The Importance of Normative Theory in the Debate about Changing the Current International Tax Regime

By Peter Hongler

So far, the main part of the debate about justice and fairness in international tax law has happened in a tax law (and economics) vacuum. An illustrative example is the Base Erosion Profit Shifting BEPS project, which was indeed led by tax lawyers and economists with generally no involvement of philosophy or moral theory. It is evident that all final BEPS reports neglect any discussion about global justice, in general, or the distributive effects of international tax law. At the same time, the term “fairness” is explicitly and implicitly central for the BEPS project. This reflects a severe contradiction. It is hardly persuasive to launch the largest project in the history of international tax law under the explicit and implicit label of “fairness” without rendering an in-depth analysis of what fairness or justice means globally. Instead, one of the main goals of the BEPS project was to realign taxation and value creation to achieve a just international tax regime, but the OECD has not reviewed, in detail, whether this is indeed true, i.e., whether it is indeed true that an international tax regime that realigns taxation and value creation (source principle) is a just system.

International law or international tax law does not provide us with sufficient guidance on how the international tax regime ought to be designed in order to be considered just. Therefore, a detailed reference to normative theory such as political philosophy helps us overcome certain parochial positions that would not have been possible by remaining within our traditional juridical methodology. Moreover, other disciplines, such as political philosophy, might not only lead to a clearer understanding of fundamental values, but they might also provide us as tax lawyers with creative ideas and issues that we might not have conceived. An important aspect would be to analyze the impact of global tax policy on distribution and the question of whether there are and to what extent distributive duties at an international level. Even though one goal of the OECD is the increase of general well-being, the international tax regime does not de facto currently follow any distributive goals in order, for instance, to abolish poverty worldwide. With respect to the BEPS project, certain measures might even lead to a higher allocation to strong economies, such as the protection of the current understanding of the arm’s length principle and the recommendations regarding the design of effective CFC rules. My personal view is that there is a cross-border humanitarian duty at an international level. However, there is no Rawlsian difference principle at an international level, which would require significant cross-border distributive payments from rich to poor states. This means that international tax policy should consider existing humanitarian duties, but the international tax regime should not lead to a cross-border distribution beyond humanitarian duties as implemented in domestic societies.

The BEPS project has, moreover, revealed the lack of principle-based studies that are considered by international policymakers. It is crucial to reason every single argument and policy principle used. Scholars, policymakers and other parties should review their position at a higher level of abstraction, or they risk being trapped in long-applied but misguided principles. This is true with respect to the neutrality, the source, the benefit, the ability-to-pay and the inter-nation equity principle. Political philosophy as a value-based discipline helps to render a detailed analysis of the normative validity of these principles. Legal academia should refer to political philosophy in order to develop a more comprehensive understanding of what indeed is a valid normative claim. As an example, it is still surprising that lectures on international tax law often contain a part on neutrality, be it CIN, CEN and/or CON (respectively capital import neutrality, capital export neutrality, capital ownership neutrality), but lectures on international tax law generally do not refer to theories of global justice. Political philosophy should, therefore, play a more decisive role within international tax law as an academic discipline, both in teaching and researching the discipline.