Content uploaded by Thomas Rixen
Author content
All content in this area was uploaded by Thomas Rixen on Oct 25, 2016
Content may be subject to copyright.
Chapter Fifteen
Institutional Reform of Global
Tax Governance: A Proposal
Thomas Rixen*
It is widely accepted that the current system of international taxation is decient.
As has been shown in Part One of this volume, the current principles and rules
of apportioning the tax base between countries do not function properly because
they are prone to manipulation by taxpayers. The result is an unfair international
tax system. Tax competition among states and tax-base-shifting across
different jurisdictions undermine revenue-raising capacity and lead to an unjust
differentiation of tax burdens among groups of taxpayers. The contributions in
Part Two show that the current policies pursued by the G20 and the OECD, while
certainly representing progress, are still insufcient to address these problems.
Thus, in Part Three, some of the guiding principles for reform have been proposed
and discussed, whereas in Part Four specic policies and institutions in line with
those principles are presented.
This chapter contributes to this last task. I will be less preoccupied with
specic policies to regulate harmful tax competition, however, but rather wish
to discuss their institutional preconditions. My aim is to answer the question:
what are the optimal international institutions in the area of direct taxation? In
line with the basic claim of new institutional economics or functional, liberal
institutionalism (as the same basic insights are referred to in international-
relations research), any efcient solution must meet certain functional
requirements that derive from the specic strategic structure of the problem. In
this chapter, I discuss the functional requirements of a solution to the problem
of international tax competition and then derive a detailed institutional design
from these requirements. I thus engage in an exercise of positively informed,
normative institutional design.
The strategic structure, however, merely provides necessary conditions for
the institutional design. There will often be several institutions satisfying those
conditions (cf., for example, Snidal 1985: 923). In order to distinguish between
different possible institutions, I introduce additional normative considerations
that relate to the notions of background justice and scal self-determination
* I am grateful for helpful comments and suggestions from Reuven Avi-Yonah, Peter Dietsch,
Patrick Emmenegger, Philipp Genschel, Lukas Hakelberg, Anja Jacobi, Ronen Palan, Inga
Rademacher, Richard Woodward and participants in the workshop on International Tax
Competition and Financial Secrecy at the University of St Gallen, November 2014.
326 Global Tax Governance
(tax sovereignty).1 As I argue below, preference should be given to those
institutional solutions that leave national tax sovereignty untouched to the largest
extent possible. However, safeguarding effective national tax sovereignty actually
requires rather strong institutions, which restrict nation states’ tax-policy choices
in signicant ways. The seeming paradox inherent in these two sentences will be
resolved below.
Tax competition can be understood as an asymmetric prisoner’s dilemma.
An institution that supports a cooperative solution under this strategic structure
needs to be global and inclusive in membership and it needs strong monitoring and
enforcement mechanisms. I argue that an International Tax Organization (ITO)2
could successfully carry out these tasks. It would, for one, function as a multilateral
forum for governments to negotiate the concrete rules, thus replacing the mode of
bilateralism and clubs so far prevalent in international taxation. Second, and even
more important, it should entail a legalised dispute-settlement procedure very
similar to that of the World Trade Organization (WTO), in which countries can be
forced to abandon tax policies that constitute harmful tax competition.
There are a number of calls for an international tax organisation. These provide
discussions of various issues and describe different tasks for such an organisation.
Some focus mainly on the task of collecting and disseminating information (Tanzi
1999); others focus on the under-representation of developing countries at the
current focal institution, the OECD (Horner 2001; United Nations 2001; TJN
2012). Finally, Sawyer’s proposal (2009) restricts itself to the issue of Advance
Pricing Agreements (APAs) and does not consider what tasks an ITO could take on
in international taxation more generally. None of these contributions, however, try
to rigorously derive the specic design and tasks of such an organisation from the
functional requirements that international taxation and tax competition entail. The
present chapter wants to close this gap and aims to integrate all of the functions
and aims that are voiced in the existing literature in one institutional solution.
The chapter is structured as follows: rst, I briey revisit why tax competition
is problematic. From this discussion, I derive one set of principles for the regulation
of tax competition. After that, I introduce the basic elements of rational design
and discuss the strategic structure of tax competition, to derive the functional
requirements of successful co-operation. This serves to derive a second set of
1. The implied distinction between functional and normative requirements is shaky. One could
rightfully object that functional requirements also have an underlying normative foundation –
efciency. Likewise, respecting the normative demands of sovereignty may also be a functional
requirement, since it affects the feasibility of an institution. Nevertheless, differentiating between
the two may be defended on the ground that efciency is a ‘thinner’ value than sovereignty;
the latter has its normative foundations in ‘thick’ values such as self-determination and, ideally,
democracy.
2. Some commentators have suggested that this choice of abbreviation is unfortunate, since it is
identical to that of the failed predecessor institution to the GATT/WTO, the International Trade
Organization. While that is true, at the same time, other potential names such as IFO (International
Fiscal Organization) or WTO (World Tax Organization) are also problematic, because they can be
confounded with existing IOs. In contrast, an ITO does not currently exist.
Institutional Reform of Global Tax Governance: A Proposal 327
principles underlying my proposal. While the principles derived in Section 1 rest
on a normative political theory of background justice, those in Section 2 rely on
a positive theory of rational action. In Section 3, I provide a detailed discussion
of the institutional design of the International Tax Organisation (ITO). Section
4 addresses potential objections that could be raised to the proposal. Finally, in
the conclusion, I consider how far the ITO differs from the current institutional
trajectory of international taxation, in order to assess the feasibility of my proposal.
1. The problems
In this section, I briey rehearse why tax competition needs to be regulated. I rst
recapitulate what the effects of tax competition are on the revenue and structure of
tax systems and will then focus on why these effects are normatively undesirable.
Both issues have been discussed in detail in Parts One and Three of this volume
and elsewhere (for example, Rixen 2011b). Nevertheless, a brief recapitulation of
the normative basis of the negative verdict on tax competition is necessary, because
it provides the grounds for giving preference to those institutional solutions that
leave national tax sovereignty untouched to the largest extent possible.
What are the effects of tax competition?
Under conditions of a globalised and liberal economy, tax bases, most importantly
mobile capital, will be free to shop around for the best tax treatment.3 The result is
that national tax policies become interdependent and governments engage in tax
competition, that is, the interactive tax-setting by independent governments in a
noncooperative, strategic way. We can distinguish between ‘virtual’ and ‘real’ tax
competition.
Virtual competition refers to tax evasion and avoidance by taxpayers. While
they differ with respect to the legality of the respective activity, they share the
characteristic that it is only the nancial capital that is booked elsewhere. The
taxpayer remains in the residence state or the state of production, which, according
to generally accepted principles of international taxation, should provide
the economic nexus that gives rise to taxation. Due to a lack of enforcement
capabilities in the case of evasion and dysfunctional rules in the case of corporation
taxes, however, the state of residence or production cannot tax the income. The
amount of funds hidden in tax havens for purposes of tax evasion is estimated
to be at least 8 per cent of global private wealth, about €5.8 billion (Zucman
2013), and evidence of paper-prot-shifting by MNEs through techniques such
as transfer-pricing manipulations and thin capitalisation is also abundant (see
Clausing’s overview 2016, Chapter Two in this volume). Importantly, under
virtual competition, taxpayers and foreign states collude, as I argue below, in an
illegitimate way. Taxpayers behave as free-riders; they enjoy public goods and
services in their country of residence or production but escape taxation. On the
3. This subsection is a shortened and modied version of section 3.1 in Dietsch and Rixen 2014a.
328 Global Tax Governance
ipside, the behaviour of governments trying to attract foreign tax base under
virtual competition is best understood as ‘poaching’ (OECD 1998; see also Dietsch
2016, Chapter Eleven in this volume).4
By contrast, under ‘real’ tax competition, taxpayers actually have to
relocate to enjoy lower taxes. Countries compete for foreign direct investment
(FDI) in the form of real business activity via tax levels. Examples include
the relocation of a production site to incur a lower tax burden. The decision
to relocate such real economic activity depends on various factors, such as
the level of education of the workforce, the costs of labour and the quality of
infrastructure. But the effective tax burden also plays a role. Empirical studies
come to the conclusion that lowering effective tax rates increases the inow of
FDI (de Mooij and Ederveen 2008, see also Clausing 2016, Chapter Two in this
volume). Attracting economic activity by lowering the effective tax rate may
be called luring. While it does not entail free-riding, luring is also illegitimate
under certain conditions (Dietsch and Rixen 2014b; see also Dietsch 2016,
Chapter Eleven in this volume).
