International Trade and International Tax Law: Are They Really Worlds Apart? A Comparison Between Peer Review Mechanisms in the WTO and the OECD

By Daniele de Carolis

Soft law as a common trait between international trade and international taxation law

Over the past few years, tax scholars have been paying increasing attention to the relationship between international trade and international taxation law by focusing almost exclusively on the tensions, disconnections and structural differences between them. Accordingly, the general view is that these two systems appear irreconcilable and, in the current scenario of a global trade war among the main trading nations, the contrasts are likely to become ever more pronounced.

Contrary to this pessimistic view, in this blogpost I will argue that the two regimes are not completely worlds apart as it may appear at first sight. On the one hand, the international trade system is essentially a body of legally binding rules of international trade centred upon an umbrella of multilateral treaties (the WTO Treaties) combined with an established dispute settlement mechanism which confers some enforcement powers to the system. On the other hand, the international tax regime is centred upon an international institution (the Organization for Economic Cooperation and Development – OECD) which looks more like a forum, able to produce only soft coordination measures such as models, guidelines, and recommendations, mainly because the lack of an enforcement mechanism. Yet, a closer look at both regimes shows that there is one common trait that is often overlooked in the relationship between international trade and international tax law, namely the importance of soft law mechanisms in both fields.

Indeed, soft law plays a crucial role in the WTO system and is employed in much the same way as in the international tax system. For example, in both systems, soft law may serve as “elaborative soft law” by providing guidance in the interpretation or application of a particular treaty rule which has an imprecise or indeterminate content. This is the case, in the WTO regime, of the Technical Note on the Accession Process laying down the details of the procedure to be followed by States wishing to become WTO members. As far as the international tax regime is concerned, the most important example of “elaborative soft law” is represented by the OECD Commentaries on the Articles of the Model Tax Convention on Income and on Capital which are commonly considered to reflect the international consensus on the proper interpretation of the provisions of tax treaties and therefore may often integrate the meaning of indeterminate provisions of existing double taxation conventions.

These examples show that, in both systems, soft law is so inextricably interconnected with hard law that it cannot be simply ignored and dismissed from a legal perspective, because it plays a crucial role in determining hard law’s meaning, scope of application and implementation. More importantly, soft law makes international trade and tax systems comparable at least from a procedural standpoint, i.e. in terms of how soft law interacts with hard law in order to clarify its meaning and monitor its implementation.

Peer reviews as a case study for the comparison between international trade and international taxation law

One particular soft law instrument which has drawn much attention in the literature in recent times is the mechanism of peer reviews. Peer reviews are a system of reciprocal, intergovernmental evaluations of the performance of a State by other States used to monitor States’ compliance with both hard and soft law obligations. On this reading, they may be considered as a particular form of “procedural soft law”, which, instead of prescribing substantive rules of behavior, lays down a procedure for the implementation of substantive hard or soft law rules. As soft law mechanisms, peer reviews lack coercive sanctions and therefore they cannot force States to comply, but seek instead to nudge them towards an expected policy outcome. Accordingly, peer reviews raise many issues as to the influence they are capable of exerting on State behaviour, the purposes they are deemed to serve, as well as the legitimacy of their operation.

As both the WTO and international tax regimes envisage some form of soft law coordination, peer reviews may be relied upon as a case study to show that the two regimes are not completely worlds apart but may actually be compared at least from a procedural standpoint, i.e in terms of how they structure peer review mechanisms.

In the remainder of this blogpost two peer review mechanisms will be analysed and compared namely the Trade Policy Review Mechanism (TPRM) in the field of WTO law and the peer review within The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) in the field of international tax law.

Comparative analysis of the TPRM’s and Global Forum’s peer reviews

A comparative analysis of the TPRM’s and the Global Forum’s peer review processes shows that these two mechanisms differ in many respects.

First, there are significant differences in terms of the structure of the review process. The typical peer review in international law encompasses three separate phases. The Global Forum’s peer review adopts this structure, organizing the activities as follows: 1) the preparation phase, conducted through questionnaires sent to the reviewed country; 2) the consultation phase, carried out through on-site visits and culminating in the Secretariat’s draft report; 3) the assessment phase, consisting in the discussion on the draft report during the review meeting. By contrast, in the TPRM process, the first two phases have been merged into a single phase, since the preparation of the draft report by the Secretariat is conducted in close connection with the reviewed country.

