TaxProf Blog

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

Wednesday, March 22, 2017

Avi-Yonah Posts Two Tax Papers on SSRN

Reuven S. Avi-Yonah (Michigan) & Haiyan Xu (Michigan), A Global Treaty Override? The New OECD Multilateral Tax Instrument and Its Limits:

The new OECD Multilateral Instrument to amend tax treaties (MLI) is an important innovation in international law. Hitherto, international economic law was built primarily on bilateral treaties (e.g., tax treaties and BITs) or multilateral treaties (the WTO agreements). The problem is that in some areas, like tax and investment, multilateral treaties proved hard to negotiate, but only a multilateral treaty can be amended simultaneously by all its signatories.

The MLI provides an ingenious solution: A multilateral instrument that automatically amends all the bilateral treaties of its signatories. If the MLI succeeds, it can be a useful model in other areas, such as investment, where a multilateral agreement was not successful, but there is a growing consensus about the need to adjust the terms of BITs to address investor responsibilities and the definition of investment comprehensively.

Whether the MLI will succeed remains to be seen. A recent estimate has suggested that the US will not agree to anything except the arbitration provision, and other OECD members may agree to only a limited set of provisions. On the other hand, the MLI may prove more appealing to developing countries because it enhances source-based taxation and limits treaty shopping.

Even a limited MLI would be a step forward. The current tax reform proposals in the US pose a significant threat to the international tax regime Countries that wish to limit the damage would be wise to accede to the MLI this year and prevent a massive race to the bottom that could ensue if the US becomes (from the perspective of the rest of the world) a giant tax haven.

Reuven S. Avi-Yonah (Michigan) & Martin Vallespinos (Michigan), Special Tax Zones and the WTO:

Since the SCM agreement was enacted in 1995, the global leadership in the field of STZs has shifted from the OECD to the WTO.

The WTO general agreement includes a broad set of policy goals that goes beyond trade relationships, but its legal framework has been systematically narrowed to the task of assuring market access, non-discrimination, and fairness in trade. Other relevant issues that has impacts on trade, such as for example harmful tax competition or tax base erosion, has not been sufficiently weighted and has been treated as secondary items.

As of today, having passed more than 20 years since the enactment of the first WTO agreements, the WTO overall treatment of STZs appears to be inconsistent with the general policy goals of the organization. While service STZs generally remain free from challenge because there are no formal subsidy rules concerning services, manufacturing STZs with substantial activities have been significantly curtailed by the SCM Agreement. The disparity in the treatment of “goods” and “services” has produced a negative impact on developing countries, as they tend to rely more on manufacturing STZs to achieve economic growth, while benefitting developed countries, which to rely more on offshore banking, technology, and financial services STZs in order and attract investment.

The fairness and distributional concerns raised by this disparity in treatment has also been placed in a secondary position, on the grounds that the objectives of the WTO are limited to market access, freedom, and non-discrimination in trade. This perspective, however, is not consistent with the rationale and general policy goals of the organization, as provided by the main WTO agreement.

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