International Trade and Tax Treaties Yariv Brauner University of Florida Sao Paulo, August 2009

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

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

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)

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

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)

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

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

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

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