International Business*Taxation - Tax Justice Network

[Pages:404]International Business Taxation

A Study in the Internationalization of Business Regulation

SOL PICCIOTTO

Emeritus Professor, University of Lancaster

? 1992 Sol Picciotto ? 2013 Sol Picciotto Print edition: Cambridge University Press Electronic edition: Sol Picciotto

ISBN 0 297 82106 7 cased ISBN 0 297 82107 5 paperback

TABLE OF CHAPTERS

Table of Contents

iii

Preface to the Digital Edition

viii

A cknowledgements

x

Introduction

xi

1. History and Principles

1

2. The Tax Treaty System

38

3. The International Tax System at the Crossroads

64

4. International Tax Avoidance

77

5. The Dilemma of Deferral

97

6. Tax Havens and International Finance

117

7. Anti-Haven Measures

142

8. The Transfer Price Problem

171

9. The Worldwide Unitary Taxation Controversy

230

10. The Internationalization of Tax Administration

250

11 Global Business and International Fiscal Law

307

Appendix: UN, OECD and USA Model Treaties

335

Bibliography

370

Table of Cases Cited

392

Contents

iii

TABLE OF CONTENTS

Chapter 1 History and Principles

1. Global Business and International Taxation

1

2. The Rise of Business Taxation

2

(a) Taxing Residents on Income from All Sources

4

(i) Britain and the Broad Residence Rule

4

(ii) Germany: Residence Based on Management

4

(b) Taxing the Profits of a Business Establishment: France

10

(c) The USA: The Foreign Tax Credit

11

3. The Campaign against International Double Taxation

14

(a) Britain and Global Business

14

(b) National and International Double Taxation

16

4. Origins of the Model Tax Treaties

18

(a) The Economists' Study and the Work of the Technical Experts

19

(b) The 1928 Conference and the Model Treaties

22

(c) The Fiscal Committee and Inter-War Treaties

24

5. Allocation of the Income of Transnational Companies

27

(a) The Carroll Report and the Problem of the Transfer Price

27

(b) The 1935 Allocation Convention

31

(c) Limitations of the Carroll Report and the League Approach

32

6. Conclusion

35

Chapter 2 The Tax Treaty System

38

1. Postwar Development of the Bilateral Treaty Network

39

(a) The US-UK Treaty Negotiation

39

(b) International Oil Taxation

42

(c) International Investment and Tax Equity or Neutrality

45

2. The Role of International Organizations

48

(a) The Mexico and London Drafts and the UN Fiscal Commission

49

(b) The OECD Fiscal Affairs Committee

52

(c) Developing Countries and the UN Group of Experts

55

(d) International Co-ordination and Tax Treaty Negotiation

58

Chapter 3 The International Tax System at the Crossroads

64

1. The Interaction of National and International Equity

65

2. The International Crisis of Tax Legitimacy 68

Contents

(a) The Movement for Tax Reform (b) European Community Harmonization

Chapter 4 International Tax Avoidance 1. The Legal Regulation of Economic Relations

(a) Liberal Forms and their Limits (b) Fairness, Efficiency and Legitimacy in Taxation 2. Taxation of Revenues and Opportunities for Avoidance 3. The Economics, Politics and Morality of Avoidance (a) The Business Purpose Rule (b) General Statutory Anti-Avoidance Rules (c) Abuse of Legal Forms (d) Tax Planning 4. International Investment and Tax Avoidance

Chapter 5 The Dilemma of Deferral 1. The UK: Control over the Transfer of Residence

(a) The Islands (b) Family Trusts: the Vestey cases (c) Companies: Controls over Foreign Subsidiaries (d) Modification of the Residence Rule 2. The US: Tax Deferral on Retained Foreign Earnings (a) Individuals (b) Foreign Corporations (c) US Corporations: Foreign Branches and Subsidiaries (d) The Deferral Debate (e) The Controlled Foreign Corporation and Subpart F 3. The Limits of Unilateral Measures

Chapter 6 Tax Havens and International Finance 1. Offshore Finance

(a) The Growth of Deregulated Offshore Sectors (b) The Inducements and Temptations of Offshore Finance (c) Respectability and Supervision

