Author:Pirlot, Alice
  1. INTRODUCTION 434 II. THE DBCFT--MAIN FEATURES 438 A. The DBCFT As Part of Tax law 440 B. The DBCFT As Seen by WTO Law 442 1. The DBCFT, Existing Taxes, and WTO Law 442 2. Typology of Taxes Under the GATT, the ASCM, and the GATS 444 III. ASSESSING THE WTO LAW INCOMPATIBILITY OF DESTINATION-BASED TAXES 449 A. Tax Treatment of Imported Products 450 1. If Destination-Based Taxes Qualify as Direct Taxes, They Are Necessarily Discriminatory Against Imported Products and/or Amount to Customs Duties 450 a. Direct Taxes Are Not Subject to the GATT 451 b. The DBCFT Is an Indirect Tax 453 c. Both Direct and Indirect Taxes Can Be Imposed on a Destination Basis 454 i. Historical Background of the Concept of BTAs 455 ii. WTO Case Law Surrounding Destination-Based Taxes 458 2. The DBCFT Discriminates Against Imported Products 463 a. Only Domestic Input Costs Are Deductible 465 i. The Deduction of Input Costs Is Neutral 466 ii. The Combination of the Deduction of Inputs with an Exemption Regime May Be Problematic 467 b. Only Domestic Labour Income Is Deductible 472 i. The Deduction of Labour Costs Is Not Product Specific 472 ii. The Safest Option Is to Independently Subsidise Labour Costs 474 3. New Destination-Based Taxes Seem to Discriminate Against Imported Products 477 4. The Collection Method Discriminates Against Imported Products 479 B. Tax Treatment of Exported Products 480 1. If Destination-Based Taxes Qualify as Direct Taxes, the Exemption of Exported Products Automatically Amounts to a Prohibited Export Subsidy 480 2. The Deduction of Labour Costs Amounts to a Prohibited Export Subsidy or to an Actionable Subsidy 484 C. Tax Treatment of Services and Service Suppliers 485 1. The Argument Related to the 'Direct Nature" of Destination-Based Taxes Is Not Worth Analysing Under the GATS 487 2. The Counterarguments Used to Challenge the Claim That the DBCFT Is Discriminatory Are Also Valid Under the GATS 488 3. The Argument Related to the Effects of the DBCFT on Exports Is Not Relevant Under the GATS 490 IV. CONCLUSION 491 I. INTRODUCTION

    In 2016, U.S. House Speaker Paul Ryan proposed to introduce a destination-based cash flow tax (DBCFT) in order to reform the United States' corporate income tax (CIT). (1) This proposal, which was based on the work of economists, failed. (2) But the political interest in destination-based taxes has remained high, both in the United States and elsewhere. More and more countries are considering destination-based taxes as a way to reform their tax system. (3) Moreover, since January 2019, the OECD/G20 inclusive framework has been exploring proposals to "allocate more taxing rights to market or user jurisdictions" in the context of its work on the taxation of the digitalised economy. (4)

    As these proposals differ from traditional CITs, it is not clear whether they fit in with the international trade legal framework. If they do not comply with World Trade Organization (WTO) law agreements, policymakers need to anticipate that their implementation will require adaptation of the international trade legal framework. This can only be done by means of a critical review of the main arguments that could be made in support of the WTO law incompatibility of these new destination-based taxes. As the DBCFT has been criticised for being a blatant violation of WTO law, this Article uses it as an example in order to assess whether WTO law agreements, as they stand now, effectively prevent countries from moving towards a tax system based on the destination principle.

    In contrast to previous works published on the topic, this Article argues that the likelihood a destination-based tax such as the DBCFT would be found incompatible with WTO law is rather low. Consequently, this Article makes the case that the alleged incompatibility of new forms of destination-based taxes with WTO law should not be used as a decisive argument against their adoption. For the design features of the DBCFT that could potentially be problematic, this Article provides design options that are unlikely to be challenged under WTO law. (5) From this viewpoint, this Article informs policymakers who are interested in alternatives to traditional CITs, whether it be the DBCFT or any other type of destination-based tax. (6)

    The Article is structured in two main parts. Part II briefly recalls the distinguishing features of the DBCFT in comparison to traditional CITs and explains how the DBCFT would be characterised under international trade law. Part III evaluates the alleged incompatibility of the DBCFT with WTO law in a two-step analysis. The first step focuses on the main claims that have been brought forward in the debate surrounding the alleged WTO law incompatibility of the DBCFT. Then, the second step of the analysis explores whether it is possible to formulate counterarguments against these claims and whether the DBCFT can qualify as an exception under WTO law. This Article argues that most of the claims that have been made against the DBCFT can be criticised and challenged.

