Date: 18 December 2018    Author: Łukasz P. Stankiewicz

Recent Trends in International Taxation: A Strategic Evaluation

Sovereignty, statehood and taxing power are strategically inseparable since Antiquity. Taxes are the only sensible and relatively liberal way to finance public services that cannot be sold at a price, such as the army or the police.

Buenos Aires, Argentina, November 30, 2018. The Heads of State and Government of the G20 countries pose for the family photography of the G20 Summit, Buenos Aires, Argentina. © Ballesteros (PAP/EPA)

They also permit the financing of otherwise marketable public services, such as education or healthcare, allowing for universal access to them. Historically, the alternative to taxes was pillage, outright State ownership of the economy or the absence of meaningful, universally accessible, public services, inducing economic inefficiencies and/or significant social inequalities.

The actual structure of a national tax system reflects the structures of the economy and the society. During the second part of the 20th century, the developed western economies witnessed a general rise in the levels of mandatory levies[1] in proportion to the GDP while the levies on income became the dominant source of public revenue. On aggregate, this allowed for the development of the welfare state and, through progressive income taxation, had the effect of shifting the financial burden relatively more on the well-to-do. As a reminder, in the seventies and eighties it was still common for corporate income to be taxed at 50%.

This picture has dramatically changed since then, especially as of the 1990s, due to economic globalization and a number of tax and regulatory reforms inspired by neoliberal economic doctrines. In particular, the US Reagan tax reform of 1986 sent shockwaves which set a global trend.

Globalization and the erosion of sovereign taxing power

Globalization in particular, which abolished obstacles to free trade, has placed post-WW2 western patterns of taxation under pressure. On one hand, technology removed several physical obstacles to trade. Two possible examples illustrate this phenomenon. The first example is the spectacular decrease in transportation costs that allowed truly global supply chains within multinational enterprises (MNEs). The second is the rapid progress of communication technologies and digitalization which allow for the realization of significant sales in a jurisdiction where a business has no physical presence. On the other hand, many of the legal obstacles to trade have been removed or alleviated. The WTO framework led to a global decrease or outright removal of customs duties. The successful dissemination of bilateral double tax treaties permitted to attenuate double taxation of income but also created opportunities to achieve a zero-tax result. Within the European Union (EU), the achievement of the single market as of 1993 created a zone of free movement not only of goods but also of persons, capital and services.

The new business mobility exacerbated the phenomenon of tax competition between jurisdictions, whether it be sovereign states or tax autonomous territories. Jurisdictions engaged in a race-towards-the-bottom in order to attract genuine business activity or merely the MNEs’ taxable bases without any meaningful shift in the location of underlying activities. As a tangible result of this trend, it is worth mentioning that the OECD average corporate tax rate dropped from 32.5% in 2000 to 23.9% in 2018[2].

In addition, jurisdictions unwilling to play the beggar-thy-neighbour game were frequently hindered from taking defensive measures because of legal constraints resulting from the double tax treaty non-discrimination clauses and, for the EU member states, the EU treaty free movement provisions. At the same time, since tax is a major cost item, businesses not exploiting planning opportunities were placing themselves at a competitive disadvantage even if only a single competitor decided to go in that direction.

Globalization and tax competition have particularly affected taxes with mobile bases such as the corporate income tax, while shifting the tax burden to less mobile bases: taxes on wages or consumption taxes such as VAT or excise duties, characterized by their regressive effects on income distribution[3]. During this time, Central European economies were transitioning after the collapse of communism and had to rebuild their tax systems. They also, however, urgently required foreign direct investment. Given this situation, it is unsurprising that they heavily relied on consumption taxes.

The economic recession of 2008, and the explosion of fiscal deficits that followed, forced all states to find new sources of revenue. Many countries responded with unpopular hikes in personal income taxation and indirect taxes, while trying to preserve their competitive position on the corporate tax plane. A seminal change came, however, when the press reported on a variety of scandals (HSBC files, LuxLeaks, Panama Papers…), involving income tax avoidance or evasion by big corporations or high-worth individuals. For the first time, perhaps, technical income tax issues started to make media headlines and became a priority for the world’s top leaders. This paper focuses on those issues as they have the potential to shape the playing field of international taxation in the first part of the 21th century.