(i) Problems of Supervision (ii) Dilemmas of UK Policy Towards Havens 2. Tax Havens 3. Intermediary Company Strategies

iv

68 72

77 77 79 82 83 86 87 89 90 91 93

97 98 99 100 102 104 106 106 106 107 109 111 114

117 119 119 123 125 126 129 131 135

Contents

Chapter 7 Anti-Haven Measures 1. Controlled Foreign Corporations

(a) The Spread of Anti-CFC Provisions (b) Defining CFG Income

(i) The Income Liable to Tax (ii) Control and Residence (c) The Effect of Anti-CFC Measures 2. Anti-Avoidance and Tax Treaties (a) Anti-Base Provisions (b) Anti-Conduit Provisions (i) Denial of Benefits under Tax Treaties (ii) Treaty Benefits and Investment Flows 3. Combating Treaty-Shopping (a) Limitation of Benefits Clauses (b) Renegotiation or Termination of Treaties with Havens

Chapter 8 The Transfer Price Problem 1. Separate Accounts and the Arm's Length Fiction

(a) The US: From Consolidation to Adjustment of Related Company Accounts (b) France: Taxing Profits Transferred to a Foreign Parent (c) The League of Nations and Arm's Length (d) The UK: Profit Split and Arm's Length (e) Germany: Organic Unity and Profit Split (f) Other National Provisions (g) The Advantages of Adjustment 2. Elaborating the Arm's Length Principle (a) The US Regulations of 1968 (b) International Concern about Transfer Price Manipulation 3. The Indeterminacy of Arm's Length (a) Arm's Length Price or Arm's Length Profit

(i) Identification of Specific Transactions (ii) Profit-Split: Criterion or Check? (b) Tangibles: The Search for Comparables (i) The US Experience (ii) The Administrative Burden of Scrutiny (c) Safe Harbours and Intrafirm Financial Flows (i) Thin Capitalization (ii) Global Trading and Transfer Parking

v

142 144 144 146 146 148 149 151 153 156 156 159 160 160 164

171 173 175 176 177 180 180 183 183 185 185 188 193 193 193 194 197 197 200 201 202 206

Contents

(iii) Proportionate Allocation of Financing Costs (d) Central Services: Joint Costs and Mutual Benefits (e) Intangibles and Synergy Profits (f) The Commensurate with Income Standard and the US White Paper

(i) Restriction of the CUP Method (ii) Periodic Adjustments (iii) The Arm's Length Return Method 4. Transfer Prices in Theory and Practice (a) Cost-Sharing and Profit-Split (b) Economic Theory and Business Practice 5. Conclusion

Chapter 9 The Worldwide Unitary Taxation Controversy 1. Formula Apportionment in the USA

(a) Constitutionality (b) Harmonization of State Formula Apportionment 2. State Unitary Taxes Applied to Worldwide Income 3. The Constitutionality of Worldwide Combination 4. The Political Campaign against WUT 5. The Global Apportionment Alternative

Chapter 10 The Internationalization of Tax Administration 1. The Development of Administrative Co-operation 2. Obtaining and Exchanging Information

(a) Obtaining Information Abroad (i) Seeking Information Unilaterally (ii) Conflict with Foreign Secrecy Laws

(b) Information Exchange under Tax Treaties (i) Procedures (ii) Safeguards (iii) Information from Havens

(c) Simultaneous Examination and Co-operation in Assessment 3. Co-ordinating Treaty Interpretation and Application

(a) Competent Authority Procedure (i) Specific Cases (ii) Advance Approval for Transfer Prices (iii) Procedural Rights and Arbitration

(b) Treaty Interpretation by Mutual Agreement

vi

208 210 212 216 217 218 218 221 222 224 228

230 230 231 232 235 239 241 246

250 250 257 257 257 262 272 272 278 280 282 284 287 287 291 291 295

Contents

4. Assistance in Collection (a) General International Law (b) Treaty Provisions

5. Conclusion

Chapter 11 Global Business and International Fiscal Law 1. Tax Jurisdiction, State Sovereignty and International Law 2. Tax Treaties and Domestic Law

