Back to Basics: Rethinking Normative Principles in International Tax

Abstract

International Tax is a relatively new legal system that lacks clear objectives and principles. These principles, which guide unilateral legislation and multilateral coordination, have not been discussed thoroughly through the lenses of jurisprudence and legal philosophy. This paper offers a unique jurisprudential analysis of normative International Tax principles by redefining them and clarifying several basic assumptions.

There are three normative International Tax principles that determine how a taxpayer should be taxed: Benefits, Single Tax, and Neutrality. These principles lack logical interpretations and often lead to incoherent rules between jurisdictions. This paper explores how basic axioms of law and coherent jurisprudential analysis provide different definitions of these principles. For example, under the Benefits principle, a taxpayer should be taxed in the place it receives benefits. But further analysis reveals that measuring benefits in the residence jurisdiction is almost impossible because of coercive powers under the social contract. In the source jurisdiction, benefits can be much more easily measured by the fees paid to the source jurisdiction, similar to any other commercial contract between a jurisdiction and an individual. The purpose of the Single Tax principle is rather incoherent when a taxpayer is taxed once in a de minimis tax rate. But a broader interpretation of that principle suggests that the Single Tax principle should be linked to a minimal rate of taxes when compared to the residence jurisdiction as recently applied in the 2017 U.S. tax reform under the Base Erosion Anti Abuse Tax (BEAT) and in the proposed EU Digital Tax. The Neutrality principle seeks to achieve worldwide efficiency, but because Neutrality does not necessarily mean efficiency, the basic axiom of the principle is efficiency. Almost all types of Neutrality demonstrate that it is an externality and players of the game are better off if they coordinate economic behavior to some extent.

After examining and redefining the three normative principles of International Tax, this paper proposes two additional principles, both widely accepted in International Trade law, to guide International Tax policy: Transparency and Non-Discrimination.

Keywords: International Tax; Tax Policy; Neutrality; Benefits; Single Tax; Non-Discrimination; Transparency.