In a transversal perspective, the questions raised in current international tax discussions can be analysed tentatively through the triple lenses of tax evasion, tax avoidance and broader jurisdictional questions. Tax evasion or tax fraud, which corresponds to violations of existing rules, is a major theme in international efforts towards greater transparency through exchange of information between administrations as well as in the field of VAT. Tax avoidance, which broadly corresponds to an abusive circumvention of existing rules by means of apparently regular transactions, is of particular focus in the field of corporate income taxation where tracing the limits between legitimate tax planning and illegitimate tax avoidance has arisen as a political question. Finally, broader jurisdictional issues are at stake when the appropriateness of existing rules assigning the right to tax between jurisdictions is discussed, in the absence of any fraud or abuse. The digitalization of the economy has now triggered such debate, particularly with respect to corporate income taxation but also, to a more limited extent, to VAT.

One of the common threads between the three is that they all focus on cross-border issues, i.e. on what is technically referred to as international taxation. If tax evasion or tax avoidance have always existed in a purely domestic context, they have been exacerbated by globalization and the opportunities offered by cross-border transactions. An easy illustration of what is now perceived as a political problem that stirs anger in voters is the fact that MNEs pay a lesser effective corporate tax rate than purely domestic, generally small, businesses. It is clear that going global offers tax opportunities not available to taxpayers operating in a purely domestic context.

One of the great challenges facing countries is finding a balance between their abilities to retain sovereignty over taxation and the need for international cooperation in the field of international taxation. Notwithstanding the importance of double tax treaties and EU law, what we call international tax law is still based mostly on domestic rules of each jurisdiction governing cross-border transactions. In the end, it is the sovereign decision of each jurisdiction to tax or not to tax a particular transaction or to establish a non-transparent financial center that creates opportunities for evasion, avoidance or aggressive planning. In such settings, state sovereignty can be played against the states, not infrequently with the sovereign complicity of some of their peers.

For states serious about defending their tax revenue, the responses can be unilateral and/or collective. While the opportunity of a unilateral response depends on the political and economic power of a state as well as on legal constraints (tax treaties, EU law, WTO agreements etc.), a collective response presents the advantage both for the governments and taxpayers in terms of greater international acceptability of the measures and of their internal coherence. The two approaches are not mutually exclusive. In particular, a timely unilateral pressure from a big player can facilitate the collective action. For example, the unilateral US FATCA (Foreign Account Tax Compliance Act) statute paved the way for the development of an international framework for automatic exchanges of financial information. However, although quite unexpected, it was rather the collective action which characterized the last decade in international taxation. We are perhaps witnessing the emergence of a truly global model of tax governance.

A new international tax governance

In the first place, this new emerging framework relies on the G20 summits which endorse by consensus the key decisions. Even if they are not legally binding, they create a momentum, difficult to reverse. The G20 came into existence in the midst of the financial crises by enlarging the then G8 formula, which was „too western” (even with Russia) and ignored the „emerging” economies, such as China, India or Brazil. It is disappointing that Central Europe is not directly represented in this body embodying global economic governance.

Secondly, because the G20 is purely a political and informal structure, it relies on the expertise of the Organisation for Economic Co-operation and Development (OECD) to carry out the technical work in tax matters. While regrouping the most developed countries in the world, the OECD, and not the United Nations, emerged as a global forum for tax debate and decision-making, akin to some sort of a proto world tax organization. In order to strengthen its impact, the two most important tax initiatives of the OECD, the BEPS project and the Global Forum for Tax Transparency are managed in a global format where all willing jurisdictions are invited to participate. In this way, the Inclusive Framework for BEPS regroups 124 jurisdictions, this number being 154 in the Global Forum[4]. While the commitments taken by jurisdictions are mostly in the nature of soft law, they seem, to date, surprisingly effective. It is partly thanks to innovative soft compliance techniques, such as the peer review and the „blame and shame approach” of black or grey lists of uncooperative jurisdictions.

Thirdly, we could cite the EU, which is partly, but to a lesser extent, a player in the international tax game and a forum where member states discuss and decide tax issues. Given that the EU can take legally binding measures such as directives and even if the decision-taking in tax matters is conditioned on member states’ unanimity, it has proven particularly precious as a channel for the implementation of several OECD/G20 agreed upon measures simultaneously in all EU member states[5].

Thus, a new tax diplomacy[6] has indubitably came into existence, which should be neither ignored nor underestimated by countries[7]. The point is that we are currently standing at a turning point where longstanding tax principles are being redefined, sometimes for the first time since the 1930s. Once the window for change closes, the ideas which will be endorsed now will probably stay for decades to come.

The most spectacular and controversial tension points lie, in the author’s view, in the field of transparency and in that of corporate income taxation. Some important VAT issues could also be addressed but they will be left aside given the short format of this paper.