Both kinds of tax competition have consequences for public nances. In
OECD countries, nominal corporate tax rates have been lowered from an average
of 50 per cent in 1975 to 23.4 per cent in 2014 and nominal top personal income
tax rates from 70 per cent to 43.6 per cent (OECD 2015). These rate cuts were
renanced by broadening the bases on which taxes are applied (‘tax-cut-cum-base-
broadening’). As a result, tax revenue as a percentage of GDP has so far remained
stable – though at least for the corporation tax this may actually be a negative
result, as revenues should have increased given the increase in the number of
incorporated businesses and higher protability (see Clausing 2016, Chapter
Two in this volume). The situation is different in developing countries, largely
because they lack the administrative capacity to pursue base-broadening policies
to counter-nance the nominal rate cuts that they undertook. They experienced
revenue losses in the era of tax competition.
While the effect on tax revenue varies with the stage of development of
countries, the distributive consequences do not. In both developed and developing
countries, the distribution of the tax burden among different kinds of taxpayers has
changed. For one, there is an effect within the business sector: highly protable
MNEs benet, while nationally organised small and medium-sized enterprises
are more heavily burdened. Second, the tax burden is shifted from capital to
labour. This is also visible in the general trend to increase indirect taxes, such
as consumption taxes. Last but not least, due to the ‘backstop’ function of the
corporate for the personal income tax, a lower corporate tax rate often spills
4. One may dispute the appropriateness of the term ‘poaching’ as a metaphor for all kinds of virtual
tax competition. Many would maintain that one attribute of poaching is illegality, whereas virtual
tax competition, as described, involves (illegal) tax evasion as well as (legal) tax avoidance. My
usage of the term should be understood so as to not necessarily imply illegality. It is, however,
intended to characterise prot-shifting as illegitimate. Thus, the insistence on this term underlines
our demand to make it illegal.
Institutional Reform of Global Tax Governance: A Proposal 329
over into a atter personal income tax structure.5 Overall, both developed- and
developing-country governments felt compelled to pursue less redistributive
polices than they would otherwise have pursued (for a more detailed discussion of
these matters with further references, see Rixen 2011a).
In sum, tax competition negatively affects the revenue-raising capacities of
governments and exacerbates existing inequalities.
Tax sovereignty and two principles of background justice
But why is that a problem? In short, the answer is that the policy changes just
described are not legitimately chosen by the governments involved but forced
upon them by the pressures of tax competition (see Ronzoni 2016 and Dietsch
2016, Chapters Nine and Eleven in this volume). In order to develop this point,
Peter Dietsch and I have elsewhere argued that tax competition in its current form
violates the condition of background justice (Dietsch and Rixen 2014b). In a world
divided into states – irrespective of the question of whether such a world is ideal
or not – the minimum requirements of background justice are that states must be
able to ‘(1) exercise sovereignty over their territory, (2) regulate justice-relevant
socioeconomic dynamics, and (3) interact as free and equal with one another’
(Ronzoni 2009: 457). Under increasing economic globalisation, the background
conditions under which states interact with each other change and, in order for
the three conditions to continue to hold, it is necessary to set up international
institutions to ensure these conditions (Ronzoni 2009). All three of the conditions
for fair and just interactions of states relate to different aspects of a state’s
sovereignty or self-determination, which is the basic normative foundation of the
institutional design proposed here.
More precisely, background justice requires what has been called de facto
sovereignty and can be distinguished from de jure sovereignty (Bull 1977: 8; Palan
1998: 628–9; Rixen 2008: 26–9). De jure tax sovereignty can be dened as the
‘legal freedom of action’ (Keohane 1993: 91) to impose taxes, that is, it merely
relates to the formal legal authority to decide upon, implement and enforce tax
policies. De facto sovereignty, in contrast, goes beyond a merely formal right and
can be dened as the ability to effectively achieve the desired goals of tax policy,
such as efciency or equity (cf. Keohane 1993). Thus, it relates to the actual real-
world capability to pursue policy goals.
The relationship between de jure and de facto sovereignty is not straightforward.
On the one hand, de facto sovereignty depends on de jure sovereignty. Only if the
government of a state is formally authorised to determine tax policy can it be in
a position to actually achieve its policy goals. On the other hand, whereas de jure
5. The spill-over occurs if the nominal corporate tax rate on retained prots is aligned with the top
personal income tax rate. If the corporate rate were lower than the personal income rate, then
individuals would have an incentive to hide their income behind a corporate veil – incorporating
themselves and re-categorising their income as corporate. In order to make such tax avoidance
unattractive, policy-makers often aim at the alignment of the two rates.
330 Global Tax Governance
sovereignty can only be constrained by formal, legal measures, de facto sovereignty
can also be constrained by social, material or other factors – globalisation and tax
competition, for instance. Importantly, it may be the case that states possess full de
jure sovereignty but lack de facto sovereignty.
This is the case in the area of international taxation. In particular, tax competition
is characterised by a situation in which the very fact that states possess de jure
sovereignty and use that sovereignty to compete for capital undermines their de
facto sovereignty. The result is the seeming paradox that in order to regain de facto
sovereignty under conditions of internationally integrated markets, governments
have to give up some of their de jure sovereignty, by pooling it with other states
or by delegating it to an international organisation. Effective protection of self-
determination requires limits on self-determination.6 Only through this can they
overcome the collective-action problem inherent in tax competition. Depending on
the particular problem structure, this may require different governance structures –
and turn out to be more or less difcult.7
All this implies that states must not give up all of their de jure sovereignty.
While an analysis of the specic policy problem to be solved is required (and
provided below) to determine how much or which parts of de jure sovereignty
states have to pool or delegate, it is clear that a state cannot command any de facto
sovereignty if there is no de jure sovereignty left. Of course, being sovereign in
a de jure sense should not be an ultimate goal of governments but only a means
to achieve their policy goals. But it is assumed that, as long as it leads to good
outcomes in terms of de facto sovereignty, it is preferable to leave their de jure
sovereignty intact. In other words, the maxim is to internationalise as much de jure
sovereignty as necessary but as little as possible.
There are two reasons for this maxim. First, it is most in line with the
requirements of democracy. The main reason why we care for sovereignty or
self-determination of nation states is that this self-determination is carried out in
a democratic way. While there are certainly undemocratic states on the one hand
and rudimentary forms of international democracy on the other hand, I take it that
democracy in a rich sense does (so far) only exist within nation-states. Domestic
democracy, however, can only be meaningful if the demos has (i) the formal
authority to decide about relevant issues (de jure sovereignty); and (ii) those choices
can actually matter to achieve the desired policy goals (de facto sovereignty).
Given the partially complementary and partially competitive relationship between
de jure and de facto sovereignty, the proposed maxim aims at an optimal balance
of the two. Second, and relatedly, there are feasibility arguments for this maxim.
Irrespective of how one evaluates the desirability of a world state (or several
regional ones), states are unlikely to disappear any time soon and to delegate all
6. This is, of course, a well known and widely accepted principle of domestic liberal societies:
individual freedom must be constrained if it endangers the freedom of others. We have to
constrain freedom adequately in the defence of freedom.
7. This is the usual perspective of neo-liberal institutionalism on the issue of national sovereignty
and effectiveness (cf. e.g. Keohane and Nye 2000: 19–22; Raustiala 2003: 856–62).
Institutional Reform of Global Tax Governance: A Proposal 331
of their power to tax to a supranational entity (for more on the issue of feasibility,
cf. Dietsch and Rixen 2014a).
In Dietsch and Rixen 2014b, we argue that there are two principles that provide
the required constraints on de jure sovereignty and would, if put into practice
safeguard nation-states’ de facto sovereignty. Thus, they are the principles from
which a globalisation-proof understanding of tax sovereignty could be developed.
First, the membership principle demands that all natural and legal persons should
be liable to pay tax in the state of which they are a member. This principle is
compatible with the internationally accepted, but laxly enforced, principles
of residence taxation for individuals and taxation at source for multinational
enterprises (MNEs). If implemented, individuals and multinationals would no
longer be able to free-ride on generous public services and infrastructure in one
country while paying their taxes elsewhere. The membership principle would
curb virtual tax competition and governments’ poaching of foreign tax bases.
