Abstract
This chapter provides an introduction to the subject matter of the book, its basic structure, and a summary of the book’s conclusions.
… taxation, and in particular direct (or income) taxation, is, b y definition, a barrier to international trade. On the other hand, the elimination of income taxes is unlikely in the near future, as most governments finance their operations to a large extent with income tax revenues. Insofar as the ideal of free trade cannot be achieved, a compromise that both promotes free trade and allows for the existence of tax related trade barriers must be established.
Yariv Brauner (2005) at 255–56.
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Notes
- 1.
Brauner (2005) at 256.
- 2.
At present, there are few limitations on a country’s tax practices. Customary international law provides virtually no protection against tax discrimination and constitutional or national limitations on tax discrimination against non-residents are rare. The primary restraint against egregious tax practices is international goodwill, limitations imposed in integrated agreements such as the Treaty on the Functioning of the European Community or in limited circumstances, bilateral tax treaties.
- 3.
The potential gains from protectionism are increasing with globalization. It is therefore likely that countries will try to employ protectionist techniques that escape the tight WTO grip, such as income tax measures. Ibid.
- 4.
The General Agreement on Trade in Services (15 April 1995) is part of the World Trade Organization Agreement, Annex 1B, 1869 UNTS 183, 33 ILM 1167 (1994) [GATS].
- 5.
WTO, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 15 April 1994 [WTO Agreement].
- 6.
North American Free Trade Agreement Between the Government of Canada, the Government of the United Mexican States and the Government of the United States, 17 December 1992, Can TS 1994 No. 2, 32 ILM 289 (entered into force 1 January 1994) [NAFTA].
- 7.
Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area, 27 February 2009 (entered into force on 1 January 2010 for eight Parties: Australia, New Zealand, Brunei, Burma, Malaysia, the Philippines, Singapore and Vietnam. The agreement has entered into force for all parties, including Thailand, Cambodia, Indonesia and Laos).
- 8.
Trans-Pacific Partnership Agreement, 4 February 2016 (not yet in force) [TPP], online: http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/tpp-ptp/text-texte/toc-tdm.aspx?lang=eng.
- 9.
Trade and tax experts approach the relationship between trade and tax issues from different perspectives. Tax experts are primarily concerned with tax policies and administrative rules that raise revenues in a fair and equitable way. Trade experts focus on reducing or eliminating measures that can be viewed as barriers to trade. Taxation, and in particular direct (or income) taxation is, by definition, a barrier to international trade. However, the elimination of income taxes in the near future is very unlikely. The result is an incompatibility between tax policies and the administration of tax systems on the one hand, and the objectives of trade agreements on the other.
- 10.
General Agreement on Tariffs and Trade, 30 October 1947, 58 UNTS 187, 33 ILM 1153 (1994) (entered into force 1 January 1948) [GATT].
- 11.
- 12.
The arguments by tax experts for excluding direct tax measures in particular, from the discipline of trade agreements were threefold. First, many of the countries that would join the WTO had already entered bilateral tax agreements. It was unpalatable that bilateral concessions made under these tax treaties should extend to all WTO signatories under the most favored nation obligation. Second, the national treatment obligation was incompatible with important policy reasons for distinguishing between residents and nonresidents in tax matters. Third, the issue of non-discrimination was already addressed in tax treaties leaving open the potential of jurisdictional conflict between tax and trade agreements.
- 13.
Stahl (1994) at 429.
- 14.
- 15.
OECD, Committee on Fiscal Affairs, Model Tax Convention on Income and on Capital (Paris: OECD Publishing) [OECD Model Tax Treaty]. The Fiscal Committee of the OECD produced the first draft convention for double taxation in 1963. The OECD Model Treaty currently impacts more than 3000 bilateral tax treaties that are based on it.
- 16.
United Nations, Department of Economic and Social Affairs, Model Double Taxation Convention between Developed and Developing Counties (New York: United Nations, 2011) [UN Model Tax Treaty], which are substantially similar to those found in the OECD Model Treaty.
- 17.
See e.g., the Free Trade Agreement Between Canada and the Republic of Colombia, 21 November 2008, Can TS 2011 No 11 (entered into force 15 August 2011) [Canada-Colombia Free Trade Agreement] and the Free Trade Agreement Between Canada and the Republic of Panama, 14 May 2010, Can TS 2013 No 9 (entered into force 1 April 2013) [Canada-Panama Free Trade Agreement].
- 18.
- 19.
