Book - Peter Hongler 2021 - International Law of Taxation

International Law of Taxation
E L E ME NTS OF IN TER NATION AL L AW
Series Editors
Mark Janis is William F. Starr Professor of Law
at the University of Connecticut.
Douglas Guilfoyle is Associate Professor of International
and Security Law at UNSW Canberra.
Stephan Schill is Professor of International and Economic Law
and Governance at the University of Amsterdam.
Bruno Simma is Professor of Law at the University of Michigan and
a Judge at the Iran-US Claims Tribunal in The Hague.
Kimberley Trapp is Professor of Public International Law
at University College London.
Elements of International Law represents a fresh approach in the

literature of international law. It is a long series of short books.
Elements adopts an objective, non-argumentative approach to
its subject matter, focusing on narrowly defined core topics in
international law. Eventually, the series will offer a comprehensive
treatment of the whole of the field. At the same time, each
individual title will be a reliable go- to source for practising
international lawyers, judges and arbitrators, government and
military officers, scholars, teachers, and students engaged in the
discipline of international law.
Previously published titles in this series

The European Court of Human Rights
Angelika Nussberger
International Law in the Russian Legal System
William E Butler
The International Tribunal for the Law of the Sea
Kriangsak Kittichaisaree
Jus Cogens
Dinah Shelton
International Law
of Taxation
Peter Hongler
Professor of Tax Law at the University of St. Gallen
1
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Series Editors’ Preface
Elements represents a fresh approach to the literature of international law.

It is a long series of short books. Following the traditional path of an inter-
national law textbook, Elements, rather than treating the whole of the field
in one heavy volume, focuses on more narrowly-defined subject matters.
There is nothing like Elements. It treats particular topics of international
law much more extensively and in significantly more depth than traditional
international law texts or encyclopedias. As each book in the Elements
series has a relatively narrow focus, it provides a comprehensive treatment
of a specialized subject matter, in comparison to the more limited treatment
of the same subject matter in other general works.
Like a classic textbook, Elements aims to provide objective statements of
the law. The series does not concern itself with the academic niches filled
ably by doctoral theses, nor include works which take an argumentative
point of view, already well done by the OUP Monograph series. Except in
length and integration, Elements is for substantive topics comparable to
OUP’s Commentary series on individual treaties. Each book is exhaust-
ively footnoted in respect of international legal practice and scholarship,
including treaties, diplomatic practice, decisions by international and mu-
nicipal courts and arbitral tribunals, resolutions and acts of international
organizations, and commentary by the most authoritative jurists.
Elements adopts an objective, non-argumentative approach to its many
subject matters and constitutes a reliable go-to source for practicing inter-
national lawyers, judges and arbitrators, government and military lawyers,
and scholars, teachers, and students engaged in the discipline of inter-
national law.
Mark Janis
Douglas Guilfoyle
Stephan Schill
Bruno Simma
Kimberley Trapp
Acknowledgement
I would like to thank the entire team of the Institute for Public Finance,
Fiscal Law and Law and Economics (IFF-HSG) – in particular (alphabetic-
ally) Ariane Menzer, Delia Lohmann, Jan-Marius Hüweler, Josiane Weder,
Nathanael Zahnd, and Rafaele Perot – for their impressive efforts.
Moreover, a special thanks goes to Alice Pirlot and Daniela Hohenwarter-
Mayr who are definitely greater experts than I am. Your inputs on the trade
law and the European tax law chapter were extremely helpful!
Table of Contents
Table of Cases xv
List of Abbreviations xxvii
1. Introduction 1
1. Taxation and Statehood 2
2. Terminology 3
2.1 English as the lingua franca 3
2.2 International law of taxation 4
2.3 International tax law 5
2.4 The international tax regime 6
3. History of the International Tax Regime 6
3.1 The international tax regime until 1920 7
3.2 The League of Nations as the leading international tax
organization in and after the 1920s 8
3.3 The post-Second World War phase and the rise of the OECD
in the 1950s and 1960s 9
3.4 The G20 in the driver seat in the new century 11
3.5 Excursus: development aid and the
international tax regime 12
4. Institutions and Main Actors 14
4.1 Introduction 14
4.2 The UN and its work on taxation 15
4.3 The OECD and its work in the field of taxation 16
4.4 The Inclusive Framework 18
4.5 The Global Forum 18
5. Sovereignty in Tax Matters 19
5.1 Sovereignty in international law 19
5.2 Jurisdiction to tax 22
5.2.1 The genuine link as a connective factor in international
tax law 22
5.2.2 Worldwide and territorial taxation 23
5.2.3 Source and residence—terminology 25
5.3 Double income taxation is systemic 26
x Table of Contents
2. Sources of the International Law of Taxation 28
1. Overview 28
2. The International Tax Law Regime—a Treaty-based Regime 29
2.1 Interpretation of tax treaties 29
2.1.1 Grammatical element (textual approach) 30
2.1.2 Teleological element (purposive interpretation) 31
2.1.3 Systematic element (contextual interpretation) 32
2.1.4 Supplementary means of interpretation (Art 32 VCLT) 33
2.1.5 Relevance of the domestic laws 33
2.1.6 The value of the OECD and UN commentaries 36
2.2 Multilateral and bilateral tax treaties 38
2.3 Double tax treaties 40
2.3.1 Model conventions 40
2.3.2 The importance of the domestic laws 40
2.3.3 Steps in the application of a double tax treaty 41
2.3.4 Scope of the convention 46
2.3.5 Allocation rules 50
2.3.6 Special provisions 99
2.3.7 Final provisions 111
2.4 Double tax treaties with respect to taxes on estates and
inheritances 112
2.5 Treaties regulating mutual assistance in tax matters 112
2.5.1 The Convention on Mutual Administrative Assistance in
Tax Matters 112
2.5.2 Exchange of information on request 113
2.5.3 Automatic exchange of information 115
2.5.4 Spontaneous exchange of information 116
3. Customary International Tax Law 117
3.1 Traditional requirements 117
3.2 State practice 118
3.3 Opinio iuris 119
3.4 Examples from a tax perspective 120
3.4.1 Preliminary remarks 120
3.4.2 Interpretation principles according to Art 31 VCLT 121
3.4.3 Prohibition of juridical double taxation 121
3.4.4 Non-taxation of diplomatic and consular personnel 122
3.4.5 Arm’s length principle 123
3.4.6 The principal purpose test 123
3.4.7 Fiscal transparency 124
4. General Principles of International Tax Law 125
4.1 Introduction 125
4.2 Examples from a tax perspective 126
Table of Contents xi
4.2.1 Abuse of law 126
4.2.2 Estoppel 128
4.2.3 Collision rules 129
5. Soft Law and Its Importance for International Tax Law 130
5.1 Terminology 130
5.2 Soft law and its effectiveness 131
5.3 Soft law in the field of taxation 133
6. EU Law and Taxation 134
6.2 The fundamental freedoms and taxation 135
6.2.1 Introduction 135
6.2.2 Scope 135
6.2.3 Priority 137
6.2.4 The right comparison 139
6.2.5 Justifications 140
6.2.6 Proportionality 142
6.3 Specific topics 143
6.3.1 Deductions and allowances 143
6.3.2 Cross-border offset of losses 147
6.3.3 Dividend taxation 149
6.3.4 Thin capitalization 151
6.3.5 Controlled foreign corporation 152
6.3.6 Exit taxation 152
6.4 State aid and taxation 155
6.4.1 In general 155
6.4.2 Application to advanced pricing agreements 156
6.5 Secondary EU law 158
6.5.1 Direct taxation and the directives 158
6.5.2 Indirect taxation and the directives 163
6.5.3 Further projects 164
3. Relationship with other Areas of International Law 166

1. Trade Law 167
1.2 Some preliminary remarks on the WTO 168
1.2.1 Agreements of the WTO 168
1.2.2 Non-discrimination principle 169
1.3 Taxation of goods: the General Agreement on Tariffs and
Trade 170
1.3.1 Overview 170
1.3.2 Treatment of internal taxes 170
xii Table of Contents
1.4 Taxation of services: the General Agreement on Trade in
Services 177
1.4.1 Overview 177
1.4.2 Treatment of taxes on services 178
1.5 Tax subsidies: Agreement on Subsidies and
Countermeasures (and the GATT) 180
1.5.1 Overview 180
1.5.2 Tax relief as a subsidy under Art 1 SCM 181
1.5.3 Treatment of export tax relief 182
1.5.4 Treatment of tax relief upon use of domestic inputs 184
1.5.5 Treatment of other tax reliefs 186
1.6 Conclusions 188
2. Investment Treaty Law 189
2.2 Some preliminary remarks on bilateral
investment treaties 189
2.2.1 Overview 189
2.2.2 Contents of bilateral investment treaties 191
2.2.3 Relevance of case law 191
2.3 Scope of bilateral investment treaties 192
2.3.1 Preliminary note 192
2.3.2 Personal scope 192
2.3.3 Objective scope 195
2.4 Substantive provisions 198
2.4.1 Full protection and security and fair and equitable
treatment 198
2.4.2 National treatment and most-favoured nation 199
2.4.3 Expropriation 201
2.4.4 Umbrella clause 202
3. Human Rights Law 203
3.1 Human rights and the international tax regime 203
3.2 The European Convention on Human Rights and
tax matters 205
3.3 Procedural rights 205
3.4 Substantive rights 207
3.4.1 Equality (including ability to pay) 207
3.4.2 Taxpayers’ property rights 209
3.4.3 Further substantive rights 210
4. Tax Rules in Non-tax Agreements 210
4.1 Tax provisions and status of forces agreements 211
4.2 Tax provisions in headquarters agreements between
international organizations and their host state 213
Table of Contents xiii
4. Conceptual Problems 214
1. Success and Failure in the International Cooperation
regarding Tax Matters 214
1.1 Success of the international tax regime 214
1.2 Failures of the international tax regime 215
1.3 What are the reasons for the failure of the international
tax regime? 217
1.3.1 The missing value-based framework 217
1.3.2 The guiding principles of international tax policy are
flawed 218
1.3.3 Institutional difficulties in a dynamic set-up 221
2. The Most Pressing Issues 223
2.1 Measures against aggressive tax planning 223
2.1.1 Harmful tax regimes 224
2.1.2 The Base Erosion and Profit Shifting Project 225
2.1.3 The years following the Base Erosion and Profit Shifting
Project 228
2.2 Taxing the digital economy 230
2.2.1 Overview 230
2.2.2 The specifics of the digital economy 230
2.2.3 Potential solutions for value-added-tax-
related problems 231
2.2.4 Potential solutions for corporate-income-related
problems 232
2.3 Formulary apportionment as the silver bullet? 237
2.3.1 Introduction 237
2.3.2 Arguments in favour of and against the
formulary system 238
2.3.3 Income allocation and redistribution 240
2.3.4 Why destination-based systems are preferable 242
2.4 Taxation and the Paris Agreement 244
Index 247
Table of Cases
INTERNATIONAL COURTS
Ad Hoc Arbitration
Eureko BV v Republic of Poland (Partial Award, 2005)
Ad Hoc Arbitration.�� 203n.191
Arbitration Institute of the Stockholm Chamber of Commerce

RosInvestCo UK Ltd v The Russian Federation (Final Award, 2010)
SCC Case No V079/2005.��201–2
GATT
GATT, Income Tax Practices Maintained by Belgium –Report of the Panel
(7 December 1981) BISD 23S/127.��182–83n.73
GATT, Income Tax Practices Maintained by France –Report of the Panel
(7 December 1981) BISD 23S/114.��182–83n.73
GATT, Income Tax Practices Maintained by The Netherlands –Report
of the Panel (7 December 1981) BISD 23S/137. ��182–83n.73
GATT, United States Tax Legislation (DISC) –Report of the Panel
(7 December 1981) BISD 23S/98.��182–83n.73
International Centre for Settlement of Investment Disputes

Abaclat and Others v The Argentine Republic (Decision on Jurisdiction
and Admissibility, 2011) ICSID Case No ARB/07/5.�� 197n.160
Asian Agricultural Products Ltd v Republic of Sri Lanka (Final Award, 1990)
ICSID Case No ARB/87/3. �� 197n.159
Bayview Irrigation District et al v United Mexican States (Award, 2007) ICSID
Case No ARB(AF)/05/1.�� 198n.167
Biwater Gauff Ltd v United Republic of Tanzania (Award, 2008)
Bureau Veritas, Inspection, Valuation, Assessment and Control, Bivac BV v
The Republic of Paraguay (Decision of the Tribunal on Objections to
Jurisdiction, 2009) ICSID Case No ARB/07/9.�� 203n.190
Ceskoslovenska Obchodni Banka AS v The Slovak Republic (Decision
of the Tribunal on Objections to Jurisdiction, 1999)
ICSID Case No ARB/97/4. ��192n.128, 197n.157, 198n.165
CMS Gas Transmission Company v The Argentine Republic
(Award, 2005) ICSID Case No ARB/01/8.�� 203n.193
xvi Table of Cases
Compañia de Aguas del Aconquija SA and Vivendi Universal SA v
Argentine Republic (Decision on Jurisdiction, 2005) ICSID
Case No ARB/97/3. �� 197n.158
Consortium RFCC v The Kingdom of Morocco (Decision on Jurisdiction,
2001) ICSID Case No ARB/00/6.�� 178n.55
Corn Products International Inc v The United Mexican States
(Decision on Responsibility, 2008) ICSID
Case No ARB(AF)/04/01.�� 200n.178, 201, 202n.187
Duke Energy International Peru Investments No 1 Ltd v Republic of Peru
(Award, 2008) ICSID Case No ARB/03/28.�� 203n.196
El Paso Energy International Company v The Argentine Republic (Decision
on Jurisdiction, 2006) ICSID Case No ARB/03/15.��202–3
Fedax NV v The Republic of Venezuela (Decision of the Tribunal
on Objections to Jurisdiction, 1997) ICSID Case
No ARB/96/3.��196–97, 197n.156
Joy Mining Machinery Limited v The Arab Republic of Egypt (Award on
Jurisdiction, 2004) ICSID Case No ARB/03/11.�� 197n.161
Malaysian Historical Salvors SDN BHD v The Government of Malaysia
(Decision on the Application for Annulment, 2009) ICSID
Case No ARB/05/10. �� 197n.154
Mr Saba Fakes v Republic of Turkey (Award, 2010) ICSID
Case No ARB/07/20. ��192–93
PSEG Global Inc, The North American Coal Corporation, and Konya Ilgin
Elektrik Üretim ve Ticaret Limited Sirketi v Republic of Turkey
(Decision on Jurisdiction, 2004) ICSID Case No ARB/02/5.�� 197n.162
Salini Costruttori SPA and Italstrade SPA v Kingdom of Morocco
(Decision on Jurisdiction, 2001) ICSID Case No ARB/00/4.��196–97
SGS Société Générale de Surveillance SA v Republic of the Philippines
(Decision of the Tribunal on Objections to Jurisdiction, 2004)
The Rompetrol Group NV v Romania (Award, 2013)
ICSID Case No ARB/06/3. �� 199
The Rompetrol Group NV v Romania (Decision on Respondent’s Preliminary
Objections on Jurisdiction and Admissibility, 2008) ICSID
Case No ARB/06/3. �� 193n.134
Tokios Tokelés v Ukraine (Decision on Jurisdiction, 2004) ICSID
Case No ARB/02/18. ��193–94
International Court of Justice

Case concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic
Republic of the Congo) (Judgment of 19 June 2012), ICJ Rep 2012. �� 21
Case concerning the Barcelona Traction, Light and Power Company, Limited
(Belgium v Spain) (Judgment of 5 February 1970), ICJ Rep 1970. �� 21
Case concerning the Temple of Preah Vihear (Cambodia v Thailand)
(Judgment of 15 June 1962), ICJ Rep 1962.�� 128, 128n.283
Fisheries Case (United Kingdom v Norway) (Judgment of
18 December 1951), ICJ Rep 1951.�� 128, 128n.283
Table of Cases xvii
Jurisdictional Immunities of the State (Germany v Italy:
Greece intervening), Judgment (2012) ICJ Rep 2012.�� 118n.239
Legal Consequences for States of the Continued Presence of South
Africa in Namibia (South West Africa) (Advisory Opinion
of 21 June 1971), ICJ Rep 1971.�� 134n.302
North Sea Continental Shelf Cases (Federal Republic of Germany v
Denmark and Netherlands) (Judgment of 20 February 1969),
ICJ Rep 1969. �� 117n.237, 119n.245
Nottebohm Case (Liechtenstein v Guatemala) (Judgement of
6 April 1955), ICJ Rep 1955.�� 21
London Court of International Arbitration

EnCana Corporation v Republic of Ecuador (Award, 2006)
LCIA Case No UN3481. �� 201nn.184–85
Occidental Exploration and Production Company v The Republic
of Ecuador (Final Award, 2004) LCIA Case No UN3467.�� 199n.173
Permanent Court of Arbitration

Cairn Energy PLC and Cairn UK Holdings Limited v The Republic of India
(Award 2020) PCA Case No 2016-07.�� 199n.175
Romak SA v The Republic of Uzbekistan (Award, 2009)
PCA Case No AA280. �� 197n.164
Vodafone International Holdings BV v India (Final Award, 2020)
PCA Case No 2016-35. �� 85n.156, 199
Permanent Court of International Justice

The Case of the SS ‘Lotus’ (The Government of the French
Republic v The Government of the Turkish Republic),
PCIJ Series A No 10.�� 21
United Nations Commission on International Trade Law

The Canadian Cattlemen for Fair Trade v United States of America
(Award on Jurisdiction, 2008) UNCITRAL IIC 316.�� 198n.166
World Trade Organization

WTO, Argentina: Measures Affecting the Export of Bovine Hides and the
Import of Finished Leather –Report of the Panel (16 February 2001)
WT/DS155/R.�� 175n.40
WTO, Argentina: Measures Relating to Trade in Goods and Services –
Report of the Appellate Body (9 May 2016) WT/DS453/AB/R.�� 178n.57
WTO, Argentina: Measures Relating to Trade in Goods and Services –Report
of the Panel (9 May 2016 as modified by Appellate Body Report WT/
DS453/AB/R) WT/DS453/R.��179–80n.62
WTO, Brazil: Measures Affecting Desiccated Coconut –Report of the
Appellate Body (20 March 1997) WT/DS22/AB/R. �� 169n.11
xviii Table of Cases
WTO, Canada: Certain Measures Affecting the Automotive Industry –
Report of the Appellate Body (19 June 2000) WT/DS139/AB/R,
WT/DS142/AB/R.��178n.56, 184n.84
WTO, Canada: Certain Measures Affecting the Automotive Industry –
Report of the Panel (19 June 2000 as modified by Appellate Body
Report WT/DS139/AB/R, WT/DS142/AB/R) WT/DS139/R,
WT/DS142/R.�� 185n.87
WTO, Canada: Certain Measures Concerning Periodicals –Report of the
Appellate Body (30 July 1997) WT/DS31/AB/R.��173n.28, 176nn.42–43,
181n.68,
WTO, China: Measures Affecting Imports of Automobile Parts –Report
of the Appellate Body (12 January 2009) WT/DS339/AB/R, WT/DS340/
AB/R, WT/DS342/AB/R. �� 171n.20
WTO, China: Measures Related to the Exportation of Various Raw Materials
–Reports of the Panel (22 February 2012) WT/DS394/R, WT/DS395/R,
WT/DS398/R.�� 121n.256
WTO, European Communities: Measures Affecting Asbestos and Asbestos-
Containing Products –Report of the Appellate Body (5 April 2001)
WT/DS135/AB/R.�� 185n.86
WTO, European Communities: Measures Affecting the Importation of Certain
Poultry Products –Report of the Appellate Body (23 July 1998)
WT/DS69/AB/R.�� 170n.19
WTO, European Communities: Measures Prohibiting the Importation
and Marketing of Seal Products –Report of the Appellate Body
(18 June 2014) WT/DS400/AB/R, WT/DS401/AB/R.��169–70
WTO, European Communities: Regime for the Importation, Sale and
Distribution of Bananas (Ecuador, Guatemala and Honduras,
Mexico, United States) –Report of the Panel (25 September 1997
as modified by Appellate Body Report WT/DS27/AB/R)
WT/DS27/R/ECU, WT/DS27/R/GTM, WT/DS27/R/HND,
WT/DS27/R/Mex, WT/DS27/R/USA.��177n.51, 178n.55
WTO, European Communities: Regime for the Importation, Sale and
Distribution of Bananas –Report of the Appellate Body
(25 September 1997) WT/DS27/AB/R.��178nn.55–56, 185n.89
WTO, Japan: Countervailing Duties on Dynamic Random Access Memories
from Korea –Report of the Appellate Body (17 December 2007) WT/
DS336/AB/R. �� 187n.97
WTO, Japan: Taxes on Alcoholic Beverages –Report of the Appellate Body
(1 November 1996) WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R.�� 167–68n.6, 170–76
WTO, Japan: Taxes on Alcoholic Beverages –Report of the Panel
(1 November 1996 as modified by Appellate Body Report
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R) WT/DS8/R, WT/
DS10/R, WT/DS11/R.��170–76
WTO, Korea: Measures Affecting Imports of Fresh, Chilled and Frozen Beef –
Report of the Appellate Body (10 January 2001) WT/DS161/AB/R,
WT/DS169/AB/R.�� 185
Table of Cases xix
WTO, Korea: Taxes on Alcoholic Beverages –Report of the Appellate Body
(17 February 1999) WT/DS75/AB/R, WT/DS84/AB/R.�� 173n.28
WTO, United States: Measures Affecting Trade in Large Civil Aircraft
(Second Complaint) –Report of the Appellate Body (23 March 2012)
WT/DS353/AB/R.��187–88
WTO, United States: Measures Affecting Trade in Large Civil Aircraft
(Second Complaint) –Report of the Panel (23 March 2012 as modified
by Appellate Body Report WT/DS353/AB/R) WT/DS353/R.��187–88
WTO, United States: Standards for Reformulated and Conventional
Gasoline –Report of the Appellate Body (20 May 1996)
WT/DS2/AB/R. ��179–80n.62
WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’ –
Recourse to the Article 21.5 of the Dispute Settlement Understanding by
the European Communities –Report of the Appellate Body (29 January
2002) WT/DS108/AB/RW.��185–86
WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’ –Recourse
to the Article 21.5 of the Dispute Settlement Understanding
by the European Communities –Report of the Panel (29 January 2002
as modified by Appellate Body Report WT/DS108/AB/RW)
WT/DS108/RW.��181n.71,185–86
WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’ –Report
of the Appellate Body (20 March 2000) WT/DS108/AB/R.�� 167–68n.6,
181n.70, 183
WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’ –Report
of the Panel (20 March 2000 as modified by Appellate Body Report WT/
DS108/AB/R) WT/DS108/R.�� 181n.71, 183
EUROPEAN COURTS
European Court of Human Rights

A and B v Norway [GC] App No 24130/11 and 29578/11,
15 November 2016. �� 207n.208
Brito Ferrinho Bexiga Villa-Nova v Portugal App No 69436/10,
1 December 2015.�� 210n.228
Burden v the United Kingdom [GC] App No 13378/05, 29 April 2008.�� 209
Chambaz v Switzerland App No 11663/04, 5 April 2012.�� 206n.206, 207n.209
Clinique Mozart SARL v France App No 46098/99, 8 June 2004. �� 206n.207
Ferrazzini v Italy App No 44759/98, 12 July 2001. ��205–6
Hannu Lehtinen v Finland App No 32993/02, 22 July 2008. �� 206n.205
JB v Switzerland App No 31827/96, 3 Mai 2001.�� 207n.209
Janosevic v Sweden App No 34619/97, 23 July 2002.�� 206n.207
Jussila v Finland App No 73053/01, 23 November 2006.�� 206n.205
Michaud v France App No 12323/11, 6 December 2012.��210nn. 226 –227
Nielsen v Denmark App No 44034/07, 2 July 2009.�� 206n.207
P Plaisier BV and others v the Netherlands App No 46184/16,
14 November 2017. �� 209n.222
Rousk v Sweden App No 27183/04, 25 July 2013. �� 209n.223
Ruotsalainen v Finland App No 13079/03, 16 June 2009.�� 207n.208
xx Table of Cases
Satakunnan Markkinapörssi OY and Satamedia OY v Finland [GC] App No
931/13, 27 June 2017.�� 210
European Court of Justice

Judgement of the ECJ of 14 May 1974, J Nold, Kohlen-und
Baustoffgroßhandlung v Commission of the European Communities,
C-4/73, ECLI:EU:C:1974:51.�� 204n.197
Judgement of the ECJ of 2 July 1974, Italian Republic v Commission of the
European Communities, C-173/73, ECLI:EU:C:1974:71. �� 156n.396
Judgement of the ECJ of 20 February 1979, Rewe-Zentral AG
v Bundesmonopolverwaltung für Branntwein, C-120/78,
ECLI:EU:C:1979:42.�� 141n.328
Judgement of the ECJ of 28 January 1986, Commission of the European
Communities v French Republic, C-270/83, ECLI:EU:C:1986:37.�� 135
Judgement of the ECJ of 13 December 1989, Salvatore Grimaldi v Fonds des
maladies professionnelles, C-322/88, ECLI:EU:C:1989:646. �� 131n.292
Judgement of the ECJ of 8 May 1990, Klaus Biehl v Administration
des contributions du grand-duché de Luxembourg, C-175/88,
ECLI:EU:C:1990:186.�� 136n.311
Judgement of the ECJ of 18 June 1991, Elliniki Radiophonia Tiléorassi AE and
Panellinia Omospondia Syllogon Prossopikou v Dimotiki Etair
ia Pliroforissis and Sotirios Kouvelas and Nicolaos Avdellas and others,
C-260/89, ECLI:EU:C:1991:254. �� 204n.197
Judgement of the ECJ of 28 January 1992, Hanns-Martin Bachmann v Belgian
State, C-204/90, ECLI:EU:C:1992:35. �� 142n.332
Judgement of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt v
Roland Schumacker, C-279/93, ECLI:EU:C:1995:31.�� 136n.311, 139n.320,
143n.340, 144, 145–46, 208n.213
Judgement of the ECJ of 11 August 1995, G. H. E. J. Wielockx v Inspecteur
der Directe Belastingen, C-80/94, ECLI:EU:C:1995:271.�� 146
Judgement of the ECJ of 30 November 1995, Reinhard Gebhard v
Consiglio dell’Ordine degli Avvocati e Procuratori di Milano, C-55/94,
ECLI:EU:C:1995:411.�� 143
Judgement of the ECJ of 17 October 1996, Denkavit International BV,
VITIC Amsterdam BV and Voormeer BV v Bundesamt für Finanzen,
C-283/94, ECLI:EU:C:1996:387. �� 150n.370, 159n.413
Judgement of the ECJ of 15 May 1997, Futura Participations SA and
Singer v Administration des contributions, C-250/95,
ECLI:EU:C:1997:239.�� 142n.333, 147n.354
Judgement of the ECJ of 12 May 1998, Mr and Mrs Robert Gilly v Directeur des
services fiscaux du Bas-Rhin, C-336/96, ECLI:EU:C:1998:221.�� 139n.319,
208n.212
Judgement of the ECJ of 14 September 1999, Frans Gschwind v Finanzamt
Aachen-Außenstadt, C-391/97, ECLI:EU:C:1999:409. �� 146
Judgement of the ECJ of 6 June 2000, Staatssecretaris van Financiën v BGM
Verkooijen, C-35/98, ECLI:EU:C:2000:294. �� 149
Judgement of the ECJ of 8 June 2000, Ministério Público and Fazenda
Pública v Epson Europe BV, C-375/98, ECLI:EU:C:2000:302.�� 159n.415
Table of Cases xxi
Judgement of the ECJ of 4 October 2001, Athinaiki Zithopiia AE v Elliniko
Dimosio (Greek State), C-294/99, ECLI:EU:C:2001:505.�� 159n.415
Judgement of the ECJ of 8 November 2001, Adria-Wien Pipeline GmbH and
Wietersdorfer & Peggauer Zementwerke GmbH v Finanzlandesdirektion
für Kärnten, C-143/99, ECLI:EU:C:2001:598. �� 156n.395
Judgement of the ECJ of 12 December 2002, FWL. de Groot v Staatssecretaris
van Financiën, C-385/00, ECLI:EU:C:2002:750. �� 146
Judgement of the ECJ of 12 December 2002, Lankhorst-Hohorst GmbH v
Finanzamt Steinfurt, C-324/00, ECLI:EU:C:2002:749.�� 151n.376
Judgement of the ECJ of 12 June 2003, Arnoud Gerritse v Finanzamt
Neukölln-Nord, C-234/01, ECLI:EU:C:2003:340. ��139n.323, 146–47
Judgement of the ECJ of 11 March 2004, Hughes de Lasteyrie du Saillant
v Ministère de l’Économie, des Finances et de l’Industrie, C-9/02,
ECLI:EU:C:2004:138.��152– 53
Judgement of the ECJ of 1 July 2004, Florian W Wallentin v Riksskatteverket,
C-169/03, ECLI:EU:C:2004:403. �� 145n.345
Judgement of the ECJ of 15 July 2004, Anneliese Lenz v Finanzlandesdirektion
für Tirol, C-315-02, ECLI:EU:C:2004:446. �� 149
Judgement of the ECJ of 7 September 2004, Petri Manninen, C-319/02,
ECLI:EU:C:2004:484.�� 149
Judgement of the ECJ of 13 December 2005, Marks & Spencer plc
v David Halsey (Her Majesty’s Inspector of Taxes), C-446/03,
ECLI:EU:C:2005:763. ��147–49
Judgement of the ECJ of 7 September 2006, N v Inspecteur van de
Belastingdienst Oost/kantoor Almelo, C-470/04, ECLI:EU:C:2006:525. �� 153
Judgement of the ECJ of 12 September 2006, Cadbury Schweppes plc and
Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue,
C-196/04, ECLI:EU:C:2006:544. �� 141n.331, 151n.378
Judgement of the ECJ of 14 September 2006, Centro di Musicologia
Walter Stauffer v Finanzamt München für Körperschaften, C-386/04,
ECLI:EU:C:2006:568.�� 142n.333
Judgement of the ECJ of 3 October 2006, Fidium Finanz AG v
Bundesanstalt für Finanzdienstleistungsaufsicht, C-452/04,
ECLI:EU:C:2006:631.�� 138n.318
Judgement of the ECJ of 12 December 2006, Test Claimants in the FII
Group Litigation v Commissioners of Inland Revenue, C-446/04,
ECLI:EU:C:2006:774.��149–50
Judgement of the ECJ of 14 December 2006, Denkavit Internationaal BV
and Denkavit France SARL v Ministre de l’Économie, des Finances et de
l’Industrie, C-170/05, ECLI:EU:C:2006:783.��150–51
Judgement of the ECJ of 25 January 2007, Finanzamt Dinslaken v Gerold
Meindl, C-329/05, ECLI:EU:C:2007:57. �� 145
Judgement of the ECJ of 6 March 2007, Wienand Meilicke, Heidi Christa
Weyde and Marina Stöffler v Finanzamt Bonn-Innenstadt, C-292/04,
ECLI:EU:C:2007:132.�� 149
Judgement of the ECJ of 13 March 2007, Test Claimants in the Thin Cap
Group Litigation v Commissioners of Inland Revenue, C-524/04,
ECLI:EU:C:2007:161.�� 151
xxii Table of Cases
Judgement of the ECJ of 18 July 2007, Oy AA, C-231/05,
ECLI:EU:C:2007:439.��148–49
Judgement of the ECJ of 8 November 2007, Amurta SGPS v Inspecteur
van de Belastingdienst/Amsterdam, C-379/05, ECLI:EU:C:2007:655.�� 140,
150–51,
Judgement of the ECJ of 18 December 2007, Skatteverket v A,
C-101/05, ECLI:EU:C:2007:804. �� 142
Judgement of the ECJ of 15 May 2008, Lidl Belgium GmbH & Co. KG
v Finanzamt Heilbronn, C-414/06, ECLI:EU:C:2008:278.��148–49
Judgement of the ECJ of 20 May 2008, Staatssecretaris van Financiën v
Orange European Smallcap Fund NV, C-194/06, ECLI:EU:C:2008:289. �� 150
Judgement of the ECJ of 26 June 2008, Finanzamt Hamburg-Am Tierpark v
Burda GmbH, C-284/06, ECLI:EU:C:2008:365.�� 150
Judgement of the ECJ of 3 September 2008, Yassin Abdullah Kadi and
Al Barakaat International Foundation v Council of the European
Union and Commission of the European Communities, C-402/05 P,
ECLI:EU:C:2008:461.��203–4
Judgement of the ECJ of 16 October 2008, RHH Renneberg v Staatssecretaris
van Financiën, C-527/06, ECLI:EU:C:2008:566. ��146, 147
Judgement of the ECJ of 23 October 2008, Finanzamt für Körperschaften III
in Berlin v Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt GmbH,
C-157/07, ECLI:EU:C:2008:588. ��148–49
Judgement of the ECJ of 27 November 2008, Société Papillon v Ministère
du Budget, des Comptes publics et de la Fonction publique, C-418/07,
ECLI:EU:C:2008:659.��148–49
Judgement of the ECJ of 27 January 2009, Hein Persche v Finanzamt
Lüdenscheid, C-318/07, ECLI:EU:C:2009:33.�� 142
Judgement of the ECJ of 12 February 2009, Belgische Staat v Cobelfret NV,
C-138/07, ECLI:EU:C:2009:82. �� 159
Judgement of the ECJ of 15 October 2009, Grundstücksgemeinschaft Busley
and Cibrian Fernandez v Finanzamt Stuttgart-Körperschaften,
C-35/08, ECLI:EU:C:2009:625. �� 147
Judgement of the ECJ of 10 February 2011, Haribo Lakritzen Hans Riegel
BetriebsgmbH, Österreichische Salinen AG v Finanzamt Linz, C-436/08,
ECLI:EU:C:2011:61.�� 150
Judgement of the ECJ of 29 November 2011, National Grid Indus BV v
Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam, C-371/
10, ECLI:EU:C:2011:785.�� 154
Judgement of the ECJ of 10 May 2012, European Commission v Republic of
Estonia, C-39/10, ECLI:EU:C:2012:282. �� 145
Judgement of the ECJ of 13 November 2012, Test Claimants in the FII Group
Litigation v Commissioners of Inland Revenue, The Commissioners
for Her Majesty’s Revenue & Customs, C-35/11,
ECLI:EU:C:2012:707.�� 138, 149–50
Judgement of the ECJ of 26 February 2013, Åklagaren v Hans Åkerberg
Fransson, C-617/10, ECLI:EU:C:2013:105. ��203–4
Judgement of the ECJ of 3 October 2013, Itelcar —Automóveis de Aluguer
Lda v Fazenda Pública, C-282/12, ECLI:EU:C:2013:629.�� 138n.316
Table of Cases xxiii
Judgement of the ECJ of 23 January 2014, DMC Beteiligungsgesellschaft mbH v
Finanzamt Hamburg-Mitte, C-164/12, ECLI:EU:C:2014:20.��154–55
Judgement of the ECJ of 24 February 2015, Finanzamt Dortmund-Unna v
Josef Grünewald, C-559/13, ECLI:EU:C:2015:109. ��146–47
Judgement of the ECJ of 21 May 2015, Verder LabTec GmbH & Co KG v
Finanzamt Hilden, C-657/13, ECLI:EU:C:2015:331. �� 154
Judgement of the ECJ of 17 September 2015, JBGT Miljoen, X,
Société Générale SA v Staatssecretaris van Financiën, C-10/14,
ECLI:EU:C:2015:608. ��150–51
Judgement of the ECJ of 17 December 2015, Timac Agro Deutschland GmbH v
Finanzamt Sankt Augustin, C-388/14, ECLI:EU:C:2015:829.�� 148
Judgement of the ECJ of 21 December 2016, European Commission v
Portuguese Republic, C-503/14, ECLI:EU:C:2016:979. �� 154
Judgement of the ECJ of 21 December 2016, European Commission v
World Duty Free Group SA and others, C-20/15 P and C-21/15 P,
ECLI:EU:C:2016:981.��156–57
Judgement of the ECJ of 9 February 2017, X v Staatssecretaris van
Financiën, C-283/15, ECLI:EU:C:2017:102. �� 145
Judgement of the ECJ of 16 May 2017, Berlioz Investment Fund SA v
Directeur de l’administration des contributions directes, C-682/15,
ECLI:EU:C:2017:373.��113–14
Judgement of the ECJ of 12 September 2017, Republic of Austria v Federal
Republic of Germany, C-648/15, ECLI:EU:C:2017:664.�� 72
Judgement of the ECJ of 23 November 2017, A Oy, C-292/16,
ECLI:EU:C:2017:888.�� 154
Judgement of the ECJ of 6 March 2018, Slovak Republic v Achmea BV,
C-284/16, ECLI:EU:C:2018:158. ��190–91
Judgement of the ECJ of 12 April 2018, European Commission v Kingdom
of Belgium, C-110/17, ECLI:EU:C:2018:250. ��139–40
Judgement of the ECJ of 12 June 2018, A/S Bevola, Jens W Trock ApS v
Skatteministeriet, C-650/16, ECLI:EU:C:2018:424.��148–49
Judgement of the ECJ of 6 December 2018, Frank Montag v Finanzamt
Köln-Mitte, C-480/17, ECLI:EU:C:2018:987.��146–47
Judgement of the ECJ of 19 December 2018, Finanzamt B v A-Brauerei,
C-374/17, ECLI:EU:C:2018:1024. ��155–56
Judgement of the ECJ of 26 February 2019, Danish Beneficial Ownership
Cases, C-115/16, ECLI:EU:C:2019:134; C-118/16, ECLI:EU:C:2018:146;
C-119/16, ECLI:EU:C:2018:147; C-299/16 ECLI:EU:C:2018:148;
C-116/16, ECLI:EU:C:2019:135; C-117/16, ECLI:EU:C:2018:145.��73–74
Judgement of the ECJ of 26 February 2019, Martin Wächtler v Finanzamt
Konstanz, C-581/17, ECLI:EU:C:2019:138. ��153–54
Judgement of the ECJ of 26 February 2019, X-GmbH v Finanzamt Stuttgart
– Körperschaften, C-135/17, ECLI:EU:C:2019:136. �� 152
Judgement of the ECJ of 19 June 2019, Skatteverket v Memira Holding AB,
C-607/17, ECLI:EU:C:2019:510. ��148–49
Judgement of the ECJ of 27 February 2020, AURES Holdings
a.s. v Odvolací finanční ředitelství, C-405/18,
ECLI:EU:C:2020:127.�� 147
xxiv Table of Cases
General Court of the European Union
Judgement of the General Court of the EU of 24 September 2019, Grand
Duchy of Luxembourg and Fiat Chrysler Finance Europe v European
Commission, T-755/15 and T-759/15, ECLI:EU:T:2019:670.��156–57
Judgement of the General Court of the EU of 24 September 2019, Kingdom of
the Netherlands and Others v European Commission, T-760/15 and
T-636/16, ECLI:EU:T:2019:669. ��156–57
Judgement of the General Court of the EU of 15 July 2020, Ireland and
Others v European Commission, T-778/16 and T-892/16,
ECLI:EU:T:2020:338.��156–57
NATIONAL COURTS
Council of State of France

Council of State, Société Schneider Electric, No 232276, 28 June 2002.�� 48
Council of State, Société Zimmer Limited, No 304715, 308525, 31 March 2010.�� 56
Court of Appeal of the United Kingdom

Court of Appeal, Indofood International Finance Limited v JP Morgan Chase
Bank N.A., London Branch, STC 1195, 2 March 2006.�� 73
Federal Constitutonal Court of Germany

Judgment of the Federal Constitutional Court of Germany, Judgment of the
First Senate of 15 December 1983, 1 BvR 209/83, 1 BvR 269/83, 1 BvR
362/83, 1 BvR 420/83, 1 BvR 440/83, 1 BvR 484/83, 15 December 1983. �� 210
Federal Court of Appeal of Canada

Federal Court of Appeal, Canada v Prévost Car Inc, A-252-08,
26 February 2009.��73–74
Federal Court of Australia

Federal Court, Addy v Commissioner of Taxation, No QUD 108 of 2018,
30 October 2019. �� 100
High Court of Delhi

High Court, Director of Income Tax v Infrasoft Limited, ITA 1034/2009,
22 November 2013. �� 78
Supreme Administrative Court of Finland

Supreme Administrative Court, Re A Oyj Abp, KHO:2002.26, 4 ITLR 1009,
20 March 2002.�� 48
Supreme Court of India

Supreme Court, Vodafone International Holdings BV v Union of India & Anr.,
No 733, 20 January 2012.�� 85
Table of Cases xxv
Supreme Court of Japan
Supreme Court, Glaxo Kabushiki Kaisha v Director of Kojimachi Tax Office,
2008 (Gyo-Hi) 91, 29 October 2009. �� 48
Supreme Court of Norway

Supreme Court, Dell Products v Staten v/Skatt øst, HR-2011-02245-A,
No 2011/755, 2 December 2011.�� 48
Supreme Court of Spain

Supreme Court, Roche case, JUR\2012\41054, 12 January 2012. �� 56
Supreme Court of the Netherlands

Supreme Court, Beslissingen in Belastingzaken, 09/03847, 13 May 2011. �� 95
Supreme Court of the United States

Supreme Court, Cook v Tait, Collector of Internal Revenue, 265 U.S. 47,
5 May 1924.��22–23
Swiss Federal Administrative Court

Federal Administrative Court, A v Swiss Federal Tax Administration,
A-4911/2010, 30 November 2010.�� 121
Federal Administrative Court, A v Swiss Federal Tax Administration,
A-7789/2009, 21 January 2010.�� 31
Swiss Federal Supreme Court

Federal Supreme Court, A v Swiss Federal Tax Administration, 2A.239/2005,
28 November 2005. �� 127
Federal Supreme Court, Canton Valais v Canton Ticino, BGE 106 Ib 154, 2
July 1980.�� 129
Federal Supreme Court, Swiss Federal Tax Administration v A,
BGE 143 II 136, 12 September 2016. ��113–14
Federal Supreme Court, Swiss Federal Tax Administration v Bank X,
BGE 141 II 447, 5 May 2015.��73–74
Federal Supreme Court, Swiss Federal Tax Administration v UBS Switzerland
AG, BGE 146 II 150, 26 July 2019. �� 114
Federal Supreme Court, X v Cantonal Tax Administration of the Canton
of Geneva, 2C_606/2016, 2C_607/2016, 25 January 2017. �� 94
Tax Court of Canada

Tax Court, Khabibulin v The Queen, 96-4680-IT-G, 14 October 1999. ��93–94
United States Tax Court

Tax Court, Pei Fang Guo v Commissioner of Internal Revenue, Docket No
4805-16, 2 October 2017.�� 30
List of Abbreviations
AOA authorized OECD approach

APA Advance Pricing Arrangements
ATAD Anti-Tax Avoidance Directive
BEPS Base Erosion and Profit Shifting
BGE Bundesgerichtsentscheid (Decision of the Swiss Federal
Supreme Court)
BITs bilateral investment treaties
BRICS Group of States Consisting of Brazil, Russia, India, China, and
South Africa
CCCTB Common Consolidated Corporate Tax Base
CEN capital export neutrality
CFA Committee on Fiscal Affairs
CFC controlled foreign corporation
CFR Charter of Fundamental Rights
CIN capital import neutrality
CMAATM Convention on Mutual Administrative Assistance in Tax Matters
cons Consideration
DISC Domestic International Sales Corporations
DSU Dispute Settlement Understanding
EAEC European Atomic Energy Community
EBITDA Earnings before Interest, Taxes, Depreciation and Amortisation
EC European Community
ECHR European Convention on Human Rights
ECJ European Court of Justice
ECLI European Case Law Identifier
ECOSOC United Nations Economic and Social Council
ECT Energy Charter Treaty
ECtHR European Court to Human Rights
edn edition
ed/eds editor/editors
EEC Treaty of Rome; or European Economic Community
eg exempli gratia (for example)
et al and others
et seq et sequens
ETI Extraterritorial Income Exclusion
xxviii List of Abbreviations
EU European Union
FET fair and equitable treatment
FSC Foreign Sales Corporation
FTT Financial Transaction Tax
GAARs general anti-avoidance rules
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GC Grand Chamber
GOP Grand Old Party (refers to the Republican Party in the US)
G20 Group of Twenty (informal forum for international cooperation
consisting of 19 major economies plus the European Union)
HTVI hard-to-value intangibles
IBFD International Bureau of Fiscal Documentation
ICJ International Court of Justice
ICRC International Committee of the Red Cross
ICSID International Centre for Settlement of Investment Disputes
Id idem
ie id est
IIC International Investment Claims
ILO International Labour Organization
IP intellectual property
IRC Internal Revenue Code
IRD Interest and Royalty Directive
LCIA London Court of International Arbitration
LOB limitation on benefits
MAP mutual assistance procedure; or mutual agreement procedure
MC model convention
MCAA Multilateral Competent Authority Agreement
MFN most-favoured-nation
MLI multilateral instrument
MNE multinational enterprise
NAFTA North American Free Trade Agreement
No number
NT national treatment
OECD Organisation for Economic Co-operation and Development
OEEC Organisation for European Economic Cooperation
OJ Official Journal
para paragraph(s)
PCA Permanent Court of Arbitration
PCIJ Permanent Court of International Justice
PE permanent establishment
PPT principal purpose test
List of Abbreviations xxix
PSD Parent-Subsidiary Directive
SAARs special anti-avoidance rules
SCC Stockholm Chamber of Commerce
SCM Agreement on Subsidies and Countervailing Measures
SDGs Sustainable Development Goals
Sec Section
SOFAs status of forces agreements
TEU Treaty on the European Union
TFEU Treaty on the Functioning of the European Union
TIEAs tax information exchange agreements
TNMM transactional net margin method
TP transfer pricing
TPRM Trade Policy Review Mechanism
TRIMS Trade-Related Investment Measures
TRIPS Agreement on Trade-Related Aspects of Intellectual Property
Rights
UK United Kingdom
UN United Nations
UNCITRAL United Nations Commission on International Trade Law
UNCTAD United Nations Conference on Trade and Development
US United States of America
v versus
VAT Value-Added Tax
VCCR Vienna Convention on Consular Relations
VCDR Vienna Convention on Diplomatic Relations
VCLT Vienna Convention on the Law of Treaties
vol volume
WTO World Trade Organizations
1
Introduction
International tax law is a very dynamic discipline, and a book such as this
is just a snapshot of the current international tax regime. The goal of this
book is to provide the reader with insights on how the international tax
regime is embedded in a broader context in the international law regime.
The focus, therefore, is on the interaction of the international tax law re-
gime with other legal regimes, such as the international trade law or the
investment law regime. Moreover, this book outlines the main elements of
the European Union (EU) tax system, a very dynamic scheme of partially
harmonized tax rules.
EU tax law must be understood not only by those in an EU member state
but also by those who are not. The EU has on the one hand been a test la-
boratory for the interaction of various non-harmonized tax regimes in a
common market. This is relevant for the international tax regime as the
world faces similar difficulties from a tax policy perspective: a globalized
economy regulated by domestic, non-harmonized tax systems. In addition,
fundamental freedoms as key elements of the EU common market have
given rise to a fascinating case law by the European Court of Justice (ECJ),
which is of relevance far beyond the EU.
Of course, besides these cross-disciplinary areas, this book discusses
the functioning of double tax treaties as the main legal source of the inter-
national tax regime. The more recently crafted treaty-based rules of the
international tax regime, such as the mutual exchange provisions in various
international treaties, are also discussed.
This book could be used as a course book for a course on international
tax law. Depending on how such course is structured, the entire book or
large parts of it may be of interest to the students. The book should also
serve as a go-to source for practitioners. It is of course impossible to cover
all the topics pertinent to the international tax regime in a comprehensive
way, but no major area has been left out. The book should allow the reader
to understand how the international tax regime operates.
2 Introduction
There are not too many chapters in this book that provide the reader with
the author’s personal opinions, as the goal is to approach and discuss the
topic in an objective way. Moreover, case laws from around the world are
referred to and discussed rather than approaching the topic with reference
only to a specific jurisdiction. This means that the readers should be able to
follow the discussion regardless of which country they obtained their edu-
cation from. As I (the book’s author), however, am a tax lawyer with a Swiss
law background, the practice in my home country is unintentionally high-
lighted slightly more than the practice in other states.
If an author writes a book on a topic on which he has already published
a detailed study, there may be some overlaps. In my case, I recently pub-
lished a study on justice in international tax law, where I discussed certain
topics tackled in this book but in a more argumentative and detailed way.1
This means that parts of this book have already been published in a dif-
ferent form.
1. Taxation and Statehood

There is wide agreement that the imposition of taxes is justified if the exist-
ence and purpose of the state are justified.2 It is difficult to consider a state
without tax revenue even if the state is responsible only for the most essential
functions, such as national defence, enforcement of law and order, and pro-
vision of the most basic public goods. This is even more true considering the
tasks of modern states, which obviously go far beyond these essential func-
tions. Thus, the amount of money collected worldwide based on tax rules is
impressive. Nevertheless, the level of taxation and the right tax burden are
still partisan topics that are only partly accessible to academic research.3
1 Peter Hongler, Justice in International Tax Law (IBFD 2019)1 et seq.

2 See, however, the seminal contribution of Klaus Vogel, ‘Rechtfertigung der Steuern: Eine
vergessene Vorfrage’ (1986) 25 Der Staat 481. We will not further discuss the fundamental
issue of the extent to which private property should be protected from state actions (for a re-
cent contribution on the historical development both in the US and in the European countries,
see Wolfgang Schön, ‘Taxation and Democracy’ (2019) 72 Tax Law Review 235, 258 et seq).
3 The obvious reason for this is that the level of taxation highly depends on state spending,
and the state is left to make democratic decisions about this. However, economists have devel-
oped precise suggestions to increase welfare through tax policy under the umbrella term op-
timal tax theory. See, for instance, James A Mirrlees, ‘An Exploration in the Theory of Optimum
Income Taxation’ (1971) 38 The Review of Economic Studies 175; Peter A Diamond and James
A Mirrlees, ‘Optimal Taxation and Public Production I: Production Efficiency’ (1971) 61 The
American Economic Review 8; Peter A Diamond and James A Mirrlees, ‘Optimal Taxation
Terminology 3
Of course, many of the collected tax revenues do not have an inter-

national connection. For instance, it is evident that income taxes are often
a major part of the entire tax cake of the state,4 and that the incomes on
which such taxes are based are in many instances received without an inter-
national link. However, in a globalized world, there are many employees
who travel abroad at least once a year, and as such, their activities are not
limited to the domestic setting. In this situation, there is a link to a foreign
jurisdiction that requires states to regulate who is competent to tax a cer-
tain amount of the received income. Moreover, the value chains of multi-
national enterprises (MNEs) have indeed become global, which is a huge
challenge for the international tax regime, as I will demonstrate throughout
this book.
The international tax regime thus plays the crucial role of meeting the
need for levying taxes and at the same time coordinating the taxing rights
among various jurisdictions in a globalized world. In this book, I will dis-
cuss how the international tax regime as a legal regime is dealing both with
its challenges and its necessity.
2. Terminology
2.1 English as the lingua franca
English is the lingua franca among tax academics and tax professionals. On
the one hand, this seems obvious as English has become the global lingua
franca both in business and politics, but on the other hand, tax treaties
are still often written in several languages (and not necessarily including
English).5 Therefore, dealing with tax treaties does not always mean dealing
with a treaty written in English as other authoritative languages are com-
monly used.
and Public Production II: Tax Rules’ (1971) 61 The American Economic Review 261). Or for
a more recent approach, see Emmanuel Saez and Stefanie Stantcheva, ‘Generalized Social
Marginal Welfare Weights for Optimal Tax Theory’ (2013) National Bureau of Economic
Research Working Paper 18835, 1 et seq.
4 Income taxes (including corporate income taxes) contribute on average more than 30% of
the total fiscal revenues of the OECD member states (see OECD, Revenue Statistics 2020, Tax
Revenue Trends in the OECD (OECD Publishing 2020) 8).
5 For a further reference, see Paolo Arginelli, Multilingual Tax Treaties: Interpretation,
Semantic Analysis and Legal Theory (IBFD 2015) 147 et seq.
4 Introduction
The fact that English is the lingua franca in international tax law brings
with it many advantages, such as that the entire world is able to participate in
global discussions about how the international tax regime can be improved.
Another advantage is that it has allowed a common understanding of the
various terms used in the international tax regime.6 It also has disadvan-
tages such as the fact that while tax treaties are signed in several languages,
interpretative guidelines such as those of the Organisation for Economic
Co-operation and Development (OECD)7 and the United Nations (UN)8
may be available only in English.9 This may lead to some discrepancies in
practice. Moreover, non-native speakers may have difficulty interpreting
the provisions of such guidelines.
In the following, I will explain the meaning of the terms international tax
law, international law of taxation, and international tax regime, which are
used throughout this book.
2.2 International law of taxation
The term International Law of Taxation as used in the title of this book
covers all the rules and principles stemming from international law sources
regulating the taxation of cross-border situations.10 Therefore, the scope of
this book depends on how the term international law sources is understood.
There is a debate in legal philosophy on what the sources of law are, and of
course such debate differs from one legal system to another. Of course, there
is also a debate focused particularly on the term sources of international law
or international law sources.11
As this book uses a pragmatic approach, it understands the term sources
of international law in a broad way so as not to risk not discussing important
6 Of course, there are also various examples that show that a harmonized understanding is
very difficult to achieve even though English is used as the lingua franca (see our remarks on
the term beneficial ownership in Chapter 2, Section 2.3.5.7.d).
7 OECD Commentaries on the Articles of the Model Tax Convention (2017).
8 Commentaries on the Articles of the UN Model Double Taxation Convention (2017).
9 Both the OECD MC (2017) and the OECD Commentaries on the Articles of the Model
Tax Convention (2017) are also available in French.
10 In this book, we use the term international law and not international public law as the
latter term seems outdated (Samantha Besson, ‘Theorizing the Sources of International Law’
in Samantha Besson and John Tasioulas (eds), The Philosophy of International Law (Oxford
University Press 2010) 168.
11 See, for instance, Hugh Thirlway, The Sources of International Law (2nd edn, Oxford
University Press 2019)1 et seq.
Terminology 5
parts of the international tax regime. Therefore, the term includes the
sources mentioned in Art 38 International Court of Justice (ICJ) Statute,
such as treaty law, customary law, and general principles of law, but soft
law is also regarded as a source of law.12 As soft law is often used as a regu-
lative means within the international tax regime, it is important to include
it in our analysis. We are not treating case law as a separate source of inter-
national law, but as stated in Art 38 para 1 lit d ICJ Statute, it serves as a sub-
sidiary means for the determination of rules of law.
2.3 International tax law
The term international tax law, while mentioned many times throughout
the book and is commonly used by many academics and professionals, was
deliberately not used as the title of the present book for reasons that will be
explained below.
The term international tax law is understood as including both the rules
stemming from the domestic sources and from international law sources
with a reference to taxation in cross-border situations. Therefore, the term
also includes provisions in domestic tax acts regulating international tax
matters.
Not all rules that can be regarded as international tax law, however,
can also be regarded as international law of taxation. Probably one of the
best-known domestic sets of rules that illustrate this fact is the well-known
German Aussensteuergesetz (ie the German Foreign Tax Act).13 While this
law is a domestic law that regulates taxation in cross-border situations, it
was not derived from an international law source and is thus not an inter-
national law of taxation. As such, it is outside the scope of this book.
Importantly, the term tax law refers to a law that deals only with the
state’s revenue collection and not with state spending. State spending is
traditionally included when the term fiscal law is used instead of tax law,
but international fiscal law is not a commonly used term. The reason for this
is that state spending does not attract much international regulation as it is
seen as being within the realm of state sovereignty and is thus in the discre-
tion of domestic legislators.
12 See already Peter Hongler, Justice in International Tax Law (IBFD 2019) 48 et seq.
13 Germany, Law regarding the Taxation of Transactions Involving Foreign Jurisdictions
(Gesetz über die Besteuerung bei Auslandsbeziehungen) of 8 September 1972.
6 Introduction
2.4 The international tax regime
The international tax regime encompasses all principles, rules, and

decision-making procedures in the area of the international law of tax-
ation.14 It consists of binding and non-binding rules that are the outcomes
of an inter-state process.15 These rules (and principles) regulate particu-
larly the taxation of cross-border income, such as corporate or individual
income, and also the levy of other taxes, such as value-added tax (VAT),
inheritance or gift taxes, or any other taxes or levies. Importantly, in our
understanding, the term international tax regime includes not only inter-
national tax law but also supranational tax law (eg European tax law).
However, the international tax regime is not well defined as it is a moving
target and undergoes dynamic changes and developments.16 Nevertheless,
it is a suitable term to use for the purpose of describing the current regula-
tion in the field of international taxation.
3. History of the International Tax Regime

The historical development of the international tax regime can be split into
the following four periods, which will be discussed in Sections 3.1 to 3.4.
• the international tax regime until 1920;

• the League of Nations as the leading international organization in and
after the 1920s;
• the post-Second World War phase and the rise of the OECD in the
1950s and 1960s; and
• the G20 in the driver seat in the new century.
We will close the present section with an excursus on development aid and
the international tax regime.17
14 See the famous regime definition of Stephen D Krasner, ‘Structural Causes and Regime
Consequences: Regimes as Intervening Variables’ (1982) 36 International Organization 185.
15 Samantha Besson, ‘Theorizing the Sources of International Law’ in Samantha Besson and
John Tasioulas (eds), The Philosophy of International Law (Oxford University Press 2010) 167.
16 On the development of the international tax regime, see in particular Yariv Brauner, ‘An
International Tax Regime in Crystallization’ (2003) 56 Tax Law Review 259.
17 See Section 3.5.
History of the International Tax Regime 7
3.1 The international tax regime until 1920
Considering that custom duties are also part of the international tax regime,
it can be said that the first treaties of the international tax regime signed by
independent states were free trade agreements lowering or abolishing the
tariffs between states.18 Moreover, custom unions were built among states
even before the question of double taxation was addressed.19
One of the earliest treaties addressing double taxation concerning inher-
itance taxes was the treaty between the Swiss Federal Council (on behalf
of the canton of Vaud) and Great Britain signed in 1887.20 In the last years
of the nineteenth century, other special tax agreements were signed,21 but
the agreement between Austria-Hungary and Prussia signed in 1899–1900
and dealing with different tax issues is often considered the starting point
of the modern international (income) tax regime. It contained nine art-
icles allocating taxing rights, such as with regard to interest and pensions.22
The subsequent agreements used a similar approach.23 Interestingly, the
first double tax treaties were triggered by the need to form economic al-
liances. For instance, Prussia signed the aforementioned treaty and other
tax treaties to form an economic alliance against France and to expand the
German Empire at that time.24
For the sake of completeness, it is worth mentioning that states had
to deal with domestic double taxation even before they dealt with inter-
national double taxation. In other words, the question of allocating taxing
18 See, for instance, the Cobden-Chevalier Commercial Treaty (1860).

19 See, for instance, the German Zollverein Treaty (1833), which led to the establishment of
a free trade area in Germany.
20 Declaration relative to Succession or Legacy Duties on Property of British Subjects Dying
in the Canton of Vaud or of Citizens of the Canton of Vaud Dying in the British Dominions
(1872).
21 See the references in Sunita Jogarajan, ‘Prelude to the International Tax Treaty
Network: 1815–1914 Early Tax Treaties and the Conditions for Action’ (2011) 31 Oxford
Journal of Legal Studies 679, 684 et seq.
22 See Christian Freiherr von Roenne, ‘The Very Beginning—The First Tax Treaties’
in Thomas Ecker and Gernot Ressler (eds), History of Tax Treaties (Linde 2011) 24 et seq.
See also Hildegard Hemetsberger- Koller, ‘Der wirtschaftspolitische Hintergrund des
Doppelbesteuerungsabkommens zwischen Österreich-Ungarn und Preussen 1899’ in Michael
Lang (ed), Die Zukunft des Internationalen Steuerrechts (Linde 1999) 13 et seq.
23 Sunita Jogarajan, ‘Prelude to the International Tax Treaty Network: 1815–1914 Early Tax
Treaties and the Conditions for Action’ (2011) 31 Oxford Journal of Legal Studies 679, 690 et
seq; Bettina Oeser and Christoph Bräunig, ‘The History of German Double Tax Treaties’ in
Michael Lang and others (eds), History of Double Tax Conventions (Linde 2008) 2 et seq.
24 For details, see Sunita Jogarajan, ‘Prelude to the International Tax Treaty Network: 1815–
1914 Early Tax Treaties and the Conditions for Action’ (2011) 31 Oxford Journal of Legal
Studies 679, 692.
8 Introduction
rights is not limited to (and also did not originate from) international law.
In federal states such as the US25 or Switzerland,26 double taxation used to
be systemic and thus had to be abolished. Of course, the approaches to allo-
cating income between two fiscal authorities may be different at the inter-
national level as there are generally no fiscal transfer payments between
states and a rebalancing of tax revenue through such a transfer system is not
in place at the international level.
3.2 The League of Nations as the leading

international tax organization in and
after the 1920s
Crises are often the drivers of new developments in tax matters as states
seek new sources of revenue.27 It is thus no surprise that the First World
War led to an increased need for fiscal revenue, and as the cross-border
trade and movement of persons increased at that time, it is no surprise that
double taxation became a working pillar of the League of Nations after it
was incorporated in 1920. The Financial Committee, which was concerned,
inter alia, with financial reconstruction after the First World War, indeed
focused partly on double taxation.28 However, how and whether to miti-
gate cross-border double taxation deviated significantly in the beginning
of the international discussions on such. Some states were reluctant to sign
double tax treaties as they reckoned that they would not benefit from such
agreements while other states started more frequently signing tax treaties.
In 1923, four economists29 presented a report to the Financial Committee
of the League of Nations in Geneva, Switzerland on the (right) place of
25 See, for instance, the seminal work of Arthur L Harding, Double Taxation of Property and
Income (Harvard University Press 1933) 1 et seq, or concerning later developments, Walter
Hellerstein, ‘Tax Coordination between the US States—The Role of the Courts’ in Michael
Lang and others (eds), Horizontal Tax Coordination (IBFD 2012) 245 et seq.
26 For an overview of the development of the intercantonal tax law in Switzerland, see
Madeleine Simonek, ‘Tax Coordination between Cantons in Switzerland—Role of the Courts’
in Michael Lang and others (eds), Horizontal Tax Coordination (IBFD 2012) 221 et seq.
27 For a recent contribution, see Stef van Weeghel, ‘COVID-19 and Fiscal Policies’ (2020) 48
Intertax 733.
28 Sunita Jogarajan, ‘Stamp, Seligman and the Drafting of the 1923 Experts’ Report on
Double Taxation’ (2013) 5 World Tax Journal 368, 369 et seq.
29 League of Nations, Economic and Financial commission, Report on Double Taxation
submitted to the Financial Committee (E.F.S.73. F.19, 1923).
taxation for various types of income and wealth.30 Such report contained
arguments in favour of and against both residence and source taxation.
However, the four economists did not reach a consensus on a single allo-
cation principle,31 but the report was more of a compromise, attempting to
align different arguments and principles.
Even though the report’s actual impact in the 1920s and 1930s is dis-
puted, the report is still of importance today.32 Following the study that was
conducted by the four economists, several expert meetings took place in
the years 1923–27. A first draft of a model tax convention was developed in
1927.33 However, it was difficult to reach a compromise and to approve the
draft’s final version as states had widely opposing views.
Finally, in 1933, the Fiscal Committee of the League of Nations published
a draft convention containing six articles, and the arm’s length principle was
introduced, which is still the leading transfer pricing (TP) principle today.34
In 1943, another draft of a model convention was published: the so-called
Mexico Draft. In the Mexico Draft, the taxing rights were partly shifted to
the source state.35
3.3 The post-Second World War phase and

the rise of the OECD in the 1950s and 1960s
The development of a more integrated international tax regime stopped to

a large extent in the years during and directly after the Second World War
until the Organisation for European Economic Cooperation (OEEC), the
predecessor of the OECD, took over the lead in the area.
30 Christian Freiherr von Roenne, ‘The Very Beginning—The First Tax Treaties’ in Thomas
Ecker and Gernot Ressler (eds), History of Tax Treaties (Linde 2011) 30.
31 Sol Picciotto, International Business Taxation (Quorum Books 1992) 19.
32 See the different opinions as demonstrated by Luzius U Cavelti, International Tax
Cooperation, The Sovereignty Conflict between the Residence and the Source Country (Stämpfli
2016) 53 et seq. See also Hugh J Ault, ‘Corporate Integration, Tax Treaties and the Division of
the International Tax Base: Principles and Practices’ (1992) 47 Tax Law Review 565, 567 et seq.
33 For details about this period, see Sunita Jogarajan, ‘The “Great Powers” and the
Development of the 1928 Model Tax Treaties’ in Peter Harris and Dominic De Cogan (eds),
Studies in the History of Tax Law (Bloomsbury Publishing 2017) 341 et seq.
34 League of Nations, Fiscal Committee, Report of the Council on the Fourth Session of the
Committee (C.399.M.204. 1933).
35 For further details, see Kevin Holmes, International Tax Policy and Double Tax Treaties,
An Introduction to Principles and Application (2nd edn, IBFD 2014) 61.
10 Introduction
In 1956, the OEEC formed the Fiscal Committee, which drafted four in-
terim reports within the period from 1956 to 1961. In 1961, the OECD was
established, superseding the OEEC, and the first draft of the OECD model
convention (OECD MC) was published in 1963.36 As it was an agreement
among the countries in the developed world, the taxing rights were shifted
to the resident state from the source state compared to the Mexico Draft.
Interesting from a technical perspective is the fact that the convention con-
tained both a credit method article and an exemption method article as no
agreement was reached on a single method of relief.37
After 14 years, in 1977, the first final version of the OECD MC was
adopted,38 followed by amended model conventions and commentaries
in 1992, 1994, 1995, 1997, 2000, 2003, 2005, 2008, 2010, 2014, and 2017.
Concerning exchange of information, another amended version of the
model convention was published in 2012. Historically, the changes to the
OECD MC cited below are of particular importance.
• In 1977, the term beneficial ownership was introduced.39

• In 2000, Art 14 was deleted from the OECD MC.40
• In 2005, a new article on the exchange of information, Art 26, was
introduced. The introduction was related to the OECD report on
harmful tax practices.41
• In 2008, a new paragraph on arbitration was introduced in Art 25 of
the OECD MC.42
• In 2010, the OECD introduced the authorized OECD approach
(AOA).43
36 For further details, see Klaus Vogel and Alexander Rust, ‘Introduction’ in Ekkehart
Reimer and Alexander Rust (eds), Klaus Vogel on Double Taxation Conventions (4th edn,
Wolters Kluwer 2015)para 22.
37 On the latter topic, see Ottmar Bühler, Prinzipien des internationalen Steuerrechts
(Internationales Steuerdokumentationsbüro 1964) 53. On the methods of mitigating double
taxation below, see Chapter 2, Section 2.3.3.3.
38 Kevin Holmes, International Tax Policy and Double Tax Treaties, An Introduction to
Principles and Application (2nd edn, IBFD 2014) 62.
39 See Chapter 2, Section 2.3.5.7.d.
40 See Chapter 2, Section 2.3.5.12.
41 See Moris Lehner, ‘Grundlagen’ in Klaus Vogel and Moris Lehner (eds),
Doppelbesteuerungsabkommen der Bundesrepublik Deutschland auf dem Gebiet der Steuern
vom Einkommen und Vermögen, Kommentar auf der Grundlage der Musterabkommen (6th
edn, C.H.Beck 2015)para 35a.
42 Art 25 para 5 OECD MC (2017).
43 OECD, 2010 Report on the Attribution of Profits to Permanent Establishments (OECD
Publishing 2010). See Chapter 2, Section 2.3.5.3.
• In 2017, an explicit anti-abuse provision was introduced in Art 29

OECD MC.
Besides the work of the OECD, developing states launched a UN initiative

according to which a model convention that also suits the needs of the de-
veloping world should be developed.44 This was triggered by the fact that
the 1963 draft of the OECD MC mainly addressed the interests of devel-
oped states. Based on a resolution of the UN Economic and Social Council
(ECOSOC) in 1968, the Ad Hoc Group of Experts on Tax Treaties between
Developed and Developing Countries was incorporated.45
An initial draft of the UN Model Convention (UN MC) was published
in 1980. In 2004, the Ad Hoc Group was renamed Committee of Experts
on International Cooperation in Tax Matters. In the meantime, several up-
dated versions have been published, the latest in 2017.
3.4 The G20 in the driver seat in the new century
In the twenty-first century, the international tax work was highly influenced
by the G20, and the new international quasi-legislative projects were driven
by both the fight against cross-border tax evasion and the fight against ag-
gressive tax planning.
An important milestone in the fight against cross-border tax evasion was
the restructuring of the Global Forum in 2009.46 The Global Forum has de-
veloped international standards for both the automatic exchange of infor-
mation and the exchange of information on request. Moreover, it monitors
the implementation of the transparency standards by applying a peer re-
view process, in which the state practice is monitored by representatives of
other states.
In the early 2010s, the G20 mandated the OECD to draft a report about
the problem of Base Erosion and Profit Shifting (BEPS). Such report was
published in early 2013. Thereafter, in July of the same year, the OECD is-
sued the Action Plan on BEPS.47 The final reports were approved by the
44 See Kevin Holmes, International Tax Policy and Double Tax Treaties, An Introduction to
Principles and Application (2nd edn, IBFD 2014) 63 et seq.
45 UN Economic and Social Council, Resolution E/RES/1273 (XLIII) ‘Tax treaties between
developed and developing countries’ of 4 August 1967.
46 See Section 4.5.
47 OECD, Action Plan on Base Erosion and Profit Shifting (OECD Publishing 2013).
12 Introduction
Committee on Fiscal Affairs (CFA) on 21–22 September 2015. The G20 fi-
nance ministers endorsed the reports at a meeting on 8 October 2015.48 The
rising interest of the G20 in the topic shows that international tax law is no
longer discussed only among technicians but is considered a very high pri-
ority among policymakers. This development must be seen as an important
change in the institutional framework of the international tax regime.49
There has also been a shift from a material perspective in recent years
as international tax policy projects have come to focus no longer only on
mitigating double taxation but also on avoiding double non-taxation.50
Moreover, geopolitically, it is interesting to note that increased attention
is being given to non-OECD states, such as but not exclusively the BRICS
states.51 In the aftermath of the OECD project, the OECD member coun-
tries and the G20 states have developed the so-called Inclusive Framework,
which aims at involving as many states as possible in the international tax
debate.52
3.5 Excursus: development aid and

the international tax regime
In the past decades, taxes have also become part of a broader sustainability
debate. To highlight such phenomenon, we will refer mainly to the Addis
Ababa Action Agenda. Such agenda was the outcome of the Third UN
Conference on Financing for Development that was held in Addis Ababa
in 2015.53
48 See OECD, ‘G20 finance ministers endorse reforms to the international tax system for
curbing avoidance by multinational enterprises’ <http://www.oecd.org/tax/g20-finance-
ministers-endorse-reforms-to-the-international-tax-system-for-c urbing-avoidance-by-
multinational-enterprises.htm> accessed 16 February 2021.
49 On this topic, see also Allison Christians, ‘Taxation in a Time of Crisis: Policy Leadership
from the OECD to the G20’ (2010) 5 Northwestern Journal of Law & Social Policy 19.
50 Sol Picciotto, ‘Can the OECD Mend the International Tax System?’ (2013) 71 Tax Notes
International 1105, 1114.
51 On the rising importance of the BRICS states for the formation of the international tax
regime, see Pasquale Pistone and Yariv Brauner, ‘Introduction’ in Yariv Brauner and Pasquale
Pistone (eds), BRICS and the Emergence of International Tax Coordination (IBFD 2015) 1
et seq.
52 See Section 4.4.
53 The final text was also endorsed by the UN General Assembly: General Assembly of
the UN, Resolution A/RES/69/313 ‘Addis Ababa Action Agenda of the Third International
Conference on Financing for Development (Addis Ababa Action Agenda)’ of 27 July 2015.
The Addis Ababa Action Agenda refers to the 17 Sustainable

