section, it is crucial to consider again that we are not arguing
that justice as such requires a perfect allocation of income in the sense that
each income item should only be taxed once. The single taxation principle,
as was shown above in detail, has no normative value.2298 However, if there
is an agreement to enhance international trade through a reduction of cross-
border double taxation, we would suggest a partly destination-based alloca-
tion key. The advantages of such a partly destination-based allocation key
will be outlined in detail in the following section.
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First, and this seems self-evident, if one suggests an allocation key, the key
as such should ensure taxation. Or in other words, it would not be persuasive
to suggest an allocation key that leads to no taxation from a consolidated
perspective, as otherwise the necessity of taxation as such is questioned
and, therefore, the necessity for an allocation is questioned. We are of the
opinion that a more destination-oriented allocation key or destination-based
taxation mitigates the risk of artificial profit-shifting considerably. The latter
is a major reason why value added taxes (VAT) have gained momentum in
recent decades, as consumption taxes are more difficult to circumvent com-
pared to income taxes in cross-border circumstances, i.e. it is more difficult
to implement profit-shifting or base-erosion schemes.2307 Consequently, the
argument in favor of taxation (i.e. the need for fiscal revenue) suggests that
destination-based allocation keys are justified. Therefore, the underlying
justification is not that it aligns with any potential distributive duties, but
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Rule 1: Arm’s length principle
Nevertheless, this still means that both the source principle and the benefit
principle need to be considered when drafting a new allocation key, but that
an allocation in accordance with these principles can be drafted in various
manners. In this respect, we would argue that a more destination-based cor-
porate income tax system would allow for the achievement of an allocation
based on value creation and benefits obtained, while simultaneously ensur-
ing fiscal self-determination. At least it seems clear that such an allocation
would not conflict with the source and benefit principles.
This is true, as the market as such or the consumers (i.e. the place of rev-
enue) are value creating. This was shown in detail in a different study with
respect to the digital economy,2310 but it is also true with respect to other
industries. Demand as such seems to create value, even though the involve-
ment of the consumers might be different, depending on the industry. For
instance, if I buy a BMW, as a consumer, I will have a marketing function,
as the logo of BMW will be further distributed due to my driving around the
city in which I live. The same is true with respect to the benefit principle.
We would argue, for instance, that market states also contribute with their
benefits to the successful sale of a good. Again, this is obvious with respect
to the digital economy; for instance, the business of Google would not
work without the necessary IT infrastructure in the relevant revenue states.
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However, this is also true with respect to other industries. For instance, a
car producer would sell fewer cars if states did not provide for the neces-
sary infrastructure (i.e. streets, traffic lights, etc.). Therefore, as an example,
BMW directly benefits from the services of different states toward their
inhabitants. For instance, if Sudan builds better roads in the future, BMW
is likely to sell more cars in the Sudanese market and BMW will sell more
cars in general, thus creating more value in Sudan.
12.2.3. Intermediate conclusion
In previous sections, we outlined our opinion that justice per se does not
require that income be perfectly allocated among jurisdictions, i.e. fol-
lowing a single taxation principle.2313 Nevertheless, we focused in sec-
tion 12.2.2.3.3. on the question of how to draft a just allocation if justice
would indeed require that income be only (but at least) taxed once, and
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Rule 1: Arm’s length principle
This is one aspect that should influence international tax policy. However,
we also argued that this would affect only minor parts of global trade. For
the large part of global trade, we have also seen that there is a need for an
allocation key, if any, to be drafted in manner that disallows circumventing
taxation, or else the claim for taxation as such is weak. In other words, if
we advocate in favor of taxation, we would need to support an allocation
key with a low circumvention quota. Therefore we suggested that revenue
as such should be an element to be considered when drafting an allocation
key. A (partly) destination-based regime cannot easily be circumvented and
it protects the purpose of taxation, i.e. the levy of tax revenue. It was also
shown, however, that a destination-based tax system is justified, consider-
ing both the benefit principle and the source principle as justification-to-tax
principles. Furthermore, it was also argued that only parts of the income
are allocated to the market states, as otherwise the benefits obtained in the
production states (not in the market states) and the value created in the
production states would be ignored.
2314. See secs. 8.1. and 8.3. on the issue that left and right institutionalist approaches
might overlap depending on the exact interpretation of both a global difference principle
and a global humanitarian duty or the duty to assist burdened societies.
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Chapter 12 - Review of Concrete Rules of the International Tax Regime
Justice as such does not require that income be perfectly allocated among
the involved jurisdictions. Double taxation and double non-taxation are not
detrimental to our understanding of global justice.
12.3.1. Preliminary remarks
2315. See on this discussion, for instance, Smit, 2014, p. 259 et seq. See also OECD/
G20, Base Erosion and Profit Shifting Project Designing Effective Controlled Foreign
Company Rules, Action 3 ‑2015 Final Report (OECD 2015), p. 17 et seq.
2316. See art. 7 et seq. ATAD.
2317. This was the term used within the Action Plan (see OECD, Action Plan on Base
Erosion and Profit Shifting (OECD 2013), p. 16). In the final reports, the OECD/G20
used “Designing CFC rules” (see OECD/G20, Base Erosion and Profit Shifting Project
Designing Effective Controlled Foreign Company Rules, Action 3: 2015 Final Report
(OECD 2015).
2318. Id., p. 1 et seq.
2319. See sec. 4.1.2.2.5.
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Rule 2: CFC rules
The most important advantage of CFC rules (not from the perspective of
the taxpayer) is that they lead to a significant expansion of the tax base2320
and, depending on the design, they indeed prevent the (artificial) shifting of
income to the jurisdiction of the subsidiary. The latter means that companies
with foreign operations face, from a consolidated perspective, the same (or
a similar) tax burden as groups that are active only domestically. Therefore,
CFC rules might indeed lead to the equal treatment of domestic companies
with domestic operations and domestic companies with foreign operations,
but only from the perspective of the parent state.
2320. See, with respect to Action 3 of the BEPS project, Kane, 2014, p. 321. See also
OECD/G20, Base Erosion and Profit Shifting Project Designing Effective Controlled
Foreign Company Rules, Action 3: 2015 Final Report (OECD 2015), p. 14.
2321. Kane, id.
2322. See, for example, with respect to the Chinese CFC regime Li, 2014, p. 536. See
also para. 1 of the Preamble to the ATAD.
2323. See OECD/G20, Base Erosion and Profit Shifting Project Designing Effective
Controlled Foreign Company Rules, Action 3: 2015 Final Report (OECD 2015), p. 13.
