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'Fixing' the social contract: A blueprint for individual tax reform



In the face of population ageing and demographic decline, nowadays all countries compete for an increasingly valuable asset: human capital. Indeed, the drain of human capital from one country to another concerns not only highly-skilled individuals seeking job opportunities abroad, but also pensioners relocating to sunnier and more tax-friendly jurisdictions. Absent global action, the risk of uncoordinated and unilateral measures taken by countries to increase and protect their own tax base, with adverse effects both from the inter-nation and the intranation equity perspective, is very concrete. So far, however, neither the OECD nor the European Union have developed specific policies or measures in the domain of individual taxation. Arguing that scope of reform exists also in this field, the article explores various policies and measures as a blueprint for individual taxation reform, with the double aim to curb tax competition among countries and fix the crumbling social contract.
UDC 336.22:314.15(100) ; 330.341:005.952
DOI: 10.5937/AnaliPFB1904068B
Giorgio Beretta, PhD*1
In the face of population ageing and demographic decline, nowadays all
countries compete for an increasingly valuable asset: human capital. Indeed, the
drain of human capital from one country to another concerns not only highly-skilled
individuals seeking job opportunities abroad, but also pensioners relocating to
sunnier and more tax-friendly jurisdictions. Absent global action, the risk of
uncoordinated and unilateral measures taken by countries to increase and protect
their own tax base, with adverse effects both from the inter-nation and the intra-
nation equity perspective, is very concrete. So far, however, neither the OECD nor
the European Union have developed specific policies or measures in the domain of
individual taxation. Arguing that scope of reform exists also in this field, the article
explores various policies and measures as a blueprint for individual taxation reform,
with the double aim to curb tax competition among countries and fix the crumbling
social contract.
Key words: Human capital. – Individual taxation. – Migration. – Social contract.
– Tax policy.
* Researcher,;
** An early version of this article was presented at the Tax Aspects of the Brain
Drain’ conference, hosted by the Faculty of Law at the University of Belgrade, on 11
October 2019. The author would like to acknowledge the faculty members for organizing
the conference and all the participants at that event for their valuable comments and
remarks. The usual disclaimers apply.
Giorgio Beretta (p. 68–115)
Society is indeed a contract ... As the ends of such a partnership
cannot be obtained in many generations, it becomes a partnership not
only between those who are living, but between those who are living,
those who are dead, and those who are to be born.
(Burke 1790)
It is no longer the call to ‘Give me your tired, your poor, your
huddled masses’; now we ask for your alert, your privileged, your brainy,
your talented. Our machines can do the menial work. Today the emphasis
is on technical skill, sophisticated training and adaptability to modern
(Perkins 1966, 617)
A place in the sun and a tax-free pension
(Somerset Webb 2015)
The launch and subsequent delivery of the broad and multifaceted
Base Erosion and Profit Sharing (BEPS) 15 Action Points in 2013–2015
undoubtedly marked a turning point for international taxation (on BEPS,
see Christians, Shay 2017; Brauner 2014). After BEPS, in fact, no one
can seriously hold the traditional view of a completely sovereign
autonomy of countries in tax matters (for a discussion, see Rocha,
Christians 2017). As a matter of fact, major theoretical developments in
tax policies are now achieved not only through political and legal
processes undertaken at the national level, but also in a multilateral setting
and with the increased participation of non-governmental actors.1 In the
past the OECD has been and, certainly still is, the major organization to
act as a central hub for shaping international tax policies (see, especially,
Cockfield 2005).
The action spearheaded by the OECD and undertaken by all
countries participating to the Inclusive Framework on BEPS,2 however,
has narrowly focused on closing tax loopholes exploited by multinational
1 An example of the increasing intervention of non-governmental actors in a
global tax governance is given by the Platform for Collaboration on Tax, launched in
April 2016 by the International Monetary Fund (IMF), the Organisation for Economic
Co-operation and Development (OECD), the United Nations (UN), and the World Bank
Group (WBG).
2 The OECD/G20 Inclusive Framework on BEPS was established in 2016 as a
means to ensure interested countries and jurisdictions, including developing economies,
can participate on an equal footing in the development of standards on BEPS-related
issues, while reviewing and monitoring the implementation of the OECD/G20 BEPS
Annals FLB – Belgrade Law Review, Year LXVII, 2019, No. 4
enterprises (MNEs) and has sought to establish a new international tax
order in the field of corporate taxation only (see, especially, Christians
2016).3 Remarkably, no action has so far been taken at the international
level in the realm of individual taxation. The same has indeed occurred in
the European Union (EU), where the fight against Harmful Tax
Competition (HTC), since the establishment of the Code of Conduct
Group in 1997, has only revolved around the identification and elimination
of preferential tax regimes designed for companies and other legal
Such dearth of action is rather surprising given that, although
revenue losses for national governments due to international tax evasion
and avoidance are far greater in the corporate sector, the number and
extent of threats arising in the field of individual taxation are by no means
The author indeed posits that three distinct challenges – each of
which is somehow referred to in the three passages quoted in the epigraph
deserve, in particular, closer attention. The first challenge is related to
the threat posed to the social contract by the combined effects of
population ageing and demographic decline in nearly all developed
countries, which contribute to a widening divide across generations and
urge governments all around the world to search for additional sources of
revenue. The second challenge is related to the phenomenon of the brain
drain, which sees countries fiercely competing among themselves for
increasingly valuable assets such as human capital and poaching one
another’s pool of talented individuals. The third challenge is related to the
increasingly large wave of pensioners who migrate from one country to
another in search of a milder climate and often a more tax-friendly
environment, which causes a revenue drain in the country where pension
income was built up and/or from which it is paid out.
Project. As to October 2019, over 130 countries and jurisdictions are collaborating on the
implementation of the BEPS 15 Action Points.
3 Notably, in pursuit of the BEPS goals, countries have committed to implementing
four minimum standards, respectively concerning measures on Harmful Tax Practices
(HTPs) (Action 5), on Tax Treaty Abuse (Action 6), on Country-by-Country (CbC)
Reporting (Action 13), and on a Mutual Agreement Procedure (MAP) (Action 14), all of
which, however, relate only to corporate taxation (see OECD/G20, 2019a).
4 This in spite of the fact that the Preamble of the Resolution on a Code of
Conduct, of 1 December 1997, explicitly contemplated the possibility to tackle HTC
practices also with regard to ‘special tax arrangements for employees’ (see European
Commission 1998, 1). A similar plea was then reiterated by the Commission in its 2012
Communication titled ‘An Action Plan to Strengthen the Fight against Tax Fraud and Tax
Evasion’, but it did not actually lead to the enactment of any measure in this field (see
European Commission 2012a, 7).
5 Notably, revenue losses for governments due to BEPS practices by MNEs are
conservatively estimated by the OECD at around 4–10% of global corporate income tax
revenues or USD 100–240 billion annually (see OECD 2019a).
Giorgio Beretta (p. 68–115)
While all these three challenges indeed point to the need to
undertake global action in the field of individual taxation, with a
discussion of each of them provided in the following, in terms of
proposals, the article mostly focuses on migration of pensioners and
cross-border taxation of pension income. Despite such a narrow context,
the author submits that the proposed policies and measures may offer
valuable suggestions for rethinking individual taxation on a more general
The article is organized as follows. Section 2 provides background
information on the increasing challenges faced by the implicit social
contract, which underpins the Welfare State currently adopted by nearly
all developed countries. In particular, the discussion centres around the
threats posed by a widening divide across different generations. Section 3
traces the main causes and consequences of the brain drain and the battle
for human capital which is fiercely being waged by countries worldwide.
Section 4 describes the phenomenon of migrating pensioners as well as
the main features of the different pension taxation regimes. Section 5
deals with taxation of pension income on an international plane, with
focus on the treatment currently provided under the OECD Model.
Exploration of the tax treatment of pension income at the international
level is used for individualizing possible policies and measures to be
enacted in the field of individual taxation. This task is undertaken in
Section 6, where a blueprint for individual tax reform is laid down, and
pros and cons of each proposed measure are closely compared. Section 7
We are arguably entering an age of increasing global instability and
social disillusion, both of which may be seen as prominent hallmarks of
the end of the globalization thrust and the beginning of an opposite
‘deglobalization’ era (see, especially, van Bergeijk 2019; James 2017).
The symptoms of a growing instability and disillusion are variably
expressed in politics, society and the economy, in so far as all these areas
are experiencing a surge of nationalist and protectionist movements,
fuelled by popular grievance and general distrust of elites (see, in this
regard, Lagarde 2019). In the aftermath of the financial crisis of 2008, it
has in fact become common for people, especially the middle-class in
developed countries, to have declining perceptions of well-being and trust
in the future,6 whereas the global wealthiest one percent has gained
6 According to OECD (2019b, 13), due to nearly stagnating wages, growing
lifestyle costs and housing prices, rising job insecurity in the middle of fast-transforming
labour markets, ‘today the middle class looks increasingly like a boat in rocky waters’.
Annals FLB – Belgrade Law Review, Year LXVII, 2019, No. 4
enormously throughout the past decades (for different perspectives in this
regard, see Smith et al. 2019; Piketty 2013).
Rising inequality both at the national and international level – is
certainly a major source of government and individual concerns (see, for
example, Wilkinson, Pickett 2019; Stiglitz 2015), as indeed those worries
are further exacerbated by gloomy forecasts of employment conditions in
the near future due to the rapid pace at which epochal phenomena such as
automation (see, for a discussion, Baldwin 2019; Ford 2015) and
population ageing7 are occurring.
The Welfare State, adopted after World War II by nearly all
developed countries, since it is seen as a valuable weapon against
inequalities in society, is currently under tight scrutiny.8 This is largely
due to the social contract implicitly agreed upon between generations,
which underpins the Welfare State and, arguably, contributes to holding a
society together (for a perspective on the situation in this regard in the
United Kingdom, see House of Commons 2016, 8–23).
The intuitive idea of such an intergenerational social contract is
that the redistributive mechanism underpinning the Welfare State justifies
the obligation of the current productive generations to finance the health,
pension and care services of the older generations, by arguing that future
generations will provide the same kinds of benefits once the current
generations retire (see Hammer, Istenič, Vargha 2018, 22). In this way,
the Welfare State facilitates solidarity across different generations or age
cohorts, via financial transfers to the old, mainly in the form of pensions,
and to the young, mainly in the form of education, both of which are
funded principally by taxing the current working-age population (see
Resolution Foundation 2018, 25–27).
But there is a catch. In principle, everyone is to pay in during their
working life, drawing down in early years and retirement, for a broadly
neutral lifetime result. However, the amount of transfers and benefits
provided in return may well change over time, as indeed do tax rates and
the size of generations that are contributing or withdrawing. As a result,
over their lifetime span, different generations can end up with net gains
or net losses, a circumstance that is very much capable of skewing the
redistributive mechanism underpinning the Welfare State (see Gardiner
2016, 7).
7 Tellingly, by 2020, for the first time in history, there will be more people on the
planet over the age of 65 than under five (see He, Goodkind, Kowal 2016, 3).
8 As early as 2000, Avi-Yonah (2000, 1578) warned that ‘globalization leads to a
more pressing need for revenues at the same time that it limits governments’ ability to
collect those revenues. This dilemma threatens to undercut the social consensus about the
value of the Welfare State that underlies modern industrialized societies and to create a
backlash against the globalization that produces too many overall benefits’.