Development Goals (SDGs). The UN General Assembly approved these
SDGs on 25 September 2015,54 replacing the so- called Millennium
Development Goals. The Addis Ababa Action Agenda also reaffirmed
the results of the Monterrey Consensus (approved in 2002) and the Doha
Declaration (approved in 2008), and it outlines action areas for achieving
the SDGs. The Monterrey Consensus, the Doha Declaration, and the Addis
Ababa Action Agenda have been key documents that improved people’s
well-being around the world.
It is evident, however, that tax policy has gained importance since the
Monterrey Consensus, as has the goal of enhancing domestic resources as a
major means to increase people’s well-being. Although the 2002 Monterrey
Consensus already highlighted the importance of domestic resource mo-
bilization through effective and equitable tax systems, in recent years the
recommendations have become more detailed and more comprehensive.55
As an example, in the Addis Ababa Action Agenda, the participating
states also agreed to certain tax-related actions. For instance, these meas-
ures included improving fairness and transparency in tax matters. The
Addis Ababa Action Agenda does not suggest a new allocation of taxing
powers between source and residence countries, but it aims to improve the
fiscal capacities of developing states. To do this and to enhance the domestic
resource mobilization, some states also agreed to adopt the so-called Addis
Tax Initiative. The initiative, which is a soft law instrument, was signed by
41 states and supported by several organizations. The initiative contains the
following commitments:56
- collectively doubling technical cooperation in domestic revenue

mobilization;
- enhancing domestic revenue mobilization to spur development; and
- ensuring policy coherence.
54 For the precise contents of the SDGs, see the Annex to the General Assembly of the UN,
Resolution A/RES/69/315 ‘Draft outcome document of the United Nations summit for the
adoption of the post-2015 development agenda’ of 1 September 2015. The SDGs were also in-
cluded in General Assembly of the UN, Resolution A/RES/70/1 ‘Transforming Our World: The
2030 Agenda for Sustainable Development’ of 25 September 2015.
55 Even decades ago, tax policy was considered an important piece of development policy
at the level of the UN. Stewart traces these approaches back to the 1950s (Miranda Stewart,
‘Global Trajectories of Tax Reform: Mapping Tax Reform in Developing and Transition
Countries’ (2003) 44 Harvard International Law Journal 140, 155 et seq).
56 Addis Tax Initiative, Financing for Development Conference, The Addis Tax Initiative—
Declaration (International Tax Compact 2015).
14 Introduction
The goal of the first commitment is to achieve greater coordination between

the partner countries and the development partners. This includes the pro-
vision of support for technical cooperation.57 The second commitment is
in line with the broader goal of attaining sustainable development and pro-
tecting and enhancing human rights. Lastly, the third commitment requires
policy coherence, meaning the private sector shall also act in line with the
legal framework.
To a large extent, the debate on development aid and the international
tax regime is separated from the more traditional debate on how to struc-
ture the international tax regime. Nevertheless, at least with respect to the
UN MC, the question regarding how to design the international tax regime
to allow developing states to prosper is also considered. Moreover, we will
discuss whether the international tax regime is likely to lower the global in-
equalities, and if so, how.58
4. Institutions and Main Actors

4.1 Introduction
The overview of the historical development of the international re-

gime has also made clear that there is no single international institu-
tion steering the development of the international tax regime. Several
players are of importance, and the international law of taxation may
even be a battlefield of regulation as several institutions try to influence
the design of the international tax regime. In the following, some of the
most important institutions in the area will be presented. We will refer
both to the UN and the OECD but also to the Global Forum and the
Inclusive Framework. We will not discuss the role of the World Bank
and the International Monetary Fund in the development of the inter-
national tax regime.
57 Addis Tax Initiative, Financing for Development Conference, The Addis Tax Initiative—
Declaration (International Tax Compact 2015) 2. For further details about how the sup-
port of the development partners is calculated, see Addis Tax Initiative, ATI Monitoring
Report (International Tax Compact 2015) 28 et seq, with a focus on cross-border tax
issues.
58 See Chapter 4, Section 2.3.3.
Institutions and Main Actors 15
4.2 The UN and its work on taxation
As was mentioned in Section 3.3, in 2004 the so-called Ad Hoc Group of

Experts was uplifted within the UN structure and was renamed Committee
of Experts in International Cooperation in Tax Matters. The committee is
now directly reporting to the ECOSOC.59 The member states elect 25 mem-
bers, each for a term of four years.60 The members do not represent states
but are appointed in their personal capacity, as experts.61
Two very important documents are published by the Committee of
Experts in International Cooperation in Tax Matters: the UN MC and the
UN TP Guidelines. The UN MC has an important influence on the de-
sign of tax treaties, particularly between developing and developed states.
Compared to the OECD MC, the UN MC attaches more taxing rights to
the state where the investment occurs and where the economic activity
is taking place. The reasons for this are that the committee considers the
needs of developing countries more strongly62 and that the compositions of
the committees are very different. The committee also aims to simplify the
international tax regime to allow developing states to develop the capacity
to implement an effective domestic tax regime.63 Capacity building is a key
goal of the committee, not only through the design of the international tax
regime but also by helping developing states effectively design their do-
mestic tax systems.64
Since 2013, the ECOSOC has been holding an annual special meeting
focused on international cooperation in tax matters.65 Besides the
Committee of Experts in International Cooperation in Tax Matters in par-
ticular and the ECOSOC in general, other UN institutions are working on
59 Michael Lennard, ‘The Purpose and Current Status of the UN Tax Work’ (2008) 14
Asia-Pacific Tax Bulletin 23, 24. See also UN Economic and Social Council, Resolution 2004/
69 ‘Committee of Experts on International Cooperation in Tax Matters’ of 11 November 2004.
60 A list of the current members can be accessed at UN, ‘The United Nations Committee
of Experts on International Cooperation in Tax Matters’ <http://www.un.org/esa/ffd/tax-
committee/tc-members.html> accessed 16 February 2021.
61 Michael Lennard, ‘The Purpose and Current Status of the United Nations Tax Work’
(2008) 14 Asia-Pacific Tax Bulletin 23, 24.
62 See also UN Economic and Social Council, Resolution 2004/69 ‘Committee of Experts on
International Cooperation in Tax Matters’ of 11 November 2004 para d (v).
63 For example, see UN Economic and Social Council, Resolution 2004/69 ‘Committee of
Experts on International Cooperation in Tax Matters’ of 11 November 2004 para d (iv).
64 For more details, see UN, ‘Capacity Development: Tax Cooperation’ <http://www.un.org/
esa/ffd/topics/capacity-development-tax-cooperation.html> accessed 16 February 2021.
65 See UN Economic and Social Council, Resolution E/RES/2013/24 ‘Committee of Experts
on International Cooperation in Tax Matters’ of 24 July 2013.
16 Introduction
other tax-related issues. Reference is made in particular to the work of the

Independent Expert on the effects of foreign debt and other related inter-
national financial obligations of states on the full enjoyment of all human
rights.66 The Independent Expert issues guiding principles on human rights
impact assessments of economic reforms.67 In his work, revenue mobiliza-
tion through a successful tax policy is highlighted as a means to protect
human rights.
4.3 The OECD and its work in the field of taxation
According to Art 3 of the OECD Convention on the Organisation for

Economic Co-operation and Development (1960), the member coun-
tries should consult each other on a continuing basis. The decisions of the
OECD can have either a binding or non-binding character.68 This notwith-
standing, at least in tax matters, the OECD does not publish binding de-
cisions; it has had a significant influence on the international tax regime,
inter alia, through the publication of the OECD MC and the OECD TP
Guidelines. Both documents are considered soft law (ie formally non-
binding instruments).69
Besides its influence on the international tax treaty network and the
international tax regime, the work of the OECD has also impacted do-
mestic tax laws. For instance, the project on harmful tax competition and
the very recent BEPS Project had a significant impact on the domestic le-
gislation and administrative practices in various jurisdictions beyond
the OECD member states.70 Institutionally, the Centre for Tax Policy and
Administration is an OECD department that consists of the CFA and sev-
eral subgroups. The goal of the CFA, inter alia, is the following.71
66 The various UN reports and documents cited herein are available online at UN,
‘Publications’ <https://www.ohchr.org/EN/PublicationsResources/Pages/Publications.aspx>
accessed 16 February 2021.
67 UN Human Rights Council, Guiding Principles on Human Rights Impact Assessments of
Economic Reforms (A/HRC/40/57, 2018).
68 See Art 5a OECD Convention on the OECD (1960).
69 See Chapter 2, Section 5.
70 See Chapter 4, Section 2.1.
71 OECD Council, Resolution C(2008)147 and C/M(2008)20 ‘Revision of the Mandate
of the Committee on Fiscal Affairs’ of 28 October 2008. The resolution is also published in
OECD, Directory of Bodies of the OECD (OECD Publishing 2012) 253 et seq.
Institutions and Main Actors 17
a) The overarching objective of the Committee on Fiscal Affairs (herein-

after called ‘The Committee’) is to contribute to the shaping of global-
isation for the benefit of all through the promotion and development
of effective and sound tax policies and guidance that will foster
growth and allow governments to provide better services to their
citizens. Its work is intended to enable OECD and non-OECD govern-
ments to improve the design and operation of their national tax sys-
tems, to promote co-operation and co-ordination among them in the
area of taxation and to reduce tax barriers to international trade and
investment.
To achieve these goals, the CFA shall, in particular:
• develop standards, guidelines and best practices in areas where inter-

national coordination is desirable and monitor the practical imple-
mentation of them and other recommendations;
• provide a forum for discussions by senior policymakers and tax admin-
istrators, and where appropriate the business community and other
parts of civil society, of international and domestic tax policy and ad-
ministration issues and emerging issues in a global economy which re-
quire a response from senior tax policy makers;
• supply OECD countries with internationally comparable tax statistics
and comparisons of the major taxes used throughout the OECD area,
and provide strategic analysis of important tax policy and administra-
tion issues for use in publications, briefs, and the like.72
Institutionally, the work is delegated to working and advisory groups. Some

of the working and advisory groups of the CFA have been key to the devel-
opment of the international tax regime. Among them are the following:
a. Working Party No 1 on Tax Conventions and Related Questions;

b. Working Party No 2 on Tax Policy Analysis and Tax Statistics;
c. Working Party No 6 on the Taxation of MNEs;
d. Working Party No 9 on Consumption Taxes;
72 OECD Council, Resolution C(2008)147 and C/M(2008)20 ‘Revision of the Mandate

of the Committee on Fiscal Affairs’ of 28 October 2008. The resolution is also published in
OECD, Directory of Bodies of the OECD (OECD Publishing 2012) 253 et seq.
18 Introduction
e. Working Party No 10 on Exchange of Information and Tax

Compliance;
f. Forum on Harmful Tax Practices; and
g. Forum on Tax Administration.
4.4 The Inclusive Framework
The Inclusive Framework first met in June 2016 in Japan in the aftermath
of the BEPS Project, starting with 80 member states. Formally, the OECD
Council created the Inclusive Framework in 2016, and it was later endorsed
by the G20.73
One of the goals of the Inclusive Framework is to allow a broad range of
countries to participate in the decision-making process concerning rules
tackling BEPS. However, the Inclusive Framework is very much linked to
the OECD’s CFA as it is basically the CFA plus further states wishing to
participate.
Therefore, although the reach of the Inclusive Framework seems global,
it is not certain if the Inclusive Framework is indeed inclusive and is not
mainly steered by the largest economies in the world.
The institutional framework of the Inclusive Framework is indeed highly
unclear, and the fact that many documents in relation to the functioning
and decision-making process are not disclosed further highlights the opa-
city of the organization.74
4.5 The Global Forum
The Global Forum on Transparency and Exchange of Information for Tax

Purposes is an institution with a global reach as it currently has 161 member
states.75 The geographic scope of the Global Forum goes far beyond that of
the OECD.
73 The decision of the council is confidential. The endorsement of the G20 is contained in the
following document: G20, ‘G20 Leaders’ Communiqué: Hangzhou Summit’ para 19 <http://
www.g20.utoronto.ca/2016/160905-communique.html> accessed 16 February 2021.
74 For further details, see Allison Christians and Laurens van Apeldoorn, ‘The OECD
Inclusive Framework’ (2018) 72 Bulletin for International Taxation 226.
75 OECD, ‘Global Form members’ <https://www.oecd.org/tax/transparency/who-we-are/
members/> accessed 16 February 2021.
Sovereignty in Tax Matters 19
At the core of the development of the current reach of the Global Forum
was the G20’s introduction of white, black, and grey lists in 2009. During
that time, the G20 agreed on imposing coordinated sanctions against non-
cooperative jurisdictions (countries on the blacklist).76 This caused the
abolishment of secrecy laws in various countries. Such abolishment process
was mainly guided by the Global Forum through its peer review process.
Although the Global Forum first focused on the introduction of an
exchange-of-information system on request, the scope of the current
work is much broader as the Global Forum is concerned with various
forms of cross-border mutual assistance (including automatic exchange of
information).77
According to publicly available information, below are the obligations of
the member states of the Global Forum.78
1. Commit to implement the standards on transparency and exchange

of information (exchange of information on request and automatic
exchange of information).
2. Participate and contribute to the peer review process.
3. Pay an annual membership fee: a yearly base fee for each member, and
for jurisdictions with gross national income greater than USD35 bil-
lion, a share calculated based on their annual scale of contributions.
5. Sovereignty in Tax Matters

5.1 Sovereignty in international law
Sovereignty is an undisputed and fundamental principle in international

law, understood in the sense that states are sovereign entities in inter-
national law. However, it is extremely challenging to attribute sovereignty
to one of the sources of international law. Prima facie, the following ap-
proaches seem possible:
76 G20, London Summit—Leader’s Statement (2009) para 15. For a comprehensive over-
view of the development during that phase, see Xavier Oberson, International Exchange of
Information in Tax Matters, Towards Global Transparency (2nd edn, Elgar Tax Law and
Practice 2018) Chapter 2.
77 On the different forms of mutual assistance, see Chapter 2, Section 2.5.
78 OECD, ‘Why and how to join the Global Forum’ <http://www.oecd.org/tax/
transparency/who-we-are/members/why-and-how-to-join-the-global-forum.htm> accessed
16 February 2021.
20 Introduction
- As there seems to be sufficient state practice and an opinio iuris, the

principle of sovereignty could be considered part of customary inter-
national law.79
- We could also argue that sovereignty is a general principle of law ac-
cording to Art 38 para 1 lit c of the ICJ Statute as it is accepted as a prin-
ciple recognized by civilized countries.80
- Another position would be that sovereignty is part of treaty law as
states have signed thousands of treaties (and not just tax treaties) con-
firming that the states are sovereign.
- Lastly, state sovereignty could even qualify as an unwritten rule, idea,
fundamental principle, or peremptory norm (or even ius cogens)81 of
the international legal regime.
As the concept was developed at a different instance, we subscribe to the

position that sovereignty is indeed a legal precondition of the international
law regime, and as such, it is not even necessary to derive it from one of the
sources of international law.82
Moreover, in international law, a distinction is made between internal
and external sovereignty. External sovereignty is defined as the ability to
represent a state in relation to other states.83 It also encompasses the notion
that a state may act independently of any other state.84 Internal sovereignty,
on the other hand, means the authority to implement a domestic state order.
It also means that people are free to choose their political system.85
79 On the requirements of customary international law see Chapter 2, Section 3. From a

tax perspective, see, for instance, Stjepan Gadžo, Nexus Requirements for Taxation of Non-
Residents’ Business Income—A Normative Evaluation in the Context of the Global Economy
(IBFD 2018) Chapter 2, Section 2.6.
80 For further details about the general principles of law, see Chapter 2, Section 4.
81 For a further reference on the ius cogens character of the principle of sovereign equality,
see Athena D Efraim, Sovereign (In)equality in International Organizations (Martinus Nijhoff
Publishers 2000) 88.
82 For a further reference, see Peter Hongler, Justice in International Tax Law (IBFD 2019)
62 et seq.
83 Volker Epping, ‘Völkerrecht und staatliches Recht’ in Knut Ipsen (ed), Völkerrecht (7th
edn, C.H. Beck 2018) Chapter 5 para 137. For further details, see also Diana M Ring, ‘What’s
at Stake in the Sovereignty Debate?: International Tax and the Nation-State’ (2008) 49 Virginia
Journal of International Law 155, 159 et seq.
84 See Luzius Wildhaber, ‘Sovereignty and International Law’ in Ronald St J MacDonald
and Douglas M. Johnston (eds), The Structure and Process of International Law, Essays in Legal
Philosophy Doctrine and Theory (Martinus Nijhoff Publishers 1983) 436 et seq.
85 Volker Epping, ‘Völkerrecht und staatliches Recht’ in Knut Ipsen (ed), Völkerrecht (7th
edn, C.H. Beck 2018) Chapter 5 para 258.
For a comprehensive understanding of internal sovereignty, it is im-

portant to distinguish between prescriptive and enforcement jurisdiction.
Prescriptive jurisdiction means, inter alia, the power to legislate while
enforcement jurisdiction refers to the power to take executive action. In
the well-known Lotus case, the Permanent Court of International Justice
(PCIJ) held the following:
[T]‌he first and foremost restriction imposed by international law upon a

state is that—failing the existence of a permissive rule to the contrary—it
may not exercise its power in any form in the territory of another state.
In this sense jurisdiction is certainly territorial; it cannot be exercised by
a state outside its territory except by virtue of a permissive rule derived
from international custom or from a convention.86
Therefore, extraterritorial enforcement is certainly prohibited under gen-

eral international law. States are not allowed to physically enforce their
legislation on the territory of another state. Referring to prescriptive jur-
isdiction, the PCIJ stated that countries have ‘a wide measure of discretion
which is only limited in certain cases by prohibitive rules; as regards other
cases, every State remains free to adopt the principles [that] it regards as
[the] best and most suitable’.87
An important limitation of prescriptive jurisdiction is that without the
explicit consent of another state, a state has no jurisdiction over people who
have no link to its territory. Such genuine link doctrine was not yet fully
developed in the Lotus decision but received further contours from the
Nottebohm case,88 the Barcelona Traction case,89 and the Diallo case.90
In each field of international law, different genuine links have been de-
veloped, and there is no single definition of what a sufficient genuine link
is. Moreover, each link may justify jurisdiction only to a certain extent.
Therefore, depending on the quality of the link, the extent of jurisdiction
86 The Case of the S.S. ‘Lotus’ (The Government of the French Republic v The Government of
the Turkish Republic), PCIJ Series A No 10, 18 et seq.
87 The Case of the S.S. ‘Lotus’ (The Government of the French Republic v The Government of
the Turkish Republic), PCIJ Series A No 10, 19.
88 Nottebohm Case (Liechtenstein v Guatemala) (Judgment of 6 April 1955), ICJ Rep 1955,
23 et seq.
89 Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v
Spain) (Judgment of 5 February 1970), ICJ Rep 1970, 42 et seq.
90 Case concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the
Congo) (Judgment of 19 June 2012), ICJ Rep 2012.
22 Introduction
may be different. As will be shown later, this is actually of relevance in

international tax law. Moreover, the genuine link may also develop. It is,
for instance, not surprising that the digitalization of the economy has led
to a new discussion about jurisdiction and the genuine link in various
disciplines.
In the following, we will outline the main elements of the genuine link
doctrine by referring to the question of jurisdiction to tax in a broader sense.
5.2 Jurisdiction to tax
For the purpose of this book, jurisdiction to tax is understood as the legal
right to impose taxes by creating tax rules.91 Therefore, we are mainly refer-
ring to prescriptive jurisdiction. Of course, the international law boundaries
of enforcement jurisdiction are also of interest from a tax perspective.92
5.2.1 The genuine link as a connective factor in international

tax law
What has been said with respect to international law in general is also true
from an international tax law perspective. Therefore, a state has the right
to tax a certain income or person as long as such income or person has a
genuine link to the state’s territory. In negative terms, a person shall not be
taxed if she does not have any link to a certain country.
This means, for instance, that (i) a person physically present in a state
may be taxed in that state, (ii) a person receiving income sourced in a spe-
cific territory may be taxed there, or (iii) a person owning assets situated in
a certain jurisdiction may be taxed in the situs state. These are all territorial
links. Besides these territorial links, nationality as a personal link is also a
sufficient link to create tax liability.93 There indeed seems to be an agree-
ment that there is no rule of general international law that would prohibit
taxation based on citizenship.94 It is well known that the US taxes its citizens
91 See Peter Hongler, Justice in International Tax Law (IBFD 2019) 71 et seq.
92 For instance, during the Yugoslavian War, a question arose regarding whether the em-
bassy of Bosnia and Herzegovina is allowed to levy a tax on its citizens living in Switzerland.
This, however, was considered infringing international law (for further details, see Jörg P
Müller and Luzius Wildhaber, Praxis des Völkerrechts (3rd edn, Stämpfli 2001) 430).
93 This seems to be the only personal income tax nexus (see Stjepan Gadžo, Nexus
Requirements for Taxation of Non-Residents’ Business Income—A Normative Evaluation in the
Context of the Global Economy (IBFD 2018) Chapter 2, Section 2.7).
94 See generally Rutsel S J Martha, The Jurisdiction to Tax in International Law (Kluwer
1989) 66 et seq. See also Eric C C M Kemmeren, ‘Legal and Economic Principles Support
regardless of whether they live or do not live in the US. In this respect, in
1924, the US Supreme Court held the following in Cook v Tait:95
In other words, the principle was declared that the government, by its
very nature, benefits the citizen and his property wherever found, and
therefore has the power to make the benefit complete. Or, to express it
another way, the basis of the power to tax was not and cannot be made
dependent upon the situs of the property in all cases, it being in or out of
the United States, nor was not and cannot be made dependent upon the
domicile of the citizen, that being in or out of the United States, but upon
his relation as citizen to the United States and the relation of the latter to
him as citizen. The consequence of the relations is that the native citizen
who is taxed may have domicile, and the property from which his in-
come is derived may have situs, in a foreign country, and the tax be legal,
the government having power to impose the tax.
Of course, it could be argued that citizenship taxation reflects a quite ex-

treme understanding of the genuine link doctrine as a person can become
subject to taxation even if he or she owns a passport issued by a state but has
never lived in such state’s territory. Nevertheless, this is a mere normative
position and is not based on the existing legal argument against citizenship
taxation.96
Finally, it is important to note that each area of international tax law may
require different links. For instance, with regard to criminal tax law, specific
guidance can be derived from international criminal law.97
5.2.2 Worldwide and territorial taxation

Besides the question of which genuine links justify taxation, there is a
need to review the extent to which a specific genuine link justifies taxation.
an Origin and Import Neutrality-Based over a Residence and Export Neutrality-Based Tax
Treaty Policy’ in Michael Lang and others (eds), Tax Treaties: Building Bridges between Law
and Economics (IBFD 2010) 254 et seq; Frederick A Mann, ‘The Doctrine of International
Jurisdiction Revisited after Twenty Years’ (1984) 186 Collected Courses of the Hague Academy
of International Law 9, 24.
95 Supreme Court of the United States, Cook v Tait, Collector of Internal Revenue, 265 U.S.
47, 5 May 1924.
96 For the details, see Peter Hongler, Justice in International Tax Law (IBFD 2019) 77 et seq.
97 For further details, see James R Crawford, Brownlie’s Principles of Public International
Law (9th edn, Oxford University Press 2019) 645 et seq; Jörg P Müller and Luzius Wildhaber,
Praxis des Völkerrechts (3rd edn, Stämpfli 2001) 386 et seq.
24 Introduction
First of all, there seems to be an agreement among states that general

international law does not limit taxation to income sourced in a certain
country.98 Secondly, there is an agreement among states that general inter-
national law allows a state to tax its residents on the basis of their world-
wide income. At least it is a fact that most states partially have a worldwide
tax system if a corporation or an individual is a resident in its territory.
Therefore, the international tax law may be different from other areas of
international law as it seems to be one of the few areas of international eco-
nomic law in which domestic rules lead to factual extraterritorial jurisdic-
tion (ie the taxation of foreign-sourced income).99
As mentioned there is broad agreement that the resident state is legally
allowed to tax the worldwide income of its residents. More challenging
is the question of whether the source state also has an unlimited taxing
right.100 To be more precise, the question is if a state can tax the entire in-
come of a person who is not its resident but who only earns income sourced
therein. A few authors have already dealt with such question. For instance,
Monsenego states that ‘international law does not prohibit the taxation of
non-residents on foreign income’.101
In the 1960s, Mann held that the state of the permanent establishment
(PE) (ie the source state) of an enterprise with foreign activities has no suf-
ficiently close connection to such enterprise to have the right to tax it.102
In other words, the PE state is not allowed to tax the worldwide income of
such enterprise, and there is no state that is actually taxing the worldwide
income of an enterprise just because it has a PE in its territory. This does not
mean, however, that the source state currently cannot tax foreign income.
For instance, according to Art 21 para 2 OECD MC, the PE state may tax
income sourced abroad if such income is effectively connected to the PE.103
98 See Arthur R Albrecht, ‘The Taxation of Aliens under International Law’ (1952) 29
British Yearbook of International Law 145, 158 et seq; Frederick A Mann, ‘The Doctrine of
Jurisdiction in International Law’ (1964) 111 Collected Courses of the Hague Academy of
International Law 1, 113 et seq. For a deviating opinion with respect to impersonal taxes, see
Rutsel S J Martha, The Jurisdiction to Tax in International Law (Kluwer 1989) 54 et seq.
99 See Werner Meng, Extraterritoriale Jurisdiktion im öffentlichen Wirtschaftsrecht
(Springer 1994) 450.
100 On the topic of how source can be defined from an international law perspective,
see Stjepan Gadžo, Nexus Requirements for Taxation of Non-Residents’ Business Income—
A Normative Evaluation in the Context of the Global Economy (IBFD 2018) Chapter 2,
Section 2.7.3.
101 Jérôme Monsenego, Taxation of Foreign Business Income within the European Internal
Market (IBFD 2012) 54.
102 Frederick A Mann, ‘The Doctrine of Jurisdiction in International Law’ (1964)
111Collected Courses of the Hague Academy of International Law 115.
Source states are thus not obliged to tax on the basis of a strict territorial tax
base, although territorial taxation is common for source states and it may
even infringe general international law if source states tax the worldwide
income of a person.
In conclusion, residency seems to be a sufficient link to justify world-
wide taxation. Moreover, general international law does not limit the right
of the source state to tax income sourced therein. Source as a link may still
allow states to tax foreign income at least to a certain extent. However, such
practice is uncommon, and it is presumed that it would infringe general
international law if a source state taxes the worldwide income of a foreign
person. As a consequence, it seems important to distinguish between source
and residence even from the perspective of general international law.104
5.2.3 Source and residence—terminology

The international tax regime attaches different consequences to a person’s
being a resident of a certain state (residence state) and a person’s only
earning income sourced in a certain state (source state). However, the terms
source and residence are not at all well defined.
As will be shown in Chapter 2, Section 2.3.4.c, double tax treaties in par-
ticular limit the taxing rights of the source state but in general do not limit
the taxing rights of the resident state. Besides such limitation provided
for in tax treaties, states are free to define what triggers taxation based on
source and what triggers taxation based on residence. As such, these con-
cepts may overlap.
For instance, a state could implement a law according to which a person
becomes a resident of such state if he or she spends more than 10 days in the
state and works therein.105 At the same time, another state could implement
a law requiring source taxation of a person who works for at least 10 days
in its jurisdiction. Therefore, source may actually be construed as residence
and vice versa.
These ambiguities again show that general international law does not
provide detailed guidelines on how the terms source and residence should
104 As we will see in the following chapter, this is not in opposition to the view that source
and residency are, from an international law perspective, ‘two sides of the same coin’ (see
Stjepan Gadžo, Nexus Requirements for Taxation of Non- Residents’ Business Income— A
Normative Evaluation in the Context of the Global Economy (IBFD 2018) Chapter 2, Section 3).
105 See Art 3 para 3 lit a Switzerland, Federal Act on the Federal Direct Tax (Bundesgesetz
über die direkte Bundessteuer) of 14 December 1990, requiring 30 days’ presence for employ-
ment purposes to justify residency.
26 Introduction
be defined and whether states should be allowed to tax persons or corpor-

ations to different extents. General international law does not help solve the
source vs residence dilemma as it does not define these terms.
Another concern regarding the distinction between the terms source and
residence is related to the fact that there is often no overlapping between
voting power and the payment of taxes. That is, with the enhanced cross-
border mobility, taxpayers may now face worldwide taxation in their state
of residence although they do not have a voting right therein unless they are
citizens of such state.106
5.3 Double income taxation is systemic
Following the aforementioned remarks, it is obvious that a taxing right

is often not exclusive but conjunctive107 particularly because worldwide
tax systems are widespread and in line with general international law.
Therefore, it is not surprising that double taxation is systemic in the
international income tax regime. We will see throughout this book that
this has been a key driver of the development of the international tax
regime.
The situation is different in other tax regimes, which have a clearer
allocation of jurisdiction. For instance, double taxation in VAT is less
likely to happen (but it happens!) as VAT aims to tax territorial con-
sumption and as there is generally no worldwide element in VAT
systems. The same is true for many transfer taxes, such as real estate
transfer taxes, as the link is often territorial (ie the sold house is located
in one jurisdiction).
Importantly, the genuine link doctrine does not provide any guidance
on how to allocate income. In other words, income allocation among juris-
dictions (ie between the source and the resident state) is mainly a political
task, and the outcome is not clear at all.108 In particular, the arm’s length
106 For such a discussion, see Wolfgang Schön, ‘Taxation and Democracy’ (2019) 72 Tax
Law Review 235.
107 Allison Christians, ‘Sovereignty, Taxation and Social Contract’ (2009) 18 Minnesota
Journal of International Law 99, 108. From an international law perspective, see Frederick A
Mann, ‘The Doctrine of Jurisdiction in International Law’ (1964) 111 Collected Courses of the
Hague Academy of International Law 1, 10.
108 Wolfgang Schön, ‘International Tax Coordination for a Second-Best World (Part I)’
(2009) 1 World Tax Journal 67, 93.
principle as the most important allocation key cannot be derived from the
genuine link doctrine.
In Chapter 4, Section 2.3.3, we will refer to some guidelines leading the
discussion on the allocation of income. However, these are mere normative
guidelines, with no legal base.
2
Sources of the International Law
of Taxation
1. Overview
To present the content of the international tax regime in a comprehensive
way, we shall structure the following chapters on the basis of the different
sources of the international law of taxation. Therefore, the present chapter
is split into four topics:
- the international tax regime—a treaty-based regime;1

- customary international tax law;2
- general principles of international tax law;3 and
- soft law and its importance for the international law of taxation.4
Before focusing on the different sources of international law, it is neces-

sary to briefly highlight the interaction and the relationship between the
various sources. The key provision of Art 38 International Court of Justice
(ICJ) Statute, containing the sources of international law (except soft law),
does not mention any explicit hierarchy between the sources. Nevertheless,
some guiding remarks can be made:
First of all, it is important to understand that custom and treaty are the
two most important law-creating sources in international law. As we will
see, general principles of law are, however, necessary to solve non-liquet
situations but they are not a sufficient legal source to decide whether an in-
come is taxable or not.5
1 See Section 2.
2 See Section 3.
3 See Section 4.
4 See Section 5.
5 See Section 4.1.

A Treaty-based Regime 29
Second of all, and as consequence from the first remark, as custom and
treaties seem to be the only sufficient sources to decide a case upon, it is
decisive to clarify the relationship between the two sources. It, however,
reflects the common understanding in literature that there is no specific
hierarchy between the two. This means that neither treaty obligations nor
custom always prevail but they belong to ‘a horizontal system of rights and
obligations without hierarchies’.6 As custom has not played a key role within
the international tax regime, such conflict has, as far as it can be observed,
not been of relevance in international tax law.
Third, there are ius cogens obligations from which no treaty-based devi-
ation is possible7 and therefore, at least rules with ius cogens character such
as the prohibition of genocide always prevail. However, ius cogens provi-
sions are of no importance for the following chapters.
Fourth, each individual case requires a detailed assessment whether
there is indeed a conflict between two rules and how such conflict can be
solved. Most conflicts in international tax law relate to conflicts between
treaties or between domestic law and treaties (so called treaty override).
The latter conflict is solved according to domestic principles and is out of
scope of the present book. The former conflict might be solved following
existing conflict rules such as lex specialis or lex posterior as accepted gen-
eral principles of law.8
2. The International Tax Law Regime—

a Treaty-based Regime
2.1 Interpretation of tax treaties
In the following, we will refer to various international treaties related

to taxation. The focus here is not on the domestic laws but on the inter-
national tax regime as a legal regime that is part of the international law
regime. Therefore, it is important to first outline the main elements of the
6 With further references Erika de Wet, ‘Sources and the Hierarchy of International
Law: The Place of Peremptory Norms and Article 103 of the UN Charter within the Sources of
International Law’ in Samantha Besson and Jean d’Aspremont (eds.), The Oxford Handbook of
Source of International Law (Oxford University Press 2017) 637.
7 See Art 53 VCLT.
8 See Section 4.2.3.
30 Sources of the International Law of Taxation
interpretation of international treaties. The rules of the Vienna Convention

on the Law of Treaties (VCLT) in Arts 31−33 are the key rules in this respect.
According to Art 31 para 1 VCLT:
A treaty shall be interpreted in good faith in accordance with the or-

dinary meaning to be given to the terms of the treaty in their context and
in the light of its object and purpose.
The VCLT has been ratified by dozens of states. Even the courts in states
that have not ratified the VCLT follow a similar approach. For instance, the
following extract stems from a decision of the US Tax Court. Similar elem-
ents of interpretation can be derived from such statement.
When interpreting a treaty or other international agreement, we begin

with its text. Volkswagenwerk Aktiengesellschaft v Schlunk, 486 U.S. 694,
699 (1988). We interpret a treaty according to the ordinary meaning of
its terms, consistently with their context and the agreement’s object and
purpose. SanchezLlamas v Oregon, 548 U.S. 331, 346 (2006). Treaties are
contracts between sovereigns and, as such, should be construed to give
effect to the signatories’ intent. United States v Stuart, 489 U.S. 353, 365–
366 (1989). Because treaties are construed more liberally than private
agreements, we may ascertain their meaning by looking beyond the
written words to the history of the treaty, the parties’ negotiations, and
the practical construction they have adopted. [emphasis added]9
The rules of interpretation in the VCLT have indeed become part of cus-
tomary international law and are therefore applicable even if a state has not
ratified the VCLT.10 In the following, we will discuss the main interpret-
ation elements as derived mainly from Art 31 et seq VCLT.
2.1.1 Grammatical element (textual approach)

As mentioned in Art 31 VCLT, a treaty shall be interpreted ‘in accordance
with the ordinary meaning’. The grammatical or textual element of in-
terpretation is of preeminent importance.11 The goal is to understand the
9 United States Tax Court, Pei Fang Guo v Commissioner of Internal Revenue, Docket No
4805-16, 2 October 2017, 6.
11 Frank Engelen, Interpretation of Tax Treaties under International Law (IBFD 2004) 427.
wording of a treaty and not of a law statute. In other words, the object of
interpretation is a written obligation between two states. This requires that
the reader or the person applying the treaty consider that the wording of
the treaty reflects a consensus between two parties and is not the result of
legislative (often majority-based) process in the sense of a parliamentary
approval of a law.
To assess the ordinary meaning of a term, reference is often made to its
definition from dictionaries or other linguistic sources, although interpret-
ation here means to understand the term as it is used in legal documents
such a double tax treaty rather than following its common use in society.
Besides, Art 31 para 4 of the VCLT foresees cases when the ordinary
meaning of the term is not the one that is relevant but a special meaning
adopted by the concerned parties. Therefore, only if it is clear that the par-
ties wanted to attach a special meaning to a term shall the courts deviate
from the term’s ordinary meaning.12
A particular problem of the international tax regime is that although
English is the lingua franca,13 tax treaties are often signed in several lan-
guages and are therefore multilingual treaties. This poses various difficulties
for the interpreter. To solve some of the uncertainties, Art 33 VCLT states
that in this situation, ‘the text is equally authoritative in each language, un-
less the treaty provides or the parties agree that, in case of divergence, a
particular text shall prevail’.14 Therefore, it may be necessary to review sev-
eral versions of a treaty to determine if there are conflicting interpretations
between the different languages involved.
2.1.2 Teleological element (purposive interpretation)

The use of the terms object and purpose in Art 31 para 1 VCLT indicates that
the purpose of a treaty is indeed an important element of the interpretation
of international treaties. In individual cases, there is a need to review not
only what the purpose of the treaty is but also what the purpose of the ap-
plicable rule is. For instance, the purpose of the Organisation for Economic
Co-operation and Development model convention (OECD MC) (not ne-
cessarily of the actual double tax treaty) is, inter alia, the following:
12 See, for instance, the Swiss Federal Administrative Court, A v Swiss Federal Tax
Administration, A-7789/2009, 21 January 2010 cons 3.5.1.
14 See on this the seminal work of Paolo Arginelli, Multilingual Tax Treaties: Interpretation,
Semantic Analysis and Legal Theory (IBFD 2015).
Intending to conclude a Convention for the elimination of double tax-

ation with respect to taxes on income and on capital without creating
opportunities for non-taxation or reduced taxation through tax evasion
or avoidance (including through treaty-shopping arrangements aimed
at obtaining reliefs provided in this Convention for the indirect benefit of
residents of third States).15
However, the purpose of Art 24 OECD MC for instance is to prevent certain

kinds of discrimination.16 Therefore, the latter rule-specific purpose may
be more important than the purpose of the treaty itself when interpreting
Art 24 OECD MC. Finally, a purposive interpretation shall not undermine
the prevailing value of the text of the treaty.17 This is required by Art 31 para
1 VCLT.
2.1.3 Systematic element (contextual interpretation)

As held in Art 31 para 1 VCLT, the terms in an international treaty shall be
interpreted ‘in their context’. Context means that terms shall be understood
as part of the entire provision and the entire treaty (ie both in relation to
other terms in the same provision and to other terms in the treaty). From
a tax perspective, a very important contextual consideration is that an in-
come can fall under only one of the allocation rules in Art 6−22 OECD MC
(2017).18
Therefore, it can be argued that provision A must be understood in
manner B because provision C does not explicitly cover the income in ques-
tion. As an example, income received as a member of the board of directors
of a company can indeed be considered employment income according to
Art 15 OECD MC. However, as there is an explicit provision on director
fees in Art 16 OECD MC, employment income has a narrower interpret-
ation for purposes of applying the treaty.19
Besides, a contextual analysis includes reference to other agreements
signed between the concerned parties before or after the treaty was signed.20
15 Preamble of the OECD MC (2017).

16 See Section 2.3.6.2.
17 See with respect to tax treaties Frank Engelen, Interpretation of Tax Treaties under
International Law (IBFD 2004) 429.
18 Michael Lang, Hybride Finanzierungen im internationalen Steuerrecht: Rechtsgrundlagen
der Doppelbesteuerungsabkommen zur Beurteilung von Mischformen zwischen Eigen-und
Fremdkapital (Wirtschaftsverlag Orac 1991) 111.
19 Moreover, Art 15 para 1 first sentence OECD MC explicitly states that Art 16 OECD MC
prevails.
20 See in particular the instruments mentioned in Art 31 para 2 and 3 VCLT (1969).
2.1.4 Supplementary means of interpretation (Art 32 VCLT)

While discussing the historical element of interpretation, reference is made
to Art 32 VCLT as such article contains the supplementary means of inter-
pretation. Accordingly, reference to supplementary means such as the pre-
paratory work for the treaty or the circumstances of the conclusion of the
treaty is possible in the following cases:
- if the interpretation according to Art 31 leaves the meaning ‘am-

biguous or obscure’; and
- if the interpretation leads to a result that is ‘manifestly absurd or
unreasonable’.
Sometimes the commentaries to the OECD MC and to the United Nations

(UN) MC are considered elements of interpretation falling under Art 32
VCLT. We will specifically deal with such question below, in Section 2.1.6.
Importantly, what is often called the historical element of interpretation
concerning the interpretation of domestic law is therefore not as relevant as
the aforementioned elements of the interpretation of tax treaties. The use
of historical documents such as documents providing further information
about the circumstances of the conclusion of the treaty shall be used only in
the outlined situations above in line with Art 32 VCLT.
2.1.5 Relevance of the domestic laws

The international tax regime aims to coordinate two or more tax systems.
This includes the allocation of taxing rights to avoid double taxation, but
the international tax regime also contains rules on administrative assist-
ance for the purpose of actually applying the domestic tax laws. Therefore,
domestic law is important for understanding the international tax regime.
This also explains why the working mode of the international tax regime
can be fully understood only by referring to and understanding the do-
mestic tax regimes of the involved countries.
The same is true for the interpretation of tax treaties. The domestic law
plays a vital role in this regard. Besides, in the systematic nexus between
tax treaties and the domestic laws, there are also explicit references to the
domestic law in tax treaties. A particular reference is found in Art 3 para
2 OECD MC, and a similar provision is found in several mutual assistance
treaties.21
21 See eg Art 3 para 2 CMAATM (2010).

Art 3 para 2 OECD MC reads as follows:
As regards the application of the Convention at any time by a Contracting

State, any term not defined therein shall, unless the context otherwise
requires or the competent authorities agree to a different meaning pur-
suant to the provisions of Article 25, have the meaning that it has at that
time under the law of that State for the purposes of the taxes to which
the Convention applies, any meaning under the applicable tax laws of
that State prevailing over a meaning given to the term under other laws
of that State.
According to such provision, the terms not defined in the treaty shall be
understood according to the domestic laws:
1. unless the context requires otherwise; or

2. unless the competent authorities agree to a different meaning.
The second exception was introduced only during the Base Erosion and
Profit Shifting (BEPS) project and was first implemented in the OECD
MC (2017). It does not give rise to any specific question that needs to be
addressed in the present book. However, the intensity of the reference to
the domestic laws in Art 3 para 2 OECD MC, (ie the interpretation of the
phrase unless the context requires otherwise) likely gives rise to one of the
most controversial questions in international tax law: how intense should
the reference to the domestic laws be?
Moreover, such question is obviously one of the most important ques-
tions in international tax law as the application of a tax treaty can differ
significantly depending on whether the domestic understanding plays a
prominent role or no role at all.
Example
Switzerland has a domestic provision according to which (simply put) in-
come derived from selling a participation in a company where the seller
holds more than 50% of the shares is considered a dividend distribution
and not a capital gain. The underlying rationale is that capital gains are in-
come tax exempt in Switzerland while dividends are taxable. Transferring
the participation to a company will allow later dividend payments to
be transformed into capital gains from the perspective of the seller. As
such, the legislators implemented the mentioned provision to avoid the
aforementioned tax-planning structures. If such a sale, however, happens

cross-border (ie if the seller is an individual in another contracting state),
the question is whether the income derived from the sale is considered
a capital gain or a dividend for treaty purposes. The answer depends on
whether one extensively refers to the domestic law or understands the
term ‘capital gain’ autonomously. In the case of an autonomous interpret-
ation, the resident state will have the exclusive taxing right,22 and in the
case of reference to the domestic law, the source state will have a limited
taxing right in line with Art 10 OECD MC.23
There are two major schools of thought on this matter, with many inter-
mediate positions. One school of thought does not see a need to refer to
the domestic law as the context basically always requires an autonomous
interpretation,24 and the other school of thought is very reluctant to apply
an autonomous interpretation of treaty terms and frequently refers to the
domestic law.25
Once there is an agreement that a term should be understood in line with
the domestic law, there is a need to review whether one should refer to the
domestic law in force at the moment the treaty was signed or the law in
force at the moment the disputed legal question arose. There is wide agree-
ment that the most recent version of the domestic law applicable to the case
at hand should be relevant.26 There is also no risk that this will undermine
the democratic decision-making process as the more recent domestic law
was approved by the legislators. The situation is different with regard to the
22 On the application of Art 13 see Section 2.3.5.11.

23 On the application of Art 10 see Section 2.3.5.10.
24 The most prominent representative of such school is Michael Lang (see already
Michael Lang, Hybride Finanzierungen im internationalen Steuerrecht: Rechtsgrundlagen
der Doppelbesteuerungsabkommen zur Beurteilung von Mischformen zwischen Eigen-und
Fremdkapital (Wirtschaftsverlag Orac 1991) 23 et seq). See for a recent contribution Michael
Lang, ‘Tax Treaty Interpretation—A Response to John F. Avery Jones’ (2020) 74 Bulletin for
International Taxation 660.
25 The most prominent representative of such school is John Avery Jones (see John F Avery
Jones and others, ‘The Interpretation of Tax Treaties with Particular Reference to Article
3(2) of the OECD Model—I’ [1984] British Tax Review 14; John F Avery Jones and others,
‘The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD
Model—II’ [1984] British Tax Review 90). See also the most recent contribution John F Avery
Jones, ‘A Fresh Look at Article 3 (2) of the OECD Model’ (2020) 74 Bulletin for International
Taxation 653.
26 See eg with further details Frank Engelen, Interpretation of Tax Treaties under
International Law (IBFD 2004) 489 et seq.
application of younger versions of the OECD and UN commentaries, as we

will discuss in the following chapter.
2.1.6 The value of the OECD and UN commentaries

Of particular importance for the interpretation of double tax treaties are
the Commentary on the OECD MC and the Commentary on the UN MC.
The reason for this is that signed double tax treaties are highly influenced
by both the OECD MC and the UN MC, and as such, the commentaries on
these two may provide guidelines on the interpretation of signed double tax
treaties.
In the following, we will focus on the Commentary on the OECD MC
as such Commentary has a higher standing than the Commentary on
the UN MC at least for the OECD member states as the former was for-
mally approved by the OECD member states.27 However, how to value the
Commentary within the framework of the interpretation method provided
for in Art 31 et seq of the VCLT is far from being clear. The following ap-
proaches are possible:
• the meaning in the Commentary reflects the ordinary meaning ac-

cording to Art 31 para 1 VCLT;
• the Commentary is an agreement according to Art 31 para 2 lit
a VCLT;
• the Commentary is an instrument according to Art 31 para 2 lit
b VCLT;
• the Commentary is an agreement according to Art 31 para 3 lit
a VCLT;
• the Commentary is a practice according to Art 31 para 3 lit b VCLT;
• the meaning in the Commentary reflects the special meaning ac-
cording to Art 31 para 4 VCLT; or
• the Commentary is a supplementary means of interpretation ac-
cording to Art 32 VCLT.
Notwithstanding such dispute, it seems clear that the Commentary on

the OECD MC is of great relevance for the interpretation of tax treaties
signed between OECD member states but only to the extent that the treaty
actually follows the OECD MC. As non-OECD member states are not

involved in the drafting of the Commentary on the OECD MC, it seems

also clear that the Commentary cannot be obligatorily used for the inter-
pretation of tax treaties between non-OECD member states or between an
OECD member state and a non-OECD member state. Even for the OECD
member states, however, it is persuasive to argue that the Commentary is
still a soft law instrument and is therefore not a legally binding document.28
Consequently, it is not at all mandatory for courts to follow the interpret-
ation in the Commentary. Nevertheless, there are strong arguments that
the Commentary should at least be considered for the interpretation of tax
treaties to assess the ordinary meaning of a term or of a rule in line with Art
31 para 1 VCLT. This, however, also means that the Commentary is not just
a supplementary means in the sense stated in Art 32 VCLT and can there-
fore be used beyond the limits placed by such article.
The situation is different if a treaty directly refers to the Commentary
as a means for interpretation. There are various such references (eg partial
or full references, references with a clarifying or confirmatory purpose29).
As an example, a full reference is found in the treaty between Spain and
Albania:
It is understood that provisions of the Agreement which are drafted ac-

cording to the corresponding provisions of the OECD Model Convention
on income and on capital shall be interpreted according to the OECD
Commentaries thereon. The Commentaries—as they may be revised
from time to time—constitute a means of interpretation in the sense of
the Vienna Convention of 23 May 1969 on the Law of Treaties.30
Once reference is made to the Commentary during an interpretation pro-

cess, there is a need to clarify which version of the Commentary should
be considered: the one in place at the time the treaty was signed or the
one in place at the time of the treaty’s application? For example, if a
treaty was signed in 2015, should the courts now refer to the 2014 OECD
Commentary (static approach) or should they refer to the 2017 OECD
28 On the term soft law see Section 5.

29 See the comprehensive study of Craig West, ‘References to the OECD Commentaries in
Tax Treaties: A Steady March from “Soft” Law to “Hard” Law?’ (2017) 9 World Tax Journal 117.
30 Protocol to the Agreement between the Kingdom of Spain and the Government of the
Republic of Albania for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to the Taxes on Income (2010). I owe such reference to Craig West, ‘References
to the OECD Commentaries in Tax Treaties: A Steady March from “Soft” Law to “Hard” Law?’
(2017) 9 World Tax Journal 117, 129.
Commentary (dynamic approach) if the interpretative question arises in

the 2020 tax year?
With regard to the aforementioned treaty between Spain and Albania
and with respect to tax treaties in general, there are strong arguments that
the static interpretation based on the Commentary in place at the time the
treaty was signed should be applied.31 The reason for this is that it is as-
sumed that both parties (both OECD member states) wanted to interpret
a term in a certain way but such interpretation could be derived from the
OECD MC in place at the time the treaty was signed.32 That is, the treaty
negotiator was of the opinion that the understanding in the Commentary
in place at the time the treaty was signed should be relevant. A too dynamic
understanding could undermine the will of the negotiators and, therefore,
also the will of state and its citizens.
2.2 Multilateral and bilateral tax treaties
The international tax regime has always been multilateral due to the im-
portance of the OECD MC, the UN MC, and their respective commen-
taries, even though from a formal perspective the international tax regime
is still a regime primarily based on bilateral agreements.33
As in other areas of international law, bilateral and multilateral treaties
have advantages. For instance, the negotiation of a multilateral treaty is
more time consuming but at the same more cost efficient.34 A multilateral
system may also be simpler to understand than a system of thousands of
double tax treaties with slightly different contents. Within the international
tax regime, multilateral treaties have more often been used in the last years.
31 See, however, the dynamic position of the OECD (Introduction para 35 OECD
Commentaries on the Articles of the Model Tax Convention (2017)).
32 For my own position see already with further references Peter Hongler, Hybride
Finanzierungsinstrumente im nationalen und internationalen Steuerrecht der Schweiz
(Schulthess 2012) 218 et seq.
33 In a persuasive manner Garcia Anton uses the term ‘fuzzy multilateralism’, Ricardo
García Antón, ‘The 21st Century Multilateralism in International Taxation: The Emperor’s
New Clothes?’ (2016) 8 World Tax Journal 147.
34 Achim Pross and Raffaele Russo, ‘The Amended Convention on Mutual Administrative
Assistance in Tax Matters: A Powerful Tool to Counter Tax Avoidance and Evasion’ (2012) 66
Bulletin for International Taxation 361, 365. See, on the transaction cost aspect of a multilat-
eral agreement from an international tax law perspective, Ricardo García Antón, ‘The 21st
Century Multilateralism in International Taxation: The Emperor’s New Clothes?’ (2016) 8
World Tax Journal 147, 187 et seq.
We see at least three types of multilateral conventions as part of the inter-

national tax regime:35
• special-purpose multilateral tax conventions;

• multilateral double tax conventions; and
• multilateral tax harmonization conventions.
Multilateral tax treaties with a particular purpose (except avoiding double

taxation) can be considered special-purpose multilateral tax conventions.
For instance, the Convention on Mutual Administrative Assistance in Tax
Matters (CMAATM) is considered a special-purpose convention as it aims
to ensure and enhance administrative assistance among the signatory par-
ties. Another special-purpose multilateral agreement is the Multilateral
Competent Authority Agreement (MCAA). Its goal is ‘to improve inter-
national tax compliance by further building on their relationship with re-
spect to mutual assistance in tax matters’.
With respect to multilateral double tax conventions, it will indeed be
feasible for taxing rights to be allocated among jurisdictions based on a
multilateral convention instead of a network of bilateral agreements. In
fact, there are a few examples of multilateral double tax treaties that are in
force, such as the Nordic Tax Convention and the Caribbean Community
Multilateral Double Taxation Agreement.36 In general, these agreements
use a significant part of the OECD MC’s and UN MC’s wording, but they
have some other interesting features.37 It is very challenging to agree on a
multilateral double tax treaty. For instance, even in the EU, a highly inte-
grated market, attempts to implement a multilateral double tax convention
have failed.38
35 See already Peter Hongler, Justice in International Tax Law (IBFD 2019) 131 et seq.
36 Even though further multilateral double tax conventions exist, such as the multilateral
tax agreement between the Andean countries. For more details see Kim Brooks, ‘The Potential
of Multilateral Tax Treaties’ in Michael Lang and others (eds), Tax Treaties: Building Bridges
between Law and Economics (IBFD 2010) 227 et seq.
37 For instance, the Agreement among the Governments of the Member States of the
Caribbean Community for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, Profits or Gains and Capital Gains and for the
Encouragement of Regional Trade and Investment (1994) (so called CARICOM Income Tax
Treaty) contains an exclusive taxing right for the source state concerning interests and divi-
dends and this is a significant deviation from the approach in the OECD MC (2017).
38 See Michael Lang and Josef Schuch, ‘Europe on its Way to a Multilateral Tax Treaty’
(2000) 9 EC Tax Review 39.
A particular multilateral double tax convention is the Multilateral

Convention to Implement Tax Treaty Related Measures to Prevent BEPS
(‘Multilateral Instrument’ or ‘MLI’). The MLI tries to harmonize several
clauses in double tax treaties to allow an efficient and coordinated imple-
mentation of treaty-related BEPS measures in a multilateral context.39
Multilateral tax harmonization conventions, however, have not yet been
implemented. Within the EU, the Common Consolidated Corporate Tax
Base (CCCTB) is a project to be implemented through a multilateral con-
vention.40 Furthermore, at the international level, model conventions may
have already led to a de facto harmonization of a part of the domestic tax
law. As an example, the domestic definitions of a permanent establishment
(PE) may be very similar to the definition of the same term in tax treaties41
as states try to align their domestic laws with their treaty obligations.
2.3 Double tax treaties
2.3.1 Model conventions

In the following, we will refer to both the OECD MC and the UN MC as
the wording of one is very similar to that of the other. We will refer to actual
double tax conventions only in a few instances as the signed treaties are to a
large extent identical to the OECD MC and the UN MC.42
Moreover, states have their own model tax conventions, which they
use as the bases for their negotiations with other contracting states. These
model conventions are sometimes publicly available43 and sometimes not.
2.3.2 The importance of the domestic laws

States’ taxing rights are based on their respective domestic laws, and the
double tax treaty may only limit such taxing right. In other words, double
tax treaties do not grant a taxing right to a contracting state that does not
39 See the Preamble of the Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent BEPS (2016).
41 See Art 5 OECD MC (2017). For further details see Section 2.3.5.3(b).
42 But of course, there are also significant differences between the treaties. See for an em-
piric analysis on similarities and differences in the language used in tax treaties Elliott Ash
and Omri Y Marian, ‘The Making of International Tax Law: Empirical Evidence from Natural
Language Processing’ (2019) University of California Irvine School of Law Research Paper
2019/02, 1 et seq.
43 See, for instance, the United States Model Income Tax Convention (2016).
exist in such state’s domestic laws. This is why it is said that tax treaties
have a negative effect in the sense that they do not create but only limit
tax claims.44 This does not mean, however, that a tax treaty cannot worsen
the position of a taxpayer. For instance, the OECD MC contains in Art 27
OECD MC a provision on the cross-border collection of taxes45 and may
therefore allow a state to collect taxes abroad with the support of the other
contracting state. Obviously, such cross-border enforcement may be disad-
vantageous for taxpayers.
As was held by Klaus Vogel, double tax treaties do not have the same ef-
fect as conflict rules in private international law.46 Their goal is not to define
which legal system is applicable but to allocate taxing powers, which are
often overlapping (ie both states can tax an income). Therefore, double tax
treaties may limit the taxing powers of states but do not lead to an exclusive
application of one of the two legal systems.
Importantly, the question of how double tax treaties are implemented in
the domestic laws and how they interact with the domestic provisions must
be answered with reference to a particular legal system. As is well known,
there are states that follow a monistic system and states that follow a dual-
istic system. Moreover, intermediate regimes exist. We will not further
cover this country-specific topic in the present book.
2.3.3 Steps in the application of a double tax treaty

To understand whether a double tax treaty is applicable and what its legal
effects are, the three questions below must be answered.
- Are the taxpayer and the tax covered by the treaty?

- Which allocation rule is applicable?
- Which method article is applicable?
2.3.3.1 Are the taxpayer and the tax covered by the treaty?

First, it must be evaluated if the item taxed in one or both contracting states
is within the scope of the double tax treaty. To answer this question, whether
44 Peter Locher, ‘Zur “negativen Wirkung” von Doppelbesteuerungsabkommen’ in

Urs R Behnisch and Adriano Marantelli (eds), Beiträge zur Methodik und zum System des
schweizerischen Steuerrechts (Stämpfli 2014) 83 et seq.
46 Klaus Vogel, Klaus Vogel on Double Taxation Conventions (3rd edn, Wolters Kluwer
1997)Introduction No 45a.
the taxpayer falls within the personal scope47 of the treaty and whether the
tax(es) are covered by the treaty will have to be assessed.48
2.3.3.2 Which allocation rule is applicable?

In the second step, it has to be reviewed which allocation rule (from among
Arts 6−22 OECD MC) is applicable. The allocation rules provide for two
different ways of allocating income. The first is the exclusive allocation of
taxing rights: only one state is allowed to tax the income (the other one is
prohibited from doing so). Such exclusive allocation of taxing rights is in-
dicated by the use of the words ‘only taxable in’ (or similar words). For in-
stance, Art 13 para 5 OECD MC states the following:
Gains from the alienation of any property, other than that referred to in
paragraphs 1, 2, 3 and 4, shall be taxable only in the Contracting State of
which the alienator is a resident.
The second way of allocating taxing rights is the non-exclusive allocation

thereof (ie both states have the right to tax the item). This is indicated by the
use of the words ‘may be taxed’ (or similar words). For instance, Art 13 para
1 OECD MC states the following:
Gains derived by a resident of a Contracting State from the alienation

of immovable property referred to in Article 6 and situated in the other
Contracting State may be taxed in that other State.
In the case of exclusive allocation, there is no need to refer to the

method articles as double taxation has already been mitigated through
the application of the allocation rule. However, in the case of non-
exclusive allocation, the method articles force the resident state to
mitigate double taxation by applying either the exemption method or
the credit method.
2.3.3.3 Which method article is applicable?

Although both the wording of the method article in treaty practice and
the actual implementation of the relief instrument significantly differ, the

following subsections will present some generic remarks on how both

method articles work.
It is important to understand that method articles do not work recipro-
cally in the sense that if state A foresees a credit on employment income,
state B will do so as well. For each income category, each state defines
whether it applies the credit or the exemption method.
(a) Exemption method If the exemption method is applied, it simply

means that the resident state exempts income that according to the treaty
may be taxed in the other state.
Example
According to Art 15 para 1 OECD MC (Income from Employment), the
resident state has the exclusive taxing right unless the employment is
(physically) exercised in another state. Assuming that Anna is a resident
of state X and works in state Y, and assuming that state Y has the taxing
right for her income, applying the exemption method means that state X
exempts her employment income from taxation.
Both the OECD MC (Art 23A para 3) and the signed tax treaties contain a
safeguarding progression proviso. Such provision guarantees that the ex-
emption method does not restrict the right of the resident state to consider
the exempted income for the calculation of the applicable tax rate.
Example
Anna is a resident of state X and works partly in state Y. We assume that Y
may tax parts of her income according to the treaty between states X and
Y. Overall, she earns EUR60,000 whereas EUR10,000 is allocated to her
presence in state Y and may be taxed in state Y. In this case, the exemption
method means that the tax base in state X is EUR50,000, but the tax rate
is calculated based on a EUR60,000 income (safeguarding progression
proviso).
Importantly, although many treaties contain subject-to-tax clauses for the

application of the exemption method, the OECD MC does not contain such
a clause. Subject to tax means that a state grants an exemption only if the
income is taxed in the other state. In other words, it is no longer an uncon-
ditional exemption but a conditional one.
(b) Credit method Since the Second World War, when the US, Canada,
and the UK began signing more double tax treaties, and as these states trad-
itionally and unilaterally followed the credit method, the credit method has
also more often been used in treaty practice.49 Such method requires the
resident state to credit the taxes paid in the other state. However, the gross
income is taxed in the resident state.
Example
Anna, who is a resident of state X, receives EUR1,000 in interests from
a source in state Y. State Y levies a 10% withholding tax on interest pay-
ments in line with the double tax treaty between states X and Y. This
means that Anna will receive a net income of only EUR900. Nevertheless,
the application of the credit method requires that EUR1,000 (ie the gross
income) be subject to income taxation in state X. If we assume that the ap-
plicable income tax rate in state X is 25%, it means that Anna is obliged to
pay a EUR250 income tax in state X, but she will receive a EUR100 credit
for the taxes levied in state Y. Therefore, she will only pay EUR150 of in-
come tax in state X.
The resident state, however, is not obliged to grant a tax credit if the other
state does not levy its taxes in line with the double tax treaty. In this situ-
ation, it is the taxpayer who will face double taxation.
Example
Company A, a resident of state X, receives a payment from company B, a
resident of state Y, for the use of the former’s software. State Y considers
such payment a royalty payment and, in accordance with the royalty art-
icle in the double taxation convention, state Y levies a 10% source tax on
it. However, the approach is infringing the tax treaty as payments for the
use of software are in general excluded from the royalty article and fall
under Art 7 OECD MC or Art 21 OECD MC.50 Therefore, company A
is of the opinion that state Y is not allowed to levy any withholding tax.
However, state X is also not required to grant a tax credit according to
the credit method. Therefore, this leads to double taxation unless state Y
changes its view (or state X knows domestic relief mechanisms).
49 See Ottmar Bühler, Prinzipien des Internationalen Steuerrechts (Internationales

Steuerdokumentationsbüro 1964) 50 et seq.
50 See Section 2.3.5.9(b).
Moreover, the resident state does not have to grant a full tax credit if the
source country levies a tax lower than that allowed under the tax treaty.
Example
Anna, a resident of state X, receives EUR1,000 in interests from a source
in state Y. State Y levies a 10% withholding tax on interest payments.
According to the treaty, state Y may tax not more than 15% of the interest.
In this situation, the credit is limited to 10% and not 15%.
Exceptions are so called tax-sparing provisions, according to which the

resident state grants a credit even though the source country does not levy
a source tax or levies a lower one. This means that resident countries grant a
tax credit notwithstanding the fact that the source country did not impose
any tax or imposed a lower tax. These provisions will enhance investments
in the source country and are used in treaties between developing and de-
veloped states.51
The credit method in Art 23B OECD MC defines the maximum amount
of taxes to be credited. The maximum amount is defined in Art 23 para 1
OECD MC as the tax attributable to the income that may be taxed in the
other state. Therefore, how much income tax is to be levied by the resident
state on the income stemming from the other state and subject to taxation
in the other state shall be calculated. To do so, states require that costs be
deducted from the gross income; the tax burden is calculated on the basis of
the net income. States therefore need to define which costs are related to the
income subject to source taxation.
There are different systems applicable for the calculation of the max-
imum amount of taxes to be credited. The most favourable for the taxpayer
is a system in which all income subject to taxation in the source states falls
into the same basket, and then the maximum amount is calculated on the
basis of all the income in such comprehensive basket. Such approach is
sometimes referred to as overall limitation.52 There are more limited ap-
proaches, as follows:
51 However, their effect is disputed. For a detailed analysis of the use of various tax sparing
provisions in treaty practice Annet Wanyana Oguttu, ‘The Challenges of Tax Sparing: A Call to
Reconsider the Policy in South Africa’ (2010) 65 Bulletin for International Taxation 330.
52 Michael Lang, Introduction to the Law of Double Taxation Conventions (2nd edn, Linde
2013)No 457.
- per-country limitation: all income subject to taxation in one specific

state falls in the same basket;
- per-basket limitation: all income of the same kind (eg royalties) falls
in the same basket; and
- per-item limitation: each item of income is treated separately for cal-
culating the maximum amount of taxes to be credited.
Depending on the system to be chosen by the state, the credit system is

more attractive for taxpayers. This is true as, for instance, it is less likely
that the source taxes to be credited will exceed the maximum amount in the
overall limitation system than in a system in which a per-country limitation
applies. However, it should be highlighted that both the OECD MC and the
UN MC do not provide for limitations in this respect, and the states are free
to choose the system that they want to adopt.53
(c) Switch-over clauses Some double tax treaties contain switch-over

clauses. The application of switch-over clauses leads to the application of the
credit method instead of the exemption method in specific circumstances.
The rationale is to avoid situations in which an income is not taxed at all (ie
double non-taxation). The risk of applying the exemption method is that
the resident state exempts the income and the source state does not tax it ei-
ther even though it ‘may tax’ the income according to the OECD MC.
2.3.4 Scope of the convention

2.3.4.1 Persons covered
(a) In general According to Art 1 para 1 OECD MC, the double tax treaty
applies if a person is a resident of one or both contracting states. This means
e contrario that a double tax treaty is not applicable if a person is not a resi-
dent of either of the two contracting states.
A person is a resident of a contracting state if he is liable to tax in such
state ‘by reason of his domicile, residence, place of management or any
other criterion of a similar nature’.54
Therefore, residency is defined with reference to the domestic law in the
sense that only persons who are subject to taxation in a state based on one
of the mentioned elements are considered residents. However, as indicated
53 See already Peter Hongler and Fabienne Limacher, ‘Steueranrechnung in der Schweiz’
[2020] Forum für Steuerrecht 223.
54 Art 4 para 1 OECD Commentaries on the Articles of the Model Tax Convention (2017).
by the last sentence in Art 4 para 1 OECD MC, persons are not considered
residents of a state if they are liable to tax only with respect to their income
from the sources in the state or from capital situated in the state.
Example
Company A has its seat and place of effective management in state A but
has a PE each in states B and C. In this case, the double tax treaty of states
B and C is not applicable as company A is neither a resident of state B nor
of state C. However, both the treaties between states A and B and between
states A and C are applicable as company A is a resident of state A (ie one
of the contracting states).
The OECD MC (2017) has led to the introduction of Art 1 para 2 and 3
OECD MC as part of in the article on the persons covered. We will briefly
discuss how these two particular provisions function as they are part of the
personal-scope provision in Art 1 OECD MC.
(b) Income of transparent entities Art 1 para 2 OECD MC does in fact

not deal with the personal scope of a double tax treaty but with questions
regarding the allocation of income derived by or through an entity or an
arrangement that is treated as transparent according to the laws of either
contracting state.55 Transparent means that the entity is not a taxpayer with
respect to its income but its income is directly attributed to the person be-
hind the entity (eg a partner in a partnership).
The goal of the provision is to avoid situations in which the treaty bene-
fits are granted in inappropriate circumstances. Accordingly, an income
shall be considered that of a resident company if it is treated as the income
of a resident of that state for tax purposes. This is a rather abstract wording,
and reference should be made to the following example to further explain
the functioning of such provision:
Example
Company A in state X pays interests to a trust in state Y. These interests are
taxed at source in state X. The trust is considered a transparent entity in
state Y, and its income is directly allocated to the beneficiaries of the trust.
55 Art 1 para 2 applies not only to partnerships but also to other entities which are treated
as transparent. Therefore, it goes beyond the partnership report which was published in 1998
(see Art 1 para 3 OECD Commentaries on the Articles of the Model Tax Convention (2017)).
The trust has three beneficiaries, one in state X and two in a third state. In
this case, the interest to be allocated to the beneficiary resident of state X is
considered the income of a resident for purposes of the application of the
state X−Y treaty, but this is not the case for the income to be allocated to
the residents of the third state.56
(c) Savings clause Since the OECD MC (2017) took effect, the OECD MC
has come to contain a so-called savings clause in Art 1 para 3. The rationale
for this is that tax treaties primarily limit source taxing rights and not resi-
dence taxing rights.57 Therefore, such provision shall actually guarantee
that the taxing rights of the resident state are not limited and will remain
reserved to it.
Example
State X has a controlled foreign corporation (CFC) legislation according
to which the income of a foreign subsidiary is taxed in such state if the tax
rate in the resident state of the subsidiary is below 15%. There is no other
requirement for the taxation of the income of the foreign subsidiary. One
can argue that such provision is infringing the double tax treaty, in par-
ticular Art 7 OECD MC.58 Therefore, in such a situation, a savings clause
will clarify that these CFC rules are not infringing the treaty. For the sake
of completeness, even without such savings clause it can be argued that
the CFC rules are not infringing double tax treaties.59
Nevertheless, the OECD MC contains areas where the taxing rights of the
resident state are indeed limited. For instance, Art 1 para 3 OECD MC
states that the savings clause shall not apply to Art 7 para 3 and Art 9 para 2
OECD MC. These two provisions oblige the contracting state to grant cor-
responding transfer pricing (TP) adjustments because of an initial adjust-
ment of the other state.60 Therefore, the contracting state shall grant such
57 OECD/G20, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances,
Action 6—2015 Final Report (OECD Publishing 2015) para 61.
58 See eg Council of State of France, Société Schneider Electric, No 232276, 28 June 2002.
59 See eg Supreme Administrative Court of Finland, Re A Oyj Abp, KHO:2002.26, 4 ITLR
1009, 20 March 2002; Supreme Court of Japan, Glaxo Kabushiki Kaisha v Director of Kojimachi
Tax Office, 2008 (Gyo-Hi) 91, 29 October 2009.
60 For details see Section 2.3.5.5.
corresponding adjustment even though it is limiting the taxing right of the

resident state.
2.3.4.2 Taxes covered
According to Art 2 para 1 OECD MC, the convention applies both to taxes
on income and on capital. However, in practice, many treaties apply only
to taxes on income. The reason for this is that not many states still have
taxes on capital, such as wealth taxes for individuals or equity capital taxes
for corporations. Obviously, in case a state does not have wealth or equity
capital taxes, there is no need to contractually mitigate the risk of double
taxation as double taxation per se cannot occur.
As it is not always easy to determine if a tax is a tax on income or a tax
on capital, the OECD MC contains further explanations of which type of a
tax falls under the OECD MC. On the one hand, Art 2 para 2 OECD MC
contains an explanatory definition of which taxes are considered taxes on
income or capital, and Art 2 para 3 OECD MC requires states to indicate
the actual taxes to which the treaty shall apply. As mentioned earlier, the
language of the signed tax treaties is in practice very similar to the wording
of both the OECD MC and the UN MC. However, Art 2 para 3 OECD MC
contains a placeholder for the taxes to which the treaty shall apply, and here,
major differences can be found. For instance, in the treaty between Angola
and Portugal, the following wording is used:
The existing taxes to which the Convention shall apply are in particular:
• in Portugal:
• the personal income tax (Imposto sobre o Rendimento das Pessoas
Singulares—IRS);
• the corporate income tax (Imposto sobre o Rendimento das Pessoas
Colectivas—IRC); and
• the surtaxes on corporate income tax (derramas);
(hereinafter referred to as ‘Portuguese tax’); and
• in Angola:
2. the employment income tax (Imposto sobre os Rendimentos do
Trabalho);
3. the industrial income tax (Imposto Industrial);
4. the urban property tax on rents (Imposto Predial Urbano sobre

rendas); and
5. the investment income tax (Imposto sobre a Aplicação de
Capitais);
(hereinafter referred to as the ‘Angolan tax’).61
In most cases, it is clear that a tax either falls under the OECD MC or
does not. For instance, VAT is considered a tax on revenue and not on in-
come, and is therefore not within the scope of the OECD MC. However, for
instance, both income and corporate income taxes are taxes that are obvi-
ously within the scope of double tax treaties. The same is true for special
income taxes such as real estate capital gains taxes, but also for withholding
taxes on dividends on interests or special income taxes on wages.
Not only recently, legislators have introduced taxes that are harder to de-
termine to be within the scope of a double tax treaty. For instance, digital
service taxes (ie taxes on the revenue of certain digital services62) have been
introduced in several states.63 It is far from clear if these taxes fall under
Art 2 OECD MC. On the one hand, it can be argued that these are special
income taxes applicable to enterprises of the digital economy and are there-
fore within the scope of double tax treaties. On the other hand, as the tax
base is the revenue and not the profit of an enterprise, it can be argued that
these taxes are not within the scope of double tax treaties as they are not
levied on income.64
2.3.5 Allocation rules

2.3.5.1 Overview
The allocation rules according to Arts 6–22 OECD MC allocate the taxing
rights concerning specific items of income or capital to the resident and/or
the source state, whereby Arts 6–21 OECD MC concern the allocation of
income and Art 22 OECD MC concerns the allocation of capital. If a double
61 Art 2 para 3 Angola-Portugal Double Tax Treaty (2018).