2324. Kane, 2014, p. 325 et seq. See also OECD/G20, id.
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Chapter 12 - Review of Concrete Rules of the International Tax Regime
rules is that CFC rules per se (depending on the design) might infringe the
principles of sovereignty and fiscal self-determination of another state.
An argument against CFC rules is that they lead to the unequal treatment
of companies having a subsidiary in a low-tax jurisdiction and companies
with a subsidiary in a high-tax jurisdiction (i.e. a higher tax rate than in the
parent state). It could even be that CFC rules infringe constitutional rights
in this respect.2325 Depending on the structure, CFC rules might also lead to
the unequal treatment of domestic and foreign subsidiaries.
12.3.3. Normative review
12.3.3.1. Preliminary remarks
Prima facie, it seems in line with the position taken in the present study
regarding the source and benefit principles that CFC rules as such are by
no means a desirable legislation, as these rules infringe the sovereignty of
other states, as taxes might be levied on income that was created exclusively
abroad (source principle) by exclusively obtaining the benefits in another
state (benefit principle) and, therefore, taxation should be in the other state.
We outlined our understanding of the source and benefit principles as not
only justification-to-tax principles, but also limitation-to-tax principles
above.2326
It is fair to argue with Bühler that the taxation of income of a foreign sub-
sidiary is a “radical” measure2327 and that CFC legislation (such as that of
the United States in place since 1962) touches the border of admissibility
from a fiscal sovereignty perspective as a legal constraint.2328 However, in
order to further discuss whether there is a normative need for CFC rules, in
2325. See, with further references from a German perspective, Maciejewski, p. 449 et
seq.
2326. See sec. 11.5.2. (source principle) and sec. 11.6.2. (benefit principle).
2327. Bühler, p. 265.
2328. Id., p. 118 et seq. See sec. 4.1.2.2.5.
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Rule 2: CFC rules
line with our methodology, we will refer to the different ideas of political
philosophy in order to develop a well-reasoned and impartial result that is
in line with Sen’s methodology outlined in The Idea of Justice.2329
12.3.3.2.1.
Concerns of fiscal self-determination
The principle of fiscal self-determination would require that a state (or the
people of a state, respectively) can decide whether it would like to levy
corporate income taxes, VAT, income taxes or inheritance taxes, unless such
a state does not infringe the sovereignty of another state with its policy. It
should also be at the discretion of each state (and ideally at the discretion of
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Chapter 12 - Review of Concrete Rules of the International Tax Regime
the democratic will) whether it would like to have a high or low expenditure
quota, even though economic weakness might limit a state’s leeway anyway.2331
As mentioned in several instances and in the introduction to this study,2332 the
international legal structure in general and the international tax regime must
be able to be considered just by different states with various (and very differ-
ent) societal concepts. In an extreme situation, the international tax regime
must be able to be considered just from both a socialist and a libertarian
perspective. This is a decisive reason why we suggested that it is crucial
that the principle of fiscal self-determination be protected, as it might also
protect the (democratic) will of societies regarding the level of distribution.2333
From a fiscal perspective, this means that a state shall refrain from taxing in-
come that has no link to a certain territory. States shall, furthermore, refrain
from taxing the entire worldwide income of an enterprise that has only a
limited link to a territory. We mentioned above that the source principle2334
and the benefit principle2335 should be understood as limitation-to-tax prin-
ciples and justification-to-tax principles. This means that if an enterprise
generates income that is sourced in two or more states, and/or if such an
enterprise receives benefits from two or more states, that income should
not only be taxed in one jurisdiction. With respect to CFC rules, we would
assume that CFC rules solely based on the applicable tax rate (and not on
any avoidance schemes) are as such unjust rules, as they ignore people’s
freedom to decide on their own tax system and they infringe the principle
of fiscal self-determination.
The situation is different if CFC rules as such are implemented to fight abu-
sive structures aiming at eroding the tax base in the parent state (but not
the worldwide tax base). In this case, the substance of the activity of an
enterprise might indeed not be in the CFC state, but in the state of the parent
company and, therefore, the implementation of such CFC rules would still
be in line with the principles of sovereignty and fiscal self-determination.2336
However, there are still limitations, as the enterprise might not have any
activity in the CFC state and might not obtain any considerable benefit from
the CFC state, but the enterprise may actually be located in third states and/or
2331. See sec. 8.4. on our more narrow understanding of the term “fiscal self-determination”.
2332. See sec. 2.1.2.
2333. See sec. 8.4.1.
2334. See sec. 11.5.2.
2335. See sec. 11.6.2.
2336. In these cases, CFC rules would protect the base of the parent state and not the base
of any other state (for different policies in this respect see OECD/G20, Base Erosion and
Profit Shifting Project Designing Effective Controlled Foreign Company Rules, Action 3:
2015 Final Report [OECD 2015], p. 16).
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Rule 2: CFC rules
might obtain considerable benefits in a third state. In this case, CFC rules can
lead to unjust results if these rules allocate the overall profit of the company.
If a state implements CFC rules and does not require that the group uses an
abusive structure eroding the tax base in the parent state, according to the
benefit and source principle, the application of CFC rules qualifies as a coer-
cive measure, as a state might be forced to change its domestic tax system
even against the democratic will in such a state, and as other states might
otherwise tax income that was created in the CFC state by using the benefits
in the CFC state. When debating about coercive measures, also with respect
to the application of CFC rules, it is worth referring again to Blake and
his remarks on the use of coercive measures among states. As mentioned
above, Blake follows an eliminate-or-justify approach when dealing with
a coercive system.2337 From a domestic perspective, we would try to justify
coercive measures of the state by arguing that all citizens benefit from the
use of coercive measures, for instance, the use of police forces to reduce
crime. At an international level, however, the use of coercive measures by
one state against another state might not be justified in a similar manner and,
therefore, it seems persuasive to aim at abolishing such coercive elements at
an international level. The latter would, for instance, require that CFC rules
be drafted aiming at avoiding abusive structures eroding the tax base2338 in
the parent state and avoiding forcing other states to raise their tax rates and/
or to tax income, notwithstanding the fact that it has no or a very limited
link to the parent jurisdiction.
We will now focus on some remarks in this area within the BEPS Project
and demonstrate whether the OECD/G20 considers such intermediate con-
clusions on the principles of sovereignty and fiscal self-determination.