The membership principle should be rather uncontroversial because it merely
amounts to the requirement of non-discriminatory tax treatment of all members
of a nation-state.
Second, the scal policy constraint states that real tax competition is
illegitimate when it is both strategically motivated and leads to a reduction in
the aggregate level of scal self-determination of other states. Strategic intent
is given if a government implements a tax reform with the aim to attract foreign
FDI. A tax reduction is not strategic if it would also have been chosen in the
counterfactual absence of an FDI inow. The requirement of maintaining the
aggregate level of scal self-determination is violated if one country’s tax-
policy choices constrain several other countries’ ability to set taxes as they wish,
for example, compelling them to lower their corporation tax even though they
would not have done so absent the policy-move of the other country. A policy is
considered illegitimate only if both conditions are met. This principle is likely to
be more controversial, as it attempts to balance the tax sovereignty of involved
countries against each other. Notice that the principle does indeed constrain a
nation’s self-determination. Not all interdependence between countries’ tax
systems is ruled out. A policy that is not strategic but nevertheless compels other
countries to lower their taxes is legitimate, as is a policy that is strategic but
does not constrain other countries in their policy choices. The intuition behind
this is that some scal interdependence is the price to be paid for economic
globalisation.
Besides the differentiation between de jure and de facto sovereignty, it is useful
to further differentiate de jure sovereignty into legislative and administrative
sovereignty. Legislative sovereignty is the authority to make tax policy; that is,
to design tax laws. Administrative sovereignty is the authority to implement and
enforce these laws, that is, to collect taxes (Rixen 2008: 28; for the same distinction
with different terminology, see Cnossen 1996: 77; McLure 1997: 35–6). This
distinction is useful because, as we will see in the next section, it is likely that the
functional requirements of global tax governance allow for delegating or pooling
legislative and administrative sovereignty to different degrees.
332 Global Tax Governance
2. Institutional design and the functional requirements of global tax
governance
In this section, I determine what the functional requirements are for successful
co-operation against harmful tax competition. I rst give an overview of the
basic elements of rational institutionalism and then turn to the strategic structure
inherent in tax competition in order to derive the required institutional design.
Basics of institutional design
The basic contention of the (normative) theory of rational institutional design is
that an institution should be designed in such a way that it guarantees collectively
optimal outcomes.8 It starts from the assumption that actors are self-interested
or even opportunistic (self-interest with guile) and boundedly rational. In order
to achieve a collectively optimal outcome, they have to come to a cooperative
agreement that sticks. The task of the institutional designer is to devise mechanisms
that sustain co-operation under these conditions (cf. for example, Williamson
1985, 1996).
We can distinguish between different stages of co-operation, at which different
kinds of co-operation problems arise and require institutional solutions. In the ex
ante phase the task is to agree on what the issue of co-operation is. The problems
involved at this stage are mostly issues of bargaining. In the ex post phase, the task
is to make sure that the parties involved will actually stay in line with the agreement,
that is, do not cheat on each other. In reality, the ex ante and ex post phases of
co-operation interact, because parties already consider possible ex post problems
in the ex ante phase of co-operation. This means that there is a need to distinguish
between (empirical) enforcement and bargaining phases and (analytical) bargaining
and enforcement problems (Williamson 1985; Kreps 1990; Fearon 1998).
This basic distinction can be further rened by reference to the ANIME scheme
of Abbott and Snidal (2009), which is simply a variant of the well known policy-
cycle and consists of the following stages of the co-operation process (Figure 15.1).
1. At the Agenda-setting stage, the issues to be put on the institution’s agenda
must be decided or, in other words, what are the objects of co-operation?
2. In Negotiations, parties develop the rules which are then laid down in
an agreement. At this stage, the main problems concern questions of a
distributive nature: who gets what? Likewise, as stated above, actors also
have to agree on mechanisms that ensure the effectiveness of the three ex
post tasks.
8. Rational institutionalism is often used as positive theory that postulates that the functional
requirements inherent in different strategic structures are reected in the resultant institutional
design. Whether or not, and under what conditions, such a postulate makes sense is, of course,
a controversial matter (even among rational institutionalists). In any case, the normative line of
argument pursued here, that the functional requirements should be reected in the institutional
design, is far less controversial.
Institutional Reform of Global Tax Governance: A Proposal 333
3. After an agreement has been made it needs Implementation. The most
important question to be answered is: who is responsible for implementing
the agreement? In order to ensure that the agreement is actually put into
practice, there is a need for
4. Monitoring compliance, to verify whether all actors actually play by the
rules they agreed to.
5. Finally, there may be a need for Enforcement, that is, sanctions must
be imposed on non-complying actors to bring them into line with the
agreement.
Policy issues exhibit different strategic structures. The interest or actor
constellations can be differentiated in a stylised way and different co-operation
problems can be derived from them. From the nature of the co-operation problem,
the institutional design required for a cooperative agreement is then derived
in a functionalist manner. For example, overcoming a prisoner’s dilemma
situation requires strong enforcement measures, whereas coming to agreement
in co-ordination games may simply require certain supporting functions in the
ex ante phase, such as the provision of information or focal points so that the
negotiation process is speeded up (Stein 1982: 302–3; Koremenos et al. 2001:
787–8). In the next section, I turn to a description of the co-operation problems
inherent in international taxation.
Functional requirements of co-operation against international tax
competition
Determining the strategic structure of a policy issue requires careful analysis of
the underlying problem and the relevant actors’ interests. Since this work has been
done elsewhere (for example, Rixen 2008: 30–54, 156–61; Dehejia and Genschel
1999; Bucovetsky 1991) it is well established that the problem of international
tax competition exhibits the strategic structure of an asymmetric prisoner’s
dilemma. States can individually benet from undercutting each other’s taxes to
attract foreign capital but, if they all engage in this behaviour, the outcome is
collectively damaging. However, the incentive to under-tax is different for big and
small countries (in terms of population). For big-country governments, since their
Figure 15.1: Stages of co-operation
ex post
ex ante
t
0 t
2
Agreement (t1)
Agenda-
setting Monitoring Enforcement
Negotiation Implementation
334 Global Tax Governance
domestic tax base is relatively large compared to the attracted foreign tax base, tax
competition may lead to national welfare losses. While they may individually prot
from undercutting other countries, it is collectively preferable for them to come
to a cooperative agreement to curb tax competition. Small-country governments,
since their domestic tax base is small compared to the foreign tax base, can
overcompensate the potential welfare loss of lower taxes with the inow of tax
base from other countries. Thus, small countries oppose collective agreements to
abolish tax competition.
Overcoming an asymmetric dilemma is very demanding because of the strong
conicts of interest and the individual incentives to defect from a cooperative
solution. Big countries would rst have to overcome the dilemma among
themselves – they are in a symmetric dilemma game – and then collectively get tax
havens (always small countries) into the agreement. Overcoming the symmetric
dilemma is difcult enough but easier than overcoming the asymmetric dilemma,
since tax havens, as the winners from tax competition, are reluctant to agree to
co-operation. The fact that the two games are nested within each other makes this
a very hard problem to overcome.
Specically, the cooperative solution has to meet the following requirements
(cf. Rixen 2008: 46–8, with references to the relevant theoretical literature): First,
as is well known, prisoner’s dilemma situations can be overcome if actors use a
strategy of reciprocity and the shadow of the future is long enough (Axelrod 1984).
This insight provides a prima facie case for durably institutionalising any efforts
to solve the problem. Building a formal intergovernmental organisation (IGO),
and joining it, implies a commitment (if only a mild one) to the cooperative effort.
Second, any agreements have to apply to all countries worldwide. Under the
assumption that nancial capital is perfectly mobile, it would, in theory, sufce to
undermine the effectiveness of co-operation if only one country remained outside
and did not effectively commit to the agreement. In this sense, the international tax
base is a common-pool resource that can be depleted. This means that co-operation
should be multilateral and encompassing, so that no country can get a free ride
and exploit co-operating countries. Third, especially in a situation with many
players, it is costly to identify defectors and thus target retaliatory action at the
right country. Because of that, an institutional solution needs effective monitoring
mechanisms to provide assessments of (non-)compliance with the agreement.
Fourth, the cooperative agreement must be enforceable. Given the individual
incentives to defect, there must be mechanisms to punish non-compliant states
effectively.