For example, Michael Daly of the WTO released a paper in June 2005, Daly (2004), which identifies the potential impact of direct taxation in trade and outlines the role of the WTO in resolving disputes about WTO-inconsistent direct tax measures. Michael Lang and others published the proceedings of a Global Conference on “WTO and Direct Taxation” in 2005, which brought together 70 experts to discuss the relations between the WTO Agreement, domestic tax law, tax treaty law and European Community law.
- 20.
Article 24 of the OECD and UN Model Tax Treaties include a non-discrimination principle if the non-resident service provider has a permanent establishment in the source state.
- 21.
The GATS, Article XIV(d).
- 22.
- 23.
Although economists are only now formalizing the connection between taxes and competitiveness, non-economists have long been concerned with considerations of competitiveness, including how taxation can tilt the playing field between residents and nonresidents. Mason and Knoll (2012).
- 24.
In the case of Canada, the Canada-Colombia Free Trade Agreement and Canada-Panama Free Trade Agreement and applicable tax treaties are examined as these are the two most recent free trade agreements that Canada has entered into that have come into force. At the time of writing, there was not text available for the Canada-EU Free Trade Agreement. In the case of Australia, the Free Trade Agreements with Singapore, Thailand, the United Sates, Chile and Malaysia are examined.
- 25.
Until 2008 Australia reserved its position on Article 24 in para 85 of the Commentary on Article 24 of the OECD Model Treaty. This reservation was replaced in 2008 as follows: “Australia reserves the right to propose amendments to ensure that Australia can continue to apply certain provisions of its domestic law relating to deductions for R & D and withholding tax collection.” OECD Model Commentary on Article 24 at para 86.
- 26.
The exceptions include the tax treaties with the United States and Chile. A non-discrimination obligation is also included in the Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, 31 January 2008, [2008] ATS 21 (entered into force 3 December 2008) [Australian-Japan Tax Treaty]. See the Explanatory Memorandum of Article 26 of the Australia–Japan Tax Treaty, Chapter 1, 2008 Australia-Japan Convention, International Tax Agreements Amendment Bill (No 1) 2008 circulated by the authority of the Treasurer, the Hon Wayne Swan MP, online: http://www.austlii.edu.au/au/legis/cth/bill_em/itaab12008416/memo_0.html
- 27.
A potential exception is an indirect obligation that results from the non-discrimination clause in the tax treaties with the United States and Chile as it applies to the deductibility of amounts paid to a non-resident.
- 28.
The method of resolving treaty conflicts is ostensibly found in the Vienna Convention on the Law of Treaties, opened for signature May 23,1969, 1155 UNTS 331, 8 ILM 679 (entered into force on January 27, 1980) [VCLT].
- 29.
At least at the time of writing.
- 30.
See Samuels (2008).
- 31.
European Union, Consolidated Version of the Treaty on the Functioning of the European Union, 26 October 2012, OJ L 326/47-326/390
- 32.
It draws from two main sources: First, research on the use of the UN Model Tax Treaty provisions in services in tax treaties that was carried out by the International Bureau of Fiscal Documentation (IBFD) at the request of the Committee of Experts on International Co-Operation in Tax Matters in 2011 and 2012 as reported in Wijnen et al. (2012) [Wijnen Study]. This paper provides a detailed study of the service provisions employed in tax treaties between 1997 and 2011. The second source is the 2012 International Fiscal Association study on Enterprise Services which included reports from 38 jurisdictions about how their income tax rules are applied under a tax treaty. IFA (2012).
- 33.
Foreign Account Tax Compliance Act, 26 USC (2010) Pub L No 111-147.
- 34.
See OECD Model Tax Treaty, Article 24(4) and discussion in Chap. 2 at 2.2.
- 35.
See Chap. 4 at 4.2. Such an overlap could occur, for example, in respect of the non-discrimination obligation found in the OECD and UN Model Tax Treaties as it applies to the deduction of amounts in determining taxable profits with the trade obligation with respect to tax measures affecting the purchase or consumption of services. Both Model Tax Treaties provide that “disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.” Both free trade agreements include a non-discrimination obligation that would fall within this general wording. Specifically, Article 2204(5)(a) of the Canada-Colombia Free Trade Agreement imposes the national treatment obligation in respect of services for “taxation measures on income, capital gains, or on the taxable capital of corporations that relate to the purchase or consumption of particular services.”
- 36.
There is no non-discrimination obligation in the Canada-Colombia Tax Treaty similar to that found in the OECD and UN Model Treaty.
- 37.
Until 2008 Australia reserved its position on Article 24 in para 85 of the then Commentary on Article 24 of the OECD Model. This reservation was replaced in 2008 as follows: “Australia reserves the right to propose amendments to ensure that Australia can continue to apply certain provisions of its domestic law relating to deductions for R & D and withholding tax collection.” Para 86, OECD Model Commentary on Article 24.