We showed above that CFC rules and, in particular, the relevant threshold
for the application of CFC rules should be drafted in a way that aligns with
the principle of fiscal self-determination. The OECD/G20, however, has
a rather strange and essentially unjust approach when discussing the spe-
cific threshold recommendations for CFC rules. The OECD/G20 explicitly
denies the need for an anti-avoidance threshold, which would allow the
application of CFC rules only in the event of avoidance schemes and an
erosion of the parent state’s tax base. The reason is that this would narrow
the effectiveness of CFC rules or, in the words of the OECD/G20:
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Chapter 12 - Review of Concrete Rules of the International Tax Regime
Moreover, the OECD/G20 clearly states that the aim of the BEPS Project
is to prevent the erosion of all tax bases, not just of the parent state’s tax
base.2341 Therefore, it is argued that CFC rules only aiming at stripping the
parent state’s tax base are not effective and should not be implemented. This
means that the OECD/G20 implicitly suggests that states should protect the
tax base of other countries through CFC rules.
2339. OECD/G20, Base Erosion and Profit Shifting Project Designing Effective Controlled
Foreign Company Rules, Action 3: 2015 Final Report (OECD 2015), p. 36.
2340. Id., p. 49.
2341. See id., p. 16.
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Rule 2: CFC rules
Prima facie, base erosion and profit shifting might of course undermine the
fiscal self-determination of states, as both base erosion and profit shifting
might disallow a state to tax income that was created in its territory by using
its governmental benefits. Therefore, a state – due to base erosion and profit
shifting – might not be able to tax income as required by our understanding
of the principle of fiscal self-determination.2343 CFC rules, however, are not
a measure protecting taxation in line with our understanding of the source
and benefit principles as normative goals of international tax policy. CFC
rules, generally speaking, protect worldwide taxation in the resident states,
which is not at all required in order to protect the fiscal self-determination
of a state and in order to achieve a just international tax regime. Our under-
standing requires that base erosion and profit shifting be avoided in the state
where the income is created and benefits are obtained.
2342. For our reasons and understanding of the term “fiscal self-determination” see sec. 8.4.
2343. On the different opinions see id.
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As mentioned above, the OECD/G20 argues moreover that CFC rules should
be implemented and understood in a broad manner, as this would also allow
protection of the tax base in third countries, particularly in source countries
(including developing countries). It is undeniable that the implementation
of CFC rules might lead to fewer foreign-to-foreign stripping transactions,
which could indeed lead to higher taxes levied in source countries. This was
already argued in the BEPS Action Plan:
While CFC rules in principle lead to inclusions in the residence country of the
ultimate parent, they also have positive spillover effects in source countries
because taxpayers have no (or much less of an) incentive to shift profits into a
third, low-tax jurisdiction.2344
However, if the OECD/G20 would indeed support the needs of source coun-
tries and the protection of the fiscal sovereignty of source states, CFC rules
should include a transfer of fiscal revenue levied on income that was indeed
created in the source country by using the benefit of the source country.
This would mean that the income levied on income created in other coun-
tries could be taxed in the parent state, but the levied revenue should be
transferred to the state whose tax base is eroded. Otherwise, this is again
an inconsequent application of the source principle, as the application of
CFC rules does not at all follow the principle that taxation should be in the
state where value creation occurs. The application of CFC rules follows,
in very simplified terms, the goal that taxation should be in the residence
state unless the source state levies higher taxes. This would, for instance,
be the case if all states would implement CFC rules. However, there is no
normative argument supporting such an approach. This brings us to the next
section, focusing on the distributive impact of CFC rules.
12.3.3.3. Distributive duties
The methodology of the present study aims at a better and more diverse
understanding of justice considerations in international tax law by render-
ing an in-depth analysis of some principles and rules from an impartial per-
spective. We have already used the principles of sovereignty and fiscal self-
determination to judge whether CFC rules are indeed just and whether it is a
just policy step to propose the strengthening of CFC rules at an international
level, as stated in Action 3 of the BEPS Project. In the following, we will fur-
ther highlight the interaction between CFC rules and international distribu-
tive duties, if any. In this respect, reference is made to our remarks in Part
III of the present study, where we discussed the different opinions existing
2344. OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), p. 16.
482
Rule 2: CFC rules
To see how CFC rules currently function and whether CFC rules might
indeed be seen as an instrument to achieve a just system, we analyzed the
link between the GDP of countries and the likelihood of having a CFC rule.
The “First Quartile” in the following figure consists of the 25% largest econ-
omies in the world (47 states). Sixty-four percent of these states have CFC
rules as of 1 January 2015. In the “Second Quartile” 19% of states know
CFC rules and 13% and 4% in the “Third Quartile” and “Fourth Quartile”.
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We used the GDP estimates for the year 2013, as published by the World
Bank, and we have used the IBFD Research Platform to decide whether
a country has a CFC rule. In total, 189 states were reviewed. There are
some minor inconsistencies between the IBFD platform and the data of the
World Bank, and we deleted a few states, since it was not clear whether
these states have or do not have CFC rules. Furthermore, there are a few
deviations between the IBFD platform and the data of the World Bank with
respect to which countries indeed qualify as self-governed states. However,
the chosen amount of 189 states still seems to be sufficient to demonstrate
a potential link between the economic strength of a state and the likelihood
of the implementation of CFC rules.
The result is not surprising, as it evidently proves that the higher the GDP
in a country, the higher the likelihood that a state has a CFC rule. There are
many reasons for this, such as the fact that poor or small states might not be
able to implement a CFC rule in their domestic tax code due to its complex
implementation requirements. Furthermore, the fact that capital export is
considerably lower in poor states means that the need for CFC rules and
the efficiency of CFC rules might also be smaller. However, such data also
shows important arguments against the use of CFC rules. The percentage
within the first quarter is considerably higher for large economies. One rea-
son might be that the negotiation position of large economies is generally
stronger than that of smaller economies.
As the data shows, strengthening CFC rules, prima facie, leads to an allo-
cation of income to large economies.2348 We would, therefore, argue that
“strengthening” these rules as such is – different from the perspective of
the OECD/G20 within the BEPS Project – not necessary to achieve a just
global tax system. Moreover, these rules can even be considered as contra
productive concerning existing cross-border distributive duties if they apply
notwithstanding the poverty level in the CFC state. In other words, our
understanding of cross-border humanitarian duties would actually require
that CFC rules should, for example, under no circumstance apply if the CFC
country is unable to fulfill basic human entitlements and is considered one
of the poorest states. This is true because the application of CFC rules might
hinder investments in such countries and, therefore, potentially increase
welfare. The application of CFC rules if the inhabitants of the CFC state
face severe poverty seems unjust and cannot be justified by its role in fight-
ing base erosion or profit shifting.2349
2348. However, we cannot fully explore the economic impact of CFC rules (see, for
example, Egger & Wamser, p. 77 et seq.).