62 For details see Chapter 4, Section 2.2.4.5.
63 See eg European Commission, ‘Proposal for a Council Directive on the common system
of a digital services tax on revenues resulting from the provision of certain digital services’
COM(2018) 148 final.
64 See for a more detailed analysis Matthias Valta, ‘Verfassungs-und
Abkommensrechtsfragen des Richtlinienentwurfs für eine Steuer auf digitale Dienstleistungen’
[2018] Internationales Steuerrecht 765; Daniela Hohenwarter and others, ‘Qualification of the
Digital Services Tax under Tax Treaties’ (2019) 47 Intertax 140.
tax treaty deals only with income, it will not contain a provision similar to
Art 22 OECD MC.
Sometimes the term distributive rule is used instead of allocation rule to
indicate that the taxing rights are distributed between the two contracting
states.65
Allocation rules generally reduce the tax rate applicable in the source
state or even oblige the source state not to tax certain kinds of income. In
very general terms, the OECD MC follows the idea that active income (eg
employment or business income) should be taxed in the source country
and passive income (eg dividends, interests, and royalties) should be taxed
in the resident country. In the following, we will discuss the various alloca-
tion rules and will present the extent to which the actual rules follow such
an underlying rationale. At several instances, we will also discuss the scope
of such allocation rules, and in particular, we will review how the different
items of income are understood in the OECD MC.
2.3.5.2 Immovable property (Art 6 OECD MC)

(a) Allocation of income Art 6 para 1 OECD MC grants the taxing rights
both to the situs state (ie the state where the property is located) and to the
resident state. This means that double taxation must be mitigated by ap-
plying the method articles.
Example
Anna, a resident of state X, owns an apartment in state Y. Anna rents out
such apartment to a third party, and she receives annual rental payments
of EUR10,000. Such rental payments may be taxed both in states X and Y
according to Art 6 para 1 OECD MC. However, state X mitigates double
taxation by applying the method article (ie following either the exemption
or credit method).
(b) Definitions of income from immovable property The distinction be-

tween immovable and movable property generally stems from civil law
countries, and common law countries may not know the identical distinc-
tion between the two. In some common law countries, for instance, terms
65 Other terms would also be possible, eg classification and assignment rules (see on ter-
minology already Klaus Vogel, Klaus Vogel on Double Taxation Conventions (3rd edn, Wolters
Kluwer 1997) Introduction para 45d).
such as freehold or leasehold interest in land are more common and refer to
owning or renting immovable property.66
Art 6 para 2 of the OECD MC contains an explicit reference to the do-
mestic law for defining what is considered immovable property for treaty
purposes. Therefore, the application of Art 6 OECD MC makes it clear that
what constitutes immovable property should be based on what is under-
stood as immovable property in the domestic law. However, Art 6 para 2
also provides for a core definition of what should in any case be considered
immovable property:
The term shall in any case include property accessory to immovable

property, livestock and equipment used in agriculture and forestry,
rights to which the provisions of general law respecting landed prop-
erty apply, usufruct of immovable property and rights to variable or
fixed payments as consideration for the working of, or the right to work,
mineral deposits, sources and other natural resources; ships and aircraft
shall not be regarded as immovable property.
The aforementioned elements are always regarded as immovable prop-

erty, and at least according to the OECD, the list also reflects the domestic
understanding of immovable property in most OECD member countries.67
Besides the more traditional items of income from immovable prop-
erty, such as income from renting out immovable property, the article also
covers other income considered entrepreneurial but related to income from
land in very general terms. Depending on the domestic law, this can, for in-
stance, include the following:
- income from farming;

- income from mines; and
- income from springs.
Finally, Art 6 para 3 OECD MC clarifies that it shall apply to the direct use,
letting, or use in any other form of immovable property.
For conflict of laws, Art 6 para 4 provides that Art 6 OECD MC is also
applicable to an enterprise’s income from immovable property. This means
66 For England see Jonathan Schwarz, Schwarz on Tax Treaties (5th edn, Wolters Kluwer
2018) 262.
that the source state has a taxing right even though there is no PE in the
source state according to Art 7 OECD MC.
Example
Real Estate Inc is a company resident of state X. It owns a property with an
office space in state Y. The offices are rented to an advisory firm in state Y.
The rental payment may be taxed in state Y even though Real Estate Inc
has no personnel in such state.68 However, the rental income may also be
taxed in state X. The latter shall mitigate double taxation by applying the
method article (ie the exemption or credit method).
2.3.5.3 Business profits (Art 7 OECD MC)

(a) Overview Art 7 OECD MC is a key provision, if not the key provision,
in the OECD MC. It limits the taxing right of the source country with re-
spect to business income to cases in which the foreign enterprise meets the
PE threshold in the source state.
This means that it sets a threshold for an enterprise resident of one con-
tracting state to become subject to (corporate) income taxation in the other
contracting state, and such threshold is the PE.
Therefore, it is crucial to first understand what a PE means. The PE re-
quirement must also be understood as the counterpart of the residence cri-
terion as it justifies source taxation and not full residence taxation.
(b) Permanent establishment The definition of the term permanent estab-

lishment is found in Art 5 OECD MC. It contains a general definition in Art
5 para 1 OECD MC, according to which a PE requires a fixed place of busi-
ness. Moreover, the business must wholly or partly be carried out through
such PE.
Example
A bank resident of state Y wants to expand its services geographically and
thus opens a representation office in state X. The only function of such
representation office is to organize events with potential clients. The en-
terprise has a fixed place of business, and parts of the business are carried
68 Personnel would be required for the creation of a PE and therefore for a taxing right of the
source state also according to Art 7 OECD MC (2017). However, as Art 6 OECD MC (2017)
prevails, there is no need to review whether there is a PE in the other state.
on through such fixed place of business. Therefore, the requirements of

Art 5 para 1 OECD MC are met. However, as we will see, one of the ex-
ceptions in Art 5 para 4 OECD MC may apply, and as such, it will not be
considered a PE for treaty purposes.69
One can argue that a subsidiary (ie a fully owned company) is also a PE as
the parent company has a fixed place of business at the seat of the subsid-
iary. However, Art 5 para 7 OECD MC explicitly mentions that the fact that
a company controls another company in another state does not mean that
it has a PE in that other state. Of course, the subsidiary is subject to taxation
in its resident state, but the subsidiary is not considered a PE of the parent
company.
Besides the general rule in Art 5 para 1 OECD MC, Art 5 para 2 OECD
MC also contains an enumerative albeit non-exhaustive list of what should
be understood as PE:
a. a place of management;
b. a branch;
c. an office;
d. a factory;
e. a workshop; and
f. a mine, an oil or gas well, a quarry, or any other place of extraction of
natural resources.
Therefore, the requirements in Art 5 para 1 OECD MC must be met in any

case, and it is not sufficient to create a PE if an operation would fall under
one of the terms in Art 5 para 2 OECD MC but would not meet the require-
ments in Art 5 para 1 OECD MC.
With respect to construction or installation projects, the OECD MC
holds that these projects constitute a PE if they last more than 12 months.70
This means that even though the construction operations have to relocate
continuously as the construction continues (eg if a new road or a tunnel
is to be built), it still forms a PE if the whole project lasts for more than
12 months.71
69 See in particular Art 5 para 4 lit d OECD MC (2017).

70 The UN MC (2017) foresees a minimum of six months.
71 On this last point see Art 5 para 57 OECD Commentaries on the Articles of the Model
Tax Convention (2017).
Art 5 para 4 OECD MC lists what does not constitute a PE. One of the
main rationales behind Art 5 para 4 OECD MC is to avoid a very low PE
threshold as this will lead to a highly fragmented tax base with minor PEs
triggering significant compliance costs but at the same time leading to few
fiscal revenues in the source states. This is why Art 5 para 4 OECD MC
explicitly states that certain activities do not qualify as a PE. Art 5 para 4
OECD MC states that the term permanent establishment does not include:
a. the use of facilities solely for the purpose of storage, display or de-
livery of goods or merchandise belonging to the enterprise;
b. the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
c. the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d. the maintenance of a fixed place of business solely for the purpose
of purchasing goods or merchandise or of collecting information, for
the enterprise;
e. the maintenance of a fixed place of business solely for the purpose of
carrying on, for the enterprise, any other activity;
f. the maintenance of a fixed place of business solely for any combin-
ation of activities mentioned in subparagraphs a) to e),
provided that such activity or, in the case of subparagraph f), the
overall activity of the fixed place of business, is of a preparatory or
auxiliary character.
The last clause of Art 5 para 4 OECD MC provides that the exceptions to
what constitutes PE apply only if the activity is of a preparatory or auxil-
iary character.72 Therefore, for a business facility not to qualify as a PE, its
activities (i) have to be mentioned in the list in Art 5 para 4 lit a–f and (ii)
have to be of a preparatory or auxiliary nature. It is challenging to figure
out what auxiliary and preparatory actually mean, and the answer to such
question depends on each individual case. According to the Commentary
on the OECD MC and as defined in a negative way, the activities of the fixed
place of business are not preparatory or auxiliary if they form ‘an essential
and significant part of the activity of the enterprise as a whole’.73
72 Until the OECD MC (2017), the exemption of activities of preparatory or auxiliary activ-
ities was not applied to the examples mentioned in a–e.
One of the reasons that the OECD MC (2017) requires that all the activ-
ities of a business facility are of a preparatory or auxiliary nature for such
facility to not be considered a PE is that before 2017 some enterprises could
avoid having a PE in a state if they fell under one of the exceptions in lit a–e,
even though their operations in such state were of significant importance or
essential for their business. Therefore, the application of the exceptions in
Art 5 para 4 OECD MC were posing the risk of profit shifting by relying on
such exceptions to avoid a tax liability in a high-tax country.
Besides the requirement of auxiliary or preparatory character, Art 5 para
4.1 OECD MC foresees that it is not possible to rely on Art 5 para 4 OECD
by splitting up contracts or operation among several of its members so
that each operation would be considered auxiliary or preparatory even if
from a consolidated perspective the operations are really not auxiliary or
preparatory.
Finally, Art 5 paras 5 and 6 OECD MC contain provisions concerning
dependent and independent agents. Various decisions of courts around
the globe have dealt with these two provisions or at least earlier versions
of them.74 In particular, the origin of the concepts of dependent and in-
dependent agents both in civil law and in common law has triggered dif-
ficulties in their application.75 Moreover, during the BEPS project, there
was an agreement to broaden the application of the dependent agent PE
to tackle the tax-planning strategies that eroded the tax base in the state
where the sales took place through distribution structures that did not
yet qualify as a dependent agent PE. This includes so-called commis-
sionaire structures, which sometimes aimed at avoiding the application
of Art 5 para 5 OECD MC.76 In the following, we will outline the main
elements of the new provisions as they were included in the OECD MC
(2017).
First of all, it is important to again highlight the fact that Art 5 para 1
OECD MC requires that an enterprise operate through a fixed place of busi-
ness in the other state for a PE to exist. Therefore, if an enterprise in state X
engages an independent agent in state Y to sell its products, such enterprise
74 See eg Council of State of France, Société Zimmer Limited, No 304715, 308525, 31 March
2010; Supreme Court of Norway, Dell Products v Staten v/Skatt øst, HR-2011-02245-A, No
2011/755, 2 December 2011; Supreme Court of Spain, Roche case, JUR\2012\41054, 12
January 2012.
75 See the profound analysis of John F Avery Jones and Jürgen Lüdicke, ‘The Origins of
Article 5(5) and 5(6) of the OECD Model’ (2014) 6 World Tax Journal 203.
76 For details see OECD/G20, Preventing the Artificial Avoidance of Permanent Establishment
Status, Action 7—2015 Final Report (OECD Publishing 2015) para 6 et seq.
has in general no PE in state Y as it does not have a fixed place of business

there. However, if the requirements of the dependent agent PE threshold in
Art 5 para 5 OECD MC are met, the enterprise shall be deemed to have a
PE in the other state notwithstanding the fact that the requirements of Art
5 para 1 are not met. This means that both the agent and the enterprise en-
gaging the agent will become subject to (corporate) income taxation.
According to the new wording of the OECD MC, a dependent agent PE
exists if:
1. a person (i.e. the agent) acts on behalf of the foreign enterprise;

2. [the agent] habitually concludes contracts or habitually plays the key
role for the conclusion of standardized contracts; and
3. the contracts are in the name of the enterprise or for the transfer of
ownership of, or for the granting of the right to use, property owned
by that enterprise or that the enterprise has the right to use, or for the
provision of services by that enterprise.
The third requirement ensures that the provision will apply to the created
obligations that should be met by the foreign enterprise even if it did not
sign the contract.77
If the above requirements are met, the enterprise is deemed to have
formed a PE in the source state. However, if the agent acts as an independent
agent, it is deemed that there is no PE unless the independent agent ‘acts
exclusively or almost exclusively on behalf of one or more enterprises to
which it is closely related’.78
Example
The representatives of a company in the pharmaceutical industry pro-
mote certain drugs by contacting doctors in several states. Such doctors
will later prescribe these drugs. As the marketing activity does not dir-
ectly lead to the conclusion of a contract between the pharmaceutical
company and the patients, no dependent PE exists as requirement 2 above
is not met.79
77 See Art 5 para 91 OECD Commentaries on the Articles of the Model Tax Convention
(2017).
78 Art 5 para 6 second sentence OECD MC (2017).
79 The example is taken from Art 5 para 89 OECD Commentaries on the Articles of the
Model Tax Convention (2017).
(c) Allocation of income according Art 7 OECD MC Once it is estab-

lished that there is a PE, the question of how much income shall be attrib-
uted to such PE arises. In this regard, Art 7 para 2 OECD MC contains the
so-called authorized OECD approach (AOA). Accordingly, the profits to be
taxed in the state of the PE shall be calculated as if the PE is a separate and
independent entity (ie separated from the head office). This is particularly
true for dealings with other parts of the enterprise, such as between the PE
and the head office.
Therefore, for the determination of the income to be allocated to the
PE, a legal fiction is necessary, where the PE is considered a separate
entity independent of the rest of the enterprise. Therefore, an analysis
is necessary to determine the functions, assets, and risks of the PE for
determining the income of the PE as if it were a separate entity with sep-
arate functions, assets, and risks. As a consequence, it may be the case
that the PE is profitable whereas the enterprise as a whole is in a loss pos-
ition, or vice versa.
To be more precise, the OECD foresees a two-step procedure:80
1. a functional and factual analysis is rendered to determine the func-

tions, risks, and assets of the PE; and
2. it is necessary to determine the appropriate transfer price on the deal-
ings between the PE and the associated enterprises. Transfer prices
are calculated in line with the OECD TP Guidelines.81
Until 2010, the OECD MC contained a different approach as it provided for

the option82 of attributing the profits to a PE by apportioning the profits of
the enterprise, such as by relying on a certain factor (eg sales or personnel).
However, such provision was abolished as it was argued that such appor-
tionment would not be in accordance with the arm’s length principle.83
Nevertheless, in several older treaties, such provisions based on the older
versions of Art 7 OECD MC can still be found.
It is obvious that the AOA is not always applied in an identical manner
in the contracting states. For instance, which assets can actually be allo-
cated to the PE and which assets are to be allocated to the head office may
80 See Art 7 para 21 et seq OECD Commentaries on the Articles of the Model Tax
Convention (2017).
81 For details Section 2.3.5.5.
82 See Art 7 para 4 OECD MC (2008).
be a subject of dispute. Therefore, Art 7 para 3 OECD MC foresees a mech-

anism for mitigating double taxation in such situation. How Art 7 para 3
OECD MC applies is very similar to how Art 9 para 2 OECD MC works.
That is, a corresponding adjustment is required only if the other state is of
the opinion that the adjusted profits reflect the appropriate income to be
allocated to the PE. How such corresponding adjustment has to be imple-
mented is not specified in the article.84
Finally, Art 7 para 4 OECD MC states that the other articles of the con-
vention shall prevail over Art 7 OECD MC. Therefore, if another article of
the OECD MC deals with an item of income, the allocation according to
such provision shall apply rather than the allocation provided for in Art 7
para 2 OECD MC.
Example
Flower Ltd is a company resident of state X and owns 5% of the share
capital of Sunny Ltd, a company resident of state Y. The dividends
paid from Sunny Ltd to Flower Ltd are subject to a 25% withholding
tax in state Y. According to Art 7 OECD MC, state X is not allowed
to tax such dividends as Flower Ltd does not have a PE in such state.
However, as Art 10 OECD MC (dividend article) prevails, state Y has
a taxing right in the amount of 15% according to Art 10 para 2 lit b
OECD MC.85
2.3.5.4 International shipping and air transport (Art 8 OECD MC)

(a) Allocation of income The OECD MC contains a particular rule for en-
terprises operating ships or aircrafts in international traffic. These enter-
prises shall be taxable only in the state of the enterprise. An enterprise is
considered an enterprise of a contracting state if its activities are carried out
by a resident of a contracting state.86
In older versions of the OECD MC, and therefore still in several applic-
able treaties, it is provided that the profits shall be taxable only in the state
where the place of effective management of the enterprise is located. This
was, however, changed with the OECD MC (2017).
85 For details Section 2.3.5.7(a).
86 Art 3 para 1 lit d OECD MC (2017).
Example
Alpha Airline Ltd is based in state X, but it is an international airline
serving more than 80 destinations in 12 countries. As such, the entire
corporate income of Alpha Airline is taxable only in state X. It is not im-
portant if Alpha Airline Ltd has ground staff in other jurisdictions.
(b) Income covered Art 8 OECD MC only deals with income from inter-
national shipping and air transport. Therefore, boats engaged in inland
waterways are not covered, and they would fall under the general provision
of Art 7 OECD MC. However, the Commentary foresees that states may
also apply the allocation in Art 8 OECD MC to income from boats engaged
in inland transport.87
As the income from international shipping and air transport may be
treated differently from other business income, it is crucial to demon-
strate what part of the income of an enterprise is related to international
shipping and air transport and what part is considered ordinary business
income.
Example
Alpha Airline Ltd does not only sell tickets for its flights but also earns
income from selling advertisements in its inboard journal. Technically
speaking, this is not income from the operation of air transport. However,
this is ancillary services to the ticket sale and, as such, the profits from
these services are also covered by Art 8 OECD MC.88
2.3.5.5 Associated enterprises—transfer pricing (Art 9 OECD MC)

(a) Overview Art 9 OECD MC plays a key role in the OECD MC. However,
it is not an allocation rule as the other ones in Arts 6−22 OECD MC in the
sense that the taxing right is either allocated to the source or the residence
state or two both states. The article, however, holds that transactions be-
tween related parties must be at arm’s length, that is the price for supplies
87 Art 8 para 15 et seq OECD Commentaries on the Articles of the Model Tax Convention
(2017).
88 See the example in Art 8 para 8.1 OECD Commentaries on the Articles of the Model Tax
Convention (2017).
between related parties must be the same as if it was a supply between third
parties.
To be more precise, Art 9 OECD MC allows contracting states to include
profits while assessing taxpayers if transactions were not at arm’s length.
Therefore, Art 9 OECD MC is not the actual base for the amendments of
the transfer price but it only provides the state the right to amend the ap-
plicable transfer prices. Therefore, a domestic provision is necessary for any
adjustments.
Interestingly, the OECD MC does not say anything about the applic-
able TP methods. These methods are, however, outlined in the OECD TP
Guidelines, a soft law instrument, regularly updated by the OECD. In the
following, we will briefly discuss these methods.
2.3.5.6 Transfer pricing
(a) Methods The TP Guidelines specify five TP pricing methods in order
to assess what a third-party price should be. The five methods are split into
three traditional transaction methods:
- Comparable uncontrolled price method89

- Resale price method90
- Cost plus method91
and two transactional profit methods:
- Transactional net margin method (TNMM)92

- Transactional profits split method93
(b) Selection of transfer pricing methods The OECD TP Guidelines pro-

vide some guidance on the selection of the TP methods, however, there are
89 See para 2.14 et seq of OECD, TP Guidelines for Multinational Enterprises and Tax
Administrations (OECD Publishing 2017).
no clear guidelines with regards to the circumstances under which a par-

ticular method is applicable.
First, the selection process should consider the strengths and weaknesses
of each method.94 Second, it needs to be reviewed (in particular through
a functional analysis) whether the method is appropriate when taking
into account the nature of the controlled transaction.95 Third, the chosen
method depends on whether enough reliable information is available on
the comparables.96 Finally, the degree of comparability between controlled
and uncontrolled transactions needs to be considered. If both a traditional
transaction method and transactional profit method are equally reliable,
the traditional transaction method is preferable.97 Nevertheless, trans-
actional profit methods may be more appropriate under certain circum-
stances, as for example when data availability on uncontrolled transactions
is limited or in case of highly integrated services.98
(c) Comparability analysis The goal of a comparability analysis is to find

the most reliable comparable with a view to calculating the third-party
price. Uncontrolled transactions differ in their degree of comparability.99
The OECD provides details on a typical process for performing a compar-
ability analysis. This includes, inter alia, a detailed understanding of the
controlled transaction and a review of both existing internal and external
comparables.
An internal comparable is a comparable transaction between one party
of the controlled transaction and an independent party while an external
comparable refers to a comparable transaction between two independent
enterprises.100 External comparables are often derived from commer-
cial databases where data on accounts filed by various enterprises is being
94 See para 2.2 of OECD, TP Guidelines for Multinational Enterprises and Tax
97 See para 2.3. of OECD, TP Guidelines for Multinational Enterprises and Tax
100 For details see para 3.24 of OECD, TP Guidelines for Multinational Enterprises and Tax
collected. Such benchmarking analysis usually provides for a certain range

of figures which are all equally reliable. Such range is determined through
what is commonly known as a benchmarking study.
Once the TP method and a range of comparables have been chosen, ad-
justments might be necessary in order to increase the reliability of the TP
analysis. Material differences between the comparable transaction and the
transaction to be priced can thereby be balanced out.101
(d) Application of the CUP method The CUP method assumes that the
price charged between related parties is the same in a comparable uncon-
trolled transaction. A situation is deemed to be comparable if no differ-
ences between the controlled and uncontrolled situation materially affect
the price. The CUP method is a very reliable way of determining the third-
party price given that reference is made to an independent party selling the
same product as between related parties. There are basically two options for
applying the CUP method:
In option one, the CUP price is accurate and there are no material dif-
ferences between the controlled and uncontrolled transaction. In op-
tion two, reasonably accurate adjustments can be made to eliminate
the price in the open market.102 Both internal and external comparables
can be used. However, it is essential that the comparable is indeed
comparable.
For instance, with respect to commodity transactions the following elem-

ents need to be considered, even though there is in general a market price
for commodities: physical features, quality of the commodity and contrac-
tual terms such as volume, period of the arrangement, timing, terms of de-
livery, transportation insurance, or foreign currency terms.103
(e) Application of the resale price method In case of the resale price
method, the baseline for determining the price of a good sold between two
related parties is the price sold to an independent party. From such price,
102 Para 2.15 OECD, TP Guidelines for Multinational Enterprises and Tax Administrations
(OECD Publishing 2017).
an appropriate gross margin is deducted in order to determine the price of

the good which was purchased from a related party. Therefore, the com-
parison made is between the resale price margin achieved by the reseller in
the controlled transaction and the gross margin earned in an uncontrolled
transaction.
Again, reference can be made both to an internal or external compar-
able. In comparison with the CUP method, differences between the prod-
ucts sold in the controlled and uncontrolled situation are not as harmful.
At least minor differences do not hinder the application of the resale price
method—what matters more is functional comparability (ie whether the
functions assumed by the suppliers in the controlled and uncontrolled situ-
ation are comparable).104
For example, A is a distributor in South East Asia and purchases prod-
ucts from a related manufacturing company in Australia. A then sells these
products for 100 to local costumers. If the gross margin in a comparable
transaction is 5%, the appropriate transfer price to be paid to the manufac-
turer in Australia would be 95.
(f) Application of the cost-plus method For the cost-plus method, the
core element is the costs incurred by the taxpayer in a controlled transac-
tion. Reference is then made to the mark-up of a supplier in a comparable
uncontrolled transaction. Such mark-up is added to the costs incurred.
The cost-plus method is often used when intra-group services are pro-
vided, semi-finished products are sold, or if a related party provides limited
manufacturing functions (eg contract manufacturing or toll manufac-
turing).105 In general, the supplier bears only limited risks and, therefore,
the costs are assumed to be a good indicator for the value created by the
parties.
Of course, the applied mark-up depends on the functions performed.
For instance, in case of low value-adding services the OECD assumes a
mark-up of 5% to be appropriate.106 However, states differ in terms of their
practices in this respect. The same holds true for the question of which costs
should be considered for the calculation of the cost-plus price. Generally
104 Georg Kofler, ‘Associated Enterprises’ in Ekkehart Reimer and Alexander Rust (eds),
Klaus Vogel on Double Taxation Conventions (4th edn, Wolters Kluwer 2015) para 83.
105 For details see para 2.45 et seq of OECD, TP Guidelines for Multinational Enterprises and
Tax Administrations (OECD Publishing 2017).
106 Para 7.61 of OECD, TP Guidelines for Multinational Enterprises and Tax Administrations
speaking, only costs relating to the supplies provided need to be considered

according to the OECD TP Guidelines. Finally, it must be ensured that a
comparable mark-up is applied to a comparable cost basis.107
For example, if company A produces product X on behalf of company
B, the appropriate transfer price would be the costs of A triggered by the
production of product X plus a 5% margin (ie in case of a toll manufac-
turing agreement). This assumes that 5% reflects the third-party mark-up
in an uncontrolled comparable transaction. The mark-up might of course
be higher if the manufacturer bears risks that go beyond a mere toll manu-
facturing agreement.
(g) Application of the transactional net margin method The TNMM

compares the net margin realized by the taxpayer in a controlled transac-
tion to a net margin realized in an uncontrolled transaction. It therefore op-
erates very similarly to the cost-plus and resale minus methods—however,
reference point are net margins instead of gross margins or mark-ups
on costs.
The TNMM method is the most widely employed method in practice.
It relies on so-called profit level indicators of other enterprises (internal or
external comparables). The profit level indicators are, for instance: return
on revenue, return on assets, return on capital, or return on costs. The TP
Guidelines also mention Berry ratios (ie the ratio of gross profit to oper-
ating expenses) as potential profit indicators.108 The TNMM method is,
for instance, used for production, distribution, or R&D activities to the ex-
tent that comparable data for the application of the cost-plus or resale price
methods is not available.
For example, Company X is a distributor of products manufactured by
the Y group. X is a company resident in France and purchases its products
from a related company in Spain. There are no internal comparables avail-
able. However, a benchmarking study shows that the net margins achieved
in comparable uncontrolled transactions range from 1.9% to 4.5%. In such
case, the TNMM method could be applied.
(h) Application of the transactional profit split method The transactional

profit split method seeks to account for the individual contributions made
by the contracting parties, particularly in relation to intellectual property
(IP). The first step of the analysis involves identifying the profit to be split
between the associated enterprises from the controlled transaction. The
second step is splitting the profit between the associated parties on an eco-
nomically valid basis and in the light of a functional analysis. In order to
split the profit, the economically significant functions, assets, and risk con-
tributed by the parties need to be considered.
The transactional profit split method is most adequate where unique and
valuable contributions are made by both parties to a transaction, in case
of highly integrated business operations or in transactions involving the
shared assumption of economically significant risks by all parties.
For example, company A and company B are members of Z group that
sells IT appliances. A performs certain R&D functions and decides on the
lines of research as well as relevant timelines. A also decides on the levels of
production, performs quality controls, and uses its valuable know-how and
expertise. B is responsible for designing the marketing strategy, deciding
on the level of marketing expenditure in each country where the products
will be released, and validating the impact of the marketing campaigns
on a monthly basis, which results in a valuable trademark and associated
goodwill. B also performs certain R&D activities and assumes the risks as-
sociated with the development of a sophisticated proprietary algorithm to
collect and analyse client feedback with regards to product performance
and potential room for improvement. Both contributions from A and B are
unique and valuable to the success of the IT appliances sold. Under these
circumstances, the profit split method is likely to be the most appropriate
method for determining the compensation for the products sold by A to B.
(i) Further specific topics

Intangibles
Chapter VI of the TP Guidelines contains specific guidance regarding the
treatment of intangibles in TP. Intangibles are understood in a broad sense and
include patents, know-how and trade secrets, trademarks, trade names and
brands, rights under contracts and government licences, licences and similar
limited rights in intangibles as well as goodwill and ongoing concern value.
The preliminary question in terms of determining an appropriate
transfer price for the use of intangibles is which entity is entitled to income
from the exploitation of an intangible. In order to assess this question, the
TP Guidelines state that the owner of the IP determined for TP purposes

might be different from the formal/legal IP owner. In order to assess which
party is the owner for TP purposes (ie the person who should be remu-
nerated in case the IP is used by other parties), it is key that entities are
compensated for functions, assets, and risks in proportion to their relative
contributions to the development, enhancement, maintenance, protection,
and exploitation of intangibles.109 These so-called DEMPE functions are,
therefore, key to determine the owner of IP for TP purposes and also in
order to evaluate the price to be paid for the use of a certain intangible in
line with functions assumed and risks borne.
A TP analysis is also necessary for the transfer of IP within a group. In
this regard, the TP guidelines contain specific recommendations on how to
price hard-to-value intangibles (HTVI). HTVI are defined as intangibles
that are very difficult to value as there are no benchmarks available and in-
tangibles for which the projection of future cash flows or income expected
to be derived is highly uncertain.110
Financial transactions
Financial transactions trigger various issues from a TP perspective. Inter
alia, the following:
• How to remunerate treasury functions in an multinational enter-

prise (MNE)
• The pricing of guarantees
• How to remunerate captive insurance if used within an MNE
Treasury functions are generally considered as adding only low value to the
overall structure, the function is hence remunerated on a cost-plus basis
(with a margin of around 5%). More complex treasury structures can justify
a deviation from the cost-plus approach.
Also the granting of guarantees to affiliated companies is subject to the
arm’s length principle. In general, guarantee fees need to be charged if
they would have been agreed also between unrelated third parties and
the reason for granting such guarantee is not based on the corporate
110 For a precise definition of what HTVI mean according to the OECD, see para 6.189
of OECD, TP Guidelines for Multinational Enterprises and Tax Administrations (OECD
Publishing 2017).
relationship. Let’s assume that a subsidiary is offered a loan at a rate of

interest x from a third-party bank. If the parent acts as guarantor for this
loan provided by a third-party bank to the parent’s subsidiary, the guar-
antee fee is determined by the difference between the interest rate the sub-
sidiary would have paid without the guarantor and the interest rate it does
pay (ie x-y).
Some MNE have established their own intra-group insurance company
(so-called captive insurance). Depending on the size of the group, captive
insurance is useful to diversify a number of business risks within the group
and across national borders, such as business interruption or product li-
ability risks. In connection with captives it is particularly important not
to create any artificial transactions through a captive.111 On 11 February
2020, the OECD published the final version of its TP Guidance on Financial
Transactions.112 Section E provides guidance on captive insurance com-
panies that offer insurance services to affiliates. It is important to note that
the fundamentals of insurance must also be fulfilled internally within the
group and remuneration should be based on whether the transaction ac-
tually qualifies as insurance. In particular, the question arises as to whether
the insured risk exists at all and whether it has been allocated to the captive
company. For this purpose, the OECD lists a number of (noncumulative)
indicators:
- There is diversification and pooling of risks at the level of the captive

company;
- The diversification improves the capital position of the group and thus
has a real economic impact on the group of companies as a whole;
- The insured risk would be insurable also outside the group;
- There is the potential for the captive company to actually suffer losses.
These criteria shall ensure that the captive company provides a tangible
benefit to the group, resp. group companies. This is to assure that the cap-
tive company does not receive a remuneration without also generating an
economic benefit.
111 See Oliver Busch, ‘Versicherungen’ in Alexander Vögele, Thomas Borstell, and Lorenz
Bernhardt (eds), Verrechnungspreise (5th edn, C.H. Beck 2020) para R 306.
112 See OECD, TP Guidance on Financial Transactions: Inclusive Framework on
BEPS: Actions 4, 8–10 (OECD Publishing 2020).
Business restructuring
Since 2010 the TP Guidelines contain a specific chapter on business re-
structurings.113 The goal is to provide guidance on the TP consequences
of cross-border reorganizations. An example would be a change in the dis-
tribution structure, such as a conversion of a full-fledged distributor into a
commissionaire. Business restructurings thus often trigger a reallocation
of profit potential within a group.114 The goal of a TP analysis in case of a
business restructuring is to assess whether the conditions of a business re-
structuring differ from the condition of the same transaction among inde-
pendent parties.
(j) Transfer pricing documentation TP documentation is key both for

the taxpayer in order to justify the applied transfer prices but also for tax
authorities to better understand how the business of the taxpayer is struc-
tured and why the taxpayer has chosen a certain TP policy. This allows the
authorities to perform efficient TP analysis, for example in an audit pro-
cedure.115 In its TP Guidelines, the OECD outlines a three-tiered approach
to TP documentation which is also followed by many states:116
a. Master file: the master file contains an overview of the overall TP

policy of an MNE. The OECD groups the information in a master file
into the following five categories: (a) the MNE group’s organizational
structure; (b) a description of the MNE’s business or businesses;
(c) the MNE’s intangibles; (d) the MNE’s intercompany financial ac-
tivities; and (e) the MNE’s financial and tax positions.117
b. Local file: the local file contains information on specific intercompany
transactions and focuses on transactions between a local company
and associated enterprises. In particular, it contains information such
as financial information concerning the transactions, a comparability
113 See Chapter IX of OECD, TP Guidelines for Multinational Enterprises and Tax
analysis as well as selection and application of the most appropriate

TP method.
Country-by-country reporting: As part of the minimum standard
c.
of the BEPS project,118 states are obliged to introduce rules that
force multinational groups with revenues above EUR 750m to re-
port certain key numbers such as revenue, income, profit before
taxes, income tax paid, number of employees, etc. Such informa-
tion will be shared with other countries. The legal base for the
latter exchange is the MCAA on Exchange of Country-by-C ountry
Reports.
2.3.5.7 Dividends (Art 10 OECD MC)

(a) Allocation of income The dividend article contains a non-exclusive al-
location of taxing rights. This means that both states have the right to tax
dividends, and double taxation is avoided through the application of the
method article.
An important distinction is made in signed double tax treaties, but also
in the OECD MC between (i) qualifying participations held by a company
and (ii) other participations (ie non-qualifying participations or qualifying
participations held by individuals). Double tax treaties generally contain
lower residual source tax rates for (i), and higher for (ii). In the case of
the OECD MC, the residual withholding tax is 5% on the dividends from
the qualifying participations held by a company,119 and 15% in all other
cases.120
A qualifying participation means that at least 25% of the capital is dir-
ectly held. This aims at granting the lower residual withholding tax to intra-
group situations (ie dividend payments between the subsidiaries and the
parent company). In treaty practice, both higher and lower thresholds can
be found. It is important to note that the allocation applies notwithstanding
the fact that the resident state may often exempt dividends in intra-group
situations through the application of a participation relief or a similar
mechanism.121
118 On the BEPS project see Chapter 4, Section 2.1.3.

119 Art 10 para 2 (a) OECD MC (2017).
120 Art 10 para 2 (b) OECD MC (2017).
121 A few states do also not levy source taxes on dividends. This is for instance true for
Liechtenstein and, with some exceptions, for the UK.
Example
Anna is a resident of state X, and Bingo Ltd is a company also resident in
state X. Both hold 30% shares in a company called Camping Ltd, a resi-
dent person in state Y. Camping Ltd pays out a dividend of EUR100,000.
With respect to the EUR30,000 paid to Bingo Ltd, the taxing right of state
Y is limited to 5%, and with respect to the EUR30,000 paid to Anna, the
taxing right of state Y is limited to 15%.
Since the OECD MC (2017), it is moreover required to benefit from the

lower residual withholding tax (ie 5%) that the participation was held for
a 365-day period. This latter should mitigate the use of dividend-stripping
schemes.
Dividend stripping means that the shares are sold shortly before the
dividend payment date122 to a person who benefits from a lower residual
withholding tax, and after the dividend payment date these shares are sold
back to the original owner. In order to avoid dividend stripping the 365-day
reservation was included in the OECD MC (2017) and for the purpose of
calculating such period, corporate reorganizations (eg merger or divisive
reorganization) are not taken into account. This means that if a company
holds shares for 100 days and is merged into another company, the 100-day
holding period before the merger is still considered for calculating the 365-
day holding period after the merger.
(b) Definition of dividends Art 10 para 3 OECD MC provides a detailed

definition of dividend. It includes share as the most common equity invest-
ment instrument, and mentions other corporate rights as well. To be more
precise, it consists of the following three categories:
a. income from shares, jouissance shares or jouissance rights, mining

shares, founders’ shares; or,
b. income from other rights, not being debt claims, participating in
profits; as well as,
c. income from other corporate rights, which is subject to the same
taxation treatment as income from shares by the laws of the state of
which the company making the distribution is a resident.
122 Actually, decisive is the dividend record date.

Therefore, in the definition, reference is made to the domestic law, but only
with respect to the last part of the definition of dividend.123 This means that
the definition has autonomous elements with respect to the first and second
parts, and as such, an income may qualify as a dividend for treaty purposes
but not under the domestic law, and vice versa.124
An important distinction between income from debt claims has to be
made as these are explicitly dealt with in Art 11 OECD MC. The distinc-
tion between income from debt claims falling under Art 11 OECD MC and
income from corporate rights falling under Art 10 OECD MC, however, is
not at all straightforward, and particularly with regard to hybrid financial
instruments (ie instruments with both equity and debt features), the dis-
tinction triggers problems in practice.125 According to the Commentary on
the OECD MC, one of the key distinctions between interests and dividends
lies in whether the investor bears entrepreneurial risks.126 Simply put, if an
investor faces entrepreneurial risks and not just the risks of a debtor, it is
likely that the income falls under the dividend article.
(c) Permanent establishment proviso A common feature of Arts 10−12

OECD MC is the so-called PE proviso. The PE proviso in Art 10 para 4
OECD MC states that the allocation of taxing rights as earlier outlined
should not apply if the beneficial owner of the dividends carries on business
in the other contracting state through a PE and the investment is effectively
connected to the PE. The idea behind the PE proviso is that the source state
should not be obliged to refrain from exercising its taxing rights in the case
of a domestic investment by a local PE.
Example
Sunny Ltd is a company resident of state X and belongs to an industrial
group producing air conditioners. It carries out business activities through
123 See on the dividend definition already Michael Lang, Hybride Finanzierungen im
internationalen Steuerrecht: Rechtsgrundlagen der Doppelbesteuerungsabkommen zur
Beurteilung von Mischformen zwischen Eigen-und Fremdkapital (Wirtschaftsverlag
Orac 1991).
124 The exact reference to domestic law is disputed (see Peter Hongler, Hybride
Finanzierungsinstrumente im nationalen und internationalen Steuerrecht der Schweiz
(Schulthess 2012) 237 et seq).
125 See, for instance, the dispute between Austria and Germany referred to the ECJ as an
arbitration court (Judgment of the ECJ of 12 September 2017, Republic of Austria v Federal
Republic of Germany, C-648/15, ECLI:EU:C:2017:664).
126 Art 10 para 25 OECD Commentaries on the Articles of the Model Tax Convention
(2017).
a PE in state Y. The PE produces parts of the engines. As such, it owns 30%

of the share capital of a manufacturer in state Y called Production Ltd.
Production Ltd distributes dividends to all its shareholders. In this case,
Art 10 para 4 OECD MC is applicable as the participation in Production
Ltd is effectively connected with the PE. Therefore, Art 10 para 1 and 2
OECD MC do not limit the taxing right of state Y.
The PE proviso as provided for in Art 10 para 4 OECD MC applies only if the
income is attributed to a PE in the other contracting state, and it does not apply
if the PE is in a third country. If the PE proviso applies, it means that the in-
come falls under Art 7 OECD MC (ie the source state has the right to tax the
income of the PE, including the dividend, as a separate entity).127
(d) Beneficial ownership A key term in Arts 10−12 OECD MC is beneficial

ownership or beneficially owned. The term was introduced into the OECD MC
in 1977. It has since then been understood differently around the world and
has probably been one of the most disputed terms in international tax law in
the past decade. The underlying issue relates to the fact that the term also has
various meanings in the domestic laws; however, it has been confirmed by sev-
eral courts around the world that it has an autonomous meaning in treaty law,
or as famously held by the UK Court of Appeal:
‘Beneficial owner’ had a tax treaty meaning autonomous of national law.

In order to be regarded as the beneficial owner of income, the company
needed to have the full privilege to directly benefit from the income.128
As mentioned above, there have been many decisions on the interpretation

of the term beneficial owner.129 In most cases, the court dealt with structures
that could also be considered abusive. In particular, conduit structures130
127 This is explicitly stated in Art 10 para 4 last sentence OECD MC (2017).
128 Court of Appeal of the United Kingdom, Indofood International Finance Limited v JP
Morgan Chase Bank NA, London Branch, STC 1195, 2 March 2006.
129 Court of Appeal of the United Kingdom, Indofood International Finance Limited v JP
Morgan Chase Bank NA, London Branch, STC 1195, 2 March 2006; Federal Court of Appeal of
Canada, Canada v Prévost Car Inc, A-252-08, 26 February 2009; Swiss Federal Supreme Court,
Swiss Federal Tax Administration v Bank X, BGE 141 II 447, 5 May 2015; Judgment of the ECJ of
26 February 2019, Danish Beneficial Ownership Cases, C-115/16, ECLI:EU:C:2019:134; C-118/
16, ECLI:EU:C:2018:146; C-119/16, ECLI:EU:C:2018:147; C-299/16 ECLI:EU:C:2018:148; C-
116/16, ECLI:EU:C:2019:135; C-117/16, ECLI:EU:C:2018:145.
130 In conduit structures income is streamed through a special purpose vehicle in a state
with a favourable treaty with the source state.
were challenged by authorities by referring to the beneficial ownership re-

quirement. It is also stated in the Commentary on the OECD MC that a
conduit company ‘cannot normally be regarded as the beneficial owner if,
through the formal owner, it has, as a practical matter, very narrow powers
which render it, in relation to the income concerned, a mere fiduciary or
administrator acting on account of the interested parties’.131
Therefore, the goal of the beneficial ownership requirement is not to
apply a substance-over-form perspective and to figure out who bene-
fits from a certain income at the end of the chain.132 The goal is to review
whether the formal owner of an income is in special circumstances not the
beneficial owner as there is a legal or factual obligation to pass the income
such as a dividend onto a third party.
Example
Anna is a resident of state X, an offshore state, and she owns 100% of the
share capital of Sunny Ltd, a resident of state Y. There is no treaty applic-
able between states X and Y. As such, Anna transfers her shares to a fidu-
ciary John, who is a resident of state Z. There is a double tax treaty in place
between states Z and Y. In the shareholders’ documentation, John appears
as the formal owner of the shares, and Sunny Ltd pays the dividends to
an account in the name of John. Nevertheless, John is not the beneficial
owner of the dividends as he has an obligation to transfer the dividends to
Anna, as obliged by the fiduciary contract.
2.3.5.8 Interests
(a) Allocation of interest Compared to dividends, interests are generally
deductible from the corporate income tax base. As with dividends, how-
ever, the interest article contains a non-exclusive allocation rule. According
to Art 11 para 1 and 2 OECD MC, interests may be taxed in both states,
although the taxing right is limited to 10% of the gross amount of interest
in the source state if the beneficial owner of the interest is a resident of the
other contracting state. There is no difference between situations in which
131 Art 10 para 12.3 OECD Commentaries on the Articles of the Model Tax Convention
(2017).
132 This is why the term has to be differentiated from the term ‘ultimate beneficial owner’
which is sometimes used in the financial industry for compliance purposes (know your cus-
tomer, etc).
the investor is an individual and in which the investor is a company holding

a qualifying participation comparable to that stated in Art 10 para 1 and
2 OECD MC. In treaty practice, the residual source tax rate can both be
higher or lower than 10%.133
For the application of Art 11 para 1 and 2 OECD MC, it is important
that interests arise in one of the contracting states. Determining whether an
interest indeed arises in one of the contracting states is not always straight-
forward particularly if a PE is involved. Art 11 para 5 OECD MC contains
a specific provision for the determination of the source of an interest.
Accordingly, interest generally arises in the state in which the payer is a resi-
dent. However, if the payer has a PE in one of the contracting states and the
interest is borne by the PE, then the interest shall be deemed to arise in the
state where the PE is.
Example
Sunny Ltd is a resident of state X and has a PE in state Y. Sunny Ltd
enters into a loan agreement with bank Z. Sunny Ltd uses the loan
mainly for the modernization of all its production facilities around the
world. This includes the production facility of its PE in state Y. In this
case, the interest payments are attributable to more than one source
as the loan is used for the modernization not only of the production
facility in state Y but also of the other production facilities elsewhere
in the world. Such a situation is not covered by the second sentence of
Art 11 para 5 OECD MC.134 Therefore, the interests do not arise in the
PE state.
(b) Definition According to Art 11 para 3 OECD MC, the term interest
means ‘income from debt-claims of every kind’. This includes any kind of
debt claim, be it governmental bonds or bonds issued by private companies.
133 See eg the example of the Council Directive 2003/49/EC of 3 June 2003 on a common
system of taxation applicable to interest and royalty payments made between associated com-
panies of different Member States [2003] OJ L157/49. Accordingly, there are in general no
residual withholding taxes on intra-group interest payments within the EU (see Section 6.5.1).
134 For more details see Art 11 para 27 OECD Commentaries on the Articles of the Model
Tax Convention (2017). However, in practice this does not cause particular problems in state
Y, as the states of the PE would often not levy source taxes on the interest payments to the bank
in such situations. States, however, might levy source taxes on interest payments between the
PEs and the head office on back-to-back loans.
Even loans between individuals are considered debt claims, and as such,
interests on such private loans fall under the ambit of Art 11 OECD MC.
Moreover, it does not matter if the interests are linked to the success of
the company (profit-participating loans) and whether the interests are paid
during or at the end of the term through a discount upon issuance. Interests
on secured debt claims (eg mortgages) are also covered by the definition.
Example
Through its national bank, state X issues governmental bonds with a 2%
interest rate. State X levies a 30% withholding tax on interests on gov-
ernmental bonds. These interests are also considered interests for treaty
purposes, and as such, the taxing right of state X is limited to 10% if the
beneficial owner is a resident of a state with which state X has a double tax
treaty in line with the OECD MC.
As mentioned above, a distinction from dividends is drawn by referring

to the question of whether the investor bears any entrepreneurial risk (ie a
substance-over-form analysis).135
(c) Permanent establishment proviso Art 11 para 4 OECD MC also con-

tains a PE proviso,136 which again means that the foreseen allocation of
taxing rights in Art 11 para 1 and 2 OECD MC does not apply if the inter-
ests are paid to a PE in the source state and the debt claim in respect of
which the interest is paid is effectively connected with the PE. Therefore, in
such a situation, the taxing right of the source state is not limited by Art 11
para 1 and 2 OECD MC, but Art 7 OECD MC is applicable.
(d) Special relationship Art 11 para 6 OECD MC contains a particular

rule concerning interest payments if there is a special relationship between
the concerned parties. If the following requirements are met, Art 11 OECD
MC is applicable only to the arm’s length amount:
i. there is a special relationship between the payer and the beneficial

owner or between both of them and another person;
ii. the amount of interest exceeds the arm’s length amount; and
iii the higher amount is paid because of the special relationship.

136 See Section 2.3.5.7(c).
Therefore, the allocation rule in Art 11 OECD MC does not apply to the
excessive parts if the requirements are met. However, such excessive parts
may fall under another allocation rule in the OECD MC, such as Art 10
OECD MC.
Example
Sunny Ltd is a resident of state X. It is partly financed through a loan from
Anna. Anna is at the same time the main shareholder of Sunny Ltd, and
she is a resident of state Y. The loan pays a 5% pa interest, although fol-
lowing an arm’s length analysis, only 3% is justified. According to the do-
mestic law of state Y, 2% is reclassified as dividend payment (hidden or
deemed distribution). Therefore, Art 11 of the treaty between states X and
Y applies only to 3%. For the 2% excessive interest, Art 10 OECD MC
is likely (but not necessarily) applicable. The latter assessment requires a
detailed analysis of both the domestic law and the treaty provision applic-
able in an individual case.
2.3.5.9 Royalties
(a) Allocation of taxing rights The royalty article contains an exclusive
allocation of the taxing right to the resident state. This means that if the
royalty arises in one contracting state and is beneficially owned by a resi-
dent of the other state, only the latter state has a taxing right. Contrary
to the OECD MC, Art 12 para 1 and 2 UN MC contain a non-exclusive
allocation in the sense that the source state has the right to tax up to a
certain percentage of the gross amount of royalties comparable to the
allocation of taxing rights in Art 10 and 11 OECD MC. The UN MC,
however, does not specify what the maximum tax rate is as this is left to
the treaty negotiators.
Unlike Art 11 para 5 OECD MC, the royalty article in the same conven-
tion does not contain a rule concerning the determination of the source of
a royalty. However, Art 12 UN MC provides for a similar rule with the fol-
lowing wording:
Royalties shall be deemed to arise in a Contracting State when the payer

is a resident of that State. Where, however, the person paying the roy-
alties, whether he is a resident of a Contracting State or not, has in a
Contracting State a PE or a fixed base in connection with which the li-
ability to pay the royalties was incurred, and such royalties are borne by
such PE or fixed base, then such royalties shall be deemed to arise in the
State in which the PE or fixed base is situated.
According to such provision, where the payer is a resident is decisive. In

domestic law, however, other rules may apply according to which not only
where the payer is a resident is decisive but also, for instance, where the IP
is located or even where the contract was signed, to determine the source of
a royalty.137
(b) Definition Art 12 para 2 OECD MC contains a definition of royalty. In

very general terms, a royalty is a remuneration for the use or the right to use
certain specified (intangible) assets, in particular:
- copyrights;
- patents;
- trademark;
- models; and
- plans or processes.
Even the remuneration for the use of information concerning industrial,

commercial, or scientific experience, however, is considered a royalty ac-
cording to Art 12 para 2 OECD MC.
Example
Bank A, a resident of state X, orders customized banking software from
company B, a resident of state Y. In this case, the payment of bank A to
company B is not considered a royalty as bank A does not receive the right
to use any of the aforementioned movable properties, and particularly no
IP as well.138 However, in some states, software rights are copyright pro-
tected, and Art 12 OECD MC can thus apply. Therefore, depending on
the exact contractual agreement, a payment for the use of software may
be considered a royalty if it is a remuneration for the right to use the copy-
right to the digital product.139
137 See for the law in the UK Jonathan Schwarz, Schwarz on Tax Treaties (5th edn, Wolters
Kluwer 2018) 290.
138 See for a similar case High Court of Delhi, Director of Income Tax v Infrasoft Limited, ITA
1034/2009, 22 November 2013.
139 For details see Art 12 para 17.1 et seq OECD Commentaries on the Articles of the Model
Tax Convention (2017). Of course, the topic is far too complex to be comprehensively outlined
The term royalty is particularly important as double tax treaties (in contrast
to Art 12 para 1 OECD MC, however) often allow the source state to levy a
certain residual source tax. In these cases, if an income falls under Art 12 or
7 OECD MC, the source state may have different taxing rights. In the case of
the latter, the source state will have a taxing right only if the foreign enter-
prise operates a PE; in the case of the former, it is required only that the roy-
alty is sourced in the other state. Therefore, it is not surprising that source
states try to apply a broader royalty definition, deviating from that in Art 12
para 2 OECD MC, to encompass a broader variety of payments.
For instance, Art 12 para 3 of the double tax treaty between Canada and
Brazil also considers payments ‘for the use of, or the right to use, industrial,
commercial or scientific equipment’ royalties.140
(c) Permanent establishment proviso Art 12 para 3 OECD MC contains a

PE proviso, which again means that the foreseen allocation of taxing rights
in Art 12 para 1 OECD MC does not apply if the right or property for which
the royalty is paid is effectively connected with the PE in the contracting
state.141
(d) Special relationship Art 12 para 4 OECD MC contains a specific rule

concerning excessive royalties in the case of a special relationship. The re-
quirements are the same as outlined above concerning Art 11 para 6 OECD
MC,142 and again, if excessive royalty payments are at hand, it means that
Art 12 OECD MC shall not apply to the excessive parts but such parts may
fall under other provisions of the OECD MC, such as Art 10 OECD MC.
2.3.5.10 Technical services (Art 12A UN MC)

(a) Introduction Although the focus of the present chapter is on the OECD
MC, we will briefly discuss Art 12A UN MC as it contains a particular pro-
vision on technical services, which is used in several treaties. The article is
in the present book. For details see eg Aleksandra Bal, ‘The Sky’s the Limit—Cloud-Based
Services in an International Perspective’ (2014) 68 Bulletin for International Taxation 515.
140 Convention between the Government of Canada and the Government of the Federative
Republic of Brazil for the Avoidance of Double Taxation with Respect to Taxes on Income
(1984). This reflects the wording of Art 12 para 3 UN MC (2017).
141 See already Section 2.3.5.7(c).
142 See Section 2.3.5.8(d).
also of particular importance in the current debate on how to tax the digital
economy, which we will tackle in Chapter 4, Section 2.2.
One of the reasons for the inclusion of a specific article on fees from tech-
nical services in the UN MC was the fact that the services covered by the
article otherwise generally fall under Art 7 OECD MC, and as such, there is
a taxing right in the source state only if there is a PE. However, the latter is
often not the case if technical services are provided for a limited amount of
time due to the lack of a fixed place of business. One way of addressing the
issue of not being able to tax these technical services in the source state is to
include a specific service PE provision.143 Another way of addressing it is to
include a specific article on fees from technical services, as will be discussed
in the following.
(b) Allocation of taxing powers Not surprisingly, Art 12A UN MC con-

tains a non-exclusive allocation provision concerning fees for technical
services. However, the residual source tax rate is not fixed but subject to ne-
gotiations. Therefore, double taxation is mitigated or avoided through the
application of one of the method articles. Importantly, the source state can
apply gross taxation.
As mentioned earlier, the specific article on fees from technical services
was developed as an alternative to specific provisions concerning service
PEs. The latter provision faces difficulties; in particular, the allocation of in-
come to a service PE is a challenging task.144 It would be net taxation in the
source state in case a service PE is at hand.
Importantly, Art 12A UN MC applies only if the fees for technical serv-
ices are sourced in the other contracting state. Sourced in the other state
means that the payer is a resident of the other state or the person paying the
fees has a PE or a fixed base and the fee is borne by the PE or the fixed place
and the underlying obligation was incurred by the PE or the fixed place.145
However, the fees do not arise in a contracting state if the payer is a resident
of that state but has a PE (or a fixed place of business) in the other con-
tracting state and the fees are borne by such PE or fixed base.146
143 See eg Art 12A UN MC (2017).

144 For a comprehensive comparison see Andrés Báez Moreno, ‘The Taxation of Technical
Services under the UN Model Double Taxation Convention: A Rushed—Yet Appropriate—
Proposal for (Developing) Countries?’ (2015) 7 World Tax Journal 267, Section 3.2.1.
145 Art 12A para 5 UN MC (2017).
146 Art 12A para 6 UN MC (2017).
(c) Income covered According to Art 12A para 3 UN MC, the term fees
from technical services means ‘any payments in consideration for any ser-
vice of a managerial, technical or consultancy nature’. Importantly, the term
technical services is exhaustively defined in Art 12A para 3 UN MC.147 The
use of the terms managerial, technical, and consultancy means that the sup-
plier of the services must have specialized knowledge, skill, or expertise; as
such, routine services are not covered by Art 12A UN MC.148 However, the
provision explicitly excludes the following three services:149
i. payment is made to an employee;

ii. payment is made for teaching or educational engagements; and
iii. payment is made by an individual for services for the personal use of
an individual.
Example
Sunny Ltd, a resident of state X, offers the following supplies to A Ltd, a
resident of state Y:
- the right to use a patented chemical formula owned by Sunny

Ltd; and
- the use of specialized knowledge to produce an industrial substance.
From a treaty perspective, the payments for the right to use a patented
chemical formula are considered royalties and fall under Art 12 OECD
MC /Art 12 UN MC. However, the payments for the use of specialized
knowledge by the employees of Sunny Ltd are considered fees for tech-
nical services and therefore fall under Art 12A UN MC.
(d) Permanent establishment proviso Art 12A para 4 UN MC also con-

tains a PE proviso. As in the other allocation rules, the PE proviso means
that the foreseen allocation of taxing rights in Art 12A para 1 UN MC does
not apply if the fees are effectively connected with the PE of the supplier
in the other contracting state. In this situation, the allocation of the taxing
rights follows Art 7 UN MC, and as the UN MC still contains an Art 14,
147 Art 12A para 61 Commentaries on the Articles of the UN Model Double Taxation
Convention (2017).
148 Art 12A para 62 Commentaries on the Articles of the UN Model Double Taxation
Convention (2017).
149 Art 12A para 3 UN MC (2017).
the allocation follows Art 14 UN MC in the case of independent personal

services.
(e) Special relationship Art 12A para 7 UN MC contains a specific rule con-
cerning excessive fees for technical services in the case of a special relation-
ship. The requirements are the same as earlier outlined concerning interests
and royalties,150 and again, if excessive fees are at hand, it means that Art 12A
UN MC shall not apply to the excessive parts but such parts may fall under
other provisions of the OECD MC, such as Art 10 OECD MC.
2.3.5.11 Capital gains (Art 13 OECD MC)

(a) Allocation of taxing rights Art 13 OECD MC contains five different
allocation rules, one in each paragraph. These allocation rules apply to cap-
ital gains on different assets. Therefore, the asset category sold is decisive for
the allocation of the taxing right. It is important to understand that in all
five paragraphs, an alienation is required (ie that an asset is transferred to
another person).151
(b) Immovable property If immovable property is sold, the gains may be

taxed in the state where the immovable property is situated. This means that
the situs state has no exclusive taxing right, and the resident state shall miti-
gate double taxation by applying either the credit or exemption method.
For the purpose of defining immovable property, Art 13 para 1 OECD MC
refers to Art 6 OECD MC.152
The situation is different if the immovable property is situated in a third
state (or in the resident state of the seller). In this case, Art 13 para 1 OECD
MC is not applicable, but the allocation according to Art 13 para 5 OECD
MC is decisive, as will be outlined below.
Example
Anna is a resident of state X and owns an apartment in state Y. She sells the
apartment to John, a resident of state Z. In this situation, state Y may tax
the capital gain from selling the apartment according to Art 13 para 1 of
150 See Section 2.3.5.8(d).

151 It is no surprise that the term ‘alienation’ might trigger some difficulties in practice (see
for details Stefano Simontacchi, Taxation of Capital Gains under the OECD Model Convention
with Special Regard to Immovable Property (Wolters Kluwer 2007) 175 et seq).
the treaty between X and Y, and state X shall mitigate double taxation by
applying either the credit or exemption method.
(c) Movable property as part of a permanent establishment Art 13 para

2 OECD MC states, simply put, that gains from the alienation of movable
assets belonging to a PE in the other contracting state may be taxed in
that state. This means that the state where the PE is located has a non-
exclusive taxing right, and the resident state shall again mitigate double
taxation by applying the method article (ie by applying either the exemp-
tion or credit method). The paragraph also covers gains from selling the
entire PE.
Example
Sunny Ltd is a resident of state X and operates a production facility in state
Y. The production facility is considered a PE for treaty purposes. Sunny
Ltd sells a machine attributable to the PE, with a gain to a buyer who is
a resident of state Z. In this case, the gain may be taxed in state Y, and
state X must mitigate double taxation by applying the credit or exemption
method.
(d) Ships and/or air traffic in international traffic Art 13 para 3 OECD
MC is best understood in connection with Art 8 OECD MC, which states
that profits of enterprises of a contracting state from the operation of a ship
or an aircraft shall be taxable only in the state of residence of the person
carrying on the enterprise. The same is true for gains from the alienation of
such ships or aircrafts. The article also covers ‘movable property pertaining
to the operation of such ships or aircraft’.
(e) Shares in real estate companies The situs principle in Art 13 para 1
OECD MC is easy to circumvent if what is sold is not the immovable prop-
erty through an asset deal but the shares held in a real estate company. If
the case is considered a sale of movable and not immovable property, Art
13 para 1 OECD MC is not applicable. Consequently, the situs state will
have no taxing right because Art 13 para 5 OECD MC will be applicable,
according to which the resident state shall have an exclusive taxing right.
However, to avoid the situation in which the economic ownership of im-
movable property changes without granting the situs state taxing rights,
Art 13 para 4 OECD MC foresees a special rule for the sale of real estate
companies.
According to Art 13 para 4 OECD MC, gains from selling shares (or
similar interests) may be taxed in the state where the immovable property
is situated if the shares (or similar interests) derive more than 50% of their
value from immovable property in the other contracting state. This means
the following requirements must be met:
- alienation of shares (or similar interests);

- 50% of the value stems from directly or indirectly owned immov-
able property (at any time during the 365 days preceding the alien-
ation); and
- the above directly or indirectly owned immovable property from
which 50% of the value stems must be in the other contracting state.
If the above requirements are met, a non-exclusive allocation of taxing

rights applies, meaning the situs state may tax the gains derived by the tax-
payer. Therefore, the resident state is required to mitigate double taxation
by applying the method article.
Example
Sunny Ltd is a company resident of state X. It owns a holding company,
HoldCo Ltd, in state Y. HoldCo Ltd in turn holds a real estate company,
Real Estate Ltd, in state Z, which owns only real estate in state Z (except
for some cash necessary for maintaining the properties). Sunny Ltd sells
all its shares in HoldCo Ltd with a gain to a third party. State Z assumes
that this is a transfer subject to real estate capital gains taxation as it is a
transfer of ownership of properties located in state Z. According to the
treaty between states X and Z, state Z indeed has a taxing right as shares
are sold and more than 50% of the underlying value is related to real estate
in state Z. The treaty between states X and Y cannot limit the taxing rights
of state Z.
Therefore, Art 13 para 4 OECD MC covers not only the direct transfer of
shares of a real estate company but also indirect share transfer (ie if the
shares of the parent company of the real estate company are sold). However,
it is required that at least 50% of the value stem from real estate in the other
contracting state.
As stated in our introductory remarks on the functioning of double tax

treaties,153 however, levying taxes in this situation requires a basis in the do-
mestic law (ie not all states tax both direct and indirect transfers of shares in
a local real estate company).
(f) Umbrella clause Art 13 para 5 OECD MC must be understood as a re-

siduary or umbrella clause in case a gain does not fall under one of the pre-
vious paragraphs. If this is the case, the taxing right is exclusively with the
resident state of the seller.
Example
Anna, a resident of state X, owns a few shares of a large multinational bank
that is a resident of state Y. The shares are listed on the stock exchange in
state Z. Anna sells her shares with a gain. State Y is not allowed to tax such
gain according to Art 13 para 5 of the treaty between states X and Y. State
Z, however, will also not be allowed to tax such gain according to Art 13
para 5 of the treaty between states X and Z.
Art 13 para 5 UN MC, however, contains an important deviation from such

umbrella clause. It applies to the alienation of shares in the case of a quali-
fying participation (above a certain threshold154). In this case, the gain may
be taxed in the resident state of the company whose shares are sold. The
problem with such provision is that compared to Art 13 para 4 OECD MC,
it is easier to circumvent as an indirect sale of shares will generally not fall
under such provision, and the source state will not have a taxing right.155
Independent from the question of whether the treaty contains a provision
similar to Art 13 para 5 UN MC, it must be reviewed whether the state in-
deed levies an income or a similar tax on such gains according to its do-
mestic law.156

154 See Art 13 para 5 UN MC (2017). However, the article leaves to the contracting states to
define what qualifying participation should be in scope.
155 With further references Gonzalo Suffiotti and Carolina Masihy, ‘Recent Developments
in the Taxation of Indirect Share Transfers in South America: Lessons and Challenges from
Chile, Colombia, Peru and Uruguay’ (2019) 73 Bulletin for International Taxation 464, 472
et seq.
156 Some states might even tax the gain from an indirect sale based on an explicit provision
or based on the anti-avoidance doctrine (see eg the epic Vodafone case in Supreme Court of
India, Vodafone International Holdings BV v Union of India & Anr, No 733, 20 January 2012).
2.3.5.12 Independent personal services (Art 14 OECD MC)

(a) History Many double tax treaties still contain a specific article con-
cerning independent personal services even though the provision was al-
ready deleted from the OECD MC in 2000. The reason for the deletion was
that the responsible Working Party came to the conclusion that there are no
practical differences between applying Art 7 and applying 14 OECD MC,
and as such, Art 14 OECD MC is not necessary.157 Art 14 OECD MC 1998
had the following wording:
Income derived by a resident of a Contracting State in respect of profes-

sional services or other activities of an independent character shall be
taxable only in that State unless he has a fixed base regularly available to
him in the other Contracting State for the purpose of performing his ac-
tivities. If he has such a fixed base, the income may be taxed in the other
State but only so much of it as is attributable to that fixed base.
The term ‘professional services’ includes especially independent
scientific, literary, artistic, educational or teaching activities as well as
the independent activities of physicians, lawyers, engineers, architects,
dentists and accountants.
However, several countries still include Art 14 OECD MC in their newly

signed tax treaties, and such article is of course contained in the treaties
signed before 2000. Therefore, it is still worthwhile to briefly discuss the
said article.
(b) Allocation of taxing rights According to Art 14 OECD MC 1998, the

taxing right shall exclusively be with the resident state unless the person:
- has a fixed base;

- is regularly available;
- is in the other contracting state; and
- is in the other contracting state for the purpose of performing his
activities.
The article has indeed broad similarities to Art 7 OECD MC as a fixed place
of business is required in the source state and only if such threshold is met
157 See OECD, Issues Related to Article 14 of the OECD Model Tax Convention (OECD
Publishing 2000) as adopted by the Committee on Fiscal Affairs on 27 January 2000.
will the source state have a taxing right. In Art 7 OECD MC, a similar mech-
anism applies, but the threshold is the PE and not the fixed base in the other
state. Therefore, it is indeed not surprising that the results of applying Art 7
and 14 OECD MC 1998 are often the same particularly because the terms
PE and fixed base overlap in many ways.
Interestingly, Art 14 UN MC even further broadens the taxing rights
of the source state as besides the fixed base, the article contains a second
alternative, according to which the source state may impose a tax if
the taxpayer stays in the other contracting state for a period of at least
183 days within a 12-month period commencing or ending in the con-
cerned fiscal year.158
(c) Scope Art 14 OECD MC 1998 covers only independent personal serv-
ices, or to be more precise, ‘professional services or other activities of an
independent character’.159 Professional services are further defined in Art
14 para 2 OECD MC 1998 as ‘especially independent scientific, literary,
artistic, educational or teaching activities as well as the independent activ-
ities of physicians, lawyers, engineers, architects, dentists and accountants’.
Importantly, the term independent indicates that employment relations (ie
relationships based on an employment contract) are not within the scope of
Art 14 OECD MC but are included in the general terms covered by Art 15
OECD MC.
2.3.5.13 Income from employment

(a) Allocation of taxing rights Art 15 OECD MC is a residuary clause in
the sense that it applies only if an income does not fall under Arts 16, 18, or
19 OECD MC. Art 15 para 1 OECD MC consists of a general rule and the
following two exceptions:
- an important exception is found in Art 15 para 2 OECD MC, (the so-

called 183-day rule or exception for short-stay employees); and
- a less important exception is found in Art 15 para 3 OECD MC con-
cerning employees as a regular complement of a ship or aircraft in
international traffic.
158 See Art 14 para 1 lit b UN MC (2017).

