October 2010 Archives
Territoriality and taxation may seem inevitably linked. Even the borderless EU has had to acknowledge a concept of territoriality in the free movement cases involving direct taxation - although "territoriality" there has a specific meaning. It's no surprise that the WTO also has to confront fiscal territoriality in its drive to facilitate international commerce.
No doubt it will take time for governments and taxpayers to recognise the potential effects on taxation of the WTO rules. Pascal Lamy recently said that: "The WTO's impact now goes far beyond the traditional scope of trade policy touching on core national and international interests." Taxation, both direct and indirect, is certainly a core national and international interest.
Of course, it has been clear for a long time that trade law affects taxation. A number of Panel decisions, adopted many years ago, showed that a country could not rely on territoriality to give favourable tax treatment to profits which were obtained outside a country and subjected to foreign taxation. Viewed from the perspective of trade law such treatment constituted a prohibited export subsidy. The scope for direct tax provisions to be treated as export subsidies was further shown in the dispute over the USA treatment of foreign sales corporations.
There are other examples of tax-based export subsidies. Take tax sparing. A country may agree, for example, to give its resident corporations a credit for foreign tax which the corporation would have paid but for an exemption or reduction in the country of source. Other countries may want to contend that an export subsidy has been provided.
And then there is the issue of the most favoured nation principle ("MFN"). A protocol to the UK/Argentina double tax convention, for example, requires Argentina to apply to that convention the benefit of any lower rate, or narrower tax base, that Argentina subsequently gives to any other OECD country. Sometimes this is referred to as the operation of MFN. It is no such thing. MFN seeks to ensure that a specific privilege is generalised so that limited advantages are prohibited. In contrast, provisions such as the one that applies to Argentina aim to maintain the value of a specific privilege.
Quite apart from WTO law, it is increasingly clear that tax lawyers have to re-consider the impact of public international law generally on states' rights to levy taxation. The arcane disagreements which have developed over the years in this area are rapidly attracting the attention of tax advisers anxious to ensure that they leave no stone unturned in challenging what their multi-national clients, families as well as corporations, may well regard as an unjustified exercise in extra-territorial taxation.
In short, what were once matters of exclusively academic interest are now becoming issues of great practical significance both for taxpayers and tax authorities.