Some Reflections On The OECD And The Sources Of International Tax Principles by SSRN

Hugh J. Ault

Boston College Law School

July 1, 2013

Reprinted from Tax Notes International, Volume 70, Number 12, June 17, 2013, p. 1195

Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2013-03

Abstract:

The article of Hugh J. Ault is the revised text of a lecture held on May 2, 2013, at the Max Planck Institute for Tax Law and Public Finance. It focuses on the OECD’s work on the definition of Permanent Establishment, the transfer pricing treatment of Intangibles and the recently announced project on base erosion and profit shifting (“BEPS”). After describing these positive law developments, Ault relates to more basic questions of how principles of international tax law, and particular the normative claims to taxing rights, are estabilshed.

Some Reflections On The OECD And The Sources Of International Tax Principles – Introduction

As we all know, the basic architecture of the existing international systems goes back to the work of the League of Nations in the 1920s and I don’t need to repeat that familiar history here. From that seminal work grew the structure of the tax principles that we know today: residence taxation, permanent establishments, reduced source taxation, credit and exemption methods for relief of still existing double taxation, and the like. But to some extent, these developments have been one-sided. I think there is one important aspect of the early work that has been neglected. I quote a key part from the 1927 report:

From the very outset, [the drafters of the model convention] realized the necessity of dealing with the questions of tax evasion and double taxation in co-ordination with each other. It is highly desirable that States should come to an agreement with a view to ensuring that a taxpayer shall not be taxed on the same income by a number of different countries, and it seems equally desirable that such international cooperation should prevent certain incomes from escaping taxation altogether. The most elementary and undisputed principles of fiscal justice, therefore, required that the experts should devise a scheme whereby all incomes would be taxed once and only once.1 [Emphasis added.]

It is fair to say that most of the effort in the ensuing years has been focused more on ensuring the relief of double taxation than making sure that double nontaxation does not take place. There are many reasons why things have developed this way, not the least of which is that for tax competition reasons some countries were happy to see structures that reduced the tax burden on their multinational enterprises in their activities abroad, and facilitating double nontaxation was part of that effort.

In 1998 the OECD released a report on harmful tax competition that signaled an important change of focus in international cooperation efforts.2 The report directly or indirectly raised three distinct problems related to double nontaxation or reduced or nominal taxation on international income:

  • tax evasion;
  • tax avoidance; and
  • tax subsidies and ‘‘substantive’’ tax competition.

A description of the history of the 1998 report would be a separate story in itself, full of political intrigue, broken promises, and the like. I will simply say that the most concrete results of that work have been in the area of tax evasion. Events, political pressure, people such as Heinrich Kieber and Bradley Birkenfeld, and the recent International Consortium of Investigative Journalists (ICIJ) data dump have now made the cross-border exchange of tax information increasingly a reality. After the Foreign Account Tax Compliance Act developments in the U.S. and the recent statements by the G-20 and the EU, it is only a question of time – and not much time in my view – before automatic exchange of information becomes the international norm. The technical work to implement such automatic exchange has been developed by the OECD and now the political will to put it into effect seems to be here as well.

On the second strand of the 1998 report, it now seems that the time has come for greater international cooperation in the area of tax avoidance in the form of the OECD’s base erosion and profit shifting (BEPS) project and that is what I would like to focus on today. I will also touch on possible work concerning some forms of tax subsidies and tax competition, although I am more skeptical that quick progress can be made in that area.

Some Reflections On The OECD And The Sources Of International Tax Principles