159 The draft of the OECD MC (1963) used the terms ‘professional services or other inde-
pendent activities of a similar character’.
The general rule of Art 15 OECD MC states that employment income shall
be taxed only in the residence state unless the employment is exercised in
the other contracting state. If the employment is indeed exercised in the
other contracting state, then such state may also tax the employment in-
come. Physical presence is decisive here. This is of particular interest in the
current environment of digital nomads160 and enhanced use of home of-
fice and e-working, not only since the pandemic. Therefore, only if the em-
ployee is indeed present in the other contracting state, the resident state is
required to mitigate double taxation by applying either the exemption or
credit method. Otherwise, Art 15 para 1 OECD MC provides for an exclu-
sive allocation of taxing rights to the resident state.
Example
Anna is a resident of Bali, Indonesia. She works as a software developer
for a software development company in the UK. Due to the pandemic, she
has never been physically in the UK but works remotely from her home
in Bali. Her salary is paid to her bank account in the UK. In this case, as-
suming that the treaty between the UK and Indonesia follows the OECD
MC, Indonesia has the exclusive taxing right according to Art 15 para 1
OECD MC.
(b) The 183-day rule or rule for short-stay employees Notwithstanding

the fact that an employee physically exercises her employment in another
state, the resident state has an exclusive taxing right if the three require-
ments of the 183-day rule or the rule for short-stay employees are met (see
Art 15 para 2 OECD MC):
i. the employee is present in the other state for a period or periods

less than 183 days in any 12 months commencing or ending in the
fiscal year;
ii. the remuneration is paid by an employer who is not a resident of the
other contracting state; and
iii. the remuneration is not borne by a PE of the employer in the
other state.
160 See for a topical review of the difficulties of applying Art 15 OECD MC (2017) in the
digital age Svetislav V Kostić, ‘In Search of the Digital Nomad—Rethinking the Taxation of
Employment Income under Tax Treaties’ (2019) 11 World Tax Journal 189.
If all the three requirements above are met, the resident state, as mentioned,
has an exclusive taxing right. Concerning the requirements, the below shall
be added.
- With respect to requirement 1, all the days shall be counted, including

not only the days of arrival and departure but also the weekends spent
in the source state .161 Importantly, it is not the days within one fiscal
year but within 12 months beginning or ending in a fiscal year that
shall be counted.162 Of course, in practice, states may have slightly dif-
ferent treaty provisions.
- With respect to requirement 2, the crucial issue is whether the em-
ployer is not in the other contracting state (ie not the resident state).
In practice, it is disputed whether employer should be understood
in a formal or in a substantive manner. Countries have different ap-
proaches.163 Understanding employer in a formal manner would mean
it is decisive who the other party in the employment contract is, and
understanding employer in a substantive manner means that the em-
ployer is the de facto employer (eg who has the right to instruct the
person, etc).
- With respect to the third requirement, it is decisive that the costs
are not borne by the PE in the other contracting state. This not only
includes cases in which the costs are explicitly borne by the PE (ie
through salary payments) but also cases in which the costs are re-
charged to the PE or at least should have been recharged.
Example
Anna is employed by a Swiss-based multinational company (formally, she
works for the management company of the group in Switzerland), and she
is responsible for the implementation of new accounting software roll-
out. In this function, in the year 20X1 she visited six states (each for two
weeks) to discuss the details of the roll-out with the responsible person at
the premises of the local subsidiaries. According to Art 15 para 1 OECD
MC, Anna is physically present in the other contracting state, and as such,
her salary for such activity may be taxed in the other contracting state.
161 For more details see Art 15 para 5 OECD Commentaries on the Articles of the Model Tax
Convention (2017). Of course, some states might know deviating practices.
162 However, see Art 15 draft of the OECD MC (1963).
163 For the position of the OECD see Art 15 para 8 et seq OECD Commentaries on the
Articles of the Model Tax Convention (2017).
However, as the requirements of Art 15 para 2 OECD MC are met, only

the resident state has the exclusive taxing right. Therefore, Switzerland
has the exclusive taxing right.
(c) Employment income Art 15 OECD MC covers both regular employ-

ment income (ie monthly or weekly salaries) and one-time payments. The
latter includes termination payments, covenant-not-to-compete, or pay-
ments for sickness. It is not decisive whether benefits are paid in cash or
in kind. Further complexities are triggered, however, by certain benefits
in kind, such as employee stock options and other employee participation
rights. The Commentary contains a specific chapter on this.164
Besides the problem that countries generally have different rules on
how and when to tax income from employment participation rights, a
specific issue concerning option rights arises as the gains from exercising
these option rights may often be taxed at a time different from when the
employee actually exercised the employment. As a general guidance, the
Commentary states that the source state is allowed to tax parts of the option
benefit if it is a remuneration for an employment that was exercised in that
state even though the tax may be levied years later (ie in the moment the
option is exercised).165
(d) Other exceptions in treaty practice In treaty practice, several ex-

ceptions from the rules in Art 15 OECD MC can be found. For in-
stance, states can agree to apply specific clauses for frontier workers (ie
persons commuting regularly, even daily, between the residence and
source states). States can, for instance, agree on a provision that grants
the exclusive taxing rights to the resident state in all situations166 or that
makes the taxing right shared for instance, according to which the source
state may levy a 4.5% withholding tax on salaries and the resident state
will grant credit.167 Moreover, some treaties contain specific clauses for
164 See Art 15 para 12.1 et seq OECD Commentaries on the Articles of the Model Tax
Convention (2017).
165 See Art 15 para 12.1 OECD Commentaries on the Articles of the Model Tax Convention
(2017).
166 See for instance Art 15 para 4 Switzerland-Liechtenstein Double Taxation Agreement
(2015).
167 See for instance Art 15a Germany-Switzerland Double Taxation Agreement (2010).
short-duration employment exercised as part of offshore exploration and

exploitation.168
2.3.5.14 Directors’ fees (Art 16)

(a) Allocation of taxing rights Deviating from the general allocation of
employment income according to Art 15 OECD MC, Art 16 OECD MC
contains a specific allocation clause concerning the taxation of directors’
fees. The deviation lies in the fact that the resident state of the company
where the taxpayer is a director may tax the remuneration in any case. In
other words, if Art 16 OECD MC applies, for the allocation of the taxing
right, it is not decisive whether the director should be physically present in
the state where the company is a resident. The resident state of the company
has a non-exclusive taxing right, and double taxation will be mitigated in
the resident state of the director by applying either the exemption or credit
method.
(b) Income covered The OECD MC does not contain a definition of the
term directors’ fees or board of directors for the purpose of applying Art 16
OECD MC. It is indeed challenging to draw a clear line between Arts 16
OECD MC and 15 OECD MC as states have different governing structures
in their domestic company laws (eg one-or two-tier governing structures).
However, in most cases, at least mere supervisory activities should be cov-
ered by Art 16 OECD MC, although in some states the application of Art
16 OECD MC may be broader.169 In general terms, however, day-to-day
management functions are not covered by Art 16 OECD MC but by Art 15
OECD MC.
The distinction between Art 15 and 16 OECD MC is of particular
relevance if the resident state applies the exemption method. If this is
the case, the income within the scope of Art 16 OECD MC will be sub-
ject to taxation only in the other contracting state whereas the appli-
cation of Art 15 OECD MC will lead to taxation in the resident state
of the director unless the employment is physically exercised in the
other state.
168 See the various reservations made on Art 15 (see in particular Art 15 paras 17, 18, and 21
OECD Commentaries on the Articles of the Model Tax Convention (2017)).
169 See for a detailed analysis Charlotte De Jaegher, ‘International Taxation of Directors’
Fees: Article 16 of the OECD Model or How to Reconcile Disagreement among Neighbours’
(2013) 5 World Tax Journal 215.
Example
Anna lives in state X and is a member of the board of directors of com-
pany B, a company resident of state Y. The income tax rate in state X is 30%
whereas that in state Y is 15%. According to Art 16 of the treaty between
X and Y, state Y may tax Anna’s income. If state X applies the exemption
method, the income will be subject only to a 15% income tax rate.
2.3.5.15 Entertainers and sportspersons

(a) Allocation of taxing rights The OECD MC contains a specific clause
for the taxation of entertainers and sportspersons. Accordingly, the income
of an entertainer or a sportsperson may be taxed in the country of perform-
ance even though his or her physical presence therein may be very limited
(eg only one day for a concert or a football game).
The rationale behind the provision is that entertainers’ and sports-
persons’ physical presence may be split among many states, and taxation
only in the resident state for instance, as foreseen in Art 15 para 2 OECD
MC (in case the requirements of the 183-day rule are met) will increase
the risk of parts of the income remaining untaxed or being taxed at a very
low rate if the entertainers or sportspersons live offshore, in a tax haven.
Moreover, entertainers and sportsmen may earn significant incomes in
very short time frames.170
Art 17 para 2 OECD MC contains a specific clause for the so-called rent-
a-star companies. Such provision covers the situation in which the income
of the entertainer or the sportsperson is earned by another person (ie often
a company) and not directly by the entertainer or the sportsperson. If this
is the case, Art 17 para 1 OECD MC will not apply as the income is not dir-
ectly derived by the entertainer or the sportsperson, and as such, the per-
formance state will not have a taxing right. Thus, the goal of Art 17 para 2
OECD MC is to avoid situations in which an entertainer or a sportsperson
circumvents the application of Art 17 para 1 OECD MC and thus avoids tax
liability in the state of his or her personal activities by interposing another
recipient of the income. There have been several cases where a company
owned by the entertainer or the sportsperson (ie a rent-a-star company)
was interposed. Therefore, the mere fact that the entertainer or the sports-
person receives his or her income through a company should not change
170 See also with further details on the historical rationale for the introduction of Art 17,
Karolina Tetlak, Taxation of International Sportsmen (IBFD 2014) 9 et seq.
the tax consequence of non-exclusive taxation in the performance state ac-

cording to Art 17 para 1 OECD MC.
(b) Income covered The article covers two very different groups:
1. entertainers: explicitly mentioned are theatre, motion picture, radio,

or television artists but also musicians; and
2. sportspersons.
Several decisions on what an entertainer is have been decided by courts.171

In general, a public appearance where the person concerned is actu-
ally part of the performance is key. Therefore, to cite an obvious example,
background musicians are covered by Art 17 OECD MC whereas stage
managers or the stage crew do not fall under the said article. Concerning
sportspersons, the question of who is covered by the article is less disputed.
Besides the question of who falls within the ambit of Art 17 OECD MC,
the part of the income of sportspersons and entertainers that is covered by
the article has to be reviewed. Both sportspersons and entertainers may
receive a variety of payments (eg transfer fee to a footballer, payments of
sponsors independent of performance, or awards received by entertainers).
According to the OECD MC, there must be a close connection between the
performance and the income, and only in this case does Art 17 OECD MC
apply.172 It is obvious that such an approach triggers a variety of uncertain-
ties in practice.173
Example
Anna is a hockey player in state X and signs a new contract with a hockey
club in state Y. Besides her annual salary, she receives a (non-refundable)
sign-on bonus independent of her performance for the club. In this case,
it is not Art 17 OECD MC that applies but Art 15 of the same convention.
Therefore, as she received a salary independent of any performance and
171 See Luis Alberto Romero Topete, ‘Analysis of the Case Law on the Scope of Article 17 of
the OECD Model: Issues Resolved and Yet to Be Resolved’ (2017) 71 Bulletin for International
Taxation, Chapter 1.3.
173 According to the OECD there is a close connection ‘where it cannot reasonably be con-
sidered that the income would have been derived in the absence of the performance of these
activities’ (Art 17 para 1.9 OECD Commentaries on the Articles of the Model Tax Convention
(2017)).
physical presence in state Y, state Y has no taxing right according to Art 15

and 17 OECD MC.174
2.3.5.16 Pensions (Art 18 OECD MC)

(a) Allocation of taxing rights The OECD MC contains a specific clause
on the taxation of pensions. The fiscal importance of such provision should
not be underestimated. The design of the provision can even be the most
important point of negotiation when signing a double tax treaty. This is par-
ticularly true between states famous as retirement havens (eg Thailand or
Portugal) and states from which a number of persons move their domicile
abroad upon retirement.
The reason for the fiscal importance of the foregoing is that Art 18
OECD MC allocates the exclusive taxing right to the resident state in
such cases. Considering the fact that in many states the social security
contributions (including pension insurance payments) are deductible,
a relocation upon retirement leads to an unsatisfying result, in which
the original resident state has to allow deductions whereas the pension
payments are taxable only in the new state of residence (ie the state of
retirement). Moreover, the issue intensifies if the retirement states apply
a specific tax relief for retired persons to make themselves attractive lo-
cations for retirees.
(b) Income covered The article covers pensions and other similar remu-
nerations. These include both regular payments such as monthly pension
payments but also one-time capital payments.175 As the term pension indi-
cates, it must be a remuneration for past work rendered.
Moreover, from a systematic perspective, it is crucial to distinguish pen-
sions according to Art 18 OECD MC from payments according to Art 19
para 2 of the same convention. The latter covers pensions and similar re-
munerations paid to former public servants (ie for work for a state or
174 See, however, a Canadian decision (Tax Court of Canada, Khabibulin v The Queen,
96-4680-IT-G, 14 October 1999), with slightly different facts. The decision is discussed
by Luis Alberto Romero Topete, ‘Analysis of the Case Law on the Scope of Article 17 of the
OECD Model: Issues Resolved and Yet to Be Resolved’ (2017) 71 Bulletin for International
Taxation 1, 6.
175 See eg the decision of the Swiss Federal Supreme Court, X v Cantonal Tax Administration
of the Canton of Geneva, 2C_606/2016, 2C_607/2016, 25 January 2017. In this case the tax-
payer received a lump-sum payment instead of a monthly pension. Such income falls under
Art 18 OECD MC (2017), although in this case, the taxpayer did not have access to the treaty
as the income was not taxed in Israel
subdivision). Therefore, Art 18 OECD MC covers only payments for pri-

vate employment, excluding those for public servants.
Example
Anna is a resident of state X and receives a remainder payment from her
father’s pension insurance scheme. The remainder payment was due
as her father died before the date specified in the pension contract be-
tween her father and the insurance company in state Y. In this case, Art 18
OECD MC is not applicable as the remainder payment is not a payment
for a past employment of Anna. Therefore, such payment likely falls under
Art 21 OECD MC as ‘other income’.176
2.3.5.17 Government services (Art 19 OECD MC)

(a) Allocation of taxing rights—salaries, wages, and other remuner-
ation With respect to remunerations from government services, Art 19
para 1 lit a OECD MC provides for an exclusive taxing right to the state to
whom the services were rendered. This means that if the employee is a resi-
dent of another state, the resident state has no taxing power (ie the ‘state of
the funds’ has the exclusive taxing right). The rationale behind such a lex
specialis compared to Art 15 OECD MC, is a sovereignty concern similar
to the exemption of diplomatic personnel from income taxation in the host
state.177 Therefore, other states should not interfere with the state actions
of the other states. This includes the obligation not to tax the employees of
the other states or the employees of a political subdivision. However, par-
ticularly in the EU, where there is free movement of workers, it is doubtful
whether such a provision is still reasonable as it leads to constant discrim-
ination between persons working for the state and persons working for pri-
vate institutions.178
There are two exceptions, however, from the allocation of the taxing
right to the state of the funds, as shown below.
- Besides the general rule, Art 19 para 1 lit b OECD MC contains an

exception for local employees in the other contracting state (ie
176 See, however, for a different interpretation Supreme Court of the Netherlands,
Beslissingen in Belastingzaken, 09/03847, 13 May 2011.
178 See Eric CCM Kemmeren, ‘Pensions (Article 18 OECD Model Convention)’ in Michael
Lang and others (eds), Source versus Residence (Wolters Kluwer 2008) 283.
non-citizens the state of the funds). Accordingly, the other contracting

state shall have the exclusive taxing right if the individual is a resident
of that state and (i) is either a citizen of that state or (ii) did not become
a resident of that state only for his/her employment.
- Another exception is stated in Art 19 para 3 OECD MC, according to
which the treatment of the income is different if it is paid in connec-
tion with a business carried on by a contracting state. The key words
are ‘business carried on’ by the contracting state. This excludes the sov-
ereign activities of the state. If Art 19 para 3 OECD MC is indeed ap-
plicable, it means that Art 19 para 1 or 2 OECD MC does not apply,
and the allocation of taxing rights follows Art 15 et seq OECD MC.
(b) Allocation of taxing rights—pensions and other similar remuner-

ations Besides the general rules concerning salaries, wages, and similar re-
munerations, Art 19 para 2 OECD MC contains a specific rule for pensions
and other similar remunerations in relation to past government services.
In this case, the taxing right is exclusively with the state of funds. This is an
obvious deviation from the allocation of taxing rights for ordinary pensions
according to Art 18 OECD MC. The exception does not apply, however, if
the taxpayer is a resident and a national of the other state.
Example
Anna, a Singaporean citizen, has worked for the Singapore tax adminis-
tration her whole life. Upon retirement, she relocates to India together
with her husband, who is an Indian citizen. She receives her pension from
the Singaporean state. In this case, Singapore has the exclusive taxing
right according to Art 19 para 2 lit a OECD MC assuming that the treaty
between India and Singapore follows the OECD MC.
2.3.5.18 Students (Art 20 OECD MC)

(a) Allocation of taxing rights According to Art 20 OECD MC, a specific
allocation rule applies to payments received by (i) a student or business ap-
prentice resident of one contracting state immediately before moving to
the other contracting state (ii) who is present in the other contracting state
solely for educational or training purposes. If these requirements are met,
payments received for the maintenance, education, or training shall not be
taxed in the state where the student stays for educational purposes under
the condition that these payments stem from a source outside that state.
The article is not applicable, however, if the student or apprentice receives

payments from within the state of education or training.
(b) Income covered The article covers both students and business appren-
tices. However, the latter are not mentioned in the title of the provision.
Importantly, the provision applies if the student or the apprentice is pre-
sent in the other contracting state solely for the purpose of his education of
training (ie the person has left his resident state and is present in the other
state for educational or training purposes). However, even though the term
solely is used, it does not mean that education or training shall be the only
purpose of the student’s stay in the other contracting state. Therefore, the
student is allowed to work in the other state, but such salary will not fall
under Art 20 OECD MC. Nevertheless, payments received for the purpose
of maintenance, education, or training will still fall under Art 20 OECD
MC, and the working engagement is not harmful.
Example
Anna is a student and resident of state X. In September 20x2, she moved
to state Y to study there for one semester. Anna, however, is a citizen of
state Z, and she receives a EUR1,000 scholarship grant per month from
state Z. In this case, state Y has no taxing right according to Art 20 of the
treaty between states X and Y assuming that such treaty is in line with Art
20 OECD MC. Moreover, state Z has no taxing right according to Art 21
of the treaty between states X and Z. It is important to note that Art 20 of
the treaty between states X and Z is not applicable as Anna has not moved
to state Z to study. Therefore, the income falls under the umbrella provi-
sion of Art 21 of the treaty between states X and Z.
2.3.5.19 Other income (Art 21 OECD MC)

(a) Allocation of taxing rights If Art 21 para 1 OECD MC applies, the
taxing right is exclusively with the resident state. An exception is foreseen
in Art 21 para 2 OECD MC. According to such provision, Art 21 para 1
OECD MC shall not apply if the right or property for which the income is
paid is effectively connected with a PE in the other contracting state (PE
proviso). In this case, Art 7 OECD MC applies.
(b) Covered income Art 21 OECD MC deals with income not covered by
the other articles of the OECD MC. Importantly, the article deals not only
with income sourced in one of the contracting states but with any other in-
come (ie including income from third countries).
It is difficult to develop a comprehensive list of income types falling
under Art 21 OECD MC. The following are some examples:
i. alimony payments;
ii. punitive damages;
iii. income from gambling; and
iv. income from certain structured products and derivative financial
instruments
Of course, the actual wording in the treaty may deviate from that in the
OECD MC. Some treaties explicitly exclude certain kinds of income. For
instance, Art 21 para 3 of the treaty between Bangladesh and Switzerland
states the following:
The provisions of this Article shall not apply to income derived from lot-
teries, crossword puzzles, races including horse races, card games and
other games of any sort or gambling or betting of any form or nature
whatsoever.179
Art 21 OECD MC also applies if an income in general falls under another

allocation rule, however, the allocation rule requires that the income is
sourced in the other state but in the case at hand the income is sourced
in a third state or that the income per se falls under another allocation
rules but in the case at hand another requirement of the allocation rule is
not met.
2.3.5.20 Capital (Art 22 OECD MC)

Compared to the other allocation rules, Art 22 OECD MC deals only with
taxes on capital and not on income. It also does not apply to taxes on estates
and inheritance, and on gifts and transfer duties.180
The allocation of taxing rights follows the common structure of the
OECD MC:
179 Art 21 para 3 Agreement between the Swiss Confederation and the People’s Republic of
Bangladesh for the Avoidance of Double Taxation with Respect to Taxes on Income (2007).
- immovable property may be taxed in the situs state, and the resident
state shall apply either the exemption or credit method (Art 22 para 1
OECD MC);
- movable property of a PE may be taxed in the state where the PE is lo-
cated, and the resident state shall apply either the exemption or credit
method (Art 22 para 2 OECD MC);
- the ships/aircraft and movable property pertaining to their operation
representing the capital of a shipping/aircraft company dealing with
international traffic shall be taxable only in the state where the com-
pany is a resident (Art 22 para 3 OECD MC);
- with respect to other capital, the resident has the exclusive taxing right
(Art 22 para 4 OECD MC).
2.3.6 Special provisions

2.3.6.1 Overview
The special provisions in Art 24 et seq OECD MC are not mere auxiliary
provisions for the application of the allocation rules in Arts 6–22 OECD
MC but contain some key features of the current international tax regime
independent of the allocation of taxing rights.
2.3.6.2 Non-discrimination provision (Art 24 OECD MC)

As will be outlined below in Section 6 and Chapter 3, Section 1 the non-
discrimination provisions in the World Trade Organization (WTO) law
but also in EU laws have a significant impact on domestic tax systems. The
OECD MC, however, also contains a non-discrimination provision in Art
24 OECD MC. It is not a comprehensive non-discrimination clause, but it
enumerates the prohibited acts of discriminatory treatment and the corres-
ponding measures:
- discrimination based on nationality (Art 24 para 1 OECD MC);

- discrimination of stateless persons (Art 24 para 2 OECD MC);
- discrimination of PEs (Art 24 para 3 OECD MC);
- non-discrimination based on deductibility (Art 24 para 4 OECD
MC); and
- non-discrimination based on ownership (Art 24 para 5 OECD MC).
These non-discrimination provisions apply to taxes of every kind and de-

scription according to Art 24 para 6 OECD MC. One reason for extending
the scope beyond Art 2 OECD MC was that otherwise states could have
achieved discriminatory treatment through taxes that are outside the scope
of the OECD MC, and by doing so, circumventing the agreed-upon non-
discrimination provision in Art 24 OECD MC in their respective treaties.
(a) Non-discrimination based on nationality According to Art 24 para 1

OECD MC, simply put, the nationals of one contracting state shall not be
discriminated against in the other state compared to the nationals of that
other state. This is a national-treatment provision similar to that contained
in trade law agreements.181 Discrimination means that the nationals of an-
other state shall not be subjected to a more burdensome taxation or con-
nected requirements. However, Art 24 para 1 OECD MC does not prohibit
a state from granting foreigners certain advantages compared to nationals.
For instance, a state may implement an attractive income tax regime (eg a
lump-sum tax regime) only for foreigners, without infringing Art 24 para 1
OECD MC.
Potential means of discrimination according to Art 24 para 1 OECD MC
include implementing a different tax base, a different mode of assessment,
and obviously also a different applicable tax rate.182 Importantly, Art 24
OECD MC does not refer to residence. Therefore, nationals of contracting
states can also refer to Art 24 para 1 OECD MC, even though they are not
residents of one of the contracting states.
Nationality is further defined in Art 3 para 1 lit g OECD MC. It means
‘nationality or citizenship’ for individuals, and ‘national’ according to the
law of a contracting state for legal entities.
Example
State X introduces a particular withholding tax regime on the income of
employees with a particular tourist visa (the so-called backpacker tax).
The goal of such legislation is to tax people who travel through state X (ie
backpackers) for a longer period by partly financing their travel through
short-term employments. The special tax (15%) applies only to such per-
sons. If these persons were taxed as nationals of state X, the tax rate would
be lower. Such rule is discriminatory as nationals of state X are under no
circumstances subject to the backpacker tax.183

(2017).
183 See for a similar case Federal Court of Australia, Addy v Commissioner of Taxation, No
QUD 108 of 2018, 30 October 2019.
Art 24 para 1 OECD MC prohibits only explicit or open discrimination and

not de facto or hidden discrimination of foreign nationals. However, once
a provision is considered discriminatory, there is no room for justification.
(b) Discrimination of stateless persons Art 24 para 2 OECD MC contains

a non-discrimination provision concerning stateless persons (ie persons
with no citizenship). It works in the same way as Art 24 para 1 OECD MC
in the sense that stateless persons shall not be subjected to a more burden-
some taxation or connected requirement compared to the nationals of the
state. To qualify for such provision’s protection, the stateless person has to
be a resident of one of the two contracting states. Therefore, it also protects
the stateless person from discrimination in both the source and resident
states.184
(c) Discrimination of PEs (Art 24 para 3 OECD MC) As was shown

earlier, the taxation of residents and non-residents can vary. As such, there
is a general agreement that non-residents and residents can be treated dif-
ferently. However, Art 24 para 3 OECD MC should guarantee that there is
fair competition in the market in which the PE operates in the sense that
the PE is not treated differently from a local enterprise. To achieve this, the
article requires that the taxation of PEs not be less favourable than that of an
enterprise of the other state that carries out the same activities.
Example
State A has a group tax regime for corporate income tax purposes.
Therefore, companies belonging to the same group can opt to be taxed in a
consolidated manner. However, state A does not allow local PEs of foreign
entities to become part of such group. This is a discriminatory treatment
of PEs compared to domestic enterprises.185
(d) Discrimination based on deductibility Art 24 para 4 OECD MC con-

tains a non-discrimination rule concerning the deductibility of payments
to recipients abroad. According to such rule, certain payments (ie interest,
184 Kasper Dziurdz, Non-discrimination in Tax Treaty Law and World Trade Law (Wolters
Kluwer 2019) 150.
185 This, however, is not undisputed (see the references in Kasper Dziurdz, Non-
discrimination in Tax Treaty Law and World Trade Law (Wolters Kluwer 2019) 436 et seq).
royalties, and other disbursements) shall be deductible under the same

conditions as when such payments are made to residents of the same state.
However, the article contains a limitation: it does not apply to non-arm’s
length payments.
Example
In state A’s domestic corporate income tax act, there is a rule that legal
entities cannot deduct interests exceeding 30% of the earnings before
interest, taxes, depreciation, and amortization (EBITDA).186 In this
case, if the rule applies to both domestic and foreign recipients, it is not
discriminatory.
(e) Non-discrimination based on ownership Art 24 para 5 OECD MC

prohibits discrimination based on ownership or control. Therefore, the tax-
ation or any requirement connected to such should not be more burden-
some only because an enterprise is wholly or partly owned or controlled
by one or more residents of the other contracting state. Therefore, the pro-
vision aims to create an investor-friendly environment in which a state
cannot apply protectionist policies that would discriminate against enter-
prises just because they are owned by foreigners. The article, however, does
not protect foreign shareholders from a different treatment compared to
domestic shareholders. The latter case is not covered by the article.187
Example
Company A is a resident of state X. State X has a group tax regime that
allows full consolidation of separate entities belonging to the group.
However, the group regime does not allow the inclusion of foreign entities
such as the parent company. This, however, is not infringing Art 24 para
5 OECD MC because while it may be true that ownership is a factor fig-
uring in the different treatment, Art 24 para 5 actually protects the tax-
payer (ie the entity) from being discriminated against because of foreign
ownership. It shall not lead to a reallocation of taxing rights (ie losses
186 See eg 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 [2016] OJ L193/
1, Art 4.
(2017).
from abroad do not need to be taken into account in the resident state due
to the application of a group tax regime).
2.3.6.3 Mutual agreement and arbitration (Art 25 OECD MC)

The mutual agreement provision contains two interlinked procedures:
• the mutual assistance procedure (MAP); and

• the arbitration procedure.
These two procedures will be discussed in the following subsections.
2.3.6.4 The mutual assistance procedure

If a person is of the opinion that one of the contracting states or even both
of them are infringing the double tax treaty, such person can present his/
her case to one of the competent authorities within three years. The com-
petent authorities will seek to resolve such dispute through a MAP. Most
MAPs relate to TP disputes or situations in which one contracting state is
of the opinion that the taxable income of a taxpayer should be higher. As an
obvious example, a MAP may be initiated if a state applies a 7.5% cost-plus
mark-up for a production facility whereas the other state argues that the
arm’s length price should be 10% cost-plus.
If a MAP is initiated, however, it does not mean that the concerned
states are obliged to find an agreement. This is clearly stated in Art 25 para
2 OECD MC: the competent authority shall only endeavour to resolve the
dispute or case and is not obliged to resolve it. If an agreement is reached,
such agreement shall be implemented in the domestic law, and Art 25 para
3 OECD MC clarifies that this shall happen notwithstanding any time limit.
However, the domestic procedures may still disallow the implementation of
the reached agreement. For instance, it may be the case that if the taxpayer
is assessed or if a court has already decided on the case, the result cannot be
changed by referring to a successful MAP.188 Therefore, taxpayers have to
make sure not only that the necessary steps to initiate the MAP are taken
but that the result of the MAP can also be implemented in the domestic law.
The MAP allows dealing with double taxation not only within the scope
of the treaty but also beyond it. A particular case illustrating this is that
188 This, however, depends on the domestic procedural rules of the contracting states.
involving PEs in two states of a resident of a third state. In this case, it may
be that the transfer price for transactions between the two PEs is disputed.
A MAP is therefore possible even though the treaty does not apply to the
case as no person therein is a resident of one of the contracting states ac-
cording to Art 1 OECD MC.189
According to Art 25 para 4 OECD MC, the competent authorities may
communicate directly with each other and do not have to use their diplo-
matic channels. In practice, authorities of large trading partners try to set
up regular meetings with their counterparts to resolve several cases in one
meeting (ie there are often no specific meetings for only one case). There
is also the option of holding general MAPs (ie not only applying to an in-
dividual case). Therefore, such MAPs will be applicable to a large number
of taxpayers.190 There are also MAPs for specific groups of taxpayers. An
interesting example is the MAP between Switzerland and Liechtenstein
on the taxation of the football players of FC Vaduz. The club is based in
Liechtenstein but until recently played in the highest Swiss league. The ap-
plicable MAP states that half of the salary of football players residing in
Switzerland shall be taxed in Switzerland.191
2.3.6.5 Arbitration procedure
Since 2008, the OECD MC has contained an arbitration procedure for cases
for which the authorities have not reached an agreement. During the BEPS
project, several states argued in favour of including a mandatory binding
arbitration clause in all tax treaties. However, tax treaty arbitration triggers
sovereignty concerns in several countries, and as such, states are reluctant
to agree on mandatory arbitration in tax matters.192
The requirements are the following:
189 The example is mentioned in Art 25 para 55 OECD Commentaries on the Articles of the
190 Art 25 para 6.1 OECD Commentaries on the Articles of the Model Tax Convention
(2017).
191 Memorandum of Understanding between the competent authorities of the Swiss
Confederation and the Principality of Liechtenstein concerning the treatment of income
of players of FC Vaduz resident in Switzerland according to the Convention of 10 July 2015
between the Swiss Confederation and the Principality of Liechtenstein for the avoidance of
double taxation with respect to taxes on Income and on Capital (2020).
192 Besides the sovereignty concern there are other reasons for not including a mandatory
arbitration provision into the OECD MC (eg the potential high costs of arbitration procedures
but also the uncertainty attached to arbitration procedures). See for details on these reasons
and the negotiations during the BEPS project Nathalie Bravo, ‘Mandatory Binding Arbitration
in the BEPS Multilateral Instrument’ (2019) 47 Intertax 693.
- the case has been presented to a competent authority in one of the con-
tracting states;
- there is taxation not in accordance with the treaty; and
- no agreement has been reached within two years.
If these requirements are met, the case will be submitted to an arbitration

court. This is not an automatic transfer; the taxpayer has to request an ar-
bitration procedure. Importantly, the taxpayer will not be able to access the
arbitration procedure if the matter at hand has already been decided by a
domestic court.193 The decision of the arbitration body is binding for both
contracting states, and it is implemented through a mutual agreement be-
tween the parties. Again, this applies notwithstanding the domestic time
limits.
The OECD MC does not provide for detailed procedural rules (eg pro-
cedure to appoint arbitrators), but the Commentary contains a ‘Sample
Mutual Agreement on Arbitration’.194 In very general terms, two kinds of
arbitration procedures must be distinguished from each other:
- the separate-opinion approach; and

- baseball arbitration.
If the separate-opinion approach applies, this means that the law will be
applied to the facts determined by the arbitrators. Therefore, this approach
does not involve choosing one of two separate opinions but interpreting the
treaty and determining the facts by the court.195 In baseball arbitration, on
the other hand, the arbitration panel chooses one of the dispute solutions
proposed by the two contracting states. The panel is not even required to
explain or justify its decision.196 Of course, such procedure should prompt
the involved parties to propose reasonable dispute solutions as the tribunal
will likely choose the more reasonable solution and because if one solution
193 See Art 25 para 5 OECD MC (2017). This seems also to reflect the approach most coun-
tries follow with respect to the MAP (see Art 25 para 76 OECD Commentaries on the Articles
of the Model Tax Convention (2017)).
194 See Annex ‘Sample Mutual Agreement on Arbitration’ OECD Commentaries on the
Articles of the Model Tax Convention (2017).
195 See eg Art 23 para 2 Multilateral Convention to Implement Tax Treaty Related Measures
to Prevent BEPS (2016).
196 See eg Art 23 para 1 Multilateral Convention to Implement Tax Treaty Related Measures
to Prevent BEPS (2016).
is unreasonable and very partisan, it is likely that the proposal of the other
party will be chosen.
2.3.6.6 Exchange of information (Art 26 OECD MC)

We will deal with Art 26 OECD MC on the exchange of information in
Section 2.5 while presenting a broader perspective on the topic considering
other sources of mutual administrative assistance.
2.3.6.7 Collection of taxes (Art 27 OECD MC)

A provision on the collection of taxes is required as international law does
not allow enforcing taxation on a foreign territory.197 As states are reluc-
tant to transfer parts of their enforcement competence to another state as a
core element of their sovereignty, it is not surprising that not all double tax
treaties do contain Art 27 OECD MC.
Moreover, such provision was not included until a new version
of the OECD MC was published in 2003. It is important to note that
there are other bilateral or multilateral conventions between states that
allow the cross-border collection of taxes, even going beyond the pro-
visions of Art 27 OECD MC. One such convention is the EU Recovery
Directive.198
Art 27 OECD MC requires the contracting states to lend assistance in
connection with ‘revenue claims’. The latter term is further defined in Art
27 para 2 OECD MC and includes claims for taxes of every kind if the tax-
ation is not infringing the double tax treaty between the two parties. Art 27
OECD MC foresees the following procedure:199
- first, the requesting state shall make sure that the revenue claim is
enforceable, and it needs to be proven that the person owing the tax
cannot prevent the collection of the tax in such state;
- second, the competent authority of such state shall request the collec-
tion of the tax in the other state; and
- third, if the above requirements are met, the requested state shall col-
lect the revenue as if it were its own revenue claim.
197 See already Chapter 1, Section 5.2 concerning the Lotus decision.
198 Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the
recovery of claims relating to taxes, duties and other measures [2010] OJ L84/1.
199 See in particular Art 27 para 3 OECD MC (2017).
Art 27 para 4 OECD MC extends the collection of taxes to measures of con-

servancy. Therefore, upon the request of one contracting state, the other
shall undertake measures of conservancy to ensure tax collection if such
state may do so under its law.
The article further states that a revenue claim shall not be subjected to
time limits or accorded any priority applicable in the requested state (Art
27 para 5 OECD MC), and that it is not possible to challenge the existence,
validity, or amount of the claim in the requested state (Art 27 para 6 OECD
MC). However, in case the revenue claim has been collected or remitted, the
requested state shall inform the requesting state of such, and the latter shall
either withdraw or suspend its claim (Art 27 para 7 OECD MC).
Finally, Art 27 para 8 OECD MC contains limitations similar to the ones
mentioned in Art 26 OECD MC: no obligation exists if it would be against
the law of the requested state (including against the ordre public), if the re-
questing state has not taken all reasonable measures for the collection and if
the collection would be disproportionate.200
2.3.6.8 Members of diplomatic missions and consular posts (Art 28

OECD MC)
In Art 28 OECD MC, it is held that the OECD MC shall not affect the fiscal
privileges of diplomatic missions or consular posts granted by general
rules of international law or under special agreements. The latter includes
the privileges granted through the Vienna Convention on Diplomatic
Relations (VCDR) signed in 1961201 and the Vienna Convention on
Consular Relations (VCCR) signed in 1963.202 We will briefly discuss these
provisions below in Section 3.4.4.
2.3.6.9 Entitlement to benefits—anti-abuse measures (Art 29 OECD

MC)
(a) Introduction The topic of treaty abuse has a long history in tax matters
but is of course not limited to tax law. The abusive use of treaties also occurs
in investment law for instance.203 There are various ways by which a double
tax treaty can be abused to achieve a result that was not intended by the
negotiators. We will discuss these in this book, albeit not comprehensively.
200 For details see Section 2.5.2.2.

201 See in particular Art 34 VCDR (1961).
202 See in particular Art 49 VCCR (1963).
Two traditional ways of engaging in aggressive tax planning by misusing a

double tax treaty are often discussed:
- rule shopping: the taxpayer uses a structure with the main purpose of
benefitting from a specific rule in the treaty that is more beneficial for
him/her than another rule in the same treaty; and
- treaty shopping: the taxpayer uses a structure with the main purpose
of benefiting from a certain treaty even though the taxpayer would not
have access to such treaty following mere business considerations.
There have been many ways of legally challenging such and other abusive
structures, based on both domestic and international law. In both areas,
special anti-avoidance rules (SAARs) and general anti-avoidance rules
(GAARs) have been developed and implemented.
(b) Domestic general anti-avoidance rules Many states have GAARs in

their domestic tax regime. These can be unwritten or written GAARs. There
are various ways of characterizing these GAARs, and in some cases they are
not specific rules but parts of a broader interpretation methodology.204 We
see at least the following categories:
• approaches aiming at taxing the economic substance and not the mere
formal appearance of a transaction, which are sometimes considered
substance-over-form approaches, elements of which can be found in
many states but to different degrees;
• approaches aiming at reviewing the main or one of the main purposes
of a transaction; and
• approaches derived from an abuse-of-law or similar doctrine (eg
in the Netherlands, the courts have referred to the fraus legis doc-
trine derived from Roman law to challenge aggressive tax planning
schemes).205
These categories may overlap, and it is impossible to draw clear delimitation

lines between them.
204 See eg Richard Krever, ‘General Report: GAARs’ in Michael Lang and others (eds),
GAARs—A Key Element of Tax Systems in the Post-BEPS World (IBFD 2016) 4.
205 See with further details Sigrid Hemels, ‘Netherlands’ in Michael Lang and others (eds),
GAARs—A Key Element of Tax Systems in the Post-BEPS World (IBFD 2016) 437.
(c) Domestic special anti-avoidance rules Not only since the BEPS project
have states implemented SAARs with a cross-border reach. These SAARs
include, inter alia:
• CFC rules;206
• anti-hybrid rules;207
• exit taxation rules;208 and
• interest limitation rules.209
Of course, states have many more SAARs, including those with no relation
to cross-border situations (ie SAARs that apply only to domestic situations).
(d) International unwritten general anti- avoidance rules As will be

shown in the next subsection, courts have also referred to unwritten anti-
abuse rules derived from general principles of international law.
(e) Current rules in Art 29 OECD MC (international written GAAR) Art

29 OECD MC contains two different approaches on how to tackle aggres-
sive tax planning structures. The first option is the inclusion of a limitation
on benefits (LOB) provision, as contained in Art 29 paras 1–8 OECD MC,
and the second option is to include a principal purpose test (PPT), as con-
tained in Art 29 para 9 OECD MC.
The current wording of Art 29 OECD MC is the result of long and in-
tensive negotiations within Action 6 of the BEPS project.210 During such
negotiations, the OECD members and later the members of the Inclusive
Framework agreed to a minimum standard. The minimum standard means
1, Art 7 et seq.
1, Art 9.
1, Art 5.
1, Art 4.
210 On the BEPS project see Chapter 4, Section 2.1.2.
including a PPT or including a detailed LOB provision combined with anti-

conduit rules.211
LOB’s mechanism is different from PPT’s. The LOB clause contains a list
of tests, one of which the taxpayer has to pass to benefit from the treaty.
Therefore, the passing of one of the tests must be understood as an add-
itional requirement for treaty application. For instance, the following per-
sons (non-exhaustive!) are generally considered qualified persons under
the LOB clause in treaty practice as they pass one of the tests. This means
that if they are residents of one contracting state and directly or indirectly
receive income from the other contracting state, the treaty applies:
- individuals;
- listed companies;
- the contracting state and its political subdivisions; and
- certain non-profit organizations and recognized pension funds.
The goal of these tests is to assess situations in which the risk of treaty abuse
is rather low and thus granting treaty benefits is not likely to cause unjusti-
fied revenue losses. For instance, it would be too expensive to set up a listed
company in one jurisdiction for the purpose of aggressive tax planning, and
as such, it seems reasonable to grant treaty access to a listed company.
The PPT, however, works differently as it is not a test that must be passed
to have access to the treaty; conversely, if you already have access to the
treaty, the application of the PPT may lead to a non-application of the
treaty. Importantly, the current PPT contained in Art 29 para 9 OECD MC
is a PPT as the treaty benefits shall be denied if ‘obtaining the benefit was of
one of the principal purposes of any arrangement or transaction’. Therefore,
for the denial of the treaty benefits, it is sufficient to prove that one of the
principal purposes of the arrangement or transaction was to obtain the
treaty benefits.
It would also have been possible to define it as ‘the main purpose test’ (ie
establishing that the main purpose of an arrangement or transaction was
obtaining the treaty benefits).
The aforementioned would have limited the scope of the PPT but would
have led to greater legal certainty as the current wording of the PPT allows
tax authorities to apply it in a broad variety of situations because access to
211 With further references Art 29 para 1 OECD Commentaries on the Articles of the Model
Tax Convention (2017).
treaty benefits or tax savings in general is often an important factor con-

sidered in how enterprises set up their structures.212 From a technical per-
spective, the PPT triggers many challenging questions besides the issue of
whether granting treaty benefits was one of the principal purposes or the
main purpose of a structure or an arrangement.213
The PPT also contains a carve-out according to which the treaty benefit
shall not be denied if ‘it is established that granting that benefit . . . would be
in accordance with the object and purpose of the relevant provisions of this
Convention’.214
Example
Company A, a resident of state X, is a construction company and has
won a public tender in state Y for a project that will last approximately
20 months. However, instead of signing one contract, company A signs
one contract for 10 months, and its subsidiary signs a second contract for
another 10 months. In this case, it is obvious that one of the purposes of
splitting the contract is to rely on the double tax treaty between states X
and Y, according to which it is understood that a construction project will
not create a PE if the project lasts for less than 12 months.215
2.3.7 Final provisions

The final provisions contain rules on the entry into force216 of the treaty and
a termination clause.217 These provisions are not just of theoretical interest
as several treaties have been cancelled in the past. For instance, several
states have terminated their agreements with Mauritius218 because, inter
alia, these treaties were misused for aggressive tax planning.
212 The OECD has aimed to clarify the application of the PPT by providing examples in the
OECD Commentaries on the Articles of the Model Tax Convention (2017) on what falls under
the PPT and what does not (see para 182).
213 For instance, the question of how and whether a purposive interpretation considering
the preamble of the treaty has an influence on the application of the PPT. See on the interaction
between a purposive interpretation and the application of the PPT Robert Danon, ‘The PPT in
Post-BEPS Tax Treaty Law: It Is a GAAR but Just a GAAR!’ (2020) 74 Bulletin for International
Taxation 242.
214 Art 29 para 9 OECD MC (2017).
215 See Example J in Art 29 para 182 OECD Commentaries on the Articles of the Model Tax
Convention (2017).
216 Art 31 OECD MC (2017).
217 Art 32 OECD MC (2017).
218 As an example, the treaty between Mauritius and Indonesia was terminated as of 1 July
and 1 January 2005 respectively (see Esmée Chengapen, ‘Indonesia, Treaty with Mauritius
Terminated’ (2004) 10 Asia-Pacific Tax Bulletin 211).
2.4 Double tax treaties with respect to taxes

on estates and inheritances
Besides double tax treaties on income and capital, states have also signed
tax treaties with respect to estates and inheritance taxes, with the aim of
avoiding double taxation again due to overlapping taxing rights in the case
of estates and inheritances. These treaties, however, are not addressed in the
present book.
2.5 Treaties regulating mutual assistance in

tax matters
2.5.1 The Convention on Mutual Administrative Assistance in Tax

Matters
In 1988, the member states of the Council of Europe signed the multi-
lateral CMAATM, the most important framework agreement for mu-
tual assistance in tax matters. It contains the main forms of mutual
assistance:
- exchange of information on request (Art 5 CMAATM);

- automatic exchange of information (Art 6 CMAATM);
- spontaneous exchange of information (Art 7 CMAATM);
- simultaneous tax examinations (Art 8 CMAATM); and
- tax examinations abroad (Art 9 CMAATM).
However, it is important to understand that in many ways the CMAATM is

not self-executing. For instance, Art 6 CMAATM on the automatic exchange
of information is not a direct legal base for an automatic exchange of infor-
mation as it requires that states sign a special treaty on the implementation of
automatic exchange of information.
In the following, we will deal with the three most important forms of mu-
tual assistance in tax matters:
- exchange on request;
- automatic exchange of information; and
- spontaneous exchange of information.
We have already discussed the cross-border collection of taxes according to

Art 27 OECD MC as another means of mutual assistance between states.219
2.5.2 Exchange of information on request

2.5.2.1 Overview
Exchange of information on request is the traditional way of obtaining in-
formation from foreign tax authorities. These requests are mainly based on
two or three sources, respectively:
- provisions in double tax treaties following Art 26 OECD MC;

- provisions in double tax treaties following Art 26 UN MC; and
- provisions in tax information exchange agreements (TIEAs) following
Art 5 TIEA MC.
The provisions are very similar, and in the following, we will outline the
main features based on Art 26 OECD MC.
According to Art 26 para 1 OECD MC, information shall be exchanged
if the information ‘is foreseeably relevant for carrying out the provisions of
this Convention or to the administration or enforcement of the domestic
laws concerning taxes of every kind’. The key term in this provision is ‘fore-
seeably relevant’. Therefore, an exchange on request is not possible based on
such provision if the information to be provided is not foreseeably relevant.
The Commentary on the OECD MC defines foreseeably relevant as follows:
The standard of ‘foreseeable relevance’ is intended to provide for ex-

change of information in tax matters to the widest possible extent and,
at the same time, to clarify that Contracting States are not at liberty to
engage in ‘fishing expeditions’ or to request information that is unlikely
to be relevant to the tax affairs of a given taxpayer.220
A broad understanding of the term has also been confirmed by the do-
mestic courts.221 One of the goals is indeed to allow a broad exchange of

221 See for instance the many decisions of the Swiss Federal Supreme Court, eg Swiss Federal
Tax Administration v A, BGE 143 II 136, 12 September 2016.
information without at the same time ‘plac[ing] an excessive burden on the

requested authority’.222 For example, if a state asks another state to provide
it with information on all the nationals of the first state who have a bank
account with a specific bank in the second state, it would be a prohibited
fishing expedition.223
However, it is not considered a prohibited fishing expedition but an al-
lowed group request if a state asks another state to provide it with all the
information (i) on the account holders of bank X, (ii) who have a domicile
address in the other contracting state, (iii) who were threatened with ter-
mination of the banking relationship if they were unable to provide evi-
dence of tax compliance, and (iv) who failed to provide evidence that they
were tax compliant.224
In the situation described, it is clear that the defined group likely consists
of tax evaders, and their account information would be necessary to assess
them.225 Therefore, the information is foreseeably relevant, although the af-
fected persons are not identified by their name. Of course, the wording of
the actual exchange of information provision may contain additional re-
quirements for approval of exchange of information.
2.5.2.2 Limitations
Art 26 OECD MC contains several further limitations to exchange of infor-
mation. These include the following:
- if the requested state is obliged ‘to carry out administrative measures at

variance with the laws and administrative practice’226 of that state;
- if the requested information ‘is not obtainable under the laws or in the
normal course of the administration’227 of the requested state; and
222 See for instance Judgment of the ECJ of 16 May 2017, Berlioz Investment Fund SA v
Directeur de l’administration des contributions directes, C-682/15, ECLI:EU:C:2017:373,
para 68.
223 See also the example in Art 26 para 8.1 OECD Commentaries on the Articles of the
224 For a similar case see Swiss Federal Supreme Court, Swiss Federal Tax Administration v
A, BGE 143 II 136, 12 September 2016. For a more extreme version of such group or list re-
quest see Swiss Federal Supreme Court, Swiss Federal Tax Administration v UBS Switzerland
AG, BGE 146 II 150, 26 July 2019.
225 Of course, this requires that group requests are indeed possible under the applicable
treaty. For instance, the first treaties signed after Switzerland abolished the banking secrecy
still contained the requirement that the account holder needs to clearly identified.
226 Art 26 para 3 lit a OECD MC (2017).
227 Art 26 para 3 lit b OECD MC (2017).
- if the transfer of information ‘would disclose any trade, business, in-

dustrial, commercial or professional secret or trade process, or in-
formation the disclosure of which would be contrary to public policy
(ordre public)’.228
Moreover, the information to be transferred to the other state shall be dis-

closed only to persons officially entrusted with the task of assessing and
collecting taxes (understood in a broad sense), for which purpose the infor-
mation was obtained. This means that such information shall be used only
for such purposes.229
2.5.3 Automatic exchange of information

The automatic exchange of information is mentioned in Art 6 CMAATM.
However, states need to agree on a bilateral or multilateral agreement to im-
plement bilateral automatic exchange of information as Art 6 CMAATM is
not a self-executing provision for the application of an automatic exchange
of information between two states. The MCAA is particularly relevant. To
date, it has been signed by 61 jurisdictions, and this allows states to choose
among the contracting countries whom they want to have an automatic ex-
change of information with.
To implement the very technical automatic exchange of information,
a common reporting standard was developed, which serves as the main
guideline in practice.230 Simply put, the automatic exchange of information
works as follows:231 a reporting financial institution reviews its financial ac-
counts to identify reportable accounts by applying due diligence rules, and
then reports the relevant information.
This means that only financial institutions have to report the requested
information. Such institutions include depositary institutions, custodial
institutions, specified insurance companies, and investment entities.232
However, the common reporting standard also excludes specific financial
institutions from reporting the requested information (ie the so-called
non-reporting financial institutions). This includes, for instance, central
228 Art 26 para 3 lit c OECD MC (2017).

229 Art 26 para 2 OECD MC (2017).
230 OECD, Standard for Automatic Exchange of Financial Account Information in Tax
Matters (OECD Publishing 2014).
231 OECD, Standard for Automatic Exchange of Financial Information in Tax Matters—
Implementation Handbook (2nd edn, OECD Publishing 2018) 56.
232 For a definition of these terms see OECD, Standard for Automatic Exchange of Financial
Account Information in Tax Matters (OECD Publishing 2014) Chapter VIII.
banks, international organizations, and other specified low-risk financial

institutions.
Financial institutions have to identify their reportable accounts. The
reportable accounts are accounts held by an account holder who is a re-
portable person, or by a so-called passive non-financial entity with one or
more controlling persons who are reportable persons. Reportable persons
are individuals or entities residing in a reportable jurisdiction (ie a juris-
diction with whom the resident state of the financial institution applies an
automatic exchange of information). Therefore, in the case of passive non-
financial entities, all the controlling persons have to be disclosed. Therefore,
it is not possible to avoid an automatic exchange of information concerning
an individual’s bank account by interposing a mere passive investment
vehicle.
Once the financial institution has followed the necessary due diligence
process and has identified the accounts to be reported, it will transfer the
information to the competent authorities in the state of residence of the fi-
nancial institution, and such state will transfer the information to the resi-
dent states of the account holders.
The financial information that will be reported includes not only the
account balance but also the interests, dividends, income from certain in-
surance products, sales proceeds, and other income generated with assets
held in the account.233
2.5.4 Spontaneous exchange of information

Besides the exchange on request and the automatic exchange, spon-
taneous exchange of information has emerged as a third form of ex-
change of information in tax matters. Even though the CMAATM has
contained a provision on spontaneous exchange of information since
2010,234 the main driver behind an international system of spontaneous
information exchanges was BEPS Action 5.235 As one of its minimum
standards, BEPS Action 5 required that states implement an automatic
exchange of tax rulings under the umbrella of a spontaneous exchange
of information.
233 For details see OECD, Standard for Automatic Exchange of Financial Account Information
in Tax Matters (OECD Publishing 2014) Chapter I.
234 See Art 7 CMAATM (2010).
235 See OECD/G20, Countering Harmful Tax Practices More Effectively, Taking into Account
Transparency and Substance, Action 5—2015 Final Report (OECD Publishing 2015).
Customary International Tax Law 117
The system works as follows. If a tax ruling falls within one of the fol-
lowing categories, it will be exchanged automatically with a defined group
of states:236
- cross-border TP rulings (including advance pricing arrangements

(APA));
- cross-border rulings giving a unilateral downward adjustment;
- PE rulings;
- related party conduit rulings; and
- rulings related to preferential regimes.
The states with which the ruling is actually exchanged depends on the cat-
egory of the ruling, but in general terms the ruling is sent to states that have
an interest in obtaining the information contained in such ruling (ie states
that may be affected by the ruling).
3. Customary International Tax Law

3.1 Traditional requirements
Customary international law is explicitly mentioned in Art 38 para 1 lit b

ICJ Statute as a source of international law. Customary international law
derives from a consistent (and widespread) international state practice and
opinio iuris ‘as to be evidence of a belief that this practice is rendered obliga-
tory by the existence of a rule of law requiring it’.237
The interaction between the two requirements is challenging, and the
debate on which carries more weight depends on whether one subscribes
more to the voluntarist or to the positivist approach. There have also been
positions according to which only one of the two requirements must be ful-
filled.238 However, the ICJ has also in recent decisions clearly stated that the
236 For details see OECD/G20, Countering Harmful Tax Practices More Effectively, Taking
into Account Transparency and Substance, Action 5—2015 Final Report (OECD Publishing
2015) 45 et seq.
237 North Sea Continental Shelf Cases (Federal Republic of Germany v Denmark and
Netherlands) (Judgment of 20 February 1969), ICJ Rep 1969, 44.
238 See the various references stated by Omri Sender and Michael Wood, ‘A Mystery No
Longer? Opinio Juris and Other Theoretical Controversies Associated with Customary
International Law’ (2017) 55 Israel Law Review 299 (in fn 34 and 35).
proof of the existence of customary law requires both a settled practice plus
an opinio iuris.239
In the following, rather than further digging too much into such meth-
odological dispute, we will outline the traditional requirements of sufficient
state practice and opinio iuris to determine if customary international tax
law really exists.240 Importantly, customary international law is binding for
all states unless states persistently object to a specific rule thereof.241
3.2 State practice
State practice encompasses the action or inaction of a state in relation to

other subjects of international law. With regard to taxation, this may mean
that a certain income is taxed or not taxed in a jurisdiction. It is not harmful
for the creation of customary law that a certain practice is not applied by all
states, but in an individual case, it is essential to review whether there is a
sufficient number of states following a certain rule.242
Conducting such analysis is also key to the review of whether states are at
all affected by a rule.243 As an example, how Austria taxes enterprises in the
oil extraction industry for their activities on the seabed may be of limited
importance as Austria does not have a seabed. In other words, with regard
to the question of whether there is a customary rule on how to tax enter-
prises for their activities on the seabed, Austria’s state practice is irrelevant.
For the analysis of whether there is sufficient state practice, the domestic
practice of states can of course provide some guidance. Moreover, and this
may be of particular importance from a tax perspective, the treaty practice
of states can also be a sign of the existence of customary international law.
It may even be the most important evidence that courts can use to rule that
customary international law exists on the matter at hand, although courts
239 See eg Jurisdictional Immunities of the State (Germany v Italy: Greece intervening),
(Judgment 2012), ICJ Rep 2012, 55.
240 For details from a tax perspective see already Peter Hongler, Justice in International Tax
Law (IBFD 2019)141 et seq.
241 Hugh Thirlway, The Sources of International Law (2nd edn, Oxford University Press
2019) 84 et seq.
2019) 71 et seq.
243 See Gideon Boas, Public International Law (Edward Elgar 2012) 76, with reference to the
Asylum case.
do not often explicitly refer to both requirements for the existence of cus-
tomary international law.244
3.3 Opinio iuris
The opinio iuris requirement means that, according to the case law of the
ICJ, the applicable rule reflects a ‘belief that [the] practice is rendered ob-
ligatory by the existence of a rule or law requiring it’.245 Therefore, the
person referring to customary international law needs to prove that there is
indeed a necessity for a rule.
However, the underlying justification for an opinio iuris as the subjective
element of customary international law is disputed. On the one hand, it can
be argued that an opinio iuris is necessary to demonstrate that there is con-
sent among states that a certain rule should be followed. On the other hand,
the opinio iuris element can also be required to demonstrate that the be-
haviour of a state has created reasonable expectations.246 A last group of
authors have argued that it is sufficient that a certain state practice exists to
justify that a certain rule belongs to customary international law.247
In the following, we will try to refer to some of these opinions while out-
lining some potential examples from a tax perspective. However, from our
perspective the opinio iuris requirement is key to distinguish a binding rule
from mere usage or habit.248 The International Law Commission drafted
and published conclusions on the identification of customary international
law and it also held that the for the identification of an opinio iuris ‘practice
in question must be undertaken with a sense of legal right or obligation’.249
Therefore, the key goal of the opinio iuris requirement is to identify whether
244 For details see Stephen J Choi and Mitu Gulati, ‘Customary International Law: How
Do Courts Do it?’ in Curtis A Bradley (ed), Custom’s Future, International Law in a Changing
World (Cambridge University Press 2016) 117 et seq.
245 North Sea Continental Shelf Cases (Federal Republic of Germany v Denmark and
Netherlands) (Judgment of 20 February 1969), ICJ Rep 1969, 44.
246 See for more details from a tax perspective Peter Hongler, Justice in International Tax
Law (IBFD 2019) 151 et seq.
247 This is, in simplified terms, the opinion of Maurice Mendelsohn, ‘The Subjective Element
in Customary International Law’ (1995) 66 British Yearbook of International Law 177, 206
et seq.
248 UN General Assembly, Identification of Customary International Law, 17 May 2012, A/
CN.4/L.908, Conclusion No 9.
249 UN General Assembly, Identification of Customary International Law, 17 May 2012, A/
CN.4/L.908, Conclusion No 9.
a practice is ‘accepted as law’ as indicated by Art 38 para 1 lit b ICJ Statute or

whether a certain practice is followed by other motives.250
3.4 Examples from a tax perspective
3.4.1 Preliminary remarks

There are several reasons that customary international law has not been an im-
portant source of international tax law. One reason relates to the importance
of the legality principle, as appears in most countries’ constitutions, case law,
or domestic tax laws. This means that levying taxes must have a sufficient legal
base, and as tax law often requires written legal provisions, the existence of
customary international tax law is less likely.251
Besides the legality principle, there are other reasons. For instance, tax
rules are often very detailed and technical, and in very technical areas
the creation of customary international law is less likely.252 For instance,
we have shown earlier that the current definition of a PE in Art 5 OECD
MC includes many technical elements that need to be considered to de-
termine if there is indeed a PE (eg the agency PE in Art 5 paras 5 and
6 OECD MC, but also the exceptions in Art 5 para 4 OECD MC).253 It
seems impossible that such a detailed rule can develop as a customary
rule of international tax law. Another reason why it is unlikely for cus-
tomary international tax law to emerge is that customary international
law requires a homogeneous application (ie that several states apply the
same rule). The problem with international tax law is that it is reciprocal
and dependent on bilateral negotiations. For instance, a state may re-
quire a 0% withholding tax on intra-group dividends while another state
may ask for a broad PE definition.
250 With further references see Omri Sender and Michael Wood, ‘A Mystery No Longer?
Opinio Juris and Other Theoretical Controversies Associated with Customary International
Law’ (2017) 55 Israel Law Review 299, 301 et seq.
251 See already Ottmar Bühler, Prinzipien des Internationalen Steuerrechts (Internationales
Steuerdokumentationsbüro 1964) 36.
252 See for a general overview on why customary international law becomes more and more
obsolete Joel P Trachtman, ‘The Growing Obsolescence of Customary International Law’ in
Curtis A Bradley (ed), Custom’s Future, International Law in a Changing World (Cambridge
University Press 2016) 172 et seq.
In the past years, tax scholars have referred to several rules that could be
part of customary international law.254 We will discuss some potential ex-
amples in the following subsections.
3.4.2 Interpretation principles according to Art 31 VCLT

As stated by many tax scholars255 and courts,256 the interpretation principles
contained in Art 31 VCLT have become part of customary international
law. Therefore, these principles are also relevant for the interpretation of tax
treaties between states that are not part of the VCLT. The result is that either
the elements of interpretation according to Art 31 VCLT will be followed or
the interpretation rules as part of customary law will be applied.257
3.4.3 Prohibition of juridical double taxation

As there are more than 3,000 double tax treaties aiming at avoiding or even
prohibiting double taxation, it can be argued that the prohibition of double
taxation has become part of customary international tax law.258 However,
there are very strong arguments against such a position. First, in general,
states do not prohibit double taxation if there is no applicable double tax
treaty; thus, there is no sufficient state practice that demonstrates the will of
states to avoid double taxation in all situations. Moreover, there is also no
opinio iuris demonstrating that a rule for the avoidance of double taxation
has become customary international law. As was shown earlier, even in a
treaty context, states are not ready to avoid double taxation in all situations
as, for instance, it is not mandatory to resolve MAPs.259
254 See in particular Céline Braumann, ‘Taxes and Custom: Tax Treaties as Evidence for
Customary International Law’ (2020) 23 Journal of International Economic Law 747; Brian D
Lepard, Customary International Law, A New Theory with Practical Applications (Cambridge
University Press 2010); Reuven S Avi-Yonah, ‘International Tax as International Law’ (2004)
57 Tax Law Review 483; Reuven S Avi-Yonah, International Tax as International Law, An
Analysis of the International Tax Regime (Cambridge University Press 2007) 1 et seq; Peter
Hongler, Justice in International Tax Law (IBFD 2019)139 et seq.
255 Eg Frank Engelen, Interpretation of Tax Treaties under International Law (IBFD 2004)57.
256 Eg WTO, China: Measures Related to the Exportation of Various Raw Materials—Reports of the
Panel (22 February 2012) WT/DS394/R, WT/DS395/R, WT/DS398/R, para 7.115; from a tax perspec-
tive see eg Swiss Federal Administrative Court, A v Swiss Federal Tax Administration, A-4911/2010,
30 November 2010 cons 4.1; with further references see John F Avery Jones, ‘Treaty Interpretation’ in
Richard Vann and others (eds), Global Tax Treaty Commentaries (IBFD 2014) Chapter 3.1.
257 The topic of interpretation the customary rules on interpretation is addressed by Panos
Merkouris, ‘Interpreting the Customary Rules on Interpretation’ (2017) 19 International
Community Law Review 126.
258 For more details on this topic see Peter Hongler, Justice in International Tax Law (IBFD
2019) 168 et seq.
3.4.4 Non-taxation of diplomatic and consular personnel

We have seen earlier that the VCDR and the VCCR contain specific rules
for the exemption of diplomatic and consular personnel.260 Not only these
traditional fiscal privileges but also other privileges in the VCDR and the
VCCR were based on customary international law. These privileges are
granted to enable diplomatic and consular personnel to carry out their
functions effectively.261 As such, it seems that these privileges are granted
not only as a matter of courtesy but also because there seems to be a legal
rule requiring the grant of such privileges. As a consequence, the non-
taxation of diplomatic and consular personnel has become part of cus-
tomary international law, but what it exactly means is not clear.
For instance, it is disputed whether Art 34 VCDR with the following
wording is in its entirety part of customary international law or whether
only one of the privileges is part of customary international law:
A diplomatic agent shall be exempt from all dues and taxes, personal or
real, national, regional or municipal, except:
• indirect taxes of a kind which are normally incorporated in the price of

goods or services;
• dues and taxes on private immovable property situated in the territory
of the receiving State, unless he holds it on behalf of the sending State
for the purposes of the mission;
• estate, succession or inheritance duties levied by the receiving State,
subject to the provisions of paragraph 4 of Article 39;
• dues and taxes on private income having its source in the receiving
State and capital taxes on investments made in commercial undertak-
ings in the receiving State;
• charges levied for specific services rendered; and
• registration, court or record fees, mortgage dues and stamp duty, with
respect to immovable property, subject to the provisions of Article 23.
Indeed, this shows why customary international law is not effective for
regulating very technical areas. It is impossible to agree on all these detailed
provisions by way of creating customary international tax law. Therefore,

261 AB Lyons, ‘Personal Immunities of Diplomatic Agents’ (1954) 31 British Yearbook of
International Law 301, 307.
it is unlikely that many rules of customary international tax law develop as

the technical details disallow the creation of customary international law
through its main elements: state practice and opinio iuris.
3.4.5 Arm’s length principle

As was shown in Section 2.3.5.6, the arm’s length principle is a key element
of the international tax regime as it is decisive for the determination of both
the income of a PE and the appropriate price for transactions between the
concerned parties.
As it is contained both in the UN MC and the OECD MC and is applied
worldwide, it can be argued that it has become part of customary inter-
national law.262 However, even though the arm’s length principle applies in
a treaty context worldwide, there are powerful arguments that it does not
apply in a non-treaty context as a rule of customary international law.263
For instance, states infringe the arm’s length principle in several ways
in non-treaty situations. This can happen through the application of CFC
rules264 and worldwide tax systems (ie not unilaterally exempting the in-
come of foreign PEs, although the application of the arm’s length principle
will lead to an allocation of parts of the income to such PE).
3.4.6 The principal purpose test

Authors have suggested that the PPT has become part of customary inter-
national law.265 More than 130 states have become part of the inclusive
framework266 and have therefore agreed to the BEPS minimum stand-
ards.267 This means that states will implement either a PPT or a LOB pro-
vision with anti-conduit rules in their treaties. Nearly all states (except the
US) have agreed to include PPTs in their treaties.268
262 This position is also taken by a few authors (see eg Reuven S Avi-Yonah, ‘International
Tax as International Law’ (2004) 57 Tax Law Review 483, 500). See the references stated by
Brian D Lepard, Customary International Law, A New Theory with Practical Applications
(Cambridge University Press 2010) 268 et seq; however, Lepard is of a different opinion.
263 For more details see Peter Hongler, Justice in International Tax Law (IBFD 2019) 175
et seq.
264 There are, of course, various ways of designing CFC rules; however, if a state attributes
passive income with no analysis of whether such income would also be attributable following
an arm’s length principle, CFC rules can indeed infringe the arm’s length principle.
265 Irma Johanna Mosquera Valderrama, ‘BEPS Principal Purpose Test and Customary
International Law’ (2020) 33 Leiden Journal of International Law 745.
268 For details see Irma Johanna Mosquera Valderrama, ‘BEPS Principal Purpose Test and
Customary International Law’ (2020) 33 Leiden Journal of International Law 745.
It is obvious that there is a widespread state practice applying the PPT as

an anti-abuse measure for the application of a double tax treaty. However,
again, there is a certain reluctance to agree that there is an opinio iuris on
the PPT and to thus conclude that the PPT has become part of customary
international law. The main reason for this is that with respect to the BEPS
minimum standards, some states agreed to these as they were afraid of the
negative consequences of their not doing so. The fear of being blacklisted
was indeed an important driver behind agreeing to the BEPS minimum
standards. Therefore, it is safe to assume that there are some states that were
not inclined to agree to the minimum standards because they believe that
there is no rule regarding it that is recognized as law (ie a customary rule of
international law).
3.4.7 Fiscal transparency

Some authors have argued that exchange of information on request has be-
come part of customary international tax law.269 It is undisputed that there
is widespread practice of exchanging tax-related information between jur-
isdictions. This has been discussed earlier.270 As a consequence, there seems
to be sufficient state practice of such that it can be assumed that such rule
has become part of customary international law.
However, there is an important claim against the existence of an opinio
iuris that cross-border exchange should be part of international law. Cross-
border exchange has been enforced through coercive measures, which
means that some states agreed to a cross-border exchange only because
they were threatened with negative economic consequences if they did not
agree to it, such as becoming blacklisted.
This is of course not an argument against the cross-border exchange of
information but against the position that cross-border exchange of infor-
mation has become part of customary international law. There is no un-
written customary rule requiring cross-border transparency, but there is an
agreement among states to implement rules on exchange of information
and to make these parts of international treaties because the initially non-
compliant states were threatened with negative economic consequences if
they did not comply.
269 Roberto Codorniz Leite Pereira, ‘The Emergence of Transparency and Exchange of
Information for Tax Purposes on Request as an International Tax Custom’ (2020) 48 Intertax
624. See also Pasquale Pistone, ‘Exchange of Information and Rubik Agreements: The
Perspective of an EU Academic’ (2013) 67 Bulletin for International Taxation 216.
270 See Section 2.5.
General Principles of International Tax Law 125
4. General Principles of International

Tax Law
4.1 Introduction
Besides customary international law and treaty law, general principles of

international law are mentioned in Art 38 para 1 lit c ICJ Statute as the third
source of international law.
The goal of these principles is, inter alia, to avoid non-liquet situations
(ie situations in which the judge cannot decide the case based on the other
sources of international law). However, the general principles according
to Art 38 para 1 lit c ICJ Statute have also have a limiting effect as judges
should consider whether there are indeed general principles of law influ-
encing a decision. Courts can therefore not decide on the basis of their own
discretion.
There is a dispute among international lawyers on whether the general
principles of law are valid because of their widespread application in the
domestic laws (in foro domestic) of several states or because they are prin-
ciples that apply to legal relations in general.271 The first approach will re-
quire an analysis of domestic laws in a comparative manner, and the second
will require a more moral-based approach to prove the validity of a certain
general principle of law. The dispute relates to a more fundamental under-
standing of international law as strictly a positivist legal regime or a natur-
alist one.
For instance, a positivist would take the position that the validity of a rule
depends only on the will (or consent) of the states, and therefore, it must be
proven by reference to the domestic law. However, a naturalist would not
require such codification or application within the domestic law to prove
the validity of a rule but would, inter alia, require that the international legal
system include certain general principles, believing that these are inherent
in the concept of law.
For the purpose of the present study, we agree with Ellis that ‘the val-
idity of a general principle would have to be grounded in the soundness and
persuasiveness of a legal argumentation rather than in claims about the ob-
jective nature of law or implicit state consent’.272 This is not a pure positivist
271 For details see Peter Hongler, Justice in International Tax Law (IBFD 2019) 191 et seq.
272 Jaye Ellis, ‘General Principles and Comparative Law’ (2011) 22 European Journal of
International Law 949, 971.
understanding of the source of law, but it does not mean that we hold that
any moral value can justify the existence of the general principles of law.
For instance, and referring to tax law, the moral claim that upholding
fairness or justice requires that double taxation be prohibited in cross-
border circumstances does not mean that the prohibition of double tax-
ation is considered a general principle of law with a legal value. A mere
moral-based justification of general principles of law can be misused, and
as there are many different moral understandings at a global level, there is a
significant risk of parochialism if such view is to be accepted. General prin-
ciples should therefore not be understood as mere (political) value-based
claims, but there is a need to evaluate whether a certain principle is indeed a
valid legal principle within the international law regime.
The way these general principles are used can differ. As an example, these
principles can even have a corrective effect in the sense that a treaty obliga-
tion can be lifted by referring to a general principle of law, but these prin-
ciples can also serve as a ‘necessary complement to a series of legal rules’.273
4.2 Examples from a tax perspective
In the following, we will refer to three examples that can be considered

general principles of international law according to Art 38 para 1 lit c ICJ
Statute and that are part of the international tax regime.274
4.2.1 Abuse of law