2349. See sec. 11.4.3.2.2.
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Rule 2: CFC rules
In other words, if states introduce CFC rules (which are, as was shown
above, already problematic from a sovereignty perspective), they should
at least distinguish whether the CFC state, for instance, is Sierra Leone or
Luxembourg, or whether it is the Democratic Republic of Congo or the
Netherlands. This might lead to distortions, as investments into extremely
poor countries would benefit from the non-application of CFC legislation,
but as we have seen above, the claim for a neutral international tax regime
faces practical constraints due to the different tax rates, and neutrality as
such is not a fundamental principle of the international tax regime from
which no deviation should be made. Therefore, if the design of CFC rules
has a distortive effect of increasing investments in some of the poorest coun-
tries in the world, such policies would find support. However, according to
the recommendations in Action 3 of the BEPS Project, the fiscal capacity of
the CFC jurisdiction and the poverty of the inhabitants in a certain jurisdic-
tion are irrelevant for the design of CFC rules.
12.3.4. Intermediate conclusion
2350. The OECD/G20 changed the title from “Strengthen CFC Rules” to “Designing
Effective Controlled Foreign Company Rules” in its final report (see OECD/G20, Base
Erosion and Profit Shifting Project Designing Effective Controlled Foreign Company
Rules, Action 3: 2015 Final Report [OECD 2015]).
2351. Id., p. 11.
2352. See id., p. 15 et seq.
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state as such is not the triggering event, but rather the fact that the tax base
in the parent state is eroded, i.e. that the parent state can otherwise not tax
income created in its territory. Otherwise, these rules infringe the principle
of fiscal self-determination. The remarks on the source principle and the
benefit principle have shown that these principles have normative value, as
well as a limiting effect, in the sense that worldwide tax systems that are
enforced by strong CFC rules are unjust, as they also catch income created
abroad by using the benefits of a foreign country.
12.4.1. Preliminary remarks
486
Rule 3: Mandatory arbitration
2356. See, for example, the Swiss position in this respect, Schelling, p. 220. On the topic
of double taxation and the need for arbitration see Farah, p. 710; Van Vlem et al., p. 231
et seq. See, with further references on the weakness of the mutual agreement procedure,
Lehner, in: Vogel & Lehner, Article 25 para. 199a et seq. See also Tillinghast, p. 91.
2357. See generally OECD/G20, Making Dispute Resolution Mechanisms More Effective,
Action 14: Final Report (OECD 2015), p. 1 et seq.
2358. Ault & Sasseville, p. 215. See also Desax & Veit, p. 429.
2359. Züger, p. 1 et seq.
2360. OECD/G20, Making Dispute Resolution Mechanisms More Effective, Action 14:
Final Report (OECD 2015), p. 9.
2361. Perrou, p. 83.
2362. But see Ault & Sasseville, p. 214.
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Important for the purposes of the present study is the argument that the
transfer of judicial competences to a non-governmental arbitration body
undermines the sovereignty of a state.2363 In this respect, sovereignty means
that a state can no longer decide whether or not a certain item of income
should be taxed, as such a decision is within the discretion of an arbitration
court. But of course, sovereignty is already (voluntarily) restricted by sign-
ing a double tax treaty, as a contracting state is obliged not to tax certain
items of income. Furthermore, sovereignty is only transferred with respect
to the interpretation of a treaty, and not with respect to tax policy, in gen-
eral.2364 For example, even if a state signs double tax treaties containing a
mandatory arbitration rule, this does not mean that such a state is no longer
sovereign regarding the design of its tax treaties; of course, a state could also
terminate these double tax agreements at any time following due process.
Nevertheless, a domestic court might, depending on the domestic legal and
constitutional framework, come to a different conclusion.2365
12.4.3. Normative review
In the present section, we will analyze whether double tax treaties without
mandatory arbitration clauses are unjust or, in other words, whether jus-
tice requires the implementation of a mandatory arbitration provision. An
important factual statement is that a significant part of the existing double
2363. See on this topic in general Walde & Kolo, p. 431, with further references. Mandatory
arbitration might even trigger constitutional concerns in some states, see Lehner, in: Vogel
& Lehner, Article 25 para. 237. See also Desax & Veit, p. 430; Farah, p. 710. From a South
American perspective see Cruz, p. 533 et seq. See also the decision of the Argentinian
Supreme Court (AR: SC, Jose Cartellone Construcciones v. Hidroelectrica Norpatagonica
S.A., 1 June 2004).
2364. See Cruz, p. 539.
2365. See id., p. 534 et seq.
2366. Picciotto, 2013, p. 1113.
488
Rule 3: Mandatory arbitration
From the term “commutative justice”,2367 one could derive that an agreement
between two parties that does not include an arbitration clause is unjust, as
it is not a fair exchange of contractual obligations and duties, and a state
could potentially abuse its economic strength. One reason is that if one of
the contracting states is a strong economy and the other is a weak economy,
which is dependent on a specific double tax convention, the strong economy
could consistently infringe its tax treaty obligation. This could happen, for
instance, through treaty overrides (by not endangering the treaty itself), as
the weak state would prefer the treaty, even though the other state infringes
its obligations under the treaty. Therefore such a treaty without an arbitra-
tion clause seems unjust.
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the treaty itself.2371 Arbitration clauses could indeed minimize such unjust
results, as states would be forced to act in line with the treaty. However,
arbitration clauses do limit the sovereignty of the contracting states, as the
final decision of whether a certain income can be taxed is shifted from a
governmental court to a private arbitration court. From a sovereignty per-
spective, this is a delicate issue and also needs to be considered, as states
lose, at least to a certain extent, the right to tax and the right to fiscal self-
determination. The protection of fiscal self-determination was mentioned as
a normative goal of our theory of global justice.
12.4.4. Intermediate conclusion
2371. See, for example, Kraft, p. 70, “Given the high degree of reliance on treaty provisions,
treaty override appears to be extremely undesirable from a legal certainty standpoint.”
