A New Institutional Framework for International Taxation

issuing an order suspending air services by Air France from Los Angeles to Paris for so long as the PanAm flights were barred. The Arbitral Tribunal warned that such countermeasures should be used with moderation and be accompanied by a genuine effort to resolve the dispute, in view of the dangers of retaliation and the sensitivity of the network of air services arrangements; proportionality was difficult to judge, but bearing in mind not only the private loss to PanAm, but also the principled implications of the issue, the countermeasures were not disproportionate in that case US­France Arbitration 1978. This case has clear parallels with tax treaty overrides. Until now there has been no formal retaliation or suspension of a tax treaty in such circumstances, although there have been informal retaliations, such as the delay in German ratification of its treaty with the US; and also threats, such as the enactment by the UK Parliament of a power to retaliate against state worldwide unitary taxation by withdrawal of ACT refunds to US corporations. 1 The fact that this threat has not been activated indicates some of the difficulties with such an approach, not least the possibility of counter­retaliation. It has been reported that US treaty­partners have raised the question of inclusion in tax treaties of a provision empowering retaliation. This would require some mechanism for agreeing whether a breach has taken place, and a means of identifying an equivalent benefit which could be withdrawn. The difficulties are evident; but the alternatives pose perhaps even greater problems.

3. A New Institutional Framework for International Taxation

International tax arrangements are undoubtedly due for some significant reorganization and rethinking. Already, the OECD Fiscal Committee has begun work on the revision of the 1977 model treaty, a process which, as before, is interacting with the renegotiation of some of the key bilateral treaties, such as the US­ Netherlands treaty, following on the US­German agreement signed in 1989. However, both the basic shortcomings of the bilateral treaty model and the inadequacies of the international political framework within which the issues are discussed have become increasingly clear. A strong and persuasive argument has been made by Richard Vann for an international tax institution analogous to the GATT General Agreement on Tariffs and Trade Vann 1991, pp.156 ff.. The GATT itself also resulted from the need to transcend the pattern of trade bargaining based on bilateral reciprocity, but has done so through a relatively loose model of 1 See Chapter 9 section 4 above. Due to the US Senate veto the treaty came into force without the provisions which would have prohibited WUT, so UK withdrawal of ACT refunds would itself constitute breach of the treaty and not a retaliation. organization; indeed the `weak ¶form of the GATT resulted precisely from the failure to obtain national political agreement for a more comprehensive International Trade Organization based on the Havana Charter. An organization based on the GATT model would allow for i a minimal foundation of obligations binding on all members, ii a further level of more detailed rules which could be optional or could be varied by agreement between pairs of states, iii a framework for adjudication of issues arising from the obligations, and iv an organizational basis for regular bilateral and multilateral discussion of policy issues. The minimal obligation should include not only an undertaking to prevent international double taxation, but also to combat fiscal avoidance and evasion and to ensure a minimal level of effective taxation. While this would, initially at least, limit the number of states willing to adhere to such a multilateral agreement by excluding `havens ¶ it would strengthen the basis of common action against such haven states. The more detailed codes, which might allow for variation, could cover issues such as the definition of `passive ¶income and other aspects of CFC taxation; similarly, the parameters for limitation of treaty benefits in anti­conduit rules could be fixed; and guidelines and procedures could be established in relation to the transfer pricing question. Several academic commentators have argued for a radical approach to transfer pricing by moving to a formula approach, while acknowledging the political difficulties Bird 1988, Vann 1991. However, the analysis in Chapters 8 and 9 above shows that both the separate enterprise and the formula approach require criteria for defining a unitary business and for allocating joint costs and synergy profits, as well as a mechanism for taking decisions on a case­by­case basis. Indeed, the institutional basis for this process has already been gradually established between the major states, by administrative arrangements between the competent authorities. While those involved have been fearful that politicization of these processes might prove fatal, there is no doubt that greater openness and fairness in the procedures and substantive criteria would enhance their legitimacy, and strengthen them in the long run. Inclusion of arrangements for cooperation in tax enforcement within such a general institutional framework would provide some insulation against the attacks launched against the OECDCouncil of Europe mutual assistance convention. A move towards a more formalized institutional framework of this type is not a panacea. Whether it takes place or not, much can be done to strengthen the basic mechanisms and principles, as has been indicated in previous chapters. However, what they have also shown is that what has been lacking above all has been an adequate process of legitimation at the international level. While the political difficulties to be overcome in initiating such a development cannot be underestimated, it seems clear that by one means or another, a strengthening of the international institutional basis for international taxation is an urgent necessity. A PPENDIX : M ODEL T REATIES OECD and United Nations Model Double Taxation Conventions {The text given here is based on the 1977 OECD model. Text added in the UN model is given in italics, and text omitted in the UN model is indicated by square brackets; in addition, Article 22 on Taxation of Capital is optional in the UN model and is therefore bracketed in the original, together with references to taxation of capital in Article I and elsewhere. Editors notes are indicated by curly brackets: S.P.} Title of the Convention Convention between State A and State B for the avoidance of double taxation with respect to taxes on income and on capital. Preamble of the Convention The Preamble of the Convention shall be drafted in accordance with the constitutional procedure of both Contracting States.

Chapter 1: Scope of the Convention

Article 1: Personal Scope This Convention shall apply to persons who are residents of one or both of the Contracting States. Article 2: Taxes Covered 1. This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied. 2. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation. 3. The existing taxes to which the Convention shall apply are in particular: a in State A: . . . b in State B:. . . .