Giorgio Beretta (p. 68–115)
Presently, there is in fact a widespread consensus that the social
contract is not being honoured for today’s younger generations and that,
in particular, the Baby Boom generation, commonly identified as
individuals born between 1945 and 1965, are receiving a net gain over
later coming generations, such as those of the Generation X, i.e.
individuals born between 1965 and 1980, and the Millennials, composed
of those born between 1980 and 2000.9
Worries on this matter concentrate, in particular, on this latter age
cohort. Tellingly, the Resolution Foundation (see Gardiner 2016, 5) has
revealed gloomy economic forecasts for those belonging to that generation,
signalling that Millennials are ‘the first generation that has so far earned
less than the one before at every age’ and warning that, if productivity
growth remains as low as now, ‘Millennials are at risk of becoming the
first ever generation to record lower lifetime earnings than their
predecessors’.10 On a similar strain, European Commission (2017, 12)
has flagged increased concerns that today’s young people in the EU and
their children may actually end up worse off than their parents. Concerns
also surround the future pensions of current workers, whose social
sustainability is indeed put under a severe test, in so far as it is not clear
whether the amount of the present contributions will provide adequate
living conditions for tomorrow’s retirees (see, especially, Scarpetta,
Blundell-Wignall 2015). On a broader perspective, there is also a risk that
a growing intergenerational divide would widen inequalities and wealth
gaps existing in society, therefore the overall importance of inheritances
and private transfers between generations is expected to grow (see
Resolution Foundation 2018, 114–117).11
Such dire prospects for today’s younger generations are indeed the
ultimate fruit of various ongoing trends in society and the economy. The
9 This classification of generations follows Willetts 2010. One should caution,
however, that defining different generations inevitably entails an element of arbitrary
choice, as long as, for instance, those individuals born immediately before a generational
dividing line may well dispute their implicit association with those born20 years earlier,
for example, but not with those born only one year later.
10 Such gloomy prospects, however, are contested by others (see, for example,
Ganesch 2016), who point out, for instance, that economists indeed ‘cannot account for
the dazzling consumer gains that come with technology and competition multiplied by the
passage of time’, perhaps embodied at best by ‘all the facilities now inherent to a
smartphone’ which ‘would have cost a teenager in 1980 a king’s ransom in separate,
clunky machines’.
11 See also Bangham (2018, 3–6), pleading for the elimination of the UK current
inheritance tax and its replacement with a lifetime receipts tax to be levied on recipients
with fewer exemptions, a lower tax-free allowance and lower tax rates, whose revenues
are to support a GBP 10,000 ‘citizen’s inheritance’ – a restricted-use asset endowment for
all young adults, from the age of 25, to sustain skills, entrepreneurship, housing and
pension savings.
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first challenge is related to population ageing, due to a combination of an
increased life expectancy and a decreasing trend in birth rates in nearly
all developed countries,12 both phenomena that indeed are expected to
intensify in the coming decades, so that a growing demand for health,
pension and care services will have to be sustained by the fiscal revenues
extracted by a shrinking working-age population, thus increasing the so-
called ‘dependency ratio’, measuring the number of pensioners per
working age person (see Resolution Foundation 2018, 87–89).13 Next, it
comes the inequality challenge, with an increasing share of wealth
globally owned by older generations, who have managed to shield their
income and assets from the financial crisis of 2008 better than the younger
generations (see Gardiner 2016, 23–25). The third challenge is related to
poor job prospects for the young, who, mainly due to fast-paced
automation, experiences increasing challenges in finding an employment,
at a time when overall job quality, particularly in terms of work stability
and benefits provided, has been reduced dramatically (see, especially,
OECD 2019c).
As a result, a new divide is ripping society apart and it is based on
age, in so far as when a person was born increasingly matters in
determining their present and future living standards.14 This situation, of
course, generates significant backlashes – often depicted even in terms of
‘intergenerational warfare’ (see, most notably, Willetts 2019; Pickard
2019) – across generations and in society, further fuelled by a misleading
propaganda on both sides (see, especially, Sternberg 2019; Bristow 2019).
Older generations are thus depicted as a gerontocracy of the early-retiring
and asset-rich, in contrast to precariously housed and insecurely employed
younger generations,15 whereas the latter are accused of living frivolously
and have even been caricatured for consuming avocado toast (!) and
12 Indeed, as revealed by He, Goodkind, Kowal (2016, 15), birth rates in all
countries, with the exception of African ones, are already below the so-called ‘population
replacement level’, which is the number of children per woman needed to sustain
population replacement.
13 Against this backdrop, it may be contended (see, for example, European
Commission 2018a) that an ageing population eventually favours private expenditure on
a whole new set of goods and services, from connected health devices to age-friendly
universities, all of which contributing to the flourishing of the so-called ‘silver economy’.
14 Evidence of such growing divide between the old and the young became
apparent with the Brexit referendum, which indeed showed that British politics is deeply
polarized by age, with a substantial majority of older people voting for leaving the EU,
while a large majority of younger generations voting for remaining in the Union (see
Norris 2018). It should also be noted that, as their own population grows older, the
political weight in all developed countries becomes increasingly tipped in favour of older
15 For instance, the New York Times columnist Thomas Friedman (Friedman
2010) has gloriously railed against ‘a Grasshopper Generation’, one that ‘has eaten
through all that abundance like hungry locusts’, whereas David Willetts (Willetts 2010),
Giorgio Beretta (p. 68–115)
priced coffee, instead of working and saving for the future as, supposedly,
former generations did (see Levin 2017).
New kinds of wars are being waged by many countries all around
the world for hoarding an increasingly valuable asset: human capital.16
Human capital can broadly be described as all the wealth of knowledge,
skills, competences and attributes which, overall, might be labelled as
‘super talent’17 – that a few of individuals are endowed with and that
facilitate the creation of personal, social and economic prosperity, being
all of these preconditions for the flourishing of the 21st century ‘knowledge
society’ (for a conceptualization, see Drucker 1993). As a proxy for all
these endowments, educational attainments of those individuals are
generally used.18
Amid those international wars and battles (see, in this regard,
Brücker et al. 2012), countries’ victories and losses against one another
are measured by means of inbound and outbound flows, i.e. by looking at
the overall number and quality of the endowments of individuals
permanently moving in or out the territory of the given country. Indeed,
this two-way flow is neither necessarily nor under all circumstances well-
balanced. Quite the contrary, such flow can be one-way. If this ‘human
capital’ exchange is overall positive, i.e. more highly-skilled individuals
are moving in rather than out, the country has a ‘profit’ or, more
appropriately, a ‘brain gain’. On the other hand, if for a given country the
chair of the UK Resolution Foundation, has claimed that ‘the Baby Boomers took their
children’s future’.
16 Although the origins of the expression can be traced as back as to Adam Smith
(1723–1790), the modern usage of the term ‘human capital’ is generally attributed to Gary
S. Becker (1930–2014), especially in regard to his influential book Human Capital: A
Theoretical and Empirical Analysis, with Special Reference to Education, first published
in 1964.
17 According to Shachar, Hirschl (2013, 72), ‘[t]he desire to be great, to make a
lasting mark, is as old as civilization itself. Today, it is no longer measured exclusively by
the size of a nation’s armed forces, the height of its pyramids, the luxury of its palaces, or
even the wealth of its natural resources. Governments in high-income countries and
emerging economies alike have come to subscribe to the view that something else is
required in order to secure a position in the pantheon of excellence: it is the ability to
draw human capital, to become an “IQ magnet”, that counts’.
18 In this connection, however, it should be noted that the category that is used to
qualify an individual as highly-skilled is related to the possession of tertiary education, an
element that by itself is very crude, in so far as it includes in this category even individuals
with (only) practical and technical education degrees. For an overview about education
classification at the international level, see UNESCO 2012.
Annals FLB – Belgrade Law Review, Year LXVII, 2019, No. 4
said balance is overall negative, i.e. more highly-skilled individuals are
moving out rather than in, it faces a ‘loss’ or, more appropriately, a ‘brain
drain’ (see Boeri 2012, 1).
The expression ‘brain drain’ was first coined by the British Royal
Society (see Royal Society 1963) to narrowly describe the outflow of
scientists and technologists from the United Kingdom to both the United
States and Canada in the 1950s and early 1960s.19 However, presently,
the term is more broadly used to illustrate the departure of highly-skilled
individuals – thus, not necessarily scientists or technologists – from their
own countries to others where usually wages and life conditions are more
favourable overall, or are at least perceived as such.20 As a break-down of
this compound expression suggests, the word ‘brain’ refers to the wealth
of knowledge, skills, competences and attributes with which the emigrating
individuals are believed to be endowed. The word ‘drain’ implies that the
rate of those leaving a country is far greater than the normal or desirable
level of departures from a country. The link between these two words
means that the departure of the most talented and highly-skilled individuals
from a country actually occurs at an appreciable rate (see Giannoccolo
2009, 2).
Brain drain is indeed the source of major concerns for governments
and policy makers in the countries of origin (see, for example, The Italian
Insider 2019; Filipovic 2019), which especially complain about efficiency
losses to their economy or, even, about the shortage of talented people in
specific economic sectors (e.g. in the healthcare or education sector), in
so far as those nations blame the country of arrival for poaching their own
base of talented individuals, whose education and training were often
financed by means of fiscal revenues, so that an export of its ‘human
capital’ effectively becomes a sunk investment for the country of origin.21
19 If the emigrant is an unskilled individual, then one could perhaps speak about
‘muscle drain’ rather than ‘brain drain’ (see Pomp 1985, 250, 260 and 286).
20 Compare the definition of ‘brain drain’ contained in the Cambridge English
Dictionary (‘the situation in which large numbers of educated and very skilled people
leave their own country to live and work in another one where pay and conditions are
better’) with the narrower one included in the Collins English Dictionary (‘the movement of
a large number of scientists or academics away from their own country to other countries
where the conditions and salaries are better’). For their own account, EU institutions
(European Commission 2019) define ‘brain drain’ as ‘the loss suffered by a country as a
result of the emigration of a (highly) qualified person’.
21 Tellingly, a 2019 report prepared by the Westminster Foundation for Democracy
(2019, 23) for the UK government estimates that the ‘sunk’ cost of education of emigrants
from a country such as Serbia in a single year is more than the total annual earnings from
the IT services exported by that country. On the other hand, it could be contended (see
Boeri 2012, 9) that ‘selective immigration policies increase individual incentives to invest
in human capital in the sending countries, so that the impact of migration on human
capital formation in the country of origin may not be so strong’.
Giorgio Beretta (p. 68–115)
Although the general thrust of the conventional view is that the
emigration of human capital is detrimental to a country, the actual validity
of such a statement is open to discussion, as it is related to an empirical
question whose answer varies from case to case (see, especially, Kapur,
McHale 2005; Commander, Kangasniemi, Winters 2004). Moreover,
literature also points out that, to the extent that the brain drain allocates
human capital resources more efficiently, such phenomenon is likely to
benefit more people globally (see Sykes 1992, 1). From another
perspective, it is also contended that the brain drain is nothing more than
the free exchange occurring across country borders, in as much as goods
and services flow in and out a country (see, in this regard, Carens 1987),22
which states professing a liberal creed certainly cannot obstruct, at least
if they have committed to respect fundamental human rights such as
freedom of movement, which is even enshrined in several international
charters and declarations.23 Lastly, there are additional phenomena related
to brain drain, such as remittance, diasporas and returns, whose net effects
on the country of origin are difficult to assess (for a discussion, see Faini
2017; Wei, Balasubramanyam, 2006; Dustmann, Fadlon, Weiss, 2011).
Various reasons can be traced at the roots of the brain drain
phenomenon. The main determinant of the brain drain is generally
recognized as being the wage differentials existing between countries,
which may function as either a push or pull factor for both inbound and
outbound migration patterns (see, especially, Borjas 2001). Another
traditional factor encouraging migration is related to cross-country
unemployment differentials (see, especially, Piracha, Vadean 2009). The
quality of public institutions and standards of living may also help explain
the decision of an individual to migrate from one country to another (see,
especially, Cooray, Schneider 2016). Other non-financial benefits could
equally motivate talented and highly-skilled individuals to move from a
country, such as the existence of centres of excellence in a specific
economic sector in the country of arrival: in a sense, ‘brains’ go where
other ‘brains’ are (see Tesón 2008, 902).24 Intended as such, the brain
drain – like any other economic phenomenon – is governed by the law of
supply and demand and by the law of comparative advantages (see Tesón
2008, 902).
