税法和法庭的关系

第一节　国际税收管辖权

Section 1　Tax Jurisdiction

【The Fundamental】

Tax jurisdiction refers to a state government’s power to impose tax on certain persons or objects. Based on this power, states are free to decide who are taxpayers, what kinds of earnings are taxable, and the tax rates.

Tax jurisdiction relates to the following questions: (a) Who has the power to tax, the central government or local government? This question relates to who are entitled to the revenue; (b) Who is going to be taxed? This question related to the subject of taxation payment;(c) What is going to be taxed? This question relates to the tax base, on which the taxes are calculated; (d) How much is going to be taxed? This question deals with the tax rate applied;(e) How to tax? This question deals with the rules and procedures of tax collection and administration.

Tax jurisdiction includes two general categories, i.e. personal jurisdiction and territorial jurisdiction. Personal jurisdiction includes resident jurisdiction and citizen jurisdiction. Territorial jurisdiction includes place of income jurisdiction and place of property jurisdiction.

A. Resident Jurisdiction

1. Definition of the Resident Jurisdiction.

A resident tax jurisdiction refers to a jurisdictional taxation claim on transnational incomes based on a nexus between the state making such claim and the taxpayer as the person to which such transnational incomes can be attributed. Sometimes it is also known as residence jurisdiction because the person, earning such an income, is usually defined by the tax law of the state making such a claim as a tax resident due to the fact of having “a tax residence” within the territory of that state. Under such a tax jurisdiction, the nexus connectingthe state making such a claim with the taxpayer can either be the “tax residence” of a person within the state making tax claims, or can be the “tax resident” status of such the taxpayer. It is based on the resident status of the taxpayer or tax residence of that taxpayer in a state making such revenue claims that such a state is able to impose taxes on that person.

(1) Scope of Resident Jurisdiction.

Once a cross-border taxpayer is defined as a tax resident of a state, which is usually defined as a person (either a natural person or a legal person) having a tax residence in this state, such a state will have a legitimate claim to require such a taxpayer to pay taxes for all of his incomes, including those originating in the state of which the taxpayer is a resident, or those generated abroad. That is to say, the tax basis under resident tax jurisdiction is the global income of a particular taxpayer.

(2) Taxpayer under Resident Jurisdiction.

As mentioned above, under resident jurisdiction, the resident status of a particular person is dependent on the tax residence, which such a person has in a particular state. However, tax residence does not necessarily have direct relation with the taxpayer’s nationality. Therefore, a taxpayer who has tax residence in the imposing state may have nationality of that state, or may not have. Taking a US individual taxpayer as an example, it is obvious that a taxpayer who has both a US tax residence and a US nationality is a US tax resident on the one band. On the other hand, a person who has tax residence within the territory of the United State but is not a US citizen shall also be identified as a US tax resident for tax or immigration purpose. In the latter case, such a person is usually described as a “resident alien”^[1]who is holding the so-called “green card”^[2].

2. Determining the Resident Status of a Natural Person.

With respect of a natural person, the criteria for determining whether he or she is a resident of a particular state are as follows:

(1) Domicile.^[3]

Under the home-domicile criterion, the tax resident status of a natural person depends on whether he or she has a permanent domicile in the state making revenue claims. Domicile isthe location where a natural person sets up his life and intends to live on permanently. According to provisions of General Principles of Civil Law of China^[4], the domicile of a natural person shall be the place where his permanent residence (Hukou^[5]) is registered.

The advantage of home-domicile criterion lies in its certainty. A Natural person’s home-domicile is usually fixed and the place where one’s residence is registered in China is even more fixed in a relatively long period of time. Therefore, using such criterion to determine one’s tax resident identity is comparatively reliable. However, the disadvantage of this criterion is that the results of applying such a criterion is that the income, upon which the tax claim is made, has no substantial connection with the actual economic activities in a certain period. A Chinese entrepreneur holding a U.S. tax resident and is therefore subject to the U.S. tax claim, because of his permanent resident status, then such taxes will have not so much linkage with his or her economic activities.

(2) Habitual Abode.^[6]

The second criteria for determining a natural person’s resident status is his or her habitual abode within the territory of a state making a tax claim.

Under such a criterion, a natural person’s tax resident status shall be dependent on whether he or she has a habitual abode in that state.

The advantage of the criterion on habitual abode is that it does reflect the vital center of a taxpayer’s real economic activities. However, in cases where a natural person has no, or has several habitual abodes during a certain period of time, it will be very difficult to determine whether he or she shall be indentified as a tax resident of that particular state.

(3) Time of Stay.