3. Institutional design of the International Tax Organization
This section describes the design of an International Tax Organization (ITO)
that meets the functional requirements set out in Section 2 and is in line with
the normative requirements of protecting de facto sovereignty (the membership
principle and the scal policy constraint developed in Section 1). I rst briey
discuss the goal and purpose of the ITO before I turn to a detailed discussion of
Institutional Reform of Global Tax Governance: A Proposal 335
its institutional design. The second subsection focuses on general aspects such
as the ITO’s bodies and membership. After that, I turn to the specic functions
the organisation needs to full along the policy process (ANIME scheme). The
third subsection details the competences and structure in the ex ante phase of co-
operation and the fourth subsection turns to the ex post phase.
The ITO’s mission and purpose
My aim here is not to describe in detail the specic policies that should be
adopted by the ITO. For one, potential candidates have been laid out in previous
chapters (see, for example, Grinberg 2016, Avi-Yonah 2016 and Wollner 2016,
Chapters Seven, Thirteen and Fourteen in this volume) and elsewhere (TJN
2012; Dietsch and Rixen 2014b). Also, the specic content of the policies is
not the topic of this chapter. That should ultimately be left to the negotiations
and deliberations of member-states within the ITO. However, since the main
purpose of this chapter is to zoom in on the institutional preconditions of a
solution to the problem of tax competition, it is helpful to identify policies that
full the functional and normative requirements. It serves to illustrate the ITO’s
mission and purpose.
First, governments have to abolish all rules that make it impossible for
other countries to enforce the membership principle. Thus, strict bank-secrecy
regulations, the supply of other deliberately non-transparent legal constructs and
the refusal to exchange information with other tax administrations have to be ruled
out, under the membership principle. The requirement of transparency should be
implemented through a system of multilateral automatic exchanges of information
(see Grinberg 2016, Chapter Seven in this volume). Note that an international
agreement on automatic information-exchange would only require states to pool
their administrative sovereignty – national tax administrations help each other in
enforcing9 their country’s tax policies. This sufces to stop the tax-evasion part of
virtual tax competition (mostly, personal portfolio capital).
The matter is different with respect to the tax-avoidance part of virtual tax
competition, which likewise violates the membership principle. Here, transparency
is not enough. Ultimately, prot-shifting by multinational companies is possible
because the rules for apportioning the tax base to different countries are vulnerable
to (legal) manipulation. As Avi-Yonah (2016, Chapter Thirteen in this volume)
and others (for example, McIntyre 2004; Rixen and Uhl 2007) have argued – and
this is the second policy the ITO could pursue – a solution to this problem would
be unitary taxation with formulary apportionment (UT+FA). This would require
governments to agree on a common and consolidated corporate tax base. This,
however, means that all governments have to give up some of their legislative
sovereignty, as they could no longer determine the tax base entirely as they wish.
9. Note that this refers to the enforcement of national tax laws by the national administration
vis-à-vis taxpayers. It is not about the enforcement of an international agreement to exchange
information automatically or any measure of tax co-operation (to which we turn below).
336 Global Tax Governance
This point can be generalised for all tax-avoidance practices. As tax avoidance/
tax-planning always relies on differences between national tax systems, the
solution, even if it were a different one from UT+FA, will always require some
co-ordination of tax bases and/or rates, that is, (partial) restrictions of legislative
sovereignty.
Third, in addition to these policies that put the membership principle into
practice, it is necessary to dene rules in line with the scal policy constraint.
Dening such rules is likely to be a difcult and controversial undertaking, because
the criteria – aggregate amount of scal self-determination and a government’s
strategic intent – are difcult to observe and operationalise. Most importantly,
the fact that intentions are unobservable invites hypocrisy. It is possible for
governments to misrepresent their intentions, attributing any national tax reforms
to the legitimate preferences of their citizens even if, in reality, the government
merely pursues the strategic aim of attracting foreign tax base. In order to avoid
hypocritical political discourses and long but futile attempts to distinguish
honest from dishonest representations of intentions, the institutionalisation of the
principle should, as much as possible, rely on objectively observable proxies. Is
there scientic evidence that the policy adopted would have benecial effects in
terms of efciency and/or equity on the domestic economy, other than the inow
of foreign tax base? It is clear that data on capital ows, economic-growth rates
or distributive results are readily available and could be used to derive rules.
Reference to these indicators is routinely made in all kinds of debates on policy
design; international scal policy is no exception in this respect. Nevertheless,
given the many factors that affect economic outcomes and the complex
relationships among them, controversies over the right interpretation of these data
are likely. As described below, what is needed in case of controversy is a judicial
or quasi-judicial system in which disputes among governments over tax policy
can be settled.
In addition to these considerations, one very simple and (uncontroversial)
rule can be formulated: all forms of preferential tax regimes (ring-fencing)
must be abolished. The only plausible explanation for such discriminatory
arrangements is strategic intent to lure in foreign capital. As to its consequences,
preferential tax regimes will generally not have a positive effect on the
aggregate amount of scal self-determination but rather a negative one. Thus,
overall, the third set of rules should basically state the principle of the scal
policy constraint, mention potential indicators on how to operationalise the
principle and explicitly rule out all kinds of preferential tax treatments for
foreigners.
The ITO’s bodies, membership and general functions
The ITO should consist of three main bodies. First, it should feature an assembly,
in which the principles and rules of international taxation can be negotiated and
dened by the representatives of member-states. More precisely, membership
status and voting rights are granted only to state governments and the ofcials
Institutional Reform of Global Tax Governance: A Proposal 337
of (dependent or semi-sovereign) territories that possess independent tax
jurisdiction.10 Societal interest-groups, such as NGOs, business or labour
representatives, would not enjoy voting rights but should be allowed observer
status and access to delegates, as is increasingly the case in IGOs (Tallberg
et al. 2013).
Given that it is a functional requirement that the rules apply to all countries,
because otherwise co-operation would be undermined by outsiders, it is a
requirement of democracy (all affected interests should participate in collective
decisions on the issue) that all states are members of the institution and have a
say in developing its policies. This is not only a matter of fairness, as has been
argued by tax-justice activists for a long time (for example, TJN 2012) but
also one of effectiveness. This claim may at rst appear counterintuitive: from
the perspective of effectiveness, it could be argued that an organisation that is
not fully inclusive would be preferable. With fewer and a more homogeneous
group of states, it could be easier to reach an agreement with more bite, which
might, afterwards, be adopted by non-members. However, given the strategic
structure of tax competition, it is unlikely that any outsiders to the agreement
would voluntarily adopt the policies. Thus, given that some kind of pressure
has to be exerted upon the current winners of tax competition, be it negative
(sanctions) or positive (incentives), this is much easier to achieve if the
respective jurisdictions are actually at the negotiation table. The development
of the OECD’s harmful tax competition project lends some support to this
argument. While one might rightly point out that tax havens watered down the
substance of the agreements, they did at least have to commit to something,
instead of remaining fully unrestricted in their policies (cf. Rixen 2008;
Sharman 2006). As is often the case in IGOs, the membership assembly might
meet at the level of heads of governments or ministers (usually once or twice a
year) and at the level of the heads of national delegations to the organisation,
who may meet on a weekly or monthly basis. In addition to this, the assembly
could also form committees or working-groups to address specic topics in
greater detail and prepare specic proposals to be discussed and passed by the
assembly.
Second, there should be a secretariat that provides administrative and other
services for the organisation. The secretariat and the member-states (that is, the
assembly) would have a principal–agent relationship. The member-state principals
10. This is actually more controversial than it may initially appear. One may, for example, reasonably
question the legitimacy of the tax sovereignty of some of the UK’s ‘crown dependencies’. In
most of these territories, Britain has wide powers that it could use to disallow or change their
harmful tax and secrecy legislation. But Britain has generally chosen not to exercise its powers
because these jurisdictions serve as useful satellites for London as a nancial centre (TJN 2013).
It could thus well be an item on the agenda of the ITO to revoke tax sovereignty from such (at
best semi-sovereign) territories. If it were revoked, they would lose their membership and, from
then on, be represented by the country under whose tax jurisdiction they fall. However, as long
as they enjoy tax sovereignty, such territories should be at the negotiation table, as I argue in the
following paragraph.
338 Global Tax Governance
delegate tasks to the secretarial agent.11 The tasks performed by the secretariat
would include providing information to all members about the agenda of meetings,
writing protocols, preparing the texts of formal decisions and also helping in the
implementation of policies. All these tasks are discussed in more detail in the
following two sub-sections, concerning subsequent stages of co-operation.
