International Trade and Tax Treaties Yariv Brauner University of Florida

1. International Trade and Tax TreatiesYariv BraunerUniversity of Florida Sao Paulo, August 2009

2. Background • International Trade Law • Institutional: WTO • GATT, GATS, SCM, TRIM, TRIP • Supranational • Quasi-judicial dispute settlement • International Tax Law • International Tax Regime (?) • Customary international law? • Network of primarily bilateral tax treaties • Dispute settlement by voluntary mutual agreement • Mandatory arbitration

3. State of Affairs • International Trade / WTO • Doha • DISC / FSC / ETI saga basically over • International Tax Regime • Growing in size, coverage and power • Little adaptation / lack of flexibility • Other critique – too slow / too fast / OECD • Formulary apportionment • Multilateralism

4. Relationship • Removal of barriers to trade • Practical divorce • Non discrimination focus • Trade law: MFN and National Treatment • But, certain carve-outs from MFN in both GATT (specific for tax) and GATS (effectively an “opt-in” regime) • Tax: National Treatment only (in principle)

5. Tax Treaties • Generally do not include MFN-type obligations • Normally contain National Treatment obligation – Art. 24 of the OECD model • Typically exclusive application of treaty’s non-discrimination articles • Unless agreed otherwise by competent authorities; or • Particular exception to certain applicable rules in GATT • But, of course, GATT was generally perceived as not applicable to income taxes

6. GATT/GATS Law and Taxation • Art III:2 GATT prohibits discrimination against imported goods by means of internal (non-tariff) taxes • Application to “like” products or products “in competition” • Primary exceptions in Art XX: tax not mentioned • Art XVII GATS prohibits discrimination subject to a country’s commitments • Original U.S. position – unlimited nondiscrimination • Primary exceptions in Art XIV include in Lit. (e): “Avoidance of Double Taxation” as a competing value • Interpreted to practically exempt bilateral tax treaties from the application of GATS • Conclusion reinforced by specific denial of the right for consultation or initiation of a dispute settlement procedure when a bilateral tax treaty applies – GATS XXII:3 • Unsuccessful U.S. position in FSC cases: tax treaty provisions superior to trade law obligations (with the irrelevant exception of GATT)

7. Export Subsidies • Subsidies easily transformable to tax expenditure • But, income tax based export subsidies are not common • SCM prohibits (only) subsidies (forgone revenue that is otherwise due) that are contingent upon export performance or discriminate against importation • Specific mention of tax measures in an “illustrative list” of prohibited measures • Footnote 59: • Deferral acceptable only if requires adequate interest • Arms’ length standard adopted • Measured to avoid double taxation of foreign source income exempted from scrutiny • Export contingency may be de jure or de facto, yet de facto contingency is very difficult to prove

8. DISC/FSC/ETI Saga • Clearly prohibited U.S. export (income tax) subsidies • Arguably to balance a similar effect of indirect taxes’ (VAT) not employed by the U.S. • 30 years, with some side stories • Weak analysis, yet eventually correct ruling by dispute settlement body • Essentially no guidance in result • Lessons • WTO lacks competence in tax matters • Strengths and weaknesses of WTO’s judicial model

9. Discontent • Traditionally not problematic • Little use of income tax export subsidies • General acceptance of separate regimes • Yet, FSC saga led to the largest case in terms of sanctions • Future uncertain as governments have fewer options • Dispute with China partially relieved • Unclear future: • China, India • Europe/U.S.(?) • Boeing/Airbus

10. Coordination • Is there a problem that requires a solution? • McDaniel’s analysis of FSC saga • Avi-Yonah and Slemrod: • Current trade law is capable of solving many of the challenges posed by income taxes • Reconciliation of the regimes may require a multilateral agreement • WTO can serve as the coordinating institution for a multilateral tax cooperation effort • No commitment as to its being the best solution • Brauner • International tax and trade regimes can be coordinated, yet not reconciled in current form • WTO is a theoretically proper forum, yet practically the wrong one • Expertise is not over-estimated in regard to international taxation • Politics • Current struggle of WTO with development issues tie-in to its political inappropriateness • New directions in research • Illouz