(a) Harmonizing the Interpretation of Treaty and Statute (i) Interpretation According to Context and Purpose (ii) National Law and the Treaty Regime (iii) Statute Conflicting with Prior Treaty

(b) Overriding and Renegotiating Treaties (i) Effects of US Tax Law Changes on Treaties (ii) Treaty Overrides and Treaty Shopping (iii) Treaty Breach, Suspension and Renegotiation

3. A New Institutional Framework for International Taxation

Appendix Model Treaties 1. OECD and UN Model Double Taxation Conventions 2. US Treasury Department's Model Income Tax Treaty

Bibliography Tables of Cases Cited

vii

299 299 301 305

307 307 310 311 311 316 320

323 325 329 332 333

335 335 353 370 392

PREFACE TO THE ELECTRONIC EDITION

This is a re-publication in electronic form of this book, which was first published in print some 20 years ago, by Weidenfeld & Nicolson, in the Law in Context series. It has been made possible by the kind agreement of Cambridge University Press, which acquired the rights to all the books in the series. I have been able to reformat the text from the original electronic files, as the book was written on an early BBC computer (using cassette tape storage), subsequently converted to MS-readable text files. The formatting follows the print edition as closely as possible, particularly for pagination. A few misprints have been corrected, and conversely there may be others in this text which have escaped my attention. All that has been omitted from the print edition is the Index, which is not necessary for a searchable electronic text.

I am grateful that the Press agreed to revert electronic rights to me, having decided that such an edition would not be commercially viable for them. This has rescued the book from a limbo which is the unfortunate fate of many millions of others. Although some reforms of copyright law are finally beginning to facilitate access to `orphan woUNV?WKLVFDWHJRU\ZRXOGVWLOOEHOLNHO\WRH[FOXGHPDQ\ERRNV such as this one which, although out of print, has a known copyright-owner. Although many publishers and some authors fear digital technologies as a threat, I am among those who welcome the opportunities they provide, especially to unlock access to a vast realm of knowledge and culture.

This text has not been revised, although production of an updated edition has been suggested to me at various times, by some readers and publishers. My view is that much of the value of this text lies in its detailed discussion of the historical development of international tax coordination. An updated edition would either have had to be considerably expanded, trying the attention of even dedicated readers, or to have lost some of the detail. In any case, my concern with tax was only part of a wider interest in international economic regulatLRQDVLQGLFDWHGE\WKLVERRN?V sub-title. My work on this broader canvas resulted in the publication of another more recent book Regulating Global Corporate Capitalism in 2011, This includes a chapter on international tax, which I hope provides for interested readers both an updating and a simplification of the themes explored in this earlier book.

There have certainly been many changes to the international tax system in the twenty years since this book first appeared. Yet, in my view regrettably, these have applied superficial palliatives to its many ills rather than attempting radical surgery. I am far from being the only analyst to point to the major flaws and limitations of the tax treaty system, which provides the skeleton of international tax coordination. The further deepening of international economic integration, or economic globalization, has further highlighted these flaws. This was pointed out in a lecture (drawing considerably from the material in this book) which I gave to the annual conference of the International Centre for Tax and Development in December 2012 (available from its website at . Hence, it is not surprising that the past decade has seen international tax, and especially the issue of avoidance and evasion, increasingly hit the headlines. A significant contribution to this higher visibility has been made by campaigning organisations, with a seminal report by Oxfam (2000) leading to the formation of the Tax Justice Network. The fiscal crises following on the great financial crash of 2007-9 further high-lighted the importance of devising effective and legitimate tax arrangements, not least in relation to transnational corporations, dealt with in this book.

I am pleased that the intellectual work put into this book helped make a contribution to this awakening interest and activism, and I hope also contributed to making the debates better informed. This contrasts with the deafening silence that greeted the first publication of this book in mainstream tax scholarship. This was no doubt partly because I could be regarded as an interloper, attempting to shine lights from

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