While I’m not Catholic, I like to be catholic. Hence, I was glad that this week’s paper by Miranda Stewart, while in some respects covering familiar ground for us this semester – international tax policy, with particular reference to OECD-BEPS and FATCA – was methodologically distinct from our usual fare. It’s more in the fiscal sociology literature, with particular reference, for example, to the well-known (though not previously to me) work on globalization by Saskia Sassen, and on the “transnational legal order of international taxation” as discussed by European political scientists Philipp Genschel and Thomas Rixen.
Two discussion topics of particular interest that I saw in the paper pertain to (1) the notion of “sovereignty” in international taxation, raised at the start of the paper (and by Genschel and Rixen), and (2) the question of whether, as a descriptive matter, we are witnessing developments that could rightly be described as involving the growth of a “transnational legal order” in international taxation. Hence, I will here address these two topics in turn.
Tax law has traditionally been considered Ground Zero (or at least a major part of Ground Zero) for countries’ exercise, at least in the purely domestic case, of unfettered “sovereignty.” This has been interpreted as meaning, not just that they can do whatever they like internally, but also that they don’t extensively cooperate with each other. For example, the U.S. and France generally would not collect each other’s income tax liabilities, even as to nationals of the other country who can be found within their borders. Obviously, however, the bounds of cooperation have been expanding recently.
Genschel and Rixen argue that countries’ “tax sovereignty” is being reduced or undermined because it conflicts with other goals that countries have. For example, they discern a “trilemma” as between countries’ aims of (1) preserving their tax sovereignty, (2) avoiding double taxation, and (3) restraining tax competition.
For reasons not entirely germane here, I don’t entirely agree with this analysis. When you have a trilemma, that means that you can attain any two of three goals, but not all three. It’s certainly true that, in principle, all countries in the world, by adopting a single uniform global tax base and set of rates that eliminated all tax sovereignty for particular countries, could also completely eliminate double taxation and tax competition. But the other two parts of the purported trilemma don’t work for me – again, for reasons not worth running through here, as it is only a side-theme in Stewart’s paper.
But anyway, Genschel and Rixen see tax sovereignty as being undermined – not that they necessarily consider this bad on balance – because countries are finding it increasingly important to harmonize and cooperate in what they do, so as to better achieve mutual aims. Stewart, by contrast, sees countries’ sovereignty as potentially being strengthened by the fact that, through greater cooperation, they may become more able to achieve their goals (e.g., limiting tax evasion by high-income individuals and tax avoidance by large multinationals).
For me, this disagreement reflects that “sovereignty” is a murky concept, and often not helpful in these debates. What it does mean and/or should mean, and why or when we should value it, is not always clear. The underlying problem can be illustrated via a famous bit of dialogue in Shakespeare’s Henry IV, Part I:
Owen Glendower: “I can call spirits from the vasty deep.”
Hotspur: “Why, so can I, and so can any man. But will they come when you do call for them?”
Glendower, if interpreted literally in the manner that Hotspur proposes, is describing autonomy. I can do whatever I want – and if I want to issue a verbal command regarding spirits from the vasty deep, I bloody well will. As applied to a state rather than an individual, this is sovereignty in the sense of autonomy.
Hotspur, by contrast, speaks in terms of power or empowerment. Can you actually get those spirits to come? As applied to a state, this is the other sense of sovereignty: the capacity to achieve one’s aims.
Semantically speaking, “sovereignty” can be and has been used either way. Genschel and Rixen are with Glendower, asking whether a state can choose whatever tax rules it likes, no outside approval or coordination needed. Stewart is asking whether states can succeed in achieving their aims, and in this sense sees sovereignty as potentially strengthened by cooperation, deference to common norms, etcetera, that may reduce their purely individualized discretion over tax law design.
While I’m agnostic about the semantic debate (which is why I tend to find “sovereignty” not a very useful concept), I am more on Stewart’s side regarding what I value. One could analogize the debate about whether it’s more important for states to do whatever they like, or to achieve their goals, to the question of autonomy and free choice for individuals. Does it matter for its own sake, or just instrumentally to some other aim, such as maximizing welfare? I’m in the latter camp in terms of what I value. The big difference between the two contexts is that valuing states’ sovereignty, in the sense of full autonomy and discretion rather than empowerment, requires jumping into the muddy waters of collective choice. We know too much about the dilemmas and difficulties associated with collective choice for the argument that it should be valued for its own sake, not just instrumentally, to be as straightforward as that in the context of individuals.
The upshot for me is that, while my small-c catholicism induces me to take an interest in discussing sovereignty as a key issue in international taxation, I don’t regard it as the best peg on which to hang the debate. Under any given international tax regime, we should certainly be interested in such questions as which countries have power, which countries’ interests are being served, and what a given country might benefit from doing or be likely to do. But I would tend to think the discussion can be clearer if the ambiguities around what we might mean by “sovereignty” as a concept can be kept from clouding the debate.
2. IS A “TRANSNATIONAL” INTERNATIONAL TAX REGIME INCREASINGLY EMERGING?
Sometimes the question of whether there is such a thing as truly “international” tax law – rather than just the laws of particular countries – or equivalently, for my purposes, of whether there is at least to some extent a “transnational” regime emerging in the field of international taxation – is debated for ideological purposes. The assertion that such a regime already exists, or does not exist, may be deployed in support of particular policy moves.
Stewart’s interest, however, is descriptive or analytical: to what extent does such a thing actually exist? I prefer this focus to the other one, which puts the international tax policy debate in terms different from those I consider clearest. I would certainly consider it relevant whether a given country should expect cooperative or other (such as straight-out competitive, or else tit-for-tat) strategic responses by other countries to what it does, but a 1-versus-0 “is there currently an international tax regime” framing strikes me as more distracting than illuminating.
