International tax law as a Ponzi scheme.

Author:Morgan, Ed

    It may be, as Benjamin Franklin famously wrote, that "in this world nothing can be said to be certain, except death and taxes." (1) The former, however, has a universal quality that the latter lacks, and the two share little in terms of legal theory: taxes are imposed by positive act of state while death is more typically an expression of natural law. (2) The incongruity, of course, is what makes Franklin's bon mot so clever. At the same time, it forms the basic premise and theoretical challenge for the discipline of international tax. The foundational question for international tax lawyers is whether a global tax regime truly exists, or whether tax law is only about the revenue generating system which each sovereign authority unilaterally makes for itself. (3)

    It is the ambition of this paper to explore the extent to which international tax law is more than the sum of its parts. It will do so by examining three recent legal/policy decisions. The first of these, the 2006 judgment of the Tax Court of Canada in MIL Investments, (4) decided that a statutory general anti-avoidance rule of interpretation does not operate so as to bar the practice of treaty shopping for corporate residence, and that strict construction applies to the taxpayer's use of the Canada-Luxembourg tax treaty. The second one, the 2008 judgment of the U.S. Tax Court in Jamieson, (5) determined that the alternative minimum tax credit limitation trumps the Canada-U.S. tax treaty foreign tax credit as the last-in-time enactment, and that implied repeals of earlier enactments are not favored as an interpretive approach to tax conventions. The third decision is contained in a series of progress reports on internationally agreed tax standards issued by the Organisation for Economic Cooperation and Development (OECD), (6) which seeks to implement a coordinated international standard for tax and to publicly expose non-compliant states maintaining full or partial tax secrecy regimes.

    Each of the three decisions raises distinct doctrinal issues that arise in different policy contexts. Nevertheless, these three decisions and decision-makers share normative concerns that go beyond the fact that they each, in one way or another, call into question the relationship between domestic tax policy and international agreements. More specifically, each of them concerns the interpretation or application of instruments designed to promote tax neutrality and transparency in international investment as the shared values of the international revenue system. (7) The puzzle raised by the two adjudications and one policy initiative is an existential one about the nature of the international tax system. Is the space between state tax regimes really a fiscal vacuum, (8) or is it a normative universe filled with shared definitional and enforcement ideals? (9) In a world where every taxation authority is sovereign, does the discipline of international tax--with its treaty networks and OECD framework provide any normative authority that doesn't just circle back, like one big intellectual Ponzi scheme, (10) to the system's sovereign members?


    Adjudicators in the British Commonwealth, (11) the United States, (12) and various international institutions, (13) have all had a number of occasions to consider constitutional restrictions on the revenue raising jurisdiction of states. One would assume that it is in constitutional law that states sculpt their respective revenue raising authorities to fit with each other. After all, in other fields of state power an overstepping of bounds into the terrain of a foreign nation has been assimilated to a due process violation; in this way, constitutional rules can form the backbone of a coordinated international regime. (14)

    A paradigm for the constitutional law approach to taxation power is provided by the Privy Council's opinion in B.C. Electric Railway Co. v. The King, (15) which rejected a challenge to the constitutional capacity of Canada's federal Parliament to impose a tax on non-resident shareholders in a British Columbia corporation. The company was judged to be a "Canadian debtor" company, so that its remittances to foreign shareholders were subject to the statutory provisions requiring tax to be withheld at the Canadian source of the dividend payments. (16) As the Privy Council saw it, it did not matter that the taxpayers were foreign citizens and nonresidents.