The third criteria for determining a natural person’s resident status is the time of his or her stay within the territory of the state imposing taxes. Under this criterion, a natural person’s tax resident identity shall be determined by whether the stay of such a person in the state imposing taxes exceeds a required period of time. As for the requirement of time period of stay, there are differences among different states. In some states stay for half a year is required for being granted the residing right while in some other states stay for one year is required.

Compared with home-domicile criterion, time of stay criterion has the advantage ofhaving certainty and being easy to determine.

(4) Other Criteria.

Besides the aforementioned criteria, some states determine whether a natural person is a tax resident of that state depending on nationality and intention to become a citizen of that state.

3. Determining Resident Status for Legal Persons.

With respect of the determination of legal person’s such as a corporation’s resident status, the following criteria are usually adopted various states:

(1) Place of Incorporation.

The criterion of the place of incorporation means that determining a corporation’s tax resident identity depends on whether it registers in the imposing state. This criterion is adopted by states such as Finland, Sweden, U.S. and Mexico. The advantage of such criterion is that it is easy to apply. However, it also has disadvantage that it does not reflect the gravity of a corporation’s real economic activities, especially as for those offshore corporations established by nationals. Legally, these corporations are not tax residents of the shareholder’s home state, as they are registered in tax heavens such as Liechtenstein, Cayman Islands and British Virgin Islands. However, their gravity of production and operation and profits producing is still in the shareholder’s home state. Revenue loss resulting from such corporation is a reflection of the disadvantage of this criterion.

(2) The Criterion of the Central Place of Effective Management and Control.

Criterion means to determine a corporation’s residence depending on whether its central place of effective management and control locates in the imposing state. Central place of effective management and control means the place where a corporation makes important operation and management decisions and develops overall development strategies. Therefore, the location where the board meeting is always held is deemed as central place of effective management and control. Currently, this criterion is adopted by UK, New Zealand, India and Singapore. The reason why UK adopts this criterion is that this criterion is helpful for it to expand tax jurisdiction. Actually, London, as the most prestigious and influential financial center all over the world, is always the place where board meetings of corporations controlled by London bankers and entrepreneurs are held. However, this criterion has the disadvantage that the place of director board meeting is not always consistent with the gravity of a corporation’s production and operation and also the origin of profits.

(3) Place of General Office.

Place of general office criterion means determining a corporation’s tax resident identity depending on whether its general office locates in the imposing state. General office is the organization in charge of a corporation’s daily operation and management activities, for example the general manager office. Japan has adopted this criterion. Before new Corporation Tax Law of the PRC taking effect in 2008, China also applies this criterion to determine the tax resident identity of foreign investment enterprises.

Although many states adopt only one of the above criterions in its legislation or case law, this does not prevent a state from using with multiple criteria to expand its tax jurisdiction. For example, Australia has not only adopted the criterion based on the place of incorporation but the criterion based on the place of effective management and control as well. Corporations satisfying any criterion are deemed as Australia tax resident subject to the obligation of tax payment to Australian government. China also followed suit in 2008 as it promulgated new enterprises’ income tax law and adopted both of the above-mentioned criteria. According to the definition in this new law, a tax resident corporation means corporation incorporated in China according to Chinese law, or incorporated according to laws of foreign states (regions) but with its place of effective management in China.

B. Source Jurisdiction

1. Definition of Source Jurisdiction.

Source jurisdiction is a tax jurisdiction on a sum of transnational income based on a nexus between the state making such a claim of jurisdiction and activities generating such an income. It is the reflection of territorial jurisdiction in the field of international tax law.

2. Scope of Source Jurisdiction.

While the resident jurisdiction imposes taxes on taxpayers’ global earnings, the source jurisdiction imposes taxes in taxpayer’s earnings originating in the source state, rather than all earnings.

3. Taxpayer of Source jurisdiction.

Under the source jurisdiction, taxpayers are foreigners without tax residence in the imposing state, i.e. non-residents.

4. Determination of Various Sources.

Taxpayers’ incomes could be categorized as business income, income for personal services, investment income, property income, capital gain and other income. Different kinds of incomes are subject to different rules for the determination of the sources.

C. Distinctions between the Resident Jurisdiction and the Source Jurisdiction

1. Distinction with regard to Nexuses.

With regard to the resident jurisdiction, the nexus between taxpayer and the state making tax claims is the tax residence in the resident sate, or the taxpayer’s resident identity. This is a kind of personal nexus. However, with regard to source jurisdiction, the nexus between a taxpayer and the state making tax claims is taxpayer’s economic activities generating incomes for such a taxpayer in that state, which is a kind of territorial nexus.

2. Distinction with regard to Tax Bases.

Under the resident jurisdiction, the taxable income is taxpayer’s all earnings worldwide, including earnings originating inside and outside his resident state. That is to say, the global income of such a taxpayer is subject to taxes. Therefore, tax laws of some state refer to tax obligation under resident jurisdiction as “unlimited tax liabilities”^[7]. Under the source jurisdiction, taxable income is income originating inside the imposing state. By the same token, tax obligation under source jurisdiction can be described as “limited tax liabilities”^[8].