One function of the secretariat that is pertinent to all stages of co-operation,
however, is the provision of information on all issues of taxation relevant to the
ITO’s work. The organisation should collect data on member-states’ tax systems,
innovative tax reforms or administrative solutions in different countries and so on.
Such information is important because it provides a solid ground for discussions
in the ITO and it also helps to diffuse innovation across countries. This may be
particularly helpful for developing countries. In this respect, the OECD can serve
as a model, as it provides its members with this kind of information. The new
organisation would do the same for its more inclusive membership. The secretariat
should be staffed with international public servants who command expertise in scal
and tax matters and are formally independent of their own states. As in most IGOs,
citizens from all member-states should be adequately represented in the secretariat.
Third, as developed in more detail below, there should be an independent
dispute-settlement body that can settle disputes between member states in a
(quasi-)judicial manner.
Ex ante: agreeing on the rules of the game
The decision-rules and procedures of the institution need to be specied. The rst
requirement follows directly from what has just been said about membership.
All members of the assembly must be able to cast a vote in agenda-setting and
negotiation.
Agenda-setting: in principle, every member-state should be allowed to
propose agenda items. Additionally, the secretariat, staffed with experts who
constantly observe developments in international taxation, should also have the
right to propose items. However, in order not to congest the agenda with hopeless
initiatives, there should be a minimum number of countries whose support is
needed to put an item on the agenda. On the other hand, the threshold should not
be so high that minority rights are not protected. A reasonable threshold, which is
used in national parliamentary settings and some IGOs, is 20–25 per cent.
Negotiation and agreement: in terms of decision-rules on the actual
agreement, consensus is appropriate for the ITO as well. As has been shown, this
is the decision-rule that is most common in IGOs. Even those IGOs that allow
11. Governments can, in principle, veto agents’ actions, should they use the discretion that comes
with delegation in ways not wanted by the principals. However, a renunciation of delegated tasks
will only be possible if the member-states agree collectively on this. It should not be possible for
an individual government to disempower the agent only because it alone was negatively affected
by it. On the other hand, consensus decision would be dysfunctional, too, because it would give
too much power to veto-players. Simple majority voting seems to be appropriate in this respect.
Institutional Reform of Global Tax Governance: A Proposal 339
(qualied) majority decisions usually decide by unanimity in practice (Blake and
Payton 2014). This does not preclude shifting to (qualied) majority voting in the
future, should global economic integration proceed and countries become willing
to further integrate their tax policies over time.
Of course, negotiations about international tax rules, as in other
intergovernmental contexts, will entail tough bargaining, coalition-formation,
issue-linkages and side-payments. While there is no need for formal regulation of
these real-world aspects of all negotiations, their existence shows that the process
of negotiation needs to be structured so that it allows enough (but not too much)
time for all these activities. Agreeing on appropriate procedural rules can be left
to the delegates in the assembly. Implementing those procedural rules should be
the task of the assembly’s chair-holder. The chair could be lled by member-state
delegates on a rotating basis.
Ex post: putting the rules of the game into practice
What would it take to effectively implement, monitor and enforce the new rules of
international taxation on which governments have agreed?
Implementation of the rules should be a national matter. In line with the
general stance of my argument, taxes can, in general, be collected from citizens
by their national tax administrations. Accordingly, it should be up to national
parliaments, governments and administrations to honour the agreements made
and implement the respective rules. It would, however, be conceivable that
developing countries, which may, in some cases, lack the administrative expertise
and capacity to implement the rules, are granted administrative assistance. This
task could be taken on by the secretariat of the ITO, which could advise national
tax administrations. It would also be conceivable for the organisation to fund
a programme of continuous knowledge-transfer to developing countries. The
secretariat could, for example, offer training programmes for tax administrators in
developing countries. The WTO secretariat, for instance, also provides assistance
to developing countries.
Monitoring is a different matter. Given the individual incentive to defect
on the cooperative agreement, there is a need for very strict monitoring rules.
Mere self-reporting is insufcient because of the incentive to overstate actual
compliance. While it is certainly true that members of the institution have an
incentive to monitor each other’s compliance because they do not want to be
taken advantage of, it is also clear that it is useful to institutionalise an orderly
and independent monitoring procedure. Members may, depending on their own
situation or position, either be overly critical or too lax in their evaluation of
others’ policies. A functional monitoring mechanism should (a) channel the
allegations of member-states observing each other and (b) provide independent
reporting on compliance. Monitoring should thus be carried out by the
secretariat. There should be routine missions of a secretarial monitoring team to
all member countries, to inspect whether and how the rules are implemented ‘on
the ground’. The monitors must be allowed access to all relevant information.
340 Global Tax Governance
In addition to these scheduled monitoring missions, the inspectors should also
have the authority to make unheralded on-site inspections. This way they can
objectively establish (non-)compliance. Absent such strict monitoring, ‘mock
compliance’ (see Woodward 2016, Chapter Five in this volume) is to be
expected.
Monitoring can also play an important role in improving implementation, even
in those countries willing to comply. One could envisage the monitoring team
preparing regular country-reports on implementation and tax policy in general (in
this regard, the WTO, with its trade-policy reviews, could once again serve as a
model). The reports would be published and all member-states would have access
to them. While this would create peer pressure and thus help in enforcement, it
could also, in the rst instance, be viewed as an instrument for the diffusion of
administrative innovation.
Enforcement: since the structure of tax competition is such that every individual
government has an incentive to deviate from the collectively desirable rules,
there is a need for an effective enforcement mechanism. This requires a largely
independent authority that is accepted by all member-states. The ITO should rely
on legalised enforcement, modelled after the WTO’s dispute-settlement procedure,
to satisfy this requirement.12
The procedure could be as follows. If either the ITO’s independent monitors
nd or another member-state makes a valid complaint that the tax practices of
a state violate the rules, for example, because it is not exchanging all the tax
information that it should or because a national tax reform violates the scal policy
constraint, the defecting state is asked to comply with the rules within a specied
time. If it does not, member-states affected by this non-compliance can commence
the formal dispute-settlement procedure, which involves a quasi-legal assessment
of the case before a Dispute Settlement Panel (DSP) made up of three or ve
independent international tax experts, who assume a role similar to judges.13 The
panel has to come to a ruling on the case. If a state’s policy is found to be in
violation of the rules, the panel estimates the damage done and authorises targeted
sanctions of the same magnitude by the offended countries against the offender,
should the policy in question not be repealed within a specied time limit. All
members vote on the panel report (ruling). Importantly, however, the report can
only be rejected if such a decision is unanimous. This is highly unlikely since,
at the least, the state which ‘won’ the dispute would not agree to reject it. Thus,
the panel report is of a quasi-judicial nature. Since parties to a dispute know that
there is effective enforcement of decisions in the dispute-settlement procedure, it
can be expected that they will resolve many cases in consultation. This procedure
has the advantage of avoiding excessive litigation and leaves room for political
12. For a description of the WTO dispute-settlement process, see, e.g. Zangl 2008.
13. To be sure, in the WTO, the panels are not really independent, but they are forced to act as if they
were independent because otherwise their decisions would run the risk of ending up before an
Appellate Body, which is a truly independent body (Zangl 2008: 830–1).
Institutional Reform of Global Tax Governance: A Proposal 341
negotiations and decisions but, at the same time, ensures effective enforcement of
agreements.14
Such a legalised procedure, which relies, to a large extent, on the expertise of
international tax lawyers, will, over time, help to clarify the relative vagueness
of the scal policy constraint discussed above. In order to come to a ruling, the
DSP would have to legally interpret the scal policy constraint. Over time, these
interpretations will ll gaps in the rules drafted by the assembly and thus specify
the rules, or even create new rules by setting precedents.15
One difculty discussed above in the application of the scal policy constraint
is the need to assess actors’ real intentions. In this regard, it is worth noting that
doing just that is the everyday business of courts. This is not only true in domestic
criminal law but also holds for international law. For example, in applying the
genocide convention, courts, like the International Court of Justice (ICJ) or the
International Criminal Court (ICC), or tribunals have to assess the intentions
of the alleged offender. The WTO is another case in point. Under the rules on
non-tariff trade barriers, policies with protectionist effect are generally prohibited.
