Dean, Steven A.

Kysar, Rebecca M.

English

Brooklyn Law School: BrooklynWorks

Brooklyn Journal of International LawVolume 41Issue 3 SYMPOSIUM: Reconsidering the Tax Treaty Article 22016Introduction: Reconsidering the Tax TreatySteven A. DeanRebecca M. KysarFollow this and additional works at: https://brooklynworks.brooklaw.edu/bjilThis Article is brought to you for free and open access by the Law Journals at BrooklynWorks. It has been accepted for inclusion in Brooklyn Journal ofInternational Law by an authorized editor of BrooklynWorks.Recommended CitationSteven A. Dean & Rebecca M. Kysar, Introduction: Reconsidering the Tax Treaty, 41 Brook. J. Int'l L. (2016).Available at: https://brooklynworks.brooklaw.edu/bjil/vol41/iss3/2INTRODUCTION: RECONSIDERINGTHE TAX TREATYSteven A. Dean* & Rebecca M. Kysar‡or nearly one hundred years, the international tax re-gime steadfastly pursued a single nemesis, double taxa-tion. States armed themselves against this common enemy withtheir weapon of choice, the double tax treaty. Nearly uniform inlanguage and approach, the treaties proliferated to more thanthree thousand in number,1 resulting in a secure arrangementbetween and among states and taxpayers.Yet in recent years, states have had to expand the war to mul-tiple fronts in the face of globalization, technological changes,evolving taxpayer abuses, and shifts in both domestic and inter-national political pressures. For instance, a growing recognitionthat the interests of a state and its taxpayers can and do divergehas fueled the Base Erosion and Profit Shifting (BEPS) contain-ment effort led by the Organisation for Economic Co-operationand Development (OECD), culminating in an unprecedentedmultilateral instrument. Acknowledging that tax havens lacksome combination of the resources and the inclination to fore-stall tax evasion, the U.S. Congress enacted the Foreign AccountTax Compliance Act to compel financial institutions in foreignjurisdictions to step into the breach,2 resulting in more than onehundred intergovernmental agreements implementing new re-porting regimes.3 The European Commission is currently inves-tigating whether favorable advance transfer pricing rulingsgranted to corporate taxpayers by certain European countriesviolate the European Union bar on state aid that distorts com-petition.4 These state aid cases have created tension among the* Professor of Law, Brooklyn Law School.‡ Professor of Law, Brooklyn Law School.1. See ORG. FOR ECON. CO-OPERATION & DEV. [OECD], ADDRESSING BASEEROSION AND PROFIT SHIFTING 8 (2013).2. See I.R.C. §§ 1471–74 (enlisting foreign banks as informants).3. See Resource Center: Foreign Account Tax Compliance Act (FATCA),TREASURY.GOV, https://www.treasury.gov/resource-center/tax-policy/trea-ties/Pages/FATCA.aspx (last visited Oct. 29, 2016).4. See U.S. DEP’T OF THE TREASURY, THE EUROPEAN COMMISSION’S RECENTSTATE AID INVESTIGATIONS OF TRANSFER PRICING RULES 1–2 (2016). Amongthese are investigations regarding Apple and Ireland, Starbucks and the Neth-erlands, Fiat and Luxembourg, and Amazon and Luxembourg. Id. at 2–3.F968 BROOK. J. INT’L L. [Vol. 41:3various jurisdictions that have a claim in taxing profits thathave been shifted to tax havens and have the potential to unset-tle dispute resolution procedures under bilateral tax treaties.5Whether these developments indicate a rupture of the inter-national tax regime or instead herald its repair is a subject ofdebate within the tax law community. The articles in this issuegrapple with the regime’s destabilization and draw what per-haps may be best described as “across the spectrum” conclusions.Important among these, of course, are the implications for thearchetypal double tax treaty itself.At a fundamental level, the viability of the international taxregime might be judged by its fidelity to the concept at the coreof the tax treaty: the single tax principle. Encouragingly,Shaviro probes the single tax principle—which allocates incomeamong states to ensure that income is taxed neither more norless than once—and finds that what appears to be a rule mightbe better thought of as a standard. As described in The TwoFaces of the Single Tax Principle, rather than offering the preci-sion of a fifty-five miles per hour speed limit, the single tax prin-ciple merely urges states to avoid both excessively taxing cross-border transactions and cavalierly allowing income to escapetaxation completely. Shaviro notes that the plasticity of thestandard accommodates an understandable degree of ambiva-lence regarding the single tax principle. States may tolerate—oreven facilitate—the avoidance of other states’ taxes,6 and theircompetitive instincts “frequently outweigh the urge to maximizedomestic tax revenue . . . .”7 His conclusion suggests that thesingle tax principle may be robust enough to embrace the imper-fect states it seeks to serve.Operationalizing the single tax principle will, nevertheless, bechallenging. Kane takes a fresh look at the problem of allocatingtaxing jurisdiction and hits the reset button by shifting focusfrom intellectual property to labor. Location Savings and Seg-mented Factor Input Markets: In