2372. See sec. 7.7.
490
Rule 4: Treaty abuse
12.5.1. Preliminary remarks
We have seen above, with reference to the seminal work of Kolb, that the
abuse of law rule or principle2373 is widely applied in international law in
various forms and we argued that such rule or principle indeed qualifies as
a general principle of law, according to article 38(1)(c) of the ICJ Statute,
even though states might apply rather different anti-abuse measures domes-
tically.2374 We argued that it does not harm our conclusion that the under-
standing of what abuse means deviates among countries, as our assessment
was not based on a strict positive approach regarding the requirements for
a qualification as a general principle of law, according to article 38(1)(c)
of the ICJ Statute. This means that it is not required to qualify as a general
principle of law that a certain principle is homogenously applied in all or
most civilized countries.
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Within the BEPS Project, one of the overall goals was to ensure that taxa-
tion occurs where the value is created, i.e. taxation in line with the source
principle.2378 Such a purpose also seems to reflect the underlying reason for
implementing an anti-abuse measure, such as a PPT. The OECD argues in
more general terms that measures against treaty shopping are necessary to
protect revenues.2379 Other authors argue in a similar manner that anti-abuse
measures are necessary in order to strengthen the efficiency of tax treaties.2380
492
Rule 4: Treaty abuse
might allow the stronger state to apply a rather biased interpretation of the
treaty and to deny treaty benefits in non-abusive situations due to the broad
wording of the PPT. The latter argument is again related to the question of
legal certainty. Similar arguments can be drawn with respect to an unwrit-
ten anti-abuse rule, as it also creates legal uncertainty if the authorities
and the courts can deviate from a legal obligation. Of course, the level of
uncertainty created depends on the wording of the anti-abuse measure. The
broader the wording, the more uncertainty is created, as more leeway exists
to deviate, for instance, from a double tax treaty provision or a domestic
tax law provision.
12.5.3. Normative review
12.5.3.1. Preliminary remarks
Again, we follow Sen’s The Idea of Justice and try – by impartial reason-
ing – to analyze whether the claim of an inherent abuse of law principle
is justified. We showed above that there is indeed an unwritten anti-abuse
principle inherent in any international treaty as a general principle of law.2382
However, such legal analysis must conceptually be distinguished from the
normative question of whether it is indeed just to claim that an obliga-
tion, according to an international agreement, is not binding in the case of
abuse. Nevertheless, as we showed above, the analysis of whether a rule or
a principle qualifies as a general principle of international law might also
require considerations of moral values, and not only a strict positive analy-
sis.2383 Therefore, the tension is obvious between moral concerns and the
sources of international law when analyzing whether a principle qualifies as
a general principle of law and when analyzing whether justice requires the
application of these principles. As shown, to a certain extent, naturalism still
plays a role in the qualification of a principle as a general principle of law.
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At first glance, it seems clear that justice requires that contractual obli-
gations derived from an international treaty are not executed in all cases.
For a more detailed understanding, however, it is crucial to first develop
an understanding of which demands of justice are relevant and who are
the addressees. For such an analysis, it is crucial to consider the tension
between equity, justice and legal obligations. In this regard, we will start by
referring to the remarks of Aristotle on aequitas.2385
2384. See, for example, CH: BGE 128 III 201, cons. 1c.
2385. For a detailed analysis see Chroust, p. 119 et seq.
2386. Bürgi, p. 55 et seq.
2387. Aristotle, 1137b para. 10 et seq.
2388. Id., para. 10. For further details about the interaction between the term “justice”
and “equity” in the writing of Aristotle, see Chroust, p. 124.
494
Rule 4: Treaty abuse
This means that there must be an instrument to avoid the defective and
highly unjust application of the law or, as in our case, of a treaty obligation.
The instrument of an unwritten anti-abuse provision seems one option to
fulfill such a need at an international level. Another option would be to refer
to the principle of “ex aequo et bono”, as was shown above, with references
to article 38(2) of the ICJ Statute. However, article 38(2) of the ICJ Statute
is a procedural rule to be obeyed by the ICJ and, even more important, the
court may only render a decision based on “ax aequo et bono” if the parties
to the proceeding agree thereon.2390 A different but related option would
be to use methods of interpretation to avoid the application of a treaty if it
would lead to highly unjust results.2391
These remarks on the tension between justice and legal obligations are noth-
ing new, as the discussion reflects one of the core issues of legal philosophy.
The discussion about whether it is just to apply an anti-abuse measure even
2389. This is an excerpt from the translation of Litschewski Paulson & Paulson, p. 7.
2390. See, on the distinction between equity and “ax aequo et bono”, Franck, 1997, p. 54
et seq.
2391. As the present study aims at a normative review of the international tax regime, we
will not further discuss the question of whether highly unjust results should, according to
domestic constitutional and/or internationally valid methodological thinking, be avoided
by an extra legem principle of abuse of law or through interpretation. Such a dogmatic
analysis of the interaction between interpretation methodology and the application of the
abuse of law principle goes beyond the present study. See sec. 4.3.3.3.2.
495
Chapter 12 - Review of Concrete Rules of the International Tax Regime
For the purpose of the present study, it is sufficient to state that justice
indeed requires that in an individual case, a court deviates from the word-
ing of a treaty if the application, in line with the ordinary meaning of a
term in a treaty, would lead to a highly unjust result or if it would “kill the
spirit”2394 of the law. Other tax scholars use similar approaches by using
the terms “blatant injustice” or “arbitrary results”.2395 Therefore, as stated
by Matteotti:
The principle of abuse of rights is an emergency exit to protect both the integrity
of the treaty network and domestic tax laws. It does not weaken but fosters the
essential principle of pacta sunt servanda.2396
2392. See generally Bürgi, p. 30 et seq.; Hart, p. 200 et seq.; Kelsen, 1960, p. 60 et seq.
See Böckenförde, p. 119, with reference to Aristotle. See, for example, with regard to
enforcement and other civil law procedures, Staehelin, p. 105 et seq. From a public law
perspective, see Gächter, p. 23 et seq. See, from a Swiss domestic tax law perspective,
Locher, 1983, p. 141 et seq. There are many more authors to be referred to and the topic as
such would require an entire study. A specific debate worth mentioning is the relationship
between legal norms and moral reasoning. See, for example, the famous debate between
Posner and Dworkin (e.g. Posner, 1997, p. 377 et seq. and Dworkin, p. 1718 et seq.). Our
position in the present study contradicts Posner’s argument that “moral reasoning is just
a fancy name for political contention” (Posner, 2007, p. 10). We have clearly argued that
moral reasoning is crucial for the development of an impartial position on certain policy
claims. The same must be true for the application of law, in general, and the application
of double tax treaties, in particular.