22 Many authors (see, for example, Freeman 206; Pritchett 2006), however,
criticize that the current wave of globalization includes ‘everything but labour.
23 See e.g. Universal Declaration of Human Rights (10 December 1948), Art. 13
(2); International Covenant on Civil and Political Rights (16 December 1966), Art. 12
(2); European Convention on Human Rights (4 November 1950), Art. 2 (2) Prot. No. 4.
An alternative, although nowadays minoritarian, view instead regards emigration as a
privilege to be granted by the country of origin, rather than a right to which each individual
is entitled (for a discussion, see Risse 2012, 152–166).
24 For a discussion about ‘brain hubs in the United States, i.e. innovation clusters
where the average GDP and patents for new technologies are higher, see Moretti (2012,
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The patterns of ‘brain’ migration also vary. Brain drain may affect
developing countries in favour of developed countries, such as non-
OECD countries in favour of OECD countries (see, especially, Docquier,
Lohest, Marfouk 2007). However, the phenomenon does also occur
among OECD countries, as the experience of outward individual
movements in developed nations like Italy and New Zealand conspicuously
demonstrates (see Brücker et al. 2012, 43–47). Further, brain drain can be
caused by a reversal of social and economic conditions or unexpected
political decisions occurring within a country, which, apparently, is the
case of the brain drain that is greatly feared after the Brexit vote in the
United Kingdom (see Fazackerley 2018). Lastly, it should be duly
considered that migration patterns are likely to change over time, as
demonstrated by the history of Europe during the 20th century, when it
went from an emigration to an immigration continent, (see Hatton,
Williamson 1994, 533–539).
The brain drain phenomenon is a tangible reality also within the
EU, where the free movement of workers is one of the four economic
freedoms to which Union citizens are entailed and it is a right guaranteed
by Article 45 of the Treaty on the Functioning of the European Union
(TFEU).25 In the EU, reasons at the roots of the brain drain relate, mostly,
to wage and employment differentials across the Member States as well
as different EU regions. While migration patterns mainly followed an
East to West route, from countries of the former Soviet bloc – all joining
the EU in 2004 and in 2007 to Western EU-founding Member States
during the first decades of the 2000s, the past few years have instead
signalled a clear increase of emigration rates from the South to the North
of the Old Continent, especially those involving highly-skilled
Quite intuitively, individual migration patterns also have a
significant impact on fiscal revenues. Emigration of individuals, especially
25 Notably, Article 45 TFEU stipulates that ‘freedom of movement for workers
shall be secured within the Union’, which entails, inter alia, the right ‘to move freely
within the territory of Member States’. EU law, in fact, guarantees both the right of an
individual to leave his Member State of origin and the right to enter and live in another
Member State. Therefore, freedom of movement of workers is related to the emigration
country as well as to the immigration country, both of which are indeed precluded from
hindering cross-border movements and discriminating workers based on their different
nationality. However, in so far as tax systems and economic rights arising from the
Welfare State of the various Member States differ, the economic consequences of an
individual’s decision to move from one country to another may well be discouraging,
which is an issue that the Commission has long committed to tackling but has failed to
address so far (see European Commission 2010).
26 For a more detailed description of past, present, and future trends concerning
migration of highly-skilled individuals within the EU, see European Commission 2018b.
On labour migration from Eastern to Western Europe in the past decade, see Atoyan et al.
Giorgio Beretta (p. 68–115)
those talented and highly-skilled, who presumably earn an above average
salary, erodes the tax base and dampens fiscal revenue in the country of
origin. The situation is exactly opposite for the country of arrival, as it
later sees an increase in its own tax base and fiscal revenues (with specific
regard to individuals moving from India to the United States, see the
economics analysis by Desai et al. 2009). It is no wonder, therefore, that
some measures of control – particularly, in the form of taxes to compensate
or promote development in the ‘losing’ country, i.e. the country of the
‘brain’ departure27have long been proposed as a way to restore global
or inter-country ‘fairness’ (see, especially, Bhagwati 1976; Brauner 2010).
Similar considerations apply to the current situation within the EU,
where Member States should arguably endeavour to harmonise their own
fiscal policies rather than fiercely competing against each other as they
actually are (see, in this regard, Alcini, Gros 2019), as clearly shown by
the increased number of special tax regimes for incoming individuals
enacted by Member States in recent years (for a discussion of these
regimes, see Beretta 2019a; Beretta 2019b; Beretta 2017; Arginelli, Avella
2017; Ribes Ribes 2017; Bader, Seiler 2015; Cassiano Neves 2010; van
Zantbeek 2010; Roxburgh 2006).
From a tax policy perspective, what is particularly worrying of this
growing trend is that countries seems to design these special tax regimes
before even understanding the real nature of their own social and economic
troubles, thus ending up granting tax benefits to individuals based on
rather objectionable – if not constitutionally flawed – criteria (see Kostić
If there is a word that perhaps should be retired nowadays, it would
be ‘retirement’ (see Ezra 2019). Just as individual working lives have
changed dramatically over the past several decades, so has the conventional
wisdom about retirement. Notably, time and again experts advise to
27 Measures in this regard may be taken by the country of origin, the country of
arrival or, even, adopted as the result of international cooperation (for a discussion, see
Kapur, McHale 2005).
28 Reportedly (see Tax Foundation 2019), as from 1 August 2019, Poland
introduced a blunt exemption from income tax for all Poles aged below 26 and earning
less than a given annual salary (approximately EUR 22,500) as a measure to induce Polish
youth to remain in its territory. For its own account, starting in 2019, Portugal (see
República Portuguesa 2019) introduced a special tax regime (called Programa
Regressar’), providing a 50% reduction of employment income tax, which is specifically
designed to encourage the return of former residents who have fled the country in the last
years. Indeed, in this as in other cases, one may well question the differentia specifica that
may justify providing a special tax treatment based solely on the odd criteria such the age
or the former residence of an individual (see Kostic 2019a).
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prepare for the 100-year life (see, in this regard, Gratton, Scott 2016), in
which the three traditional stages of life – education, work and leisure
are going to be subverted.29 And indeed, anecdotal evidence indicates that
droves of people are already ‘unretiring’ and going back to work (see
Cavendish 2019, 71–99; Harding 2018; Span 2018), being that such a
decision is favoured by the shrinking of the working-age population, due
to declining fertility rates in nearly all developed countries (see He,
Goodkind, Kowal 2016, 15).
The circumstances that such that pensioners are, generally, not only
healthier but also wealthier; as a matter of fact, the two major sources of
private wealth, i.e. illiquid and liquid assets such as houses and pensions,
are steadily in their hands – has also brought emigration within the
financial reach of many of them (see Gardiner 2016, 33–39). Moving,
therefore, is no longer necessarily a young person’s game.30 Indeed,
statistics show that an increasing number of pensioners are retiring in
countries other than the ones in which they spent their entire or a
substantial part of their working life, staying there for at least a
considerable part of the year (see, for example, Cruccu 2018;
KeepTalkingGreece 2018; Tilbrook 2018; Gehring 2017; ONS 2017; The
Economist 2017).
Although there is very little research into migration patterns of the
elderly population and, indeed, the exercising of the right to free
movement across the EU by ‘economically inactive’ citizens, who have
reached their retirement age has received scant attention so far,31 for
those individuals the decision to migrate seems to be favoured by a
general loosening of occupational and social ties that normally bind an
individual to a certain place of residence during their entire working life
(see, in this regard, Pyte, Rahmonov 2019). In the EU, cross-border
mobility of pensioners is further encouraged by the obligation imposed
by EU law upon Member States to eliminate national restrictions that
29 Notably, the three stages of life, i.e. education, work and leisure, were first laid
down by Harold Entwistle in Education, Work and Leisure (Routledge 1970).
30 Against this background, Young (2017, 3, 16, 40) contends that ‘people moving
across state lines are young’, since ‘people move not because they are cold and calculating
but because of where their opportunities lie’, which, according to that author, is more
likely to materialize when a person is still relatively young and is trying to establish a
career. Conversely, the propensity to move supposedly decreases when a person reaches
the peak of their career, due to a variety of factors, such as growing family responsibilities
and the accumulation of human, social and cultural capital in the place where the person
has settled.
31 Nevertheless, one recent groundwork study (see Gehring 2019) has pinpointed
three main reasons for a retiree to cross country borders: (1) increased free time and the
absence of work obligations, (2) availability of budget flights for most destinations as well
as the possibility to rely on distance-shortening technologies such as videocalls, and (3) in
the EU, the right to free movement across Member States.
Giorgio Beretta (p. 68–115)
impede or discourage the provision of pension portability without
objective justification or that are not proportionate to their own aims.32
Although, in principle, the brain drain phenomenon only pertains
to highly-skilled individuals of working age, the outbound flow of
pensioners indeed, a ‘drain’, and hence a parallel with the brain drain
phenomenon may be established is also a source of concern for
governments and policy makers, in so far as it generates a loss of fiscal
revenues for the country of origin and a corresponding gain for the
country of arrival, a circumstance that induces countries to tightly compete
in offering those individuals the most favourable tax and non-tax
conditions (in general, with regard to the fiscal effects of migration by an
individual from one country to another, see Beretta 2019a; Betten 1998).
Furthermore, even from a purely intra-country perspective,
emigration of pensioners undermines the effectiveness of deferred taxation
of pension income and leads those countries to shift the fiscal burden on
the young, thus impairing intergenerational fairness (see Redonda et al.
2019; Xu 2015, 75–77). Given that private pensions are among the most
significant financial assets currently held in the household sector, the
importance of pensions as a source of revenue for countries is quite
obvious and, indeed, it is expected to also remain significant in the near
future (see Gardiner 2016, 33–39).
The background of this discourse is that pay-as-you-go (PAYG)
regimes, in the form of compulsory contributions, are still a relevant part
of pension regimes, in many countries, as well as in most EU Member
States, the most common among those schemes being the EET system
(Exemption for the individual contributions, Exemption of the savings
and capital market returns accumulated in the pension fund, and Taxation
upon disbursement of pension wealth once an individual retires).33 Under
32 Indeed, the Commission issued a communication on the elimination of tax
obstacles to cross-border provision of occupational pensions in 2001, followed by an
update in 2003, and launched several infringement proceedings against a number of
Member States in the subsequent years (see European Commission 2001a; European
Commission 2001b; European Commission 2003). Among the infringement proceeding
launched by the Commission over the years, it is worth pointing out the case against
Denmark, which resulted in a decision rendered against that Member State by the Court
of Justice of the European Union in 2007 (CJEU, case C-150/04, Commission of the
European Communities v. Kingdom of Denmark, ECLI:EU:C:2007:69). The lack of
pension portability and double taxation of cross-border pension have long been identified
as a significant obstacle to cross-border movements and a factor of lost income for EU
citizens (for a discussion, see Williams 2001; Gutmann 2001). More recently, a regulation
on a pan-European Personal Pension Product (PEPP) was passed by the European
Parliament in 2019 (see European Parliament 2019).
3 3 There are indeed various types of old-age pensions and all are generally
underpinned by three tiers of retirement income, i.e. public, occupational and private,
whose quantitative significance however varies markedly across countries as well as
Annals FLB – Belgrade Law Review, Year LXVII, 2019, No. 4
such scheme, pensions become taxable for the first time when benefits
start being paid out. Alternatives to the EET system are the ETT system
(Exempt contributions, Taxed investment income and capital gains of the
pension fund, Taxed benefits) and the TEE system (Taxed contributions,
Exempt investment income and capital gains of the pension fund, Exempt
benefits), although other combinations are also possible.34
While in a closed economy setting the aforementioned pension
taxation regime works quite smoothly, the migration of a retired person
from one country to another instead creates havoc in such a scheme, in so
far as the emigrating person pays no taxes in the country of origin, despite
the employment activity and the income thereof to which pension
contributions can be traced having generally been made in that country
(see Starink 2016, 6–13).