What might “transnational” usefully mean in this context, from a descriptive standpoint? For me, it would mean that countries, at least in particular cases, follow a given rule or approach at least in part because it is followed by others, not just as a unilateral choice.
One way this can happen is through the top-down assertion of vertical power. In particular tax settings, the U.S. federal government (through Congress or the courts) can tell the states what to do or what not to do, the ECJ can do so with EU countries, and a (fictional) universal global tax authority could do so with all countries.
But vertical command is only one mechanism for creating aspects of a transnational regime. Lateral treaty arrangements, such as the WTO for trade, can also do so. And so could, say, pronouncements on international tax policy by the OECD if countries treat these pronouncements as mattering for their own sake.
Here’s a counterfactual example. The EU has been debating for some time creating a “common consolidated corporate tax base” (CCCTB). It could be adopted as binding on all EU countries if unanimous consent were obtained for a particular design. Then all EU countries would have the same corporate tax base and the same (formulary) approach to apportioning taxable income between member states. Only tax rates could still differ in the corporate income tax as between member states, in this scenario. As it happens, no agreement has been reached, and I wouldn’t be shocked if none ever is.
Suppose the EU adopted a CCCTB. Then clearly there’d be a “transnational” regime, in this regard, within the set of EU countries, applying through vertical hierarchy. But suppose alternatively that there were a “soft” and non-binding agreement, leading to some compliance but not 100%. Insofar as countries came closer to following the CCCTB than they would have absent the agreement, one could say there is some transnational element at work.
Circling back to the sovereignty debate for just a moment, clearly for each EU country it could be optimal if everyone else in the EU had to follow the CCCTB, but “we” alone didn’t have to. This is not something the others are likely to agree to, however – “we’re bound, but you’re not.” So the question, which again I think isn’t usefully illuminated by the sovereignty concept, is whether “we” should in practice comply – at least, more than we would have otherwise – based on the view that it will increase the extent to which others comply, or at least, less calculatingly, that we are in a situation where it makes sense to lean towards cooperating rather than defecting. (This, again, is anti-sovereignty in the Glendower sense but potentially pro-sovereignty in the Hotspur sense.)
But how do you determine in practice whether or not there is a true transnational regime in place? The problem is that countries having similar rules doesn't directly tell you anything. After all, there's no need to invoke the transnational regime if they all happen unilaterally to favor doing the same thing.
Just for a cultural reference more low-brow than Henry IV, Part 1, consider the Internet comedy series, "Chad Vader, Day Shift Manager." Chad, who looks, sounds, and dresses like Darth Vader, whom he claims as an older brother, lives in Madison, Wisconsin, and is the day shift manager at the Empire Market. He does stuff like take a woman to a restaurant on a date, and say to the waiter, in his most resonant James Earl Jones tones, "I command you to bring us the menus." But since the waiter was planning to do this anyway, he is not actually demonstrating the power of a Sith Lord over weak-willed individuals. But I digress.
Here is a more direct pass on the same issue. If we observe countries having the same or similar international tax rules, does that mean there is a transnational regime? Not necessarily. It may be parallelism rather than even soft verticality. Consider the evolutionary concept of convergence, well-demonstrated by these two creatures:
When we're talking about human institutions, convergence can be assisted by direct imitation. (A snarky example would be the rise of tax policy colloquia in law schools around the country after we introduced ours at NYU in 1996.) This is how I interpret the rise of controlled foreign corporation (CFC) rules after the U.S. adopted its CFC rules, known colloquially as the subpart F rules, in 1962. My own view is that this wasn't a "transnational" phenomenon - countries weren't choosing to cooperate rather than defect by some global welfare metric. Rather, policymakers who observed the U.S. rules and others that were adopted apparently said to themselves "That's a good idea - we could benefit from doing that, too."
This immediately brings to mind a failed transnational effort. During the OECD-BEPS process, there was support in some circles for inclusion in the final report of tough minimum-standard CFC rules. This ended up getting greatly watered down because certain key countries were opposed. And even if OECD-BEPS had ended up specifying tough CFC rules, the next question would have been how much influence this ended up having. This, in turn, reflects that, as I've discussed elsewhere, countries have good reason to be a bit ambivalent about using CFC rules, under which certain low-taxed foreign source income of resident companies' foreign subsidiaries may face current domestic taxation. This may be good for unilateral national welfare if it helps protect the domestic tax base, may be bad for such welfare if it results in higher rather than lower foreign taxes being paid, and may also be bad insofar as it raises too high the tax "price" of investing through resident companies.
In sum, I tend to view the near-universality of CFC rules as convergence plus imitation in the pursuit of unilateral objectives, rather than as evidence of a transnational regime. The widespread adoption of stronger CFC rules would have evidenced a transnational regime at work, but it doesn't appear to be happening. I also don't view the widespread adoption of economic substance / business purpose / generalized anti-avoidance rules (GAARs) as transnationality. Once again, this strikes me as a unilaterally motivated convergence plus imitation story. Note, for example, that, according to an interesting student paper that I saw last semester, China has adopted a GAAR approach recently (leading to problems that reflect its particular institutions), apparently based on its own perceived fiscal self-interest, not as a way of buttering up the international tax community.
So where are the true examples of transnational movement? With regard to OECD-BEPS, we may need to wait a few years to answer that question, and a favorable outcome is not guaranteed. But perhaps the global FATCA process can already be viewed in these terms.