With the increase of international tax planning, the abuse-of-law principle
has gained momentum in international tax law as it has been used to chal-
lenge the aggressive tax planning structure. However, the legal source of
the abuse-of-law principle is highly disputed in international law. This is
true even though there is broad agreement that the abuse-of-law doctrine
should apply in international law.275
273 Robert Kolb, ‘Principles as Sources of International Law (with Special Reference to Good
Faith)’ (2006) 53 Netherlands International Law Review 1, 34.
274 For further details see Peter Hongler, Justice in International Tax Law (IBFD 2019) 189
et seq.
275 See the impressive study of Robert Kolb, La bonne foi en droit international public
(Presses Universitaires de France 2000) 442 et seq.
The abuse-of-law principle is indeed a valid principle in international

law, but it is difficult to clearly define it as it has different appearances.276
However, if we recall that one of the goals of the general principles is to
avoid highly inequitable decisions or non-liquet situations, it seems persua-
sive to argue that the abuse-of-law principle should also be applicable in an
international law framework as a general principle of law even though its
contents are not clear. In other words, it is not detrimental to the validity
of the abuse-of-law principle that there is no single definition of the term
abuse of law in international law.
From a tax perspective, courts have referred to an unwritten abuse-of-
law principle to challenge aggressive tax planning structures if tax treaties
did not yet contain specific anti-abuse measures such as PPT or LOB pro-
visions. For instance, the Swiss Federal Supreme Court in 2005 applied
an unwritten abuse-of-law principle derived from international law even
though the double tax treaty in question did not contain a specific anti-
abuse provision.277
However, some authors argue that the abuse-of-law principle does not
form a general principle of international tax law. One of the main argu-
ments for this is that there is no harmonized understanding of the term
abusive in various states, and as its content is uncertain, it should not be
applied.278 Uncertainty itself, however, does not pose a challenge to the val-
idity of a certain general principle if a more value-based approach will be
applied to justify the principle. The abuse-of-law principle is necessary to
avoid highly inequitable situations, but if a more positivist approach will
276 Robert Kolb, La bonne foi en droit international public (Presses Universitaires de France
2000) 476 et seq. But it seems that certain key elements are commonly agreed upon (for fur-
ther details see Bin Cheng, General Principles of Law as Applied by International Courts and
Tribunals (Grotius Publications Limited 1987) 132 et seq; Pierre-Yves Marro, Allgemeine
Rechtsgrundsätze des Völkerrechts, Zur Verfassungsordnung des Völkerrechts (Schulthess 2010)
231 et seq).
277 Swiss Federal Supreme Court, A v Swiss Federal Tax Administration, 2A.239/2005,
28 November 2005. The Swiss Federal Supreme Court did not refer to Art 38 para 1 lit c of
the Statute of the ICJ (1945), but the use of the term ‘general principle of law’ (‘allgemeiner
Rechtsgrundsatz’) could lead to the conclusion that the Court understands the abuse of law
principle as applied in this case, as a general principle of law according to Art 38 para 1 lit c
of the Statute of the ICJ (1945). For details see Peter Hongler, Justice in International Tax Law
(IBFD 2019) 197 et seq. The legal environment for an unwritten or written anti-abuse provi-
sion is different in the EU, see Wolfgang Schön, ‘Rechtsmissbrauch im europäischen (Steuer-)
Recht, Teil 1’ (2020) 31 Europäische Zeitschrift für Wirtschaftsrecht 637.
278 Luc de Broe, International Tax Planning and Prevention of Abuse (IBFD 2008) 315. It is
indeed an empiric fact that there is no homogeneous practice in the different states.
be applied, it can indeed be argued that such principle is not valid in inter-
national law as no homogeneous understanding of it can be derived from
domestic laws.
4.2.2 Estoppel
Estoppel prohibits contradictory behaviour to the extent that a party could
not claim a certain right if doing so is in contrast to such party’s past behav-
iour. In the Temple of Preah Vihear Case, the ICJ held that Thailand was
bound by a map whose validity it did not oppose even though the boundary
line reflected therein did not correspond to the true watershed line.279
Furthermore, in the Fisheries Case, the ICJ implicitly applied the estoppel
principle. According to the ICJ, Norway consistently applied its border
delimitation mechanism, and the UK did not contest it for more than
60 years.280 Norway was therefore protected by the principle of estoppel.
Even though the general concept of estoppel seems obvious, the exact
content of the estoppel principle is disputed, but such vagueness is again
not detrimental as these general principles aim to find a solution in many
different and, inter alia, non-liquet circumstances. The principle of estoppel
has sometimes been referred to from an international tax law perspec-
tive. Engelen argued, for instance, that due to the principle of estoppel, the
Commentary on the OECD MC may be binding for the OECD member
states as such states could have opposed part of the Commentary by stating
their observations thereof but they did not.281 However, this argument is
not persuasive as it does not relate to an act of another state that ought to be
estopped; rather, it is an act of an international organization.282
Another example in which the estoppel principle may be of relevance
from a tax perspective relates to border conflicts.283 In the following,
279 Case concerning the Temple of Preah Vihear (Cambodia v Thailand) (Judgment of 15
June 1962), ICJ Rep 1962, 32 et seq.
280 Fisheries Case (United Kingdom v Norway) (Judgment of 18 December 1951), ICJ Rep
1951, 116 et seq.
281 Frank Engelen, ‘Some Observations on the Legal Status of the Commentaries on the
OECD Model’ (2006) 60 Bulletin for International Taxation 105. For further details see Frank
Engelen, Interpretation of Tax Treaties under International Law (IBFD 2004) 458 et seq.
282 For more details see Peter Hongler, Justice in International Tax Law (IBFD 2019) 204
et seq.
283 As it has already been shown with respect to the Case concerning the Temple of Preah
Vihear (Cambodia v Thailand) (Judgment of 15 June 1962), ICJ Rep 1962 and with respect
to the Fisheries Case (United Kingdom v Norway) (Judgment of 18 December 1951), ICJ Rep
1951, the estoppel principle is traditionally used in border conflicts so it is not a surprise to
refer to an example of a border conflict also from a tax perspective.
reference is made to a fact pattern that was decided by the Swiss Federal
Supreme Court but in an intercantonal dispute.
Example
A restaurant is located at the top of a mountain pass that happens to be the
border between states A and B. Both states A and B were of the opinion
that the restaurant was standing on the territory of state A. As such, state
A levied both a VAT and a corporate income tax on the revenue and in-
come of the restaurant. However, during a reconstruction project of the
street that connects the two states, an engineer of state B found older maps
showing that the restaurant is actually sitting on the territory of state B. As
a consequence, state B retroactively levied a VAT on and taxed the income
of the restaurant.284 In such situation, it must be reviewed if state B has not
lost its right to tax the restaurant based on the principle of estoppel be-
cause it has been aware for many years that state A was taxing the income
of the restaurant and did not oppose such as it assumed that the restaurant
was sitting on the territory of state A.
To conclude, estoppel has thus far been of minor importance from an inter-
national tax perspective, but as was shown herein, it may be of relevance
for cases in which the tax dispute is actually a border dispute (including for
instance the taxation of offshore activities such as oil drilling).
4.2.3 Collision rules

Legal systems need collision rules to resolve conflicts between two op-
posing provisions. The two most important collision rules are lex posterior
derogat legi inferiori and lex specialis derogat legi generali. There is a meth-
odological dispute regarding the actual source of these collision rules in
international law.285 For the purpose of the present study, we follow the pos-
ition that these collision rules indeed have the quality of general principles
of international law. As early as 1964, Bühler already stated that both these
rules qualify as general principles of (tax) law.286
284 For a similar case but not referring to tax law see Swiss Federal Supreme Court, Canton
Valais v Canton Ticino, BGE 106 Ib 154, 2 July 1980.
285 For instance Erich Vranes, ‘Lex Superior, Lex Specialis, Lex Posterior—Zur Rechtsnatur
der «Konfliktlösungsregeln»’ (2005) 65 Zeitschrift für ausländisches öffentliches Recht und
Völkerrecht 391 et seq.
286 Ottmar Bühler, Prinzipien des Internationalen Steuerrechts (Internationales
Steuerdokumentationsbüro 1964) 39.
Collision rules apply in a broad variety of cases. For instance, it may

happen that a tax rule in a non-tax agreement conflicts with a double tax
convention or that a provision in a multilateral tax convention is not in line
with a provision in a bilateral tax convention. The following two examples
further explain the relevance and meaning of the mentioned collision rules:
• The lex specialis rule is relevant from a tax perspective as one can argue
that Art 3 para 2 OECD MC is a lex specialis provision as it requires a
court to follow the methodological approach provided therein rather
than the one provided in Art 31 et seq VCLT when interpreting a term
in a tax treaty.287
• The lex posterior rule can be of relevance, for instance, if states have
signed both a double tax convention and a multilateral convention
with deviating rules on the exchange of information. The principle of
lex posterior would suggest that the rules in the later agreement should
prevail.
5. Soft Law and Its Importance for

International Tax Law
5.1 Terminology
On the basis of a broad understanding of the term soft law,288 it can be said
that it is not necessary to apply a specific legislative or quasi-legislative pro-
cedure to create soft law. Therefore, soft law may be shaped even if a state
does not at all participate in its development. For instance, a publication of
the OECD may also affect the state actors of non-OECD member countries.
For a certain rule to qualify as soft law, it is sufficient that a few states con-
sider that such rule should be observed or complied with. As an example, if
some states agree to amend their treaties and include a PPT in all their fu-
ture treaties, the letter of intent that they will come up with to indicate their
agreement can qualify as a soft law.289 Even a draft of a publication of an
287 See eg Frank Engelen, Interpretation of Tax Treaties under International Law (IBFD 2004)
477 et seq.
289 See for a similar example of an intra-state agreement that is considered to be soft law
and not hard law Germany-UK Joint Statement, Proposals for New Rules for Preferential IP
Regimes (2014).
Soft Law and Its Importance 131
international organization qualifies as a soft law, but of course, the higher

the level of approval of a rule the closer it is to being considered a hard law.
5.2 Soft law and its effectiveness
To categorize a rule as a soft or hard law, it is important to determine if

the rule is binding or non-binding.290 In international law, however, binding
does not necessarily mean enforceable. The reason for this is that hard-law
provisions, such as those contained in a double tax treaty, may not be en-
forceable in cross-border circumstances. When a rule is binding, however,
its breach leads to legal responsibility.291 The term soft law, however, also
indicates that the rule considered should at least have a certain effect in the
sense that it does not qualify as ‘no law’. From an international law perspec-
tive, there is no general obligation for states to consider soft laws for their
state actions.292 To be considered a soft law, a provision should have the po-
tential to influence the behaviour of states and other actors, such as courts.
As put by Thirlway, soft law is:
considered as something more than mere political gestures, so that

there is an expectation of compliance even if there is no legal duty [foot-
note omitted].293
One of the main reasons that soft laws have increasingly been used in inter-
national tax law is that governing through them is less burdensome. For in-
stance, by implementing soft law instead of a hard law, the time-consuming
process of treaty negotiation (including the signing and ratifying of treaties)
can be avoided.294 States are also more likely to agree to soft law as they do
290 See, inter alia, Hugh Thirlway, The Sources of International Law (2nd edn, Oxford
University Press 2019) 186 et seq.
291 See generally Judith Goldstein and others, ‘Introduction: Legalization and World Politics’
in Judith Goldstein and others (eds), Legalization and World Politics (MIT Press 2001) 25.
292 However, see the decision Judgment of the ECJ of 13 December 1989, Salvatore Grimaldi
v Fonds des maladies professionnelles, C-322/88, ECLI:EU:C:1989:646, para 18.
2019) 189.
294 Niels Blokker, ‘Skating on Thin Ice? On the Law of International Organizations and the
Legal Nature of the Commentaries on the OECD Model Tax Convention’ in Sjoerd Dourma
and Frank Engelen (eds), The Legal Status of the OECD Commentaries (IBFD 2008) 17 et seq.
not lose their authority in such case.295 From a very practical point of view,
soft law may be used because an international organization is not compe-
tent to issue a binding hard law. Soft laws have indeed been effective tools
for steering the international tax regime. There are several explanations for
this, as presented below.
First, in the past years, soft law was sometimes combined with direct co-
ercive measures. A very prominent example of this was the abolishment of
the banking secrecy in many states. The implementation of cross-border
transparency and therefore the abolishment of the banking secrecy were
achieved through the publication of soft law such as the recommendations
of the Global Forum. At the same time, states applied coercive measures
such as blacklisting non-compliant states to enforce their compliance. In
the words of the G20:
We stand ready to deploy sanctions to protect our public finances

and financial systems. The era of banking secrecy is over. We note
that the OECD has today published a list of countries assessed by the
Global Forum against the international standard for exchange of tax
information.296
Second, another way of achieving compliance with soft law is through other
factors, such as the pressure of public opinion or through positive measures
such as the giving of participation incentives.297
A third possibility is to structure a soft law in such a way that states would
be forced to implement it as they would face negative consequences if they
do not implement it. Therefore, there is no direct coercion, but compliance
is achieved through indirect means. For instance, not following a certain
soft law may place a state at a competitive disadvantage.298
Fourth, compliance with soft law can be increased if the affected states
will also participate in the negotiation process for new soft law, such as
295 See generally Kenneth W Abbott and Duncan Snidal, ‘Hard and Soft Law in International
Governance’ in Judith Goldstein and others (eds), Legalization and World Politics (MIT 2001)
52 et seq.
296 G20, London Summit—Leader’s Statement (2009) para 15.
297 On participation incentives, see Itai Grinberg, ‘Building Institutions for a Globalized
World’ in Thomas Pogge and Krishen Mehta (eds), Global Tax Fairness (Oxford University
Press 2016) 21 et seq.
298 As it was outlined at a different instance, the linking rules according to OECD/G20,
Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2—2015 Final Report
(OECD Publishing 2015) are such an example. See Peter Hongler, Justice in International Tax
Law (IBFD 2019) 239.
Soft Law and Its Importance 133
international standards.299 Participation in the crafting of a soft law creates

a moral obligation to implement it. The participating states are of course
not legally bound to implement a soft law they helped craft, but they may be
indebted to the other states as the participation process has created duties
among states.300
5.3 Soft law in the field of taxation
The use of soft law within the international law regime is intense in the field
of taxation. In particular, in relation to mutual assistance in tax matters,
international organizations have published a huge number of soft-law in-
struments over the last year. To mention a few:
•
Commentary on the OECD MC;
•
Commentary on the UN MC;
•
Common Reporting Standard Implementation Handbook;
•
Commentary on the Competent Authority Agreement;
•
Commentary on the Common Reporting Standard;
•
Guidance on the Implementation of Country-by-Country Reporting,
BEPS Action 13; and
• all final BEPS reports.
The reasons for the use of soft laws within the international law regime are
manifold, and some have been mentioned herein. In tax matters, one of the
main reasons that soft laws have been intensively used in the past years is
that they allow fast alignment with dynamic development in practice, but it
may also be a sign that the institutional set-up in tax matters is weak in the
sense that there are no strong institutions with legislative power. Soft laws
allow an international organization to steer the behaviour both of states and
of individuals and corporations without having to implement hard law at
the international level, which may be challenging to do. From a tax perspec-
tive, international organizations’ resolutions generally have no binding ef-
fect,301 but this may not be true in the case of a resolution of the UN Security
299 See Ana Paula Dourado, ‘International Standards, Base Erosion and Developing
Countries’ in Geerten MM Michielse and Victor Thuronyi (eds), Tax Design Issues Worldwide
(Wolters Kluwer 2015) 184 et seq.
300 See Daniel Thürer, ‘“Soft Law”—eine neue Form von Völkerrecht?’ (1985) 104 Zeitschrift
für Schweizerisches Recht 429, 445 et seq.
301 See on the OECD’s resolution (binding or non-binding) Chapter 1, Section 4.3.
Council. Therefore, the debate in international tax law on the legal quality
of the resolutions of international organizations is less intense than that in
other areas of international law.302
6. EU Law and Taxation

6.1 Introduction
In the following section, we will outline the main elements of the EU tax
system. The term ‘EU tax system’ might imply that there is indeed a fiscal
union which is obviously not true. In fact, the EU Member States have only
partly limited their taxing authority by transferring certain powers to the
EU institutions. In addition, however, EU law has also significantly influ-
enced the domestic tax systems of the EU Member States through the appli-
cation of the fundamental freedoms in tax matters.
For the purpose of the following discussion, it is important to under-
stand that the EU tax system consists both of primary and secondary law
and both sources are relevant from a tax perspective. Primary law estab-
lishes the general principles on which the EU legal system is based. This
includes the Treaty on the EU (TEU),303 the fundamental freedoms in the
Treaty on the Functioning of the EU (TFEU),304 which are highly rele-
vant from a tax perspective, the European Atomic Energy Community
(EAEC),305 and Charter of Fundamental Rights (CFR).306 Primary law is
supplemented by secondary law implemented by the EU institutions. These
are legislative acts such as directives or regulations.
EU tax law is a very dynamic field and it has developed impressively not
only as a legal regime but also as an academic discipline since the first six
Member States signed the Treaty of Rome (EEC) in 1957. But of course, as
the BREXIT debate has shown, there is constant tension between domestic
competence of the Member States and competences which have explicitly
or implicitly been transferred to the EU. The debate is particularly delicate
302 From an international law perspective see Legal Consequences for States of the
Continued Presence of South Africa in Namibia (South West Africa) (Advisory Opinion of 21
June 1971), ICJ Rep 1971, 26 et seq.
303 Consolidated version of the TEU [2012] OJ C326/01.
304 Consolidated version of the TFEU [2012] OJ C326/01.
305 Consolidated version of the Treaty establishing the EAEC [2012] OJ C327/01.
306 Charter of Fundamental Rights of the EU [2012] OJ C326/391.
EU Law and Taxation 135
in tax matters as the competence to tax is considered to be a key function of

a nation-state.307
6.2 The fundamental freedoms and taxation
6.2.1 Introduction
As part of primary EU law, the fundamental freedoms play a key role in de-
signing the domestic tax systems in the EU Member States. The European
Court of Justice’s (ECJ) case law enables and enforces negative integration
as it limits the scope of action of States in tax matters, even though, direct
taxation is not harmonized in a comprehensive form through positive in-
tegration. Likely the starting point of a broad net of decisions which have
influenced the tax systems of EU Member States was Commission v France
(better known as ‘Avoir Fiscal’)308 in which the ECJ applied the fundamental
freedoms to direct tax matters for the first time.309 In this case, the Court
explicitly held that as there is no harmonization of (corporate) income tax-
ation, the tax position of enterprises in the EU might differ and this is per se
discriminatory but in general terms in line with the fundamental freedoms,
however, Member States are nevertheless not allowed to treat nationals and
foreign persons exercising their fundamental freedoms differently, that is to
the detriment of the latter.310
6.2.2 Scope
The fundamental freedoms protect, in essence, the exercise of cross-border
economic activities within the EU. However, if there is no economic activity
at issue, there are two subsidiary provisions (Arts 18 and 21 TFEU), which
also have direct effect. Art 18 TFEU contains a general non-discrimination
clause on grounds of nationality. Art 21 TFEU safeguards that EU citizens
shall have the right to move and reside freely within the EU. However, the
special fundamental freedoms as outlined below prevail over the subsidiary

308 Judgment of the ECJ of 28 January 1986, Commission of the European Communities v
French Republic, C-270/83, ECLI:EU:C:1986:37.
309 See for the long-lasting impact of the Avoir Fiscal decision Werner Haslehner, ‘ “Avoir
Fiscal” and Its Legacy after Thirty Years of Direct Tax Jurisprudence of the Court of Justice’
(2016) 44 Intertax 374.
310 Judgment of the ECJ of 28 January 1986, Commission of the European Communities v
French Republic, C-270/83, ECLI:EU:C:1986:37, para 24, at least with respect to the freedom of
establishment.
provisions in Arts 18 and 21 TFEU, and they are also of greater relevance for
tax purposes:
- Free movement of goods (Art 34 et seq TFEU): This provision is the

key provision for the functioning of the internal market of the EU. The
free movement of goods warrants the transfer of a tangible property
from one Member State to another Member State by prohibiting quan-
titative restrictions and measures having an equivalent effect. Such
fundamental freedom applies, therefore, both to imports and exports.
- Free movement of workers (Art 45 et seq TFEU): The free movement
of workers protects workers from discriminations based on nation-
ality. This includes, inter alia, the employment conditions but it also
includes social security or tax treatment. Several landmark decisions
of the ECJ in tax matters have been rendered under the umbrella of the
free movement of workers.311 In contrast, Art 21 TFEU does not re-
quire a person to be ‘employed’ in order to fall within its scope of appli-
cation. Therefore, if a person is not protected by the free movement of
workers, she/he might still refer to the free movement of EU nationals
according to Art 21 TFEU.
- Freedom of establishment (Art 49 et seq TFEU): Many of the deci-
sions that we will refer to in the following are cases in which the tax-
payer claims an infringement of the freedom of establishment. This
fundamental freedom includes both the right of individuals to set up
their business in another Member State but also for companies to set
up operations in another Member State. It also protects persons from
discriminatory treatment in their home state (eg in case of an exit tax).
To a certain extent and in simplified terms, the freedom of establish-
ment can be understood as the free movement of workers for self-
employed persons and corporations.
- Freedom to provide services (Art 56 et seq TFEU): The freedom to
provide service protects services which are normally provided against
remuneration.312 It prohibits restrictions on cross- border serv-
ices of nationals (individuals and corporate entities) that are settled/
311 See eg Judgment of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt v Roland
Schumacker, C-279/93, ECLI:EU:C:1995:31; Judgment of the ECJ of 8 May 1990, Klaus
Biehl v Administration des contributions du grand- duché de Luxembourg, C-175/88,
ECLI:EU:C:1990:186.
312 Art 57 para 1 TFEU [2012] OJ C326/01.
established in a Member State other than that of the person receiving

the services.313
- Free movement of capital and payment (Art 63 et seq TFEU): This
fundamental freedom prohibits restrictions on the transfer of capital
(in cash or in kind) for investment purposes and on payments which
are related to the exercise of another fundamental freedom. With re-
gard to investments, the free movement of capital covers basically all
kinds of investments, be it through loans but also through equity. It ap-
plies both to the free movement of capital between EU Member States
but also between an EU Member State and third states. It is therefore
important to note that the free movement of capital as the only funda-
mental freedom also protecting investors in third countries.314 We will
not specifically deal with the free movement of payment which plays
no significant role in tax matters but which is also covered by Art 63 et
seq TFEU.
These fundamental freedoms may apply simultaneously and the Court’s

approach to review whether these freedoms are infringed is in general the
same. Therefore, regarding the steps in the analysis of the ECJ, it makes in
general terms no difference whether the ECJ reviews a case under one or
under the other freedom. However, in relation to third countries the dis-
tinction is key as the free movement of capital is the only freedom that ap-
plies to third country situations.
6.2.3 Priority
Even though in most cases it is not of relevance whether one or the other
fundamental freedom is reviewed, the ECJ has developed a priority rule in
case two or more freedoms are applicable at the same time as this might
be relevant concerning third states. Interestingly, the ECJ in earlier deci-
sions has not given priority to any freedom or it has applied several free-
doms in parallel. However, since the early 2000s the Court only examines
the dominant freedom.315 In this respect, the following two priorities are
313 Art 56 para 1 TFEU [2012] OJ C326/01.

314 See, however, Art 64 para 1 TFEU [2012] OJ C326/01 which provides for a grandfather
provision concerning restrictions which exist on 31 December 1993 according to domestic law
(or regarding restrictions in Bulgaria, Estonia, and Hungary, 31 December 1999 is decisive).
315 See for an analysis of the development of the ECJ case law Sigrid Hemels and others,
‘Freedom of Establishment or Free Movement of Capital: Is There an Order of Priority?’ (2010)
19 EC Tax Review 19.
of relevance from a tax perspective. Both priorities follow the same under-
lying rationale that the dominant freedom shall prevail:
• Freedom of establishment vs free movement of capital: As the free

movement of capital compared to the freedom of establishment ap-
plies also to third country situations, it is of great interest how these two
freedoms interact. The main area in which both freedoms might often
overlap is the case of cross-border equity investments. The ECJ has de-
veloped some guidelines to define a rule of priority. First of all, if the
domestic statute is intended only to apply to shareholdings enabling a
definite influence on a company’s decision it falls into the scope of the
freedom of establishment and, vice versa, if the national legislation is in-
tended only to apply to shareholdings purchased with the sole intention
of making a financial investment than such rule shall be examined under
the free movement of capital.316 However, if the national provision does
both refer to qualifying shareholdings and mere portfolio investments,
the ECJ has ruled that under such circumstances in EU-internal situ-
ations reference is necessary to the actual facts of the case. If in such case
the requirements of Art 49 TFEU (ie qualifying shareholding) are ful-
filled, the free movement of capital is not applicable, and the case is exam-
ined under the freedom of establishment. In relation to third countries,
the free movement of capital always prevails in case of a neutral provision
(ie if the domestic provision is not intended only to apply to sharehold-
ings enabling a definite influence).317
• Freedom of services vs free movement of capital: In another deci-
sion concerning a financial service provider granting cross-border
loans, the Court held that the free movement of capital might indeed
be affected, however, it is ‘merely an unavoidable consequence of the
restriction on the freedom to provide services’.318 Therefore, in this
316 See Judgment of the ECJ of 13 November 2012, Test Claimants in the FII Group Litigation
v Commissioners of Inland Revenue, The Commissioners for Her Majesty’s Revenue & Customs,
C-35/11, ECLI:EU:C:2012:707, paras 91, 92. It is, obviously, not straightforward to decide
whether a rule only aims at covering situations in which a definite influence is at hand. The
Court, for instance, held that a 10% participation is not necessarily enabling a definite in-
fluence (eg Judgment of the ECJ of 3 October 2013, Itelcar—Automóveis de Aluguer Lda v
Fazenda Pública, C-282/12, ECLI:EU:C:2013:629, para 22).
317 Judgment of the ECJ of 13 November 2012, Test Claimants in the FII Group Litigation v
Commissioners of Inland Revenue, The Commissioners for Her Majesty’s Revenue & Customs,
C-35/11, ECLI:EU:C:2012:707, para 93 et seq.
318 Judgement of the ECJ of 3 October 2006, Fidium Finanz AG v Bundesanstalt für
Finanzdienstleistungsaufsicht, C-452/04, ECLI:EU:C:2006:631, para 48.
situation the freedom to provide services prevailed as the free move-

ment was consumed by the freedom to provide services.
6.2.4 The right comparison

It is not surprising that the ECJ regularly holds that residents and non-
residents are in general not comparable from a tax perspective.319 This
is a necessary conclusion in an EU setting in which direct taxes are not
harmonized and taxpayers are part of different tax systems. However, the
Court has in several cases concluded that with respect to certain specific
situations even a resident and non-resident might indeed be in the same
situation.320
The fundamental freedoms are partly worded as non-discrimination
provisions321 but also as prohibitions of cross-border restrictions.322 Non-
discrimination provisions refer in general to inbound situations in which
foreigners are discriminated compared to the domestic person.
Example
An entertainer is not allowed to deduct business expenses in the State of
performance even though he would have been allowed if he were resident
of that State. In this case, such denial is discriminatory as foreigners are
treated differently compared to residents.323
Restrictions, however, are not referring to a specific comparison but aim at

challenging situations in which a person is restricted from a cross-border
activity:
Example
For instance, Belgium income tax law provided for a provision according
to which, in simplified terms, income from immovable property was cal-
culated differently whether it was situated in Belgium (cadastral income)
319 See eg Judgment of the ECJ of 12 May 1998, Mr and Mrs Robert Gilly v Directeur des serv-
ices fiscaux du Bas-Rhin, C-336/96, ECLI:EU:C:1998:221, para 49.
320 See in particular Judgment of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt
v Roland Schumacker, C-279/93, ECLI:EU:C:1995:31, paras 36–38; for details see Section
6.3.1.1.
321 See eg Art 54 TFEU [2012] OJ C326/01.
322 See eg Art 63 TFEU [2012] OJ C326/01.
323 See eg Judgment of the ECJ of 12 June 2003, Arnoud Gerritse v Finanzamt Neukölln-
Nord, C-234/01, ECLI:EU:C:2003:340, paras 27–29, 55.
or whether it was situated abroad (rental income). According to the ECJ,

this is a restriction of the free movement of capital.324
Notwithstanding the different wording of the provisions, the ECJ, however,

understands all fundamental freedoms as both prohibiting discriminations
but also as prohibiting cross-border (discriminatory) restrictions.325 In
both situations, the ECJ reviews explicitly or implicitly whether a domestic
situation is treated differently (ie more favourably) than a cross-border situ-
ation. This requires that the Court draws a conclusion whether the domestic
or cross-border scenario is indeed comparable. Moreover, in tax matters
restrictions are in very general terms considered to be a discrimination as
well, as at least the ECJ compares often the cross-border situation with the
domestic situation in order to assess whether a provision is considered to be
a restriction.
6.2.5 Justifications
In case a Member State’s legislative provision infringes a fundamental
freedom by being discriminatory or restrictive, a discrimination or restric-
tion exists under the ECJ’s case law. However, such infringement might be
justified based on an explicit justification in the TFEU. For instance, Art 52
TFEU concerning the free movement of goods, states the following:
1. The provisions of this Chapter and measures taken in pursuance

thereof shall not prejudice the applicability of provisions laid down by
law, regulation or administrative action providing for special treatment
for foreign nationals on grounds of public policy, public security or
public health.326
Besides these explicit justifications, the ECJ has developed judicial justifica-
tions and we will refer to these unwritten justifications in the following.327
The underlying rationale behind these unwritten justifications is that
certain overriding public interests (eg effectiveness of fiscal supervision or
324 Judgment of the ECJ of 12 April 2018, European Commission v Kingdom of Belgium, C-
110/17, ECLI:EU:C:2018:250, paras 53, 54.
325 For a more detailed analysis see Sjoerd Douma, ‘Non-discriminatory Tax Obstacles’
(2012) 21 EC Tax Review 67.
326 See also Art 36, Art 45 para 3, Art 62, and Art 65 TFEU [2012] OJ C326/01.
327 Depending on the classification there are further justifications eg the neutralization in
the other contracting State, see Judgment of the ECJ of 8 November 2007, Amurta SGPS v
Inspecteur van de Belastingdienst/Amsterdam, C-379/05, ECLI:EU:C:2007:655, para 83.
the protection of public health) might justify an infringement of the funda-

mental freedoms.328 However, it is difficult to draw a common and detailed
underlying principle for these unwritten justifications,329 as they do also
not derive from a single principle.
• Balanced allocation of taxing powers: Since direct taxes are not har-
monized, Member States exercise their tax sovereignty in parallel,
which is also accepted by the ECJ. To be more precise, an allocation
of taxing rights in line with the rules set out in the OECD MC is in
general considered to be balanced. The justification of a balanced al-
location of taxing powers shall guarantee that taxing rights are not
asymmetrically undermined by the application of the fundamental
freedoms. Therefore, if a State implements measures to tax income for
which such State indeed has the taxing right according to a double tax
treaty, such measures are in general terms justified. This justification
plays an important role in cases concerning the cross-border offset of
losses. For instance, the fundamental freedoms do not allow taxpayers
to freely move their losses and profits from one Member State to an-
other.330 Consequently, a domestic company is not always allowed to
offset losses from an affiliated foreign operation, whereas losses from
an affiliated domestic company are taken into account.
• Tax avoidance: According to the case law of the ECJ, tax planning
per se is not prohibited and, therefore, measures to prohibit tax plan-
ning are not per se justified if they lead to a discrimination. Hence,
taxpayers might take advantage of the fundamental freedoms to im-
prove their tax position. As a result, States cannot implement any
discriminatory or restrictive measures to challenge tax planning
schemes. However, the ECJ held that an infringement of the funda-
mental freedoms is justified if the restriction imposed by the Member
State prevents structures involving the creation of wholly artificial ar-
rangements.331 In this case, the taxpayer shall not be protected by the
328 See already Judgment of the ECJ of 20 February 1979, Rewe- Zentral AG v
Bundesmonopolverwaltung für Branntwein, C-120/78, ECLI:EU:C:1979:42, para 8.
329 See in general concerning the case law of the ECJ Hanno Kube, Ekkehart Reimer, and
Christoph Spengel, ‘Tax Policy: Trends in the Allocation of Powers Between the Union and Its
Member States’ (2016) 25 EC Tax Review 247, 254.
330 See for details Section 6.3.2.
331 Judgment of the ECJ of 12 September 2006, Cadbury Schweppes plc and Cadbury
Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544,
para 55.
fundamental freedoms. Therefore, States might indeed discriminate in

cross-border situations but only so far as the applicable (and discrim-
inatory) rule aims at challenging a wholly artificial arrangement but
does not go beyond.
• Coherence: The maintenance of the coherence of a tax system can jus-
tify that States apply discriminatory or restrictive measures. The ECJ
has justified an infringement of a fundamental freedom if a benefit was
not granted to a foreign person but only to domestic persons as there
was a close link between the benefit and a burden of a taxpayer. The
foreign taxpayer did not receive such benefit as such person was not
subject to the same (burdensome) treatment.332 For example, the de-
ductibility of an insurance premium is only granted because the later
payment is subject to taxation.
• Effectiveness of fiscal supervision: This justification has been re-
ferred to in many decisions of the ECJ.333 The rationale is that States
need to make the necessary steps to avoid infringements of national
law (including tax law).334 For instance, it is not compatible with the
fundamental freedoms for a Member State to disallow deductions
for donations to charities only in cross-border situations just based
on the argument that such State cannot verify whether the foreign
charity is actually a charity. However, such a denial is justified pro-
vided that the taxpayer does not present evidence that the recipient is
indeed a charity or if there is no way of mutual assistance between the
States concerned by way of which the State could have access to such
information.335
6.2.6 Proportionality
The principle of proportionality is well known in many legal systems. It re-
quires that State actions (including legislative measures) do not go beyond
332 Coherence was only in very few cases upheld as sufficient justification see in particular
Judgment of the ECJ of 28 January 1992, Hanns-Martin Bachmann v Belgian State, C-204/90,
ECLI:EU:C:1992:35, para 28.
333 See eg Judgment of the ECJ of 18 December 2007, Skatteverket v A, C-101/05,
ECLI:EU:C:2007:804, para 54 et seq; Judgment of the ECJ of 14 September 2006, Centro
di Musicologia Walter Stauffer v Finanzamt München für Körperschaften, C-386/04,
ECLI:EU:C:2006:568, para 47; Judgment of the ECJ of 15 May 1997, Futura Participations SA
and Singer v Administration des contributions, C-250/95, ECLI:EU:C:1997:239, para 31.
334 See eg Judgment of the ECJ of 18 December 2007, Skatteverket v A, C-101/05,
ECLI:EU:C:2007:804, para 54 et seq.
335 See eg Judgment of the ECJ of 27 January 2009, Hein Persche v Finanzamt Lüdenscheid,
C-318/07, ECLI:EU:C:2009:33, para 69.
what is necessary to achieve a legitimate goal. From an EU law perspective,

for a State measure to be proportionate, the following two conditions must
be fulfilled:
- The measure ‘must be suitable for securing the attainment of the ob-
jective which they pursue’.336
- The measure ‘must not go beyond what is necessary in order to attain
it’.337 This means that the measure taken by the Member State (eg a de-
nial of a deduction) is the least discriminatory measure to safeguard
the public interest.
For example, if a State implements an exit taxation mechanism for in-

dividual taxpayers and such exit taxation does not allow to defer the tax
payment on the unrealized capital gains until realization but requires an
immediate tax payment, such measure (ie the immediate exit tax) is indeed
suitable to fulfil the public interest (in this case a balanced allocation of
taxing rights338), however, the measure goes beyond what is necessary as it
would be sufficient to allow the taxpayer defer the payment.339
6.3 Specific topics
In order to outline the impact of the ECJ case law on domestic tax systems,
we will in the following refer to various topics. Of course, the list is not com-
prehensive, but it should allow the reader to understand the reach of the
negative integration achieved by the ECJ through the application of the
fundamental freedoms.
6.3.1 Deductions and allowances

6.3.1.1 Personal allowances and deductions
The ECJ has held that the State of residence of a taxpayer is in general re-
sponsible to consider the personal circumstances of the taxpayer.340
336 Judgment of the ECJ of 30 November 1995, Reinhard Gebhard v Consiglio dell’Ordine
degli Avvocati e Procuratori di Milano, C-55/94, ECLI:EU:C:1995:411, para 37.
337 Judgment of the ECJ of 30 November 1995, Reinhard Gebhard v Consiglio dell’Ordine
degli Avvocati e Procuratori di Milano, C-55/94, ECLI:EU:C:1995:411, para 37.
339 Judgment of the ECJ of 29 November 2011, National Grid Indus BV v Inspecteur van de
Belastingdienst Rijnmond/kantoor Rotterdam, C-371/10, ECLI:EU:C:2011:785, para 73.
340 See eg Judgment of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt v Roland
Schumacker, C-279/93, ECLI:EU:C:1995:31, para 32.
Therefore, the source country is not required to consider the personal cir-
cumstances of the taxpayer and the source country might, therefore, treat
foreign taxpayers differently compared to a domestic taxpayer.
Example
Anna (married and four kids) is resident in Sweden and owns a property
in Hungary which is rented to out to third parties. She owns the property
as an investment and is once per year in Hungary. In this case, Anna is
taxed on the rental income in Hungary but Hungary is not forced to allow
her to deduct child allowances by the mere fact that residents would be
granted such allowances.
As a rule, residents and non-residents are not in a comparable situation.

However, as famously held in the Schumacker decision,341 in special cir-
cumstances, residents and non-residents are indeed in a comparable situ-
ation. As a result, the source State might be required to treat a resident of
another State in the same manner as a domestic resident with respect to
personal allowances and deductions.
Mr Schumacker was resident in Belgium and earned more than 90% of
his income from his employment in Germany. Germany had the taxing
right regarding the employment income and was not obliged to grant
family allowances. In contrast, the residence State, due to insufficient tax-
able income, was not able to take Mr Schumacker’s personal and family
circumstances into account. In these special circumstances, the discrimin-
ation arises from the fact that the personal and family circumstances of Mr
Schumacker are not taken into account—neither in the residence nor the
source State. Therefore, the ECJ reasoned that the source State is indeed re-
quired to grant the same personal and family allowances to a non-resident
in order not to treat them in a discriminatory way.342
Of course, the rationale of the ECJ is that at least one but not both States
should grant those tax benefits. However, in practice this poses many chal-
lenges unless direct taxes are not further harmonized in the EU. It is there-
fore not surprising that many cases were brought to the ECJ and it further
developed this Schumacker doctrine.
341 Judgment of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt v Roland Schumacker,
C-279/93, ECLI:EU:C:1995:31, paras 36–38.
342 Judgment of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt v Roland Schumacker,
C-279/93, ECLI:EU:C:1995:31, paras 36–38.
In order for a cross-border situation to be comparable to a domestic situ-

ation, the ECJ evaluates (i) whether a non-resident worker receives almost
all of his income from the Member State of employment and (ii) whether
the residence State is unable to take personal and family circumstances into
account due to insufficient taxable income.343
However, in more recent case law the Court ruled that it is only decisive
that there is insufficient taxable income in the residence State to consider
personal circumstances (criterion ii) although such circumstances can
be taken into account elsewhere.344 To illustrate this, we refer to the case
Commission v Estonia:345
A resident of Finland received half of her pension income from Finland
and the other half from Estonia. However, only the income from Estonia
was subject to tax. As the income from her residence State, Finland, was
not subject to tax, the residence State could not consider her personal and
family situation (criterion ii fulfilled). Due to sufficient taxable income, her
personal situation could still be taken into account in Estonia. Hence, she
was considered comparable to a resident of Estonia. In accordance with the
Schumacker doctrine, Estonia was obliged to grant her personal and family
tax allowances. In the later X case, the Court clarified that, at least in case of
a self-employed person, if there are several source states and not sufficient
income in the resident state, each source State that provides for a certain de-
duction must grant this tax relief on a pro rata basis to non-residents, that is
in proportion to the share of income received within this Member State.346
343 Judgment of the ECJ of 9 February 2017, X v Staatssecretaris van Financiën, C-283/15,
ECLI:EU:C:2017:102, para 33; see on this development Isabella de Groot, ‘Case X (C-283/
15) and the Myth of “Schumacker’s 90% Rule” (2017) 45 Intertax 567, 568 et seq; Hannelore
Niesten, ‘Personal and Family Tax Benefits in the EU Internal Market: From Schumacker to
Fractional Tax Treatment’ (2018) 55 Common Market Law Review 819, 838.
ECLI:EU:C:2017:102, para 42.
345 Judgment of the ECJ of 10 May 2012, European Commission v Republic of Estonia, C-39/
10, ECLI:EU:C:2012:282; for further case law see Judgment of the ECJ of 25 January 2007,
Finanzamt Dinslaken v Gerold Meindl, C-329/05, ECLI:EU:C:2007:57, para 27, 29, where the
Austrian national Mr Meindl, resident in Germany, earned his entire income in Germany. His
wife, living in Austria, received more than 10% of the whole family income in Austria, which
were, however, tax exempted parental benefits. Hence, the ECJ pointed out that more than
90% (ie almost all) of the family’s taxable income stems from Germany. At the same time, in
their residence State Austria no possibility was available to take the family circumstances into
account. As a result, Germany had to grant family allowances. Along similar lines was the
ruling in Judgment of the ECJ of 1 July 2004, Florian W Wallentin v Riksskatteverket, C-169/03,
ECLI:EU:C:2004:403.
ECLI:EU:C:2017:102, para 48.
A few examples of tax benefits arising from account being taken of tax-
payers’ personal and family situation in the source State include: allowances
related to the civil status (Schumacker case), contributions to pension funds
(Wielockx case), alimony payments (De Groot case), or to negative income
from property in the residence State (Renneberg case).347
To be distinguished clearly from the Schumacker doctrine are cases
where a person receives income from several Member States, but still earns
sufficient taxable income in the residence State.348 In such cases only the
residence State has to consider the personal and family situation.
6.3.1.2 Business expenses
Compared to personal allowances, the situation is different concerning
business expenses as there the case law of the ECJ requires that the source
State considers these expenses. One of the landmark decisions in this re-
spect is Gerritse.349
Mr Gerritse, resident in the Netherlands, is a musician, who gave a con-
cert in Germany. According to German law he was not allowed to deduct
his business expenses related to the performance in Germany (i.e. he was
taxed on a gross base) even though he would have been allowed to do so if
he had been resident in Germany. The Court, inter alia, held that it was dis-
criminatory that non-residents are not allowed to deduct business expenses
whereas residents have such possibility.350 However, as it was decided in
later cases, a direct link to the activities in the source State is necessary.
347 Judgment of the ECJ of 14 February 1995, Finanzamt Köln- Altstadt v Roland
Schumacker, C-279/93, ECLI:EU:C:1995:31, paras 46, 47; Judgment of the ECJ of 11 August
1995, GH EJ Wielockx v Inspecteur der Directe Belastingen, C-80/94, ECLI:EU:C:1995:271,
para 27; Judgment of the ECJ of 12 December 2002, FWL de Groot v Staatssecretaris van
Financiën, C-385/00, ECLI:EU:C:2002:750, paras 91, 110; Judgment of the ECJ of 16 October
2008, RHH Renneberg v Staatssecretaris van Financiën, C-527/06, ECLI:EU:C:2008:566, para
83. Moreover, married couples are assessed jointly, see eg Judgment of the ECJ of 14 September
1999, Frans Gschwind v Finanzamt Aachen-Außenstadt, C-391/97, ECLI:EU:C:1999:409, para
29; Judgment of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt v Roland Schumacker,
C-279/93, ECLI:EU:C:1995:31, para 15.
348 See eg Judgment of the ECJ of 14 September 1999, Frans Gschwind v Finanzamt Aachen-
Außenstadt, C-391/97, ECLI:EU:C:1999:409, paras 29, 32, where Mr Gschwind earned 58%
of the family income in Germany and Mrs Gschwind earned the remaining 42% of the family
income in their residence State the Netherlands. The Court concluded that the tax base was
sufficient to take Mr Gschwinds personal and family circumstances into account.
349 Judgment of the ECJ of 12 June 2003, Arnoud Gerritse v Finanzamt Neukölln-Nord, C-
234/01, ECLI:EU:C:2003:340.
350 Judgment of the ECJ of 12 June 2003, Arnoud Gerritse v Finanzamt Neukölln-Nord, C-
234/01, ECLI:EU:C:2003:340, para 25 et seq, In this case the Court dealt with a further ques-
tion of whether Germany is allowed to apply a 25% flat rate on income from foreign residents.
Direct link means that these costs are not necessarily business expenses
but that these costs are necessary to carry out the activity.351 The Court,
for instance, held that mandatory contributions to an occupational pension
scheme have a direct link to the activity even though these costs are not
business expenses in a traditional understanding of the term.352
6.3.2 Cross-border offset of losses

The ECJ has had many instances to assess rules concerning the use of losses
in cross-border circumstances. In the following the focus is on the use of
losses concerning corporate taxpayers.353
There have been a few cases in which it was disputed whether the State
of the PEs is obliged to offset losses of the foreign headquarter as this could
also be seen as an infringement of the fundamental freedoms because do-
mestic and cross-border situations are treated differently.354 However, more
important in practice is the question of whether the State of the parent com-
pany or the State of the headquarter is obliged to offset losses from foreign
subsidiaries or foreign PEs.
The first leading case in this respect was Marks & Spencer.355 In simpli-
fied terms, the question was whether a UK parent company is allowed to
offset losses from a foreign subsidiary resident in another Member State
against its income while applying a group relief mechanism, even though
UK law did not provide for such an offset of cross-border losses.
The ECJ held that if there is no opportunity to offset the losses, this is dis-
criminatory compared to a domestic situation in which losses of a subsid-
iary could be offset.356 Therefore, if there are no options to offset the losses
351 See eg Judgment of the ECJ of 24 February 2015, Finanzamt Dortmund-Unna v Josef
Grünewald, C-559/13, ECLI:EU:C:2015:109, para 30.
352 Judgment of the ECJ of 6 December 2018, Frank Montag v Finanzamt Köln-Mitte, C-480/
17, ECLI:EU:C:2018:987, para 62.
353 See, however, eg Judgment of the ECJ of 16 October 2008, RHH Renneberg v
Staatssecretaris van Financiën, C-527/06, ECLI:EU:C:2008:566; Judgment of the ECJ of 15
October 2009, Grundstücksgemeinschaft Busley and Cibrian Fernandez v Finanzamt Stuttgart-
Körperschaften, C-35/08, ECLI:EU:C:2009:625.
354 See eg Judgment of the ECJ of 15 May 1997, Futura Participations SA and Singer v
Administration des contributions, C-250/95, ECLI:EU:C:1997:239. For a more recent case see
Judgment of the ECJ of 27 February 2020, AURES Holdings as v Odvolací finanční ředitelství,
C-405/18, ECLI:EU:C:2020:127.
355 See Judgment of the ECJ of 13 December 2005, Marks & Spencer plc v David Halsey (Her
Majesty’s Inspector of Taxes), C-446/03, ECLI:EU:C:2005:763.
356 The Court actually referred to the balanced allocation of taxing rights, the risk of double
deduction of losses, and the risk of tax avoidance in a combined manner to justify the provi-
sion, see Judgment of the ECJ of 13 December 2005, Marks & Spencer plc v David Halsey (Her
Majesty’s Inspector of Taxes), C-446/03, ECLI:EU:C:2005:763, paras 44–49, 51, 55.
in the State of the subsidiary, the residence State shall offset these losses. Or
in the words of the ECJ, the following requirements must be met:
- the non-resident subsidiary has exhausted the possibilities available in

its State of residence of having the losses taken into account for the ac-
counting period concerned by the claim for relief and also for previous
accounting periods, if necessary by transferring those losses to a third
party or by offsetting the losses against the profits made by the subsid-
iary in previous periods,
and
- there is no possibility for the foreign subsidiary’s losses to be taken into
account in its State of residence for future periods either by the sub-
sidiary itself or by a third party, in particular where the subsidiary has
been sold to that third party.357
From this the ‘final loss doctrine’ was developed so that States are required
to offset only foreign losses which are final in the source State. The decision
was a very controversial one as the ECJ overcame the principle of territori-
ality in the sense that you only must consider foreign losses if you can also
tax foreign profits. Or in a negative manner if you only tax domestic profits
you are not required to offset foreign losses.358
There have been several follow-up cases in which the Court dealt with
different domestic provisions.359 Moreover, there has been a series of cases
in relation to the losses of a foreign PE. In Lidl Belgium the Court extended
the final loss doctrine indeed to foreign PEs, although the profits of the for-
eign PE could not be taxed in the State of the headquarter according to the
treaty applicable.360 However, in later cases the Court was very reluctant to
follow such case law.361 Whereas more recently, the Court again followed
357 Judgment of the ECJ of 13 December 2005, Marks & Spencer plc v David Halsey (Her
Majesty’s Inspector of Taxes), C-446/03, ECLI:EU:C:2005:763, para 55.
358 See the profound analysis of Yariv Brauner, Ana Paula Dourado, and Edoardo Traversa,
‘Ten Years of Marks & Spencer’ (2015) 43 Intertax 306.
359 Judgment of the ECJ of 18 July 2007, Oy AA, C-231/05, ECLI:EU:C:2007:439; Judgment
of the ECJ of 27 November 2008, Société Papillon v Ministère du Budget, des Comptes publics et
de la Fonction publique, C-418/07, ECLI:EU:C:2008:659.
360 Judgment of the ECJ of 15 May 2008, Lidl Belgium GmbH & Co KG v Finanzamt
Heilbronn, C-414/06, ECLI:EU:C:2008:278, para 54.
361 See in particular Judgment of the ECJ of 23 October 2008, Finanzamt für Körperschaften
III in Berlin v Krankenheim Ruhesitz am Wannsee- Seniorenheimstatt GmbH, C-157/07,
ECLI:EU:C:2008:588, paras 34–39, 42–44; Judgment of the ECJ of 17 December 2015, Timac
Agro Deutschland GmbH v Finanzamt Sankt Augustin, C-388/14, ECLI:EU:C:2015:829, para
62 et seq.
Marks & Spencer more closely and considered for example that Denmark
was obliged to consider final losses from a Finnish PE.362
6.3.3 Dividend taxation

The taxation of dividends in cross-border circumstances triggers various
questions from an EU tax law perspective. Any dividend can be sub-
ject to three levels of taxation: corporate tax at the level of the company,
withholding tax on the dividend in the source State, and income tax in the
shareholder’s residence State.
It is therefore not surprising that the ECJ has delivered several judgments
with regard to dividend taxation. In the following we will discuss a few of
them both with respect to the treatment in the residence State and in the
source State.
6.3.3.1 Treatment in the residence State (inbound dividend)

Concerning (corporate) income tax, the Court ruled in the landmark de-
cisions Verkooijen, Lenz, and Manninen that any less favourable treatment
of foreign sourced dividends compared to domestic sourced dividends
is discriminatory as it makes investments in other Member States less at-
tractive.363 For instance, in intra-group situations some States granted a tax
credit for the company receiving dividends in the amount of taxes paid by
the domestic subsidiary; however, such a relief was not granted in relation
to foreign dividends. In several other judgments, the Court confirmed that
such a distinction is contrary to the EU fundamental freedoms.364
362 See Judgment of the ECJ of 12 June 2018, A/ S Bevola, Jens W Trock ApS v
Skatteministeriet, C-650/16, ECLI:EU:C:2018:424, para 59 et seq; Judgment of the ECJ of 19
June 2019, Skatteverket v Memira Holding AB, C-607/17, ECLI:EU:C:2019:510, paras 25–28,
where the Swedish company ‘Memira’ was considering absorbing its German subsidiary in a
cross-border merger. The Court held, in essence, that the losses would not be characterized as
final if there is a possibility of deducting those losses economically by transferring them to a
third party; Judgment of the ECJ of 19 June 2019, Skatteverket v Memira Holding AB, C-607/
17, ECLI:EU:C:2019:510, para 33, where the Court held that final losses arising in an indirectly
held subsidiary should not be deductible for the parent company, unless all the intermediate
companies between the parent company and the loss-making subsidiary are resident in the
same Member State as the loss-making subsidiary.
363 Judgment of the ECJ of 6 June 2000, Staatssecretaris van Financiën v BGM Verkooijen,
C-35/98, ECLI:EU:C:2000:294, para 35; Judgment of the ECJ of 15 July 2004, Anneliese Lenz v
Finanzlandesdirektion für Tirol, C-315-02, ECLI:EU:C:2004:446, para 21; Judgment of the ECJ
of 7 September 2004, Petri Manninen, C-319/02, ECLI:EU:C:2004:484, para 23.
364 See eg Judgment of the ECJ of 6 March 2007, Wienand Meilicke, Heidi Christa Weyde
and Marina Stöffler v Finanzamt Bonn-Innenstadt, C-292/04, ECLI:EU:C:2007:132, paras 22,
31; Judgment of the ECJ of 12 December 2006, Test Claimants in the FII Group Litigation v
Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para 64–65.
Later, the Court further specified this reasoning. As held in the Haribo
Salinen decision, Member States are, however, not obliged to grant a tax
credit beyond what would be the tax burden according to domestic law.365
The Court added that the residence State is allowed to apply a credit method
to foreign dividends as opposed to an exemption method for domestic divi-
dends provided that the underlying corporate tax is relieved in a similar
way.366
With regard to withholding taxes, the ECJ does not require the residence
State to grant a tax credit for foreign withholding taxes in the same manner
as for tax credit for domestic withholding taxes.367
6.3.3.2 Treatment in the source State (outbound dividend)

With regard to dividends paid to foreign shareholders, according to the
Court, the source State has no obligation to grant relief although a resident
parent company in the source State has access to a tax credit.368 According
to the ECJ rather the residence State of the shareholder has to grant tax re-
lief in order to avoid economic double taxation.369
An issue that has as well been raised in front of the ECJ relates to with-
holding taxation of outbound dividends. The Court held that it is dis-
criminatory if a State only levies a withholding tax on dividends paid to
a foreign shareholder, but such withholding tax is not levied on dividends
paid to a domestic recipient (equal treatment of resident and non-resident
shareholder).370 In a particular Dutch case it could not be justified by a bal-
anced allocation of taxing rights that the Netherlands had not chosen to tax
365 Judgment of the ECJ of 10 February 2011, Haribo Lakritzen Hans Riegel BetriebsgmbH,
Österreichische Salinen AG v Finanzamt Linz, C-436/08, ECLI:EU:C:2011:61, para 162; see
also Judgment of the ECJ of 12 December 2006, Test Claimants in the FII Group Litigation v
Commissioners of Inland Revenue, C-446/04, ECLI:EU:C:2006:774, para 52.
366 See Judgment of the ECJ of 10 February 2011, Haribo Lakritzen Hans Riegel
BetriebsgmbH, Österreichische Salinen AG v Finanzamt Linz, C-436/08, ECLI:EU:C:2011:61,
para 86; Judgment of the ECJ of 13 November 2012, Test Claimants in the FII Group Litigation
v Commissioners of Inland Revenue, The Commissioners for Her Majesty’s Revenue & Customs,
C-35/11, ECLI:EU:C:2012:707, para 39.
367 See Judgment of the ECJ of 20 May 2008, Staatssecretaris van Financiën v Orange
European Smallcap Fund NV, C-194/06, ECLI:EU:C:2008:289, paras 34, 35, 37.
368 See eg Judgment of the ECJ of 26 June 2008, Finanzamt Hamburg-Am Tierpark v Burda
GmbH, C-284/06, ECLI:EU:C:2008:365, para 96.
369 See eg Judgment of the ECJ of 26 June 2008, Finanzamt Hamburg-Am Tierpark v Burda
GmbH, C-284/06, ECLI:EU:C:2008:365, paras 89–91, 93.
370 Judgment of the ECJ of 8 November 2007, Amurta SGPS v Inspecteur van de
Belastingdienst/Amsterdam, C-379/05, ECLI:EU:C:2007:655, para 28; Judgment of the ECJ
of 14 December 2006, Denkavit Internationaal BV and Denkavit France SARL v Ministre de
l’Économie, des Finances et de l’Industrie, C-170/05, ECLI:EU:C:2006:783, para 39, 41.
domestic dividends.371 In later cases the Court held that States are, however,
allowed to neutralize the discriminatory effect through signing a double tax
treaty.372
6.3.4 Thin capitalization

Since many decades, States have known thin capitalization rules. Moreover,
BEPS Action 4 specifically dealt with thin capitalization rules and recom-
mended the introduction of a so-called interest limitation rule.373 Thin
capitalization rules historically applied in some States only in cross-border
circumstances.374 The rationale was that only in these circumstances there
is a risk that an enterprise shifts income from a high to a low tax jurisdiction
through the payment of interests to related parties. It is obvious that these
rules, applicable only to cross-border circumstances, infringe the funda-
mental freedoms375 as cross-border investments are treated less favourably
than domestic investments.
As an infringement of a fundamental freedom is at hand, the question
arises whether it might be justified. The Court held that coherence only
does not justify the application of thin capitalization rules in cross-border
circumstances.376 With respect to fight tax avoidance, the Court in general
accepts such standards, although, as it was shown above, it means that a
rule shall aim at avoiding wholly artificial arrangements.377 Concerning
thin capitalization rules, the ECJ held that granting a loan to a related party
cannot be ‘a general presumption of abusive practices and justify a measure
which compromises the exercise of a fundamental freedom’.378 However, if
371 Judgment of the ECJ of 8 November 2007, Amurta SGPS v Inspecteur van de
Belastingdienst/Amsterdam, C-379/05, ECLI:EU:C:2007:655, para 59.
372 See eg Judgment of the ECJ of 17 September 2015, JBGT Miljoen, X, Société Générale
SA v Staatssecretaris van Financiën, C-10/14, ECLI:EU:C:2015:608, paras 78–80; see already
Judgment of the ECJ of 8 November 2007, Amurta SGPS v Inspecteur van de Belastingdienst/
Amsterdam, C-379/05, ECLI:EU:C:2007:655, para 79.
373 See on ATAD Section 6.5.1.4.
374 Detlev J Piltz, ‘Generalbericht’ in International Fiscal Association (ed), Cahiers de droit
fiscal international, International Aspects of Thin Capitalization (vol 81b, International Fiscal
Association 1996) 23, 36 et seq.
375 Concerning thin capitalization rules, it is in general the freedom of establishment ac-
cording to Art 49 that applies as these rules traditionally required that a controlling shareholder
acts as the borrower (see eg Judgment of the ECJ of 13 March 2007, Test Claimants in the Thin
Cap Group Litigation v Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161,
para 28.).
376 Judgment of the ECJ of 12 December 2002, Lankhorst-Hohorst GmbH v Finanzamt
Steinfurt, C-324/00, ECLI:EU:C:2002:749, paras 40–42.
378 Judgment of the ECJ of 13 March 2007, Test Claimants in the Thin Cap Group Litigation v
Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161, para 73.
thin capitalization rules only apply to excessive interest payments beyond

an arm’s length interest rate, such measure might be justified as a propor-
tional means to fight tax avoidance.
6.3.5 Controlled foreign corporation

CFC rules trigger interesting discussions from an EU law perspective. They
are in general understood as an infringement of the fundamental freedoms
as foreign and domestic subsidiaries are treated differently as CFC rules
generally only apply if a company owns a foreign (low taxed) subsidiary—
that is in a cross-border scenario. It is, therefore, no surprise that the ECJ
has also ruled that CFC rules applying only to foreign subsidiaries must be
understood as an infringement of the fundamental freedoms.379 However,
such measures might be justified to fight tax avoidance but only if these
rules aim at challenging wholly artificial arrangements.380 Therefore, de-
signing CFC legislation beyond what is necessary to challenge wholly artifi-
cial arrangements infringes the fundamental freedoms.
6.3.6 Exit taxation

6.3.6.1 Overview
In order to protect the tax base, States have often implemented exit tax le-
gislation. Accordingly, hidden reserves—both of individual and corporate
taxpayers—are taxed in the moment of relocation to another State. In this
way, States avoid that taxpayers relocate to other (low tax) jurisdictions
and sell the assets with accrued hidden reserves in the new residence State.
Prima facie, it seems obvious that this is an infringement of the freedom of
establishment as taxpayers are restricted from relocating to another State as
this would trigger detrimental tax consequences upon exit, whereas such
tax consequences would not be triggered if the person relocates within the
same State.
6.3.6.2 Exit taxation for individuals

In Hughes de Lasteyrie du Saillant the Court held that exit taxes triggered
in France as Hughes de Lasteyrie du Saillant moved to Belgium are indeed
379 In most cases it might be seen as an infringement of the freedom of establishment. See,
however, concerning the free movement of capital Judgment of the ECJ of 26 February 2019,
X-GmbH v Finanzamt Stuttgart—Körperschaften, C-135/17, ECLI:EU:C:2019:136.
380 Judgment of the ECJ of 12 September 2006, Cadbury Schweppes plc and Cadbury
Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI:EU:C:2006:544,
para 55.
a restriction of the freedom of establishment.381 He held shares in a French

company and according to the applicable rule, upon the relocation to
Belgium, the hidden reserves were taxed but only if the taxpayer returned
within the next five years. One of the goals of such provision was to avoid
the situation in which a taxpayer leaves France for the purpose of realizing
the unrealized capital gains in a low tax jurisdiction and then returns to
France within a short period of time.
The Court had to decide whether such an exit tax might, even though
infringing the freedom of establishment, be justified. According to the ECJ,
exit taxes might indeed be justified as they are required to achieve a bal-
anced allocation of taxing rights.382 However, in Hughes De Lasteyrie du
Saillant the problem was that France did not apply the exit tax if taxpayers
do not return within the next five years and, therefore, the rule was not
proportional.383
In the later N case384 the ECJ further specified what proportional meas-
ures would be. The Court, inter alia, held that it is proportional in order to
achieve a balanced allocation of taxing rights to require that taxpayers file
a tax return upon leaving the country. Moreover, it is proportional to tax
the hidden reserves once the asset is sold at a later stage. However, it is not
proportionate to require the taxpayer to secure the tax payment already in
the moment he leaves the State. The reason is that within the EU there is a
comprehensive mutual assistance system and, therefore, the original home
State will be able to obtain the necessary information for a later assessment
of the capital gain.385
Exit taxation is predominantly affecting the freedom of establishment
and, therefore, not infringing the free movement of capital. As a result, the
case law of the ECJ does not apply in third country situations. However, the
EU might also sign bilateral treaties with third states guaranteeing a free
movement of persons similar as within the EU. In these situations (eg this
381 Judgment of the ECJ of 11 March 2004, Hughes de Lasteyrie du Saillant v Ministère de
l’Économie, des Finances et de l’Industrie, C-9/02, ECLI:EU:C:2004:138, paras 45, 46.
382 See Judgment of the ECJ of 11 March 2004, Hughes de Lasteyrie du Saillant v Ministère
de l’Économie, des Finances et de l’Industrie, C-9/02, ECLI:EU:C:2004:138, para 68. However,
such decision was not yet clear in this respect.
383 Judgment of the ECJ of 11 March 2004, Hughes de Lasteyrie du Saillant v Ministère de
l’Économie, des Finances et de l’Industrie, C-9/02, ECLI:EU:C:2004:138, para 52.
384 Judgment of the ECJ of 7 September 2006, N v Inspecteur van de Belastingdienst Oost/
kantoor Almelo, C-470/04, ECLI:EU:C:2006:525.
385 Judgment of the ECJ of 7 September 2006, N v Inspecteur van de Belastingdienst Oost/
kantoor Almelo, C-470/04, ECLI:EU:C:2006:525, para 52.
is the case with Switzerland386), the case law is also relevant for third States
relations.387
6.3.6.3 Exit taxation for business operations

The ECJ has rendered further decisions in relation to the transfer of business
operations to another Member State.388 In the leading case of National Grid
Indus, the Court held that States are allowed to tax the economic value gener-
ated in their territory even if the gain has not yet been realized.389 Therefore,
exit taxes are considered to be an infringement of the freedom of establish-
ment but such an infringement is justified and proportionate depending on
their exact design.
States are, for instance, not obliged to consider a decrease in value of the
assets after the relocation and hence, States are allowed to definitely deter-
mine the taxes due on unrealized capital gains in the moment of the exit.390
Therefore, this is a difference compared to the mentioned N case in which the
Court held that the home State must consider later losses.391
Moreover, in a later case the Court confirmed that States might re-
quire annual instalments notwithstanding the fact of whether the assets
has been sold.392 Furthermore, the Court accepted that if the payment is
386 Agreement between the EC and its Member States, of the one part, and the
Swiss Confederation, of the other, on the free movement of persons—Final Act—Joint
Declarations—Information relating to the entry into force of the seven Agreements with the
Swiss Confederation in the sectors free movement of persons, air and land transport, public
procurement, scientific and technological cooperation, mutual recognition in relation to con-
formity assessment, and trade in agricultural products [2002] OJ L114/6.
387 There are decision of EJC referring to third country situations (see eg Judgment of the ECJ
of 26 February 2019, Martin Wächtler v Finanzamt Konstanz, C-581/17, ECLI:EU:C:2019:138).
388 Judgment of the ECJ of 29 November 2011, National Grid Indus BV v Inspecteur van
de Belastingdienst Rijnmond/kantoor Rotterdam, C-371/10, ECLI:EU:C:2011:785; Judgment
of the ECJ of 23 November 2017, A Oy, C-292/16, ECLI:EU:C:2017:888; Judgment of
the ECJ of 21 May 2015, Verder LabTec GmbH & Co KG v Finanzamt Hilden, C-657/13,
ECLI:EU:C:2015:331; Judgment of the ECJ of 23 January 2014, DMC Beteiligungsgesellschaft
mbH v Finanzamt Hamburg-Mitte, C-164/12, ECLI:EU:C:2014:20; Judgment of the ECJ of 21
December 2016, European Commission v Portuguese Republic, C-503/14, ECLI:EU:C:2016:979.
Belastingdienst Rijnmond/kantoor Rotterdam, C-371/10, ECLI:EU:C:2011:785, para 49.
Belastingdienst Rijnmond/kantoor Rotterdam, C-371/10, ECLI:EU:C:2011:785, para 52 et seq.
392 Judgment of the ECJ of 23 January 2014, DMC Beteiligungsgesellschaft mbH v Finanzamt
Hamburg-Mitte, C-164/12, ECLI:EU:C:2014:20, para 64; see also Judgment of the ECJ of 21
May 2015, Verder LabTec GmbH & Co KG v Finanzamt Hilden, C-657/13, ECLI:EU:C:2015:331,
para 52.
deferred, a bank guarantee might be required on the basis of an actual risk

of non-recovery.393
In conclusion, the case law on exit taxes has developed over time and has
become stricter (ie more burdensome for the taxpayer) in particular con-
cerning exit taxation on the transfer of business operations.
6.4 State aid and taxation
6.4.1 In general
As it has been outlined in the previous chapters, direct taxes are not har-
monized at an EU level. However, as we have seen the fundamental free-
doms have a significant impact on domestic tax systems. The same is true
concerning the state aid provision which is contained in Art 107 TFEU.
Such provision has its roots in trade law, that is the prohibition of subsidies
as a means to enhance competition.
According to Art 107 para 1 TFEU a measure has to fulfil the following
requirements to be considered state aid:
1. it must confer an advantage on an undertaking,

2. this measure must be selective,
3. it must be granted by the State and through State resources and
4. it must distort or threaten to distort competition, and
5. it must affect intra-EU trade.394
There are different ways in which tax measures can be considered to be state
aid (eg by granting special deductions, by partially or fully exempting cer-
tain income but also by forgiving due taxes). Therefore, in tax matters it is
often not an issue to assess whether there has been an advantage granted
by state. However, it is often challenged whether the advantage has indeed
been selective.
The selectivity criterion has indeed become the most important and most
disputed requirement with respect to state aid in tax matters. Selectivity
exists if the measure favours an undertaking or the production of certain
goods in comparison to other undertakings or production of goods which
393 Judgment of the ECJ of 23 January 2014, DMC Beteiligungsgesellschaft mbH v Finanzamt
Hamburg-Mitte, C-164/12, ECLI:EU:C:2014:20, para 59 et seq.
394 The last two requirements can also be understood as one single requirement.
are in a comparable situation.395 It is case law of the ECJ and the General
Court that tax measures may qualify as prohibited state aid.396 This includes
measures in the field of direct taxation, although direct taxes are not har-
monized at an EU level. However, if a national measure applies to all eco-
nomic operators it is a general measure that is not selective.397
As in trade law selectivity can be formal (ie de jure) or de facto. It is im-
portant to outline the right reference framework in order to determine
whether a measure is selective. This is often done by outlining the ‘normal
tax system’ as the benchmark, that is, is the tax measure selective compared
to the normal tax system.
Even though, a tax measure might prima facie be selective and, there-
fore, state aid, it can be justified by objectives that are inherent to the gen-
eral tax systems or by objectives without a link to the general tax system.
Concerning objectives inherent, the Court holds that it is justified if the
differentiation ‘flows from the nature or general structure of the system of
which the measures form part’.398 Most prominently, a measure might be
justified by reasons outside the tax systems, for instance, by environmental
concerns.
6.4.2 Application to advanced pricing agreements

The topic state aid has in recent years gained momentum from a tax per-
spective. In 2014, the Commission initiated an investigation against three
countries (Ireland, Luxembourg, and the Netherlands) in relation to spe-
cific rulings granted to large and well-known taxpayers (ie Apple, Fiat,
Starbucks, and Amazon). The issue is whether granting these specific tax
rulings could be understood as prohibited state aid according to Art 107
TFEU. Interestingly, these cases do not relate to a certain provision in a do-
mestic tax system which could be understood as a selective undertaking;
however, the Commission assessed whether specific rulings granted to tax-
payers ought to be understood as a selective measure. The General Court,
395 Judgment of the ECJ of 8 November 2001, Adria-Wien Pipeline GmbH and Wietersdorfer
& Peggauer Zementwerke GmbH v Finanzlandesdirektion für Kärnten, C-143/99,
ECLI:EU:C:2001:598, para 41.
396 See already Judgment of the ECJ of 2 July 1974, Italian Republic v Commission of the
European Communities, C-173/73, ECLI:EU:C:1974:71, para 2.
397 Judgment of the ECJ of 19 December 2018, Finanzamt B v A-Brauerei, C-374/17,
ECLI:EU:C:2018:1024, para 23.
398 Judgment of the ECJ of 19 December 2018, Finanzamt B v A-Brauerei, C-374/17,
ECLI:EU:C:2018:1024, para 44, with reference to Judgment of the ECJ of 21 December 2016,
European Commission v World Duty Free Group SA and Others, C-20/15 P and C-21/15 P,
ECLI:EU:C:2016:981.
that is the first instance in competition matters such as state aid, decided
in 2019 in favour of the Commission in the Fiat case399 but against the
Commission in the Starbucks400, the Amazon401, and the Apple decision.402
The Court held that it is not in the competence of the Commission to
‘define the “normal” taxation of an integrated undertaking, disregarding
national tax rules’.403 The arm’s length principle was approved as a bench-
mark to review whether a selective advantage is at hand; however, the arm’s
length principle (if this is indeed the reference point in an individual case)
is not precise and subject to interpretation.404 According to the case law of
the General Court, it is not sufficient to prove the applied TP method con-
tains errors but it is required to prove that the applied TP is indeed a se-
lective advantage to the taxpayer. For instance, in the Apple decision the
Court held the following:405
However, even where there are inconsistencies which show defects in

the methodology used to calculate the chargeable profits in the con-
tested tax rulings, it is necessary to recall the considerations set out in
paragraph 348 above, from which it follows that the Commission cannot
confine itself to invoking a methodological error but must prove that
an advantage has actually been granted, inasmuch as such an error has
actually led to a reduction in the tax burden of the companies in ques-
tion as compared to the burden which they would have borne had the
normal rules of taxation been applied.
So far two decisions (Fiat and Apple) have been appealed to the ECJ.
399 Judgment of the General Court of the EU of 24 September 2019, Grand Duchy of
Luxembourg and Fiat Chrysler Finance Europe v European Commission, T-755/15 and T-759/
15, ECLI:EU:T:2019:670.
400 Judgment of the General Court of the EU of 24 September 2019, Kingdom of the
Netherlands and Others v European Commission, T-760/15 and T-636/16, ECLI:EU:T:2019:669.
401 Judgment of the General Court of the EU of 12 May 2021, T-816/17 and T-313/18,
Luxembourg v Commission and Amazon.com, Inc. v Commission, ECLI:EU:T:2021:252.
402 Judgment of the General Court of the EU of 15 July 2020, Ireland and Others v European
Commission, T-778/16 and T-892/16, ECLI:EU:T:2020:338.
403 Judgment of the General Court of the EU of 24 September 2019, Grand Duchy of
Luxembourg and Fiat Chrysler Finance Europe v European Commission, T-755/15 and T-759/
15, ECLI:EU:T:2019:670, para 112.
404 Judgment of the General Court of the EU of 24 September 2019, Kingdom of the
Netherlands and Others v European Commission, T-760/15 and T-636/16, ECLI:EU:T:2019:669,
para 199.
405 Judgment of the General Court of the EU of 15 July 2020, Ireland and Others v European
Commission, T-778/16 and T-892/16, ECLI:EU:T:2020:338, para 416.
6.5 Secondary EU law
6.5.1 Direct taxation and the directives

Even though direct taxes are not harmonized at an EU level, the EU has
the possibility to issue directives for the benefit of the establishment and
functioning of the internal market.406 Currently, enacting these directives
still requires unanimity. Nevertheless, based on such provision, the EU has
indeed agreed on the following directives which are relevant from a tax
perspective:
6.5.1.1 Parent-Subsidiary Directive
The Parent-Subsidiary Directive (PSD407) obliges Member States not to tax
certain intra-group distributions. This includes the following:
1. The State of the parent company must grant relief on dividends re-
ceived either through exempting such income or deducting the taxes
paid in the State of the subsidiary (ie full imputation).408
2. No withholding taxes shall be levied on distributions from the sub-
sidiary to the parent company.409
3. No withholding tax shall be levied on the profits received by the
parent company.410
At least with respect to 2. the goal is very similar to Art 10 para 2 lit a OECD
MC, that is to lower withholding taxes in the source country in order to en-
able intra-group dividends without triggering or at least with triggering less
source taxes. However, due to 1. and 3. the PSD goes beyond the OECD MC
as it also obliges the residence State of the recipient not to tax intra-group
dividends.
406 Art 115 Consolidated version of the TFEU [2012] OJ C326/01.

