THE MAKING OF INTERNATIONAL TAX LAW: EMPIRICAL EVIDENCE FROM TAX TREATIES TEXT.

• Date: 22 September 2020
• Author: Ash, Elliott,Marian, Omri
• Published date: 22 September 2020
• Author: Ash, Elliott

1. INTRODUCTION AND THEORETICAL BACKGROUND 152 II. LITERATURE REVIEW 157 A. Tax Treaties and the "International Tax System" 157 B. Tax Treaties and Model Treaties: Historical and Institutional Background 161 III. DATA AND METHODS 167 A. Treaty Data 167 B. Constructing Text Features 169 C. Computing Treaty Similarity 170 D. Metadata 171 IV. RESULTS 172 A. Convergence in General 172 B. Which Model Treaties Are te Most Influential? 177 V. DISCUSSION 187 A. The Institutional Aspect 187 B. The Normative Implications 188 VI. CONCLUSION 189 I. INTRODUCTION AND THEORETICAL BACKGROUND

   Whether a binding international legal tax regime exists is an intractable debate defining the academic field of international taxation. The answer to this question has important practical implications. To the extent that there is transnational tax law, nation-states "are not free to adopt any international tax rules they please, but rather operate within the context of the regime." (1)

   There is no formal "world tax organization," nor a comprehensive multilateral agreement controlling the taxation of cross-border transactions. There are, of course, certain formal, binding multilateral tax laws, such as in the European Union (EU), several multilateral tax treaties, and--as of 2016--the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). (2) These discrete multilateral instruments are far and few between, and the most significant of them (the MLI), is a very recent development. For the past six decades, the taxation of most cross-border transactions was (and still mostly is) controlled by the laws of the jurisdictions involved, as well as about 3,000 bilateral tax treaties. These bilateral tax treaties create the most (some would say only) significant binding transnational legal framework for the taxation of cross-border activities. Some commentators suggest that the network of bilateral tax treaties effectively creates a customary international law of taxa-tion. (3) Others reject this notion, arguing that countries are free to adopt whatever tax laws they choose. (4)

   To the best of our knowledge, no study has empirically investigated and compared the written language of bilateral tax treaties. Such investigation may help to assess whether some level of consensus on international tax matters exists. There has also not been an attempt, to the best of our knowledge, to empirically assess which international institutions have the most influence on the drafting of bilateral tax treaties.

   It should be noted at the outset, that a consensus on language--even if it exists--does not necessarily imply a consensus on matters of legal substance. Different schools of thought in comparative law would offer various normative explanations for the convergence of legal language. For example, functional comparatists view convergence as a desired outcome of a competitive process. (5) Their assumption is that "there is a competitive market for the supply of law," (6) in which successful models survive and are eventually widely adopted. Under this view, legal language convergence is an outcome of an efficient process of market discovery of "best" legal models. It is therefore reasonable to assume that language convergence demonstrates a convergence of something in substance.

   In contrast, the cultural approach to comparative law would reject such an assumption. Under the cultural approach, law is a manifestation of a cultural phenomenon, and each culture is unique. (7) This differentiation of cultures entails that the laws are necessarily different even if they look similar. Culturalists would argue that "what can be displaced from one jurisdiction to another is, literally, a meaningless form of words....because, as it crosses boundaries, the original rule necessarily undergoes a change that affects it qua rule." (8) Finally, the critical school of thought in comparative law would likely view legal convergence as a manifestation of some sort of hegemonial-ideological project, with winners and losers. (9) Convergence is an ideology forced by some on others.

   To date, however, it is not even empirically shown that legal language in tax treaties is converging. This fact is simply assumed by almost all comparative and international tax scholars. Thus, the normative debate described above seems purely theoretical and has little to offer in the way of practical policy implication. This Article takes the initial necessary step to provide this normative debate with an empirical foundation.

