International tax policy: recent changes and dynamics under globalization Abstract: This paper examines recent developments in international tax law and policy as part of the general dynamic of globalization. Tax policy is becoming active in the current phase of globalization, which involves international coordination, harmonization, and standardization. Unilateral, bilateral, and multilateral actions and policies by tax authorities, as well as initiatives by international bodies and agencies, are all part of this. The Organization for Economic Cooperation and Development’s attack on harmful tax competition, harmonization of corporate income tax rates within the European Union, proliferation of transfer pricing rules, and the World Trade Organization’s rejection of the U.S. Foreign Sales Corporation tax regime are all part of the present dynamic. Key words: globalization, harmful tax competition, international tax, tax harmonization, tax policy, transfer pricing.
Globalization may be seen to encompass three phases. In the first phase, the focus is on the breaking down of traditional trade barriers. During the second phase, the focus shifts to deregulation and privatization. In the third phase, international coordination, harmonization, and standardization become important. This third phase partially reflects a reaction against negative free market outcomes and the redevelopment of activist economic policy. The present paper tries to understand recent developments in international tax law and policy from this perspective. Whereas tax policy has lagged well behind developments in other realms as globalization has progressed, tax policy is becoming active and interesting in the third phase of globalization. Unilateral, bilateral, and multilateral actions and The author is an attorney and economist working with the International Tax Services Group, Deloitte & Touche LLP, Los Angeles, California. The views express in this paper are solely those of the author and do not reflect the opinions of Deloitte & Touche LLP. An earlier version of this paper was presented at the Seventh International Post Keynesian Workshop, Kansas City, Missouri, June 29–July 3, 2002. Journal of Post Keynesian Economics / Spring 2003, Vol. 25, No. 3 367 © 2003 M.E. Sharpe, Inc. 0160–3477 / 2003 $9.50 + 0.00.
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policies by tax authorities, as well as initiatives by international bodies and agencies, are all part of the current dynamic in the third phase of globalization. The international tax developments of this type, which are discussed in this paper, include: 1. The Organization for Economic Cooperation and Development’s (OECD) successful attack on “harmful tax competition” is changing laws of jurisdictions that are usually seen as tax havens. 2. Attempts at harmonization of corporate income tax rates within the European Union. 3. The proliferation of transfer pricing rules and the enforcement thereof. The basic model is the OECD’s Guidelines (OECD, 1995). The U.S. rules of I.R.C. §482 and the Mexican model are also important here. In addition, one has the development of advance pricing agreements (APAs), including bilateral ones, which allow for transfer pricing agreements between the corporation and two tax jurisdictions. 4. The World Trade Organization’s (WTO) rejection, by EU request, of the massive U.S. tax subsidy embodied in the Foreign Sales Corporation (FSC) rules and their equally problematic successor, the Extraterritorial Income Exclusion (ETI) rules. All these developments reflect conscious attempts by national governments and tax authorities, as well as international and multilateral organizations, to develop international coordination, harmonization, and standardization in tax law. A number of arguments may be made as to the impact of these changes. First, it may be argued that such changes add to the efficiency of trade in goods and services. Second, these developments are...