3. Distinction with regard to Taxpayer.

As for resident jurisdiction, taxpayers are national citizens and resident aliens obtaining permanent resident qualification. However, under source jurisdiction, taxpayers generally are non-resident aliens who do not have resident identity.

(Adapted from Chapter 6 of the WTO and International Economic Law written by Sun Fabai and published by University of International Business and Economics Press in November 2008, and adapted from Chapter 17 of the International Economic Law written by Sheng Jianming and published by University of International Business and Economics Press in September 2011)

[The Reflections]

1. What is the resident jurisdiction?

2. What is the source jurisdiction?

3. What are the differences between resident jurisdiction and source jurisdiction?

4. How do you determine the resident status for natural person and legal person?

5. Please list the method and sequence pursuant to which the resident status of a natural or legal person can be identified without causing conflicts.

【The In-depth】

Do We Already Have an International Tax Court?

A. The Recent (and less recent) Support for a So-called “International Tax Court”

The 1927 draft of the Model Tax Convention of the League of Nations envisaged that the Permanent Court of International Justice (PCIJ) would be the body that, in last resort, would decide on tax disputes that arose over the application of the Convention. The idea was picked up again after the Second World War by the Government of the Netherlands, struck by　the euphoria of the creation of the most sophisticated organization the international community had ever witnessed, the United Nations. The Dutch Government proposed that the International Court of Justice, which had just been formed in the wake of the UN Charter, should become an International Tax Tribunal. A special chamber of the ICJ would be a “tax chamber” where international tax disputes could be decided upon by judges of the court. The proposal was rejected, and it was declared that each international double taxation agreement would do better to include a clause that would leave certain disputes to the tax authorities of both countries. In the general report of the annual congress of the IFA in 1951 the call for an ITC was repeated by Michel. Reference was made to Chretien, who had defended the same solution in an article in the Journal de Droit International, in 1951.

Now, more than 50 years later, the demand and support for an international judicial or arbitral mechanism for tax disputes have still not disappeared. Fueled by the apparent lack of enthusiasm for the mutual agreement procedure by both taxpayer and tax authorities and by fears for double taxation pursuant to different interpretations of tax treaty terms by different countries, calls for another mechanism of dispute resolution or treaty interpretation fill the professional press. The calls for an International Tax Court by tax practitioners coincide with internationalists reviewing how to increase the use and appeal of the ICJ shortly after its 50th anniversary, reason enough to justify a closer look. But tax experts have lost the enthusiasm of the 1950s for the ICJ playing a role in the settlement of international tax disputes. In the literature, the ICJ is simply ignored as a possible player or deemed unsuitable to fulfill any role in international fiscal dispute resolution. As Shay puts it with respect to recourse to the ICJ for treaty override:

“The remedies available to the country that is the aggrieved treaty partner also are limited. The bilateral measures a country may pursue including conveying the complaint through diplomatic channels, invoking the mutual agreement procedure or seeking to adjudicate the claim in the ICJ. Each of these measures requires the cooperation of the offending state and therefore is unlikely to succeed.”

Luthi is of the same opinion: Another possible remedy was to submit the dispute to the International Court of Justice; but both countries had to agree to this course of action’. Also, Bricker suggests that adjudication by a world court is currently unavailable, and it will not be a feasible option anytime soon in view of legal, practical and political-psychological obstacles.

Edwardes Ker, in examining the international tax adjudication by the ICJ, notes the reason why not much can be expected of the ICJ in this respect: Accordingly, one state cannot sue another state in the ICJ unless the defendant state agrees to be bound by the jurisdiction of this Court.

Lindencrona and Mattsson also clearly do not see the ICJ as a viable option: “It is also questionable if the first option, ... After all, the judges are no specialists in international taxation.”

In this article, the role of the ICJ in tax dispute adjudication is examined under international law currently in force. Some ideas on increasing the use of the ICJ are also reviewed from a perspective of adjudicating tax cases. The different requirements and characteristics of the jurisdiction of the ICJ are discussed, but particularly, the (in tax literature almost completely unacknowledged) possibilities for compulsory jurisdiction (without consent on an ad hoc basis being necessary) are considered.

B. Potential competence of the ICJ and the requirement of legal disputes

The ICJ is the only international court that may deal with the broadest scope of questions that international law has to offer, and is therefore properly viewed as ‘the senior of all International Courts’, as Higgins notes. It may set up a separate chamber of seven judges to deal with a particular category of cases, such as transit, communications, labor. It has recently done so with respect to environmental cases, which obviously raises the possibility of doing the same with respect to taxation, as was the essence of the Dutch proposal in the 1950s.