   Using a unique dataset of4,052 bilateral income tax treaties and 23 model treaties, we seek to empirically answer three questions. First, we try to identify whether consensus on the taxation of cross-border transactions exists as far as controlling legal language is concerned and whether there are observable changes in the level of such consensus over time. We do so by measuring the level of pair-wise language similarity of each pair of treaties in effect at any given year. We find clear trends towards convergence in legal language in treaties, particularly since the early 1960s--when the OECD first introduced its model tax treaty. (10)

   Second, we take advantage of the fact that most bilateral tax treaties are neatly organized into tax topics in order to try and identify whether some areas of international taxation present a higher level of consensus than others. To date, the academic debate on the existence of an international tax regime has run a primarily binary course, with each side of the debate presenting facts supporting its own argument. There has been little attempt, however, to empirically identify particular areas of consensus or disagreement. We find that convergence in legal language is most clearly observed in the context of intercompany pricing, taxation of cross-border business income, and in the context of mutual agreement procedures. (11) The lowest levels of convergence are observed in connection with certain definitional issues (such as the taxes and the geographical extent to which treaties apply), on the question of how to relieve double taxation, as well as in the context of assistance in collection of taxes.

   Lastly, and perhaps most importantly, we investigate the institutional influence of the drafting of tax treaties. That is, to the extent that there is an international tax consensus embodied in tax treaties, what is its source? The OECD, the U.N., and several other international actors issue non-binding model treaties. Commentators point to the fact that actual treaties seem to closely follow the models, particularly the OECD Model. (12) We take advantage of the fact the model treaties are periodically updated to measure the level of similarity against each model over time. We try to identify whether actual treaties converge in language towards newly published U.N. or OECD models, or whether such models simply incorporate existing tax treaty practices. We also investigate the model published by the United States, since the United States plays a significant role in affecting international tax policies, (13) and we therefore consider the investigation of such a model worthwhile. We find evidence that the OECD Model Tax Convention is most influen-tial. (14) In the years following the adoption of a new OECD Model there is a clear trend of convergence in newly adopted bilateral tax treaties towards the language of the new OECD Model. We find that model treaties published by the U.N. have little immediate observable effect but that, overall, the U.N. model treaties seem to be similar to existing long-term tax-treaties practices. The models published by the United States tend to respond to existing treaty practices rather than to create new practices.

   To summarize our empirical conclusions: trends towards international legal language convergence are clearly observable, at least on certain matters, and IGOs, in particular the OECD, seem to function as institutional sources of consensus-building. But what does this mean? We explore possible various normative implications of this observed phenomenon, from various points of view of different schools of thought in comparative law.

   The rest of the Article is structured as follows: Part II provides the necessary background on two matters. First, it surveys the debate on whether an international legal regime controlling tax matters exists and the role of bilateral tax treaties in this discourse. Second, we discuss some of the historical background of tax treaties, the rise of model treaties, and the institutional framework in which models are concluded. In Part III we discuss the building of the dataset as well as the language processing procedures we use to test legal language convergence. Part IV presents the findings. Finally, Part V provides a discussion of the normative implications of our empirical findings.

2. LITERATURE REVIEW

   1. Tax Treaties and the "International Tax System"

      Some commentators have suggested that there is a coherent international tax regime, (15) but opinions differ as to the binding nature of this regime. Pointing to (qualitative) evidence of convergence in domestic tax laws and bilateral tax treaties, some assert that there are identifiable customary norms that provide the basis for a binding transnational framework on tax matters. (16) Others suggest that the observed convergence in tax standards represents nations' adherence to "soft law" (17) or transnational legal orders (18) that are not formally binding, yet create a sense of legal obligation.

      National and international governmental bodies also sometimes suggest that a coherent international system exists. For example, in response to rampant tax avoidance by multinational corporations and the popular outcry that resulted, the OECD launched the BEPS project in 2013. In part, this project's aim is to revisit "international tax standards" as well as the "international...