However, if a country pursues a policy with the intention of protecting consumers’
health and safety and can prove its good intentions, an exception to the rule of non-
protectionism is granted. As in our proposal, the WTO institutionalised this rule by
focusing on the observable implications of countries’ intentions. A government has
to provide valid scientic evidence of the claimed adverse effects on consumers’
health and safety (Zangl 2008: 840–1).
4. Potential objections to the proposal
In this section, I discuss six potential objections to the proposed ITO, which can
be grouped in two categories. The rst is concerned with the question whether
we really need a new organisation; the second takes issue with the design of the
proposed organisation.
Do we really need a new organisation? This objection could be raised in
at least three different ways, each emphasising an alternative institutional
solution. First, one might argue that the OECD has served as the most relevant
forum of international tax governance for the last ve decades and it has
developed a lot of expertise in the area. It should thus continue to do the job,
albeit with expanded functions and competence. This is unconvincing because,
for one, the OECD as an organisation does not have global scope. While it could
14. It may be argued that leaving room for political negotiations is undesirable as it would open up
the door for bribery and power politics. However, the potential recourse to a legalised procedure
should ensure that any negotiated agreement outside the formal process should actually be in line
with the spirit of the rules of the ITO.
15. Technically speaking, the dispute-settlement procedure provides a solution to the problem of
uncertainty and the resultant incompleteness of contracts (Williamson 1985: 70–1). Contract
theory maintains that, under these circumstances, parties ‘agree ex ante not so much on what will
be done in each particular contingency as they do on the procedure by which future contingencies
will be met’ (Kreps 1990: 119). The proposed dispute-settlement procedure serves this purpose.
342 Global Tax Governance
invite non-OECD countries to join the cooperative effort – and does in fact in
its Global Forum on harmful tax competition – there would always remain
a status difference between (core) OECD member-states and (invited) other
countries. More importantly, the OECD as an organisation is not restricted to
a single eld but is active in many social and economic policy areas. It does
not have any enforcement capacity in any of those elds (including taxation)
but the organisation derives its recognition and authority from its neutral
and professional expertise (cf. Woodward 2009; Sharman 2006). Granting
enforcement powers and judicial review to the OECD in taxation would not t
the organisation’s tradition and image and would undermine its credibility as
a knowledge-broker.
Second, it could be argued that we do not need a new tax organisation because
the issue could be dealt with under the auspices of the WTO. Most importantly,
it has been argued that direct taxation already falls within the jurisdiction of the
WTO (cf. Slemrod and Avi-Yonah 2002; Daly 2005).16 The WTO has, indeed,
ruled certain instances of tax breaks as incompatible with international trade
law. For example, in a panel report on the case of Boeing v. Airbus, some of
the tax breaks allowed by the state of Washington and the US government were
ruled to be a form of export subsidy that is not allowed under WTO rules.17
Likewise, the panel ruled that the US foreign-sales corporation (FSC) legislation
and its successor, the Extraterritorial Income Exclusion Act (ETI), violated
international trade law (Zangl 2008). While it is thus true that certain harmful tax
practices could be eliminated on the basis of WTO law, trade law is not sufcient
to adequately address all relevant problems of international tax competition.
For the WTO to get involved, the tax policy must have a distorting effect on
international trade ows. Very often, this is not the case. For example, it would
be hard to argue that individual capital-tax evasion has an effect on the ow of
goods and services among countries. Also, typically, trade distortions are caused
by preferential tax regimes. Absent preferential treatment, it is difcult to see
how a distortion can result. Thus, generalised tax competition will not cause
trade distortions and thus the WTO could not rule on such competitive moves
by governments.
Third, one might argue that such a big and inclusive institution is not needed
at all. The largest share of investment is, ultimately, made in industrialised or
emerging economies (even though it may be routed through several tax havens),
because this is where a decent return can be earned. Since this group of countries is
relatively small, it may be feasible to co-ordinate the imposition of a withholding
tax on investment income without a new institution. Co-ordination would be
necessary because, otherwise, countries would experience capital ight amongst
each other. The introduction of a 35 per cent withholding tax on all investment
16. Indirect taxation, most importantly tariffs but also other non-tariff trade barriers, have, of course,
always been within the WTO’s jurisdiction.
17. See https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds353_e.htm (accessed 7 April 2015)
for a summary of the case and the ndings.
Institutional Reform of Global Tax Governance: A Proposal 343
income, for example, would make sure that the income is taxed at least once. If
an investor proves that he/she has reported the income to his residence country,
the tax would be refunded (Avi-Yonah 2008). A natural international forum for
devising this policy might be the G20. The problem with this proposal is that it
underestimates the severity of the enforcement problem. The current evidence on
tax competition suggests that informal co-ordination on certain policies cannot be
achieved or, if it is achieved, remains toothless, as governments do not properly
implement the agreements.
The second set of concerns deals with the design of the proposed organisation.
First, it could be argued that the judicial nature of the procedure hollows-out
national political decision-making. Some of the decisions are transferred from
democratically accountable political leaders to experts who lack democratic
accountability and legitimacy. One line of this criticism, additionally, accuses
these experts of a neo-liberal bias, aiming to constitutionalise free markets
to protect them from state intervention in the name of social justice (for
example, Höpner and Schäfer 2012; Gill and Cutler 2014). These are important
concerns. But I believe they can be refuted by two counter-arguments. For
one, the status quo, with its hollowing-out of effective scal sovereignty
through tax competition as described in Section 1, is even more problematic
in this respect. Although it formally guarantees democratic accountability,
de facto, this is not the case. Conversely, while the ITO with its legalised
enforcement may reduce the scope of scal policy issues for which there is
direct democratic accountability, it would make sure that there is effective
democratic choice within this restricted realm. Further, the principles and rules
of the ITO do not have a liberalising or ‘dis-embedding’ effect. Rather, they
aim at ‘re-embedding’ the market into political and legal rules, to cushion its
adverse social effects.
Second, it could be argued that the inclusion of rather strict enforcement
mechanisms undermines progress on the front of creating new and improved rules
against tax competition. Goldstein and Steinberg (2009) make such an argument
with respect to the WTO. In short, they submit that the increasing difculty the
WTO has in concluding new trade agreements and further liberalising international
trade is partly due to the fact that all governments are cautious about passing new
agreements because, given strong enforcement, they will be truly bound by them.
Before, agreement on new rules was easier to achieve, as actors enjoyed more
‘wiggling’ room in implementation. On the basis of this argument and considering
the general state of play on international taxation, characterised by a lack of
agreement on the issue of tax competition, one could argue that strict enforcement
mechanisms could undermine progress on the front of developing new rules
against tax competition.
This is an important argument. It does not, however, dispute the functional need
for enforcement mechanisms. It merely points to the inevitable side-effects on the
negotiation phase. Proponents of this argument would not jump to the conclusion
that dispensing with strong enforcement mechanisms altogether could solve the
problem. After all, as the argument implies, a lack of enforcement merely results
344 Global Tax Governance
in a lack of compliance. Thus, this argument could usefully be interpreted, I would
argue, as a consideration on the timing of the introduction of the enforcement
mechanism. It may be worthwhile to consider launching the institution without
the legalised dispute-settlement procedure, adding it only after governments
have come to develop more areas of consensus in the course of their ongoing
deliberations. Such phasing-in of different design features would resemble the
transition from GATT to WTO in international trade law.
A related, but much broader critique might claim that it is a bad idea to use
the WTO as a role model. Has it not just been shown that the organisation is
dysfunctional, as it is incapable of delivering a new trade agreement? While this
criticism has intuitive appeal, it cannot withstand closer scrutiny. While it is true
that we currently see stalemate in international trade negotiations, this is unlikely
to be due to design aws in the WTO. First, international trade liberalisation is
already very far progressed, so negotiations on the few remaining barriers to
trade are particularly hard. But overall, the track record of the GATT/WTO is
still positive. Second, in recent years there has been a proliferation of bilateral
and other preferential trade agreements (PTAs) that provide an alternative
road to liberalisation that involves fewer concessions for many countries. It
does, however, come at the price of welfare-diminishing trade diversions. So,
while such PTAs may be second-best solutions, they are the result of countries
pursuing their individual interests at the expense of the common good. If
anything, the lesson to be learnt here is that while countries are reluctant to
conclude agreements under the umbrella of the WTO, the world would be better
off if they did.
5. Conclusion: where does the proposal differ from the current
trajectory?