Search of a Tax Treaty Solutionobserves that the embattled arm’s length method fails to providereliable answers even when the puzzle presented by intangibles5. See id. at 19–23.6. See Daniel Shaviro, The Two Faces of the Single Tax Principle, 41BROOK. J. INT’LL. 1293, 1301 (2016) (noting U.S. willingness to “tolerate[] U.S.companies’ use of check-the-box rules to avoid subpart F’s checks on the avoid-ance of other countries’ taxes.”).7. Id. at 1299.2016] Introduction 969can be put aside. Considering a pair of possible solutions to thequestions raised by labor rents, Kane demonstrates that theheadwinds faced by the treaty-based international tax regimeneither begin nor end with intangibles. No less important, Kaneshows the importance of being willing to question even our mostbasic assumptions about how the international tax regime—both at the conceptual level, with the arm’s length principal,8and at the practical level, with the treaty notion of a permanentestablishment9—can and should operate.In Tax Treaties and the Taxation of Services in the Absence ofPhysical Presence, Kirsch offers an additional note of caution,suggesting that, even in the rarified world of international tax,the road to hell can be paved with good intentions. Kirschdemonstrates that a U.N. effort to adapt its model to ensure anappropriate allocation of taxing jurisdiction by preventing profitshifting by multinationals would unintentionally cloud the taxconsequences of activities ranging from cutting-edge telesurgeryto legal advice to foreign visitors. As Kirsch describes it, effortsto modernize the international tax regime seem uncomfortablylike installing self-driving technology in a vintage Model T.10Such challenges can inspire unconventional but potent solu-tions. Cooperation can be difficult to achieve among heterogene-ous states. With “Thinking Outside the (Tax) Treaty” Revisited,Rosenzweig evokes the international trade concept of cross-re-taliation under the World Trade Organization, in which statesgain permission to apply pressure to an adversary’s vulnerablespots with, what might be termed, “cross-cooperation.” Recogniz-ing that states have different tastes in carrots just as they feardifferent sticks, Rosenzweig envisions a post-bilateral tax treaty8. See Mitchell A. Kane, Location Savings and Segmented Factor InputMarkets: In Search of a Tax Treaty Solution, 41 BROOK. J. INT’L L. 1107, 1113–14 (2016) (proposing that “arm’s length transfer pricing in the case of locationsavings ought to proceed by compensating local affiliates (where savings arerealized) by reference to comparables based on the market of the purchaser ofthe input rather than the seller of the input.”).9. Id. at 1115 (noting that “everybody tends to take the extent of source taxof the nonresident party as a fixed point (established by Article 5)” of the OECDModel, which outlines the rules on permanent establishment).10. See Michael S. Kirsch, Tax Treaties and the Taxation of Services in theAbsence of Physical Presence, 41 BROOK. J. INT’LL. 1143, 1143 (2016) (observingthat “modern technological developments have strained long-standing interna-tional tax policies and principles. Tax treaties have attempted to keep pace byfitting these new developments within the existing framework.”).970 BROOK. J. INT’L L. [Vol. 41:3regime with sufficient flexibility to allow states to trade mis-matched favors. BEPS, as he notes, represents an opportunityfor such an asymmetric system of cooperation to replace the rigidmirroring of the existing framework.11Charting a route no less radical, Marian advocates a reconcep-tualization of state intervention against taxpayer (and state)abuse of tax treaties. Unilateral Responses to Tax Treaty Abuse:A Functional Approach offers a matrix aligning the scope andscale of malfeasance with fitting responses ranging from tar-geted kill-switch mechanisms in particular treaties to the com-prehensive renegotiation of each and every node in a state’streaty network.12 In that framework, treaty termination be-comes an intermediate response suitable for profound butclearly circumscribed failures.Echoing both Shaviro andMarian’s confidence that the trustedbuilding blocks of the international tax regime have the resili-ence needed to meet today’s challenges, Shaheen offers an en-couraging perspective on the future of tax treaties.How Reform-Friendly Are U.S. Tax Treaties? argues that a range of recentlyproposed reforms of the U.S. international tax rules embrace thespirit, if not the letter, of U.S. tax treaty obligations. Shaheenthen demonstrates how these reforms can be tweaked to satisfyeven formalist interpretations of treaty obligations.13Focusing on provisions of the new U.S. Model Tax treaty thatcondition host-state concessions on a home-state tax burden,Christians and Ezenagu extrapolate possible futures of the in-ternational tax regime. Their vision highlights the swirling cur-rents shaping today’s tax landscape. Concern regarding tax com-petition among states lies near the surface of the “kill-switches”they describe. Christians and Ezenagu speculate that domestic11. See AdamH. Rosenzweig, “Thinking Outside the (Tax) Treaty”Revisited,41 BROOK. J. INT’L L. 1229, 1230–31 (2016) (“The BEPS Action Plan representsa truly revolutionary and groundbreaking effort to reform the international taxregime; in fact, it is the first attempt to revisit the fundamental building blocksof the international tax regime since its emergence in the early 1920s.”).12. See Omri Marian, Unilateral Responses to Tax Treaty Abuse: A Func-tional Approach, 41 BROOK. J. INT’L L. 1157, 1177 (2016).13. See Fadi Shaheen, How Reform-Friendly Are U.S. Tax Treaties?, 41BROOK. J. INT’L L. 1243, 1271 (2016) (“[I]f we must worry about formalism inapplying treaty provisions, any exemption system could be easily structuredand drafted in a manner that the disallowance of credit for foreign taxes onU.S.