By: Naseem “Naz” Khan

An insightful May 2019 analysis by Elliott Ash and Omri Marian provided a strong contribution to the compelling debates around international tax law. The title of their article, “Who is Making International Tax Law,” is deceptive, in the sense that one might assume something as important as international tax “law-making” is undertaken in accordance with a set of universally accepted rules. This Ash and Marian “second take” provides ample confirmation that little, if anything, associated with this tax law framework has evolved in an orderly, pre-determined fashion. A single, provocative question drives the following commentary: does a customary international law of taxation actually exist, and should it?

The Current State of Play

Unlike other international lawmaking institutions, such as the World Trade Organization, the United Nations (the “UN”), or the supranational European Union, there is no equivalent World Tax Organization whose rules are accepted by and binding on its membership. It might be argued that given the over 3,000 tax treaties now negotiated across the international community, the treaty processes are a de facto lawmaking mechanism. After all, once a nation makes a treaty commitment, customary international law on treaty-making, as reflected in the 1969 Vienna Convention, requires all “contracting States” to implement the treaty’s terms into the relevant domestic legal frameworks.

This process is further supplemented by the fact that representative international institutions (notably the UN and the Organization for Economic Co-operation and Development (“OECD”)) have published and regularly updated model tax treaties that are gaining near universal acceptance as appropriate international tax law standards. Ash and Marian provide a careful and irrefutable comparison of the key words used in all tax treaties enacted since the 1960s. Their data confirms that over the past 20 years, there has been an increasing similarity in tax treaty language irrespective of which countries are crafting their treaty terms. Particular praise is directed towards the OECD model, one that they describe as “. . . the key institutional source of the consensus building process” that is ongoing across the world.

An Ephemeral Customary Tax Law

When these initial reactions to the Ash and Marian analysis are collectively assembled, a less informed, but still reasonable observer might conclude that whilst perhaps not perfect, current international tax law evolution suggests a customary law of taxation does exist. Ash and Marian rightly make a more nuanced observation — no matter how popular the OECD model may be in terms of its broader international community uptake, the fact remains that absent a legal obligation to adopt the OECD version, there is no customary law that binds every State.

If one accepts this proposition as accurate, the first part of the question posed above is clear — a customary law of taxation does not exist. At most, there might be a “coherent” international tax regime, or tax “soft law” that tends to promote convergence in the ways that States now approach taxation issues, but these concepts fall well short of binding legal obligations.

Ash and Marian offer a sensible justification for this view. They note that unlike many other international treaties with a common State interest (such as defense, environmental protection standards, or intellectual property rights), tax treaties are uniquely negotiated. The nations pairing themselves in these agreements each have unique economic, social, and cultural circumstances that militate more strongly in favor of each party adopting positions that best serve their overarching national interests. Ash and Marian cite the example of State A being a net capital exporter in relation to treaty partner State B, but having a capital importer advantage when compared with another partner (State C). Their scenario reinforces a crucial point when assessing this entire topic: It is likely impossible to ever reconcile the respective A, B, and C negotiating positions such that a common tax framework could ensure fair treatment for each State’s interest in every circumstance.

But Should A Customary International Tax Law Exist?

This question is arguably more intriguing. Consider the individual taxpayer, who is arguably the most affected by the lack of binding legal obligations. They might say, “If there is no customary law, there ought to be! Taxation is too important to leave to individual States. Only a comprehensive approach can possibly make things fair and consistent for taxpayers and the entire international community!”

Indeed, there are various criticisms about globalization forces having encouraged a “race to the bottom” amongst States competing for highly desired foreign investment. Commentators have noted that States will often lure prospective investors with promises of low (or no) corporate tax rates, in combination with reduced workplace health and safety protections, or modified environmental compliance requirements. A single and defined global corporate tax rate might level the foreign investment playing field and at the same time protect weaker nations from being dominated by stronger investors, who are largely based in the developed world and essentially extort tax concessions from vulnerable individual taxpayers.

The ever-increasing public fury directed at transnational corporations (“TNCs”), such as Google, Amazon, Starbucks, and Netflix, and their ability to structure different intra-company networks that create tax losses to offset profits, is another powerful justification for a single international tax law framework. These enterprises are extremely profitable, and given that a typical individual taxpayer might have as much as 60 percent of their available income to pay in various taxes such as value-added and municipal-based taxes, TNCs who pay little or no tax properly prompt calls for global tax law reform.

Loopholes and Information Exchanges

The now infamous 2016 Panama Papers confirmed that wealthy individuals and corporations alike have often adopted remarkable strategies to hide their money in tax-free offshore accounts, shielded from their own national revenue agencies. There is compelling empirical evidence that these tax avoidance efforts remove billions of dollars from essential national revenue collection efforts. Further, the costs incurred by States to track and trace where these assets are hidden would likely have been reduced if a single international system was adopted.

The 2017 European Court of Justice (“ECJ”) case — Berlioz Investment Fund SA v Director of the Direct Taxation Administration, Luxembourg — is instructive. The ultimate ECJ ruling is less important to the present commentary than how the relevant national authorities were required to spend considerable time, effort, and plainly finite national resources just to deal with issues arising from requests for tax information sent by another Member State under Directive 2011/16. Further, as Steichen and Bieber astutely point out, the ECJ decision arguably strikes a blow against a global tax law, as the Court appears to favor what these authors describe as the “rule of law triumphing over the essential State need” to exchange information that is necessary to catch tax cheats.

By extension, if protection is afforded to individual privacy rights over State power to regulate, investigate, and prosecute cross-border related tax offenses, the notion that an international law in this area will be more successful strains credulity. There are simply too many variables that impact how countries pursue taxation strategies.

Is There A Solution?

Reading the Ash and Marian blog post in conjunction with their larger, more extensive academic article, these experts appear untroubled by the fact that a truly international customary tax law system has not yet evolved. Too often, the legal world becomes transfixed with the concept of ongoing law reform. It is not enough that the particular legal area seems to be developing in ways that appear logical, or that through simple, ongoing evolutionary forces the law is developing in what appears to be positive directions. This topic is a perfect example of what might be characterized as change for change’s sake. The “race to the bottom,” aggressive TNC tax avoidance practice, and patchwork enforcement quilt are legitimate concerns. However, in the face of ongoing OECD and similar model tax law success, what real additional benefits will be realized if — somehow — an enforceable global tax convention was devised, debated, and ratified by the international community? Such a process seems doomed to fail given the current global geopolitical climate, one punctuated by tensions between China and the United States that will almost certainly doom any effort to give current tax treaty models binding effect. The better and ultimately less contentious path — when considered from a global perspective — is to encourage the OECD and other tax policymaking bodies to keep promoting their models. The Ash and Marian analysis is especially cogent in this respect. The continued emphasis on model tax treaties is an equally good, if not perfect, assurance that most States will adhere to these commonly-employed, OECD-endorsed, tried and tested tax law approaches. In these uncertain times, such an outcome is likely the best one available.

Naseem “Naz” Khan is an LL.M. candidate at Durham University in England, where he is studying taxation and international human rights law.