That is not to say that other courts or bodies do not have a role to play in the development of international tax law. The ECJ of the EU has become an important source of European tax law, as is by now well known. Even the European Court of Human Rights has decided on taxation. The Dispute Settlement Body of the WTO deserves some particular attention in thelight of the US-EU dispute about the Foreign Sales Corporation (FSC). Its dispute settlement mechanism has been reformed by the ‘Dispute Settlement Understanding’ of the Uruguay Round (1986-1994) and became a ‘quasi-judicial procedure’ legally binding on all WTO members.　Tax disputes that have been submitted to the WTO’s dispute settlement body have often concerned import duties but income tax issues may also be a source of differences of opinion, as is illustrated by the FSC dispute.

Article 36 of the Statute includes within the jurisdiction ‘all matters specially provided for in the Charter of the UN’. This was included in the draft of the Statute in the expectation that the Charter would contain some provision for compulsory jurisdiction. It does not. The possibilities for compulsory jurisdiction are all described in the Statute, not in the Charter. Consequently, this particular head for jurisdiction of the ICJ has become meaningless.

The ICJ may decide on the interpretation of a treaty, any question of international law, the existence of any fact which, if established, would constitute a breach of an international obligation and the nature or extent of the reparation to be made for the breach of an international obligation. This potential jurisdiction ratione materiae clearly includes fiscal issues, such as the interpretation of tax treaties, state responsibility in tax matters, etc. It is appropriate to point out the general trend in this respect, which is the expansion of the range of possible subject matters before the ICJ.

Article 36(2) of the Statute of the ICJ (the Statute) requires that a matter brought before the ICJ concerns a legal dispute. Article.38 para. 1 states that the function of the ICJ is to decide in accordance with international law such disputes as are submitted to it. The Court is not a legal advisor to states, even if some advisory jurisdiction does exist with respect to some organs of the UN (see below).

With respect to the existence of a dispute, it is fair to say that the ICJ has had little patience with states trying to escape the jurisdiction of the Court by arguing that there is in case no dispute. In the words of Shihata: the Court was always far from being rigid or restrictive in ascertaining this requirement.

The ICJ’s definition of a dispute is ‘a disagreement on a point of law or fact, a conflict of legal views or interests between two persons’. In the German Interests in Polish Upper Silesia case, the Court pointed out that ‘a difference of opinion exists as soon as one of the governments concerned points out that the attitude adopted by the other conflicts with its own views’.

It is clear that the level of disagreement necessary to fulfill the ‘dispute’ requirement isnot that the conflict can never be resolved in any other way. This is illustrated by the UN Headquarters case. The US Congress had passed a bill aimed at having the PLO observers office at the UN closed, contrary to the UN admission of the PLO as an observer to the UN. The US suggested that there was definitely a problem, but no ‘dispute’ in the sense of Art. 36(2) of the Statute, since the mission had not yet been ordered closed. The ICJ, in its advisory opinion, found that a dispute did exist.

In the South West Africa cases, the question on the meaning of dispute, and more in particular, how that meaning may limit the jurisdiction of the Court, was given particular attention. An issue was never discussed on a bilateral basis between Ethiopia/Liberia and South Africa, but the Court noted that the views between the parties were notoriously different, so that a dispute was still assumed to exist.

With respect to the requirement of the dispute being ‘legal’, the ICJ has stated that it suffices that any of the matters listed in Art. 36(2) is concerned: the interpretation of a treaty, any question of international law, the existence of any fact which would, if established, constitute a breach of an international obligation. Indeed, there is no dispute that is entirely without some legal dimension. Needless to say, differences on tax matters between states will also have a policy dimension, but have a legal issue as well or even in first instance. Given the predominance of tax treaties as a source of international obligations in matters of taxation, the interpretation of such treaties will often be an issue in the dispute.

With respect to settlement of differences between governments in matters of taxation, the case law above is relevant with respect to the introduction by a state of legislation contrary to tax treaty provisions. If the conflict between tax treaty and domestic law is clear and intentional, it seems to this author that a ‘dispute’ must already be assumed to exist. If, on the other hand, a state issues laws that only incidentally breach the tax treaty obligations, which in itself does not constitute a dispute. That state must be given the opportunity, through diplomatic channels, to be pointed out the ‘error of its ways’ and rectify the possible breach. If, regardless of the reasonable efforts of the other state, the ‘breaching’ state is not responsive, it may be assumed that a ‘dispute’ in the sense of the Statute of the ICJ does indeed exist.