2393. For further details see Gächter, p. 31 et seq. See also Chroust, p. 123 et seq.
2394. The terminology is used by Franck, 1997, p. 58.
2395. Matteotti, 2005, p. 343 or p. 350. But see Matteotti, 2003, p. 298.
2396. Matteotti, 2005, p. 350.
496
Rule 4: Treaty abuse
These references to the interaction between moral concerns and legal obli-
gations were important to demonstrate the variety of justice considerations
and the different demands of justice within the international tax regime.
Justice as such is not only a normative policy guideline when discussing
several existing options as part of international tax policy, but also a limit-
ing factor when interpreting and/or applying double tax treaties or tax law
in general. The use of terms such as “highly unjust” or “blatant injustice”
shows the obvious relation between the normative claim for justice and the
general principle of abuse of law.
This is important to see and might also be a weak point of Sen’s The Idea
of Justice, that his method might in some circumstances not provide for any
detailed guidance.2397 The example of the introduction of a PPT as such is
a good example to demonstrate that justice might not always provide for a
crystal-clear answer to a specific question. However, this should not high-
light the weakness of the term “justice”, but rather the fact that justice is an
important guideline that might help to resolve many fundamental questions
triggered by cross-border taxation, yet might be of limited use when deal-
ing with very particular questions, such as whether or not a PPT should be
497
Chapter 12 - Review of Concrete Rules of the International Tax Regime
12.5.4. Intermediate conclusion
12.6.1. Preliminary remarks
In the last decade, the need for fiscal transparency was one of the main
drivers of international tax cooperation. Many projects and legislative mea-
sures have been implemented in this respect.2400 As was shown above, the
2398. See, for example, regarding the advantages and disadvantages of a PPT from a
Swiss perspective Simonek & Becker, p. 107 et seq. From an international perspective
see Báez Moreno, p. 432 et seq.
2399. See sec. 4.3.3.2.
2400. For a comprehensive overview of the developments worldwide since 1963, see
Opel, p. 145 et seq.
498
Rule 5: Fiscal transparency and economic sanctions
499
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Some authors have developed rather strong positions regarding the need for
fiscal transparency. For instance, Dietsch concludes that: “the resistance we
observe today to increased transparency, notably through automatic infor-
mation exchange between states, is entirely based on vested interests.”2411
The following section aims at providing more guidance on the potential
normative value of the principle of cross-border fiscal transparency, and we
will try to outline whether indeed only “vested interests” exist.
There has been intense debate over whether a conglomerate of states should
use coercive measures, such as the ones mentioned, to change the domestic
or treaty policies of other states to achieve fiscal transparency. This does not
only relate to the discussion of fiscal transparency, but also to other projects
at an international level that have tried to limit the legislative discretion of
states. Recently, BEPS Action 5 tried to eliminate what some considered
harmful tax practices in certain states by implicit economic threatening.
Therefore, as mentioned, the issue to be discussed in the following is partly
about fiscal transparency, but we will also outline certain elements of the
500
Rule 5: Fiscal transparency and economic sanctions
tension between justice and tax competition, in general, as this has thus far
only partly been covered in the present study.2412
The other side argues that states with banking secrecy or similar legislation
infringe the sovereignty of other states, as the other states are unable to
render their fiscal sovereignty or fiscal self-determination, as their inhabit-
ants are hiding their money abroad and it cannot be taxed.2417 Therefore,
states using coercive measures are not infringing the sovereignty of other
states, but actually protecting their own sovereignty. Closely linked to such
2412. See Dagan, 2017, p. 1 et seq.; Dietsch, 2011, p. 2107 et seq.; Dietsch, 2015, p. 1
et seq.; Dietsch & Rixen, p. 150 et seq.; Rixen, p. 1 et seq.; Ronzoni, 2014, p. 1 et seq.;
Ronzoni, 2016, p. 201 et seq.; Van Apeldoorn, p. 1 et seq. See also secs. 4.3.2.8.6. and
8.4.4.
2413. Ring, 2008, p. 183 et seq. See also Cavelti, 2013, p. 212 et seq.; Palan, p. 151 et
seq.
2414. For more details see Palan, id.
2415. See Ring, 2008, p. 199 et seq.
2416. See sec. 12.6.2.2.
2417. See, for example, Grinberg, 2016a, p. 14 et seq. Depending on the size of cross-
border tax evasion this might even disallow states to protect human rights within their
territory. This claim is regularly made in the country reports of the Independent Expert
of the UN Human Rights Council on the effects of foreign debt and other related interna-
tional financial obligations of States on the full enjoyment of all human rights, particularly
economic, social and cultural rights. The reports are available at https://www.ohchr.org/
EN/Issues/Development/IEDebt/Pages/IEDebtIndex.aspx (last visited 15 Feb. 2019).
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Chapter 12 - Review of Concrete Rules of the International Tax Regime
We showed above that the sovereignty principle indeed has a negative com-
ponent, in the sense that states not only have rights, but also responsibilities
and duties toward other states.2419 In this respect, certain authors conclude
that, “[s]tates should provide all the information necessary for other states
to levy the taxes they have a right to.”2420 Therefore there seems to be a
responsibility to exchange information derived from the principle of sov-
ereignty. One could argue that this is true even if one follows a strict right
institutionalist approach, as cross-border tax evasion undermines a state’s
sovereignty and fiscal self-determination, which a right institutionalist
would aim to protect.2421 According to Dietsch and Rixen, fiscal transpar-
ency, inter alia, means that, “national polities would regain the capacity to
make collective fiscal choices about the size of the budget and the level of
domestic redistribution.”2422
However, some confusion exists in this respect due to the fact that the term
“fiscal self-determination”, as outlined above, can be understood in either
2418. See generally Opel, p. 210 et seq. This side of the coin relates to an intense debate
among philosophers and political theorists concerning the (undermined) sovereignty and
fiscal policy in the 21st century (see, for example, Dietsch, 2011, p. 2107 et seq.). On this
topic, see also Ronzoni, 2014, p. 1 et seq.; Ronzoni, 2016, p. 201 et seq.
2419. See sec. 11.4.2.
2420. Dietsch, 2011, p. 2017.
2421. For further details on such a position see Ronzoni, 2014, p. 14 et seq. See also
Dietsch, 2015, p. 89 et seq.