Is the creation of an ITO politically feasible? In order to evaluate this, I compare
the institutional design features of my proposal with those of the current trajectory
of global tax governance.
In Rixen 2008, I show that the soft governance that has characterised
international tax policy for many decades is a functionally adequate solution to
the problem of double-tax avoidance (DTA). DTA is a co-ordination game with a
distributive conict. A bilateral approach, supported by the OECD disseminating
information and shared practices that all have an interest to follow, can well
accommodate countries’ preferences. The institutions needed to deal with this
problem do not have to be equipped with enforcement capabilities. The nature
of the problem is such that it can be handled by mere ‘interface regulation’ while
preserving national de jure sovereignty. As the economy becomes more global,
however, this setup enables the related phenomena of tax evasion and avoidance
and tax competition. As discussed in this chapter, these issues exhibit the
institutionally more demanding structure of an asymmetric prisoner’s dilemma.
While it is obvious that the governance structure is undergoing changes in
response to the fundamentally altered international tax game, these adaptations are
Institutional Reform of Global Tax Governance: A Proposal 345
still incomplete and do not meet the functional requirements of the new strategic
structure (see also Genschel and Rixen 2015).18
Three observations on the current institutional trajectory characterise this
governance gap. First, while it is true that there is a move towards multilateralism
in the ght against tax evasion, it is not fully global and inclusive of all states. For
example, the recent agreement on automatic exchange of tax information, which is
an important step forward, was signed by only fty-one countries. Second, while it
can be observed that the OECD and its members are increasingly willing to exert
pressure on tax havens, they still rely on informal instruments such as naming
and shaming or, less often – but FATCA is an example – blunt power politics (see
Hakelberg 2016, Chapter Six in this volume). So far, there has not been an attempt
to institutionalise formal enforcement mechanisms. Third, it is true that states are
increasingly willing to share their administrative sovereignty in order to regain de
facto control over their tax policies. Administrative co-operation and information-
exchange with other governments has been considerably strengthened. However,
they are hardly willing to delegate or pool their legislative sovereignty, the authority
to make national tax policy. According to the argument put forward in this chapter,
while this is not a problem as long as the particular issue can be effectively
addressed by administrative co-operation, there are strong indications that the
effective regulation of harmful tax competition in the eld of business taxation
requires a sharing of legislative sovereignty, that is to say, partial harmonisation of
national tax laws. This, however, is not so far forthcoming, as the recent stalemate
in the ght against corporate tax avoidance within the G20 illustrates. In short,
international tax law has to become harder and more multilateral and involve the
partial transfer of legislative sovereignty.
These three stylised shortcomings lead me to conclude that the ITO proposed
here would indeed be something qualitatively different than the existing institutional
trajectory and, consequently, that governments are currently unwilling to establish
an ITO. However, both the existence of the WTO and the experience of changes
in international tax governance that were considered utopian only three years ago
(most importantly on automatic information-exchange) suggest that it is feasible.
While this will require a lot of political investment, the prospect of resurrecting
domestic and international tax justice should make this investment worthwhile.
18. In Rixen 2008 and 2011b, I argue that the lack of adaptation has two causes. First, since DTA
is a co-ordination game, the process becomes self-reinforcing: actors do not wish to endanger
the co-ordinating function of the regime that they had established long before tax competition
became virulent. Second, governments are unable to resolve the asymmetric prisoner’s dilemma,
because of conicts of interest between big and small countries and powerful business inuences
on all governments. Consequently, governments only achieve gradual, indirect and incomplete
reforms of the international tax system.
346 Global Tax Governance
References
Abbott, K. W. and Snidal, D. (2009) ‘The governance triangle: regulatory standards
institutions and the shadow of the state’, in Mattli, W. and Woods, N.
(eds) The Politics of Global Regulation, Oxford: Oxford University
Press, pp. 44–88.
Avi-Yonah, R. S. (2008) ‘A coordinated withholding tax on deductible payments’,
Tax Notes 119: 993–6.
— (2016) ‘A proposal for unitary taxation and formulary apportionment
(UT+FA) to tax multinational enterprises’, in Dietsch, P. and Rixen, T.
(eds) Global Tax Governance: What is wrong with it and how to x it,
Colchester: ECPR Press.
Axelrod, R. M. (1984) The Evolution of Co-operation, New York: Basic Books.
Blake, D. J. and Payton, A. L. (2014) ‘Balancing design objectives: analyzing
new data on voting rules in intergovernmental organizations’, Review of
International Organizations 10: 1–26.
Bucovetsky, S. (1991) ‘Asymmetric tax competition’, Journal of Urban Economics
30(2): 167–81.
Bull, H. (1977) The Anarchical Society: A study of order in world politics, New
York: Columbia University Press.
Cnossen, S. (1996) ‘Company taxes in the European Union: criteria and options
for reform’, Fiscal Studies, 17(4): 67–97.
Daly, M. (2005) The WTO and Direct Taxation, WTO Discussion Paper No.
9, Geneva: https://www.wto.org/english/res_e/booksp_e/discussion_
papers9_e.pdf.
Dehejia, V. H. and Genschel, P. (1999) ‘Tax competition in the European Union’,
Politics & Society, 27(3): 403–30
de Mooij, R. A. and Ederveen, S. (2008) ‘Corporate tax elasticities: a reader’s
guide to empirical ndings’, Oxford Review of Economic Policy, 24(4):
680–97.
Dietsch, P. (2016) ‘Whose tax base? the ethics of global tax governance’, in
Dietsch, P. and Rixen, T. (eds) Global Tax Governance: What is wrong
with it and how to x it, Colchester: ECPR Press.
Dietsch, P. and Rixen, T. (2014a) ‘Redistribution, globalisation, and multi-level
governance’, Moral Philosophy & Politics, 1(1): 61–81.
— (2014b) ‘Tax competition and global background justice’, Journal of
Political Philosophy, 22(2): 150–77.
Fearon, J. D. (1998) ‘Bargaining, enforcement, and international co-operation’,
International Organization, 52(2): 269–305.
Genschel, P. and Rixen, T. (2015) ‘Settling and unsettling the transnational legal
order of international taxation’, in Halliday, T. C. and Shaffer, G. C. (eds)
Transnational Legal Orders, Cambridge: Cambridge University Press,
pp. 154–84.
Gill, S. and Cutler, A. C. (2014) New Constitutionalism and World Order,
Cambridge: Cambridge University Press.
Institutional Reform of Global Tax Governance: A Proposal 347
Goldstein, J. and Steinberg, R. H. (2009) ‘Regulatory shift: the rise of judicial
liberalization at the WTO’, in Mattli, W. and Woods, N. (eds) The Politics
of Global Regulation, Princeton, New Jersey: Princeton University Press
pp. 211–41.
Grinberg, I. (2016) ‘Does FATCA teach broader lessons about international
tax multilateralism?’, in Dietsch, P. and Rixen, T. (eds) Global Tax
Governance: What is wrong with it and how to x it, Colchester: ECPR
Press.
Hakelberg, L. (2016) ‘Redistributive tax co-operation: automatic exchange of
information, US power and the absence of joint gains’, in Dietsch, P. and
Rixen, T. (eds) Global Tax Governance: What is wrong with it and how
to x it, Colchester: ECPR Press.
Höpner, M. and Schäfer, A. (2012) ‘Embeddedness and regional integration:
waiting for Polanyi in a Hayekian setting’, International Organization
66(3): 429–55.
Horner, F. M. (2001) ‘Do we need an international tax organization?’ Tax Notes
International, 24 (October 8): 179–87.
Keohane, R. O. (1993) ‘Sovereignty, interdependence and international
institutions’, in Miller, L. B. and Smith, M. (eds) Ideas and Ideals:
Essays on politics in honor of Stanley Hoffmann, Boulder, CO: Westview,
pp. 91–107.
Keohane, R. O. and Nye, J. S. (2000) ‘Introduction’, in Nye, J. S. and Donahue, J. D.
(eds) Governance in a Globalizing World, Washington, DC: Brookings
Institution Press, pp. 1–41.
Koremenos, B. et al. (2001) ‘The rational design of international institutions’,
International Organization 55(4): 761–99.
Kreps, D. M. (1990) ‘Corporate culture and economic theory’, in Alt, J. and
Shepsle, K. A. (eds) Perspectives on Positive Political Economy,
Cambridge, Cambridge University Press, pp. 90–143.