    In addressing the constitutional issue, Viscount Simon indicated that the Imperial Parliament dispensed with the juridical impediments under which Canada operated prior to the 1931 enactment of the Statute of Westminster. (17) Viscount Simon agreed with Justice Kerwin's assertion that the taxation powers of the Dominion Parliament were "not restricted by any consideration not applicable to the legislation of a fully sovereign state". (18) Justice Kerwin also asserted categorically that "a [sovereign] state may tax persons outside its territory. Here it is clear that it has done so and the Canadian Courts must obey the enactment." (19) The taxation powers of Canada's Parliament, as the instrumentality of national sovereignty, were interpreted "as plenary and as ample within the [constitutional] limits prescribed ... as the Imperial Parliament in the plenitude of its power possessed or could bestow." (20)

    In the Privy Council's opinion, therefore, Canada, like any other full-fledged sovereign, (21) enjoys the unrestrained and unrestrainable power to tax non-residents. (22) The court's deference to the sovereign was not because of any perceived judicial subordination; the very point of entertaining a constitutional challenge is that it is for the court--and not the government--to interpret Canada's sovereign law. (23) Rather, the point made by Viscount Simon is a basic one of international legality: it is the inherent powers of sovereignty itself that are vindicated by the pronouncements of the law. (24) Accordingly, constitutional pronouncements on the scope of international tax jurisdiction reflect this need for unbounded taxing powers. (25)

    If the answer to the problem of international taxation is not to be found in domestic constitutions, then the logical place to search is in the pronouncements of public international law itself. After all, international tribunals, unlike domestic courts, are not in their starting points bound as organs of a state to uphold its powers and confirm its jurisdictional authority. In fact, from the objective standpoint of the International Court of Justice (ICJ), the starting point for analysis is that "[t]he right to tax necessarily implies the right to take coercive measures in case of non-payment". (26) The connotation is that fiscal authority and enforcement powers conform rather than speak at cross purposes. (27) Accordingly, the possibility is suggested that in the realm of public international law, some accommodation between legally sovereign entities can be achieved.

    On closer reading of public international case law, however, the promising illusion becomes more of a riddle. Two illustrations are found in a pair of well known tax rulings by the ICJ and its predecessor. (28) First, in Free Zones of Upper Savoy and the District of Gex, (29) the question arose as to the extent to which France's treaty obligations could be said to have curtailed its domestic taxation power. The French and Swiss governments had, in a series of 19th century treaties, established a free trade zone which entailed the elimination of customs duties and other barriers to the transborder flow of goods. In 1920, France promulgated a tax decree in which ordinary taxes on manufactured goods were for the first time levied on imports at the French-Swiss border. Switzerland complained that the fiscal measure was not only an effective barrier to the flow of manufactured goods across the border, but that it amounted to a disguised customs duty and thus squarely violated the 'free zone' arrangement.

    The court's analysis took the two-pronged approach of affirming Switzerland's legal rights as a treaty partner of France, and denying the international court's own authority to say anything about France's internal tax laws. Thus, it was stated on Switzerland's behalf that "it is certain that France cannot rely on her own legislation to limit the scope of her international obligations," (30) the implication being that the international adjudicative body holds itself as the arbiter of treaty partners' mutual rights. This statement, however, was coupled with a confirmation of the fact that the PCIJ did not view international legal authority generally as dominant in its stature. Thus, it stated on France's behalf that "it is equally certain that French fiscal legislation applies in the territory of the free zones as in any other part of French territory," (31) the implication being that the court in no way conceived of itself as having authority over the French legislature per se. The conclusion, therefore, was one of judicial abdication. The PCIJ felt that any decision with regard to the taxation powers of the parties, "even if it commended itself to the Court, on its merits, would be beyond the Court's jurisdiction". (32)

    One gets the distinct feeling from Free Zones that the interstate system, such as it is, has lost control of its state parts. If anything, this tendency is accentuated by the more renowned decision of the International Court of Justice in Rights of Nationals of the United States in Morocco (33) The United States had asserted certain privileges, including local tax immunity, for its citizens who were residents of Morocco, tracing the exemptions to a consular jurisdiction established under several century-old conventions. For its part, France responded by asserting the territorial sovereignty of its colonial possession, and in particular by characterizing the U.S. claim as reflective of the...

To continue reading