407 Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation
applicable in the case of parent companies and subsidiaries of different Member States [2011]
OJ L345/8.
OJ L345/8, Art 4.
OJ L345/8, Art 5.
OJ L345/8, Art 6.
In order to qualify for the benefits of the PSD, a 10% minimum share-
holding of the parent company is required.411 Moreover, the annex provides
for a list of companies falling under the scope of the Directive; however,
they have to be subject to corporate income tax in order to have access to
the PSD.412 Member States are, furthermore, free to require that participa-
tion was held at least for a period of two years.413
The ECJ has already had the opportunity to render various decisions con-
cerning the interpretation of the PSD both concerning the taxation in the
State of the parent and in the State of the subsidiary. For instance, Belgium
had a system in place in which dividends were part of the tax base; how-
ever, in a second step 95% of these dividends were deducted. Essentially this
is an exemption of the dividends but not a full exemption. Therefore, the
Court held that this is infringing the PSD.414 There have also been several
decisions on what withholding taxes in the State of the subsidiary exactly
means and therefore to what extent the source State is obliged to refrain
from levying source taxes.415
6.5.1.2 Interest and Royalty Directive

The Interest and Royalty Directive (IRD416) foresees that the source State
is prohibited from levying taxes on interests and royalties if the beneficial
owner of the interest and royalties is a company situated in another Member
OJ L345/8, Art 3.
OJ L345/8, Art 1 para 2.
OJ L345/8, Art 3 para 2; see, however, Judgment of the ECJ of 17 October 1996, Denkavit
International BV, VITIC Amsterdam BV and Voormeer BV v Bundesamt für Finanzen, C-283/
94, ECLI:EU:C:1996:387, para 32, which forced States to grant the benefits retroactively if the
holding period is fulfilled.
414 Judgment of the ECJ of 12 February 2009, Belgische Staat v Cobelfret NV, C-138/07,
ECLI:EU:C:2009:82, para 57.
415 See eg Judgment of the ECJ of 8 June 2000, Ministério Público and Fazenda Pública v
Epson Europe BV, C-375/98, ECLI:EU:C:2000:302, paras 22, 24, 27; Judgment of the ECJ
of 4 October 2001, Athinaiki Zithopiia AE v Elliniko Dimosio (Greek State), C-294/99,
416 Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable
to interest and royalty payments made between associated companies of different Member
States [2003] OJ L157/49.
State or a PE of such a company.417 The IRD does, therefore, only oblige the
source State not to tax the interest and royalty; however, the resident State
of the recipient is obviously free to tax such income.
As with respect to the PSD, the companies in scope of the Directive are
mentioned in the Annex and they have to be subject to corporate income
tax.418 However, in order to be in scope of the IRD, a 25% participation is
required. This threshold means that the paying company must have direct
participation of 25% in the receiving company or vice versa. Or a third
company has a participation of at least 25% in both the paying and the re-
ceiving company.419
Both terms ‘interest’ and ‘royalty’ are further defined in Art 2 lit a and b
IRD but the Directive also includes a list of payments which are not in scope
of the IRD.420 This includes, for example, payments which are treated as a
distribution of profits in the source State.
In order to avoid situations in which the requirements for the application
of the Directive have only been at hand for a short period of time, Art 1 para
10 IRD provides that Member States may not apply the Directive if the min-
imum participation has not been maintained for an uninterrupted period
of two years.
6.5.1.3 Merger Directive
One of the goals of the Merger Directive421 is to enhance tax neutral re-
organizations within the internal market. This means that reorganizations
within the internal market shall not be hampered by negative tax conse-
quences in the Member States. However, at the same time the Merger
States [2003] OJ L157/49, Art 1 para 1.
418 See Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation ap-
plicable to interest and royalty payments made between associated companies of different
Member States [2003] OJ L157/49, Art 3 lit a.
States [2003] OJ L157/49, Art 3 lit b.
States [2003] OJ L157/49, Art 4 para 1 lit a.
421 Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation
applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares
concerning companies of different Member States and to the transfer of the registered office of
an SE or SCE between Member States [2009] OJ L310/34.
Directive shall protect the right of States to tax unrealized gains that ac-
crued in their fiscal territory.
For instance, the Directive states that hidden reserves shall not be
taxed because of a merger, division, or partial division.422 However, this is
only true if values for tax purposes are taken over by the receiving com-
pany. Therefore, if there is a step-up in basis triggered by a reorganization,
Member States are not required to exempt such reorganizations. If a trans-
action is in scope of the Merger Directive and the values for tax purposes
are indeed rolled over to the receiving company, it means that the capital
gains are deferred until the realization of the hidden reserves as the book
values are transferred to the receiving company. Importantly, the Directive
foresees that a neutral merger, division or partial division is only possible if
the assets and liabilities are connected with a PE of the receiving company
in the Member State of the transferring company.423
Reorganization should also be neutral for the shareholders. Therefore,
the Directive foresees that shareholders will not be taxed if they exchange
their shares against new shares of another company in the course of a
merger.424 Such an approach is common also in other domestic reorganiza-
tion systems.
6.5.1.4 ATAD I + II
In the aftermath of the BEPS project, the EU Member States have agreed to
go beyond the minimum standard of the BEPS project425 and have declared
to implement a specific Directive (ATAD I426) to fight tax avoidance. Such
Directive is based on Art 115 TFEU and was approved unanimously. The
Directive is not necessarily aiming at harmonizing all anti-avoidance rules
422 See Council Directive 2009/133/EC of 19 October 2009 on the common system of tax-
ation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of
shares concerning companies of different Member States and to the transfer of the registered
office of an SE or SCE between Member States [2009] OJ L310/34, Art 4 para 1.
an SE or SCE between Member States [2009] OJ L310/34, Art 4 para 2 lit b.
an SE or SCE between Member States [2009] OJ L310/34, Art 8 para 1.
426 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoid-
ance practices that directly affect the functioning of the internal market [2016] OJ L193/1.
as the States can follow a higher level of protection in their domestic law.427
Although, the States are obliged to implement the following anti-avoidance
provisions:
- Interest limitation rule (Art 4 ATAD I)

- Exit taxation rules (Art 5 ATAD I)
- A general anti-abuse rule (GAAR) (Art 6 ATAD I)
- CFC rule (Art 7 et seq ATAD I)
- Anti-hybrid rules (Art 9 ATAD I)
The scope of ATAD II428 was to extend the scope of the anti-hybrid rules
contained in ATAD I also to third countries.
States have had time to implement the measures contained in ATAD
I until 31 December 2018 (Art 11 para 1 ATAD I, the implementation pe-
riod for the exit taxation rules was extended to 31 December 2019—see Art
11 para 5 ATAD I) and 31 December 2019 for ATAD II (Art 2 para 1 ATAD
II, the implementation period for the anti-hybrid rules was extended to 31
December 2021—see Art 2 para 3 ATAD II)
6.5.1.5 Further directives
For the sake of completeness, the following directives need to be mentioned.
- Tax Dispute Resolution Directive: This Directive, applicable since 1

July 2019, ensures that businesses and citizens in the EU can resolve
disputes related to the interpretation and application of tax treaties
more swiftly and effectively. Through a mutual agreement procedure
(MAP) the competent authorities of Member States endeavour to re-
solve the dispute within a time limit of two years (or three years in cer-
tain cases).429
- DAC 6: The aim of this Directive is to discourage aggressive cross-
border tax-planning arrangements and further enhance tax trans-
parency. It therefore broadened the scope of the existing automatic
427 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoid-
ance practices that directly affect the functioning of the internal market [2016] OJ L193/
1, Art 3.
428 Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as
regards hybrid mismatches with third countries [2017] OJ L144/1.
429 Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mech-
anisms in the EU [2017] OJ L265/1.
exchange of information mechanism among the Member States’ tax

authorities to such tax-planning structures (including mandatory dis-
closure rules for intermediaries).430
6.5.2 Indirect taxation and the directives

6.5.2.1 Overview
Indirect taxes are very much influenced by secondary law. The reason is that
Art 113 TFEU contains a provision according to which the Council shall
be competent to implement legislative measures for the harmonization of
‘turnover taxes, excise duties and other forms of indirect taxation to the ex-
tent that such harmonisation is necessary to ensure the establishment and
the functioning of the internal market and to avoid distortion of competi-
tion’. Such harmonization is mainly enhanced through directives such as
the VAT Directive431 and further soft law instruments.
6.5.2.2 Value-added tax in the EU

For any customs union it is key that indirect taxes on supplies are to a large
extent harmonized. One of the main reasons is that non-harmonized VAT
systems between two jurisdictions would require customs control in order
to levy import VAT in each Member State. However, the latter would under-
mine the idea of a common market without customs control. Therefore, is
essential for the functioning of the EU that VAT is harmonized.
The ‘EU VAT’ is a general tax on consumption as known in many States
around the world and it is levied on all stages of the production process. It
is, in general, levied on all goods and services. However, enterprises have
access to an input VAT deduction of VAT paid during the production pro-
cess. Moreover, it is a goal that consumption should only be subject to VAT
in one Member State.
VAT laws are to a large extent harmonized, even though, there are still
several areas where Member States have option rights and VAT law devi-
ates among Members. The current VAT Directive is in force since 1 January
430 Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as
regards mandatory automatic exchange of information in the field of taxation in relation to
reportable cross-border arrangements [2018] OJ L139/1; the starting point of enhancing tax
administration’s cooperation was Council Directive 77/799/EEC of 19 December 1977 con-
cerning mutual assistance by the competent authorities of the Member States in the field of
direct taxation [1977] OJ L336/15.
431 Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT
[2006] OJ L347/1.
2007, although VAT laws have been partly harmonized since the 1960s.432
The VAT Directive contains, inter alia, provisions on who is subject to
VAT433 (taxable persons), which transactions are taxable,434 and where
the place of supply is.435 Therefore, the Directive provides some key provi-
sions for the harmonization of VAT. However, tax rates are not harmonized
within the EU but minimum tax rates are provided for. As a consequence,
the normal tax rate ranges from 17% (Luxembourg) to 27% (Hungary) in
2020, whereas the rate in Hungary is exceptionally high.
6.5.3 Further projects

Further tax projects have long been in the pipeline at the level of the EU. In
particular the following should be highlighted:
- CCCTB: This project aims at introducing a common tax system

within the EU for multinational companies reaching a certain revenue
threshold (eg EUR750 million). If implemented, the tax base would be
calculated following the same rules and the profits would be allocated
to the Member State following a formulary apportionment system.
In 2016 the Commission announced to implement the CCCTB in
two steps as the common tax base should be the first part and con-
solidation should be implemented a few years later.436 Currently, the
CCCTB project remains on the negotiating table in the Council. The
project has been renamed (Business in Europe: Framework for Income
Taxation or BEFIT) and relaunched in May 2021.
- Financial Transaction Tax (FTT): On 28 September 2011, the
European Commission tabled a proposal for a common system
of an FTT in order to ensure a fair contribution of the financial
sector to national tax revenues.437 This common FTT is intended
432 The first VAT Directive was implemented on 11 April 1967, see First Council Directive
67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning
turnover taxes [1967] OJ L71/1301.
433 See in particular Council Directive 2006/112/EC of 28 November 2006 on the common
system of VAT [2006] OJ L347/1, Art 9 et seq.
434 See Council Directive 2006/112/EC of 28 November 2006 on the common system of
VAT [2006] OJ L347/1, Art 14 et seq.
435 See Council Directive 2006/112/EC of 28 November 2006 on the common system of
VAT [2006] OJ L347/1, Art 31 et seq.
436 See European Commission, ‘Proposal for a Council Directive on a Common Corporate
Tax Base’ COM(2016) 685 final; European Commission, ‘Proposal for a Council Directive on a
Common Consolidated Corporate Tax Base (CCCTB)’ COM(2016) 683 final.
437 European Commission, ‘Proposal for a Council Directive implementing enhanced co-
operation in the area of financial transaction tax’ COM(2013) 71 final.
to be introduced through the instrument of enhanced cooper-

ation between the Member States. However, several years after the
proposal, the Directive has not yet been adopted, which demon-
strates the difficulty to reach consensus on the detailed rules of
such a FTT.
3
Relationship with other Areas
of International Law
In the following we will discuss the interaction between the international

law of taxation and other international law disciplines. The focus is on trade
law, investment treaty law, and human rights law. Moreover, a short section
on tax rules in non-tax treaties is included as well. The selection of these
areas has been made based on their importance in practice.
Some other disciplines have on purpose been left out. In particular there
is no debate on the interaction with international environmental law as this
is an area facing very dynamic (but still mainly domestic) developments
and so far very few international agreements with a direct tax impact have
been signed.1
The following sections demonstrate that not only the international tax
regime limits the legislative leeway of states in tax matters but also other
international law obligations stemming from trade, investment, or human
rights law might have a significant impact on what states can and cannot do
in tax matters. Conceptually, it is important to note that there are several
overlaps but also several differences between the various fields themselves
and compared to the international law of taxation.
One important overlap between the international trade and investment
treaty regime is that both contain national treatment and most-favoured
nation clauses which have had an important impact on domestic tax
legislation.
We have also seen that the international tax regime contains non-
discrimination clauses and these together with the non-discrimination
clauses in investment and trade treaties reflect a rather comprehensive non-
discrimination framework in which national tax systems shall operate. This
1 See, however, not an international treaty but EU law, eg Council Directive 2003/96/EC of
27 October 2003 restructuring the Community framework for the taxation of energy products
and electricity [2003] OJ L283/51. See briefly on the Paris Agreement Chapter 4, Section 2.4.
Trade Law 167
is also not surprising as all three regimes (ie the international tax, trade, and
investment treaty regime) aim, inter alia, at enhancing global trade through
the reduction of cross-border obstacles (including reduction of distortions
through discriminatory or unequal treatment).
Interestingly, there is also an important overlap between human rights con-
ventions and investment treaties as the scope of expropriation clauses in in-
vestment treaties might have overlaps with the right to property contained in
human rights conventions.2 The right to property is both considered to be an
essential human right but also an essential right for businesses in a global en-
vironment and, of course, in tax matters the risk of expropriation is obvious.
Another important conceptional overlap but also institutional distinc-
tion are the judicial controls within these regimes as these significantly im-
pact the outcome. For instance, trade law contains a state vs state litigation
process focusing on legislative controls, whereas investment treaties but
also human rights conventions might allow taxpayers themselves to judi-
cially appeal against specific decisions of governmental bodies.
1. Trade Law

1.1 Introduction
International trade is predominantly regulated by the agreements of

the World Trade Organization (WTO).3 The WTO came into force on 1
January 1995 and aims to optimize trade benefits through the promotion of
free trade (ie the continuous removal of trade barriers).4
Jurisdiction to tax, as derived from the principle of sovereignty, is a core
function of a state5 but it may collide with WTO law as protectionist or dis-
criminatory tax measures can restrict trade flows.6
2 See the comprehensive study of Filip Debelva, International Double Taxation and the Right
to Property (IBFD 2019).
3 Originally, international trade was governed by the GATT (1947) LT/UR/A-1A/1/GATT/
2, a multilateral contract on trade in goods that was meant to serve as a temporary predecessor
of the later failed International Trade Organization. Although meanwhile kept in its provi-
sional contractual form, GATT has been continuously refined in multiple negotiation rounds,
until it was embedded in the WTO agreements.
4 Preamble of the Agreement Establishing the WTO (1994) LT/UR/A/2.
6 The Appellate Body stated this as follows: ‘A Member, in principle, has the sovereign
authority to tax any particular categories of revenue it wishes. It is also free not to tax any
particular categories of revenues. But, in both instances, the Member must respect its WTO
168 Relationship with other Areas of International Law
This section explores the relationship between tax and WTO law or trade
law in general.7 First, some preliminary remarks on WTO law, in particular
its agreements and core principles, will be discussed. Subsequently, the tax
measures problematic under the General Agreement on Tariffs and Trade
(GATT), the General Agreement on Trade in Services (GATS) and the
Agreement on Subsidies and Countervailing Measures (SCM) will be dis-
cussed, with reference to some prominent corresponding cases.
Of course, there are many other bilateral and plurilateral trade agree-
ments. We will not discuss them separately herein, but we have dealt with
one example in detail in relation to the tax-related obligations within the
EU, as an example of a very comprehensive customs union.8
1.2 Some preliminary remarks on the WTO
1.2.1 Agreements of the WTO

On 15 April 1994, the Marrakesh Agreement was signed by 124 member
states, setting up the legal and institutional foundations of the WTO while
acting as an umbrella agreement for all other WTO agreements contained
in its four annexes. Annex 1 of the said agreement covers substantive elem-
ents of trade law (ie the GATT, including 13 additional multilateral agree-
ments on trade in goods,9 the GATS and the Agreement on Trade-Related
obligations’, WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’—Report of the
Appellate Body (20 March 2000) WT/DS108/AB/R, para 90. See also WTO, Japan: Taxes on
Alcoholic Beverages—Report of the Appellate Body (1 November 1996) WT/DS8/AB/R, WT/
DS10/AB/R, WT/DS11/AB/R, 16.
7 For more details see Jennifer E Farrell, The Interface of International Trade Law and
Taxation (IBFD 2013); Justus Fischer-Zernin, ‘GATT versus Tax Treaties? The Basic Conflicts
between International Taxation Methods and the Rules and Concepts of GATT’ (1987)
21 Journal of World Trade Law 39; Gary C Hufbauer, ‘Tax Discipline in the WTO’ (2010)
44 Journal of World Trade 763; Paul R McDaniel, ‘Trade and Taxation’ (2001) 26 Brooklyn
Journal of International Law 1621; Paul R McDaniel, ‘The Impact of Trade Agreements on Tax
Systems’ (2002) 30 Intertax 166; Tulio Rosembuj, ‘Taxes and the World Trade Organization’
(2007) 35 Intertax 348; Wolfgang Schön, ‘World Trade Organization Law and Tax Law’ (2004)
58 Bulletin for International Taxation 283; Servaas van Thiel, ‘General Report’ in Michael
Lang, Judith Herdin, and Ines Hofbauer (eds), WTO and Direct Taxation (Linde 2005).
8 See Chapter 2, Sections 6–8.
9 These agreements relate either to a specific category of goods or to a specific type of trade
barriers. They regularly contain more detailed provisions on areas already included in the
GATT (1947) LT/UR/A-1A/1/GATT/2 itself. Consequently, pursuant to the Interpretative
Note in Annex 1A of the Agreement Establishing the WTO (1994) LT/UR/A/2, in relation to
the GATT, they represent leges speciales.
Trade Law 169
Aspects of Intellectual Property Rights (TRIPS)), while Annexes 2 and 3

contain the Dispute Settlement Understanding (DSU)10 and the Trade
Policy Review Mechanism (TPRM), respectively. Annex 4 covers add-
itional plurilateral agreements.11
1.2.2 Non-discrimination principle

The creation of a level playing field between domestic and imported sup-
plies plays a crucial role in fostering free trade. The WTO therefore adopted
a non-discrimination approach, which is particularly important for the
admissibility of tax measures. WTO law prohibits two forms of discrim-
ination, thereby fostering competition by trade between foreign supplies
from the different WTO member states and domestic supplies.
1. On the one hand, the most-favoured nation (MFN) obligation pro-

hibits the WTO member states from discriminating between and
among other member states.12 That is, they must subject all members
to the same conditions and must grant to all of them the same advan-
tages given to the state treated most favourably.13
2. On the other hand, in simplified terms, the national treatment (NT)
obligation prohibits WTO members from discriminating against for-
eign supplies vis-à-vis domestic supplies.14 In other words, it obliges
10 Through its agreements, the WTO not only establishes rules for world trade, but also
provides the framework for resolving potential disputes. The WTO’s dispute settlement is a
two-stage system. If a Member suspects a violation of the agreements by another Member, it
can demand the establishment of a Panel, that investigates the case and subsequently prepares
a report, subject to adoption by the representatives of all WTO Members (Dispute Settlement
Body). If one of the parties to the dispute, however, does not agree with the Panel Report, it can
file an appeal that will be dealt with by the Appellate Body and is limited exclusively to legal
issues, in particular the interpretation of WTO agreements. After considering the case, the
Appellate Body again prepares a report, subject to adoption by the Dispute Settlement Body.
See Understanding on Rules and Procedures Governing the Settlement of Disputes (15 April
1994) LT/UR/A-2/DS/U/1.
11 Except for Annex 4, WTO agreements follow a single-undertaking approach, ie they
cannot be entered separately. See WTO, Brazil: Measures Affecting Desiccated Coconut—
Report of the Appellate Body (20 March 1997) WT/DS22/AB/R.
12 See WTO, European Communities: Measures Prohibiting the Importation and Marketing
of Seal Products—Report of the Appellate Body (18 June 2014) WT/DS400/AB/R, WT/DS401/
AB/R, para 5.79.
13 This also includes non-WTO Members. Thus, a WTO Member must not put other
Members in a worse position than non-Members. On the other hand, a WTO Member has no
obligation to give advantages granted to WTO Members to non-Members.
14 See WTO, European Communities: Measures Prohibiting the Importation and Marketing
of Seal Products—Report of the Appellate Body (18 June 2014) WT/DS400/AB/R, WT/DS401/
AB/R, para 5.79.
WTO members to subject foreign supplies to the same conditions

that apply to domestic supplies.
However, these non-discrimination principles appear in different forms

and with different limitations in the various existing trade law agreements.
Therefore, a specific analysis of each trade law agreement is necessary.
1.3 Taxation of goods: the General

Agreement on Tariffs and Trade
1.3.1 Overview
The GATT15 sets basic rules for trade in goods. Most importantly, it pro-
hibits the contracting states from levying excessive customs duties on the
importation of goods above their schedule of concessions;16 from treating
imports from any of the other member states differently with regard to cus-
toms duties, internal taxes or other laws affecting the sale of goods (MFN);17
and from exposing imports to unfavourable internal taxes, quantitative re-
gulations, or other laws affecting the sale of goods compared to domestic
goods (NT).18 We will discuss the latter in the following subsections.
The NT obligation in the GATT is provided for in Art III. It predomin-
antly covers internal taxes (paras 2−3), laws, regulations, and requirements
affecting the internal sale of products (para 4), and quantitative regulations
relating to the mixture of products (paras 5−7). Hereinafter, the treatment
of internal taxes with regard to Art III para 2 GATT will be discussed.
A possible application of Art III para 4 GATT to subsidies will be discussed
in Section 1.5.
1.3.2 Treatment of internal taxes

Under GATT, internal taxes are the direct counterpart of customs duties.
While the obligation to pay a customs duty is triggered by importation,19
the obligation to pay an internal tax is triggered by an internal factor: a
15 GATT (1994).
16 Art II GATT.
17 Art I GATT.
18 Art III GATT.
19 WTO, European Communities: Measures Affecting the Importation of Certain Poultry
Products—Report of the Appellate Body (23 July 1998) WT/DS69/AB/R, para 145.
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factor occurring after importation into a customs territory, such as the do-
mestic sale of a product.20
The imposition of internal taxes on imported and domestic products is
regulated by Art III para 2 GATT. The first sentence is as follows:
The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess
of those applied, directly or indirectly, to like domestic products.
If a measure falls within the scope of the above provision (ie if it qualifies
as an internal tax or other internal charge of any kind that imported prod-
ucts are directly or indirectly subjected to), the establishment of a violation
of the provision is dependent on two conditions:21 (i) the imported prod-
ucts treated differently are like products22 and (ii) the internal tax or internal
charge applied to the imported products are in excess23 of those applied to
the like domestic products.24
20 WTO, China: Measures Affecting Imports of Automobile Parts—Report of the Appellate Body
(12 January 2009) WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R, para 163. In add-
ition, Ad Art III GATT in Annex I specifies that the collection or enforcement of internal taxes at
the time or point of importation does not disqualify them from being internal measures.
21 See WTO, Japan: Taxes on Alcoholic Beverages—Report of the Appellate Body (1 November
1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, 18–19.
22 The criterion of likeness is present in multiple provisions throughout WTO law, in gen-
eral seeking to establish if there is a competitive relationship between products or services.
With regard to NT and MFN, the rationale is that an unequal treatment of competitive prod-
ucts or services would lead to trade distortions and e contrario a competitive relationship be-
tween products or services is required to mandate equal treatment under WTO law. There
is, however, no general definition of likeness in WTO law. Rather, the concept must be inter-
preted in the specific context of each provision and the specific case. The Appellate Body stated
this as follows: ‘The concept of “likeness” is a relative one that evokes the image of an accor-
dion. The accordion of “likeness” stretches and squeezes in different places as different provi-
sions of the WTO Agreement are applied.’ WTO, Japan: Taxes on Alcoholic Beverages—Report
of the Appellate Body (1 November 1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R,
21. However, certain sets of criteria have been suggested by Working Parties and the Appellate
Body, eg intended use in a particular market, consumer preferences and habits, customs clas-
sification, and physical characteristics. See GATT, Report by the Working Party on Border Tax
Adjustment (1970) L/3464, para 18. Within Art III para 2 first sentence GATT the concept of
likeness must be interpreted particularly narrowly, as the criterion in excess is not qualified by
a de minimis standard. See WTO, Japan: Taxes on Alcoholic Beverages—Report of the Appellate
Body (1 November 1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, 19–20.
23 The criterion ‘in excess’ is not qualified by a de minimis standard. Thus, the smallest ex-
cess leads to fulfillment of this condition. See WTO, Japan: Taxes on Alcoholic Beverages—
Report of the Appellate Body (1 November 1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/
DS11/AB/R, 23.
24 Art III para 2 first sentence GATT does not contain any specific reference to the gen-
eral principle in Art III para 1 GATT. Thus, the provision is to be interpreted in conjunction
Suppose France imposes a 5% excise tax on French red wine sold to con-
sumers in France and simultaneously imposes a 10% excise tax on Italian
red wine also sold to consumers in France. It seems obvious that such
measure is a violation of Art III para 2 GATT, particularly the first sentence,
as the 10% excise tax imposed on Italian red wine is an internal tax in excess
of the 5% excise tax imposed on French red wine, with Italian and French
red wine presumably being like products.
Alternatively, Art III para 2 GATT, second sentence, provides a slightly
different route for arguing for the inadmissibility of an internal tax. It
states:
Moreover, no contracting party shall otherwise apply internal taxes or

other internal charges to imported or domestic products in a manner
contrary to the principles set forth in paragraph 1.
Unlike the first sentence of Art III para 2 GATT, the second sentence con-
tains a direct reference to Art III para 1 GATT. Thus, the condition defined
in Art III para 1 GATT (ie the protection of domestic production) must be
satisfied separately.25 Moreover, the provision is complemented by Ad Art
III para 2 GATT in Annex I, which states:
A tax conforming to the requirements of the first sentence of paragraph

2 would be considered inconsistent with the provisions of the second
sentence only in cases where competition was involved between, on the
one hand, the taxed product and, on the other hand, a directly competi-
tive or substitutable product which was not similarly taxed.
It follows that the establishment of a violation of the above provision is thus

dependent on three conditions:26 (i) the products are directly competitive or
with the general principle, but no separate examination of its condition, that is the affordance
of protection to the domestic industry, is needed. See WTO, Japan: Taxes on Alcoholic
Beverages—Report of the Appellate Body (1 November 1996) WT/DS8/AB/R, WT/DS10/AB/
R, WT/DS11/AB/R, 18.
25 See WTO, Japan: Taxes on Alcoholic Beverages—Report of the Appellate Body (1 November
1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, 24.
26 WTO, Japan: Taxes on Alcoholic Beverages—Report of the Appellate Body (1 November
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substitutable; (ii) the products are not similarly taxed; and (iii) the dissimilar
taxation affords protection to the domestic industry.27
There are thus two key differences between the first and second sen-
tences of Art III para 2 GATT. On the one hand, the latter allows for a wider
scope of products, as ‘like products’ is to be understood in a more narrow
sense than ‘directly competitive or substitutable products’.28 Therefore, if a
challenge fails to establish that the products involved are ‘like products’, it
may alternatively be examined to establish that the products involved are
‘directly competitive or substitutable products’ under the second sentence
of Art III para 2 GATT. On the other hand, the conditions for internal taxes
specified in the second sentence are less restrictive than those specified in
the first sentence as the criterion ‘not similarly taxed’, unlike the criterion
‘in excess’, allows slight deviations from tax burdens,29 and the protection of
the domestic industry needs to be established separately.
Reverting to the example above, it is evident that if French red wine and
Italian red wine are like products, then they are also directly competitive or
substitutable products. Moreover, the excise tax rate on Italian red wine will
likely meet the dissimilar taxation criterion, thus constituting a violation of
the second sentence of Art III para 2 GATT, subject to examination with re-
gard to the protection of the domestic industry.
Both the first and second sentences of Art III para 2 GATT have fre-
quently been cited in indirect tax disputes. A particular prominent case was
Japan—Taxes on Alcoholic Beverages concerning Japanese liquor taxes levied
27 The protection to domestic industry is not an issue of intent. Whether or not a measure af-
fords protection of domestic production has to be analysed on a case-by-case basis. See WTO,
Japan: Taxes on Alcoholic Beverages—Report of the Appellate Body (1 November 1996) WT/
DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, 27–31.
28 In fact, likeness is a subcategory of direct competitiveness or substitutability, which refers
to a competitive relationship between imported and domestic products, whereby the terms
‘substitutable’ and ‘competitive’ refer to interchangeability and ‘directly’ to proximity in the
competitive relationship. While like products are perfect substitutes, directly competitive or
substitutable products also include imperfect substitutes. See WTO, Korea: Taxes on Alcoholic
Beverages—Report of the Appellate Body (17 February 1999) WT/DS75/AB/R, WT/DS84/
AB/R, paras 114–16; WTO, Canada: Certain Measures Concerning Periodicals—Report of the
Appellate Body (30 July 1997) WT/DS31/AB/R, 25.
29 Unlike the criterion ‘in excess’ in the Art III para 2 first sentence GATT which prohibits
even the slightest excess, the criterion ‘not similarly taxed’ is subject to a de minimis standard,
thus leaving space for slight deviations. The applicable threshold has to be determined on a
case-by-case basis. WTO, Japan: Taxes on Alcoholic Beverages—Report of the Appellate Body (1
November 1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, 26–27.
on domestically produced or imported beverages with an alcohol content of

at least one degree intended for use in Japan.30 The tax rates, expressed as a
specific amount in Japanese yen per litre of beverage, depended on the cat-
egory (and subcategory) of liquor that the product fell under.31 The European
Communities, Canada, and the US accused Japan of violating the first and
second sentences of Art III para 2 GATT as shochu was favourably taxed
compared to vodka, gin, genever, liqueurs, rum, whisky, and brandy.32
The WTO Panel first investigated the alleged violation of the first sen-
tence of Art III para 2 GATT. It considered vodka and shochu like prod-
ucts as most of their physical characteristics were the same and as they
were classified under the same heading in the Japanese tariffs.33 Further,
it understood vodka to be taxed in excess of shochu as vodka was taxed at
9,927 yen per degree of alcohol whereas shochu was taxed at only 6,338
yen per degree of alcohol.34 With regard to the violation of the second
sentence of Art III para 2 GATT, the WTO Panel considered shochu
and gin, genever, liqueurs, rum, whisky, and brandy directly competi-
tive or substitutable products due to their significant elasticity of sub-
stitution.35 Moreover, based on the tax per kilolitre of beverage and per
degree of alcohol, the WTO Panel found a dissimilar taxation that ex-
ceeded a de minimis threshold, affording protection to shochu.36 Finally,
30 WTO, Japan: Taxes on Alcoholic Beverages—Report of the Panel (1 November 1996 as

modified by Appellate Body Report WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R) WT/
DS8/R, WT/DS10/R, WT/DS11/R, para 2.1.
31 For details see WTO, Japan: Taxes on Alcoholic Beverages—Report of the Panel (1
November 1996 as modified by Appellate Body Report WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R) WT/DS8/R, WT/DS10/R, WT/DS11/R, para 2.3.
DS8/R, WT/DS10/R, WT/DS11/R, paras 3.1–3.3.
DS8/R, WT/DS10/R, WT/DS11/R, para 6.23. On the other hand, the other alcoholic bever-
ages in dispute were not considered like shochu due to differences in physical characteristics,
in particular, the use of additives (liqueurs, gin, genever), use of ingredients (rum), and ap-
pearance (whisky, brandy). WTO, Japan: Taxes on Alcoholic Beverages—Report of the Panel
(1 November 1996 as modified by Appellate Body Report WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R) WT/DS8/R, WT/DS10/R, WT/DS11/R, para 6.23.
modified by Appellate Body Report WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R)
WT/DS8/R, WT/DS10/R, WT/DS11/R, para 6.33. In the Panel’s view, for the establishment
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the Panel noted that although shochu is also produced in countries other
than Japan, ‘high import duties on foreign produced shochu resulted
in a significant share of the Japanese shochu market held by Japanese
shochu producers’.37 It follows that through the combination of these
customs duties and the aforementioned excise taxes, ‘Japan manages to
“isolate” domestically produced shochu from foreign competition, be
it foreign-produced shochu or any other of the mentioned white and
brown spirits’,38 resulting in a de facto violation of the first and second
sentences of Art III para 2 GATT. The WTO Appellate Body upheld these
findings.39
The application of Art III para 2 GATT to direct tax measures, on
the other hand, has largely been denied due to the lacking application
to products,40 as was already expressed in discussions on the Havana
Charter.41 However, several arguments in favour of the application of Art
III para 2 GATT to direct taxes have been raised. Most importantly, it has
of protection to domestic industry it was sufficient to show the dissimilarity in taxation is not
de minimis. This understanding was overruled by the Appellate Body, stating that the protec-
tion to domestic industry has to be examined separately. However, the Appellate Body stated
that in this specific case, this did not falsify the Panel’s conclusion, that protection to domestic
industry was afforded by the measure. WTO, Japan: Taxes on Alcoholic Beverages—Report
of the Appellate Body (1 November 1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/
R, 30–31.

39 WTO, Japan: Taxes on Alcoholic Beverages—Report of the Appellate Body (1 November
40 See eg Kenneth W Dam, The GATT: Law and International Economic Organization
(University of Chicago Press 1970) 124–25; Justus Fischer-Zernin, ‘GATT versus Tax Treaties?
The Basic Conflicts between International Taxation Methods and the Rules and Concepts
of GATT’ (1987) 21 Journal of World Trade Law 39, 42; Peter van den Bossche and Werner
Zdouc, The Law and Policy of the World Trade Organization (4th edn, Cambridge University
Press 2017) 352. See also WTO, Argentina: Measures Affecting the Export of Bovine Hides and
the Import of Finished Leather—Report of the Panel (16 February 2001) WT/DS155/R, para
11.159.
41 The Havana Charter (1948) (formally the Final Act of the UN Conference on Trade and
Employment) was the legal basis for the later failed International Trade Organization. During
the discussion on Art 18 of the Havana Charter, which was the equivalent of Art III GATT, a
sub-committee agreed that ‘neither exemptions from import duties nor from income taxes
came within the terms of Article 18 since this Article refers specifically to internal taxes on
products’. UN, Conference on Trade and Employment, Third Committee: Commercial Policy,
Sub-Committee A, Notes of twentieth Meeting (1948) E/CONF.2/C.3/A/W.32, 1–2.
been argued that the word ‘indirectly’ in the first sentence of Art III para
2 GATT may include various ways that taxes can affect a product as no
limits are defined.42 The connection threshold between a direct tax and
a product for the former to fall within the scope of the first sentence of
Art III para 2 GATT, however, remains unclear and has not been clarified
in detail by judicial bodies.43 Moreover, it has been argued that the pur-
pose of Art III para 2 GATT is to prevent protectionism,44 which can also
be pursued through direct tax measures.45 This view is strengthened by
the idea that even direct taxes are sometimes shifted forward depending
on the circumstances.46 Traditionally, on the other hand, it was assumed
that direct taxes are not shifted forward and thus do not impact the prices
of products.47
42 Horn and Mavroidis argue that ‘the text does not impose any limits on the degree to
which indirect effects of taxation fall under the purview of the provision’. Henrik Horn and
Petros Mavroidis, ‘Still Hazy after All These Years: The Interpretation of National Treatment
in the GATT/W TO Case-law on Tax Discrimination’ (2004) 15 European Journal of
International Law 39, 68. In addition, the Appellate Body stated: ‘Any measure that indir-
ectly affects the conditions of competition between imported and like domestic products
would come within the provisions of Article III:2, first sentence.’ WTO, Canada: Certain
Measures Concerning Periodicals—Report of the Appellate Body (30 July 1997) WT/DS31/
AB/R 19.
43 See for details Jennifer E Farrell, The Interface of International Trade Law and Taxation
(IBFD 2013) 67. Michael Lennard notes that in WTO, Canada: Certain Measures Concerning
Periodicals—Report of the Appellate Body (30 July 1997) WT/DS31/AB/R the Appellate Body
seemed to require a close correlation between the tax and the product to find an indirect effect.
Michael Lennard, ‘The GATT 1994 and Direct Taxes: Some National Treatment and Related
Issues’ in Michael Lang, Judith Herdin, and Ines Hofbauer (eds), WTO and Direct Taxation
(Linde 2005) 93.
44 The Appellate Body stated that the purpose of Art III para 2 GATT ‘is to avoid protec-
tionism in the application of internal tax and regulatory measures’ and to ‘provide equality
of competitive conditions for imported products in relation to domestic products’. WTO,
Japan: Taxes on Alcoholic Beverages—Report of the Appellate Body (1 November 1996) WT/
DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, 16.
45 See eg Mitsuo Matsushita and others, The World Trade Organization: Law, Practice &
Policy (3rd edn, Oxford University Press 2015) 194–195.
46 See eg Mitsuo Matsushita and others, The World Trade Organization: Law, Practice &
Policy (3rd edn, Oxford University Press 2015) 761; Michael Daly ‘The WTO and Direct
Taxation’ (2005) WTO Discussion Papers No 9, 22–23. Daly further questions the internal
consistency of the treatment of direct taxes in WTO law, as WTO law generally assumes
that direct taxes do not shift forward; however, the exemption of export income from
direct taxes is prohibited under Art 3 SCM (1994) (see Section 1.5). This issue was also
raised in discussions of the working party on border tax adjustment. See GATT, Working
Party on Border Adjustments, Meeting of 18 to 20 June 1968, Note by the Secretariat (1968)
L/3039, 4.
47 See eg Kenneth W Dam, The GATT: Law and International Economic Organization
(University of Chicago Press 1970) 124; Tobias K Stricker, ‘National Report Germany’ in
Michael Lang, Judith Herdin, and Ines Hofbauer (eds), WTO and Direct Taxation (Linde
2005) 324.
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1.4 Taxation of services: the General

Agreement on Trade in Services
1.4.1 Overview
The GATS48 applies to measures affecting trade in services.49 Like the
GATT, the GATS contains both an NT and an MFN provision,50 but there
are two main differences between them. First, whereas the scope of NT in
the GATT is not subject to any good-specific limitations, NT in the GATS
covers only the sectors specified in a WTO member state’s schedule of com-
mitments. This means that the sectors not included in the said schedule are
not subject to NT (positive list approach).51 Second, the GATS contains
specific NT and MFN exceptions for tax measures. On the one hand, Art
XVI lit d GATS allows an infringement of NT provided the measure serves
the purpose of ‘equitable or effective imposition or collection of direct
taxes’.52 On the other hand, Art XVI lit e GATS permits a deviation from the
MFN obligation ‘provided that the difference in treatment is the result of an
48 GATS (1994) LT/UR/A-1B/S/1.

49 Art I para 1 GATS. Art I para 2 GATS defines four modes of supply of trade in serv-
ices covered by the agreement: the provision of a service by an actor from one Member State
in another Member State (‘cross-border supply’), the provision of a service in one Member
State with simultaneous use by a service consumer in another Member State (‘consumption
abroad’), the provision of a service by a provider from one Member State in another Member
State by means of a commercial presence there (‘commercial presence’), and the provision of
a service by a provider of a Member State in another Member State through the presence of a
natural person (‘presence of natural persons’).
50 See Art XVII GATS (NT) and Art II GATS (MFN).
51 Within these included sectors, Members may specify further limitations for each
mode of supply. In addition, a Member my also specify horizontal limitations applied to all
scheduled sectors. In contrast, the MFN obligation under GATS is considered to be ‘a gen-
eral obligation . . . applicable across the board by all Members to all service sectors, not
only in sectors . . . where specific commitments have been undertaken’. WTO, European
Communities: Regime for the Importation, Sale and Distribution of Bananas (Ecuador,
Guatemala and Honduras, Mexico, United States)—Report of the Panel (25 September 1997 as
modified by Appellate Body Report WT/DS27/AB/R) WT/DS27/R/ECU, WT/DS27/R/GTM,
WT/DS27/R/HND, WT/DS27/R/Mex, WT/DS27/R/USA, para 7.298. However, even with re-
gard to the MFN obligation, Members could specify (temporary) MFN exemptions upon the
day of entry into force of the Agreement Establishing the WTO (1994) LT/UR/A/2 or upon the
date of accession to the WTO. See Art II para 2 GATS.
52 Footnote 6 in the GATS clarifies what measures potentially serve this cause by use of an
illustrative list. Included are inter alia measures applied ‘to non-residents or residents in order
to prevent the avoidance or evasion of taxes’ and measures that ‘determine, allocate or appor-
tion income . . . between related persons or branches of the same person’. Under Art XXVIII lit
o GATS direct taxes are defined as ‘all taxes on total income, on total capital or on elements of
income or of capital, including taxes on gains from the alienation of property, taxes on estates,
inheritances and gifts, and taxes on the total amounts of wages or salaries paid by enterprises,
as well as taxes on capital appreciation.’
agreement on the avoidance of double taxation . . . by which the Member is

bound’.53 The focus of the following subsections will again be on NT.
1.4.2 Treatment of taxes on services

Unlike GATT, GATS does not contain any specific NT provision for taxes.
Rather, Art XVII GATS provides a general NT obligation applied to all
‘measures’, which are defined as ‘any measure by a Member, whether in the
form of a law, regulation, rule, procedure, decision, administrative action,
or any other form’.54 Art XVII para 1 GATS states:
In the sectors inscribed in its Schedule, and subject to any conditions

and qualifications set out therein, each Member shall accord to services
and service suppliers of any other Member, in respect of all measures af-
fecting the supply of services, treatment no less favorable than that it
accords to its own like services and service suppliers.
It follows that the establishment of a violation of the provision is thus de-

pendent on four conditions:55 (i) the challenged WTO member state
undertook a commitment in the relevant sector and mode of supply; (ii)
the measure applied qualifies as a measure affecting the supply of services;56
(iii) the services and service suppliers at stake are like services and service
suppliers;57 and (iv) the measure leads to a treatment of foreign services and
53 In addition, Art XIV GATS contains further exceptions that could potentially apply to
certain tax measures, eg measures ‘necessary to protect human, animal or plant life or health’
under Art XIV lit b GATS.
54 Art XXVIII lit a GATS.
55 WTO, European Communities: Regime for the Importation, Sale and Distribution of
Bananas (Ecuador, Guatemala and Honduras, Mexico, United States)—Report of the Panel (25
September 1997 as modified by Appellate Body Report WT/DS27/AB/R) WT/DS27/R/ECU,
WT/DS27/R/GTM, WT/DS27/R/HND, WT/DS27/R/Mex, WT/DS27/R/USA, para 7.314.
The Appellate Body followed this approach. See WTO, European Communities: Regime for the
Importation, Sale and Distribution of Bananas—Report of the Appellate Body (25 September
1997) WT/DS27/AB/R, para 244.
56 The term ‘affecting’ is to be understood as ‘having an effect on’, indicating a broad scope
of application. See WTO, European Communities: Regime for the Importation, Sale and
Distribution of Bananas—Report of the Appellate Body (25 September 1997) WT/DS27/AB/
R, para 220. The Appellate Body further suggested examining who supplied the services con-
cerned and how they are supplied to define if the supply of services is affected. See WTO,
Canada: Certain Measures Affecting the Automotive Industry—Report of the Appellate Body (19
June 2000) WT/DS139/AB/R, WT/DS142/AB/R, para 165.
57 Since the examination of likeness in GATS serves the same purpose as in GATT, namely
the finding of a close competitive relationship, similar criteria may be adopted (adapted for
trade in services). See WTO, Argentina: Measures Relating to Trade in Goods and Services—
Report of the Appellate Body (9 May 2016) WT/DS453/AB/R, para 6.31.
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service suppliers that is less favourable than the treatment of domestic serv-
ices and service suppliers.58
Suppose Canada imposes a 19% VAT on marketing management con-
sultancy services provided to Canadian businesses by Canadian consult-
ancies but imposes a 25% VAT on the same consultancy services provided
to Canadian businesses by enterprises based in the US. It is obvious that,
subject to Canada’s specific schedule of commitments, the measure is an
infringement of Art XVII GATS as it treats foreign services less favourably
than domestic services. Moreover, in recent years it was reviewed whether
digital services taxes could be seen as an infringement of the NT provi-
sion as they might de facto discriminate against large foreign suppliers as
the services covered by these taxes are mainly offered by foreign (ie US)
suppliers.59
Besides these indirect tax measures, the NT obligation also covers direct
tax measures, following a wide interpretation of the phrase ‘affecting the
supply of services’.60 However, it is important to note that Art XIV lit d
GATS contains an exception: ‘provided that the difference in treatment
is aimed at ensuring the equitable or effective imposition or collection of
direct taxes in respect of services or service suppliers of other Members’.
Therefore, direct taxes may be considered an infringement of the NT obli-
gation but may be justified based on such exception.61 As a condition to the
application of the exception, however, the exception for NT in Art XIV lit d
GATS is limited by a chapeau subjecting them to the requirement that the
examined tax measures ‘are not applied in a manner that would constitute a
means of arbitrary or unjustifiable discrimination between countries where
like conditions prevail, or a disguised restriction on trade in services’.62
58 A measure leads to less favourable treatment if it modifies the conditions of competition

in favour of services and service suppliers of the member employing the measure. Art XVII
para 3 GATS. It is irrelevant whether this is achieved by formally identical or formally different
treatment. Art XVII para 2 GATS.
59 See on the digital services taxes Chapter 4, Section 2.2.4.5. As they often apply only if a
certain threshold (eg EUR750 million) is met, these taxes might de facto only apply to foreign
suppliers. See Andrew D Mitchell, Tania Voon, and Jarrod Hepburn, ‘Taxing Tech: Risks of
an Australian Digital Services Tax under International Economic Law’ (2019) 20 Melbourne
Journal of International Law 88; Chris Noonan and Victoria Plekhanova, ‘Taxation of Digital
Services under Trade Agreements’ (2020) 23 Journal of International Economic Law 1015.
60 Servaas van Thiel, ‘General Report’ in Michael Lang, Judith Herdin, and Ines Hofbauer
(eds), WTO and Direct Taxation (Linde 2005) 36.
61 See in particular the examples in footnote 6 of Art XIV GATS.
62 There is not sufficient case law on the chapeau of Art XIV GATS. However, due to the
close similarity of the terms to the chapeau in Art XX GATT, the case law on Art XX GATT
can be used for interpretation. See WTO, Argentina: Measures Relating to Trade in Goods and
Services—Report of the Panel (9 May 2016 as modified by Appellate Body Report WT/DS453/
It follows that if a direct tax measure either does not serve the purpose
of ‘equitable or effective imposition or collection of direct taxes’ or does not
pass the chapeau of Art XIV GATS, it will be subject to the NT provision of
the GATS.63
1.5 Tax subsidies: Agreement on Subsidies

and Countermeasures (and the GATT)
1.5.1 Overview
The SCM64 is one of the 13 additional agreements in Annex 1A of the
Marrakesh Agreement. Accordingly, its scope is limited to subsidies that
affect trade in goods.
The (in-)admissibility of measures under the SCM is examined in the
following two steps.
First, as the scope of the SCM is limited to subsidies, whether a measure
represents a subsidy or does not is determined on the basis of the meaning
of subsidy stated in Art 1 SCM. If it is established that a measure represents a
subsidy under Art 1 SCM, the subsidy will be classified as prohibited (Art 3
SCM) or actionable (Art 5 SCM). The category ‘prohibited subsidies’ repre-
sents two explicitly defined forms of subsidy that are generally inadmissible
under Art 3 SCM. In contrast, the category ‘actionable subsidies’ defines a
set of trade effects that a subsidy may not result in. Thus, if a subsidy is not
prohibited on its face under Art 3 SCM, it may still be challenged under Art
5 SCM with regard to its effect on trade, subject to a specificity test under
Art 2 SCM.65 Subsidies neither prohibited under Art 3 SCM, nor causing
any trade effects listed under Art 5 SCM are admissible under the SCM.66
AB/R) WT/DS453/R, para 7.745. The Appellate Body stated that the chapeau ‘addresses, not
so much the questioned measure . . . but rather the manner in which that measure is applied’.
WTO, United States: Standards for Reformulated and Conventional Gasoline—Report of the
Appellate Body (20 May 1996) WT/DS2/AB/R, 22.
63 In addition, however, Art XXII GATS shields such potential NT violations by a Member
from a challenge within the WTO’s dispute settlement process by another Member, if the
measure ‘falls within the scope of an international agreement between them relating to the
avoidance of double taxation’.
64 SCM (1994) LT/UR/A-1A/9.
65 Art 2 para 3 SCM deems subsidies prohibited under Art 3 SCM to be specific, thus
making the specificity test for prohibited subsidies obsolete.
66 Until 1 January 2000 an additional ‘non-actionable subsidies‘ category existed. Subsidies
falling under this category were explicitly permitted, although they may have infringed Art 3
or 5 SCM.
Trade Law 181
1.5.2 Tax relief as a subsidy under Art 1 SCM

Section 1.5 discusses three types of tax measures that can be considered a
subsidy according to Art 1 para 1 SCM: (i) relief from taxes in relation to ex-
ports; (ii) relief from taxes conditional upon the use of domestic goods over
imported goods; and (iii) other forms of tax relief. While these forms of
tax relief are subject to different conditions and lead to different outcomes,
their common element is the exemption from taxes that would otherwise
be due.67
Art 1 para 1 SCM deems that a subsidy exists if ‘there is a financial
contribution by a government or any public body within the territory of
a Member . . . and a benefit is thereby obtained’. In other words, for a tax
measure to be considered a subsidy it must be demonstrated that (i) there is
a financial contribution and (ii) the recipient obtains a benefit.68
The existence of a financial contribution includes the ‘foregoing of gov-
ernment revenue otherwise due’ (exemplified by financial incentives such
as tax credits),69 which may regularly include tax reliefs.70 A tax relief is in
general considered a benefit to the recipient due to the lower tax burden.71
67 Whereas the emphasis of the previously explored NT provisions lay on discrimination

against imports through excessive taxation of imported goods and services compared to do-
mestic goods and services, the focus here lies on preferential taxation measures for domestic
industries and goods.
68 The Appellate Body ruled that the term ‘a benefit is thereby conferred’ is concerned with
a benefit to the recipient. A benefit to the recipient is given if the recipient is better off than ab-
sent the financial contribution. See WTO, Canada: Certain Measures Concerning Periodicals—
Report of the Appellate Body (30 July 1997) WT/DS31/AB/R, paras 156–57.
69 Art 1 para 1.1 lit a (1) (ii) SCM. However, footnote 1 in the SCM specifies that ‘the exemp-
tion of an exported product from duties or taxes borne by the like product when destined for
domestic consumption, or the remission of such duties or taxes in amounts not in excess of
those which have accrued, shall not be deemed to be a subsidy’. Thus, eg the exemption of ex-
ports from VAT per se, as is the case in modern VAT systems, is not considered to be a subsidy.
70 In certain cases it can, however, be fairly problematic to define what is otherwise due. The
Appellate Body specified that in order to define what is otherwise due, a normative bench-
mark has to be defined against which a comparison of the actual and otherwise encountered
tax burden is made. Because of the sovereign authority of the Members to define their tax-
ation systems (ie there is no ‘right’ tax system under WTO law, a Member can freely choose
the revenues and profits it taxes), the benchmark is set by the prevailing domestic standard,
ie the rules of taxation that each Member establishes for itself. See WTO, United States: Tax
Treatment for ‘Foreign Sales Corporations’—Report of the Appellate Body (20 March 2000) WT/
DS108/AB/R, para 90.
71 See eg WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’—Report of the
Panel (20 March 2000 as modified by Appellate Body Report WT/DS108/AB/R) WT/DS108/
R, para 7.103; WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’—Recourse
to the Article 21.5 of the Dispute Settlement Understanding by the European Communities—
Report of the Panel (29 January 2002 as modified by Appellate Body Report WT/DS108/AB/
RW) WT/DS108/RW, para 8.46.
It follows that each of the three measures discussed in Section 1.5 would
likely qualify as a subsidy under Art 1 para 1 SCM. In simple terms, a
tax relief can be regarded as an indirect subsidy as no direct government
spending occurs and taxes are waived; that is, government revenue other-
wise due is not collected.
1.5.3 Treatment of export tax relief

Art 3 SCM defines two types of subsidy that are considered unconditionally
prohibited because of their highly trade-distorting effect: export subsidies,
which will be discussed hereafter, and subsidies dependent on the use of
domestic goods, which will be discussed in Section 1.5.4.
Pursuant to Art 3 para 1 lit a SCM, a subsidy qualifies as a prohibited ex-
port subsidy if it is ‘contingent, in law or in fact, whether solely or as one of
several other conditions, upon export performance’.
Suppose the US grants a 25% income tax base deduction on profits gen-
erated by cattle farmers in the US through the export of beef. If the 25%
income tax base deduction qualifies as a subsidy under Art 1 SCM, it is ob-
vious that it is a prohibited export subsidy as it applies only to profits from
export, thus being contingent on export performance.
In fact, an illustrative list of export subsidies in Annex I of the SCM spe-
cifically includes direct tax72 base deductions related to export perform-
ance as well as other export-related exemptions or deferrals of direct taxes
within the scope of Art 1 para 1 SCM.73 With regard to indirect taxes, the
72 Under the SCM the term ‘direct taxes’ is defined as ‘taxes on wages, profits, interests,
rents, royalties, and all other forms of income, and taxes on the ownership of real property’
and the term ‘indirect taxes’ captures ‘sales, excise, turnover, value added, franchise, stamp,
transfer, inventory and equipment taxes, border taxes and all taxes other than direct taxes and
import charges’. See footnote 58 in the SCM.
73 This item is further clarified by footnote 59 in the SCM. First, it states that the deferral
of taxation does not constitute a prohibited export subsidy if interest is paid at market rates
on the deferred tax. This issue was raised in the case GATT, United States Tax Legislation
(DISC) —Report of the Panel (7 December 1981) BISD 23S/98 under GATT (1947) as the US
allowed for an unlimited deferral of taxation on parts of export profits without charging any
interest. Second, the footnote states that the provision does not prevent a Member from taking
measures to avoid double taxation of income from foreign sources. Members are therefore free
to apply the credit method or exemption method to avoid international double taxation. This
issue was raised in the cases GATT, Income Tax Practices Maintained by Belgium—Report of the
Panel (7 December 1981) BISD 23S/127; GATT, Income Tax Practices Maintained by France—
Report of the Panel (7 December 1981) BISD 23S/114; and GATT, Income Tax Practices
Maintained by The Netherlands—Report of the Panel (7 December 1981) BISD 23S/137 under
GATT (1947), as the US argued that the territoriality principle of taxation resulted in a sub-
sidy under Art XVI para 4 GATT as income of foreign branches or subsidiaries of domestic
manufacturing firms were not taxed domestically. Footnote 59, however, also clarifies that the
application of the exemption method would only be SCM-compatible if it is applied within
the framework of the arm’s length principle. The rationale is that the exemption method, in
Trade Law 183
illustrative list also entails the exemption of (prior-stage cumulative) in-

direct taxes on exported products and the goods and services used in their
production in excess of those indirect taxes levied on products sold for do-
mestic consumption.
The most prominent case of a prohibited export subsidy under the
SCM was the US Foreign Sales Corporation (FSC) legislation adopted
within the Deficit Reduction Act of 1984. Under the FSC scheme, the for-
eign subsidiaries of US exporters could elect to be treated as FSCs sub-
ject to conditions relating to foreign presence, keeping of records, and
shareholders.74 If the specific requirements were met, part of the income
from joint export activities (foreign trade income) was allocated to an
FSC through administrative pricing rules,75 and part of such income was
deemed not effectively connected with the conduct of a trade or business
in the US (exempt foreign trade income).76 In addition, foreign trade
income was generally exempted from the anti-deferral regime Subpart
F,77 and a 100% dividends received deduction applied for US corporate
shareholders.78
The WTO Panel found that the aforementioned regulation represented a
‘systematic effort to exempt certain types of income which would be taxable
in the absence of the FSC scheme’.79 Thus, the FSC regime was considered
a financial contribution under Art 1 para 1 SCM as government revenue
otherwise due was forgone,80 simultaneously representing a benefit to the
combination with weak enforcement of transfer pricing (TP) rules, leads to de facto export
subsidies, as companies could shift their income to low-tax jurisdictions (without local eco-
nomic substance).
74 Sec 922 lit a IRC (1986).

75 Sec 925 IRC (1986). Subject to requirements regarding the performed functions and
beard costs involved in the export activities. Alternatively, the allocation of income could be
based on arm’s length transfer prices.
76 Sec 921 lit a and Sec 923 lit a IRC (1986).
77 Sec 951 lit e IRC (1986). If income was allocated based on arm’s length transfer prices,
the US shareholder was subject to Subpart F rules in respect of the non-exempt portion of the
FSC’s foreign trade income. Generally, under Subpart F US shareholders are taxed on their pro
rata share of certain types of income earned by a controlled foreign corporation even if the
earnings were not distributed to the shareholders.
78 Sec 245 lit c IRC (1986). If income was allocated based on arm’s length transfer prices,
the US shareholder was subject to tax on dividends received from distributions from the non-
exempt portion of the FSC’s foreign trade income.
79 WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’—Report of the Panel
(20 March 2000 as modified by Appellate Body Report WT/DS108/AB/R) WT/DS108/R,
para 7.100.
para 7.102.
recipient.81 Moreover, the WTO Panel considered the subsidy contingent

on export performance as it could be availed of only for foreign trade in-
come, which by definition was income from the sale of US goods for use or
consumption outside the US, thus making the subsidy dependent on the
income arising from the exportation of US goods.82 The WTO Appellate
Body upheld the Panel’s findings.83
1.5.4 Treatment of tax relief upon use of domestic inputs

The second measure prohibited under Art 3 SCM is import substitution
subsidy. Pursuant to Art 3 para 1 lit b SCM a subsidy (within the meaning of
subsidy under Art 1 SCM) qualifies as an import substitution subsidy if it is
‘contingent, whether solely or as one of several conditions, upon the use of
domestic over imported goods’.84
Suppose Japan grants a 25% income tax base deduction for profits gen-
erated by the sale of electrical machinery if 50% of the associated costs are
attributable to Japanese inputs. If the 25% income tax base deduction quali-
fies as a subsidy under Art 1 SCM, it is easy to see that the measure likely
falls under this provision as the access to it is conditioned upon the use of
domestic goods.
Import substitution subsidies are closely related to the NT principle.
Consequently, these measures are also potentially within the scope of Art
III GATT, in particular the broad, ‘non-fiscal’ NT obligation in Art III para
4 GATT, which states:
The products of the territory of any contracting party imported into the
territory of any other contracting party shall be accorded treatment no
less favourable than that accorded to like products of national origin in
para 7.103.
para 7.108.
83 WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’—Report of the
Appellate Body (20 March 2000) WT/DS108/AB/R, para 177.
84 The Appellate Body noted that although it remains unclear form the wording whether de
facto contingency upon the use of domestic over imported goods is covered, it understands it
to cover de jure as well as de facto contingency. See WTO, Canada: Certain Measures Affecting
the Automotive Industry—Report of the Appellate Body (19 June 2000) WT/DS139/AB/R, WT/
DS142/AB/R, paras 139–43.
Trade Law 185
respect of all laws, regulations and requirements affecting their internal

sale, offering for sale, purchase, transportation, distribution or use.
The establishment of a violation of the provision is thus dependent on three

conditions:85 (i) the products are like products;86 (ii) the measure examined
qualifies as a law, regulation, or requirement affecting a product’s internal
sale, offering for sale, purchase, transportation, distribution, or use;87 and
(iii) the measure leads to a less favourable treatment of imported products88
compared to domestic products.89
Returning to the discussed example, it is evident that the measure can
be considered an infringement of Art III para 4 GATT as the tax relief is
contingent on the use of domestic goods, thus impairing the competitive
position of imported products as enterprises will be incentivized to use
domestic inputs. Therefore, the measure can affect the internal sale of im-
ported products and can be regarded as tantamount to treating imported
products less favourably than domestic products.
In fact, the most prominent case regarding a measure of this kind, the US
Extraterritorial Income Exclusion (ETI), which was adopted as part of the
American Jobs Creation Act of 2004 in the aftermath of the abolishment of
85 WTO, Korea: Measures Affecting Imports of Fresh, Chilled and Frozen Beef—Report of the
Appellate Body (10 January 2001) WT/DS161/AB/R, WT/DS169/AB/R, para 133.
86 Whereas Art III para 2 GATT consists of two separate obligations, referring to either
like products or directly competitive or substitutable products, Art III para 4 GATT only con-
sists of a single obligation referring to like products. The Appellate Body has therefore sug-
gested a broader interpretation of the concept of likeness in Art III para 4 GATT than in Art
III para 2 GATT, first sentence, but still more narrow than the concept of directly competi-
tive or substitutable products in Art III para 2 GATT, second sentence. See WTO, European
Communities: Measures Affecting Asbestos and Asbestos-Containing Products—Report of the
Appellate Body (5 April 2001) WT/DS135/AB/R, para 99.
87 The Panel in Canada—Certain Measures Affecting the Automotive Industry held that a
measure can represent a ‘law . . . affecting the internal sale . . .’ even if compliance with it is
not mandatory, ie enterprises accept voluntary conditions to receive an advantage. See WTO,
Canada: Certain Measures Affecting the Automotive Industry—Report of the Panel (19 June 2000
as modified by Appellate Body Report WT/DS139/AB/R, WT/DS142/AB/R) WT/DS139/R,
WT/DS142/R, para 10.73. This issue was not explicitly covered by the Appellate Body.
88 A formal difference in treatment is not sufficient to show treatment less favourable.
Instead the treatment less favourable requires the modification of competitive conditions in
the relevant market to the detriment of imports. See WTO, Korea: Measures Affecting Imports
of Fresh, Chilled and Frozen Beef—Report of the Appellate Body (10 January 2001) WT/DS161/
AB/R, WT/DS169/AB/R, para 137.
89 Art III para 4 GATT (1994) LT/ UR/A-
1A/
1/GATT/ 1 does not contain any spe-
cific reference to the general principle in Art III para 1 GATT. Thus, no separate exam-
ination of protective impact pursuant to Art III para 1 GATT is needed. WTO, European
Communities: Regime for the Importation, Sale and Distribution of Bananas—Report of the
Appellate Body (25 September 1997) WT/DS27/AB/R, para 216.
the FSC regime, has been addressed with reference to Art III para 4 GATT
rather than Art 3 para 1 lit b SCM. Under the ETI scheme, US exporters
were preferentially taxed on profits arising from transactions involving
qualifying foreign trade property.90 Qualifying foreign trade property was
in turn defined as property held for sale outside the US and not more than
50% of whose fair market value was attributable to articles manufactured
outside the US and direct costs of labour performed outside the US.91
The WTO Panel and Appellate Body found that because the access to
preferential taxation was limited by a maximum percentage of foreign in-
puts, ‘a manufacturer’s use of imported input products always [counted]
against the 50 percent ceiling in the fair market value rule, while in contrast,
the same manufacturer’s use of like domestic input products [had] no such
negative implication’,92 which ‘[influenced] the manufacturer’s choice be-
tween like imported and domestic input products if it [wished] to obtain
the tax exemption under the ETI measure’.93
Consequently, the measure qualified as law, regulation, or requirement
affecting the internal use of imported and like domestic products and that
led to a less favourable treatment of imported products compared to do-
mestic products.94
1.5.5 Treatment of other tax reliefs

If a tax relief measure that qualifies as a subsidy under Art 1 SCM is not
prohibited under Art 3 SCM, it may still be challenged under Art 5 SCM
with regard to its effect on trade. Suppose France grants its largest car pro-
ducer a 25% income tax base deduction (without further requirements). It
seems obvious that this measure does not constitute an export subsidy or
90 More specifically, under Sec 114 lit a IRC (1986) ETI was excluded from the tax base un-
less it did not qualify as qualifying foreign trade income, subject to foreign economic process
requirements under Sec 942 lit b IRC. Qualifying foreign trade income was calculated as a
fraction of income from activities involving qualifying foreign trade property. Sec 941 lit a—c
IRC, Sec 942 lit a IRC.
91 Sec 943 lit a IRC (1986).
92 WTO, United States: Tax Treatment for ‘Foreign Sales Corporations’—Recourse to the
Article 21.5 of the Dispute Settlement Understanding by the European Communities—Report of
the Appellate Body (29 January 2002) WT/DS108/AB/RW, para 212.
the Appellate Body (29 January 2002) WT/DS108/AB/RW, para 212.
the Appellate Body (29 January 2002) WT/DS108/AB/RW, para 213, 222.
Trade Law 187
an import substitution subsidy under Art 3 SCM. It may, however, be chal-

lenged under Art 5 SCM.
Importantly, the application of Art 5 SCM is limited to subsidies con-
sidered specific within the meaning of such in Art 2 SCM. Thus, a subsidy
tested under Art 5 SCM will first have to pass the specificity test under Art
2 SCM, which considers a subsidy specific if it can be availed of only by cer-
tain enterprises or industries95 or only in certain geographic regions.96 If
the example above qualifies as a subsidy under Art 1 SCM, it is evident that
it will likely be considered specific as the tax relief is limited to only one en-
terprise: the largest French car producer.
Having established that a subsidy is specific if it corresponds to the def-
inition of such in Art 2 SCM, it can be tested under Art 5 SCM, which pro-
vides that ‘No Member should cause, through the use of any subsidy . . . ,
adverse effects to the interest of other Members’, which is specified as ei-
ther ‘injury to the domestic industry of another Member’,97 ‘nullification of
impairment of benefits . . . under GATT 1994’, or ‘serious prejudice to the
interest of another Member’.98 It follows that for the above example, a proof
of adverse effects caused by the subsidy will have to be presented.99
A prominent case in which adverse effects caused by tax measures
was shown is US—Measures Affecting Trade in Large Civil Aircraft (2nd
Complaint). The European Community (EC) accused the US of providing
specific subsidies to Boeing in relation to the manufacturing of large civil
aircraft through, inter alia, state tax incentives, creating adverse effects on
the EC as defined in Art 5 SCM.100 The state tax incentives included, inter
95 Art 2 para 1 SCM.