-exempt foreign-source income is reached through an exemption basketmechanism (which is but a treaty-compatible limitation on cross crediting).”).2016] Introduction 971political concerns beyond protection of the fisc—political grid-lock and the outsized influence of transnational ventures—lurkfurther below. Tracing the history of such mechanisms, Kill-Switches in the U.S. Model Tax Treaty contrasts these innova-tions against their conceptual predecessors. Thoughtfully andthoroughly, they question whether these innovations representan embrace or a refutation of the single tax principal.14Brauner indicts BEPS as a disappointingly conservative re-sponse to the stateless income scandal that followed on the heelsof the 2008 financial crisis.15 Its fifteen action items underscorethe gap between the enormous magnitude of the threat and thescope and scale of the response. Obviously, the architects of theinternational tax regime could not have envisioned the ascend-ance of intellectual property and its outsized role in modern eco-nomic life. That their near-century-old regime fails to provideprinciples robust enough to prevent ubiquitous tax avoidance bysophisticated multinational enterprises should not surprise an-yone. Treaties in the Aftermath of BEPS laments—and method-ically catalogues—the failures of BEPS to articulate modernprinciples capable of narrowing the distance between the aginginternational tax regime’s goals and its reach.Dagan presents a dispiritingly plausible explanation for the ti-midity of the BEPS proposals.16 Tax Treaties as a Network Prod-uct observes that the international tax regime, and the treatiesthat give it shape, exhibit the classic characteristic of a networkproduct: gaining strength by being strong. While the rise ofBEPS suggests a window has opened to create a better interna-tional tax regime, she notes that the current regime favors stateswith the greatest global influence (and the loudest voices in theBEPS process). The alternative standard she calls for would re-verse that trend, shifting the balance away from the global onepercent and toward everyone else.14. See Allison Christians & Alexander Ezenagu, Kill-Switches in the U.S.Model Tax Treaty, 41 BROOK. J. INT’L L. 1043, 1070–73 (2016).15. See generally Yariv Brauner, Treaties in the Aftermath of BEPS, 41BROOK. J. INT’L L. 973 (2016).16. See Tsilly Dagan, Tax Treaties as a Network Product, 41 BROOK. J. INT’LL. 1081, 1104 (2016) (“[T]he BEPS initiative could prove to be a decisive mo-ment in the history of international taxation: as it would offer a more compre-hensive standard for international tax policy. The BEPS solution, however,does not seem to be comprehensive enough to streamline the entire interna-tional tax regime, nor does the BEPS report pay special attention to consider-ations of justice.”).972 BROOK. J. INT’L L. [Vol. 41:3Looking beyond the surface to find an explanation for counter-intuitive state action—and inaction—Ring paints an unfamiliar,yet all-too-recognizable, portrait of states as they participate inthe international tax regime. Under pressure from a range of in-terest groups and political pressures not traditionally taken intoaccount in the narrative of state action in the international taxregime—the “ever-present constraint of democracy at home”17—states can ultimately fall short on their international tax com-mitments. When International Tax Agreements Fail at Home: AU.S. Example provides a clear roadmap for scholars and policymakers struggling to make sense of a world in which states failto act in line with settled expectations.To conclude, states now find themselves confronting both com-plex internal politics and skepticism from counterparts. Were acascade of technological change and a wave of public anger overa perceived lack of accountability not enough to disrupt a cen-tury of stability, the realization that trusted allies at home andabroad blithely pursue their own agendas intensifies the threat.The perspectives and insights offered here by leading tax schol-ars offer hope that the international tax regime, and perhapseven tax treaties themselves, can emerge stronger from the cur-rent period of instability.17. Diane Ring, When International Tax Agreements Fail at Home: A U.S.Example, 41 BROOK. J. INT’L L. 1185, 1190 (2016).

Introduction:  Reconsidering the Tax Treaty

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