2422. Dietsch & Rixen, p. 117.
2423. For a similar perspective see Van Apeldoorn, p. 15.
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Rule 5: Fiscal transparency and economic sanctions
Another important relation that must be analyzed is the use of tax evasion
and the poverty in a state. It is argued that intensive cooperation and global
fiscal transparency will help to eradicate poverty2427 and the secretive sys-
tems that lead to injustice; for instance, the Tax Justice Network states that
“[t]he offshore economy of secrecy jurisdictions is a massive root cause of
social and tax injustice.”2428 This should be further discussed in the present
section, as follows:
503
Chapter 12 - Review of Concrete Rules of the International Tax Regime
504
Rule 5: Fiscal transparency and economic sanctions
2434. Global Forum on Transparency and Exchange of Information for Tax Purposes, The
Global Forum’s Plan of Action for Developing Countries Participation in AEOI, Nov. 2017,
para. 1 et seq. For further details see Matteotti, 2017/2018, p. 680 et seq.
2435. Global Forum on Transparency and Exchange of Information for Tax Purposes,
id., para. 32.
2436. See, for example, the TIEA between Liberia (HDI rank 2014: 177) and Denmark
(HDI rank 2014: 4).
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Chapter 12 - Review of Concrete Rules of the International Tax Regime
Besides these remarks on the sovereignty principle, poverty and the prin-
ciple of reciprocity, further aspects need to be considered when analyzing
whether it is just to implement a transparent international system by using
coercive measures. For instance, it is argued that the exchange of informa-
tion could lead to an infringement of human rights in the recipient state or
it could lead to the abusive use of the exchanged data in the recipient state.2439
In a similar manner, it is argued that the protection of further procedural
rights might also be infringed in the sending state, depending on the applica-
ble procedure.2440 These arguments should not be neglected in the following
assessment; however, they are at least, for the purposes of the present study,
of secondary importance, as they relate to the exact design of an exchange of
information system. As an example, data protection might highly depend on
how the exchange system is drafted to determine to what extent the recipient
state is obliged to implement certain protection measures in order to be part
of the transparent tax world.
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12.6.3. Normative review
2441. See, for instance, regarding the understanding of the Swiss Supreme Court, Kaufmann,
2002, p. 47: “Yet, within the hierarchy of constitutional values, the Swiss Supreme Court
considers the protection of financial information through banking secrecy less important
than the protection of other private information, such as medical data”.
2442. See Simonek, 2010, p. 561.
2443. We came to the same conclusion when discussing the interaction between our
understanding of fiscal self-determination and tax competition in sec. 8.4.4.
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about domestic taxpayers. If this were indeed the case, it would also require
significant payments from richer to poorer states in order to achieve equality
in fiscal self-determination, which would collide with our understanding of
(non-cosmopolitan) global justice.
Prima facie, it seems clear that the exchange of information as such is ne
cessary to achieve a just domestic tax system, as an abolition of the secrecy
laws would eliminate situations in which a taxpayer can hide money abroad
and, consequently, his contribution is not in line with the ability-to-pay prin-
ciple from a domestic perspective, and therefore not in line with the equality
principle.2445 If no cross-border transparency exists, a government would,
for instance, not be able to demonstrate to its citizens that the wealthiest
persons living in its basic structure are taxed according to their ability to
pay, since these persons could hide money abroad. This could, furthermore,
undermine the legitimacy and sovereignty of the government. States, there-
fore, argue that they need an intense exchange of information system to
ensure equal treatment between persons with domestic bank accounts and
persons with foreign bank accounts. In this respect, some authors argue that
such an exchange of information could lead to tax justice understood in a
global manner, but only if the recipient state indeed has a tax system in line
with the equality principle.2446 Within such an equality debate, however, one
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Rule 5: Fiscal transparency and economic sanctions
509
Chapter 12 - Review of Concrete Rules of the International Tax Regime
equal treatment, but only within the same state and the same basic structure.
For instance, a domestic constitution might indeed require international
transparency, as the domestic constitutional principle of equality might
require that individuals be taxed on their worldwide income, which again
requires that foreign bank accounts be disclosed.2449
510
Rule 5: Fiscal transparency and economic sanctions
12.6.4. Intermediate conclusion
511
Chapter 13
Conclusions
13.1. Preliminary remarks
513
Chapter 13 - Conclusions
So far, the main part of the debate about justice and fairness in international
tax law has happened in a tax law (and economics) vacuum.2461 An illustra-
tive example is the BEPS Project, which was indeed led by tax lawyers and
economists with generally no involvement of philosophy or moral theory.
It is evident that all final BEPS reports neglect any discussion about global
justice, in general, or the distributive effects of international tax law. At the
same time, as shown, the term “fairness” is explicitly and implicitly central
for the BEPS Project.2462
514
Interdisciplinary research and its success
positions that would not have been possible by remaining within our tradi-
tional juridical methodology.2466
The BEPS Project has, moreover, revealed the lack of principle-based stud-
ies that are considered by international policymakers. Brauner2471 already
stated such fear at the beginning of the BEPS Project in early 2014. The
results of the BEPS Project confirmed his concern. In many instances, we
have demonstrated the need to reason every single argument, and it was
already shown in the introduction with references to Peters that scholars,
2466. See the remarks in the introduction in sec. 2.1.2. on the potential lack of normative
guidelines in international law.
2467. Preamble of the Convention on the Organisation for Economic Co-operation and
Development, 14 Dec. 1960.
2468. See sec. 12.2.2.3.
2469. See sec. 12.3.3.
2470. Our position is outlined in chapter 8.
2471. Brauner, 2016, p. 14.
515
Chapter 13 - Conclusions
policymakers and other parties should review their position at a higher level
of abstraction, or they risk being trapped in long-applied but misguided
principles. We have shown this with respect to the neutrality, the source, the
benefit, the ability-to-pay and the inter-nation equity principle. Political phi-
losophy as a value-based discipline was a key factor for the presumed suc-
cess of such a detailed analysis of the normative validity of these principles.
The instruments of reasoning and impartiality, along with the reference to
ideal theories of global justice, allowed us to develop our own understand-
ing of the normative validity of these principles, which is in opposition to
certain long-standing or even axiomatic claims by international tax scholars
and policymakers.
The present study on justice in international law has outlined some ways
to strengthen justice in international tax law. Above all, we have demon-
strated that legal academia should refer to political philosophy in order to
develop a more comprehensive understanding of what indeed is a valid
normative claim. As a conclusive example, it is still surprising that lectures
on international tax law often contain a part on neutrality, be it CIN, CEN
and/or CON, but lectures on international tax law generally do not refer
to theories of global justice. Political philosophy should, therefore, play a
more decisive role within international tax law as an academic discipline,
both in teaching and researching the discipline.