96 Art 2 para 2 SCM.
97 Pursuant to Art 15 para 1 SCM (1994) LT/UR/A-1A/9, the determination of such injury
shall be based on ‘(a) the volume of subsidized imports and the effect of the subsidized imports
on prices in the domestic market for like products and (b) the consequent impact of these
imports on the domestic producers of such products’. These criteria are further defined in the
subsequent paragraphs of Art 15 SCM. Pursuant to Art 15 para 5 SCM a causal link between
the elements is needed. See also WTO, Japan: Countervailing Duties on Dynamic Random
Access Memories from Korea—Report of the Appellate Body (17 December 2007) WT/DS336/
AB/R, para 263.
98 The term ‘serious prejudice to the interest of another Member’ is further specified by Art
6 para 3 SCM (1994) LT/UR/A-1A/9 as displacement of imports/exports of like products of
another Member into the market of the subsidizing Member/from a third country market, sig-
nificant price undercutting/suppression/depression and lost sales, or an increase in the world
market share.
99 These higher evidential requirements compared to Art 3 SCM may in some cases detract
Members from pursuing complaints under Art 5 SCM. See Jennifer E Farrell, The Interface of
International Trade Law and Taxation (IBFD 2013) 114.
100 WTO, United States: Measures Affecting Trade in Large Civil Aircraft (Second
Complaint)—Report of the Appellate Body (23 March 2012) WT/DS353/AB/R, para 5.
alia, a tax rate reduction on the Washington State business and occupation
tax (ie a tax on the gross receipts of all businesses operating in Washington
State) for manufacturers of commercial airplanes or of components of such
airplanes.101
The WTO Panel and Appellate Body found that ‘commercial aircraft
and component manufacturers are subject to a lower tax rate, which would
in certain circumstances revert to higher, general taxes’,102 thereby con-
stituting the foregoing of revenue otherwise due (ie financial contribu-
tion),103 from which a benefit is conferred,104 creating a subsidy under Art
1 SCM. Moreover, the subsidy was considered specific105 as it ‘[appeared]
expressly targeted so as to limit the application . . . to a discrete category of
business activity carried out by certain enterprises within a particular in-
dustry’.106 Finally, the specific subsidy was found to have caused, through its
effect on Boeing’s prices, serious prejudice to the interest of the European
Communities, in particular significant lost sales in regard to two sales cam-
paigns,107 as ‘Boeing was under particular pressure to reduce its prices in
order to secure the sales’108 and as the tax incentives ‘were a genuine and
substantial cause of Airbus’ loss of these sales to Boeing’.109
1.6 Conclusions
Trade law is an important jigsaw piece for a comprehensive understanding of

the international tax regime. It shows that the leeway of states is limited par-
ticularly with respect to levying specific taxes on importation. However, the
Complaint)—Report of the Panel (23 March 2012 as modified by Appellate Body Report WT/
DS353/AB/R) WT/DS353/R, para 7.171. This finding was not appealed.
Investment Treaty Law 189
limitations imposed by the international trade law are farther reaching than just
aiming at lowering tariffs or similar taxes at the border. In particular, the SCM
has already had a significant impact on the design of domestic (direct and in-
direct) taxes. In more recent years, the GATS has gained momentum as the new
phenomenon of digital services taxes may indeed be considered infringements
of the obligations contained in the GATS, be it the MFN or the NT obligation.110
2. Investment Treaty Law

2.1 Introduction
Investment protection treaties have several intersections with tax law.111 In

the following, we will, inter alia, refer to expropriation and to the NT and
MFN clauses in bilateral investment treaties (BITs). However, before doing
so, it is important to discuss how BITs work in general112 and to discuss
their scope of application.113
2.2 Some preliminary remarks on bilateral

investment treaties
2.2.1 Overview
To gain access to international investment markets, an investment-friendly
climate is important and for this investment treaties are essential.114 To date,

111 See for more details Arno Gildemeister, ‘Investment Law and Taxation’ in Marc
Bungenberg and others (eds), International Investment Law (C.H. Beck, Hart, Nomos 2015);
Arno Gildemeister, L’arbitrage des différends fiscaux en droit international des investissements
(LGDJ 2013); Paul B Stephan, ’Comparative Taxation Procedure and Tax Enforcement’
in Stephan W Schill (ed), International Investment Law and Comparative Public Law
(Oxford University Press 2010); Christian Tietje and Karoline Kampermann, ’Taxation
and Investment: Constitutional Law Limitations on Tax Legislation in Context’ in Stephan
W Schill (ed), International Investment Law and Comparative Public Law Stephan (Oxford
University Press 2010); Thomas W Wälde and Abba Kolo, ’Coverage of Taxation under
Modern Investment Treaties’ in Peter Muchlinski, Federico Ortino, and Christoph Schreuer
(eds), The Oxford Handbook of International Investment Law (Oxford University Press 2008);
Thomas W Wälde and Abba Kolo, ’Investor-State Disputes: The Interface between Treaty-
Based International Investment Protection and Fiscal Sovereignty’ (2007) 35 Intertax 424.
113 See Section 2.3.
114 See eg Preamble Investment Agreement between the Government of Australia and the
Government of the Hong Kong Special Administrative Region of the People’s Republic of
China (2019).
it has not been possible to implement a comprehensive multilateral solution

in investment matters; nor is such a solution in sight. However, there have
been efforts, such as by the Organisation for Economic Co-operation and
Development (OECD) and the WTO, to conclude a multilateral agreement
in this area.115
BITs are the most important legal bases in the area of investment pro-
tection. It is estimated that there are around 3,000 BITs worldwide,116 with
some countries (eg Germany, Switzerland, China) having concluded more
than 100 agreements.117 Furthermore, there are multilateral agreements on
trade and business relations, such as the Agreement between the United
States of America, the United Mexican States, and Canada (United States-
Mexico-Canada Agreement) and the Energy Charter Treaty (ECT), which
contain BIT-like provisions and procedural investment protection meas-
ures.118 Many capital-exporting countries have drafted a model treaty that
serves as the basis for their respective contract negotiations. Increasingly,
developing countries have themselves developed their own preferences and
have included these in their own model agreements.119
The EU adopted the exclusive competence for foreign direct investment
in the Treaty of Lisbon in 2009.120 Subsequently, a question arose regarding
how to deal with intra-EU-BITs, which are treaties existing between two
EU states. In the Achmea case, the European Court of Justice (ECJ) dealt
with the consistency of the investor-state arbitration clauses in intra-EU
115 Efforts towards a global investment protection agreement led to the OECD Draft
Convention on the Protection of Foreign Property (1962). In the 1990s, the OECD states
aimed again for a multilateral agreement on investment issues (Draft Multilateral Agreement
on Investment). The WTO also dealt with a multilateral investment agreement and concluded
in 1994 the so-called TRIMS Agreement which deals with foreign investments (Agreement on
TRIMS (1994) 1868 UNTS 186). It was mainly concerned with the regulation of aspects that
lead to direct negative consequences in a liberal trading system, such as regulations for foreign
investors to use domestic products in production.
116 See with an up-to-date overview UNCTAD, ‘International Investment Agreements
Navigator’ <https://investmentpolicy.unctad.org/international-investment-agreements> ac-
cessed 16 February 2021.
117 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd
edn, Oxford University Press 2012) 13.
118 See Chapter 14 United States-Mexico-Canada Agreement (2020); Art 10 et seq ECT
(1998) 2080 UNTS 100.
119 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law
(2nd edn, Oxford University Press 2012) 14; see the list with model agreements provided by
UNCTAD, ‘International Investment Agreements Navigator, Model Agreements’ <https://
investmentpolicy.unctad.org/international-investment-agreements/model-agreements> ac-
cessed 16 February 2021.
120 See Art 3 para 1 lit e in conjunction with Art 207 para 1 Consolidated version of the
TFEU [2012] OJ C326/01.
BITs and the EU law, and concluded that they are not compatible.121 As a
consequence of this decision, 23 states signed the agreement for the termin-
ation of intra-EU BITs in 2020.122
2.2.2 Contents of bilateral investment treaties

BITs contain guarantees for investments in one state for an investor from
another contracting state. These agreements usually follow a similar struc-
ture. The typical BITs consist of the following three parts: definitions (es-
pecially of ‘investment’ and ‘investor’), substantive standards for the
protection of the investment, and the investor and dispute settlement. The
substantive standards usually include the following:
1. a provision on the admission of investments;

2. a guarantee of fair and equitable treatment;
3. a guarantee of full protection and security;
4. an NT provision;
5. a guarantee of MFN treatment; and
6. an umbrella clause.
We will refer to some of these substantive provisions with respect to tax law
in Section 2.4. Regarding dispute settlement, two provisions are mostly in-
cluded: investor-state arbitration123 and arbitration between two states.124
The former, however, is much more common.125
2.2.3 Relevance of case law

The growing number of BITs also means a growing volume of available
case law.126 These arbitral awards, however, are not a binding legal source
121 Judgment of the ECJ of 6 March 2018, Slovak Republic v Achmea BV, C-284/16,
122 Agreement for the termination of BITs between the Member States of the EU [2020] OJ
L169/1.
123 See eg Art 24 Agreement between the State of Israel and Japan for the Liberalization,
Promotion and Protection of Investment (2017).
124 See eg Art 23 Agreement between the State of Israel and Japan for the Liberalization,
Promotion and Protection of Investment (2017).
125 On this issue: Anthea Roberts, ‘State-to-State Investment Treaty Arbitration: A Hybrid
Theory of Interdependent Rights and Shared Interpretive Authority’ (2014) 55 Harvard
International Law Journal 1. Roberts notices, however, a re-emergence of state-to-state invest-
ment treaty arbitration (2 et seq).
126 In 2019 investor-state arbitration cases passed the 1,000 mark and about 70% of such
cases were brought by investors from developed countries (UNCTAD, ‘Investor-State Dispute
for other tribunals, but they are very often examined and referred to in the
judgments. As these tribunals are established on an ad hoc basis, this is par-
ticularly important to ensure consistency of jurisprudence.127 In the fol-
lowing, we will refer to several decisions of arbitration bodies.
2.3 Scope of bilateral investment treaties
2.3.1 Preliminary note

International investment treaties are intended to promote and protect the
activities of private foreign investors. However, government activities may
also be covered provided that they are commercial and not merely govern-
mental activities.128
2.3.2 Personal scope

Individuals or legal entities are eligible for protection under an invest-
ment treaty if they qualify as an investor as defined by the applicable treaty.
Moreover, the investment in question must be foreign, and the nationality
of the investor is decisive. That is, the investor must be a national of a state
that, like the host state, is a contracting party to the agreement he or she
wishes to apply.
To determine the nationality of an investor for the purpose of the ap-
plication of a BIT, the laws of the state he or she claims to be a national of
are relevant. This is generally true both for individuals and legal persons.129
Nevertheless, some particularities need to be considered, as discussed in
the following subsections.
2.3.2.1 Individuals
As international investment treaties are intended to protect foreign invest-
ments, nationals of the host state are generally excluded from the scope of
Settlement cases pass the 1,000 mark: Cases and outcomes in 2019’ <https://unctad.org/
system/files/official-document/diaepcbinf2020d6.pdf> accessed 16 February 2021).
127 Tarcisio Gazzini, Interpretation of International Investment Treaties (Hart Publishing
2016) 291 et seq.
128 See eg Ceskoslovenska Obchodni Banka AS v The Slovak Republic (Decision of the
Tribunal on Objections to Jurisdiction, 1999) ICSID Case No ARB/97/4, paras 16–27.
129 See Art I para 1 lit a and b Bilateral Agreement for the Promotion and Protection of
Investments between the Government of the United Kingdom of Great Britain and Northern
Ireland and Republic of Colombia (2010).
protection of such treaties. The question of nationality for persons with

dual citizenship, however, is controversial. They are often entitled to invoke
the BIT, but sometimes the opposite is stated.130 Another question arises re-
garding the effectiveness of a nationality in situations where the person con-
cerned has no actual connection to the contracting state. In Fakes v Turkey,
the Court addressed the question of whether the effectiveness of nation-
ality was questionable.131 It held that the rules concerning the genuine link,
which were developed in connection with diplomatic protection, were not
applicable. However, it was left open whether a corresponding test could be
applied in exceptional cases.132
2.3.2.2 Legal entities
A legal entity must meet the nationality requirements of the applicable in-
vestment treaty to have access to such treaty’s protection. The agreements
provide for a variety of criteria. It is for instance often stipulated that a legal
entity must be organized according to the law of the state whose nationality
it wishes to claim.133 Incorporation and constitution are also mentioned as
criteria, likewise with reference to domestic law.
In this regard, arbitration tribunals have addressed the question of the
formality of such a requirement. They usually do not take into account
the nationality of a company’s owner if the company’s state of incorp-
oration is the decisive criterion (ie the corporate veil is not pierced).134
130 See eg Art 1lit c Agreement between the State of Israel and Japan for the Liberalization,
Promotion and Protection of Investment (2017): ‘the term “investor of a Contracting Party”
means: . . . with respect to Japan: a natural person who is a national of Japan and who is not
also a national of the State of Israel’. See also Art 25 para 2 lit a Convention on the Settlement
of Investment Disputes Between States and Nationals of Other States (ICSID Convention,
1965) 575 UNTS 159.
131 Mr Saba Fakes v Republic of Turkey (Award, 2010) ICSID Case No ARB/07/20, para 54
et seq.
132 Exceptional cases would include, eg, a nationality of convenience or a nationality passed
on over several generations without any ties to the country in question (see Mr Saba Fakes v
Republic of Turkey (Award, 2010) ICSID Case No ARB/07/20, para 78).
133 See eg Art 1 para 7 lit a (ii) ECT (1998) 2080 UNTS 100: ‘a company or other organization
organized in accordance with the law applicable in that Contracting Party’. See also eg Art 1 lit
d (i) United Kingdom Model BIT (2008) <https://investmentpolicy.unctad.org/international-
investment-agreements/treaty-files/2847/download> accessed 16 February 2021.
134 See eg The Rompetrol Group NV v Romania (Decision on Respondent’s Preliminary
Objections on Jurisdiction and Admissibility, 2008) ICSID Case No ARB/06/3, paras 71–
110: The respondent stated that the investor was actually of Romanian nationality and was
now trying to obtain protection under the Dutch-Romanian BIT, although the control and
source of all funds was Romanian. The tribunal held that the criteria established in the BIT are
decisive for the qualification of nationality. In the present case, therefore, only Dutch incorp-
oration was required.
A decision that can be mentioned in this context is Tokios Tokelés v

Ukraine. Tokios Tokelés was an enterprise established under Lithuanian
law and 99% owned by Ukrainian nationals. The respondent Ukraine
argued that it was not a genuine Lithuanian company but a Ukrainian
investor as it was mainly owned and controlled by Ukrainian nationals.
The applicable BIT defined Lithuanian investors as entities established
under Lithuanian law.135 Therefore, the tribunal decided that Tokios
Tokelés could benefit from the BIT and did not have to meet further
requirements.136 The circumstances in such case were similar to those
in the case of Saluka v the Czech Republic. In this case, it was argued
that Saluka, which was incorporated under Dutch law, was a mere
shell company controlled by another company not constituted under
Dutch law. The applicable BIT between the Czech Republic and the
Netherlands defined investor as a legal person constituted under the
laws of the respective country.137 The tribunal held that it had some
sympathy for the argument that a company cannot rely on the BIT if
it has no effective connection with the contracting state. Nevertheless,
in the present case, Saluka was a Dutch company according to the ap-
plicable BIT, which provides for constitution under the laws of the con-
cerning state as the nationality requirement.138
Another requirement in certain investment treaties for a legal entity to
have access to the protection of the treaty is the entity’s seat or principal seat
of business. In the investment treaty between Argentina and Germany, for
example, for a legal entity to have access to such treaty’s protection, its seat
must be situated in either of the two contracting states.139
Furthermore, certain treaties require an economic connection, such
as effective control by nationals of the home state. For instance, in some
treaties investors are defined as ‘legal entities established in the territory of a
135 See Art 1 para 2 lit a Agreement between the Government of the Republic of Lithuania
and the Government of Ukraine for the promotion and reciprocal protection of investments
(1994).
136 Tokios Tokelés v Ukraine (Decision on Jurisdiction, 2004) ICSID Case No ARB/02/18,
paras 21–40.
137 See Art 1 lit b (ii) Agreement on Encouragement and Reciprocal Protection of
Investments between the Kingdom of the Netherlands and the Czech and Slovak Federal
Republic (1991) 2242 UNTS 206.
138 Saluka Investments BV v The Czech Republic (Partial Award, 2006) PCA Case No 2001-
04, paras 222–43.
139 Art 1 para 4 Agreement between the Federal Republic of Germany and the Argentine
Republic on the Promotion and Reciprocal Protection of Investments (1991) 1910 UNTS 171.
third Country but effectively controlled by nationals or legal entities of one

of the Contracting Parties’.140
The different conditions can also be found in combination. In the BIT
between the UK and Colombia, for a company to qualify as a Colombian
investor, not only must its constitution or organization be in accordance
with the Colombian law; its seat and substantial business activities must
also be in the Colombian territory.141
2.3.2.3 Bilateral investment treaty shopping

As we have seen above, the existence of bilateral treaty networks such as
in the case of double tax treaties may lead to a situation in which a person
may try to access the protection of a more beneficial treaty.142 Such threat
of treaty shopping, however, is not only a matter that has been dealt with
by tax courts but is also in the area of investment protection.143 This is par-
ticularly true if a treaty requires only that a company is incorporated in a
country (ie no economic activity test).144
Moreover, in certain investment treaties, reference is made to so-called
denial of benefits clauses, whose aim is to prevent the abuse of the protec-
tion offered by BITs. This means that some agreements refuse to confer
their advantages if certain criteria are met. For example, the ECT contains
a corresponding clause in Art 17 para 1, which denies its benefits to a legal
entity controlled or owned by nationals of a third state and that has no sub-
stantial business activities in the state.
2.3.3 Objective scope

2.3.3.1 Meaning of investment
There is no generally applicable definition of investment. The wording in
most BITs is very broad and covers all kinds of assets. Investment treaties
often contain a non-exhaustive list of investments covered by the treaty.145
140 Art 1 para 1 lit b Agreement between the Lebanese Republic and the Kingdom of Sweden
on the Promotion and Reciprocal Protection of Investments (2001). The incorporation or seat
of the legal entity are also mentioned as alternative criteria for the qualification as investor.
141 Art I para 1 lit b Bilateral Agreement for the Promotion and Protection of Investments
between the Government of the United Kingdom of Great Britain and Northern Ireland and
Republic of Colombia (2010).
143 See eg Saluka Investments BV v The Czech Republic (Partial Award, 2006) PCA Case No
2001-04, para 222 et seq.
This may include movable and immovable property; shares or other kinds
of participation in companies; title to money or to any performance with an
economic value; intellectual property (IP) rights, know-how and goodwill,
rights to search for, extract or exploit natural resources, and other business
rights.146 Some treaties also emphasize the establishment of a lasting eco-
nomic relationship.147
In general, the concept of investment is to be understood autonomously
according to the applicable treaty and with no reference to the domestic law.
A particular controversy has arisen concerning the notion of investment
in Art 25 para 1 of the International Centre for Settlement of Investment
Disputes (ICSID) Convention. This article is crucial for access to ICSID
Convention procedural protection.148 In the Salini v Morocco decision,
specific characteristics of investments were identified for the purpose of
interpreting the ICSID Convention: the so-called Salini test.149
According to the Salini criteria, investments are basically characterized
by (i) a substantial contribution by the investor, (ii) a certain duration, (iii)
the assumption of risk, and (iv) a contribution to the development of the
host country.150 The four criteria were already referred to previously in
Fedax v Venezuela, but a fifth criterion was mentioned therein: a certain
regularity of profits and returns shall be given.151 This criterion, however,
assumed less significance in later decisions.152 These five criteria are largely
recognized as the typical characteristics for the definition of investment ac-
cording to Art 25 ICSID Convention.153 However, there are also deviations
146 See eg Art 1 para 2 Agreement between the Swiss Confederation and the Islamic
Republic of Iran on the Promotion and Reciprocal Protection of Investments (1998).
147 See eg Art 1 para 1 Agreement between the Government of Ukraine and the Government
of the Kingdom of Denmark concerning the Promotion and Reciprocal Protection of
Investments (1992): ‘The term “investment” shall mean every kind of asset connected with
economic activities acquired for the purpose of establishing lasting economic relations . . .’.
148 Art 25 para 1 Convention on the Settlement of Investment Disputes Between States and
Nationals of Other States (1965) 575 UNTS 159: ‘The jurisdiction of the Centre shall extend to
any legal dispute arising directly out of an investment . . .’.
149 Salini Costruttori SPA and Italstrade SPA v Kingdom of Morocco (Decision on Jurisdiction,
2001) ICSID Case No ARB/00/4, para 50 et seq.
150 Salini Costruttori SPA and Italstrade SPA v Kingdom of Morocco (Decision on Jurisdiction,
2001) ICSID Case No ARB/00/4, para 52.
151 Fedax NV v The Republic of Venezuela (Decision of the Tribunal on Objections to
Jurisdiction, 1997) ICSID Case No ARB/96/3, para 43.
153 Christoph H Schreuer and others, The ICSID Convention: A Commentary (2nd edn,
Cambridge University Press 2009) Art 25 para 153.
from the Salini test found in other decisions concerning the term invest-
ment in Art 25 ICSID Convention.154
Tribunals have confirmed as investments, for example:
1. construction projects;155
2. the purchase of financial instruments156 and loans;157
3. participation in companies;158 and
4. agricultural operations159 or government bonds.160
Bank guarantees,161 options,162 and ordinary one- off commercial

contracts163 were rejected.
Some treaties explicitly mention that the investment needs to be in the
territory of the host state.164 Hence, it was argued with regard to financial
154 In Biwater v Tanzania the question was whether the project did not qualify as an invest-
ment because it was not profitable. The tribunal pointed out that Art 25 of the Convention on
the Settlement of Investment Disputes Between States and Nationals of Other States (1965)
575 UNTS 159 contains no reference to the Salini criteria and that it is clear from the nego-
tiating history of the ICSID Convention that the definition of investment was intentionally
left open. For these reasons it should not be permissible for the ICSID tribunals to fix their
own criteria and apply them in all cases (Biwater Gauff Ltd v United Republic of Tanzania
(Award, 2008) ICSID Case No ARB/05/22, para 307 et seq). Further severe condemnation
was expressed in the case of Malaysian Historical Salvors v Malaysia. Considering the travaux
préparatoires to Art 25, it was found that the limit for investment was only set in such a way that
simple sales and trade transactions were not covered. The Salini criteria therefore constitute an
inadequate limitation of the concept of investment (Malaysian Historical Salvors SDN BHD v
The Government of Malaysia (Decision on the Application for Annulment, 2009) ICSID Case
No ARB/05/10, para 56 et seq).
155 Consortium RFCC v The Kingdom of Morocco (Decision on Jurisdiction, 2001) ICSID
Case No ARB/00/6, para 50 et seq.
156 Fedax NV v The Republic of Venezuela (Decision of the Tribunal on Objections to
Jurisdiction, 1997) ICSID Case No ARB/96/3, para 18 et seq.
157 Ceskoslovenska Obchodni Banka AS v The Slovak Republic (Decision of the Tribunal on
Objections to Jurisdiction, 1999) ICSID Case No ARB/97/4, para 60 et seq.
158 Compañia de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic
(Decision on Jurisdiction, 2005) ICSID Case No ARB/97/3, paras 91–93.
159 Asian Agricultural Products Ltd v Republic of Sri Lanka (Final Award, 1990) ICSID Case
No ARB/87/3, para 3.
160 Abaclat and Others v The Argentine Republic (Decision on Jurisdiction and Admissibility,
161 Joy Mining Machinery Limited v The Arab Republic of Egypt (Award on Jurisdiction,
162 PSEG Global Inc, The North American Coal Corporation, and Konya Ilgin Elektrik Üretim
ve Ticaret Limited Sirketi v Republic of Turkey (Decision on Jurisdiction, 2004) ICSID Case No
ARB/02/5, para 188 et seq.
163 Romak SA v The Republic of Uzbekistan (Award, 2009) PCA Case No AA280, para 209
et seq.
164 See eg Art 1101 para 1 lit b NAFTA (1994, terminated): ‘investments of investors of an-
other Party in the territory of the Party’.
instruments such as loans that a significant physical presence in the host

state was missing, but such argument was not upheld by the Court.165
However, in the case of business operations traditionally requiring physical
presence, the courts have been more restrictive in the sense that physical
presence in the host state is actually required to qualify for protection by
the investment treaty (eg concerning cattle166 and river water operation167).
Finally, the nationality of the investor is the decisive criterion for the for-
eign nature of an investment. This means that a foreign investment exists if
it is owned or controlled by a foreign investor.168
2.3.3.2 Tax carve-out clauses

Some treaties contain special clauses that exclude tax measures from the
objective scope. However, the wording and coverage of these carve-outs
vary. Both full and partial carve-outs can be found. For instance, a partial
carve-out may affect only NT and MFN treatment.169 In other cases the
carve-out covers all clauses except those concerning expropriation.170
2.4 Substantive provisions
In the following, we will briefly discuss how four substantive provisions

often included in BITs function and how they might impact taxation.
2.4.1 Full protection and security and fair and

equitable treatment
In investment treaties, the contracting states commit themselves to (i) a
fair and equitable treatment (FET) and (ii) full security and protection of
165 Ceskoslovenska Obchodni Banka AS v The Slovak Republic (Decision of the Tribunal on
Objections to Jurisdiction, 1999) ICSID Case No ARB/97/4, para 78.
166 The Canadian Cattlemen for Fair Trade v United States of America (Award on
Jurisdicition, 2008) UNCITRAL IIC 316, para 111 et seq.
167 Bayview Irrigation District and Others v United Mexican States (Award, 2007) ICSID
Case No ARB(AF)/05/1, para 113.
169 See eg the wording of Art 3 para 3 lit c Agreement between the Government of the
People’s Republic of China and the Government of Malta on the Promotion and Protection of
Investments (2009).
170 See the particular wording in eg Art 21 para 1 and 2 United States Model BIT (2012)
<https://investmentpolicy.unctad.org/international-investment-agreements/treaty-f iles/
2870/download> accessed 16 February 2021.
investments and investors. These obligations are often combined in one pro-
vision.171 The FET provisions may be of relevance from a tax perspective.
For instance, in Occidental v Ecuador it was held that Ecuador breached
its FET obligation according to Art II para 3 lit a of the BIT between
Ecuador and the US172 as Ecuador changed its VAT law without clarifying
its new meaning and as the practice of the authorities was inconsistent with
the changes in the laws.173 In other decisions, that the behaviour of tax au-
thorities (eg intensive controls and audits of taxpayers) may infringe the
FET provisions was disputed. In Rompetrol v Romania, the Court held that
120 controls within a few years were not sufficient to infringe the FET pro-
vision in the applicable BIT.174
In a recent decision, an arbitration tribunal dealt with Vodafone’s invest-
ment in mobile telecommunications in India. Vodafone appealed against
the taxes incurred as a result of the acquisition of an indirectly held Indian
investment. The tax claims arose from the seller’s capital gain, which should
have been deducted at source (ie the acquired Indian investment). Initially,
the Indian Supreme Court decided in favour of Vodafone. However, the
Indian legislators amended the law with retroactive application, resulting in
the retention of Vodafone’s tax liability. Vodafone then filed for arbitration
under the BIT between the Netherlands and India. The tribunal ruled that
the tax claim, which was pursued despite the Supreme Court’s contrary de-
cision, violated the FET standard.175
2.4.2 National treatment and most-favoured nation

The NT and MFN provisions are important elements of BITs.
A UN Conference on Trade and Development (UNCTAD) report even
171 See eg Art 9 Netherlands Model BIT (2019) <https://investmentpolicy.

unctad.org/international-investment-agreements/treaty-files/5832/download> accessed 16
February 2021.
172 Treaty between the United States of America and the Republic of Ecuador concerning
the Encouragement and Reciprocal Protection of Investment (1993).
173 Occidental Exploration and Production Company v The Republic of Ecuador (Final
Award, 2004) LCIA Case No UN3467, para 184.
174 The Rompetrol Group NV v Romania (Award, 2013) ICSID Case No ARB/06/3, paras 46,
268–69.
175 Vodafone International Holdings BV v India (Final Award, 2020) PCA Case No 2016-35,
para 363. In Cairn Energy v India arbitration was also triggered based on the FET provision.
India raised a retroactive tax claim on a transaction from 2006, based on an amendment to
the tax law in 2012. The tribunal found that the requirement of legal certainty, stability, and
predictability of FET precludes retroactive legislation unless there is a specific justification for
such retroactivity, which was not met in this case. (Cairn Energy plc and Cairn UK Holdings
Limited v The Republic of India (Award 2020) PCA Case No 2016-07, para 879 et seq).
referred to NT as the most important standard in investment agree-

ments.176 The functioning of these provisions in BITs is very similar
to that in trade agreements, but of course with reference to the invest-
ments of foreign investors. In simplified terms, these provisions mean
that states should not treat foreign investments less favourably than
domestic investments (NT) and than investments from third states
(MFN).177
For these provisions to apply, the foreign investor or his investment must
have like circumstances as the foreign or domestic investor who is treated
more favourably. This was considered the case, for example, for producers
of sweeteners made from corn and cane sugar. The concerned producers
operated in the same business sector, and their products were in direct
competition with each other with regard to their supply to the soft drink
industry.178 Similar treatment, on the other hand, refers, inter alia, to the
treatment of the investor or his investment in terms of establishment, ac-
quisition, operations, or sale.179
The principle of NT may result in foreign taxpayers being entitled to
equal treatment as the resident taxpayers with regard to the taxes applying
to a certain investment. Depending on whether there is a double tax treaty
applicable, such NT provision may complement the non-discrimination
provision in the double tax treaty, in accordance with Art 24 OECD model
convention (MC).180
However, BITs often contain tax carve-outs concerning the application
of the NT and MFN provisions. In particular, the two carve-outs below are
often found in BITs.
1. The MFN (and the NT) provision does not apply to beneficial treat-
ment by virtue of a double tax treaty or other tax treaties.
2. The NT provision does not apply to tax privileges or similar exemp-
tions granted to residents in the other state and according to the law
in the other state.
176 UNCTAD, National Treatment, UNCTAD Series on issues in international investment

agreements (vol IV, UN 1999) 1.
177 See eg Art 3 German Model Treaty (2008).
178 Corn Products International Inc v The United Mexican States (Decision on Responsibility,
2008) ICSID Case No ARB(AF)/04/01, para 120.
179 See eg Art 1102 para 1 NAFTA (1994, terminated).
As an example of an infringement of an NT provision, the following de-

cision may be of interest. In Corn Products v Mexico, the introduction of
a 20% excise tax was considered discriminatory on the basis of Art 1102
NAFTA. The tax was levied on soft drinks using sweeteners that were not
made from cane sugar. An American company producing a sweetener
based on yellow corn filed a complaint against this measure. It was argued,
inter alia, that in Mexico only foreign-owned companies produced corn-
based sweeteners and the cane sugar producers were mainly Mexican. The
tax on the soft drinks therefore led, de facto, to a less favourable treatment
of foreign suppliers, and it was considered an infringement of NAFTA (ie
the applicable investment treaty).181
2.4.3 Expropriation
Expropriation is the most severe action of a state towards foreign investors.
Therefore, BITs stipulate that foreign investments shall not be expropri-
ated, nationalized, or subjected to other measures that have the same ef-
fect. However, generally speaking, expropriation can be lawful provided it
(i) serves a public purpose, (ii) is not discriminatory, (iii) is based on due
process, and (iv) is compensated.182 It is challenging to determine in indi-
vidual cases, however, whether a state’s act is tantamount to the prohibited
expropriation or is admissible.183
Taxes per se affect the property of an investor. However, arbitration
courts have argued that investments are subject to taxation and, as such, in-
vestors have no right to expect that the host state will not change its tax law
for the duration of the investment in a way that would be unfavourable for
them.184 This means that only in exceptional cases can a tax (and a change in
the tax system) be understood as an (indirect) expropriation. For instance,
a partial denial of VAT refunds does not qualify as an expropriation.185
Furthermore, the introduction of a 20% excise tax on soft drinks manu-
factured using certain sweeteners, which discriminated against foreign
2008) ICSID Case No ARB(AF)/04/01, para 132.
182 See eg Art 13 para 1 ECT (1998) 2080 UNTS 100; Art 1110 para 1 NAFTA (1994,
terminated).
183 It seems even that in a situation of crisis, the leeway of the host state might even be
broader (Paul HM Simonis, ‘BITs and Taxes’ (2014) 42 Intertax 234, 253.
184 See eg EnCana Corporation v Republic of Ecuador (Award, 2006) LCIA Case No UN3481,
para 173.
185 See eg EnCana Corporation v Republic of Ecuador (Award, 2006) LCIA Case No UN3481,
para 174.
producers,186 was not considered an act of expropriation. Although the in-

vestor in such case suffered a considerable loss, the introduction of the tax
that caused its loss was considered to not reach the level of expropriation. It
would be considered an act of expropriation only if the measure could des-
troy the business in question.187 In one decision on the well-known Yukos
case, it was stated that the totality of the measures, including the retroactive
profit and VAT tax claims, finally led to expropriation.188 The following was
thus famously held with regard to the VAT due:
The extremely formalistic interpretation of the VAT tax law regarding

Yukos and its trading companies to the effect that, though exports were
undisputedly not subject to VAT, the documentation also undisputedly
submitted by the trading companies could not be used in relation to
Yukos and thus Yukos was liable for more than USD 13.5 billion in VAT re-
lated taxes is difficult to accept as a justification for a tax liability the size
of which was sufficient to lead Yukos into bankruptcy.189
2.4.4 Umbrella clause

Umbrella clauses are intended to guarantee that host states will comply with
the obligations and commitments to the foreign investor they have agreed
to comply with. For instance, the ECT holds the following in Art 10 para
1: ‘Each Contracting Party shall observe any obligations it has entered into
with an Investor or an Investment of an Investor of any other Contracting
Party.’ An umbrella clause basically embodies the principle of pacta sunt
servanda. The breach of a contract between the investor and the host state
constitutes a breach of the investment treaty through such a clause. The dis-
pute is raised to the level of an international law and the path towards an
international arbitration court is open.
There are differences in the wording of umbrella clauses in invest-
ment treaties, and the question of the situation in which an umbrella
clause can be invoked has been controversially discussed by arbitration

2008) ICSID Case No ARB(AF)/04/01, paras 92–93.
188 RosInvestCo UK Ltd v The Russian Federation (Final Award, 2010) SCC Case No V079/
2005, para 621.
189 RosInvestCo UK Ltd v The Russian Federation (Final Award, 2010) SCC Case No V079/
2005, para 452.
Human Rights Law 203
tribunals.190 In some decisions it was recognized that a host state is in

breach of a treaty if it fails to meet any of the obligations it entered into
regarding an investment.191 This was restricted, however, in certain de-
cisions. For example, according to the El Paso v Argentina decision, only
those contracts that the state entered into in its capacity as a sovereign
but that are not purely commercial contracts between the state and the
investor should be affected.192 The umbrella clause should be applicable
only in special cases where there is a significant breach of an obligation.193
In addition to the frequently discussed contractual obligations, unilateral
acts of the host state, such as legislation or executive acts, can also be sub-
ject to the umbrella clause in certain cases.194
Umbrella clauses can also cover tax arrangements, such as in the case of agree-
ments on future taxation. This also makes it possible, depending on the carve-
out clause, to evaluate the later changes in taxation against the BIT.195 Umbrella
clauses may particularly be invoked for tax stabilization agreements, which are
concluded to protect the investor in cases of changes in tax legislation.196
3. Human Rights Law

3.1 Human rights and the international
tax regime
The goal of this book is to present and discuss the main elements of the
international tax regime and to refer to various sources of international law.
190 In Bureau Veritas, Inspection, Valuation, Assessment and Control, Bivac BV v The Republic
of Paraguay (Decision of the Tribunal on Objections to Jurisdiction, 2009) ICSID Case No
ARB/07/9, para 141 the tribunal held that: ‘there is no jurisprudence constante on the effect of
umbrella clauses’.
191 Eureko BV v Republic of Poland (Partial Award, 2005) Ad Hoc Arbitration, para 244
et seq; SGS Société Générale de Surveillance SA v Republic of the Philippines (Decision of the
Tribunal on Objections to Jurisdiction, 2004) ICSID Case No ARB/02/6, para 115 et seq.
192 El Paso Energy International Company v The Argentine Republic (Decision on
Jurisdiction, 2006) ICSID Case No ARB/03/15, para 79 et seq.
193 CMS Gas Transmission Company v The Argentine Republic (Award, 2005) ICSID Case No
ARB/01/8, para 299 et seq.
195 Paul HM Simonis, ‘BITs and Taxes’ (2014) 42 Intertax 234, 243.
196 Pasquale Pistone, ‘General Report’ in Michael Lang and others (eds), The Impact of
Bilateral Investment Treaties on Taxation (IBFD 2017) 11. See eg Duke Energy International
Peru Investments No 1 Ltd v Republic of Peru (Award, 2008) ICSID Case No ARB/03/28.
The protection of human rights is pluralistic for two reasons: (i) it is con-
tained in domestic laws, international treaties, and in the EU law, and these
different sources obviously interact with each other (eg the ECJ implicitly
refers to the decisions of the European Court to Human Rights (ECtHR)197)
and (ii) the various domestic judicial bodies in the field of human rights
protection interact with each other.
To foster an understanding of the interaction between the inter-
national tax regime and human rights, the European Convention on
Human Rights (ECHR), one of the most influential multilateral human
rights conventions, will be the focus of the following subsections.198 There
are other well-known multilateral human rights conventions,199 but the
ECHR is focused on herein mainly because there is a broad spectrum of
decisions based on it with respect to tax matters. Moreover, the decisions
are available in several languages. This makes the case law of the ECtHR
particularly interesting and particularly accessible for tax professionals
around the world.
197 See eg Judgment of the ECJ of 14 May 1974, J Nold, Kohlen-und Baustoffgroßhandlung
v Commission of the European Communities, C-4/73, ECLI:EU:C:1974:51, para 13; Judgment
of the ECJ of 18 June 1991, Elliniki Radiophonia Tiléorassi AE and Panellinia Omospondia
Syllogon Prossopikou v Dimotiki Etairia Pliroforissis and Sotirios Kouvelas and Nicolaos
Avdellas and Others, C-260/89, ECLI:EU:C:1991:254, para 41; Judgment of the ECJ of 3
September 2008, Yassin Abdullah Kadi and Al Barakaat International Foundation v Council of
the EU and Commission of the European Communities, C-402/05 P, ECLI:EU:C:2008:461, para
283: ‘In addition, according to settled case-law, fundamental rights form an integral part of
the general principles of law whose observance the Court ensures. For that purpose, the Court
draws inspiration from the constitutional traditions common to the Member States and from
the guidelines supplied by international instruments for the protection of human rights on
which the Member States have collaborated or to which they are signatories. In that regard, the
ECHR has special significance.’ With the entry into force of the Treaty of Lisbon in 2009 [2007]
OJ C306/1, the Charter of Fundamental Rights of the EU [2012] OJ C326/391 became an in-
tegral part of the primary law of the EU (Art 6 para 1 of the Consolidated version of the TEU
[2012] OJ C326/01). When implementing EU law, Member States must abide by the funda-
mental rights guaranteed by the Charter (Judgment of the ECJ of 26 February 2013, Åklagaren
v Hans Åkerberg Fransson, C-617/10, ECLI:EU:C:2013:105, para 17).
198 See for more details Philip Baker, ‘The Decision in Ferrazzini: Time to Reconsider the
Application of the European Convention on Human Rights to Tax Matters’ (2001) 29 Intertax
360; Philip Baker and Pasquale Pistone, ‘General Report’ in International Fiscal Association
(ed), Cahiers de droit fiscal international, The Practical Protection of Taxpayers’ Fundamental
Rights (vol 100b, International Fiscal Association 2015); Juliane Kokott, Pasquale Pistone, and
Robin Miller, ‘Public International Law and Tax Law: Taxpayers’ Rights, The International Law
Association’s Project on International Tax Law—Phase 1’ [2020] Steuer und Wirtschaft 193.
199 See eg American Convention on Human Rights ‘Pact of San José, Costa Rica’ (1969)
1144 UNTS 123; African Charter on Human and Peoples’ Rights (1981) 1520 UNTS 217;
International Covenant on Civil and Political Rights (1966) 999 UNTS 171; International
Covenant on Economic, Social and Cultural Rights (1966) 999 UNTS 3.
3.2 The European Convention on Human Rights

and tax matters
Taxation, as aforementioned,200 is important for the functioning of a state.

It is therefore no surprise that the ECHR does not comprehensively protect
the right to property as this would have stopped many states from signing
the convention due to sovereignty concerns.201 Therefore, it is of course in
line with the ECHR that states levy taxes and by doing so force the citizens
to transfer parts of their income and wealth to the authorities. However, the
ECHR contains several potential limitations in tax matters. Depending on
the classification, there are at least two categories of human rights that are
relevant from a tax perspective:202 procedural rights and substantive rights.
3.3 Procedural rights
Most prominently, Art 6 ECHR mentions a right to a fair trial, but such
right is protected only (i) in criminal cases and (ii) in the determination
of civil rights. Therefore, tax procedures are not within the article’s scope
unless they fall under either of the aforementioned two categories. As fam-
ously stated in the Ferrazzini decision, tax procedures are not considered
civil law procedures:
The Court considers that tax matters still form part of the hard core of
public-authority prerogatives, with the public nature of the relationship
between the taxpayer and the community remaining predominant. . . . It
considers that tax disputes fall outside the scope of civil rights and ob-
ligations, despite the pecuniary effects which they necessarily produce
for the taxpayer.203

201 See with further references Clement Endresen, ‘Taxation and the European Convention
for the Protection of Human Rights: Substantive Issues’ (2017) 45 Intertax 508, 513.
202 Other categories are, however, possible. See the results of the International Law
Association Study Group in Juliane Kokott, Pasquale Pistone, and Robin Miller, ‘Public
International Law and Tax Law: Taxpayers’ Rights, The International Law Association’s Project
on International Tax Law—Phase 1’ [2020] Steuer und Wirtschaft 193. The International Law
Association study report includes a third category ‘taxpayers’ rights related to sanctions’. We
will not particularly discuss topics in relation to sanctions and the protection of human rights.
203 ECtHR, Ferrazzini v Italy App No 44759/98, 12 July 2001, para 29.
Such decision has received criticism in the literature204 and is basically the
origin of the common assumption that the ECHR does not apply to tax
matters (except criminal matters).
In the later case law of the ECtHR, the Court clarified that Art 6 ‘is ap-
plicable under its criminal head to tax surcharge proceedings’.205 Therefore,
there is room for the application of the ECHR in tax matters under a
broader understanding of criminal cases, by including ‘tax surcharge pro-
ceedings’, but tax law proceedings are not considered among the procedures
about civil rights covered by Art 6 ECHR. If the taxpayer finds himself or
herself in a litigation for tax offences, the ECHR limits the power of the state
in several ways, as follows:
- Right to access documents: The taxpayer shall have access to all evi-
dence the authorities are in possession of unless withholding his or
her access to such is justified by the national interest or by the funda-
mental rights of others.206
- Taxpayer’s right to obtain justice within a reasonable time frame: The
reasonableness of the length of a proceeding is assessed with regard to
the particular circumstances of the case, the complexity of the case, and
the conduct of the relevant applicant and of the relevant authorities.207
204 Philip Baker, ‘The Decision in Ferrazzini: Time to Reconsider the Application of the
European Convention on Human Rights to Tax Matters’ (2001) 29 Intertax 360, 361: ‘Overall,
one might say that the decision in Ferrazzini confirms that the dishonest taxpayer enjoys the
full protection of Art 6 while the taxpayer who is honestly seeking to dispute his tax liability
has no right to a fair trial under the European Convention system.’
205 ECtHR, Hannu Lehtinen v Finland App No 32993/02, 22 July 2008, para 40, with refer-
ence to ECtHR, Jussila v Finland App No 73053/01, 23 November 2006, para 38.
206 See eg ECtHR, Chambaz v Switzerland App No 11663/04, 5 April 2012, para 61 et seq.
207 See eg the Court concluded that in the following cases the reasonable time was ex-
ceeded: More than 12 years and six months: The case ECtHR, Clinique Mozart SARL v France
App No 46098/99, 8 June 2004, paras 34–36, was not particularly complex and no delaying
actions of the applicant were taken during the proceeding. However, the ECtHR considered
the Court’s conduct as delaying as two years and more than nine months passed between the
lodging of the application with the Administrative Court and the receipt of the tax author-
ities’ first statement of defence; Almost six years: The case ECtHR, Janosevic v Sweden App
No 34619/97, 23 July 2002, paras 93–95, included issues of some complexity. As no delaying
actions of the applicant were at hand, the length of the proceedings must be attributed to the
conduct of the authorities. For example, the case was pending before the Tax Authority for al-
most three years and before the County Administrative Court for two years and nine months;
11 years and two months: The case ECtHR, Nielsen v Denmark App No 44034/07, 2 July 2009,
paras 36–51, was considered of particular complexity. The applicant changed counsel many
times and was during some periods not legally represented, which impacted the length of the
proceeding; however, the Court did not fulfil its duty to monitor the progress/delay of the
proceedings.
- Right to be heard: The taxpayer shall have the right to state his or her
position before administrative steps are taken.
- Ne bis in idem: The taxpayer shall not be punished or tried for an ac-
tion he or she has already been finally convicted or acquitted of.208
- Right to remain silent and right against self-incrimination: These
immunities provide the accused person with protection against im-
proper compulsion by the authorities. As such, these standards help
prevent miscarriage of justice and secure the aims of Art 6 ECHR.
They are therefore considered as lying at the heart of the notion of a
fair procedure.209
- Right of access to a court: The right of access to a court shall guarantee
that the accused person can access a court to protect his or her legal
rights and interests. This right may be subject to procedural rules, but
the courts must avoid excessive formalism or procedural irregularity
that would impair the very essence of this right.
- Independent and impartial tribunal (including public hearing): The
Convention basically requires a separation of the judicative authority
from the other governmental authorities (ie the executive and legisla-
tive bodies). There are further criteria concerning the assessment of
independence. As regards impartiality, the Convention requires that
the court not be prejudiced or biased but exercise utmost objectivity.
The public nature of court proceedings includes the holding of public
hearings and the public delivery of judgments.
3.4 Substantive rights
3.4.1 Equality (including ability to pay)

Of course, equality is a key provision in many constitutions around the
world.210 It has also been referred to by taxpayers around the world to
challenge both tax laws and their application by the authorities. The prin-
ciple of equality in tax matters is also often linked to the ability-to-pay
208 In tax matters see eg ECtHR, Ruotsalainen v Finland App No 13079/03, 16 June 2009,
para 56; see, however, ECtHR, A and B v Norway [GC] App Nos 24130/11 and 29578/11, 15
November 2016, para 148 et seq.
209 See eg ECtHR, JB v Switzerland App No 31827/96, 3 May 2001, para 64 et seq; but also
ECtHR, Chambaz v Switzerland App No 11663/04, 5 April 2012, para 61.
210 See eg Art 3 German Constitution (Grundgesetz für die Bundesrepublik Deutschland) of
23 May 1949.
principle: that taxpayers with the same ability to pay (ie income or wealth)
shall be treated equally and that taxpayers with a different ability to pay
shall be taxed differently.
However, both the ability-to-pay principle and the equality principle
have weaknesses in their application at an international level from a legal
and normative perspective. The reason for this is that it may be impossible
to treat a person with connections to two societies equally in both jurisdic-
tions211 as the two are likely to have different tax systems (and different tax
rates).212
Example
X is a resident in state A and works in state B for three months. State A
applies a 30% tax rate but exempts income earned and taxed abroad from
taxation. State B, on the other hand, taxes the salary of X at a 20% rate but
does not allow any tax deduction as she is not a resident in state B. Thus, X
is treated unequally to the residents in state B as she is not entitled to any
tax deduction, and is also treated unequally to the residents in state A as
her salary earned in state B is taxed at a lower rate.213
Therefore, it is no surprise that international treaties do not contain com-

prehensive equal- treatment provisions but provide only limited non-
discrimination clauses referring to specific elements of discrimination such
as race or gender. Non-discrimination clauses have also been discussed with
respect to Art 24 OECD MC214 and to the NT and MFN provisions both in
the WTO agreements215 and investment treaties.216 Interestingly, Protocol
No 12 to the ECHR contains a prohibition of discrimination generally ap-
plying to tax matters, but such protocol has been ratified by only 20 states.217
211 For details see Peter Hongler, Justice in International Tax Law (IBFD 2019) 393 et seq.
212 We have shown above in Chapter 2, Section 6.3.1 that this is even true within the EU. The
ECJ applies the fundamental freedoms, however, the ECJ acknowledges by applying a compar-
ability test that not all persons must be treated equally only if they are indeed in a comparable
situation for the purpose of the applicable measure. See, for instance, Judgment of the ECJ of
12 May 1998, Mr and Mrs Robert Gilly v Directeur des services fiscaux du Bas-Rhin, C-336/96,
ECLI:EU:C:1998:221, paras 46–51.
213 See, however, Judgment of the ECJ of 14 February 1995, Finanzamt Köln-Altstadt v
Roland Schumacker, C-279/93, ECLI:EU:C:1995:31, para 34 et seq.
215 See Section 1.
216 See Section 2.
217 Council of Europe, ‘Chart of signatures and ratifications of Treaty 177, Protocol No
12 to the Convention for the Protection of Human Rights and Fundamental Freedoms’
3.4.2 Taxpayers’ property rights

The levy of taxes can obviously infringe a person’s property rights. Art 1 of
Protocol No 1 to the ECHR protects the right to property, and such provi-
sion is indeed relevant from a tax perspective.218 As was held in Burden v the
United Kingdom:
Taxation is in principle an interference with the right guaranteed by the first

paragraph of Article 1 of Protocol No 1, since it deprives the person concerned
of a possession, namely the amount of money which must be paid.219
It is, however, stated in Art 1 para 2 Protocol No 1 that the right to protection
of property shall not ‘impair the right of a State to enforce [laws controlling
property] as [it is deemed] necessary to control the use of property in ac-
cordance with the general interest or to secure the payment of taxes or other
contributions or penalties’. Therefore, it can be concluded that taxation is
carved out from the right to property in the ECHR.220 However, the ECtHR
has developed a practice in relation to the interaction between the right to
property and taxation. In very general terms, tax measures can interfere with
the right to property, but they are legitimate measures if there is a balance
between the public interest in levying taxes and the protection of the fun-
damental rights of individuals. The right to property protects the taxpayer
from various forms of governmental intervention.221 For instance, as was
held by the ECtHR, ‘individual and excessive burdens’ shall be prohibited,222
or these can be infringed if there is a lack or procedural guarantees.223
<https://www.coe.int/de/web/conventions/full-list/-/conventions/treaty/177/signatures?p_
auth=ZitKEdX5> accessed 16 February 2021.
218 There was no agreement on how such provision should be worded and, therefore, the
right to property is contained in Protocol 1, ie so states could sign the ECHR without agreeing
on the right to property. For a comprehensive study see Filip Debelva, International Double
Taxation and the Right to Property (IBFD 2019). A similar provision can be found in Art 21
of the American Convention on Human Rights ‘Pact of San José, Costa Rica’ (1969) 1144
UNTS 123.
219 ECtHR, Burden v the United Kingdom [GC] App No 13378/05, 29 April 2008, para 59.
220 For a comprehensive analysis see Filip Debelva, International Double Taxation and the
Right to Property (IBFD 2019) Chapter 5.3.
221 For more details see Juliane Kokott, Pasquale Pistone, and Robin Miller, ‘Public
International Law and Tax Law: Taxpayers’ Rights, The International Law Association’s Project
on International Tax Law—Phase 1’ [2020] Steuer und Wirtschaft 193.
222 ECtHR, P Plaisier BV and Others v the Netherlands App No 46184/16, 14 November
2017, para 82.
223 ECtHR, Rousk v Sweden App No 27183/04, 25 July 2013, para 117.
3.4.3 Further substantive rights

Moreover, the following substantive rights are of relevance from a tax
perspective:
- Data protection, as derived from the right to privacy according to Art

8 ECHR and similar provisions in domestic constitutions.224 The ques-
tion of data protection in tax matters boils down to the interaction be-
tween legitimate public interest in obtaining taxpayer data and each
taxpayer’s right to self-determination. In an interesting decision, the
ECtHR has protected the right to privacy against the right to freedom
of speech in a Finnish case in which a newspaper wanted to publish
publicly available taxpayer data. The Court held that the publication
of the ‘raw data in unaltered form without any analytical input;225 is
not required to protect the public interest in having access to taxpayer
data; that is, the balance was in favour of the right to privacy.
- Professional rights: The client−attorney privilege is known around
the world and is derived from the right to a fair trial. From a human
rights perspective, it also receives protection from the right to privacy.
As held by the ECtHR, the protection is even stronger for correspond-
ence between lawyers and their clients than for correspondence be-
tween individuals.226 This is so because lawyers have a fundamental
role in a democratic society.227 Professional relationships may also be
protected by the right to privacy. For instance, the relation between a
taxpayer and its bank cannot be lifted without first fulfilling the safe-
guards of such infringement, as provided for in Art 8 para 2 ECHR.228
4. Tax Rules in Non-tax Agreements

Besides the mentioned tax treaties and the particularities in relation to trade
law, investment law, and human rights law, there are further international
224 See already Federal Constitutional Court of Germany, Judgment of the First Senate of 15
December 1983, 1 BvR 209/83, 1 BvR 269/83, 1 BvR 362/83, 1 BvR 420/83, 1 BvR 440/83, 1 BvR
484/83, 15 December 1983.
225 ECtHR, Satakunnan Markkinapörssi OY and Satamedia OY v Finland [GC] App No 931/
13, 27 June 2017, para 175.
226 ECtHR, Michaud v France App No 12323/11, 6 December 2012, para 118.
227 ECtHR, Michaud v France App No 12323/11, 6 December 2012, para 118.
228 See eg ECtHR, Brito Ferrinho Bexiga Villa-Nova v Portugal App No 69436/10, 1
December 2015, para 42 et seq.
Tax Rules in Non-tax Agreements 211
treaties that are relevant from a tax perspective. In 2011 the Institute for
Austrian and International Tax Law organized a conference on tax rules in
non-tax agreements.229 Country reporters were asked to review the tax pro-
visions in the following agreements:
• agreements regarding diplomatic and consular relations;

• tax provision of the Convention on Privileges and Immunities of the
UN and of other international agreements more or less copied from
this convention;
• headquarters agreements between international organizations and
their host states;
• status of forces agreements (SOFAs);
• development aid agreements and other agreements on technical and
financial cooperation; and
• protocols on the privileges and immunities of the EU.
These agreements, in very general terms, grant tax privileges and exemp-
tions to international organizations and state officials.230 However, the pro-
visions are far from harmonized, leading to difficulties in practice. In this
book, we will highlight two examples to provide an overview of how these
treaties and provisions work. We will first make reference to SOFAs, and
then we will briefly discuss the tax provisions in headquarters agreements.
4.1 Tax provisions and status

of forces agreements
Not only in war situations are military troops positioned abroad, but also in
peace times. This requires that states agree on how to treat troops of other
states for tax purposes. As a consequence, states sign bilateral or multilat-
eral SOFAs, and these agreements often contain a specific provision ex-
empting the state (or the military organization) and individuals (ie the
troops) from paying taxes. For instance, Art IX of the Agreement on the
229 The results of the book were Michael Lang and others (eds), Tax Rules in Non-Tax
Agreements (IBFD 2012).
230 See for an overview the general report of Daniël S Smit, ´General Report´ in Michael
Lang and others (eds), Tax Rules in Non-Tax Agreements (IBFD 2012)1 et seq.
Status of the North Atlantic Treaty Organization, National Representatives

and International Staff has the following wording:
The Organization, its assets, income and other property shall be exempt:
1. from all direct taxes; the Organization will not, however, claim ex-
emption from rates, taxes or dues which are no more than charges for
public utility services;
2. from all customs duties and quantitative restrictions on imports
and exports in respect of articles imported or exported by the
Organization for its official use; articles imported under such ex-
emption shall not be disposed of, by way either of sale or gift, in the
country into which they are imported except under conditions ap-
proved by the Government of that country;
3. from all customs duties and quantitative restrictions on imports and
exports in respect of its publications.
Moreover, Art XIX Agreement on the Status of the North Atlantic Treaty
Organization, National Representatives and International Staff provides for
the following exemptions of military personnel:
Officials of the Organization agreed under Article XVII shall be exempt

from taxation on the salaries and emoluments paid to them by the
Organization in their capacity as such officials. Any Member State
may, however, conclude an arrangement with the Council acting on
behalf of the Organization whereby such Member State will employ
and assign to the Organization all of its nationals (except, if such
Member State so desires, any not ordinarily resident within its terri-
tory) who are to serve on the international staff of the Organization
and pay the salaries and emoluments of such persons from its own
funds at a scale fixed by it. The salaries and emoluments so paid may
be taxed by such Member State but shall be exempt from taxation
by any other Member State. If such an arrangement is entered into
by any Member State and is subsequently modified or terminated,
Member States shall no longer be bound under the first sentence of
this Article to exempt from taxation the salaries and emoluments
paid to their nationals.
Tax Rules in Non-tax Agreements 213
4.2 Tax provisions in headquarters agreements

between international organizations and their
host state
It is a well-known fact that international organizations are often located in

geographic clusters since some states are particularly famous for hosting
international organizations. The attractiveness at least partly relates to the
tax treatment of both the organization and the personnel. For instance,
Switzerland hosts various international organizations and grants tax ex-
emptions to both the organizations and employees, but the privileges may
vary from one agreement to another. Most agreements, however, contain a
rule exempting the organization per se from taxation. Such exemption does
not apply to charges levied by authorities for specific services rendered.231
Some agreements contain an exemption from income taxation of em-
ployees’ salaries received from an international organization.232 In some
cases, specified employees receive the same privileges as diplomatic
agents.233 The problem with exempting employees’ salaries from income
taxation is that this can lead to double non-taxation of officials of inter-
national organizations if their home state does not levy income taxes on the
salaries of such officials.
231 See Art 6 para 3 e contrario Agreement between the International Committee of the
Red Cross and the Swiss Federal Council to determine the legal status of the Committee in
Switzerland (1993).
232 See eg Art 17 lit b Agreement between the Swiss Federal Council and the International
Labour Organisation concerning the legal status of the International Labour Organisation in
Switzerland (1946).
233 Art 16 Agreement between the Swiss Federal Council and the International Labour
Organisation concerning the legal status of the International Labour Organisation in
Switzerland. See on the taxation of diplomats Chapter 2, Section 3.4.4.
4
Conceptual Problems
1. Success and Failure in the

International Cooperation regarding
Tax Matters
1.1 Success of the international tax regime
This is not the place to discuss the positive and negative impacts of global-
ization in general.1 However, if we assume that globalization has been a suc-
cess because people’s well-being has generally increased around the world,2
it seems fair to conclude that the international tax regime has contributed
to globalization by lowering the cost of accessing foreign markets through
the reduction of cross-border double taxation and through the coordin-
ation of tax claims between states.
The development of the tax treaty network shows that the inter-
national tax regime seems successful as more and more states are par-
ticipating and governments see a need to sign double tax treaties.3 In a
similar way, it can be considered a success that the international tax re-
gime has allowed and enhanced cross-border mobility by reducing the
tax obstacles posed by moving to another state or commuting between
two states.
Besides the impact of the international tax regime on global trade and the
enhancement of the cross-border movement of persons, the international
tax regime has also harmonized tax systems around the world to a certain
1 See, for instance, Angus Deaton, The Great Escape: Health, Wealth, and the Origins of
Inequality (Princeton University Press 2013) 1 et seq.
2 Of course, globalization has triggered negative impacts such as environmental harm and
potentially also the increase of inequalities.
3 However, there are well-known risks in signing as many tax treaties as possible from an
individual state perspective (see the seminal analysis of Tsilly Dagan, International Tax Policy
(Cambridge University Press 2017) 72 et seq).
Success and Failure in the International Cooperation 215
extent. This is not something that can be underpinned by comprehensive

empirical evidence at least in this book. However, for instance, the wide-
spread use of transfer pricing (TP) and particularly of the Organisation for
Economic Co-operation and Development (OECD) TP Guidelines for the
calculation of prices between group companies (also in domestic circum-
stances) has allowed multinational enterprises (MNEs) to prosper as more
or less the same rules (ie TP methods) apply worldwide.4 Such system with
at least partly harmonized rules seems less costly than if each state were to
apply its own allocation rules.
1.2 Failures of the international tax regime
The international tax regime has received much scrutiny in the past two
decades. The fact that aggressive tax planning and cross-border tax evasion
have been possible within such international legal regime has been at the
forefront of the debate about it. Therefore, there are indeed reasons to con-
clude that the international tax regime has failed.
However, the assessment of whether a regime has led to failures requires
a review of the original purpose of such regime. The original purpose of
the international tax regime was to prevent or mitigate double taxation,5
but over the years further purposes were added, such as enabling cross-
border transparency and preventing tax evasion and tax avoidance.6 If the
latter will be considered, it will be fair to conclude that the international
tax regime has at least partly failed as it has allowed both cross-border tax
evasion and tax avoidance. Besides enabling cross-border tax evasion and
tax avoidance, however, there are other reasons that can be cited to sup-
port the claim that the international tax regime has partly failed as a legal
4 I am fully aware that this is a controversial statement as the interpretation of the TP

Guidelines deviates significantly around the world. Nevertheless, the use of more-or-less-
harmonized TP rules can be considered a success from the perspective of compliance costs
as such system is less costly than if states would apply unilateral allocation rules (for the cur-
rent exception to the allocation approach taken by Brazil, see Ricardo André Galendi Júnior
and Luís Eduardo Schoueri, ‘Brazil Country Report’ in International Fiscal Association (ed),
Cahiers de droit fiscal international, 71st Congress of the International Fiscal Association (vol
102b, International Fiscal Association 2017).
5 See League of Nations, Economic and Financial commission, Report on Double Taxation
submitted to the Financial Committee (EFS73. F.19, 1923).
6 Concerning the latter, see the Preamble of the OECD MC (2017).
216 Conceptual Problems
regime. In the following, we will highlight some further weaknesses of the

international tax regime and will particularly refer to the position that such
regime is unjust or unfair. These remarks are more generic, and justice or
fairness is a reference point that applies to any legal regime and not just to
the international tax regime.
One argument that supports the claim that the international tax re-
gime is unjust or unfair is that due to the current design of such regime,
MNEs do not pay their fair share. For instance, the OECD estimated in
2015 that USD100–240 billion in tax revenue is lost every single year
due to Base Erosion and Profit Shifting (BEPS).7 In a related manner,
it is argued that the international tax regime has increased immoral
activities such as money laundering or tax evasion.8 Moreover, it is ar-
gued that the international tax regime was particularly harming the de-
veloping world9 and seems to fuel global inequalities.10 Institutionally,
it is said that not all states are on an equal footing in terms of designing
international tax policy as few states dominate the international nego-
tiations on tax matters.11 In a similar way, it is argued that the inter-
national tax regime undermines the sovereignty of states as aggressive
tax planning has led to the underfunding of states, and that the inter-
national tax regime is disallowing a fair competition in a globalized
world.12
Therefore, on the basis of fairness or justice, there are several reasons that
the international tax regime has partly failed as a legal regime. It will be in-
teresting to review these reasons for these failures of the international tax
regime in the following sections.
7 OECD/G20, Measuring and Monitoring BEPS, Action 11—2015 Final Report (OECD
Publishing 2015) 102. For a more recent calculation, see Tax Justice Network, The State of Tax
Justice 2020: Tax Justice in the time of COVID-19 (Tax Justice Network 2020).
8 See, for instance, Joseph E Stiglitz and Mark Pieth, Overcoming the Shadow Economy,
International Policy Analysis (Friedrich-Ebert-Stiftung 2016) 1, 22. See also James S Henry,
‘Let’s Tax Anonymous Wealth!’ in Thomas Pogge and Krishen Mehta (eds), Global Tax Fairness
(Oxford University Press 2016) 43, who speaks of the ‘rise of a vast new grey zone of quasi-legal
economic activity’.
9 See, for instance, the studies mentioned by Thomas Pogge and Krishen Mehta,
‘Introduction’ in Thomas Pogge and Krishen Mehta (eds), Global Tax Fairness (Oxford
University Press 2016) 4.
10 See, at least implicitly, Tax Justice Network, The State of Tax Justice 2020: Tax Justice in the
time of COVID-19 (Tax Justice Network 2020).
11 In particular, see the article of Peter Essers, ‘International Tax Justice between Machiavelli
and Habermas’ (2014) 68 Bulletin for International Taxation 54, 65.
12 OECD, Action Plan on BEPS (OECD Publishing 2013) 8.
1.3 What are the reasons for the failure of the

international tax regime?
In the following, we will present and discuss three reasons for the seeming
failures of the international tax regime. These reasons are the following:
• the missing value-based framework;

• the flawed guiding principles of the international tax regime; and
• institutional difficulties in a dynamic set-up.
The reasons presented herein are not exhaustive but are seen as the key
reasons for the presumed failures.
1.3.1 The missing value-based framework

In the domestic setting, one way of judging whether a tax regime has
failed or succeeded is to assess whether it is in line with the higher moral
values agreed upon by a society. Such values are often found in the con-
stitution or have even been defined by the courts. They often include the
principles of equality and proportionality but also certain human rights,
such as the rights to property and a fair trial, which are relevant from a tax
perspective.13
At the international level, however, such value-based framework does
not exist. For instance, neither is there an international principle of propor-
tionality nor a valid international principle of equality.14 Of course, states
can agree on certain value-based rules or principles, such as through human
rights conventions, but there is no value-based framework that can serve
as a guideline for designing the international tax regime. Individual inter-
ests such as the protection of certain substantive rights have played minor
roles in the most recent international tax law developments.15 There is also
no common ground for the protection of community interests (which is
also often found in domestic constitutions), such as that there should be
sustainable economic growth or that there should be a fair balance be-
tween generations (intra-generational justice), although some community

14 For the details, see Peter Hongler, Justice in International Tax Law (IBFD 2019) 457 et seq.
15 See, eg, on the (missing) protection of human rights in the international debate on fiscal
transparency, Philip Baker and Pasquale Pistone, ‘General Report’ in International Fiscal
Association (ed), Cahiers de droit fiscal international, The Practical Protection of Taxpayers’
Fundamental Rights (vol 100b, International Fiscal Association 2015) 21 et seq.
interests (eg the prohibition of cross-border tax evasion or the fight against
tax avoidance) have led to the creation of a certain agreed-upon framework
in which international tax policy projects shall operate. These community
interests were not surprisingly the justification for some of the most im-
portant policy projects in the past decades, among them the implementa-
tion of cross-border transparency and the initiation of the BEPS Project.16
Therefore, one reason for the failure of the international tax regime is
that the international community has to a large extent not agreed on a
value-based framework for the design of such regime. This problem is ag-
gravated by the fact that the international tax regime should be considered
a success by various societies, which makes it even more difficult to agree
on a certain value-based framework. That is, the international tax regime
has to be considered a success by a state with a high tax-to-GDP ratio but
also by a state with a low tax-to-GDP ratio. This issue is at the core of any
international law discussion as international law regimes such as the inter-
national tax regime must be considered legitimate by various states, which
may be following very different domestic fiscal systems.
1.3.2 The guiding principles of international tax policy

are flawed
Another reason that the international tax regime has partly failed is that the
existing guiding principles are flawed. In international tax policy discus-
sions, it is fascinating to see (i) how many principles are used to steer tax
policy in one direction or the other and (ii) how differently these principles
are understood. At least the following five principles are regularly used in
policy discussions.17
- The principle of inter-nation equity: This principle is one of the most

disputed and flawed terms in international tax law. The most generic
understanding of such principle is that there should be justice or eq-
uity between the involved states. However, beyond that, there is little
agreement on what it actually means.18 It is often used to argue in

17 Furthermore, one could mention the principles of certainty and simplicity, effectiveness,
and fairness and flexibility (see, for instance, CFA, Electronic Commerce: Taxation Framework
Conditions (OECD Publishing 1998) para 9).
18 See on the development of inter-nation equity, Kim Brooks, ‘Inter-Nation Equity: The
Development of an Important but Underappreciated International Tax Policy Objective’ in
John G Head and Richard Krever (eds), Tax Reform in the 21st Century (Wolters Kluwer 2009)
471; Peter Hongler, Justice in International Tax Law (IBFD 2019) 407 et seq.
favour of or against one or another mechanism of allocating taxing

rights.
- The principle of neutrality or efficiency: This principle requires that
business decisions not be influenced by tax considerations. In inter-
national tax matters, the following kinds of neutrality are distin-
guished. According to capital export neutrality (CEN),19 the state of
residence would treat the income from an investment the same way
whether it stems from country A or B or is sourced in the investor’s
home (ie residence) country. As a consequence, the investment de-
cision is in theory not distorted by tax considerations. According to
capital import neutrality (CIN), an investor would be treated the same
way whether or not he or she is a resident abroad.20 Consequently, the
resident state would exempt the income generated in a foreign state.
In this case, the enterprise faces the same tax consequence faced by
a local enterprise in the same market (ie the source state). Lastly, ac-
cording to capital ownership neutrality, the allocation of assets should
be driven only by non-tax reasons, and investment decisions should
depend on the amount of (pre-tax) return that an investor can extract
from an asset.21 It is impossible to align these neutralities in one co-
herent policy;22 moreover, there have also been voices that challenge
the claim of efficiency at an international level: that the international
tax regime should not necessarily be as efficient and as neutral as
possible.23
- The benefit principle: Taxpayers should contribute to the revenues
of a state if they are receiving benefits from such state. This a very
19 See on CEN and CIN, see eg Michael J Graetz, ‘The David R. Tillinghast Lecture: Taxing
International Income: Inadequate Principles, Outdated Concepts, and Unsatisfactory Policies’
(2001) 54 Tax Law Review 261, 270 et seq; Klaus Vogel, ‘Worldwide vs. Source Taxation of
Income—A Review and Re-Evaluation of Arguments (Part II)’ (1988) 16 Intertax 310, 311
et seq.
20 The exact design of CIN, however, is disputed (see Michael S Knoll, ‘Reconsidering
International Tax Neutrality’ (2011) 64 Tax Law Review 99, 107 et seq).
21 See Wolfgang Schön, ‘International Tax Coordination for a Second-Best World (Part I)’
(2009) 1 World Tax Journal 67, 71. Concerning capital ownership neutrality, see also Mihir
A Desai and James R Jr Hines, ‘Evaluating International Tax Reform’ (2003) 56 National Tax
Journal 487 et seq.
22 See, however, Michael S Knoll, ‘Reconsidering International Tax Neutrality’ (2011) 64
Tax Law Review 99, on the potential compatibility of CEN and CIN.
23 Michael J Graetz, ‘The David R. Tillinghast Lecture: Taxing International
Income: Inadequate Principles, Outdated Concepts, and Unsatisfactory Policies’ (2001) 54 Tax
Law Review 261, 282 et seq; Peter Hongler, Justice in International Tax Law (IBFD 2019) 421 et
seq; Cees Peters, On the Legitimacy of International Tax Law (IBFD 2014) 106 et seq, 364 et seq.
traditional approach and is also found in the domestic setting as a

guiding principle for distinguishing between levies and taxes (ie a levy,
unlike a tax, does not go beyond remuneration for the benefit received
from the state). At the international level, the benefit principle is used
both as an allocation principle (ie that income should be allocated
depending on the services received from different states24) and as a
limitation to the tax principle.25 According to the latter, there should
be taxation if an enterprise receives benefits from a state, and there
should be no taxation if an enterprise does not receive benefits from
a state.
- The source principle: This is probably the most discussed principle in
recent years.26 The source principle is often understood as requiring
taxation where value is created. As has been shown by many others,
however, value creation cannot be clearly defined.27 Therefore, the
source principle is not really useful for the allocation of income in
cross-border circumstances, and it can even be misused to argue in
favour of a partisan allocation system by referring to a very generic
principle.
- The ability-to-pay principle: This principle states that taxpayers
should be taxed according to their ability to pay. This means that tax-
payers with a higher ability to pay should contribute more to the tax
revenue collected by the state, and that taxpayers with a lower ability
to pay should contribute less. We have seen above that it is difficult to
achieve equal treatment in cross-border circumstances.28
Even though the aforementioned principles are weak as design principles

in international tax policy, they are often referred to in policy debates.
Therefore, one reason that the international tax regime may have been a
failure is that it is based on weak and not-well-defined principles.29
24 With further details see Matthias Valta, Das Internationale Steuerrecht zwischen Effizienz,
Gerechtigkeit und Entwicklungshilfe (Mohr Siebeck 2014) 47 et seq.
25 Peter Hongler, Justice in International Tax Law (IBFD 2019) 452 et seq.
26 For an insightful discussion of the source principle even in a pre-BEPS world, see Eric
Kemmeren, ‘Source of Income in Globalizing Economies: Overview of the Issues and a Plea
for an Origin-Based Approach’ (2006) 60 Bulletin for International Taxation 430, 439 et seq.
27 With respect to the digital economy, see for instance Itai Grinberg, ‘User Participation
in Value Creation’ [2018] British Tax Review 407; Marcel Olbert and Christoph Spengel,
‘International Taxation in the Digital Economy: Challenge Accepted?’ (2017) 9 World Tax
Journal 3, 9 et seq.
29 For further details on why these and other design principles are to a large extent weak
policy principles, see the seminal piece of Michael J Graetz, ‘The David R. Tillinghast
1.3.3 Institutional difficulties in a dynamic set-up

Another reason that the international tax regime can be said to have been a
failure is the weak institutional set-up for the creation of the rules and prin-
ciples of such regime. We will tackle some of these institutional weaknesses
by referring to the legislative, executive, and judicial bodies, as is tradition-
ally the case in the domestic setting.
1. Legislative: Even though domestic legislators have not formally

transferred their legislative competences in tax matters to an inter-
national organization (except to a certain extent in the case of the
EU30), it is evident that domestic tax regimes are highly influenced
by international developments. This has been shown throughout this
book, such as with respect to the implementation of cross-border
transparency or with respect to the BEPS minimum standards. The
institutions behind this partial harmonization of tax laws (eg the
Inclusive Framework or the Global Forum),31 however, have a weak
or even a non-existing legal base as no legislative competences have
been formally transferred. Moreover, it is far from clear how these in-
stitutions reach a consensus in certain areas, and who the key players
are. There is also no clear procedure for choosing the areas in which
there should be cross-border harmonization and who is competent to
decide on such harmonization.
2. Executive: It is obvious that there is no executive international body
with an encompassing power to execute the existing international tax
rules.32 In other words, the international tax regime as a legal regime is
still executed through domestic bodies such as tax authorities or other
governmental bodies. Both the assessment and collection of taxes are
still domestic competencies. The international peer review process,
which determines whether a state complies with international soft
laws such as the BEPS minimum standards, could perhaps be under-
stood as an executive measure to supervise the implementation of the
Lecture: Taxing International Income: Inadequate Principles, Outdated Concepts, and

Unsatisfactory Policies’ (2001) 54 Tax Law Review 261; see also Peter Hongler, Justice in
International Tax Law (IBFD 2019) 387 et seq.