C. Reservation of ‘other means of settlement’, the mutual agreement procedure and arbitration clauses

Most of the states that have accepted the compulsory jurisdiction ipso facto of the ICJ by means of the declaration under Art.36(2) of the Statute, have formulated the reservation that if another means of settlement exists (like an arbitration clause in the treaty), the ICJ has nojurisdiction pursuant to the declaration.

Is the mutual agreement procedure (Art. 25 of the OECD Model Treaty) such an alternative means of settlement, and does it consequently precludes the jurisdiction of the ICJ? In the opinion of this author, such is not the case. The mutual agreement procedure is not a mechanism to solve disputes between the contracting states. The purpose is to give to the taxpayer a possibility (not a certainty) to find a remedy for a taxation that is not in accordance with the Treaty. This is clear from the text of the Article: ‘Where a person considers that the actions of one or both states results or will result for him in taxation not in accordance with the provisions of this convention, he may...’ (author’s italics). A ‘person’ is an individual, a company or another body of persons. It does not include the ‘Contracting States’. The Commentary also leaves little doubt as to who can use this procedure: ‘Par. 1 makes available to taxpayers...’, ‘It should be noted that the mutual agreement procedure can be set in motion by a taxpayer...’.

It cannot be excluded that a taxpayer’s case may show a difference of opinion between two (tax authorities of) states, but Art. 25 of the OECD Model DTC is not equipped to deal with such dispute. It does not establish an arbitration (compulsory or voluntary) that will decide on a difference between the states.

Certain DTCs have arbitration clauses, as a matter of fact more and more of them do. Do they fall within the scope of the reservation for ‘alternative means of dispute settlement’ in declarations made under Art.36 (2) of the Statute? Some arbitration clauses are only in function of the mutual agreement procedure. Such clauses cannot be set in motion without a taxpayer starting the procedure. The following example is shown from the French-German DTC:

(a) In the cases described in Article 25, if the competent authorities are unable to reach a mutual agreement within a period of 24 months from the day of receipt of the application from the taxpayer(s) concerned, they may agree to turn the matter over to an arbitration commission.

(b) On a case-by-case basis, the Commission shall be made up of the following: each Contracting State shall designate a member, and both members shall then designate, by mutual agreement, a representative from a third party State, who shall be named Chairman. All the members must be appointed within three months from the date on which the competent authorities agreed to submit the case to the Arbitration Commission.

(c) If the deadlines mentioned in paragraph (2) are not met, and failing otherarrangements, each Contracting State may ask the General Secretary of the Permanent Arbitration Court to make the necessary appointments.

(d) The Arbitration Commission shall decide in accordance with the rules of international law, and, more specifically, in accordance with the provisions of this Convention. The procedures to be followed shall be determined by the Commission. Taxpayers are entitled to appear before the Commission or to file written pleadings.

(e) Decisions by the Arbitration Commission shall be by majority vote of the members and are binding. Should one of the two members appointed by the Contracting States be absent or should one of these members abstain, this shall not prevent the Commission from ruling. In the event of a tie, the Chairman shall cast the deciding vote.

The US-French DTC applies different phrasing, but a similar approach: If an agreement cannot be reached by the competent authorities pursuant to the previous paragraphs of this Article, the case may, if both competent authorities and the taxpayer agree, be submitted for arbitration, provided that the taxpayer agrees in writing to be bound by the decision of the arbitration board. The competent authorities may release to the arbitration board such information as is necessary for carrying out the arbitration procedure. The decision of the arbitration board shall be binding on the taxpayer and on both States with respect to that case. The procedures, including the composition of the board, shall be established between the Contracting States by notes to be exchanged through diplomatic channels after consultation between the competent authorities. The provisions of this paragraph shall not have effect until the date specified in the exchange of diplomatic notes (author’s italics).

It is clear that the arbitration is limited to disputes involving taxpayers. The arbitration clause clearly is an extension of the mutual agreement procedure. It cannot be set in motion without first having gone through a mutual agreement procedure, which is only functioning for disputes with taxpayers. Again, a state that disputes the conduct of the other state (refusal to exchange information, introduction of new legislation with potential for treaty shopping, treaty override, etc.) cannot find a mechanism to settle the dispute in this arbitration clause. Therefore, in the opinion of this author, such arbitration clauses (that are conditioned by the mutual agreement procedure) are not ‘alternative means of settlement’ as referred to by some reservations under Art.36(2) of the Statute.

Other arbitration clauses can be invoked by the states themselves, so it seems. Even if there is no taxpayer setting the procedure in motion, they still apply. Only this kind of arbitration clauses can be deemed to be an ‘alternative dispute settlement method’, andconsequently may preclude the jurisdiction of the ICJ, provided a reservation to this effect was made in the declaration.