As such, the cross-border aspects of private pensions is characterized
primarily by a potential conflict between two distinct elements: (1) the
ability of an individual to accrue a pension without impediments during
the contribution and accumulation phases, regardless of where one person
works or lives, and (2) the tax claim by the country of origin over
payments made from pensions accrued under favourable tax provisions
upon disbursement (see Kavelaars 2007).
The quasi-contractual argument that lies behind such a claim is
evident: the emigrating pensioner has received a tax benefit from his
country of origin and, therefore, has a duty – a moral one, at least – to pay
it back to the country from which he departs (see Brokelind, Axmin 2017,
261). As a matter of fact, the flow of pensioners and, accordingly, of
pension income between two countries could very well not be reciprocal
and, in some cases, may represent a relatively substantial net outflow for
the country of origin of these elderly migrants (see Staats 2015).
Indeed, this quasi-contractual argument gains further traction if the
pension income goes untaxed not only in the country of origin but also in
the country of arrival, effectively achieving international double non-
taxation. Notably, this situation occurs where the emigrating pensioner
between individuals within a country. Notably, in order to render their pension systems
more sustainable over time, countries generally motivate employers and employees to
support occupational and private retirements savings with various forms of tax preferences
or direct subsidies. For an overview of the current and prospective pension systems at the
international level, see OECD 2017a.
34 According to Dilnot, Johnson (1993, 2), ‘three main transactions constitute
most private pension schemes and it is these transactions which are the possible occasions
for taxation: (1) contributions into the scheme, from employer or employee, (2) income
derived from the investment of contributions, and (3) payment of retirement benefits from
the accumulated fund’. For a discussion of the various pension taxation regimes in the
EU, see Brokelind 2014, which concludes that ‘cross-border workers may have a lot to
lose compared to non-migrant workers, just because of a lack of simplicity in mixing the
Giorgio Beretta (p. 68–115)
moves from an EET country to a TEE country, in so far as the differences
between the pension taxation regimes that are in place in the two countries
in question ultimately lead to double non-taxation of the particular
income.35 Indeed, double non-taxation of pensions may also occur if a tax
treaty is in place between the country of origin and the country of arrival
and such a treaty follows the OECD Model, but the latter country provides
for an exemption or simply does not actually tax the relevant pension
income (see Beretta 2019b). This situation can be best understood by
reviewing the current regime for taxation of pension income under double
tax treaties, which is done in the next section.
Under the current version of the OECD Model Convention on
Income and on Capital (2017), pension income from past private
employment is addressed in Article 18. This article provides for a single
– for some, indeed, ‘deceptively simple’ (see Brown 2019, para. 1.1.1.)36
– taxation rule, stipulating that pension and similar remuneration, paid in
consideration of past private employment, are taxable only in the state of
the individual recipient.37
35 Notably, double taxation and non-taxation as a result of an individual moving
across state borders were dealt with at a seminar during the 2008 IFA Congress in Brussels
(see De Broe, Neyt 2009). For an analysis of similar issues in the EU, see European
Commission 2016.
36 Notably, according to Brown (2019, para. 1.1.1.), such ‘deceptively simplicity’
is related to the fact that Article 18 of the OECD Model ‘provides no definition and, of
course, no source rule. In fact, unlike most of the other distributive rules in tax treaties,
the provision is not limited to pensions that arise in one state and are paid to a resident of
the other state’. Lacking a tax treaty definition, pursuant to Article 3 (2) of the OECD
Model, the term ‘pension’ must be interpreted in accordance with the domestic law of the
jurisdiction imposing the tax, unless the context requires differently. Furthermore, as long
as the OECD Model does not include a specific provision regarding social security
benefits or annuities, it might be doubtful whether, in a concrete situation, those items of
income fall under Article 18 or not (see, most recently: CJEU, case C-372/18, Ministre de
l’Action et des Comptes publics v. Mr and Mrs Raymond Dreyer, ECLI:EU:C:2019:206,
concerning the actual characterization of contributions paid by an individual resident in
France to a Swiss social security scheme). Moreover, since Article 18 of the OECD Model
provides for no taxation by the source state, it also does not contain any source rule.
Accordingly, the allocation rule contained in Article 18 is not limited geographically,
which means that all payments that fall within the definitional scope of Article 18 are
governed by such rule, without any regard to where those payments actually ‘arise’.
37 Article 18 of the UN Model indeed contains two alternative provisions, i.e. (A)
and (B), for taxation of pension income from past private employment. Notably, these two
alternatives reflect very distant tax policies. The first alternative (A) includes a general
rule that follows the corresponding OECD Model provision. The second alternative (B),
instead, ensures taxation by the state of residence of the recipient and the state of which
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As an allocation rule, Article 18 closely follows the residence
principle. The taxing rights of the source state are therefore completely
disregarded. On the other hand, pursuant to Article 19 (2) of the OECD
Model, pension income from past government employment is taxable
only in the source country, which is identified as the country where the
government services were in fact rendered.38 Importantly, the OECD
Model and double tax treaties in general focus only on the actual
disbursement of pension income, disregarding the contribution and
accumulation phases.
Historically, taxing rights over private pension income shifted from
the source country to the residence country at time of the drafting of the
1946 London Model, under the sponsorship of the League of Nations.39
The main reason for the overhaul is related to the fact that the same shift
occurred for taxation of income from movable capital and that private
pensions were ultimately regarded as just a form of income from capital.40
The new allocation of taxing rights among the source and residence
countries indeed gained further confirmation in all subsequent updates of
the OECD Model41 and, eventually, the rule was upheld by ensuing
discussions which took place inside the various Working Party Committees
through the years.42
the payer is a resident. It is worth noting that both alternatives provide for exclusive
taxation of social security payments by the source state.
38 Blank, Ismer (2015, 252–253) indeed suggest bluntly deleting this provision
from the OECD Model, in so far as they argue that ‘the paying state principle’, on which
this provision is based, creates a lot of complexities as well as opportunities for tax
arbitrage and that, furthermore, a great deal of simplification could be achieved by
providing a single rule that applies to all pensions, from both private and government past
employment. Along the same lines, see Lang (2007).
39 Although it is not entirely clear what was the reason taxing rights over private
pension income were allocated to the source state instead of the residence state prior to
1946, it should be noted that the 1927 League of Nations Draft Convention also proposed
to extend the treatment that had applied only to public pensions – i.e. taxation by the state
from which payment was made – to also include private pensions. The Commentaries to
Article 8 of the 1927 Draft Convention (League of Nations 1927, 16 [4130]), in fact,
explained this decision by stating that ‘it appeared both right and practical that all pensions
should be made subject to the same rules’. As it happened, the treatment of private
pensions provided under the 1927 Draft Convention had little effect on the drafting of
actual tax treaties between countries (see Brown 2019, para.
40 See League of Nations (1946, 28 [4348]) reasoning that ‘[i]n the London Draft,
private pensions and life annuities are made taxable in the country of fiscal domicile of
the creditor, as in the case of interest from debts’. For a discussion, see Starink (2016, 8).
41 As recalled by Brown (2019, para. 1.2.2.), in truth, the United Kingdom made
an attempt to add a subject-to-tax test to the provision that would have been then included
in the 1963 OECD Draft, but it only gained the support of the United States.
42 See OECD (1973, 6) pointing out that ‘the article as it stands does not seem to
have given rise to difficulties’.
Giorgio Beretta (p. 68–115)
Despite, as a rule, exclusive source-based taxation displays a
number of strengths,43 four broad justifications are usually found for
providing exclusive residence-based taxation of pension income from
past private employment. Notably, those reasons relate to:
(1) the ability-to-pay principle, as its concrete assessment depends
on the worldwide income of the individual taxpayer and it is assumed that
personal and family circumstances of the pensioner are better evaluated
by the residence state, which, therefore, is also able to ensure personal
income taxation of the individual taxpayer on a net basis.44 On the other
hand, taxation of pensions at source is likely to result in excessive
taxation, especially if the source state imposes a final withholding tax on
the gross amount of pension payments;45
(2) the need to fund expenses associated with an aging population,
especially for health, pension and care services available to pensioners,
whose costs are to be borne by the residence state (see Kavelaars 2007;
Blum 1999, 656–657);46
(3) easiness of tax administration by the competent authorities, as
long as significant hurdles might arise in the case of individuals who have
worked in more than one state, changed residence during their career, or
43 Notably, the main advantage of exclusive source-based taxation is related to the
existence of a clear causal link between pension and private employment income, which
implies that it is reasonable to tax pensions, as a manifestation of income subject to a
suspensive condition, in the very same country where employment income is also taxed.
See UN Model Tax Commentary on Article 18 (2017), para. 11. Noteworthy, exclusive
source-based taxation is provided under the multilateral Nordic Convention. See Denmark-
Faroe Islands-Finland-Iceland-Norway-Sweden Income and Capital Tax Convention
(Nordic Convention) (1996) (as amended through 2008), Art. 18 (1).
44 OECD Model Commentary on Article 18 (2017), para. 17. The Commentaries
on Article 18 were amended in the 2005 Update of the OECD Model, following discussions
among representatives of Member States at the OECD level (see OECD, 2003). Notably,
similar considerations can be found also in the case-law of the CJEU (see e.g. CJEU, case
C-279/93, Finanzamt Köln-Altstadt v. Roland Schumacker, ECLI:EU:C:1995:31, para.
45 It should be noted, however, that in Hirvonen (CJEU, case C-632/13,
Skatteverket v. Hilkka Hirvonen, ECLI:EU:C:2015:765, para. 49) the CJEU ruled that the
refusal by the source state to grant non-resident taxpayers, who obtain the majority of
their income from the source state and who have opted for the taxation at source regime,
the same personal deductions as those granted to resident taxpayers under the ordinary
taxation regime, does not constitute, by itself, a discrimination contrary to EU law, in
particular where the non-resident taxpayers are not subject to an overall tax burden greater
than that placed on resident taxpayers.
46 In this connection, Kemmeren (2001, 32) draws a distinction between the
production of income and its consumption, arguing that payment of consumption taxes
provide sufficient compensation for the public services offered to emigrated taxpayers in
the new country of residence. This argument, however, is rejected by other scholars (see,
especially, Starink 2016, 12).
Annals FLB – Belgrade Law Review, Year LXVII, 2019, No. 4
derived pensions from funds established in a state other than the one in
which they worked;47
(4) simplification of tax compliance obligations for individual
taxpayers, since exclusive residence-based taxation enables emigrated
individuals to deal with income tax rules and tax authorities of only one
Although exclusive residence-based taxation, as the relevant taxing
rule, is mandated by Article 18 of the OECD Model and, as seen, a series
of justifications for its adoption can be found, actual tax treaty practice
shows that allocating taxing rights to the source state is equally possible.
Notably, a study conducted by the IBFD in 2014 (see Wijnen, de
Goede 2014) highlighted that, up until 2013, out of 1,811 tax treaties
included in the survey, seven tax treaties concluded between two OECD
countries provided for exclusive source-based taxation, whereas 25 of
them allocated non-exclusive taxing rights to the source state, limited to
a certain percentage, ranging between 10% and 25%. As for tax treaties
concluded between an OECD and UN country, 44 tax treaties provided
for exclusive source-based taxation, whereas 31 of them allocated non-
exclusive taxing rights to the source state, limited to a certain percentage,
ranging between 10% and 25%.
The tendency to attribute at least some private pension income
taxing rights to the source state is indeed growing, in particular among
pension-exporting nations like the northern countries in the EU. Denmark,
for instance, terminated its tax treaties with France and Spain in 2009,
after repetitive failures to negotiate some form of source-based taxation
of private pension income with those countries.49
Along the same lines, recent tax treaties concluded between the
Netherlands, on the one hand, and respectively, Ireland and Germany, on
the other, the latter of which came into effect in 2016 (in contrast, the
Dutch-Irish income tax treaty is not yet in force), provide for source state
taxation of private pensions exceeding, respectively, EUR 25,000 and
EUR 15,000 per annum.50
47 OECD Model Commentary on Article 18 (2017), paras. 19–19.2.
48 OECD Model Commentary on Article 18 (2017), para. 20.
49 Notably, the income tax treaties with Spain and France were terminated by
Denmark, effective 1 January 2009. See Dyppel 2011, reporting that ‘from a Danish
perspective, it is crucial that future treaties contain provisions resulting in a more balanced
allocation of rights to tax pension income ... As neither France nor Spain seems to show
consideration for the Danish taxation of pensions as a whole and conclude a new treaty
with a provision in line with this view, the Minister does not expect new treaties to be
entered into in the near future’.