32 See, inter alia, Christian Tomuschat, ‘Die internationale Gemeinschaft’ (1995) 33 Archiv
des Völkerrechts 1.
(quasi-) legislative proposals. However, apart from this, there is no

institutional framework for executing international tax rules through
international bodies. We are not arguing that there should be such
an executive body; rather, we are arguing that the absence of such an
executive body partly explains why the international tax regime has
been considered to be a failure.
Judicial: There are international courts with judicial power,
3.
such as the European Court of Human Rights, the International
Criminal Court, and the dispute resolution bodies of the World
Trade Organization (WTO). I have already highlighted the im-
pact of the case law of the European Court of Human Rights on
the domestic and international tax regime,33 and we have dis-
cussed the power of judicial control of the WTO bodies in tax
matters.34 We have also mentioned bilateral judicial bodies such
as arbitration courts, whether under the umbrella of an invest-
ment treaty35 or under that of a double tax treaty, which provide
international judicial elements.36 However, not only the debate
with respect to Action 14 of the BEPS Project has shown that the
international tax regime is far from providing comprehensive ju-
dicial protection both for states and taxpayers. Therefore, the ju-
dicial side of the institutional framework of the international tax
regime is fragmented and has major loopholes. Again, we are not
arguing in favour of stronger international judicial institutions;
rather, we are suggesting that the missing judicial framework is
one reason that the international tax regime is highly disputed
and under constant scrutiny.
To conclude, the judicial and executive powers are weak at the international
level even though the global tax policy has a huge impact on domestic le-
gislation. The lack of judicial and executive checks and balances will likely
trigger and has already triggered severe institutional issues and may re-
quire further institutional reconsiderations in the future. The international
tax regime has other institutional (mainly deliberative) weaknesses. One

35 See c
hapter 3, Section 2.
The Most Pressing Issues 223
concerns the issue of the involvement of all states and of the public in the
relevant international debates, and of putting all states on an equal footing
in these debates.37
2. The Most Pressing Issues

After the aforementioned rather generic remarks on the success or failure of
the international tax regime, we will highlight four specific areas that have
been at the forefront of the relevant international debate in the past years
and in some cases even in the past decades.
2.1 Measures against aggressive tax planning
The liberalization of capital markets in the twentieth century and the reduc-
tion of tariffs accompanied by the globalization of value chains have also
allowed MNEs to optimize their corporate structures through cross-border
tax planning measures.
The rationale of tax planning is to achieve lower effective tax rates and
thus to increase one’s profit. In theory, higher profitability increases the
value of a company, and consequently, the value of the company’s shares.38
Tax planning is achieved through various means. In the following, we
will discuss some actions that have been taken to challenge the most ag-
gressive forms of tax planning.39 We will start by referring to the debate on
harmful tax regimes mainly in the late 1990s, and we will of course discuss
the most recent BEPS Project launched by the OECD and the G20 in 2013.
We will close with some remarks on the current state of the discussion in a
post-BEPS world.
37 This issue is mainly related to the contribution of the decision-making process to the
legitimacy of the international tax regime (see in particular Cees Peters, On the Legitimacy of
International Tax Law (IBFD 2014) 218 et seq; or Irma J Mosquera Valderrama, ‘Legitimacy
and the Making of International Tax Law: The Challenges of Multilateralism’ (2015) 7 World
Tax Journal 343).
38 Of course, corporate tax planning can also have a negative impact on the reputation of an
enterprise, and therefore on the sustainable development of the enterprise.
39 Still one of best contribution in this respect is Chris J Finnerty and others, Fundamentals
of International Tax Planning (IBFD 2007) 1 et seq.
2.1.1 Harmful tax regimes

In 1998, the OECD published a report on harmful tax competition.40 Such
work of the OECD is of particular importance because it had a significant
impact on domestic tax systems as many states changed their domestic tax
laws to align these with the recommendations provided in the report. The
four main elements of harmful tax regimes are the following:41
• the regime leads to no or low effective tax rates;

• the regime is ‘ring-fenced’;
• lack of transparency; and
• lack of effective exchange of information with the jurisdiction ena-
bling the regime.
The OECD’s report on harmful tax competition was very much influenced
by the thought that granting ring-fenced regimes to certain taxpayers
harms the competition among domestic and foreign enterprises. Therefore,
the report was not so much about the question of the appropriate effective
tax rates of MNEs in general and how MNEs structure their operations in
particular but was mainly about legislative regimes and how these could
be harmful for the international community as a whole. In parallel, the EU
took further steps to fight harmful tax competition by arguing that cer-
tain regimes shall be prohibited under the state aid prohibition in Art 107
TFEU.42 This led to the publication of the Code of Conduct in December
1997, a soft law instrument. According to the Code of Conduct, the fol-
lowing elements should be considered when assessing whether a domestic
tax regime is harmful:43
- advantages are granted only to non-residents, or transactions are car-

ried out with non-residents;
- advantages do not affect the national tax base (ie ring fencing);
- advantages are granted even without any real economic activity or
substantial economic presence;
40 OECD, Harmful Tax Competition, An Emerging Global Issue (OECD Publishing 1998).
41 OECD, Harmful Tax Competition, An Emerging Global Issue (OECD Publishing 1998)
para 59.
42 On state aid, see Chapter 2, Section 7.
43 The Council of the EU and the Representatives of the Governments of the Member States,
Resolution [1998] OJ C2/1, ‘Code of Conduct for Business Taxation’ of 1 December 1997.
- the rules for the determination of the taxable income deviate from the
internationally accepted principles (ie the allocation according to the
OECD model convention (MC)); and
- the tax measure lacks transparency.
Such Code of Conduct and its review process have led to the abolishment
of various harmful tax regimes in the EU.44 Moreover, it increased the pres-
sure on third countries to also align their regimes with the recommenda-
tions of both the OECD and the EU.
In the following years and particularly in the aftermath of the financial
crisis, the focus of the OECD, the EU, and other institutions was on the
prevention of cross-border tax evasion and the fight for cross-border trans-
parency. This also led to the restructuring of the Global Forum and to the
implementation of various means of achieving cross-border transparency.45
By the same token, the focus was on individuals and their tax avoidance and
evasion strategies. Only with the launch of the BEPS Project was corporate
tax avoidance again put at the forefront of the international debate.
2.1.2 The Base Erosion and Profit Shifting Project

The work of both the EU and the OECD on harmful tax regimes continued
in the 2000s, although the OECD then came to focus more on the preven-
tion of aggressive tax planning by MNEs in particular through BEPS tech-
nics. Such development finally led to the publication of the BEPS Action
Plan in 2013.46
Institutionally, it is worth mentioning that it was the G20 finance min-
ister in 2013 who called on the OECD to develop an action plan to chal-
lenge various means of BEPS.47 Moreover, the goal of the work of the OECD
had been to align taxation with economic activity or to achieve taxation in
line with the source principle.48 To achieve such goals, the OECD devel-
oped the 15 actions shown below.
- Address the tax challenges of the digital economy (Action 1).

- Neutralize the effects of hybrid mismatch arrangements (Action 2).
44 For an overview of which regimes were considered harmful, see Council of the EU,
Primarolo Report (SN 4901/99, 1999).
46 OECD, Action Plan on BEPS (OECD Publishing 2013).
47 OECD, Action Plan on BEPS (OECD Publishing 2013) 11.
48 On the source principle, see Section 1.3.2.
- Strengthen controlled foreign corporation (CFC) rules (Action 3).

- Limit base erosion via interest deductions and other financial pay-
ments (Action 4).
- Counter harmful tax practices more effectively, taking into account
transparency and substance (Action 5).
- Prevent treaty abuse (Action 6).
- Prevent the artificial avoidance of permanent establishment (PE
status) (Action 7).
- Assure that TP outcomes are in line with value creation.
◦ Intangibles (Action 8)
◦ Risks and capital (Action 9)
◦ Other high-risk transactions (Action 10)
- Establish methodologies to collect and analyse data on BEPS and the
actions to address it (Action 11).
- Require taxpayers to disclose their aggressive tax planning arrange-
ments (Action 12).
- Re-examine TP documentation (Action 13).
- Make dispute resolution mechanisms more effective (Action 14).
- Develop a multilateral instrument (Action 15).
The aforementioned project found broad support from policy-

makers, non- governmental organizations, business organizations,
and academics. It received further public support as in November
and December 2014, approximately 600 tax rulings granted to MNEs
by the tax authorities in Luxembourg were published by a group of
investigative journalists.49 To a certain extent, some of these rulings
showed the sophisticated measures that were used by MNEs to reduce
their effective tax burden. Therefore, considerable pressure was put
by policymakers and on the OECD in particular. Through various
intermediate publications particularly in the year 2014,50 and various
webcasts, the OECD tried to involve the stakeholders as much as pos-
sible. The outcome of the negotiations, which were finalized in 2015,
was an agreement on a minimum standard consisting of the following
measures:
49 See International Consortium of Investigative Journalists <www.icij.org> accessed 16

February 2021.
50 So-called deliverables.
- Action 5: The final report contains two minimum standards. First, the
countries agreed that preferential regimes should be assessed based
on the substantial-activity requirement test (ie the so-called (modi-
fied) nexus approach). In particular, with respect to intellectual prop-
erty (IP) regimes (ie IP and patent boxes), it was agreed that taxpayers
should benefit from a regime only if they themselves operate substan-
tial research and development activities in the state in which the re-
gime applies. Second, there was an agreement that specified rulings
with a high BEPS risk shall spontaneously be exchanged.51
- Action 6: It was agreed that states should include anti-abuse provi-
sions in their tax treaties to counter, inter alia, treaty shopping. This
would be achieved through the measures below.
◦ Include a statement (eg in the preamble) indicating that a tax treaty
should be entered with the intention of preventing the creation of
opportunities for non-taxation or reduced taxation through tax eva-
sion or tax avoidance.
◦ Include a specific anti-abuse rule: either a detailed limitation on
benefits (LOB) provision including anti-conduit rules or a prin-
cipal-purpose test (PPT).52
- Action 13: Country- by-
country reporting shall be implemented
for MNEs with a consolidated group revenue equal to or exceeding
EUR750 million.53
- Action 14: Countries have agreed to ensure effective dispute settle-
ment with the elements shown below.54
◦ Treaty obligations concerning the mutual assistance procedure
(MAP) should be fully implemented, and cases should be resolved
in a timely manner.
◦ Administrative processes promoting the prevention and timely
resolution of disputes should be implemented.
◦ Access to the MAP should be ensured if the requirements are
fulfilled.

52 For the details, see Chapter 2, Section 2.3.6.9.
53 OECD/G20, Action 13: Guidance on the Implementation of TP Documentation and
Country-by-Country Reporting (OECD Publishing 2015). See Chapter 2, Section 2.3.5.6(j).
54 OECD/G20, Making Dispute Resolution Mechanisms More Effective, Action 14—2015
Final Report (OECD Publishing 2015).
The countries that are part of the Inclusive Framework committed to follow
these minimum standards. Peer review processes should ensure such
implementation.
Furthermore, the final reports of the BEPS Project contained several re-
commendations for both the design of tax treaties and the design of do-
mestic tax laws. The recommendations concerning the design of tax treaties
were the starting point of the Multilateral Convention to Implement BEPS
related Measures (the so-called MLI or multilateral instrument).55
The goal of the MLI was to allow states to efficiently implement the re-
commended rules in their tax treaty network with respect to both recom-
mendations and treaty-related minimum standards such as Action 6 and
Action 14. Moreover, the final reports have led to several changes in the
OECD MC and the TP Guidelines.
2.1.3 The years following the Base Erosion and Profit

Shifting Project
As mentioned earlier, the BEPS Project was formally finished in 2015, after
a very tight schedule of publishing intermediate deliveries, draft reports,
and final reports. Once the reports were finalized and the MLI was drafted,
the focus of the OECD had been twofold: (i) on implementing a peer re-
view process to determine if states have indeed implemented the minimum
standard and (ii) on ensuring the global reach of these measures, beyond
the OECD member states. The main tool for achieving the latter was the in-
corporation of the Inclusive Framework.56
Moreover, the focus of the discussion in the aftermath of the BEPS
Project was on Action 1 and how to tax the digital economy (the so-called
Pillar 1). We will refer to such discussion in the following Section 2.2.
Besides, the OECD launched a particular project to implement a global
minimum taxation policy as a continuation of its work on fighting aggres-
sive tax planning (the so-called Pillar 2). Such approach was called GloBE
(global anti-base erosion proposal). It consists of the following three dif-
ferent measures, as shown below.
55 The MLI speaks of a ‘swift, co-ordinated and consistent implementation’ (see the
Preamble of the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent BEPS (2016)).
- Income inclusion rule: This rule has similar mechanics as a CFC rule
as income is included if it is taxed in a specific state below a certain
minimum tax rate. The latest proposal of the income inclusion rules is
as follows: if the effective tax rate of an MNE in a specific jurisdiction is
below a certain threshold (eg 15%), the ultimate parent entity applies a
top-up tax on its share of the incomes of the lower entities facing a tax
rate below the minimum threshold.57
- Undertaxed payments rule: This rule applies as a backstop if the in-
come of the low-taxed entity is not already subject to the income in-
clusion rule. Therefore, this rule applies in the case of an entity that is
not controlled (directly or indirectly) by an entity that is subject to the
income inclusion rule. However, the undertaxed payments rule means
that when an entity makes deductible payments to a low-taxed related
party, the top-up tax is levied in the state where the payor is a resident,
but the top-up tax must be shared by all the entities making deductible
payments to the low-taxed entity.58
- Subject-to-tax rule: This rule is a treaty measure that applies if the
specific payments are subject to a nominal tax rate below a certain
threshold in the jurisdiction of the payee. If this is the case, the source
state shall not grant treaty relief. Therefore, such rule should prevent
states from not taxing certain income items because of a double tax
treaty when the income is not taxed or is taxed at a very low level in
the other contracting state. The subject-to-tax rule foreseen does not
apply to all payments but only to specific payments, such as royalties
and interests.59
Despite the mention of these measures in Pillar 2, however, there has so far
been no agreement on their implementation at the level of the OECD or
the Inclusive Framework. Although the G7 finance ministers agreed in June
2021 on a global minimum tax of at least 15% on a country by country basis.
The details of such global minimum tax following the concepts of Pillar 2
have not yet been published.
57 For the details, see OECD/G20, Tax Challenges Arising from Digitalisation—Report on
Pillar Two Blueprint: Inclusive Framework on BEPS (OECD Publishing 2020) 112 et seq.
2.2 Taxing the digital economy

2.2.1 Overview
As has already been mentioned,60 the BEPS Project followed a very tight
schedule in the sense that the results had to be published by the end of 2015, ap-
proximately within two years after the project started. During the execution of
the BEPS Project, however, the OECD member states realized that the specific
features of the digital economy give rise to extremely difficult and very funda-
mental questions, such as the potential reallocation of taxing rights, which re-
quire further work beyond the BEPS Project. Interestingly, the tax strategies of
the largest multinationals in the digital economy (ie Apple, Google, Amazon,
and Facebook) likely served as the impetus for the entire BEPS Project even
though such project failed to answer the core question of how to tax mere
digital services. The OECD and the Inclusive Framework continued their work
in this respect, and we will outline some of the main discussion points.
2.2.2 The specifics of the digital economy

Many authors have rightly highlighted the fact that there is not ‘the digital
economy’ as all enterprises are transforming their business models to be
ready for the digital age.61 Moreover, industrial developments are very dy-
namic as digitalization has a constant impact on how enterprises operate.
It is also impossible to define all digital business models as there is no ex-
haustive list of digital business models that is available. Nevertheless, at least
to my understanding, the main rationale behind a specific project that aims
to tackle the taxation of the digital economy primarily relates to two dif-
ferent specifics under the umbrella of the digital economy, as shown below.
– The first business model does not require an enterprise to have a fixed
place of business in the market state to sell products. This means that such
enterprise does not become subject to corporate income tax in the market
state. Companies offering mere online services such as online streaming,
online advertising, and cloud computing fall under this category.
– A second business model, which was also focused on in the work of the
OECD on the taxation of the digital economy, relates to an enterprise
selling physical goods through an online platform. Such platforms

61 See, for instance, Marcel Olbert and Christoph Spengel, ‘International Taxation in the
Digital Economy: Challenge Accepted?’ (2017) 9 World Tax Journal 3.
often have very limited premises in the market state (eg limited to a
warehouse). However, compared to the first business model, the en-
terprise sells or at least offers a platform for selling physical goods in-
stead of mere digital products.
In the following, we will discuss the recent proposals with respect to these
two models, which should allow us to better understand them. However,
as we will see in the following, the work of the OECD will likely affect not
only these two business models but also consumer-facing business models
in general.
2.2.3 Potential solutions for value-added-tax-related problems

From a VAT perspective, the digital economy poses several policy ques-
tions. The two items below have been focused on by the OECD:62
– The threshold for a VAT exemption concerning low- value par-

cels from online sales. Many states have come up with a de minimis
threshold for levying their import VAT (eg EUR50). This has led to a
situation in which a part of the domestic consumption has not been
subject to VAT as the cross-border trade through online platforms
selling products below EUR50 has increased significantly. As such,
states have begun to change their legislation to also levy VAT even on
low-value parcels.
– The second problem relates to the levying of VAT on services from
foreign suppliers of pure digital services. For instance, enterprise A in
state X offers a video streaming platform to a consumer in state Y. The
problem is even aggravated if the consumer in this case is a private in-
dividual not subject to VAT and not subject to a reverse charge mech-
anism. A way of reducing the tax gap in such settings is to qualify the
foreign supplier as a domestic taxpayer in B2C transactions.
From a policy perspective, it is very interesting to highlight the fact that

VAT requires less cooperation as it is a tax on domestic consumption, and
as such, the taxing rights overlaps of jurisdictions concerning VAT are
fewer than those concerning income taxation. Therefore, the goal of these
international discussions on improving the international VAT regime are
62 See OECD/G20, Addressing the Tax Challenges of the Digital Economy, Action 1—2015
Final Report (OECD Publishing 2015) para 309 et seq.
focused more on reducing the VAT gap than coordinating taxing rights
to levy VAT. Another consequence of such difference is that there are no
double tax treaties required in the area of VAT.63 It is therefore no surprise
that the focus of the present book is on income and corporate income tax-
ation as the regulative need is considerably higher in this field than with
respect to VAT.
2.2.4 Potential solutions for corporate-income-

related problems
2.2.4.1 Overview
As was shown above, one of the rationales behind the BEPS Project was
to realign taxation and value creation. The term value creation in relation
to taxing the digital economy has, however, triggered a flood of articles
both in legal and economic literature,64 and we are still far from reaching
an agreement on how much the consumer or the user contributes to the
value creation of an enterprise and whether the latter should indeed be of
any relevance for the allocation of income in tax matters. For the purpose of
the following policy analysis, we assume that there is a need and persuasive
rationale for the market state (ie the state where the digital services are sold)
to tax part of the corporate income even though the supplier of the digital
services is not physically present in such state.
In the work of the Task Force on the Digital Economy, which was in
charge of BEPS Action 1, inter alia, the options outlined in the following
subsections were discussed.65
2.2.4.2 Modifying the current definition of the permanent

establishment in Art 5 OECD MC
One option would have been to amend Art 5 OECD MC to apply a broader
nexus in the market states so that foreign enterprises in the digital economy
will more often become subject to corporate income tax in the market state
and will have fewer ways to avoid taxation in the market state. One par-
ticular way by which enterprises in the digital economy avoided taxation
63 On this topic, see Thomas Ecker, A VAT/GST Model Convention (IBFD 2013) 1 et seq.
64 See, for instance, the seminal reviews of Itai Grinberg, ‘User Participation in Value
Creation’ [2018] British Tax Review 407; Marcel Olbert and Christoph Spengel, ‘International
Taxation in the Digital Economy: Challenge Accepted?’ (2017) 9 World Tax Journal 3.
65 See OECD/G20, Addressing the Tax Challenges of the Digital Economy, Action 1—2015
Final Report (OECD Publishing 2015) para 273 et seq, although the first option was dis-
cussed within Action 7 (see OECD/G20, Preventing the Artificial Avoidance of Permanent
Establishment Status, Action 7—2015 Final Report (OECD Publishing 2015) para 10 et seq).
in the market states was to misuse the exemptions cited in Art 5 para 4
OECD MC.
These exemptions were particularly related to business models that sell
physical products through online platforms and that were only present in
the market state by means of a warehouse. In this case, the enterprise can
potentially benefit from the exemptions in Art 5 para 4 OECD MC.
The OECD has partly already narrowed these tax planning opportun-
ities by narrowing the exceptions in Art 5 para 4 in the OECD MC 2017.66
However, as physical presence in the market state is still required according
to Art 5 para 1 OECD MC, suppliers of pure digital services have not be-
come subject to corporate income taxation in the market states.
2.2.4.3 Implementing a new permanent establishment

Another approach would have been to include a new nexus in the OECD
MC significantly deviating from Art 5 OECD. This would mean that it
would no longer be necessary to have physical presence to become subject
to corporate income tax. For instance, it was discussed whether a certain
number of users67 or a certain number of digital contracts68 or a certain
amount of revenue69 should be a sufficient nexus.
Of course, once the new PE is defined, new allocation rules would be
necessary as well.70 The reason for this is that following the current under-
standing of the arm’s length principle,71 there would be no allocation to
the market state as there are no functions, assets, and risks to be allocated
thereto.
2.2.4.4 Imposing withholding taxes

Another approach would be to levy a low-rate but final withholding tax on
all base-eroding payments. At the same time, an exemption would apply
66 See Chapter 2, Section 2.3.5.3(b).

67 See, for instance, our own proposal, Peter Hongler and Pasquale Pistone, ‘Blueprints
for a New PE Nexus to Tax Business Income in the Era of the Digital Economy’ (2015) IBFD
Working Paper, 1.
68 See, for instance, European Commission, ‘Proposal for a Council Directive Laying
Down Rules Relating to the Corporate Taxation of a Significant Digital Presence’ (2018) COM
147 final.
69 See, for instance, the approach of Nigeria requiring that a company shall have significant
economic presence if it supplies specified services (eg streaming or downloading services) and
if it has a gross turnover or an income of more than N25 million (see Nigeria, Companies
Income Tax Act of 3 February 2020).
on payments to payees subject to an ordinary net income tax scheme.72

Therefore, non-base-eroding payments would in general terms be exempt
from such withholding tax. This would mean that all payments, including
payments for digital services, would be subject to such withholding tax.
Such approach therefore focuses on challenging abusive or aggressive tax
planning structures.
2.2.4.5 Introducing a special tax on digital services

Another option would be to levy a new tax on digital services (the so-called
digital services taxes) sold in a certain jurisdiction. This is the solution cur-
rently used by several states as an intermediate solution until a global con-
sensus is reached to amend the existing international corporate income
tax regime. From a policy perspective, the introduction of such special tax
does not require international consensus and is thus relatively easy to im-
plement. This tax will be levied on the turnover of all enterprises (both for-
eign and domestic), but they are generally levied only on enterprises with
a certain global and local turnover. As such, it often affects only the largest
enterprises in the world, which are mainly US-based companies. The digital
services tax proposed by the EU Commission aims at a 3% tax rate.73
Importantly, the imposition of a digital services tax requires that the le-
gislators clearly define what kind of digital services are within the scope of
such tax (eg advertising, streaming, transmission of data).
It is disputed whether such turnover taxes are within the scope of double
tax treaties.74 Moreover, they may still infringe international law obliga-
tions, be it the EU fundamental freedoms or the GATS obligations.75 The
main reason for the discrimination is that it may de facto only or mainly
affect foreign enterprises such as the large US multinationals within the
digital economy.
72 This proposal is supported by Andrés Báez Moreno and Yariv Brauner, ‘Taxing the Digital
Economy Post-BEPS . . . Seriously’ (2019) 58 Columbia Journal of Transnational Law 121, or
see Andrés Báez Moreno and Yariv Brauner, ‘Withholding Taxes in the Service of BEPS Action
1: Address the Tax Challenges of the Digital Economy’ (2015) IBFD Working Paper.
73 See European Commission, ‘Proposal for a Council Directive on the common system of a
digital services tax on revenues resulting from the provision of certain digital services’ (2018)
COM 148 final.
75 For a detailed analysis, see Ruth Mason and Leopoldo Parada, ‘The Legality of Digital
Taxes in Europe’ (2020) 40 Virginia Tax Review 175. Laura Simmonds, ‘Comments on
the Digital Services Tax: A Panacea or Placebo for the Taxation of the Digital Economy?’
in Pasquale Pistone and Dennis Weber (eds), Taxing the Digital Economy (IBFD 2019)
Chapter 8.3.2.
2.2.4.6 Unified approach of the OECD (Pillar 1)

These mentioned proposals have been intensively discussed both during
and after the BEPS Project. As such, the OECD has developed a so-called
unified approach considering the various options available and the various
positions of the OECD and Inclusive Framework member states. The uni-
fied approach aims to achieve a consensus among states and has three dif-
ferent key elements, as shown below.
– Amount A: The market states will receive a new taxing right as a share
of the residual profit of an MNE. Such taxing right will be the focus of
the following remarks.
– Amount B: The physical activities in a market state are remunerated
as a fixed return for specified baseline marketing and distribution
activities.
– Implementation of dispute prevention and resolution mechanisms.
It is important to understand that not all business activities are affected by

the aforementioned proposed approach. The latest version published in
October 2020 included automated digital services76 and consumer facing
business.77 Therefore, income from supplies outside these activities is not
affected by the new proposal. Moreover, it is foreseen that only MNEs with
global revenues of above EUR750 million are within the scope of the new
allocation mechanism. The mechanism applies only if the MNE passes a
certain de minimis test with respect to foreign income. This means that
only MNEs with a certain aggregated foreign sourced revenue are within
the scope of the new allocation mechanism. As such, MNEs with basically
only domestic income and only a minor foreign-sourced income are not af-
fected by the mechanism.
The key goals of the entire proposal are to define the new nexus that must
be met in the market state and to outline how much income is allocated
to the market states. Therefore, the circumstances under which the market
state should receive parts of Amount A are at the core of the proposed ap-
proach and are also part of the focus of the following remarks. To calculate
76 For details on the term OECD/G20, see Tax Challenges Arising from Digitalisation—
Report on Pillar One Blueprint: Inclusive Framework on BEPS (OECD Publishing 2020) 22
et seq.
Pillar One Blueprint: Inclusive Framework on BEPS (OECD Publishing 2020) 38 et seq.
the amount to be taxed in the market states, the steps outlined below are
necessary.
First of all, if the MNE is within the scope of the new proposal, the MNE
may be required to segment its profits before taxes if parts of its income
do not relate to automated digital services and consumer-facing business.
This is necessary so that the income that should not be subjected to the new
unified approach would be excluded. After such step, it is assessed if the
nexus test is passed in other jurisdictions. The nexus test consists of a rev-
enue threshold both for automated digital services and consumer-facing
business. Therefore, the market state will receive parts of Amount A if the
foreign enterprise has at least a certain amount of revenues in the territory.
However, in the case of consumer-facing business, the latest proposal fore-
sees that the plus factor needs to be met in the market states. For instance,
only if an enterprise has a fixed place of business in the market state is the
nexus met,78 and only in this case shall parts of Amount A be allocated to
the market states.
Once the nexus is met, the following three steps are necessary to calcu-
late taxable Amount A in the market states:79
1. the residual profits must be isolated through a simplified method (eg

profit before tax-to-revenue ratio);
2. the allocable tax base (a fixed percentage of the residual profits con-
sidering other factors, such as trade intangibles, capital, and risks)
must be determined; and
3. the allocable tax base must be shared among the eligible market juris-
dictions (ie the jurisdictions that have passed the nexus test).
Moreover, the latest report contains further guidance on how Amount B

should be calculated and how to improve the tax certainty through dispute
prevention and resolution.80 The latter may include a binding resolution
mechanism for the determination of Amount A and beyond, but also im-
provements to the MAP.
78 OECD/G20, Tax Challenges Arising from Digitalisation—Report on Pillar One Blueprint:

Inclusive Framework on BEPS (OECD Publishing 2020) 65 et seq.
79 See OECD/G20, Tax Challenges Arising from Digitalisation—Report on Pillar One Blueprint:
80 See OECD/G20, Tax Challenges Arising from Digitalisation—Report on Pillar Two Blueprint:
So far no agreement among the OECD member states or the member

states of the Inclusive Framework has been reached. However, in June
2021 the G7 finance ministers have indeed agreed on the introduction of a
new taxing right for the market state of at least 20% concerning profits ex-
ceeding a 10% margin. However, the details of such agreement have not yet
been published. In particular to what extent the above outline of the unified
approach needs to be amended.
2.3 Formulary apportionment as the

silver bullet?
2.3.1 Introduction
It is evident that many of the current failures of the international tax regime
are to a certain extent triggered by the fact that each corporate entity is as-
sessed separately by referring to the arm’s length principle and that there is
generally no consolidation of an MNE’s income and expense at the inter-
national level.81 The implementation of a formulary system would mean
that the consolidated income of a multinational group would be allocated
among various jurisdictions based on certain parameters, such as revenue,
employees, or assets in a certain state. The term formulary apportionment or
formulary system is often used to describe such an approach. Interestingly,
some countries use formulary systems to allocate income among their fed-
eral states.82
Some authors have already suggested that a formulary allocation of in-
come should be implemented at the international level as a replacement of
the arm’s length principle.83 The debate on whether the arm’s length prin-
ciple should be replaced by a formulary system is indeed detailed and still
ongoing.84 The discussion is complex as there is a wide variety of formulas
81 Of course, several states know group tax systems domestically. In these systems, the cor-
porate income of several (domestic) group companies is consolidated.
82 This, for instance, is the case in the US and Switzerland.
83 See in particular Sol Picciotto, International Business Taxation (Quorum Books 1992).
84 For an overview of the development of the dispute between the arm’s length principle and
the formulary system, see Sol Picciotto, International Business Taxation (Quorum Books 1992)
230 et seq; see also Lorraine Eden, ‘The Arm’s Length Standard’ in Thomas Pogge and Krishen
Mehta (eds), Global Tax Fairness (Oxford University Press 2016)153 et seq; Sol Picciotto,
‘Towards Unitary Taxation’ in Thomas Pogge and Krishen Mehta (eds), Global Tax Fairness
(Oxford University Press 2016) 221 et seq; or Alessandro Turina, ‘Which “Source Taxation” for
the Digital Economy?’ (2018) 46 Intertax 495 et seq.
suggested, from a single formula to three-factor formulas.85 For instance,

the Common Consolidated Corporate Tax Base (CCCTB) proposal of the
EU Commission provided for a three-factor formula considering labour,
assets, and sales.86, 87 A formulary approach requires that the legislator de-
fine the factors or parameters and determine if they are equally weighted.
We will not further discuss the precise design options for a formulary
system, but we will discuss some arguments in favour of and against formu-
lary apportionment.88
2.3.2 Arguments in favour of and against the formulary system

There are various arguments in favour of and against a switch from the
arm’s length principle to the formulary system, and the validity of some of
these arguments of course depends on how the arm’s length principle and/
or the formulary system is designed.
In support of formulary apportionment, it can be argued that a stringent
application of the arm’s length principle is impossible as some cases are not
comparable.89 Another well-known argument in favour of the formulary
system is that the arm’s length principle allows manipulation and offers tax
planning opportunities or transfer mispricing.90 A particular issue raised
is that under some circumstances the arm’s length principle creates re-
sidual profits for the resident state.91 In addition, the arm’s length principle
85 J Clifton Fleming, Robert J Peroni, and Stephen E Shay, ‘Formulary Apportionment in the
U.S. International Income Tax System: Putting Lipstick on a Pig?’ (2014) 36 Michigan Journal
of International Law 1, 32 et seq.
86 European Commission, ‘Proposal for a Council Directive on a Common Consolidated
Corporate Tax Base (CCCTB)’ (2011) COM 121/4, Art 86.
87 Of course, the way in which Amount A is calculated under the unified approach has the
characteristics of a partial formulary system. See Section 2.2.4.6.
88 On the potential amendment of the arm’s length principle, see for instance Romero JS
Tavares, ‘Multinational Firm Theory and International Tax Law: Seeking Coherence’ (2016) 8
World Tax Journal 243; Alessandro Turina, ‘Back to Grass Roots: The Arm’s Length Standard,
Comparability and Transparency—Some Perspectives from the Emerging World’ (2018) 10
World Tax Journal 295.
89 For instance, Reuven S Avi- Yonah, Kimberly A Clausing, and Michael C Durst,
‘Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split’
(2009) 9 Florida Tax Review 497, 510 et seq.
90 See, for instance, Peter Dietsch and Thomas Rixen, ‘Tax Competition and Global
Background Justice’ (2014) 22 The Journal of Political Philosophy 150, 167 et seq.
91 Jinyan Li, ‘Global Profit Split: An Evolutionary Approach to International Income
Allocation’ (2002) 50 Canadian Tax Journal 823, 839. Such residual profits are not the same
as excessive profits, which are profits that are abnormal in the sense of unearned results, such
as because of market failures. For a recent proposal to tax such excessive profits, see Allison
Christians and Tarcísio Diniz Magalhães, The Rise of Cooperative Surplus Taxation (Online
Publication 2020) 1 et seq.
enhances the possibility for tax havens to attract revenues, which would be
more difficult in a formulary system.92
An argument against formulary systems is that they lead to arbitrary
results not following the allocation of the business operations.93 Argued
slightly differently, the formulary system has no underlying theoretical
rationale compared to the arm’s length principle, which is at least theor-
etically linked to value creation as the justification for taxation.94 Another
important argument is that a change from the arm’s length principle to the
formulary system would lead to huge disruptions as the arm’s length prin-
ciple is applied not only for tax purposes in intra-group situations,95 and it
is argued that the implementation of a pure formulary system would lead
to a relocation of production factors to low-tax countries because if these
production factors are part of the formula, this would lead to a higher allo-
cation of income to low-tax countries.96 Lastly, depending on how the for-
mulary system is designed, it may be detrimental for developing states.97
Therefore, some of the arguments in favour of or against a switch from
the arm’s length principle to the formulary system relate to the question of
whether the applicable system leads to a fair distribution of taxable income
among various jurisdictions. Finding the answer to this question requires
determining whether the international tax regime would indeed have a dis-
tributive effect.
92 Reuven S Avi-Yonah, Kimberly A Clausing, and Michael C Durst, ‘Allocating Business

Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split’ (2009) 9 Florida Tax
Review 497, 511.
93 Charles E McLure Jr, ‘Replacing Separate Entity Accounting and the Arm’s Length
Principle with Formulary Apportionment’ (2002) 56 Bulletin for International Taxation 586,
598; Edward D Kleinbard, ‘Stateless Income and its Remedies’ in Thomas Pogge and Krishen
Mehta (eds), Global Tax Fairness (Oxford University Press 2016) 129, 146.
94 Charles E McLure Jr, ‘Replacing Separate Entity Accounting and the Arm’s Length
Principle with Formulary Apportionment’ (2002) 56 Bulletin for International Taxation
586, 587.
95 See on this topic Reuven S Avi- Yonah and Ilan Benshalom, ‘Formulary
Apportionment: Myths and Prospects— Promoting Better International Tax Policy and
Utilizing the Misunderstood and Under-Theorized Formulary Alternative’ (2011) 3 World
Tax Journal 371, 387; see also OECD, TP Guidelines for Multinational Enterprises and Tax
Administrations (OECD Publishing 2017) para 1.3.
96 See on this topic Reuven S Avi- Yonah and Ilan Benshalom, ‘Formulary
Apportionment: Myths and Prospects— Promoting Better International Tax Policy and
Utilizing the Misunderstood and Under-Theorized Formulary Alternative’ (2011) 3 World
Tax Journal 371, 395.
97 With respect to a formula based only on revenue, see Peter Dietsch, Catching Capital: The
Ethics of Tax Competition (Oxford University Press 2015) 75 et seq.
2.3.3 Income allocation and redistribution

Given the fact that tax law may be the most efficient law instrument to
achieve distribution in a society,98 it is important for policymakers to dis-
cuss whether international tax policy should lead to cross-border distri-
bution or would not. As has been shown earlier, the arm’s length principle
uses functions, risks, and assets to allocate income among states. In generic
terms, formulary systems also allocate income based on parameters such as
assets, revenues, or functions (through a payroll or a headcount element).
Neither system, however, considers whether income is allocated to
a poor or a rich country. Both the arm’s length principle and a formulary
system, at least as they are currently designed, are therefore not able to fulfil
distributive duties at the international level. The question to be discussed
in the following is whether there is a distributive duty that should guide
international tax policy and thus the allocation of income. Of course, distri-
bution from a rich to a poor state could happen not only through the design
of the allocation mechanism but also through a mere transfer of funds from
one state to another, but the focus in the following is on the distributive ef-
fect of the international tax regime (excluding the spending side).
To be more precise, there are different (distributive) moral duties dis-
cussed both in politics and literature, as shown in the following.
– Comprehensive claim for redistribution: This means that there

should be redistribution from a rich to a poor state until the existing
inequalities are for the benefit of the worst off (ie well balanced). Such
cosmopolitan approach is comparable to the distributive duty within
a state derived from a domestic theory of justice.99 Therefore, the ar-
gument is that inequalities are justified if they are for the benefit of
the worst off, and this requires distribution to achieve such a level of
inequalities. However, the claim that there is a moral duty to achieve
cross-border distribution to such a comprehensive extent is disputed,
and the dispute relates to the question of whether there is a basic struc-
ture at the international level that is comparable to the basic structure
within a state. The argument is that certain principles of justice, such
98 For a detailed discussion see Louis Kaplow and Steven Shavell, ‘Why the Legal System Is
Less Efficient than the Income Tax in Redistributing Income’ (1994) 23 The Journal of Legal
Studies 667.
99 See, for instance, John Rawls, A Theory of Justice (2nd edn, Harvard University Press
1999) 52 et seq. Inequalities can be for the advantage of the worst off and for the society as a
whole if they enable and even incentivize prosperity in the society.
as the principle of distributive justice, should apply only in a basic

structure in which the compatriots share the same institutions, there
is extensive cooperation among the compatriots, and the central gov-
ernment has coercive powers. Cosmopolitans would argue, however,
that all humans are in the same basic structure, and as such, morality
requires that we achieve a fair distribution even at the global level and
not only at the national level. Statists argue, however, that there is no
basic structure at the international level, which would require redistri-
bution, as required in the domestic basic structure. There have indeed
been attempts to define an allocation system that would consider how
rich a state is to achieve such redistribution, following a cosmopolitan
approach.100
– Relational distributive duty: It can be argued that international trade
creates relational distributive duties in the sense that if states engage in
international trade with other states, this creates a duty on the part of
the state that benefits from trading with the vulnerable state through
unfair exploitation.101 This could for instance mean that source tax-
ation between developing and developed states should be increased as
developing states presumably have been exploited through the inter-
national trade regime or bilateral trade relationships. Therefore, rela-
tional duties may require a shift from residence to source taxation as
developing countries would mainly benefit from source taxation.
– Humanitarian duty: Lastly, it can be argued that there is at least a
humanitarian duty to avoid the most inhumane circumstances.102
Therefore, there is no duty to achieve a decent level of inequalities for
the benefit of the worst off at a global level, but there is at least a duty
to achieve humanity. If this is the standard, international tax policy
should not focus per se on the increase of tax revenue in developing
states to lower inequalities; rather, it should aim at the abolishment of
the most severe injustices in the world. Therefore, the focus should be
on the collection of taxes in states that do not enable humane living
conditions. The problem obviously is that the trade share of the least
100 See already Richard A Musgrave and Peggy B Musgrave, ‘Inter-nation Equity’ in
Richard M Bird and John G Head (eds), Modern Fiscal Issues: Essays in Honor of Carl S. Shoup
(University of Toronto Press 1972) 63 et seq. Or more recently, Pablo Mahu Martinez,
‘Distributive Profit Allocation Rules: A New Approach for an Old Problem’ (2021) Intertax 144.
101 A similar approach was developed by Ilan Benshalom, ‘The New Poor at Our
Gates: Global Justice Implications for International Trade and Tax Law’ (2010) 85 New York
University Law Review 1.
102 See Peter Hongler, Justice in International Tax Law (IBFD 2019) 346 et seq.
developed countries is very small and the impact of a redesign of a

global income allocation key based on humanitarian duty may not
be focused. Therefore, the argument that an omnipotent allocation
key that affects only a small part of all cross-border trade in goods
and services should be designed in the interest of the least developed
countries is not persuasive.
Obviously, there is no moral consensus on which of the aforementioned ap-

proaches should be adopted. Moreover, there are political constraints as the
first and second approaches, in particular, would face significant opposition
in the current international setting of negotiations. However, depending on
how the allocation key is designed (be it a formulary system or the arm’s
length principle), it could fulfil one of the aforementioned duties. The goal
of these brief remarks on the moral argument behind cross-border dis-
tributive duties was to create an awareness of the fact that there are different
moral claims for redistribution and that tax law may indeed be an efficient
means to achieve distribution.
2.3.4 Why destination-based systems are preferable

So far, we have shown that neither the arm’s length principle nor the for-
mulary system is the silver bullet that will address all the failures of the
international tax regime. We have also discussed whether the arm’s length
principle or a formulary system can be aligned with cross-border distribu-
tive duties, but there is a dispute regarding the extent to which there are
cross-border distributive duties, and there is a disagreement concerning
the right income allocation on account of such underlying moral dispute.
In this last section on whether the international tax regime should follow
a formulary system or the arm’s length principle, we will discuss a separate
but linked question: whether the allocation key (either the arm’s length
principle or the formulary system) should be designed as a destination-
based system. Accordingly, the revenue realized in a state should at least
partly be relevant for income allocation. To achieve this, the formulary
system could rely on revenues as one factor, or in the case of the arm’s length
principle, it could be adjusted through an enhanced application of profit-
split methods, which would allow the allocation of parts of the income to
the market states.103 There have been other proposals relying on destination
103 An example would be an upfront allocation of 30% of the income to the market states, as
suggested in another instance, with particular reference to the digital economy (Peter Hongler
as a trigger for corporate income.104 We have already discussed the unified

approach which at least in some areas allocates parts of the income to the
market states.105
There are indeed very strong arguments to follow such a path or to im-
plement a partly destination-based system, as shown below.106
– A partly destination-based allocation mitigates the risk of double-

non-taxation through artificial profit-shifting. This also explains why
VAT has become more important in the past decades: it is more dif-
ficult to implement profit-shifting or base-erosion schemes in VAT
systems. The need for fiscal revenue suggests that destination-based
allocation keys are justified as they ensure taxation, which enables
states to exercise fiscal self-determination.
– A more- destination-
based corporate income tax system would be
aligned with the benefit and source principles as the market as such or
the consumers (ie the place of revenue) create value and the market state
provides the necessary infrastructure to the foreign enterprise offering
goods and services.107 The involvement of the consumers in the value
creation process, however, differs from one industry to another, but con-
sumers often have an important marketing function as they (i) wear the
product in public and (ii) spread the word about the product among the
people they relate with. Similar arguments can be drawn with respect to
the benefit principle. As an example, a car producer will sell fewer cars if
states do not provide the necessary infrastructure (ie streets, traffic lights,
etc), but the enterprises in the digital economy will also sell fewer prod-
ucts if states do not maintain sophisticated telecommuting systems.
Therefore, if states agree to allocate taxing rights among themselves to

avoid double taxation, there are strong reasons to implement a partly
and Pasquale Pistone, ‘Blueprints for a New PE Nexus to Tax Business Income in the Era of the
Digital Economy’ (2015) IBFD Working Paper, 32 et seq).
104 See eg GOP Tax Plan of 2016 (Tax Reform Task Force, A Better Way—Our Vision for a
Confident America (GOP 2016) 28).
106 With further arguments see the detailed analysis of Alan Auerbach and others,
‘Destination- Based Cash Flow Taxation’ (2017) Saïd Business School Research Papers,
February 2017. See also Peter Hongler, Justice in International Tax Law (IBFD 2019) 469 et seq.
107 See, for instance, Peter Hongler and Pasquale Pistone, ‘Blueprints for a New PE Nexus to
Tax Business Income in the Era of the Digital Economy’ (2015) IBFD Working Paper, 1 et seq.
destination-based system either by amending the arm’s length standard or

by introducing a formulary system partly relying on sales as a factor.
2.4 Taxation and the Paris Agreement
In the past six years the Paris Agreement has been signed by almost all states
around the world. The agreement aims at ‘[h]‌olding the increase in the
global average temperature to well below 2°C above pre-industrial levels
and pursuing efforts to limit the temperature increase to 1.5°C above pre-
industrial levels’.108 The agreement requires states to set and achieve their
own nationally determined contributions which must reflect ‘ambitious
efforts’.109 States shall introduce domestic mitigations measures to achieve
these nationally determined contributions.110
There are various ways in which taxation can have a positive impact on
greenhouse gas emissions and, therefore, for the stabilization of global tem-
perature. The most obvious one, which is also frequently used around the
world, is the introduction of carbon taxes. The goal of carbon taxes is to
reduce CO2 emission through higher prices on CO2-intensive produc-
tion. Carbon taxes are often levied as a certain amount per ton of speci-
fied emissions. The covered emissions, however, depend on each country’s
legislation.
Moreover, the topic of environmental border tax adjustments has been
widely discussed at an international level. Environmental border tax ad-
justments are specific (carbon related) taxes on imported supplies from
countries without or with insufficient taxes (or similar measures) in place to
reduce CO2 emissions. However, there are various ways in which to struc-
ture environmental border tax adjustments and also how to define the ap-
plicable exceptions.111 In general, they aim at achieving a level playing field
between domestic and foreign suppliers as the production abroad might
trigger higher greenhouse emissions for a cheaper price. It is obvious that
such environmental border tax adjustments, depending on their exact
design, could infringe trade obligations be it the national treatment pro-
vision under the GATT umbrella or obligations under the Agreement on
108 Art 2(1)(a) Paris Agreement (United Nations 2015).

109 Art 3 Paris Agreement (United Nations 2015).
110 Art 4(2) Paris Agreement (United Nations 2015).
111 For details see Alice Pirlot, Environmental Border Tax Adjustments and International
Trade Law (Edward Elgar 2017) Section 4.
Subsidies and Countervailing Measures. This has already intensively been

discussed in literature.112 Moreover, from an international law perspective,
the question arises whether there is a need to sign a bilateral or multilat-
eral treaty to harmonize both carbon taxes and environmental border tax
adjustments.113 An international agreement on how carbon taxes should
be designed would mitigate the risk of double taxation but also the risk
of double non-taxation. And such treaty would also mitigate the need for
border tax adjustments as such treaty could already enhance a level playing
field without states requiring adjustments at the border.
112 See already GATT, Report by the Working Party on Border Tax Adjustment (1970) L/
3464. For more details see Christine Kaufman and Rolf H Weber, ‘Carbon-related Border Tax
Adjustment: Mitigating Climate Change or Restricting International Trade?’ (2011) 10 World
Trade Review 497; or Alice Pirlot, Environmental Border Tax Adjustments and International
Trade Law (Edward Elgar 2017).
113 See with a proposal Tatiana Falcao, A Proposition for a Multilateral Carbon Tax Treaty
(IBFD 2019).
Index
For the benefit of digital users, indexed terms that span two pages (e.g., 52–53) may, on occasion,
appear on only one of those pages.
183-day rule, 87, 88–90, 92 allocation system, 220, 240–41

balanced allocation of taxing powers, 141,
ability-to-pay principle, 207–8, 220 143, 147n.356, 150–51, 153
abuse of law, 126–28 destination-based allocation, 242–44
doctrine, 108, 126 exclusive allocation of taxing rights,
principle, 126–28, 127n.277 42, 77, 88
Action Plan on BEPS, 11–12, 216n.12, 225 formulary allocation, 237–38
Addis Ababa Action Agenda, 12–13 non-exclusive allocation of taxing rights,
Addis Tax Initiative, 13, 14n.57 42, 70, 77, 80, 84
advance pricing arrangements (APA), anti-abuse
117, 156–57 measures, 107–11, 124, 127
agent provision, 11, 127, 227
dependent agent, 56–57 anti-hybrid rules, 105–0, 109
diplomatic agent, 122, 213 arbitration, 10, 103
independent agent, 56–57 arbitration clause, 104
aggressive tax planning, 11, 107–8, 110, 111, arbitration courts, 105, 222
126, 215, 216, 228 arbitration procedure, 103, 104–6
cross-border tax planning arrangements, baseball arbitration, 105–6
120, 226 mandatory arbitration, 104
measures against tax planning, 223–37 arm’s length
prevention of tax planning, 225 amount, 76
tax planning schemes, 108 analysis, 77
tax planning structures, 109, 127, 233–34 principle, 9, 26–27, 58, 67–68, 123, 157,
Agreement on Subsidies and Countervailing 182–83n.73, 233, 237–40, 242–43
Measures (SCM), 168–69, 180–88 transfer prices, 183n.75, 183nn.77–78
allocation associated enterprises, 58, 60–61, 66, 69–70
allocation clause, 91 authorized OECD approach (AOA),
allocation key, 26–27, 241–43 10, 58–59
allocation mechanism, 235, 240 auxiliary activity, 55–56
allocation of capital, 50–51, 98–99
allocation of income, 26–27, 47, 50–51, Base Erosion and Profit Shifting (BEPS),
58–60, 70–71, 80, 183n.75, 220, 232, 11–12, 216
239, 240–43 BEPS minimum standard, 123,
allocation of interest, 74–75 124, 221–22
allocation of taxing rights, 13, 33, 81–82, BEPS project, 16, 18, 33, 56, 70, 104, 109–
86–88, 91, 92–93, 94, 95–97 10, 161–62, 217–18, 222, 223, 225–29,
allocation principle, 219–20 230, 232, 235
allocation rules, 32, 42, 50–99, 214–15, 233 beneficial ownership, 10, 72, 73–75, 159–60
248 Index
benefit principle, 219–20, 243 debt claims, 71, 72, 75–76
Berry ratios, 65 DEMPE functions, 66–67
bilateral investment treaties (BITs), 189–203 denial of benefits clause, 195
bonds development aid, 6, 12–14, 211
governmental bonds, 75–76, 197 digital economy, 21–22, 50, 79–80, 229
privately issued bonds, 75–76 taxation of, 225, 228, 229
business profits, 53–59 digital services taxes, 50, 179, 188–89, 234
business restructuring, 69 diplomatic/consular
missions, 107, 211
capital, 50–51, 98–99, 226, 236 personnel, 95, 122–23
capital export neutrality (CEN), 219 directors’ fees, 91–92
capital gains, 34–35, 82–85, 143, 152–53, discrimination, 32, 95, 99, 100, 101–2, 136,
154, 161 140, 141–42, 144, 234
capital import neutrality (CIN), 219 dispute settlement in investment
return on capital, 65 matters, 191
taxes on capital, 32, 49, 98, 122 dividends, 34–35, 50, 51, 59, 70–75, 76, 77,
captive 116, 120, 158, 159, 183
company, 67, 68 dividend stripping, 71
insurance, 67, 68 dividend taxation, 149–51
citizenship taxation, 23 Doha Declaration, 13
civil law country, 51–52, 56 double non-taxation, 13, 46, 213, 244–45
collision rules, 129–30 dualistic system, 41
Committee of Experts in International
Cooperation in Tax Matters, 15–16 Energy Charter Treaty (ECT), 190, 195, 202
Committee on Fiscal Affairs (CFA), 11–12, entertainers, 92–94
17, 86n.157 estoppel, 128–29
Common Consolidated Corporate Tax Base European Convention on Human Rights
(CCCTB), 40, 164, 237–38 (ECHR), 204, 205, 206, 207, 208,
common law country, 51–52, 56 209, 210
comparability analysis, 62–63, 69–70 exchange of information, 18, 19, 106,
comparable 124, 224
comparable transaction, 62–63, 64 automatic, 11, 112, 115–16, 162–63
external comparable, 62–63, 64, 65 on request, 11, 112, 113–15
internal comparable, 62–63, 64, 65 spontaneous, 112, 116–17
conduit structure, 73–74 exemption method, 10, 42, 43, 46, 82–83, 91,
controlled foreign corporation (CFC), 48, 92, 150, 182–83n.73
109, 123, 152, 162, 183n.77, 226, 229 exit taxation, 109, 143, 152–55, 162
Convention on Mutual Administrative expropriation, 167, 189, 198, 201–2
Assistance in Tax Matters (CMAATM), extraterritorial income exclusion, 185–86
39, 112–13, 115, 116
corporate income tax, 3n.4, 50, 74–75, 101, Financial Transaction Tax (FTT), 164–65
106, 129, 159, 160, 230, 231–33, 234, 243 financial transactions, 67–68
country-by-country reporting, 70, 133, 227 Fiscal Committee of the League of Nations, 9
credit method, 10, 42–43, 44–46, 51, 53, 83, fiscal law, 5
88, 99, 150, 182–83 fiscal transparency, 124, 217n.15
customary fishing expeditions, 113–14
customary international law, 20, 30, Foreign Sales Corporation (FSC), 183–84
117, 118–25 formulary apportionment/system,
customary international tax law, 164, 237–44
28, 117–24 fraus legis doctrine, 108
customary law, 4–5, 117–18 full protection and security, 191, 198–99
Index 249
fundamental freedoms, 1, 86–8 7, to be heard, 207
135–43, 147, 149, 151, 152, 155, to obtain justice within a reasonable time
208n.212, 234 frame, 206
free movement of capital and payment, to privacy, 210
137, 138–40, 153–54 to property, 167, 205, 209, 217
free movement of goods, 136, 140 to remain silent and against self-
free movement of workers, 95, 136 incrimination, 207
freedom of establishment, 136, humanitarian duty, 241–42
138, 152–54 hybrid financial instruments, 72
freedom to provide services, 136– hybrid mismatch, 225
37, 138–39
priority among fundamental ICSID Convention Art 25 para 1, 196–97
freedoms, 137–39 immovable property, 42, 51–53, 82–84, 99,
122, 139–40, 195–96
G20, 6, 11–12, 18, 19, 132, 223, 225 Inclusive Framework, 12, 14, 18, 109–10,
General Agreement on Tariffs and Trade 123, 221, 228, 230
(GATT), 168–69, 170–76, 184–86 income from employment, 32, 43, 87–
General Agreement on Trade in Services 91, 144
(GATS), 168–69, 177–80 income inclusion rule, 229
general anti-avoidance rules (GAARs), 108, independent personal services, 81–82, 86–87
109–11, 124, 162 inheritance taxes, 7, 112
general principles intellectual property (IP), 66–67, 78, 195–
of the EU legal system, 134 96, 227
of international law, 109, 125, 126, 127– interest limitation rules, 109, 151, 162
28, 129 interests, 44, 45, 47–48, 50, 51, 72, 74–
of international tax law, 28, 125–30 77, 82, 84, 102, 116, 151, 159–60,
of law, 4–5, 20, 28, 29, 125–26, 127, 226, 229
204n.197 Interest and Royalty Directive
genuine link, 21–24, 26–27, 192–93 (IRD), 159–60
doctrine, 21 internal taxes, 170–76
gift taxes, 6 International Monetary Fund, 14
Global Forum, 11, 14, 18–19, 132, 225 international shipping and air transport,
goodwill, 66, 195–96 59–60, 83, 99, 160
government services, 95–96 interpretation
grammatical element see under autonomous interpretation, 34–35, 196
interpretation contextual interpretation see systematic
guarantee, 67–68, 197 element
grammatical element, 30–31
hard-to-value intangibles (HTVI), 67 historical element, 33
harmful interpretation of tax treaties, 29–
tax competition, 16, 224 38, 119–20
tax practices, 10, 226 interpretation principles, 121
tax regimes, 223, 224–25 purposive interpretation see teleological
headquarters agreements, 211, 213 element
historical element see under interpretation systematic element, 32
human right teleological element, 31–32
of access to a court, 207 textual interpretation see grammatical
to access documents, 206 element
to an independent and impartial investor, 190–91, 192–95, 196–97, 198–
tribunal, 207 200, 201–3
to a fair trial, 205, 206n.204, 210, 217 ius cogens, 20, 29
250 Index
jouissance rights, 71 mutual assistance, 19, 39, 112, 142
jurisdiction procedure (MAP), 103–4, 227
eligible market jurisdiction, 236 system within the EU, 153
enforcement jurisdiction, 21, 22 treaty, 33, 112–17
extraterritorial jurisdiction, 23–24
jurisdiction to tax, 22–26, 167 national treatment, 169–80, 184–86, 191,
non-cooperative jurisdiction, 19 198, 199–201
prescriptive jurisdiction, 21, 22 nationality, 192–95, 198
reportable jurisdiction, 116 ne bis in idem, 204
non-discrimination, 99–103, 135–36, 139,
League of Nations, 6, 8–9 169–70, 199–201
lex posterior, 29, 129, 130 non-liquet situations, 28, 125, 127, 128
lex specialis, 29, 95, 129, 130 North American Free Trade Agreement
like circumstances, 200 (NAFTA), 201
likeness, 171–73, 171n.22, 173n.28, 178–
79, 184–85 opinio iuris, 20, 117–18, 119–20, 121, 122–
limitation 23, 124
overall limitation, 45, 46 optimal tax theory, 2–3n.3
per-basket limitation, 46 ordre public, 107, 115
per-country limitation, 46 Organisation for Economic Co-operation
per-item limitation, 46 and Development (OECD)
limitation on benefits (LOB) provision, 109– OECD TP Guidelines, 16, 58, 61–62, 64–
10, 123, 127, 227 65, 66–67, 69, 214–15, 228
loans, 137, 197 Organisation for European Economic
cross-border loans, 138–39 Cooperation (OEEC), 9, 10
private loans, 75–76 other income, 95, 97–98
profit-participating loans, 76
local file, 69–70 pacta sunt servanda, 202
Parent-subsidiary Directive (PSD), 158–
master file, 69 59, 160
method article, 41, 42–46, 51, 53, 70, Paris Agreement, 244–45
80, 83, 84 pensions, 7, 94–95, 96
Mexico Draft, 9, 10 Permanent Court of International Justice
Model treaty (in the area of investment (PCIJ), 21
protection), 190 permanent establishment (PE), 24–2 5,
monistic system, 41 40, 47, 52–5 7, 58–5 9, 75, 77–7 8,
Monterrey Consensus, 13 80, 83, 86–8 7, 88, 89, 97, 99, 101,
most-favoured nation (MFN), 169–70, 177– 111, 120, 123, 148–4 9, 161, 220,
78, 191, 198, 199–201 226, 232–3 3
multilateral agreements permanent establishment proviso, 72–73, 76,
on trade in goods, 168–69 79, 81–82
on trade and business relations, 190 personal link, 22–23
Multilateral Competent Authority piercing of the corporate veil, 193–94
Agreement (MCAA), 39 preparatory activity, 55–56
multilateral tax conventions preparatory work, 33
multilateral double tax conventions, 39, 40 principal purpose test (PPT), 109–11, 123–
multilateral tax harmonization 24, 127, 130–31, 227
conventions, 39, 40 principle
special-purpose multilateral tax of equality, 207–8, 217
conventions, 39 of inter-nation equity, 218–19
Index 251
of neutrality or efficiency, 219 taxing right of the source state, 9, 10,
of proportionality, 142–43, 217–18 24–25, 34–35, 50–51, 52–53, 57, 72, 73,
professional rights, 210 74–75, 76, 77, 79, 80, 85, 86–87, 90–91
property, 47 source taxation, 8–9, 25, 45, 53, 241
sovereignty
R&D element of sovereignty, 106
activities, 65, 66 external sovereignty, 20
functions, 66 internal sovereignty, 20, 21
real estate principle of sovereignty, 20, 167
capital gains taxes, 50, 82–83, 84 sovereignty as a source of international
company, 53, 83–85 law, 19–20
transfer taxes, 26 sovereignty concerns, 95, 104, 205, 216
relational distributive duty, 241 sovereignty in tax matters, 19–27, 141
relief mechanism, 149, 150, 158 special anti-avoidance rules (SAARs),
group relief mechanism, 147 108, 109
participation relief, 70 sportspersons, 92–94
residence state, 25, 60–61, 88, 144, 145–46, state aid, 155–57, 224
147–48, 149–50, 152, 158 state practice, 11, 20, 117, 118–19, 121,
residence taxation, 53 122–23, 124
residency, 25, 46–47 state spending, 5
royalties, 44, 46, 51, 77–79, 81, 82, 101–2, stateless persons
159–60, 229 discrimination of, 99, 101
rule shopping, 108 status of forces agreements (SOFAs), 211–12
students, 96–97
safeguarding progression proviso, 43 subject-to-tax
Salini test, 196–97 clause, 43
savings clause, 48–49 rule, 42
separate-opinion approach, 105–6 subsidiary, 48, 54, 67–68, 111, 147–48, 152,
shares, 34–35, 71, 74, 85, 152–53, 161, 195–96 158, 159, 183
founders’ shares, 71 subsidy, 180–88
jouissance shares, 71 actionable subsidy, 180, 186–88
mining shares, 71 export subsidy, 180, 182–84
shares in real estate companies, 83–85 import substitution subsidy, 180, 184–86
similar treatment, 200 prohibited subsidy, 180, 182–86
soft law, 4–5, 13, 16, 28, 36–37, 61, 130–34, substance-over-form, 74, 76, 108
221–22, 224 Sustainable Development Goals (SDGs), 13
source principle, 220, 225, 243 switch-over clause, 46
source state systematic element see under interpretation
deductions and allowances in the source
state, 144, 145, 146–47 tariffs, 7, 174–75, 188–89, 223
dividend taxation in the source state, 149, tax carve-out clause, 198, 200, 203
150–51, 159, 160 tax evasion, 11, 32, 215–16, 217–18, 225, 227
fiscal revenues in the source state, 55 tax examinations
interest taxation in the source simultaneous tax examinations, 112
state, 159–60 tax examinations abroad, 112
losses in the source state, 148 tax information exchange agreements
presence of the employee in the source (TIEAs), 113
state, 89 tax relief, 181–88
taxation in the source state, 45, 46, 51, 80, tax ruling, 116, 117, 156–57, 226
219, 229 tax-sparing provision, 45
252 Index
technical services, 79–82 treaty override, 29
teleological element see under interpretation treaty shopping, 108, 195, 227
territorial link, 22–23 turnover taxes, 45, 163
thin capitalization, 151–52
trade law, 167–89 umbrella clause, 85, 97, 191, 202–3
transfer pricing (TP), 9, 58, 60–70 UN Economic and Social Council
adjustments, 48–49 (ECOSOC), 11, 15–16
disputes, 103 undertaxed payments rule, 229
documentation, 69–70, 226 unified approach, 235–37, 242–43
rulings, 117 United Nations (UN), 4, 11, 14, 15–16
transfer pricing methods, 61, 214–15 United Nations Transfer Pricing Guidelines
comparable uncontrolled price (CUP) (UN TP Guidelines), 15
method, 61, 63
cost plus method, 61 value-added tax (VAT), 6, 26, 50, 129, 163,
resale price method, 61, 63–64 179, 184–86, 199, 201–2, 243
selection of transfer pricing VAT in the EU, 163–64
methods, 61–62 value-based framework, 217–18
transactional net margin method Vienna Convention on the Law of Treaties
(TNMM), 61, 65 (VCLT), 29–38, 121, 130
transactional profits split method, 61, 66
transfer taxes, 26 withholding tax, 44, 45, 50, 59, 70, 71, 76,
transparency 90–91, 100, 120, 149, 150–51, 158–
cross-border transparency, 132, 215–16, 59, 233–34
217–18, 221, 225 World Bank, 14
transparency in tax matters, 13, 162– worldwide income, 23–25
63, 226 World Trade Organization (WTO), 167–90
transparency standards, 11, 19 Appelate Body, 169n.10
treaty abuse, 107–8, 110, 226 dispute settlement, 169n.10
treaty law, 4–5, 20, 73, 125
Treaty of Lisbon, 190–91 Yukos, 201–2

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International Law of Taxation

E L E ME NTS OF IN TER NATION AL L AW

Elements of International Law represents a fresh approach in the

Previously published titles in this series

Elements represents a fresh approach to the literature of international law.

3. Relationship with other Areas of International Law  166

Arbitration Institute of the Stockholm Chamber of Commerce

International Centre for Settlement of Investment Disputes

International Court of Justice

London Court of International Arbitration

Permanent Court of Arbitration

Permanent Court of International Justice

United Nations Commission on International Trade Law

World Trade Organization

European Court of Human Rights

European Court of Justice

Council of State of France

Court of Appeal of the United Kingdom

Federal Constitutonal Court of Germany

Federal Court of Appeal of Canada

Federal Court of Australia

High Court of Delhi

Supreme Administrative Court of Finland

Supreme Court of India

Supreme Court of Norway

Supreme Court of Spain

Supreme Court of the Netherlands

Supreme Court of the United States

Swiss Federal Administrative Court

Swiss Federal Supreme Court

Tax Court of Canada

United States Tax Court

AOA authorized OECD approach

1. Taxation and Statehood

1 Peter Hongler, Justice in International Tax Law (IBFD 2019)1 et seq.

Of course, many of the collected tax revenues do not have an inter-

2.2 International law of taxation

2.3 International tax law

2.4 The international tax regime

The international tax regime encompasses all principles, rules, and

3. History of the International Tax Regime

• the international tax regime until 1920;

3.1 The international tax regime until 1920

18 See, for instance, the Cobden-​Chevalier Commercial Treaty (1860).

3.2 The League of Nations as the leading

3.3 The post-​Second World War phase and

The development of a more integrated international tax regime stopped to

• In 1977, the term beneficial ownership was introduced.39

• In 2017, an explicit anti-​abuse provision was introduced in Art 29

Besides the work of the OECD, developing states launched a UN initiative

3.4 The G20 in the driver seat in the new century

3.5 Excursus: development aid and

The Addis Ababa Action Agenda refers to the 17 Sustainable

-​ collectively doubling technical cooperation in domestic revenue

The goal of the first commitment is to achieve greater coordination between

4. Institutions and Main Actors

The overview of the historical development of the international re-

4.2 The UN and its work on taxation

As was mentioned in Section 3.3, in 2004 the so-​called Ad Hoc Group of

other tax-​related issues. Reference is made in particular to the work of the

4.3 The OECD and its work in the field of taxation

According to Art 3 of the OECD Convention on the Organisation for

a) The overarching objective of the Committee on Fiscal Affairs (herein-

To achieve these goals, the CFA shall, in particular:

3. Relationship with other Areas of International Law 166

18 See, for instance, the Cobden-Chevalier Commercial Treaty (1860).

3.3 The post-Second World War phase and

• In 2017, an explicit anti-abuse provision was introduced in Art 29

- collectively doubling technical cooperation in domestic revenue

As was mentioned in Section 3.3, in 2004 the so-called Ad Hoc Group of

other tax-related issues. Reference is made in particular to the work of the

72 OECD Council, Resolution C(2008)147 and C/M(2008)20 ‘Revision of the Mandate

- As there seems to be sufficient state practice and an opinio iuris, the

5.2.3 Source and residence—terminology

- the international tax regime—a treaty-based regime;1

2. The International Tax Law Regime—

- if the interpretation according to Art 31 leaves the meaning ‘am-

aforementioned tax-planning structures. If such a sale, however, happens

• special-purpose multilateral tax conventions;