D. Conclusion

1. Preliminary question: do we need an International Tax Court?

A question that should be addressed before answering ‘if we already have an International Tax Court’ is if we need one. The arguments of those who support the need of an International Tax Court are well known and certainly reasonable. The uniformity of interpretation, the obligation to solve problems (such as double taxation pursuant to transfer pricing corrections) rather than the possibility and the element of control on national institutions, would obviously contribute to the development of international tax law. Creating an international adjudication on tax disputes between taxpayers and states, may be the way that offers the most guarantees, as was shown by the European experience, but it also constitutes a far reaching attempt on the(fiscal) sovereignty of states. Problems of interpretation of tax treaties and disputes may just as well develop between states and non-residents as between states and their own nationals. Is it not essential to the functioning of a sovereign state to keep the final word on the application and interpretation of its tax rules within the jurisdiction of its own courts? On the other hand one wonders how successful the development of international tax law will be without some safeguards for the uniformity in the interpretation of international tax rules.

It may therefore be asked if the creation and use of an adjudicating body is the only way to achieve the objectives that the supporters of the creation of an international tax court have in mind. In the opinion of this author, municipal courts will not often decide to interpret tax treaty rules with intentional disregard for international law, as is shown by the brilliant study of Michael Edwardes Ker. ‘Automatic’, voluntary consideration for internationally accepted interpretation of tax treaty rules offers perhaps less guarantees for uniform interpretation, but may be quite effective as information and transparency concerning interpretation of tax treaties by courts around the world, is increased. The words of Merrills seem appropriate:

‘In international affairs, where even “compulsory’’ jurisdiction is voluntary, law frequently stands alone, totally unsupported by institutional arrangements. Is there any value in legal rules without procedures for adjudication? The answer is yes. First because in practice where legal rules exist they are normally followed, and secondly because although international disputes are generally resolved without adjudication, law will frequently play a significant part in defining the points in issue, and providing a framework for negotiation…’

Much of the problems concerning uniform interpretation of tax treaties are a consequenceof the special nature of double taxation conventions. They are in the same time constituting rights and obligations between states, and between states and their taxpayers (when and if implemented). Municipal courts may interpret their (own) tax law as they see fit almost without having to pay any consideration at all to international law.　As soon as a double taxation convention is the source of the tax rule that has to be applied, however, the court must at least in theory take the international public law dimension of the treaty into account, and is no longer free to interpret the rules unilaterally.

It is appropriate to answer the question raised in the title of this article (‘Do we already have an International Tax Court?’) in the perspective of this unique characteristic of double taxation conventions: first between states and secondly between state and taxpayer (which is the context that most of the supporters of an international tax court have in mind).

2. Do we already have an ‘International Tax Court’ between states in the ICJ?

The answer to this question is yes. One of the first main conclusions that can be drawn from this article is that the theoretical possibilities for international adjudication of tax disputes, and what is more, by the ICJ, is far more important than most authors have assumed. As was shown above, most authors do not acknowledge the legal possibility of the compulsory jurisdiction of the ICJ in tax matters. This author has until now only found one reference to it in tax literature, a footnote by Baker. It is, to say the least, remarkable that the ICJ has jurisdiction on a dispute in tax matters between, e.g. Japan and India, the Netherlands and Cyprus, Canada and Switzerland, the UK and Mauritius, etc. without the specific consent of both parties.

Is there a need for the ICJ to become involved in tax disputes between states, or rather, is there potential for tax disputes between states and settlement thereof? Recent years have shown that there is indeed plenty of potential for states to take offence at each other’s tax policies or conduct, not in the least by the globalization of business. Actually, it is not so hard to see that internationalization of business is followed by internationalization of business taxation and that this may entail conflicts for the different (competing, overlapping) treasuries of countries. Increasingly internationally working taxpayers require increasingly internationally sensitive tax legislation.

Tax holidays and investment incentives, for instance, have the potential of provoking tax disputes between states, as was clearly illustrated by the OECD’s ‘Harmful Tax Competition’initiative. International tax avoidance is acting as a catalyst on the potential for tax disputes, as is also illustrated by CFC legislation, anti-avoidance rules with respect to foreign dividends,etc. Tax treaty termination is a clear indicator of tax disputes between states, often (but not always) for reasons of tax avoidance. Transfer pricing by taxpayers and the governments’attempts to retain taxing power on a maximum amount of profit have the potential of creating conflicts between states, as is acknowledged by the Arbitration Convention. Supranational economic and financial cooperation (such as creating the EURO) will have a hard time in succeeding if tax policies are not compatible, as the former prime minister of Belgium Eyskens argued in a recent article. The failure of the EU to introduce the qualified majority vote for taxation until now, however, goes to show that states have a hard time in accepting the political consequences of that. This clearly creates a friction between economic necessity and fiscal sovereignty. The FSC dispute before the WTO dispute settlement body between the EU and the US is another example of international tax disputes between states. The practice of the ECJ illustrates better than any other example the potential for tax disputes between states.