50 Ireland-Netherlands Income and Capital Tax Treaty (signed on 13 June 2019,
not yet in force), Art. 17 (2); Germany-Netherlands Income Tax Treaty (1 Jan. 2016), Art.
17 (2).
Giorgio Beretta (p. 68–115)
Exclusive residence-based taxation, compounded with the adoption
of an EET taxation system of private pensions by most countries,
ultimately leads to a ‘fairness dilemma’. On the one hand, by bilaterally
agreeing to such a regime, the country of origin in fact forgoes all its
potential fiscal revenues. On the other hand, the emigrating pensioner is
effectively double-taxed if the country of origin tries to close the tax
income gap by, for instance, taxing pension contributions, whereas the
country of arrival, following the treaty, also taxes the pension benefits
upon receipt by the individual (see Genser, Holzmann 2016, 10–15).
Indeed, in the EU, this situation is further complicated by the encroachment
of the freedom of movement across different Member States to which all
EU citizens – including ‘economically inactive’ ones such as pensioners
– are entitled.51
Nevertheless, as a result of the growing willingness and capacity of
pensioners to move across country borders, maintaining an exclusive
residence-based taxation for income from private pensions in double tax
treaties has become increasingly problematic.52 Indeed, if, at time when
exclusive residence-based taxation was conceived, the amounts of
pensions paid cross-border were relatively small in relation to other types
of cross-border payments such as dividends, interest and royalties, so that
the costs for the source state of giving up its own taxing rights were not
seen that great, this is no longer the case in the current political, social
and economic landscape (see Brown 2019, para. 1.1.1).
To add to this problem, in a few cases the residence state provides
for a blunt exemption or simply does not tax the relevant pension
income.53 This situation occurs in Portugal, which has a special tax
51 Indeed, as clarified by the CJEU, first, in Pusa (CJEU, case C-224/02, Heikki
Antero Pusa v. Osuuspankkien Keskinäinen Vakuutusyhtiö, ECLI:EU:C:2004:273, para.
18) and then in Turpeinen (CJEU, case C-520/04, Pirkko Marjatta Turpeinen,
ECLI:EU:C:2006:703, paras. 13–23), the exercising of an economic activity is no longer
a requirement for an emigrant to have treaty standing, as the combination of Union
citizenship and the right of residence avails the ‘economically inactive’ citizen of a right
to national treatment in the state of destination and of a right of non-restriction in the state
of origin. See also CJEU, case C-300/15, Charles Kohll and Sylvie Kohll-Schlesser v.
Directeur de l’administration des contributions directes, ECLI:EU:C:2016:361, para. 28.
52 See OECD Model Commentary on Article 18 (2017), stipulating that ‘[t]he
globalisation of the economy and the development of international communications and
transportation have considerably increased the international mobility of individuals, both
for work-related and personal reasons. This has significantly increased the importance of
cross-border issues arising from the interaction of the different pension arrangements
which exist in various States and which were primarily designed on the basis of purely
domestic policy considerations. As these issues often affect large numbers of individuals,
it is desirable to address them in tax conventions so as to remove obstacles to the
international movement of persons, and employees in particular’. For a discussion of
movements of pensioners across country borders inside the EU, see Del Sol, Rocca 2017.
53 Granting an exemption to foreign-source pensions does not necessarily imply
the complete forfeiture of fiscal revenues, in so far as a country may well expect an
Annals FLB – Belgrade Law Review, Year LXVII, 2019, No. 4
regime providing for a 10-year exemption for foreign-source pension
income.54 Repeated failures to negotiate a new tax treatment for private
pensions by Finland with the Portuguese tax authorities led the
Scandinavian state to terminate the income tax treaty with Portugal as
from 1 January 2019 (see Ambagtsheer-Pakarinen 2018).
Indeed, the number of variations on and deviations from any of the
standard models, or even the alternatives included in the Commentaries to
the OECD and UN Models, as well as the circumstance that countries are
normally prone to negotiate ‘bespoke’ provisions combining multiple
provisions from the Commentaries on Article 18, or ignore them
altogether, indicate the existence of scope for reforming the current tax
treatment of pension income under double tax treaties (see Brown 2019,
para. 1.1.1).
6.1. Rethinking individual taxation for the 21st century challenges
There are indeed good reasons to believe that international wars
and battles for human capital will intensify in the next few decades. Fast-
paced automation combined with the increasing specialization of
developed countries in human capital-intensive activities are, in fact,
expected to spur the general demand for labour by highly-skilled
individuals and, thus, also the extent of the brain drain phenomenon.
Also, population ageing along with the growing willingness and capability
of pensioners to move across borders are predicted to impose tight budget
constraints and, thus, put additional pressure on the Welfare State of most
developed countries. Ultimately, the aforementioned two phenomena
might be in correlation, in so far as challenges related to an ageing
population spur the general demand for workers, especially highly-skilled
individuals, from abroad.
Uncontrolled flows of people across borders, being either highly-
skilled or elderly individuals, could well increase the extent of strategic
tax competition among countries, thus draining the brain and fiscal
resources of many nations (see Dagan 2018, 59; Rixen 2011, 449). This
increase in collected revenues through indirect taxation. This is indeed the case of Portugal
which, reportedly, experienced a sharp increase of new residents in the last years, largely
due to its preferential tax regime for foreign-source pensions (see Wise 2019). As stated,
Kemmeren (2001, 32) takes the view that payment of consumption taxes by the emigrated
individual in the country of arrival offers sufficient compensation for the public services
provided by that country to those individual.
54 Código do Imposto sobre o Rendimento das Pessoas Singulares (CIRPS)
[Portuguese Individual Income Tax Code], Arts. 16 (8–12), 72 (6) and 81 (4–6). For a
discussion of the Portuguese special tax regime, see Cassiano Neves 2010.
Giorgio Beretta (p. 68–115)
is even truer inside the EU, given the freedom of movement that workers
and Union citizens are entitled to under EU law. As a result of such cross-
border movements, wealth gaps between those who leave and those who
remain – the former not necessarily being the younger, the latter not
necessarily being the older – are also likely to widen.
Against this background, the author submits that a coordination
strategy to address the current disarray existing in the realm of individual
taxation at the international level is highly desirable and that the allocation
rules as provided under current double tax treaties, not only for corporate
but also for individual taxpayers, should be duly reconsidered.55
Accordingly, in the following, various policies and measures that might
constitute a blueprint for individual tax reform are analysed and their
respective pros and cons are in turn evaluated. Importantly, the ensuing
discussion mostly focuses on Articles 18 of the OECD Model and taxation
of cross-border pension income from past private employment, the author
arguing that such an examination might offer valuable suggestions for
rethinking individual taxation on a more general scale. Also worth noting
is that the following sections only deal with how the taxing rights between
the source and the residence state, i.e. the country of origin and the
country of arrival in case of migration of an individual from one country
to another, could be allocated, without further discussing how the proceeds
resulting from such allocation should be used by the countries concerned.
As a further word of caution, given that each of the proposed policies and
measures warrants an article of its own, only the main elements and
arguments of each are hereinafter delineated.
6.2. Extended residence-based taxation
A first measure to address the current challenges encountered in the
field of individual taxation may consist in granting taxing rights to the
country of origin of the emigrants, being either highly-skilled or elderly
individuals, over income received by those persons while abroad.56
Notably, the possible strategies that the country of origin may implement
in order to protect its own tax base against tax-induced migration of
individuals can essentially be divided into three broad categories: (1) exit
taxes, (2) extended tax liabilities, and (3) recaptures of previously enjoyed
benefits, deductions or deferrals (see De Broe 2002, 23).
55 For a thoughtful examination and some reconsideration of allocation rules for
employment income under tax treaties, in particular with regard to Article 15 of the OECD
and UN Models, see Kostí ć 2019b.
56 As a matter of international law (see Norr 1961, 432), countries are free to
assert jurisdiction over the worldwide income of an individual abroad, provided that a
‘minimum connection’ or ‘nexus’ exists between the country and the individual or the
income concerned.
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‘Exit taxes’ or ‘departure taxes’ can be summarily described as
taxes that the country of origin levies upon a person when they cease to
be its resident. It is worth nothing that becoming a resident of the other
Contracting State under a tax treaty’s tie-breaker rule is, in most
circumstances, equated to an expatriation. The primary purpose of an exit
tax is to ensure that, following the change of residence by a taxpayer, the
income accrued while that person was a resident does not escape taxation
altogether because of the excluded or limited taxing rights permitted to
the source state (i.e. the country of arrival) under its domestic law or by
virtue of tax treaty obligations.
As regards their theoretical design, two main types of exit taxes
can be distinguished: namely ‘general’ and ‘limited’ exit taxes. General
exit taxes are fiscal liabilities imposed on all accrued-but-not-yet-realized
income (e.g. capital gains) of the emigrated individual. Limited exit taxes
are instead imposed on accrued-but-not-yet-realized items of income
from certain types of property, such as income from the alienation of a
substantial shareholding.
Exit taxes are quite problematic. By imposing an exit tax, a state
might in fact be found in breach of its tax treaty obligations. Indeed, an
exit tax in regard to pension rights imposed by the Netherlands was found
inconsistent with its tax treaty obligations, which, pursuant to Article 18
of the OECD Model, attributed taxing rights on pension income
exclusively to the state of residence of the individual recipient.57 Exit
taxes might also be troublesome in relation to obligations deriving from
EU law, in so far as those measures amount to illegitimate restrictions on
one or more of the four freedoms (for an introduction to this topic, see
Helminen 2019, Chapter 2). Since they are immediately charged to the
emigrated individual, exit taxes also present complications in cases of
temporary migrations, i.e. where an individual moves from one country to
another and remains therein only for a few years, to the extent that the
individual taxpayer, once returned, is not able to recover the tax paid to
the country of origin upon emigration.58
The second type of defensive measures is related to ‘extended’ tax
liabilities or ‘trailing’ taxes. These are taxes that are levied on income that
is not otherwise subject to the country of origin’s source rules, accrued to
an individual within a given period following his change of residence
57 See: Hoge Raad, BNB 2009/263, 19 June 2009. However, in a more recent
decision (see Hoge Raad, BNB 17/186, 14 July 2017), the Dutch Supreme Court held to
be compliant with the country’s treaty obligations the law enacted by the Dutch government
in response to the 2009 Supreme Court decision, prescribing a ‘conservatory assessment’
limited to the tax-exempt pension contributions accrued to an individual until emigration.
For a comment, see Pötgens, Kool (2018).
58 See Helminen (2002, 234), submitting that ‘a mere temporary emigration of a
Finnish national should not trigger limited tax liability in Finland. Only emigration, which
may be regarded as final, should trigger limited tax liability’.
Giorgio Beretta (p. 68–115)
(generally, five to 10 years).59 Following the imposition of a trailing tax,
based on an idiosyncratic definition of residence (see Oldman, Pomp
1979, 31), the emigrated individual remains liable for tax on their
worldwide income in the country of origin, both on income derived from
assets owned at the time of departure and on income accrued to them
thereinafter. In contrast to an exit tax, a trailing tax is not assessed at the
time of the transfer of residence, but only subsequently, i.e. when the
individual actually receives the income thereof.
