Oxford University Centre for Business Taxation
Over the past years, a broad range of tax measures have faced criticism due to their alleged incompatibility with the law of the World Trade Organization (WTO). In 2016, when the United States considered moving from traditional corporate income taxes to destination-based taxes, some tax academics argued that the proposal was contrary to WTO law provisions. Similar criticisms were expressed against some of the measures of the US Tax Cuts and Jobs Act adopted at the end of 2017. According to some experts, both the Foreign-Derived Intangible Income provision (FDII) and the Base Erosion and Anti-Abuse Tax provision (BEAT) violate WTO agreements. In 2018, WTO law was, once again, invoked to criticize the EU’s proposal to adopt a digital service tax (DST). All these examples suggest that WTO agreements are put forward on a regular basis as a justification for curbing – or dismissing altogether – tax proposals which depart from the established norm. In that sense, WTO measures have become something of a legal scarecrow which are used to scare off any attempt to depart from traditional tax measures. This trend of invoking WTO law against new tax proposals, calls for a reconsideration of the role and effects of WTO law on taxation. Three main comments can be made.
First, the interaction between tax and WTO law remains unclear not only with regard to new tax measures but also with regard to traditional tax measures. This is due to the lack of systematic control exercised at the WTO level to guarantee that WTO members respect their WTO commitments. It is only when one WTO member brings a claim of a violation that the compatibility of a tax measure with WTO law agreements will be examined by the WTO Panel and Appellate Body. This unsystematic character of the control exercised on WTO members’ tax systems implies that traditional tax measures themselves are not necessarily in compliance with WTO law. Therefore, it is simply not correct to argue that new tax measures that resemble traditional tax measures are automatically “WTO-proof”. Nevertheless, it is true at a practical level that resemblance with existing tax measures can be used to predict the likelihood that a tax measure will be challenged by other WTO members. Not surprisingly, WTO members are less likely to attack tax measures that are similar to taxes of their own tax system. From this perspective, WTO law is highly “political” in its application.
Second, there is no good reason to consider that WTO law is necessarily hostile to new types of tax measures or fundamental tax reforms. Although WTO members may be more likely to attack measures that differ from traditional taxes, one should not draw hasty conclusions as to the WTO incompatibility of new tax measures based on their differences with existing tax systems. WTO law leaves WTO members free to design their own tax system in the manner they think appropriate: the goal of WTO law is not to encourage the adoption of certain given types of tax measures but rather only to prevent WTO members from adopting tax or regulatory measures that distort international trade. So, in order to analyze the compatibility of new taxes with WTO law, the question to be asked is not whether these new measures are similar to existing taxes but whether they belong to one of the tax categories deemed problematic under international trade law.
Third, roughly speaking, five main types of tax measures can be incompatible with WTO law. First, the General Agreement on Tariffs and Trade (GATT) significantly limits the adoption of tariffs, namely taxes that are triggered by the act of importation of goods. Second, taxes that are imposed both on domestic and imported products are likely to violate WTO law, where they favour domestic products over imported products. Third, WTO law in principle forbids the adoption of preferential tax regimes that encourage the consumption of domestic products over imported products. Fourth, the Agreement on Subsidies and Countervailing Measures (ASCM) limits the adoption of export tax reliefs and subsidies to certain domestic enterprises that cause adverse effects to the interest of other WTO members. Finally, the General Agreement on Trade in Services (GATS) regulates the adoption of discriminatory taxes on services and service suppliers. These five categories are helpful to understand the claims made against recent tax proposals and new tax measures such as the FDII, BEAT and DST. Some of these proposals may be problematic from a WTO perspective but some may not be. For example, one of the arguments that has been made against the DST is that it discriminates against foreign companies, which could lead to a violation of the GATS.
Before adopting new tax measures, WTO members should of course always consider the risks of any challenge under WTO law. However, WTO law should not automatically be wheeled out as some sort of “tax scarecrow” to ward off attempts by WTO members to adopt new types of tax measures or to fundamentally reform their tax systems. Generally speaking, WTO law does not operate to prevent WTO members from adopting new tax measures, including tax measures that represent a radical departure from the established norm.
Alice Pirlot is a Research Fellow at the CBT. Prior to joining the Centre, Alice was a research fellow of the National Belgian Fund for Scientific Research (F.N.R.S.) at the University of Louvain, where she completed her PhD in April 2016. Alice’s research focuses on environmental taxation and the interaction between tax and WTO law.
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