The potential for conflicts is certainly there, and increasingly so. But also the legal dimension, to make a conflict into a legal proceeding, is more and more to be found. Double taxation conventions have become so widespread that for many countries cross-border income that is governed by treaty rules is more the general rule than the exception. Trade agreements and EU treaty are other illustrations of sources of international obligations in tax matters that apply to the relationship between states.

As Michael Edwardes-Ker puts it: ‘... in recent years tax treaty disputes solely between states themselves have not been adjudicated upon at a public international level. However, such international adjudication is likely in the next few years ... where supranational adjudication is now no more than a taxpayer’s dream.’

Meanwhile, arbitration clauses in tax treaties to settle disputes between states do exist but are clearly a minority. Furthermore, one wonders if those clauses will ever be put into practice. As Gray and Kingsbury note:

‘The contrast between the very substantial amount of treaty provisions for arbitration and the very small number of actual arbitral awards suggests that attempts to prescribe how states ought to use arbitration will be in vain. It is more important to consider how states have used arbitration in practice and to decide whether any deductions may be made as regards the future of arbitration.’

In this context it is hard to believe that the ICJ will not play any future role in the adjudication of tax disputes between states. The main objection for this to happen has been that consent of the states concerned is required. Not excluding the possibility of establishingthe jurisdiction of the Court by reference of the parties (which would be in line with the general trend in international law for the moment), it has been demonstrated above that ante hoc the jurisdiction of the ICJ may already have been established, for example, on the basis of the ECSD. A tax dispute between Germany and Liechtenstein, for example, does not seem far-fetched and specific consent of one of those states is not required as long as the other conditions for the jurisdiction of the ICJ are also fulfilled.

Most importantly, the compulsory jurisdiction of the ICJ may be derived from the declarations that were delivered under Art.36 (2) of the Statute. Although not every state has issued the necessary declaration (as a matter of fact, there are many conspicuous absences such as those of the US, France, Germany, China and Italy) the ones that did are sufficiently numerous (62), divers (developing countries, developed countries, tax haven countries, economies in transition, liberal economies) and economically significant (UK, Switzerland, Japan, India, Netherlands, Belgium, Sweden, Australia, Canada) to be relevant.

The restrictions or conditions that are included in the declarations of states accepting the compulsory jurisdiction never exclude taxation as a subject matter. The exclusion of ‘matters of domestic jurisdiction’ that certain countries have included may, if deemed to have any legal effect at all, keep taxation out of the compulsory jurisdiction of the ICJ, but only insofar no tax treaty has a bearing on the case (nor the minimum standard of the treatment of foreigners under customary international law).

The fact still remains that ‘to haul another state before the ICJ is politically an unfriendly act’. However, the UN, by its resolution 3232 of 12 November 1974 reaffirms that recourse to judicial settlement of legal disputes, particularly referral to the ICJ should not be considered as an unfriendly act between states. Also, friendship is one thing, losing tax revenue another, as is illustrated by current conflicts between states in tax matters that were quoted above. Furthermore, it is noteworthy that the UN announced in 1989 the constitution of a Trust Fund to assist states in settling their disputes through the ICJ, in order to compensate for the lack of expertise and money certain states may have.

In that sense and with the restrictions demonstrated, the answer to the question in the title is: yes, we do have an ‘International Tax Court’ in the ICJ with respect to tax disputes between states.

3. Do we already have an ‘International Tax Court’ between State and Taxpayer in the ICJ?

The answer to this question is no. It is not impossible for the ICJ to play a role in a taxdispute that originates in a conflict between a state and a taxpayer, but it is not very likely. The fact that only states can be parties before the Court means in practice that diplomatic protection must be granted, and that the state of the taxpayer’s nationality must be ready to ‘lift up’ the case and make it its own. Above, it was noted that there is no rule in international law that makes such an obligation. It is fair to say that, while diplomatic protection in tax matters cannot be excluded entirely (and we have seen case law of the ICJ where this was exactly what happened), in practice such would only lead to a legal proceeding between states before the ICJ when larger interests are at stake.

The competence of the ICJ to issue advisory opinions seems an attractive concept at first glance. The opinions are in theory not binding and thus pose no real threat to the fiscal sovereignty of a state, and can be ‘bottlenecked’ through the organs of the UN. That ‘bottleneck’however, is currently what renders the advisory opinion in tax matters ineffective. Although in theory, ECOSOC as well as some other bodies may have the possibility to ask advisory opinions on fiscal issues, such has never happened until now. The political and bureaucratic obstacles involved with this process, so it would seem, are at this time too important for the advisory opinion of the ICJ to play any role in the adjudication of tax disputes and the development of international tax law.