Indeed, the scholarly proposal to change the order of the tie-breaker
rules for individual residence purposes currently used in the OECD
Model, by primarily assigning residence to the country where the
individual taxpayer has their ‘centre of vital interests’ rather than ‘a
permanent home available to him’, as is presently the case, can be seen as
a sort of extended tax liability or trailing tax also (see Brauner 2010,
250). Further, the use, by a country, of citizenship as the main personal
connecting factor for income tax purposes, to the extent that by doing so
such country succeeds in taxing its expatriated citizens, leads to the same
effects.60 Ultimately, citizenship may also be used, even if not as the main
personal connecting factor, in the context of extended liability provisions,
by countries having a residence-based tax system (this is the case of
Finland, Hungary and Sweden).61 While these kinds of constraints to tax-
driven expatriation are usually unilateral, nothing prevents a specific
provision allowing citizenship-based taxation to be inserted in a double
tax treaty. France has followed this route in its double tax treaties with
Andorra and Monaco.62
59 Notably, a Dutch ten-years trailing tax, although in the field of inheritance tax,
was at stake in van Hilten (CJEU, case C-513/03, Heirs of M.E.A. van Hilten-van der
Heijden v. Inspecteur van de Belastingdienst/Particulieren/Ondernemingen buitenland te
Heerlen, ECLI:EU:C:2006:131).
60 However, it should be noted that at the present, the United States is one of the
few countries that still uses citizenship as the main personal connecting factor (for an
overview, see Holm 2014). The only other country that uses citizenship as the main
personal connection factor, Eritrea, was in fact condemned by both the UN and the EU for
the practice of imposing a 2% levy, named ‘Diaspora Tax’ or ‘Recovery and Rehabilitation
Tax’, on its citizens permanently living abroad. See: United Nations, Resolution 2023, UN
Doc. S/RES/2023, 5 December 2011; European Parliament, Resolution on the Situation in
Eritrea, 2016/2568(RSP), 10 March 2016. Past practices by other states (most notably,
Mexico and Philippines) to levy income tax based on citizenship were, indeed, largely
unsuccessful, mainly due to the difficulties encountered by those countries in enforcing
tax obligations on their expatriated citizens (see Pomp 2015).
61 Tuloverolaki 1992 [Finnish Income Tax Act], Sec. 11; Inkomstskattelag 1999
[Swedish Income Tax Act], Sec. 7; Személyi jövedelemadóról szóló 1995. évi CXVII.
törvén 1995 [Hungarian Law on Individual Income Tax], Sec. 3 (2) (a).
62 France-Monaco Income Tax Treaty (18 May 1963), Art. 7; Andorra-France
Income Tax Treaty (2 April 2013), Art. 25 (1) (d). For a discussion of the provisions
contained in these two treaties, see Kallergis (2015).
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As a potential alternative or in addition to the aforementioned
measures, the country of origin may decide to recapture or ‘claw-back’
benefits, deductions or deferrals previously granted to an individual upon
emigration. In this way, the country of origin essentially aims to safeguard
its latent taxing rights over an emigrant’s income.63 However, claw-back
provisions imposed on income such as pensions are highly problematic,
in so far as those measures frequently generate a liquidity shortage for the
emigrated individual, who might not have readily or entirely available
cash needed to pay the tax assessment concerned. Arguably, such kinds of
income recaptures should therefore at least contemplate payment in
instalments. Notably, with respect to pension income, a proportionate
method of tax remittance might take the form of a withholding on monthly
pension payments.64
Whether any of the measures discussed above is included in a
blueprint for a given tax reform, the establishment of some procedural
rules would also be needed. In particular, it would be useful to provide
for an effective exchange of information and adequate tax collection
mechanism between countries. While imposing a tax on its emigrated
individuals, a country is in fact confronted with two kinds of hurdles.
First, it must obtain accurate information about the emigrated individual’s
income in order to assess their tax liabilities and, second, it must collect
the amount of tax owed.65 Indeed, an exchange of tax information can
also be useful for the country of arrival, as long as a specific obligation is
imposed upon such country to take into account the tax charged by the
other state while levying its own taxes on the individual taxpayer.66
6.3. Subject-to-tax rule(s)
As it is known, under international tax law states are under no
obligation to prevent either double taxation or non-taxation, unless
specific provisions to that effect are inserted in a double tax treaty.
Subject-to-tax rules fulfil precisely this function, by ensuring that income
63 In a sense, previously enjoyed deductions represent a sort of ‘tax loan’, which
must be recouped at a later date. See: Opinion of Advocate General Stix-Hackl, case
C-150/04, Commission of the European Communities v. Kingdom of Denmark,
ECLI:EU:C:2006:357, para. 68.
64 Interestingly, in their proposal for a ‘brain drain tax’, Bhagwati, Dellalfar (1973,
96) suggested the tax be collected for 10 years following migration or, preferably, through
lifetime payments.
65 Those kinds of procedural rules are set forth, respectively, in Articles 26 and 27
of the OECD and UN Models.
66 Noteworthy, such an obligation exists in the EU for exit taxes levied on
emigrated corporate taxpayers after the first Anti-Tax Avoidance Directive (ATAD)
entered into force in July 2016. See: Council Directive (EU) 2016/1164 of 12 July 2016
laying down Rules against Tax Avoidance Practices that Directly Affect the Functioning
of the Internal Market, Art. 5 (5), OJ L 193/1 of 19/6/2016.
Giorgio Beretta (p. 68–115)
is taxed at least by one of the two Contracting States (see Rust 2015,
1624 paras. 34). Seen from this perspective, subject-to-tax rules provide
a concrete example of how the single tax principle, i.e. the principle
stipulating that the same income is to be taxed once and only once, can
act as a coordination mechanism to turn the international tax regime into
a more comprehensive one.67
The idea underlying subject-to-tax rules is anything but new (for a
discussion, see Burgstaller, Schilcher 2004; Lampe 1999). Although not
generally recommending that states include subject-to-tax rules in their
double tax treaties,68 the Commentaries to the OECD and UN Models in
fact mention time and again the possibility for countries of bilaterally
agreeing on a rule according to which the tax relief to be granted by one
Contracting State is contingent upon the income being subject to tax in
the other Contracting State.69 It is worth noting that a subject-to-tax rule
is also included in the Global anti-Base Erosion (GloBE) proposal
unveiled by the OECD in early 2019, which essentially aims to ensure
that internationally operating businesses pay a minimum level or ‘fair
share’ of taxes (see OECD/G20 2019b; OECD/G20 2019a).
67 For a theoretical concept of the single tax principle as a cornerstone of the
international tax regime, see Avi-Yonah (2007, 8–10). Gil Garcí a (2019) argues that
‘single taxation is not pursued by tax treaties but is, rather, a consequence when specific
provisions are implemented’, such as subject-to-tax rules, whereas Shaviro (2015, 6)
points out that the single tax principle can be seen as ‘an often useful coordinating device’.
68 Until 2014, the Commentaries to Article 1 on the OECD Model in fact stipulated
that ‘[g]eneral subject-to-tax provisions provide that treaty benefits in the State of source
are granted only if the income in question is subject to tax in the State of residence. This
corresponds basically to the aim of tax treaties, namely, to avoid double taxation. For a
number of reasons, however, the Model Convention does not recommend such a general
provision’. OECD Model Tax Convention Commentary on Article 1 (2014), para. 15. The
quoted passages were deleted during the 2017 Update of the OECD Model (see OECD
2017b, 47). It is also worth recalling that the BEPS Action 6 Final Report proposed to add
new provisions to Article 11 (Interest), Article 12 (Royalties) and Article 21 (Other
Income) of the OECD Model, stipulating that interest, royalties or other income arising in
a Contracting State and beneficially owned by a resident of the other Contracting State
‘may be taxed in the first-mentioned Contracting State in accordance with domestic law if
such resident is subject to a special tax regime’ (see OECD/G20 2015, 98). The provisions
in question would essentially allow taxation by the source country when there is a
preferential tax regime in the residence state and this is defined in the relevant tax
treaty. However, the proposed new provisions were not included in any of the
aforementioned articles during the 2017 Update of the OECD Model.
69 See e.g. OECD Model Tax Convention Commentary on Article 13 (2017), para.
21, stipulating that ‘[a]s capital gains are not taxed by all States, it may be considered
reasonable to avoid only actual double taxation of capital gains. Therefore, Contracting
States are free to supplement their bilateral convention in such a way that a State has to
forego its right to tax conferred on it by the domestic laws only if the other State on which
the right to tax is conferred by the Convention makes use thereof’. See also UN Model
Tax Convention Commentary on Article 13 (2017), para. 4.
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The forms and wordings of subject-to-tax rules contained in the
various double tax treaties concluded by countries are indeed manifold.
According to relevant literature, one criterion for categorizing such rules
is whether the subject-to-tax rule only applies to a certain item of income
– thus, resulting in a ‘specific’ subject-to-tax rule – or whether it applies
to all categories of income covered by a double tax treaty – thus, resulting
in a ‘general’ subject-to-tax rule (see Burgstaller, Schilcher 2004).
A specific subject-to-tax rule is envisaged in the Commentaries to
Article 18 of the OECD Model (reproduced in the Commentaries to
Article 18 of the UN Model), allowing source taxation of pension
payments where the residence state does not subject to tax these payments
‘under the ordinary rules of its tax law’.70 The adoption of a general
subject-to-tax rule by EU Member States in their double tax treaties was
instead proposed by the European Commission in its 2012 Recommendation
on Aggressive Tax Planning.71 Moreover, a general subject-to-tax rule is
laid down in Article 26 (2) of the multilateral Nordic Convention.72 A
mechanism ultimately resulting in a similar effect to that of a general
subject-to-tax rule commonly called a ‘switch-over clause’73 is also
envisaged in paragraph 4 of Article 23 (A) of the OECD Model and is
related to the exemption method used by the residence state, which is
prevented from exempting items of income from tax whether those
incomes have not been taxed in the source state.74
70 OECD Model Tax Convention Commentary on Article 18 (2017), para. 15.
Notably, the subject-to-tax rule on pension income was added to the OECD Commentaries
following the 2003 Discussion Draft on Tax Treaty Issues Arising from Cross-Border
Pensions (see OECD 2003, 6).
71 See European Commission 2012b. Dourado (2015, 50–51) submits that ‘in the
current EU context of tax competition and lack of will to harmonize, it is very unlikely
that EU Member States would adopt such a subject-to-tax clause, especially regarding
intended gaps, aimed at promoting investment abroad or investment in developing
countries. Moreover, EU Member States may also be resistant to adopting a general
subject-to-tax clause geographically limited to the EU territory. Taking into account free
movement of capital, subject-to-tax clauses should ideally be adopted universally or at
least in the OECD context, in order to avoid diversion of investment to those States that
do not adopt those rules’. Remarkably, thus far, all these predictions have been fulfilled.
For a critical analysis of the subject-to-tax rule recommended by the European Commission
in 2012, see Marchgraber 2014.
72 Convention between the Nordic Countries for the Avoidance of Double Taxation
with respect to Taxes on Income and on Capital (23 September 1996, as amended through
2018), Art. 26 (2).
73 See e.g. van Horzen, De Groot (2018), discussing the switch-over clauses
included in the EU anti-BEPS rules.
74 See also OECD Model Tax Convention Commentary on Article 18 (2017), para.
35. By contrast, Rust (2015, 1655 para. 102) considers that the relevant provision ‘does
not constitute a subject-to-tax clause’.
Giorgio Beretta (p. 68–115)
In actual tax treaty practice, general subject-to-tax rules can be
found in several bilateral treaties, such as those signed by Italy with
France and Germany or by Austria with Malta and the United Kingdom.75
Specific subject-to-tax rules concerning pension income from past private
employment can also be found in many double tax treaties, for instance
those between Cyprus and Switzerland, Denmark and the United
Kingdom, Estonia and Serbia, or France and Switzerland.76
Although, as stated, subject-to-tax rules are nothing new under the
sun and, indeed, can be found in various double tax treaties, no
internationally agreed standard has evolved yet. A blueprint for individual
tax reform including such measures could thus offer a valuable framework
for harmonizing their interpretation and application. It is worth noting
that subject-to-tax rules might be particularly useful to address in
situations where pension income from past private employment is not
taxed in the resident state of the emigrated retiree due to the operation of
a preferential tax regime.77
However, it should be noted that a subject-to-tax rule, by itself, is
not able to tackle situations in which pension income is actually taxed by
the residence state, but a preferential tax rate applies.78 In fact, even the
exact meaning of the term ‘subject-to-tax’ is far from clear and, thus, the
answer to this question is very much open to different interpretations,
especially in borderline situations.79 What if, for instance, no preferential
regime exists for pension income in the residence state, but such country
is a TEE state and therefore it simply does not levy any tax upon
75 1989 Protocol of the France – Italy Income and Capital Tax Treaty (5 October
1989), Point 15; Protocol of the Germany – Italy Income and Capital Tax Treaty (18 Oct.
