International Trade and Tax Treaties
Yariv BraunerUniversity of Florida
Sao Paulo, August 2009
Background
• International Trade Law– Institutional: WTO
• GATT, GATS, SCM, TRIM, TRIP
– Supranational– Quasi-judicial dispute settlement
• International Tax Law– International Tax Regime (?)
• Customary international law?
– Network of primarily bilateral tax treaties– Dispute settlement by voluntary mutual agreement
• Mandatory arbitration
State of Affairs
• International Trade / WTO– Doha– DISC / FSC / ETI saga basically over
• International Tax Regime– Growing in size, coverage and power– Little adaptation / lack of flexibility– Other critique – too slow / too fast / OECD– Formulary apportionment– Multilateralism
Relationship
• Removal of barriers to trade
• Practical divorce
• Non discrimination focus– Trade law: MFN and National Treatment
• But, certain carve-outs from MFN in both GATT (specific for tax) and GATS (effectively an “opt-in” regime)
– Tax: National Treatment only (in principle)
Tax Treaties
• Generally do not include MFN-type obligations• Normally contain National Treatment obligation –
Art. 24 of the OECD model• Typically exclusive application of treaty’s non-
discrimination articles– Unless agreed otherwise by competent authorities; or– Particular exception to certain applicable rules in
GATT– But, of course, GATT was generally perceived as not
applicable to income taxes
GATT/GATS Law and Taxation• Art III:2 GATT prohibits discrimination against imported goods by
means of internal (non-tariff) taxes – Application to “like” products or products “in competition”– Primary exceptions in Art XX: tax not mentioned
• Art XVII GATS prohibits discrimination subject to a country’s commitments – Original U.S. position – unlimited nondiscrimination– Primary exceptions in Art XIV include in Lit. (e): “Avoidance of Double
Taxation” as a competing value– Interpreted to practically exempt bilateral tax treaties from the
application of GATS– Conclusion reinforced by specific denial of the right for consultation or
initiation of a dispute settlement procedure when a bilateral tax treaty applies – GATS XXII:3
• Unsuccessful U.S. position in FSC cases: tax treaty provisions superior to trade law obligations (with the irrelevant exception of GATT)
Export Subsidies
• Subsidies easily transformable to tax expenditure• But, income tax based export subsidies are not common• SCM prohibits (only) subsidies (forgone revenue that is
otherwise due) that are contingent upon export performance or discriminate against importation– Specific mention of tax measures in an “illustrative list” of
prohibited measures– Footnote 59:
• Deferral acceptable only if requires adequate interest• Arms’ length standard adopted• Measured to avoid double taxation of foreign source income
exempted from scrutiny
– Export contingency may be de jure or de facto, yet de facto contingency is very difficult to prove
DISC/FSC/ETI Saga
• Clearly prohibited U.S. export (income tax) subsidies
• Arguably to balance a similar effect of indirect taxes’ (VAT) not employed by the U.S.
• 30 years, with some side stories• Weak analysis, yet eventually correct ruling by
dispute settlement body• Essentially no guidance in result• Lessons
– WTO lacks competence in tax matters– Strengths and weaknesses of WTO’s judicial model
Discontent
• Traditionally not problematic– Little use of income tax export subsidies– General acceptance of separate regimes
• Yet, FSC saga led to the largest case in terms of sanctions
• Future uncertain as governments have fewer options• Dispute with China partially relieved• Unclear future:
– China, India– Europe/U.S.(?)
• Boeing/Airbus
Coordination• Is there a problem that requires a solution?• McDaniel’s analysis of FSC saga• Avi-Yonah and Slemrod:
– Current trade law is capable of solving many of the challenges posed by income taxes
– Reconciliation of the regimes may require a multilateral agreement– WTO can serve as the coordinating institution for a multilateral tax cooperation
effort• No commitment as to its being the best solution
• Brauner– International tax and trade regimes can be coordinated, yet not reconciled in
current form– WTO is a theoretically proper forum, yet practically the wrong one
• Expertise is not over-estimated in regard to international taxation• Politics• Current struggle of WTO with development issues tie-in to its political
inappropriateness
• New directions in research – Illouz