McIntyre, M. J. (2004) ‘The use of combined reporting by nation states’, Tax
Notes International 35 (September 6): 917–48.
McLure, C. E. (1997) ‘Tax policies for the XXIst century’, in International Fiscal
Association (IFA) (ed.) Visions of the Tax Systems of the XXIst Century,
The Hague: Kluwer Law International, pp. 9–52.
OECD (1998) Harmful Tax Competition: An emerging global issue, Paris: OECD:
http://www.oecd.org/tax/transparency/44430243.pdf
— (2015) OECDiLibrary Statistics: http://www.oecd-ilibrary.org/statistics
(accessed 5 March 2015).
Palan, R. (1998) ‘Trying to have your cake and eating it: how and why the state
system has created offshore’, International Studies Quarterly 42(4):
625–44.
Raustiala, K. (2003) ‘Rethinking the sovereignty debate in international economic
law’, Journal of International Economic Law 6(4): 841–78.
Rixen, T. (2008) The Political Economy of International Tax Governance,
Basingstoke: Palgrave Macmillan.
348 Global Tax Governance
— (2011a) ‘Tax competition and inequality: the case for global tax
governance’, Global Governance: A Review of Multilateralism and
International Organizations 17(4): 447–67.
— (2011b) ‘From double tax avoidance to tax competition: explaining
the institutional trajectory of international tax governance’, Review of
International Political Economy 18(2): 197–227.
Rixen, T. and Uhl, S. (2007) Europeanizing Corporate Taxation. Regaining
national tax policy autonomy: http://library.fes.de/pdf-les/id/04750.pdf
(accessed 31 August 2015).
Ronzoni, M. (2009) ‘The global order: a case of background injustice? A practice-
dependent account’, Philosophy & Public Affairs, 37(3): 229–56.
— (2016) ‘Tax competition: a problem of global or domestic justice?’, in
Dietsch, P. and Rixen, T. (eds) Global Tax Governance: What is wrong
with it and how to x it, Colchester: ECPR Press.
Sawyer, A. J. (2009) Developing a World Tax Organisation: The way forward,
Birmingham, UK: Fiscal Publications.
Sharman, J. C. (2006) Havens in a Storm: The struggle for global tax regulation,
Ithaca, New York: Cornell University Press.
Slemrod, J. and Avi-Yonah, R. (2002) ‘(How) should trade agreements deal
with income tax issues?’, Tax Law Review 55: 533–54 and also
Michigan research paper #01-008: http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=285345 (accessed 31 August 2015).
Snidal, D. (1985) ‘Coordination versus prisoner’s dilemma: implications for
international co-operation and regimes’, American Political Science
Review 79(4): 923–42.
Stein, A. A. (1982) ‘Coordination and collaboration – regimes in an anarchic
world’, International Organization 36(2): 299–324.
Tallberg, J. et al. (2013) The Opening Up of International Organizations.
Transnational access in global governance, Cambridge: Cambridge
University Press.
Tanzi, V. (1999) ‘Is there a need for a world tax organization?’, in Razin, A. and
Sadka, E. (eds) The Economics of Globalization: Policy perspectives from
public economics, Cambridge: Cambridge University Press, pp. 173–86.
TJN (Tax Justice Network, 2012) Tax Us If You Can, 2nd edition: http://www.
taxjustice.net/cms/upload/pdf/TUIYC_2012_FINAL.pdf (accessed 27
March 2013).
— (2013) ‘Narrative report on United Kingdom’: http://www.
nancialsecrecyindex.com/PDF/UnitedKingdom.pdf (accessed 10 March
2015).
United Nations (2001) Report of the High Level Panel on Financing for
Development [the Zedillo Report]: http://www.un.org/en/ga/search/
view_doc.asp?symbol=A/55/1000 (accessed 21 June 2006).
Williamson, O. E. (1985) The Economic Institutions of Capitalism, New York:
Free Press.
Institutional Reform of Global Tax Governance: A Proposal 349
— (1996) The Mechanisms of Governance, Oxford: Oxford University
Press.
Wollner, G. (2016) ‘International nancial transaction taxation, public goods and
justice’, in Dietsch, P. and Rixen, T. (eds) Global Tax Governance: What
is wrong with it and how to x it, Colchester: ECPR Press.
Woodward, R. (2009) The Organisation for Economic Co-operation and
Development (OECD), Abingdon, Oxon and New York: Routledge.
— (2016) ‘A strange revolution: mock compliance and the failure of the
OECD’s international tax transparency regime’, in Dietsch, P. and Rixen,
T. (eds) Global Tax Governance: What is wrong with it and how to x it,
Colchester: ECPR Press.
Zangl, B. (2008) ‘Judicialization matters! A comparison of dispute settlement
under GATT and the WTO’, International Studies Quarterly 52(4):
825–54.
Zucman, G. (2013) ‘The missing wealth of nations: are Europe and the U.S.
net creditors or net debtors?’, Quarterly Journal of Economics 128(3):
1321–64.
Global Tax Governance
What is wrong with it and how to x it
Edited by
Peter Dietsch and Thomas Rixen
© Peter Dietsch and Thomas Rixen 2016
Cover © Estate Werner Hartmann
Installation ‘New York’ by Werner Hartmann (1945–1993)
First published by the ECPR Press in 2016
The ECPR Press is the publishing imprint of the European Consortium for Political Research
(ECPR), a scholarly association, which supports and encourages the training, research and
cross-national co-operation of political scientists in institutions throughout Europe and beyond.
ECPR Press
Harbour House
Hythe Quay
Colchester
CO2 8JF
United Kingdom
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form
or by any electronic, mechanical, or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or retrieval system, without
permission in writing from the publishers.
Typeset by Lapiz Digital Services
Printed and bound by Lightning Source
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-1-785521-26-3
PDF ISBN: 978-1-785521-64-5
EPUB ISBN: 978-1-785521-65-2
KINDLE ISBN: 978-1-785521-66-9
www.ecpr.eu/ecprpress
Table of Contents
List of Figures and Tables vii
List of Abbreviations ix
Contributors xiii
Acknowledgements xvii
Chapter One – Global Tax Governance: What It is and Why It Matters 1
Peter Dietsch and Thomas Rixen
PART ONE – THE PROBLEM: INTERNATIONAL
TAX COMPETITION 25
Chapter Two – The Nature and Practice of Tax Competition 27
Kimberly A. Clausing
Chapter Three – Winners and Losers of Tax Competition 55
Philipp Genschel and Laura Seelkopf
Chapter Four – Tax Competition: An Internalised Policy Goal 77
Lyne Latulippe
PART TWO – SHORTCOMINGS OF THE CURRENT
REGULATORY FRAMEWORK AND INITIATIVES 101
Chapter Five – A Strange Revolution: Mock Compliance and the
Failure of the OECD’s International Tax Transparency Regime 103
Richard Woodward
Chapter Six – Redistributive Tax Co-operation: Automatic Exchange of
Information, US Power and the Absence of Joint Gains 123
Lukas Hakelberg
Chapter Seven – Does FATCA Teach Broader Lessons about
International Tax Multilateralism? 157
Itai Grinberg
Chapter Eight – The G20, BEPS and the Future of International
Tax Governance 175
Richard Eccleston and Helen Smith
vi Global Tax Governance
PART THREE – NORMATIVE PRINCIPLES
FOR GLOBAL TAX GOVERNANCE 199
Chapter Nine – Tax Competition: A Problem of Global or
Domestic Justice? 201
Miriam Ronzoni
Chapter Ten – International Taxation and the Erosion of Sovereignty 215
Laurens van Apeldoorn
Chapter Eleven – Whose Tax Base? The Ethics of Global Tax Governance 231
Peter Dietsch
PART FOUR – FROM THEORY TO PRACTICE: JUST
INSTITUTIONS FOR INTERNATIONAL TAX GOVERNANCE 253
Chapter Twelve – Towards an International Yardstick for Identifying
Tax Havens and Facilitating Reform 255
Markus Meinzer
Chapter Thirteen – A Proposal for Unitary Taxation and Formulary
Apportionment (UT+FA) to Tax Multinational Enterprises 289
Reuven S. Avi-Yonah
Chapter Fourteen – International Financial Transaction Taxation,
Public Goods and Justice 307
Gabriel Wollner
Chapter Fifteen – Institutional Reform of Global Tax Governance:
A Proposal 325
Thomas Rixen
Index 351