This departure from internationally accepted practice makes the TPRM process flawed in terms of its ability to guarantee the independence and reliability of the review, since it ends up conferring too much control upon the reviewed country on the drafting of the Secretariat report. Also, the TPRM review lacks a clear definition of the assessment criteria, the Secretariat’s reports only following a standard format which is the same for every reviewed country. By contrast, the Global Forum’s peer review follows a detailed set of criteria stated in the Terms of Reference encompassing all the crucial aspects of effective exchange of information. In the light of this overview, it is thus not surprising that criticism has been raised against the TPRM, concerning both the Secretariat’s reports for their lack of critical content, and the ability of the mechanism to effectively trigger policy reform.

Second, in addition to these relevant differences in terms of structure, the two processes differ also in terms of the purpose they are deemed to serve. The TPRM review is essentially conceived as a mutual learning exercise providing its members with a better understanding of their trade policies with particular reference to the impact such policies have on international trade cooperation. Conversely, the Global Forum’s peer review is essentially an implementation device founded on very straightforward forms of “naming and shaming” expressed in an articulated system of country rating.

The difference in terms of purpose largely explains the TPRM’s rather rudimentary and flawed structure with respect to the Global Forum’s complex and almost “bureaucratized” architecture. As the TPRM is conceived essentially as a forum aimed at stimulating mutual learning discussions among its members, it does not need a set of complex bureaucracy or procedures to fully monitor the continuous implementation of the standards, as it is the case of the Global Forum.

Despite these differences, a comparative analysis between the two forms of peer review shows that the Global Forum’s peer review seems to represent the model the TPRM shall look at in order to address its shortcomings. For example, the clear set of assessment criteria and the presence of an assessment team of peers carefully selected on the basis of their expertise and familiarity with the reviewed country’s legal system are features of the Global Forum which may be relied on in order to assess the criticism (lack of critical content and inability to produce policy reform) against the TPRM. By the same token, an articulated system of country rating and additional phases of the peer review process aimed at monitoring progress made by the assessed jurisdiction may be introduced in the TPRM to enhance its compliance dimension which, according to some commentators, belongs also to this review mechanism.

Finally, it must be observed that both mechanisms present their own peculiar legitimacy concerns. In particular, the TPRM has been criticised for the lack of dissemination of its results to the general public which is perceived to undermine its public pressure dimension. By contrast, the Global Forum’s review has raised a strong criticism for having led a number of countries to compromise the level of taxpayer’s protection in their domestic legislation.

Concluding remarks

This blogpost has singled out peer reviews as a case study to explore the possible interactions between two different realms of international law that are often depicted as irreconcilable, namely international trade and international taxation law.

In particular, the analysis above has shown that the structure and design of the Global Forum’s peer review process is more in line with best practices of peer reviews in international law and may be even used as a reference point to address the TPRM’s shortcomings.

The general conclusion one may draw from this comparison is that, overall, the different purpose peer review mechanisms may serve within a given legal system is related to the particular structure of that system.

As outlined above, the WTO system is essentially structured as a body of legally binding rules of international trade, whereas the international taxation system is essentially a form of multilateral coordination among countries founded on soft law instruments. Accordingly, in the international trade context, countries decided to confer upon the TPRM only an ancillary mutual learning purpose because the function of implementing trade obligations was already performed by the binding dispute resolution procedure under the DSB. Conversely, in the international taxation context, the use of a soft law, peer review mechanism was the possible solution envisaged to ensure the rapid diffusion and implementation of the standards of information exchange in tax matters. This was because “there is no principle of international tax law that imposes an obligation upon states to cooperate in the regard to taxation” (Brodzka & Garufi, Eur Taxn, 2012, vol.52, n.8) and thus to exchange information for tax purposes.

Moreover, the urgency of providing a quick and uniform solution to address the public indignation around global tax avoidance seems to be the main political reason justifying the use of very straightforward forms of “naming and shaming” techniques that characterises the Global Forum peer review’s mechanism. Accordingly, the strong peer and public pressure exerted by the Global Forum on its members has undoubtedly contributed to bring about an “unprecedented progress towards better transparency and exchange of information” (Owens, Bull Intl Taxn, 2009, vol.63, n.11)


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