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Dealing with the Fragmented International Legal Environment pp 25–45Cite as

The Cases

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Abstract

Tax issues sometimes are very hard to resolve, which can lead to nullify or modify trade agreements. Thus, there is a need for flexibility and an understanding of taxes within any organization that might encounter tax issues and disputes. This chapter is divided into two sections. The first discusses actual cases that arose in the past under the GATT and the WTO, where a tax, specifically income tax, was the subject of a dispute, such as the Domestic International Sales Corporation (DISC) cases. The second section includes several hypothetical cases that are presented to show the potential fallout if the problem is not dealt with.

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Notes

  1. 1.

    Indirect taxes include taxes on alcoholic beverages (e.g., Chile taxes: Panel Report, Chile – Taxes on Alcoholic Beverages, WT/DS87/R, WT/DS110/R, adopted January 12, 2000, modified by Appellate Body Report, WT/DS87/AB/R, WT/DS110/AB/R, DSR 2000:I, 303), or Japan taxes on beverages: Panel Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/R, WT/DS10/R, WT/DS11/R, adopted November 1, 1996, modified by Appellate Body Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, DSR 1996:I, 125; and sales taxes on automobiles as in Indonesia: Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr. 1, 2, 3, and 4, adopted July 23, 1998, DSR 1998:VI, 2201).

  2. 2.

    Ruling by the Chairman, The Phrase “Charges of any Kind” in Article I:1 in Relation to Consular Taxes, August 24, 1948, BISD II/12.

  3. 3.

    Ruling by the Chairman, The Phrase “Charges of any Kind” in Article I:1 in Relation to Consular Taxes, August 24, 1948, BISD II/12.

  4. 4.

    Ruling by the Chairman, The Phrase “Charges of any Kind” in Article I:1 in Relation to Consular Taxes, August 24, 1948, BISD II/12. See also Palmeter and Mavroidis (2004, p. 304).

  5. 5.

    GATT Panel Report, United States – Customs User Fee, L/6264, adopted February 2, 1988, BISD 35S/245, Para 91, Footnote 13.

  6. 6.

    Report of the Panel on “Belgium – Family Allowances,” BISD 1S/59 (adopted on November 7, 1952).

  7. 7.

    Report of the Panel on “Belgium – Family Allowances,” BISD 1S/59 (adopted on November 7, 1952).

  8. 8.

    Report of the Panel on “Belgium – Family Allowances,” BISD 1S/59 (adopted on November 7, 1952), p. 3.

  9. 9.

    Report of the Panel on “Belgium – Family Allowances,” BISD 1S/59 (adopted on November 7, 1952).

  10. 10.

    Report of the Panel on “Belgium – Family Allowances,” BISD 1S/59 (adopted on November 7, 1952).

  11. 11.

    Report of the Panel on “Belgium – Family Allowances,” BISD 1S/59 (adopted on November 7, 1952).

  12. 12.

    See footnote 4 in Chap. 1. Working Party on Tax Adjustment meeting of October 8–11, 1968.

  13. 13.

    Revenue Act of 1971, Pub. L. No. 92–178, 501–07, 85 Stat. 497, 535–53; see IRC 991–997 for current DISC rules.

  14. 14.

    Internal Revenue Code (IRC 482).

  15. 15.

    IRC 995(b)(2).

  16. 16.

    See Goodspeed (2006, 143). See footnote 14 in Chap. 1.

  17. 17.

    Staff of Joint Committee on Taxation, 108th Congress, United States International Tax Rules: Background and Selected Issues Relating to the Competitiveness of US Business Abroad, p. 2.

  18. 18.

    GATT XVI.

  19. 19.

    DISC Para. 71.

  20. 20.

    DISC Para. 72.

  21. 21.

    See Income Tax Practices Maintained by France, Nov. 12, 1976, GATT B.I.S.D. 114 (23d Supp. 1977); Income Tax Practices Maintained by the Netherlands, Nov. 12, 1976, GATT B.I.S.D. 137 (23d Supp. 1977); Income Tax Practices Maintained by Belgium, GATT B.I.S.D. 127 (23d Supp. 127 1977).

  22. 22.

    The full understanding is:

    The Council adopts these reports on the understanding that with respect to these cases, and in general, economic processes (including transactions involving exported goods) located outside the territorial limits of the exporting country need not be subject to taxation by the exporting country and should not be regarded as export activities in terms of Article XVI:4 of the General Agreement. It is further understood that Article XVI:4 requires that arm’s-length pricing be observed, i.e., prices for goods in transactions between exporting enterprises and foreign buyers under their or the same control should for tax purposes be the prices which would be charged between independent enterprises acting at arm’s length. Furthermore, Article XVI:4 does not prohibit the adoption of measures to avoid double taxation of foreign-source income. GATT, BISD 114 (28th Supp. 1982).

  23. 23.

    On the OECD, see Végh (2005, p. 141).

    OECD Article 23a provides in part:

    Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall, subject to the provisions of paragraphs 2 and 3, exempt such income or capital from tax.

    Article 23b provides in part:

    1. Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall allow:

    a) as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State.

    b) As a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in that other State.

    Such deduction in either case shall not, however, exceed that part of the income tax or capital tax, as computed before the deduction is given, which is attributable, as the case may be, to the income or the capital which may be taxed in that other State.

  24. 24.

    OECD Article 9 provides in part:

    1. Where

    a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

    b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

    2. Where a Contracting State includes in the profits of an enterprise of that State – and taxes accordingly – profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other. (emphasis added).

