Ruling the World: Generating International Tax Norms in the Era of Globalization and BEPS
70 Pages Posted: 22 May 2017 Last revised: 22 Nov 2017
Date Written: May 22, 2017
In this innovative and comprehensive article, I will explore how international tax norms are generated in the era of globalization within the theoretical framework of international relations that studies International Regimes and tries to answer questions of formation, implementation, compliance, effectiveness, and spectrum of success. I will study the multilateral efforts that preceded BEPS to predict the prospects of BEPS. I deeply examine regulatory, institutional and political aspects of the key multilateral initiatives on international taxation to better understand the structure and politics of international tax law making in the global digital economy and infer from this past experience with regards to the prospects and feasibility of the BEPS project. This interdisciplinary article is the first to systematically study these previous initiatives, gauge their impacts, and apply these lessons to the current BEPS endeavor. The article contributes to an emergent line of interdisciplinary scholarship that integrates political economy literature into the analysis of the current international tax regime and its challenges. This innovative method of scholarship has contributed substantially to the current academic understanding of international taxation in the 21st century and offers potential solutions to the obstacles facing international taxation.
I analyze major four case studies of pre-BEPS multilateral international tax reform efforts that would be in different places along the international regimes spectrum of success as I will develop in this article: (1) The Automatic Exchange of Information regime, which aims to limit individual tax evasion; (2) The Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes; (3) the OECD Ottawa framework on e-commerce taxation, which intended to set certain standards for e-commerce taxation, but the principles set forth by the framework were not implemented widely and were thus largely ineffective; and (4) The OECD 1998 Harmful Tax Competition framework that defined tax havens and preferential tax regimes and Member States committed to cooperate and remove such regimes from their tax systems, however, tax havens and preferential regimes continue to flourish today. In discussing these four cases, I analyze three specific dimensions: First, regulatory: here I analyze the characteristics of the regulation, in terms of substance and form (unilateral, bilateral or multilateral), and level (hard law or soft law); Second, institutional: here I analyze the institutional aspects of the regulation, namely the role of the main players in the regulation with attention to the role of the G20/OECD and the United States; Third, the political dimension: here, it explores the political constraints and political opportunities that influenced the making of the norms.
I make five significant observations, based on my analysis of both successful and unsuccessful multilateral initiatives: First, the structure of the international tax regime continues to be dominated by unilateral and bilateral hard law, with some increase in the influence of multilateral soft law; Second, the subject matter of multilateral soft law is mainly individual tax evasion rather than corporate tax avoidance. Third, the emergence of multilateral soft law reflects an increase in international cooperation in tax matters. This cooperation is mainly administrative and technical (information exchange, administrative assistance, etc.) rather than substantive. Fourth, institutionally, the G20/OECD played an important and complex role in developing multilateral soft law; Fifth, The U.S. is the main player that influences the scope and limits of international tax cooperation; The U.S position is shaped by domestic U.S. politics, which consequently affects the prospects of international tax cooperation.
The implementation of these five observations on the BEPS project leads me to the conclusion that the prospects of the BEPS project are complex. Some proposals are progressing and are expected to be widely accepted and implemented such as the proposals on Country by Country reporting and the proposals on transparency and information exchange to handle individual tax evasion and the proposals on Mutual Agreement Procedures (MAP) to solve treaty disputes in timely manner. Amendments to the OECD Model Treaty and to the OECD transfer pricing guidelines are expected to be implemented at the OECD soft law level and they will probably have some indirect impact on bilateral treaty law and case law. Some soft law proposals will influence the creation and amendment of domestic law in some countries. However, I do not expect that the G20/OECD BEPS project will substantially impact the international tax regime. The main challenges of tax competition and corporate tax avoidance are likely to continue to prevail and will require different solutions. This argument is supported by the recent fact that the United States under the presidency of Trump is considering and taking actions to reduce its statutory corporate tax rate from 35% to 15%, namely, aggressive competition and unilateralism, which is likely to lead to the end of corporate tax and heavy taxation of middle class through individual income taxation and consumption taxation.
In conclusion, currently, the world is facing a critical juncture that would affect taxation in the 21st century substantially. One way, the way of the OECD and the BEPS project intends to enhance cooperation and multilateralism to cope with the challenges. A different way, the way of the United States under president Trump, which would increase competition and unilateralism. In between these two ways there are several middle ways. This comprehensive and historical study reveals a wide "regulation spectrum" that have been used to rule the world and generate international tax norms in the era of globalization. The spectrum includes unilateral domestic instruments at one edge and multilateral or even supranational global instruments at the other edge. This paper contributes to understanding the powers and limits of each regulation instrument along the spectrum. It argues that all these instruments shall be considered and appropriately used in handling globalization challenges and ruling the international tax world in the era of globalization.
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