Embracing Global Tax Reform in the General Agreement on Trade in Services?

Paragraph (d) Article XIV General Agreement on Trade in Services (GATS).

Paragraph (e) Article XIV GATS.

OECD. (2015), Model Tax Convention on Income and on Capital 2014, OECD Publishing, p I-1.

OECD. (2015), Model Tax Convention on Income and on Capital 2014, OECD Publishing, p I-1.

OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing.

G20 Leader’s Declaration, September 2013, paras 50–52.

OECD, Members of the OECD/G20 Inclusive Framework on BEPS (updated: August 2019), available at: https://​www.​oecd.​org/​tax/​beps/​inclusive-framework-on-beps-composition.​pdf.

OECD, “About Base Erosion and Profit Shifting (BEPS)”. See http://​www.​oecd.​org/​ctp/​beps-about.​htm.

OECD (2015), Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, para 6.

OECD (2015), Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, para 5.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, p. 11. See also OECD (2017), Harmful Tax Practices – 2017 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris; OECD (2019), Harmful Tax Practices – 2018 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.

OECD, Background Brief: Inclusive Framework on BEPS, January 2017, Section 3.2.

For example, Article III:8(b) carves out subsidies to domestic producers from the national treatment obligation. The concept of “border tax adjustment” is relevant in discussing the relation between the GATT and direct taxation, which has been addressed by existing literature. Since the focus of this paper is on the relation between the GATS and direct taxation, border tax adjustment will only be mentioned in passing.

The concept of “subsidies” is narrowly defined under the SCM Agreement compared with the definition generally used by economists. Horizontally applied taxation policy could fall under the SCM Agreement under limited circumstances. For further discussion, see Daly (2005).

Article I:2 GATS.

As noted by a WTO Dispute Settlement panel, a direct income tax measure would generally be covered by the GATS. Otherwise, the Uruguay Round negotiators would not have deemed it necessary to create an explicit exception for such measures under Article XIV(d) of the GATS. See Panel Report, US – FSC, para 8.143; Appellate Body Report, Argentina – Financial Services, para 6.113.

There are a few exceptions, including those singled out by the WTO Members in their lists of MFN exceptions upon entering into the WTO.

See GATT document MTN.GNS/W/178, MTN.GNS/W/210, MTN.GNS/49.

GATT document MTN.GNS/W/210, Note by the Secretariat, ‘The Applicability of the GATS to Tax Measures’, 1 December 1993. See, also, MTN.GNS/49.

GATT document MTN.GNS/W/210, Note by the Secretariat, ‘The Applicability of the GATS to Tax Measures’, 1 December 1993, last paragraph.

The GATS, footnote 6. “Measures that are aimed at ensuring the equitable or effective imposition or collection of direct taxes include measures taken by a Member under its taxation system which: (i) apply to non-resident service suppliers in recognition of the fact that the tax obligation of non-residents is determined with respect to taxable items sourced or located in the Member’s territory; or (ii) apply to non-residents in order to ensure the imposition or collection of taxes in the Member’s territory; or (iii) apply to non-residents or residents in order to prevent the avoidance or evasion of taxes, including compliance measures; or (iv) apply to consumers of services supplied in or from the territory of another Member in order to ensure the imposition or collection of taxes on such consumers derived from sources in the Member’s territory; or (v) distinguish service suppliers subject to tax on worldwide taxable items from other service suppliers, in recognition of the difference in the nature of the tax base between them; or (vi) determine, allocate or apportion income, profit, gain, loss, deduction or credit of resident persons or branches, or between related persons or branches of the same person, in order to safeguard the Member’s tax base. Tax terms or concepts in paragraph (d) of Article XIV and in this footnote are determined according to tax definitions and concepts, or equivalent or similar definitions and concepts, under the domestic law of the Member taking the measure.”

GATT document MTN.GNS/49, p. 2.

See, for example, the summary of “likeness” test in Appellate Body Report, Argentina – Financial Services, Section 6.1.4; the summary of “treatment no less favourable” in Appellate Body Report, Argentina – Financial Services, Section 6.2.4.

OECD (2019), Harmful Tax Practices – 2018 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, p. 14. See also, OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, p. 11. See also OECD (2017), Harmful Tax Practices – 2017 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.

See OECD, above OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, p. 9. See also OECD (2019), Harmful Tax Practices – 2018 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, p. 14. “This ensures that the core income generating activities are undertaken, including with an adequate number of fulltime qualified employees and an adequate amount of operating expenditure, supported by a transparent mechanism to ensure compliance.”

Panel Reports, China – Electronic Payment Services, para. 7.641; China – Publications and Audiovisual Products, para. 7.944; and EC – Bananas III, para. 7.314; Argentina – Financial Services, para. 7.448.

WTO document, MTN.GNS/W/120, Section 1.C.

See database on services schedules at: http://​i-tip.​wto.​org/​services/​default.​aspx.

The company that conduct R&D services by themselves can still be characterized as a service supplier of “R&D services”, even if the company involves in other businesses. In EC – Bananas, the Appellate Body clarified that even if a company is vertically integrated, and even if it performs other functions, to the extent that it is also engaged in providing the services at issue and is therefore affected in that capacity by a particular measure of a Member in its supply of those services, that company is a service supplier within the scope of the GATS. Appellate Body Report, EC – Bananas, para 227.

See, for example, Appellate Body Report, Canada – Renewable Energy and Panel Report, India – Solar Cells.

Nevertheless, countries may comply with Article XVII of the GATS by not granting any tax preferences, or eliminating all the preferential IP regimes.

In Argentina – Financial Services, two measures at issue are of similar nature as the one recommended by the BEPS Package. Measure 1 of the impugned measures applies different gain withholding taxes on interest or remuneration to service suppliers in non-cooperating countries; Measure 4 applies different rules on the allocation of expenditure for transactions between Argentine taxpayers and persons of non-cooperative countries. See Appellate Body Report, Argentina – Financial Services, Sections 5.2, 5.5.

See the services sectors identified in Argentina – Financial services. Panel Report, Argentina – Financial Services, paras 7.97–7.98.

For this reason, the conventional debate and controversy on the process and production method (PPM) in the context of trade in goods may also find its way under the GATS.

See recent updates in OECD, OECD/G20 Inclusive Framework on BEPS, Progress report, July 2018–May 2019.

While Article XIV(d) can justify Article XVII-inconsistent measures if the different 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”, the proviso of “equitable” and the chapeau of Article XIV may operate together to ensure that the anti-abuse domestic legislation is not used as a disguised restriction on trade in services.

OECD, “BEPS – Frequently Asked Questions”, Question 4 “What is the nature of the BEPS outputs? Are they legally binding?” available at: http://​www.​oecd.​org/​ctp/​beps-frequentlyaskedq​uestions.​htm.

Noting, however, not all WTO Members are participating in the BEPS Project. The Inclusive Framework on BEPS has included 125 jurisdictions, while the WTO has 164 Members.

Article II:2 of the GATS: “A Member may maintain a measure inconsistent with paragraph 1 provided that such a measure is listed in, and meets the conditions of, the Annex on Article II Exemptions”.

Such approach was used by WTO Members during the extended Uruguay Round negotiations on basic telecommunications with regard to the use of differential accounting rates for the termination of international traffic. See Adlung and Carzaniga (2009), p. 389.