Itai Grinberg’s fascinating and important new work addresses the thorny question of how best to coordinate and implement international tax norms.
International tax avoidance by multinationals has generated public attention across the globe, and ushered in a new era of cross-border coordination in the area of international tax law, most prominently through the OECD’s Base Erosion and Profit Shifting (BEPS) project. Grinberg’s new work identifies, and evaluates, the BEPS project’s increasing reliance on the institutional and procedural frameworks used for coordinating international financial law, and considers the consequences of this approach for the overall success of the BEPS project.
In particular, Grinberg argues that the framework used to coordinate international financial law may not be readily transferable to the context of international tax law, due to the different political economy considerations in the two spheres. In contrast, Grinberg argues, international tax regimes are best coordinated through model tax treaties, specifically the OECD Model Treaty, and the elements of BEPS tied to model treaty reform are consequently most likely to succeed.
The work begins by identifying the trend of the BEPS project adopting “soft law” institutions and procedures common in the coordination of international financial law, generally characterized by informal intergovernmental organizations overseeing international rules and monitoring, but without formal legal authority, and with a centralized agenda largely set by the G-20. In this multi-step process, international agreements are then implemented domestically through legislative or regulatory action.
Grinberg argues that this framework is less likely to succeed in the context of international tax law, because of the different political economy effects in this area. In particular, Grinberg argues that this model of international soft law is most effective when: (1) political salience does not cause parochial domestic interests to “trump” (so to speak) international policy coherence, (2) national preferences align and the rules have fewer distributional consequences among nations, (3) leading economies or a subset of states can effectively set global standards, (4) distributional considerations do not override the effects of precedent and path-dependence, and (5) compliance and enforcement is relatively easy. In other words, a laundry list of conditions that generally do not apply to many areas of international tax law (for reasons that may seem evident to anyone with a passing familiarity with the field and that are developed further in the work).
Not to worry. Grinberg consequently argues that international tax law has a unique tool at its disposal, that can form the basis for effective cross-border coordination: model tax treaties, and in particular the OECD’s Model Tax Convention on Income and Capital (the “Model Treaty”). Grinberg argues that this tool, although technically also a form of soft law, can short-circuit the multi-step process described above, due to the partially self-executing nature of changes to the Model Tax Treaty provisions and technical commentary. In particular, Grinberg argues that treaty negotiators often uses the Model Treaty as a starting point for negotiations, domestic courts and tax administrations often use the model commentary to interpret the meaning of bilateral treaty provisions, and changes to the model commentary can retroactively alter the substance of previously executed agreements. The Article concludes by arguing that the model treaty framework might be expanded through multilateral instruments that modify bilateral tax treaties, and thereby increase the efficacy of the BEPS project.
Inevitably, a project this complex and nuanced suggests additional avenues for exploration. For example, a positive account of the types of tax rules that are—and are not—most amenable to implementation through the Model Treaty and commentaries would be helpful in assessing the potential—and limitations—of model tax treaties as a tool for international tax coordination. It may be that the rules that are most likely to be self-executing are the low salience technical commentaries, with lesser distributional impacts, since domestic courts, administrators and treaty negotiators have no incentive to “reinvent the wheel” when devising definitional lines that are defensible, rational, and relatively immune to abuse. In contrast, it may be harder to bury higher salience first-order rules, with higher distributional stakes, in model tax treaty provision and commentary, and any such model rules may be less likely to be self-executing. In this event, parties may have no choice but to fall back on softer forms of soft law, comparable to those found in the international finance sphere. (By analogy to the classification of bathroom tissues, such might be termed “extra-soft law”).
The work concludes by suggesting that issues in international tax law that fall outside the purview of the Model Treaty may descend into a struggle between national self-interests, instead of cohering into a consistent international regime. It would also be interesting to extend this analysis to account for a broader range of multi-party dynamics beyond an “every nation for themselves” perspective, including an account of nations with partially aligned economic interests (such as, possibly, among the EU-member states or developing nations).
In sum, this work provides a fascinating and important contribution to the ongoing project of international tax coordination, and is certain to influence the direction of future efforts.