    This reasoning in two steps--which could also be used to analyse other types of destination-based taxes aimed at replacing or complementing traditional CITs--largely reflects the way WTO law is being enforced and international trade disputes handled by the WTO Dispute Settlement Body (DSB). The rules of the WTO set limits to the way and the extent to which its members can impose taxes on internationally traded goods and services. (7) Yet, no systematic control is exercised to guarantee that WTO members respect their commitments under WTO agreements. WTO members benefit from the presumption that they comply with their WTO obligations, unless otherwise proven. (8) Moreover, WTO members do not have the possibility of requesting a ruling to get certainty on the WTO implications of their legal system. The Panels and Appellate Bodies adjudicate on alleged violations of WTO law when a claim of a violation is brought by a WTO member. (9) Consequently, it is not necessary--and probably not possible--to positively prove that new destination-based taxes are compatible with WTO law. (10) It is sufficient to assess whether any convincing claim can be formulated in support of their incompatibility which is less burdensome. (11) Part III of this Article provides such an assessment.


    The DBCFT is a tax on cash flows (namely inflows minus outflows) imposed in the country where final products are consumed and services supplied. (12) According to Auerbach, Devereux, Keen, and Vella, a DBCFT is more robust to tax planning and immune to tax competition than traditional CITs. (13) Despite these advantages, many academic lawyers consider that the DBCFT is not a realistic option to reform the tax system because they anticipate that such a tax would violate the rules of the WTO. (14) One of their arguments is that the DBCFT is too different from the types of destination-based taxes that WTO law can accommodate. This claim, which is analysed in more detail in the next subpart (Part III.A), relies on the assumption that destination-based taxes that copy the features of existing indirect taxes are unproblematic under WTO law whereas new types of destination-based taxes would likely infringe international trade law. This Part highlights that it is correct to say that the DBCFT differs from traditional destination-based taxes (Part II.A) but incorrect to consider that the innovative features of the DBCFT necessarily make it incompatible with WTO law (Part II.B.l). Therefore, this Article recommends analysing new forms of destination-based taxes in light of the WTO's own typology of taxes rather than by comparing them with existing tax measures (Part II.B.2).

    1. The DBCFT As Part of Tax Law

      In some respects, the DBCFT resembles existing taxes, such as VATs and CITs, but, in other respects, it strongly differs from traditional taxes.

      The cash flow component of the DBCFT refers to the way its tax base is calculated: the tax is imposed on net receipts (inflows minus outflows). (15) Two main tax bases can be envisaged, either a real base ("R" base) or a real plus financial base ("R+F" base). (16) Under an "R" base, the tax is imposed on the receipts from sales and the supply of services minus real costs, including labour costs. Under an "R+F" base, financial inflows (e.g., borrowing) and outflows (e.g., lending) are also included in the tax base. In both cases, the DBCFT is neutral towards debt and equity. (17) This makes the DBCFT more economically efficient than most traditional CITs, which favour debt over equity (as interests are usually deductible under CITs).

      The destination component of the DBCFT refers to the fact that inflows (namely sales and the supply of services) are taxed when they take place in the DBCFT jurisdiction. (18) In other words, the tax is imposed on domestic and imported products and on all services deemed to be provided within the DBCFT jurisdiction. By contrast, no tax is imposed on exported products and services supplied outside the DBCFT jurisdiction. The destination basis of the tax is the feature that makes it robust to tax planning. In comparison to traditional CITs that are imposed on profits (which can easily be shifted from one jurisdiction to another), the DBCFT is imposed on sales and/or the supply of services. This tax base is relatively immobile and thus not easy to manipulate.

      Although the DBCFT differs from existing taxes, some of its features make it comparable to traditional direct and indirect taxes. The DBCFT is presented as an alternative to CITs, and it could therefore be compared to a direct tax. (19) However, the DBCFT can also be compared to existing indirect taxes, such as VATs or excise duties. The taxation of sales and services in the place of consumption is a design feature that mirrors the one used under VAT systems. Therefore, some authors describe the DBCFT as a combination of a value added tax...

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