1989), Point 18 (b); Austria – United Kingdom Income Tax Treaty (30 April 1969, as
amended through 2009), Art. 2 (2); Austria – Malta Income and Capital Tax Treaty (29
May 1978), Art. 2 (5).
76 2014 Protocol Cyprus – Switzerland Income and Capital Tax Treaty (25 July
2014), Point 4 (b); Denmark – United Kingdom Income Tax Treaty (11 November 1990,
as amended through 1996), Art. 18 (1); Estonia – Serbia Income Tax Treaty (24 September
2009), Art. 18 (2); France – Switzerland Income and Capital Tax Treaty (9 September
1966, as amended through 2014), Art. 20 (2).
77 As recalled in section 5 above, this is the case of foreign-source pensions in
78 For instance, as from 2019, Italy has introduced a special tax regime for
incoming pensioners to which a 7% substitute tax of the income tax apply (see Beretta
79 See Lang (2004, 111), also noting that ‘in some languages, the term ‘subject to
tax’ means the same as ‘liable to tax’, thus adding further confusion to the interpretation
and application of the expression in question’. The general subject-to-tax rule included in
the recommendation issued by the European Commission in 2012 was surprisingly short.
It only stipulated that ‘an item of income should be considered to be subject to tax where
it is treated as taxable by the jurisdiction concerned and is not exempt from tax, nor
benefits from a full tax credit or zero-rate taxation’ (see European Commission 2012b).
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disbursement of pension income? Or, even, what if the amount of pension
income is below the minimum taxable amount in the residence state so
that no actual tax liability arises? Or, further, what if a substitute tax
rather than the statutory income tax applies to pension income, so that
such levy might be excluded from the scope of a double tax treaty
pursuant to Article 2 of the OECD Model?80 Shall the subject-to-tax rule
operate also in those situations? Moreover, in addition to the specific case
of an emigrated pensioner, a subject-to-tax rule fails to entirely address
the brain drain issue, since no financial compensation is provided to the
country of origin of the highly-skilled emigrant if the income that he
receives once in the country of arrival is subject to tax therein.
6.4. Exclusive source-based taxation
One may imagine addressing the challenges arising in the field of
individual taxation by means of changes to the relevant allocation rules
currently provided under double tax treaties. Notably, with regard to
pension income from past private employment, this would imply
abandoning exclusive residence-based taxation in favour of exclusive
source-based taxation.81
A proposal to that effect was recently advanced by Genser and
Holzmann. Notably, the two authors implore for a coordinated shift from
EET to TEE (or TTE) taxation of pension income, since they regard the
latter taxation system of pension income better suited for a world of
increasingly mobile individuals, than the EET, adopted by most countries
(see Genser, Holzmann 2016, 16–23).82 In their opinion, universal or
widespread adoption of TEE (or TTE) taxation of pension income in
their word ‘front-load taxation’ instead of ‘back-loaded taxation’ – would
prevent revenue losses for the country of origin when the individual
taxpayer emigrates, as the income will have already been taxed at the
time it was earned, and would also avoid double taxation, as the residence
state would be required to exempt the income in question.83 As an
80 As it might occur in the case of the substitute tax that applies to incoming
pensioners in Italy as of 1 January 2019.
81 A model provision to that effect is indeed included in the Commentaries to the
OECD Model. See OECD Model Tax Convention Commentary on Article 18 (2017),
para. 15. It is worth noting that exclusive source-based taxation is also provided under the
multilateral Nordic Convention. See the Convention between the Nordic Countries for the
Avoidance of Double Taxation with respect to Taxes on Income and on Capital (23
September 1996, as amended through 2018), Art. 18 (1).
82 See also Schindel, Atchabahian (2005, 40), noting that ‘from the point of view
of inter-nation equity and efficiency, exclusive or predominant taxation at source is
shaping up as the most reasonable basis of taxation’.
83 A tax levied by the country of origin over the income of the emigrated individual
also emerged from international discussion as the most feasible version of the Bhagwati
brain drain tax (see Oldman, Pomp 1979, 246–247).
Giorgio Beretta (p. 68–115)
alternative, they also propose that pension taxation by the source state be
deferred until the relevant income is effectively disbursed, so that the tax
becomes due only at time of disbursement of the monthly pension benefits
(see Genser, Holzmann 2016, 20–21).
The most important advantage of applying the TEE (or TTE) rather
than the EET system is that cross-border movements of pensioners from
one country to another no longer distort inter-country equity. Pension
income is, in fact, taxed already at time when contributions to pension
systems are not deductible from employment income in the country of
origin, so that no recouping of income tax relief is required to restore
equity between different jurisdictions once the individual taxpayer leaves
their country of origin. A second advantage is related to the administration
of the TEE (or TTE) system in contrast to the EET one, in so far as the
former method requires no control of correct deductions for pension
savings and since, if the TTE system is applied, old-age pension
contributions and pension savings do not reduce the income tax base in
the country where the relevant income is built up. The third advantage is
related to the fact that, since old-age pension benefits to pensioners are
tax-free, for the emigrated taxpayers filing income tax returns in the
country of origin is not a requirement, even if pension income is received
from several sources, possibly located in different countries. Accordingly,
there is no need to establish any source rule either.84
Exclusive source-based taxation, however, will only work if
countries universally adopt the TEE (or TTE) system. If this is not the
case, bilateral tax treaty negotiations will be complicated furthermore by
the fact that resident pensioners will receive pension benefits from
different source countries, so situations may arise where a country that
suffered a tax revenue loss from preferential treatment accorded during
the contribution and accumulation phases of pension income, is not the
source country paying out the pension income and, is therefore, not part
of the negotiation process with the residence state. In fact, a consistent
solution to this dilemma would require establishing some form of
multilateral consent. In this regard, however, the claim made by Genser,
Holzmann (2016, 24) that a pan-European decision to move from a EET
to a TEE (or TTE) system of taxation of pension income would put
pressure on non-European countries to replicate such an approach, so as
to avoid revenue shortfalls and double taxation, does not seem sufficiently
84 There are indeed three different possible source rules for pensions, i.e. their
source may be located: (1) where the fund paying pension income is established, (2) in the
state in which employment services were rendered, or (3) in the state in which deductions
in respect of the pension have been claimed. See OECD Model Tax Convention
Commentary on Article 18 (2017), para. 19.1; UN Model Tax Convention Commentary
on Article 18 (2017), para. 13.
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It should also be taken into account that exclusive, rather than
shared, taxing rights attributed to the source state are likely to bring
additional pressure on national governments during tax treaty negotiations
(see Starink 2016, 11).85 A solution to this shortcoming might then be
found in granting the source state shared – as opposed to exclusive
taxing rights with the residence state, regarding pension income. This
practically implies limited source-based taxation, meaning that the source
tax cannot exceed a specified rate, while the residence state is obliged to
credit the tax levied by the source state, as similarly provided for dividends
and interest, respectively, in Articles 10 and 11 of the OECD and UN
Models. And yet, even this solution presents some hurdles, since limited
source-based taxation might not actually be sufficient to fully compensate
the country of origin for the fiscal revenues forgone as a consequence of
the emigration of an individual taxpayer.86
6.5. Compensation tax
An alternative to the aforementioned measures may be to leave the
current allocation rule (taxing rights over pension income vested solely to
the residence state) unchanged, but to provide at least some fiscal
compensation to the source state, which should be identified as the
country from which pension income payments are made. The ground idea
is that the country of arrival is to levy a tax on pension income to fully or
partially compensate the country of origin for the revenues forgone
following the expatriation of the individual taxpayer, being either a
highly-skilled or an elderly individual. Indeed, although abandoned in
later versions of the proposal, as it was found difficult to actually enforce,
the original Bhagwati tax proposal envisioned a surtax imposed by the
country of arrival (see Bhagwati 1972, 44).
A proposal featuring a sort of compensation tax to address the brain
drain phenomenon was also advanced more recently in Lister (2017). The
key feature of the proposal contained therein is to resort to a tax credit
roughly akin to the foreign tax credit currently available to US citizens
living and working abroad87as a means to compensate the countries of
origin experiencing a revenue loss following the departure of highly-
skilled individuals from their own territory.88 Specifically, it is proposed
85 However, Brauner (2010, 163) contends that a ‘brain drain tax’ can also be
implemented by countries bilaterally, through purposive changes to existing double tax
86 A model provision to that effect is included in the Commentaries to the OECD
Model. See OECD Model Tax Convention Commentary on Article 18 (2017), para. 15.
87 Internal Revenue Code (IRC), Title 26, Sub. A, Ch. 1, Subch N, Part III, Subpart
A, Sections 901–909.
88 Lister (2017, 75) defines highly-skilled individuals as those who, cumulatively:
(1) have received higher education or skills training, (2) whose training or education was
Giorgio Beretta (p. 68–115)
that the country of origin levy an income tax over employment income
earned abroad by its emigrated highly-skilled individuals and that the
resulting fiscal proceeds, collected by the country of arrival, are credited
against employment taxes due in that country, whereas the remainder is
returned to the countries of origin of the emigrated individuals, thereby
compensating at least to a degree those latter countries for the sunk
investment made in human capital that has left its territory. Lister (2017,
76) further stipulates that the levying of the compensation tax is to last
long enough to fully compensate the country of origin for the lost
investment in the highly-skilled individual.
Cases in point can be found in actual tax treaty practice by countries.
It is worth noting that under Article 9 of the 2015 Protocol to the double
tax treaty concluded between France and Germany, the resident state of
the individual recipient of the pension paid out under the statutory social
insurance schemes is entailed to tax the income in question, but it must
pay back to the state in which the payments arise a ‘compensation amount’
corresponding to the tax which that state would have charged under its
tax laws.89
The main advantage of the aforementioned proposal is that it aligns
the interests of both the countries concerned, since it provides for shared
allocation of taxing rights between the residence and source states and,
therefore it also allows shared allocation of tax revenues between the
country of origin and the country of arrival. This is consistent with the
fact that, arguably, both countries have a legitimate claim to tax the
income of the emigrated individual. Another, related advantage is that
countries no longer have to strive for exclusive source-based taxation as
a means to tackle tax-induced emigration of individual taxpayers from
their own territory. Indeed, this very circumstance is likely to significantly
smooth tax treaty negotiations between countries. In the context of the
brain drain from a developing to a developed country, the further
advantage of this proposal is related to the fact that the compensation tax
builds upon the administrative capabilities of the developed country (see
Lister 2017, 82).
The major concern related to the proposal under discussion are the
nature and characteristics of such a ‘compensation tax’. If, in fact, the
proposed compensation tax is designed to apply separately and on top of
income taxes levied by the residence state (i.e. the country of arrival), it
might not actually be considered as an income tax covered by a double
tax treaty, pursuant to Article 2 of the OECD and UN Models, with the
largely or completely publicly funded, and (3) have left their own country to work in
another within a defined number of years after completing their education or training.