  25. 25.

    Joel P. Trachtman, Decisions of the Appellate Body of the World Trade Organization “United States – Tax Treatment for Foreign Sales Corporations – Recourse to Article 21.5 of the DSU by the European Communities,” can be found at http://www.ejil.org/journal/curdevs/sr32.html.

  26. 26.

    FSC Repeal and Extraterritorial Income Exclusion Act of 2000, Pub. L. No. 106-519, 2, 114 Stat. 2423, 2423; IRC 921-927 (before repeal in 2000).

  27. 27.

    It is suspected that the EU’s true purpose was not to deal with the tax issue, but to use the issue as a bargaining chip to achieve other goals such as: (a) beef hormones and potential biotechnology claims; (b) Section 201 restrictions on steel imports; or (c) agricultural subsidies. See Hufbauer (2002), Hufbauer (2001, p. 1555).

  28. 28.

    See, e.g., Stehmann (2000, p. 127); Clark et al. (2001, p. 291); McDaniel (2001, pp. 1621, 1629); Qureshi and Grynberg (2002, p. 979). Most scholars have come to the conclusion that the ultimate decision was correct in that the USA was violating the SCM, although they have criticized the decision in other aspects. See, e.g., McDaniel (2004, pp. 275, 277); but see Hufbauer (2001, pp. 1555, 1562), arguing that the FSC was “wrongly decided.”

  29. 29.

    I.R.C. 924(f)(1) (2000).

  30. 30.

    I.R.C. 921(a) (2000).

  31. 31.

    I.R.C. 951–964 (2000).

  32. 32.

    AB, on FSC, 180.

  33. 33.

    AB, 179.

  34. 34.

    AB, 91.

  35. 35.

    AB, 90.

  36. 36.

    FSC Repeal and Extraterritorial Income Exclusion Act of 2000, Pub. L. No. 16-519, 114 Stat. 2423.

  37. 37.

    DISC, FSC, ETI.

  38. 38.

    World Trade Organization Appellate Body Report on US Tax Treatment for “Foreign Sales Corporations,” WT/DS108/AB/RW (Jan. 14, 2002), 256.

  39. 39.

    It could be done by imposing a withholding tax on the sellers, or additional tariffs, or other sanctions to force the producers to report the 10% income tax.

  40. 40.

    GATT, art. I.

  41. 41.

    Art. III.2 states that “The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.”

  42. 42.

    GATT art. III.2.

  43. 43.

    An additional problem would arise in a situation where the USA requires investors to pay income tax on worldwide as it requires from US individuals. The US government could theoretically impose a worldwide income tax on foreigners or foreign products by applying a literal interpretation of MFN and NT found in the GATT and GATS.

  44. 44.

    GATT art. III.2. [emphasis T.al.].

  45. 45.

    Warren (2001, pp. 150, 157), citing Debate on Revenue Bill Continues, 92 TNT 210-99, Oct. 19, 1992. Other examples noted by Warren include: IRC 884 (taxation of certain branch profits), 243(e) (the deductibility of interoperate dividends), 267(a)(3) (recognition of certain corporate transfers), 163(j) (deductibility of interest payments), and 1446 (withholding for foreign partners). See also Turro (1990, pp. 609, 612) (describing the view of foreign officials that excise taxes on “gas guzzler” and luxury automobiles would be disproportionately borne by imported vehicles).

  46. 46.

    IRS Section 1366(a). See also CCH Incorporated, US Master Tax Guide at 152 (2004).

  47. 47.

    Interestingly, there appears to be no reservation made with regard to “S” corporations specifically. Research revealed only an indirect reservation with respect to the MFN under the GATS; it states that “sub-federal tax measures affording differential treatment to service suppliers or to services when the differential treatment is based on one of the following criteria: differ based on the size or income of the service supplier or on the scale or methods (including environmental and health and safety measures) of performance.” See the US Schedule of Commitments under the General Agreement on Trade in Services (1998), available at http://hotdocs.usitc.gov/docs/pubs/332/GATS98.pdf. Since the “S” corporation is limited in size, it could be included under this reservation. Even with this inclusion, there is no reservation with respect to national treatment article. A similar reservation was made, however, for small business loans. Similarly, “[f]ederal Small Business Administration loans are restricted to US citizens or companies that are 100 per cent owned by US citizens and whose directors are all US citizens.” http://hotdocs.usitc.gov/docs/pubs/332/GATS98.pdf.

  48. 48.

    GATS art. XVII, 1.

  49. 49.

    GATS art. XXII.3 [emphasis T.al].

  50. 50.

    GATS art. XXII.3.

  51. 51.

    OECD art. 24.

  52. 52.

    OECD art. 25.2.

  53. 53.

    Hudec writes: “Because the United States Treasury Department believed strongly in the legitimacy of this objective, it would defend DISC with an intensity considerably greater than governments normally expend on ordinary beggar-thy-neighbor trade measures. Indeed, the United States would never yield on the legitimacy of DISC’s basic purpose.” Hudec (1988, p. 1449).

  54. 54.

    See supra Chap. 1.

  55. 55.

    http://www.arabicnews.com/ansub/Daily/Day/030305/2003030513.html.

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    Turki Althunayan

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Althunayan, T. (2010). The Cases. In: Dealing with the Fragmented International Legal Environment. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-04678-0_2

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