A New Governance Framework in Cross-Border Tax Policymaking

Abstract

The first tax treaty can probably be traced to the end of the 19th century, the treaty between the Swiss Federal Council (on behalf of the Canton of Vaud) and Great Britain. However, most tax scholars refer to the period of post-World War I and the work of the League of Nations as the formative period in which international tax regime was founded. In the 1920s, the League of Nations (which initially consisted of approximately 42 member states and reaching a peak of 58 member states in the 1930s) formed a committee of four renowned economists that was asked to formulate a set of rules that would assist states in allocating taxing rights of cross-border income and gains between different taxing jurisdiction and that would reduce double taxation. The committee presented its report in 1923, which proposed a compromise between capital exporting countries and capital importing countries (the closest equivalent of developing and developed countries).

Following World War II, the international tax work was highly influenced by the OEEC, the predecessor of the OECD (made by 38 rich member-states), leaving behind the U.N., which mainly served as a voice for the developing countries. In the 21st century, the international tax framework is still influenced by the OECD and the G20 accompanied. For instance, in the early 2010s, the G20 was an important driver in the OECD’s BEPS project.

Over the past decade, international tax policy decisions are allegedly no longer made by a few dozen OECD member states, but by over 140 countries from all regions and levels of development through the ‘Inclusive Framework’ on an equal footing, however recent scholarly literature identifies obstacles that lead to an unequal participation of developing countries in practice. Our article will explore the relations between developed and developing countries, the different organizations’ impact in shaping the international tax policymaking and propose that a new World Tax Authority (WTA) would replace the existing governmental framework, or to hand it over to a more politically balanced international organization such as the WTO or to the World Bank that neither of which is bound by decision-making arrangements that require achieving consensual support of all its member states.

Furthermore, and irrespective of the formation of a WTA (which may possibly be viewed as undermining national sovereignty in tax matters), with the rise of bilateral tax treaties together with the intensifying of global mobility of businesses, investments, trade and migration has undoubtedly increased the potential tax conflicts which are currently by thousands tax tribunal around the world and tens of thousands if not hundreds of thousands tax judges and arbitrators that interpret cross-border tax disputes in a manner that maintains their national fiscal revenues which create competing and overlapping claims to tax cross-border income and gains and uncertainty in the application and interpretation of the tax rules that govern cross-border transactions.

We therefore propose forming an international world tax court (WTC) whose justices be appointed in a manner that would represent high- and low-income tax countries. This novel tax court would serve as the supreme judicial authority and its rulings would be ideally binding by national judges from all over the world. Nevertheless, to the extent that it would be difficult for countries to waive their independence in interpreting tax treaties, we propose that the courts' rulings will have declaratory (non-binding) status. The non-binding status would still assist national judges from all over the world interpret tax treaties in a more consistent and conform manner.

Keywords: Taxation, International Taxation, International Law, Tax Policy, Inclusive Framework, OECD, U.N.

JEL Classification: K34, K33