89 2015 Protocol of the France – Germany Income and Capital Tax Treaty (21 July
1959, as amended through 2015), Art. 9, introducing a new Art. 13c in the text of the
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consequence that the double taxation relief mechanisms provided in the
relevant double tax treaty would not apply. Such a compensation tax
might be considered as a sort of ‘extraordinary tax’, i.e. a levy imposed
for a limited period – particularly, until the country of origin is fully
compensated for the lost investment in the highly-skilled individual – and
for certain reasons, provided various circumstances are also met.90
Another important disadvantage is related to the fact that the
implementation of the proposal requires quite a smooth system through
which the collected tax is passed on by the emigrated individual’s country
of arrival to their country of origin. A further drawback is related to the
circumstance that an emigrated individual will be at a disadvantage vis-à-
vis an individual resident in the country in the same personal and
economic circumstances. As such, the compensation tax seems to run
contrary to the general obligation of non-discrimination, which is
enshrined both in tax treaties pursuant to Article 24 (1) of the OECD
Model and at the EU level in Article 18 TFEU, to the extent that taxation
of incoming individuals equates to taxation of foreigners by the country
of arrival.91 However, probably the major source of concern is that the
actual implementation of the proposal seems utopian at best, since the
country of arrival would not only miss out on fiscal revenues, but it would
also have to help collect those proceeds, all for the sole benefit of the
emigrated individual’s country of origin.92
6.6. Global minimum tax
The GloBE proposal unveiled by the OECD in early 2019 envisages
an international tax regime where MNEs are required to pay, at least, a
minimum level of taxes. This practically ensures that a ‘global minimum
90 ‘Extraordinary taxes’ are also considered in the Commentaries to the OECD and
UN Models. Notably, it is stipulated therein that Article 2 ‘does not mention ‘ordinary
taxes’ or ‘extraordinary taxes’. Normally, it might be considered justifiable to include
extraordinary taxes in a Model Convention, but experience has shown that such taxes are
generally imposed in very special circumstances. In addition, it would be difficult to
define them. They may be extraordinary for various reasons; their imposition, the manner
in which they are levied, their rates, their objects, etc. This being so, it seems preferable
not to include extraordinary taxes in the Article. But, as it is not intended to exclude
extraordinary taxes from all conventions, ordinary taxes have not been mentioned either.
The Contracting States are thus free to restrict the convention’s field of application to
ordinary taxes, to extend it to extraordinary taxes, or even to establish special provisions’.
See OECD Model Tax Convention Commentary on Article 2 (2017), para. 4. For a
discussion, see Ismer, Blank (2015, 15 para. 28).
91 Based on paragraph 6 of Article 24 of the OECD Model, the prohibition of
discrimination, ‘notwithstanding the provisions of Article 2’, applies to ‘taxes of every
kind and description’, consequently, in principle, also to a ‘compensation levy’ that is not
covered by a double tax treaty.
92 As admitted by the same proponent of the ‘compensation tax’ against brain
drain illustrated in this section (see Lister 2017, 83).
Giorgio Beretta (p. 68–115)
tax’ is ultimately paid by MNEs. A ‘global minimum tax’ in the field
individual taxation may eventually be introduced, mimicking in a way
developments occurring in the corporate sector at the international tax
A ‘global minimum tax’ in the individual sector would in fact
display a number of strengths. Probably the most important advantage is
related to the fact that its worldwide implementation by countries would
provide a unique opportunity for meaningful multilateralism, although it
does not seem equally feasible to entrust the administration and collection
of such global minimum tax to a ‘World Tax Organization’93, as it was
notably stipulated under a version of the Bhagwati tax proposal, which
assigned such a task to the UN.94
A first concern with regard to a global minimum tax is related to its
nature and characteristics. In this sense, similar considerations to those
presented above with regard to a compensation tax apply. In addition to
the issue of devising a robust enough effective tax rate, there is also the
issue of establishing the category of persons to be subject to the tax as
well as the rules and principles governing the calculation of the tax base.
To put it into a perspective: should a global minimum tax be imposed
only on highly-skilled and/or elderly individuals or, also on all/other
categories of emigrated taxpayers? Notably, what about emigration of
individuals from one country to another for a short period say, two or
three years – such as it may occur in the case of academics and students?
In fact, the individual motives for a person to reside abroad could also
change over time. Furthermore, as regards the calculation of the tax base,
should the income tax rules of the country of arrival or those of the
country of origin apply? An autonomous set of rules for calculating the
tax base could also ultimately be laid down. Another set of concerns is
related to the actual implementation of such a global minimum tax. Even
if an adequate consensus is built around it and a multilateral framework
is then established, implementing such a tax is by no means straightforward,
to the extent that this would require a change of bilateral tax treaties. In
this sense, it seems far more practical to amend current tax treaties
through a multilateral convention. The experience of the BEPS Multilateral
Convention (MLI) can provide useful insights in this regard (see OECD
93 A first plea for a supervising ‘World Tax Organization’ was famously made by
Tanzi (1999). Questioning the actual feasibility of a ‘World Tax Organization’ as a means
to achieve international tax coordination, see Schö n (2009), who considers that ‘a realistic
outlook will be the ongoing use of bilateral treaties, including some regional multilateral
conventions which would extend the number of participants but would not change the
traditional character of this instrument as such’.
94 Oldman, Pomp (1979, 44–58), however, also suggest that the United Nations
might only promulgate a set of guidelines for the imposition of an ‘international brain
drain tax’, or ‘IBDT’, by individual countries.
Annals FLB – Belgrade Law Review, Year LXVII, 2019, No. 4
2017c). However, this would again involve a demanding process,
involving modification thousands of existing bilateral treaties on the basis
of a complex set of options to accommodate many different possible
combinations of treaty partner preferences, as a quick glance at the OECD
MLI Matching Database clearly shows (see OECD 2019d).
After BEPS, the idea of tax sovereignty, i.e. that national
governments have a non-exclusive right to shape their own tax policies
completely independently of one another, seems a distant memory at best.
In the post-BEPS world, the unconditional sovereign autonomy of
countries over tax matters is, in fact, no longer conceivable.
It is unclear, however, whether the new international tax order that
the OECD has long envisaged will ultimately lead to more cooperation
or, rather, it will bring more competition among countries. A meaningful
cooperation would indeed require building-up a global consensus, based
on which a tax level playing field would be established among countries.
Without such a global consensus, an international tax order would be
difficult to shape, since countries would compete against each other in a
global strategic game, based on volatile preferences reflecting their
political and economic bargaining power rather than on a sound framework
of jointly established principles and rules.
If the ultimate outcome of the action undertaken by the OECD is
hard to predict, it is clear that the consequences of non-action at the
international level are quite dire, in so far as an increasing number of
countries would likely introduce unilateral measures to preserve their
own tax base. Indeed, several decentralized actions by countries might
ultimately produce the dissolution of any sort of international tax regime.
Specifically, with regard to migration of individual taxpayers from one
country to another, in the absence of any form of cooperation at the
international level, bilateral negotiations would likely be stalled and,
perhaps, even rolled back by the intrinsic antagonism of the countries
concerned, as a result of their opposing budgetary interests.
This would certainly be detrimental not only from an inter-country
perspective, but also from an intra-country point of view. As a matter of
fact, in the current political, social and economic landscape, welfare-
enhancing objectives can only be achieved if the international and national
level are considered simultaneously and, possibly, aligned. The author
therefore posits that if a new and fairer social contract is to be established
at the national level, the terms and the course of the international tax
Giorgio Beretta (p. 68–115)
order should also be more clearly articulated among countries. In this
sense, the various policies and measures explored in this article might
eventually kick-off discussions on establishing such an international tax
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Article history:
Received: 31. 10. 2019.
Accepted: 2. 12. 2019.
ResearchGate has not been able to resolve any citations for this publication.
Full-text available
Pension policy reforms across the world in recent decades are a reaction to the changing demographic and socioeconomic environment. While pension scheme redesign has received much attention, the tax treatment of contributions, returns, and benefits of retirement savings remains mostly unattended and the taxation of internationally portable pensions is terra incognita for economists. This paper focuses on the huge differences in old-age pension taxation within and across OECD countries and highlights fiscal equity and efficiency issues that emerge in a world of internationally mobile workers and pensioners. It highlights that pension taxation differs widely not only across countries but also across pension pillars within a country, creating savings and mobility distortions and fiscal equity problems at individual and country level. The paper offers explanations for this heterogeneity and proposes a switch from deferred taxation towards front-loaded taxation of retirement savings to meet the demographic challenges of a globalized world. Three policy options presented differ in the way taxes are paid, but all of them are claimed superior to single-country measures taken to uphold deferred pension taxation or to rely on renegotiations of bilateral double taxation treaties.
This chapter has three objectives. First it attempts to take stock of our knowledge concerning the scale, composition, and direction of migration from developing to developed countries in the recent period. Second, the chapter places that mobility in the context of the existing literature. Third, it attempts to indicate ways in which, at both an analytical and empirical level, progress can be made in better understanding the phenomenon and, in particular, the appropriate policy implications. The overall conclusion is that, while there is clearly a possibility that the brain drain is beneficial to the residents left behind in the home countries, there are reasons to be suspicious of that conclusion. It is not even certain that there is an overall global-welfare gain from the brain drain, although given the apparently large private benefits of the migrants themselves and their higher productivity in their new locations, it seems highly likely. A commentary is also included at the end of the chapter.
Countries around the world have traditionally treated tax planning as a legitimate practice, unless the ambiguous borders to abusive behaviour have been crossed. However, over time, business structures have become more sophisticated and tax authorities have become involved in keeping pace with the continuous improvement of international tax planning. By exploiting the inconsistencies between domestic tax rules and bilateral double taxation conventions it is even possible that certain income remains completely untaxed. In order to properly address this issue of double non-taxation, the European Commission - alongside the work of the OECD on Base Erosion and Profit Shifting (BEPS) - issued a recommendation on aggressive tax planning. The EU Member States are, inter alia, being encouraged to revise their tax treaty policies. The European Commission recommends the incorporation of a general subject-to-tax clause in the Member States' bilateral double taxation conventions. This article analyses whether the Member States are well advised to follow this recommendation.
Gradually, taxpayers have become increasingly responsible for their own pensions. One of the reasons for this development is related to the problems Member States have had in financing their retirement systems. This has made second and third-pillar provisions increasingly important. Therefore it is interesting to look at the position of the third pillar within the system of retirement provisions and see if there is a model with respect to personal pensions that can be applied by Member States of the EU that complies with European and international tax law and contributes to the EU-strategy to make pension systems adequate, safe and sustainable in the long term.
The aim of this article is to discuss the Spanish tax regime for expatriates, currently envisaged in Article 93 of the Individuals' Income Tax Act. The purpose of this favourable system was to strengthen Spain's international competitiveness by attracting recipients of high income and foreign investment. However, the option to be taxed as a non-resident (exclusively on the Spanish sourced income and at 24%) for the five subsequent years, provided certain conditions are met, gives rise to some controversial questions both in the light of the constitutional principles and in the international field. The article provides insight into the expatriate tax treatment of other European Union (EU) Member States, by examining the different approaches to the same topic. This comparative experience is taken into account for our criticism and proposals for an alternative design of a new Spanish expatriate taxation system.
In recent years, Article 19 Organization for Economic Co-operation and Development (OECD) MC has become the subject of growing scholarly criticism and contentious court rulings. The authors argue that many of these reflect a confused understanding of Article 19 OECD MC's foundation and rationale. The history, drafting, and structure of the provision clearly show that the provision is motivated not so much by fiscal considerations, but by the aim of protecting the sovereignty of the contracting states. The interpretation should accordingly be guided by the public international law doctrine of (relative) sovereign immunity. This rationale, however, no longer applies once the government employment has ended. It would therefore be best if Article 19(2) were deleted.
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The growing economic openness expressed in the globalization of independent economic systems has created problems as well as opportunities that cross formal borders in unexpected ways. Professors Assaf Razin and Efraim Sadka explore the ramifications of globalization in selected public finance issue areas. Seven main topics are covered by the sixteen papers in the volume: the international mobility of technology; capital flows and exchange rate misalignments; tax incentives and patterns of capital flows; income redistribution and social insurance in federal systems; tax harmonization and coordination; political economy aspects of international tax competition; the migration of skilled and unskilled labour; and the fiscal aspects of monetary unification.