Wednesday, October 23, 2024
Ordower: Tax As Hybrid Law—Borrowing And Convergences
Henry Ordower (St. Louis; Google Scholar), Tax As Hybrid Law: Borrowing and Convergences, 11 J. Int’l & Compar. L. 259 (2024):
This article argues that tax is a hybrid of civil and common law, public and private law, and is cross-disciplinary. It observes that tax law has become an all-purpose tool for legislators. It seeks to demonstrate how the US, a common law jurisdiction, has turned to civil law models for taxation while civil law jurisdictions and the European Union have sought common law models to combat tax avoidance. The ubiquity of tax and its public law influence on private law transactions, its cross disciplinary nature, and its deployment as a legislative tool to manage the economy make it a candidate for reform targeting cross-border uniformity and systemic convergence—a motion that has begun and should continue to reach full uniformity.
Conclusion: Merging Common and Civil Law for Taxation, the BEPS Developments, and the ATAD and Hybrid Mismatch
As taxation in the US gradually has become more civil law like and moved towards statutorily complex but clearly defined rules, civil law countries have sought flexibility in application of their tax laws to limit tax avoidance and arbitrage. Those civil law jurisdictions have enacted broad statutory overrides that move them towards common law interpretative flexibility as they confront aggressive tax planning. The ATAD embraced GAARs as a critical tool for controlling tax avoidance and applauded the OECD’s BEPS projects. It also identified five principal tax planning areas to address, including related entities and transfer pricing, borrowing costs and deductibility, exits and exit taxes to capture unrealised appreciation, controlled foreign company rules, and hybrid mismatches. All the identified areas emphasise the ability of taxpayers to arbitrage differences in tax computations, rates, and rules across jurisdictions.
The extensive BEPS projects seek to staunch tax arbitrage by redirecting taxable income to high tax, developed economies, rejecting longstanding acceptance of respect for taxpayers’ chosen business structure and accompanying favourable tax characteristics. The GloBE minimum tax, also referred to as BEPS II, aims to compel low tax jurisdictions to impose at least a 15 percent tax on income without regard to whether the low or no tax jurisdictions have the tax infrastructure needed to impose the 15 percent tax. While 138 jurisdictions have agreed to the minimum tax, implementation in a fully consistent manner remains challenging. Lack of uniform tax rules, however, thwarts any effort to control tax arbitrage. Even if rates become uniform, tax competition may shift to the design of the tax rules and the practicalities of collection. The uniform rate may serve only to allow developed economies to capture more tax revenue at the expense of those economies that previously used a very low rate to capture much needed investment.
Absent uniform rules, no country is immune from offering tax arbitrage opportunities and even actively engaging in tax competition to capture business and investment. At the simplest level, a rule as basic as the realisation requirement for inclusion provides an opportunity to shift assets to jurisdictions permitting tax deferral longer than others. The basis step up at death rule in the US encourages taxpayers with large amounts of appreciated assets to change their residence to the US in their old age so that gain that would inhere in their assets disappears at their death. And many countries, the US in particular, continue to rely on their tax system to deliver subsidies and incentives rather than constructing a separate and politically more transparent mechanism for those subsidies.
Nevertheless, as this article illustrates, taxation is indeed hybrid between civil and common law, public and private law. The essential process of making tax uniform has begun and is facilitated by the hybrid nature of tax. Basic distinctions between common and civil law retreat in importance. Nations regularly borrow tax concepts and design from other nations so that tax systems and rules tend to converge. The ubiquity of tax draws many thoughtful, resourceful, and creative people to the tax discipline. Tax hybridity should look to harness that creative power to make tax work towards transparent, uniform rule-making free from opportunities for arbitrage and competition, leaving competition to productive creativity.
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https://taxprof.typepad.com/taxprof_blog/2024/10/ordower-tax-as-hybrid-lawborrowing-and-convergences.html