TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, September 6, 2005

Conglomerate Junior Scholars Workshop: Mason and Christians Discuss US/EC Tax Treaties

Today's edition of the Junior Scholars Workshop at Conglomerate features Ruth Mason (NYU) and Allison Christians (Wisconsin).

Masonr_1Ruth's paper is U.S. Tax Treaty Policy and the European Court of Justice. Here is the abstract:

This Article considers the effects of EC law on U.S. tax treaty policy. The discussion is framed by the controversy over the legality of tax treaty limitation on benefits clauses (LOBs) in the wake of recent ECJ decisions. The Article argues that the United States and the EU Member States should take positive action to conform their treaties with EC law. Such voluntary harmonization would allow the countries to take a more flexible approach to EC law compliance than they could after an adverse judgment by the European Court of Justice (ECJ). Moreover, voluntary alignment of tax treaties with EC law would help reduce the risk of further encroachment on Member State direct tax sovereignty by the ECJ. By curing EC law conflicts present in current bilateral treaties, the Member States reduce the risk that their treaties will be reviewed by the ECJ, a court hostile to both national revenue needs and Member State direct tax competence. The proposed method of alignment of tax treaties with EC law is a 26-country multilateral tax treaty between the United States and the EU Member States.

Christians_2Here is part of Allison's review:

Although there is no denying that a multilateral treaty would be an effective protection against the uncertainty of possible ECJ interference, it seems the cost, both political and administrative, to achieving 26-way agreement on anything but the most basic terms is enormous and probably prohibitive. Mason references a couple of alternative intermediate steps, but doesn’t dwell on them. For example, Mason references a 1986 study that encourages the adoption of treaty principles into United States domestic laws (which would automatically ensure uniform treatment to all comers, whether EU or not as well as whether covered by a treaty or not), and the practice of introducing most favored nation clauses into United States tax treaties (which is a small but not insignificant step towards harmonization of United States tax treaty terms for all comers, at least from treaty countries). It may be that these alternatives are the only real hope for harmonization of treatment between the United States and the EU member countries, so it seems to me more attention should be paid to these efforts.

Indeed, though not discussed in detail in this paper, the primary and fundamental function of treaties is to introduce discrimination, that is, to provide preferred terms to selected persons and transactions based on the relationships between sovereign nations. Achieving uniformity of terms among treaties is but one step towards global harmonization of tax treatment, the ultimate goal of a US-EU member multilateral treaty. Nevertheless, reaction in the EU to controversial rulings on related matters should serve as a harbinger of things to come, so Mason’s argument that the potential for interference from the ECJ should spring countries into preemptive action is timely and well-made.

To read the full commentary, see here.

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