- 38.
The exceptions are the tax treaties with the United States and Chile. A non-discrimination obligation is also included in the Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, 31 January 2008, [2008] ATS 21 (entered into force 3 December 2008). See the Explanatory Memorandum of Article 26 of the Australia–Japan Tax Treaty, Chapter 1, 2008 Australia–Japan Convention, International Tax Agreements Amendment Bill (No 1) 2008: online: http://law.ato.gov.au/atolaw/view.htm?locid='PAC/20080102'&PiT=99991231235958 circulated by the authority of the Treasurer, the Hon Wayne Swan MP, online: http://www.austlii.edu.au/au/legis/cth/bill_em/itaab12008416/memo_0.html
- 39.
The imposition of a non-discrimination obligation under a trade agreement with respect to a tax measure that falls under a tax treaty is clearly inconsistent with the rights and obligations assumed by each of the free trade partners under the tax treaty. If this view is correct, the existence of a tax treaty between the Parties that does not include a non-discrimination article would operate to negate any non-discrimination obligation under the free trade agreement. If this conclusion is correct then with the possible exception of Singapore, no non-discrimination obligation currently applies to any tax measure under the majority of Australia’s free trade agreements as the result of the interaction of these bilateral tax and trade agreements; A potential exception is an indirect obligation that results from the non-discrimination clause in the tax treaties with the United States and Chile as it applies to the deductibility of amounts paid to a non-resident.
- 40.
This assumes the differences are not arbitrary, unjustified or a disguised restriction on trade in services contrary to Article XIV of the GATS.
- 41.
Specifically, under the GATS, the ability to challenge whether the national treatment obligation has been violated is limited if there is a tax treaty in place between the two Contracting States.
- 42.
Cockfield and Arnold (2010). See also Nitikman and Schreiner (2008) who comment “As a practical matter, discrimination for tax purposes is not a prominent issue in Canada with foreign nationals, as evidenced by the lack of litigation and because foreign persons simply see (with good advice) the differences before them, and then appropriately measure and weigh the additional cost of adapting …” With respect, this seems to be a circular argument. A determination as to whether or not tax discrimination is occurring, if based on an analysis of a law that does not include a non-discrimination obligation, will inevitably lead to a lack of evidence of discriminatory treatment.
References
Legislation
Foreign Account Tax Compliance Act, 26 USC (2010) Pub L No 111-147.
Treaties and Treaty Documents
Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area, 27 February 2009, [2010] ATS 1.
Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, 31 January 2008, [2008] ATS 21.
European Union, Consolidated Version of the Treaty on the Functioning of the European Union, 26 October 2012, OJ L 326/47-326/390.
Free Trade Agreement Between Canada and the Republic of Colombia, 21 November 2008, Can TS 2011 No 11.
Free Trade Agreement Between Canada and the Republic of Panama, 14 May 2010, Can TS 2013 No 9.
General Agreement on Tariffs and Trade, 30 October 1947, 30 October 1947, 58 UNTS 187, 33 ILM 1153 (1994).
General Agreement on Trade in Services, 15 April 1995, Annex 1B of the World Trade Organization Agreement, 1869 UNTS 183, 33 ILM 1167 (1994).
North American Free Trade Agreement Between the Government of Canada, the Government of the United Mexican States and the Government of the United States, 17 December 1992, Can TS 1994 No 2, 32 ILM 289.
Trans-Pacific Partnership Agreement, 4 February 2016 (not yet in force). http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/tpp-ptp/text-texte/toc-tdm.aspx?lang=eng.
OECD. (2010). Model Tax Convention on Income and on Capital Paris: OECD.
United Nations. (2011). Department of Economic and Social Affairs, Model Double Taxation Convention between Developed and Developing Counties (New York: UN).
Vienna Convention on the Law of Treaties, opened for signature 23 May 1969, 1155 UNTS 331, 8 ILM 679.
WTO, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 15 April 1994.
Government Documents
Explanatory Memorandum of Article 26 of the Australia-Japan Tax Treaty, Chapter 1, 2008 Australia-Japan Convention, International Tax Agreements Amendment Bill (No 1) 2008 circulated by the authority of the Treasurer, the Hon Wayne Swan MP. http://www.austlii.edu.au/au/legis/cth/bill_em/itaab12008416/memo_0.html.
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Brown, C.A. (2017). Introduction. In: Non-discrimination and Trade in Services. Springer, Singapore. https://doi.org/10.1007/978-981-10-4406-9_1
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