516
Global justice and international tax law – Some conceptual conclusions
To evaluate the validity of some of the most important rules and principles
of the international tax regime, we referred to the instruments of “norma-
tive reasoning” and “impartiality”. This was necessary to further shape
517
Chapter 13 - Conclusions
Another example is the remarks on the allocation of income, when the nor-
mative validity of the arm’s length principle and a formulary system were
discussed.2481 In this respect, we referred to different ideal theories of global
justice to outline and frame our opinion on this topic. For instance, we
highlighted the importance of the principle of fiscal self-determination and
the consideration of the potential distributive impact when designing an
international allocation key.2482
2478. In this respect, the present study was not only influenced by Sen, who uses the
instrument of public reasoning (see sec. 7.7.), but particularly by the work of Singer, as
outlined in the introduction in sec. 2.2.4.
2479. See sec. 11.2.3.
2480. See sec. 11.2.3.2.3.
2481. See sec. 12.2.2.
2482. See sec. 12.2.2.3.
518
Enhanced tax cooperation and coercion and its consequences
The question then is whether the current world order already has elements
resembling a domestic society and a basic structure, respectively. Of course,
the world is far from being considered a federal state in which a central
power enforces certain policies globally. Nevertheless, taxation as such is
one of the core state functions and a more intense international coopera-
tion – and potentially harmonization with the combination of a coercive
implementation of certain tax policies – might trigger further moral duties
at the international level.2485 The present study has shown that parts of the
legislative competences in tax matters have shifted to international organiza-
tions – at least de facto and not de jure.2486 In particular, the BEPS Project
2483. The basic structure is for Rawls the primary subject of justice. However, as was
shown, it is disputed what the basic structure indeed means, i.e. whether the world or
only domestic society fulfills the requirements of a basic structure. For our position see
sec. 8.3.
2484. See sec. 8.3.2.
2485. Interestingly, our position is rather similar to Dagan, 2017, p. 34, who argues that
“[a] multilateral regime established through cooperation is justified in promoting justice if
and only if it improves (or at least does not worsen) the welfare of the least well-off in all
cooperating states.[footnote omitted].” However, we would not argue that cooperation per
se requires a consideration of the position of the worst off, but that enhanced cooperation
and tax harmonization, in particular, lead to a global basic structure triggering cross-border
duties, such as an international difference principle.
2486. See sec. 4.4.4.1.1.
519
Chapter 13 - Conclusions
In other words, it seems unlikely that people around the world would accept
a global harmonized tax system if it were not combined with global distribu-
tive mechanisms: a tax base harmonization in a federal state or at an inter-
national level always creates losers that will only accept a certain policy if
they will also benefit from such a (potentially coercively enforced) regime.
Moreover, there is no right or wrong regarding income allocation. It is not
surprising that in federal states, tax base harmonization was essentially
successful because it was combined with equalization payments or fiscal
transfers between the states, such as the rather comprehensive inter-cantonal
equalization scheme in Switzerland (“Finanzausgleich”)2487 or the more
fragmented existing fiscal transfers in the United States through federal
spending.2488 Therefore, tax base harmonization without cross-border fiscal
transfers is difficult, if not impossible, to achieve and to sustain.2489
520
A new perspective on income allocation (source vs residence)
521
Chapter 13 - Conclusions
We showed that international law only provides for very few limitations
regarding the taxation of cross-border activities. Accordingly, it is suffi-
cient that a person has a genuine link to a certain jurisdiction to create a li-
ability and to tax even their worldwide income.2495 However, by referring to
political philosophy, we have shown that such an extensive understanding of
jurisdiction to tax is unjust, as it leads to an infringement of the (normative)
principles of sovereignty and the fiscal self-determination of other states.2496
These principles are decisive to achieve a just international tax regime. We
have, moreover, understood the benefit principle and the source principle
as both limitation-to-tax and justification-to-tax principles. States should
only tax what was created in their territory and what was created by using
governmental benefits in such a state.2497 A worldwide tax system infringes
on such a normative goal. The BEPS Project is contradictory in this respect,
as the OECD/G20 indeed aims at a realignment of taxation and value cre-
ation by simultaneously aiming at certain global minimum taxation and the
protection of worldwide tax systems.2498 These goals are incompatible, from
our perspective, as an alignment of taxation and value creation is clearly in
contradiction to worldwide tax systems.2499
One important justification for such a position lies in the fact that the protec-
tion of fiscal self-determination is of the utmost importance to achieve a just
international tax regime. If we understand an increase in worldwide welfare
as a crucial part of a just international tax policy, we should aim at protect-
ing fiscal self-determination, as the protection of fiscal self-determination
is critical for an increase in worldwide welfare through successful domestic
policies.2500 Moreover, as we do not assume a cross-border distributive duty
following Rawls’ difference principle in an intra-society circumstance,2501
we are not of the opinion that an international tax regime should have a
distributive goal beyond humanitarian duties. Therefore, the international
tax regime should not lead to a general distribution from rich to poor states,
or from developed to developing states, but should instead protect the fiscal
522
A new perspective on income allocation (source vs residence)
2502. The present study has not discussed in detail how these could happen, but we have
indicated some approaches. For instance, see sec. 11.4.3.2.2.
2503. See sec. 11.2.3.
2504. See sec. 12.2.2.3.3.
2505. Double taxation and double non-taxation were also mentioned by authors as in-
justices in the current international tax regime. See sec. 1.5.
2506. See sec. 11.5.2.
2507. But see regarding the term “equity” Musgrave, 2001b, p. 1339.
523
Chapter 13 - Conclusions
In Part IV, we also reviewed some of these specific rules, particularly focus-
ing on rules proposed during the BEPS Project, such as the inclusion of a
PPT2509 or the inclusion of a mandatory arbitration provision.2510 Regarding
these clauses, we concluded that the term “justice” might not provide us
with sufficient guidelines to decide whether or not we should include these
rules into a double tax treaty. There might indeed be a plurality of reasons
for and against their inclusion.2511 We might need further arguments and fur-
ther normative guidance to reach a final policy recommendation. Therefore,
the term “justice” is indeed weak, at least to a certain extent, as it does not
resolve all issues and might even be a flawed term. Certain policy ques-
tions cannot be answered by referring to the term “justice”. However, even
though it is indeed true that justice is a term that might have its limits for
the purposes of steering international tax policy, it still helped us develop
some very precise conclusions.2512
524
The just double tax treaty
525
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Peer Review Process and Statement by the Publisher
After the review process was completed, the author was required to make
changes in accordance with the reviewers’ recommendations. Once the
changes were satisfactorily made, the editorial and publishing teams made
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amendments.
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