From the above it appears that, for the ICJ to play a role in international tax law and disputes, most hopes are attached to some sort of a reform. The idea of Lauterpacht, Schwebel et al. to give the ICJ an influence on national courts by the possibility of an interlocutory question, seems to be the most feasible one to give the ICJ a role of significance in adjudicating tax disputes between states and tax-payers. It is an interesting possibility to entertain, but with little more than academic interest at the time being. Furthermore, to administratively organize preliminary rulings of the ICJ through one of the organs of the UN has the advantage of not having to reform the Statute of the ICJ, but again entails the risk of bureaucratic and political impasse.

For these reasons, it must be assumed that the ICJ will not play a significant role regarding fiscal disputes between taxpayers and states in the short run. It is however important to know that nothing in theory precludes the ICJ from assuming such a role if the institutional reforms discussed above would be carried out. ‘If it is possible’, is therefore not the real issue. The question is, if governments want to relinquish a part of their power to interpret and apply tax rules from international sources as they see fit for internal purposes.

The dual nature of double taxation agreements is reflected in the possibilities for adjudicationon its interpretation and application. Governments have usually little trouble in acknowledging that international rules can be adjudicated by international courts, but double taxation agreements create rules on an international level and on a municipal level. An international adjudication on a dispute between states (for instance on the question if certain technical services may be deemed royalties under the DTC) will immediately also have effect on the taxpayers of both states. States are traditionally reluctant to have the application and interpretation of their tax law (be it derived from an international treaty or not) removed from their sovereignty.

But there is no such thing anymore as complete fiscal sovereignty. The once exclusively domestic domain of taxation has become entangled with international obligations on the state, not just because of double taxation conventions, but also pursuant to trade agreements and organizations, human rights conventions and treaties with respect to mutual assistance in criminal matters. The next ten years may show the observer if the municipal courts of the states will be willing and able to adjudicate tax disputes between states and taxpayers with due consideration for international law (as this author hopes it will), or if the doubtlessly complicated creation of an International Tax Court (advisory or otherwise) is really required for the development of international tax law.

(Written by Edwin van der Bruggen, Tax lawyer, Eurasian Structured Finance, Hong Kong and from the Article “Compulsory Jurisdiction of the International Court of Justice in Tax Cases: Do We Already Have an‘International Tax Court’?)

[The Terms]

1. League of Nations: 国际联盟。

2. PCIJ：Permanent Court of International Justice，常设国际法院。

3. ICJ：International Court of Justice，国际法院。

4. IFA：International Fiscal Association，国际财政协会。

5. ITC：International Tax Court，国际税法法院。

6. International Tax Tribunal: 国际税法法庭。

7. Tax Chamber: 税法法庭（指设在国际法院内的）。

8. Aggrieved treaty partner: 受损害的缔约方。

9. Offending state: 致害国。

10. Adjudication：（法庭的）判决。

11. Tax holiday: 免税期，减税期。

12. CFC: Controlled Foreign Company，受控外国公司（指在避税地区或国家设立的由本国居民直接或间接控制的外国公司）。

13. ECSD: European Convention for the Peaceful Settlement of Disputes, 欧洲和平解决争端公约。

14. ECOSOC: Economic and Social Council, 联合国经济与社会理事会。

15. FSC: Foreign Sales Corporation, 外校公司（美国税法为美国公司接受联邦所得税出口退税而规定的一种方式，主要用于公司的离岸分支机构）。

[The Discussions]

1. The advantages and disadvantages of international tax court.

2. The feasibility of construction of international tax court.

3. The regional tax court.

【The Further Sources】

Reuven S. Avi-Yonah, International Tax as International Law: An Analysis of the International Tax Regime, Cambridge University Press, 2007.

Peter Harris and David Oliver, International Commercial Tax, Cambridge University Press, 2010.

Ernest R. Larkins, International Applications of U.S. Income Tax Law, John Wiley ＆ Sons, Inc, 2004.

John A. Swain，Misalignment of Substantive and Enforcement tax Jurisdiction in a Mobile Economy: Causes and Strategies for Realignment，National Tax Journal, December 2010.

Professor L. Hinnekens, How OECD Proposes to Apply Existing Criteria of Jurisdiction to Tax Profits Arising from Cross-border Electronic Commerce，INTERTAX, Volume 29, Issue 10, Kluwer Law International 2001.

David Fautsch，The Tax Injunction Act and Federal Jurisdiction: Reasoning from the Underlying Goals of Federalism and Comity, Michigan Law Review, Vol. 108:795 March 2010.

David F. BRADFORD, Addressing the Transfer-Pricing Problem in an Origin-Basis X Tax, International Tax and Public Finance, 10, 591—610, Kluwer Academic Publishers, 2003.