Challenges of Tax Transparency

One of the most spectacular achievements of the last decade is the revolution in the scope and intensity of administrative cooperation. The enforceability of a tax system relies on administrative capacity to access information in order to establish legally relevant facts. The information exchange is therefore, first and foremost, a tool aimed at fighting tax evasion where the realization of a tax event is deliberately hidden from the eyes of the administration. It permits the abatement of information bias which results from the fact that taxpayers operate globally while the range of action of a national administration is necessarily territorial.

The idea is not new and since the 1920s bilateral tax treaties have provided a legal framework for the exchange of information. It was, however, limited in scope. Firstly, it was necessarily bilateral and bound to the issue of avoidance of double taxation. Since high-tax countries were not entering into double tax treaties with low-tax jurisdictions, there was no exchange of information between those countries either. Secondly, the requested jurisdiction could refuse to transmit information on the ground of domestic bank secrecy. Thirdly, it was generally limited to the exchange of information on request (EIOR) only. Under an EIOR framework, the requested jurisdiction is not bound to provide information unless a sufficiently precise question is raised by the requesting jurisdiction. The number of handled requests is, therefore, limited by the resources of the administrations and there must already exist a documented suspicion of the tax law violation[8]. The post-2008 events brought decisive changes to all of these three facets.

In 2010, a forgotten and up to then unsuccessful 1988 Council of Europe Convention on Mutual Administrative Assistance in Tax Matters (CMAATM) had been amended and opened to be signed by all states. Today, the number of jurisdictions participating in the convention stands at 126. Since then, the participation in the convention became a condition of state respectability as evidenced by the communiqué of the G20 summit in Buenos Aires in 2018 which states that all jurisdictions should sign and ratify the CMAATM. Importantly, the 2010 amending protocol forbids the parties to the CMAATM from invoking bank secrecy in order to turn down a request for information. As a result, there now exists a comprehensive worldwide multilateral framework for information exchanges on request which includes low-tax jurisdictions, such as Bermuda or the Cayman Islands, independent from double taxation treaties and unhindered by bank secrecy. Within the European Union, the Directive 2011/16/UE issued on February 15, 2011 pushed the cooperation even further and sounded the death knell for tax-effective bank secrecy in Luxemburg, Belgium and Austria.

In addition, as of 2013, the OECD/G20, emboldened by unilateral action from the US, endorsed a revolutionary concept of a worldwide multilateral standard for the automatic exchange of financial account information. Under an automatic exchange scheme, an administration receives each year, without any prior request, a number of predefined data related to financial accounts (in particular, bank or savings accounts), held abroad by its resident taxpayers. It is again the OECD that assumed the leading role by establishing the Common Reporting Standard (CRS), enforced under the legal umbrella of the CMAATM, as well as the technical infrastructure for actual data transfers. Currently, 104 jurisdictions committed to exchanging information with each other under the CRS. The effective exchanges commenced in 2017, for the first group of jurisdictions, and 2018, for the remaining part. In France, the simple announcement of the imminent entry of Switzerland in the automatic exchange scheme resulted in an unparalleled action of spontaneous regularization by taxpayers holding undisclosed bank accounts (51,000 between 2014 and 2017)[9].

The headquarters of the World Trade Organization in Geneva. © WTO

The enforcement of the reinforced transparency standard led to the emergence of a new model of multilateral governance based on mutual surveillance and a name-and-shame approach, which have, up to now, proven unexpectedly successful. For that reason, the Global Forum on Transparency and Exchange of Information for Tax Purposes, in which all committed jurisdictions participate on an equal basis, was set up alongside the OECD. The Global Forum conducts peer-reviews that are released to the public[10].

As a result of these worldwide transparency efforts, tax administrations will be exchanging a large amount of data. While it might raise privacy issues, if properly employed it can provide for an open space for virtuous use outside of tax law enforcement. In particular, under the CMAATM, if some conditions are met, tax information received from a foreign administration may be used domestically, for example, in the fight against corruption.

The tax transparency process was enabled by a rare unanimity of leading states, which had a shared interest in enforcing their own tax systems in the wake of the 2008 recession. The US push against Switzerland and the enactment of the FATCA had proven decisive in this respect setting new dynamics in motion. Such shared common interest was not necessarily present with respect to the revamping of corporation tax rules and yet we are witnessing a major reform in that field as well.

Challenges of corporate income taxation

In 2012, encouraged by the progress in the field of tax transparency, the G20 invited the OECD to study the topic of „base erosion and profit shifting” (BEPS) affecting the nations’ corporate income taxes and in 2013 gave it a mandate to submit a coherent action plan. This was the beginning of the „BEPS project” which through its 15 actions and 2000 pages of 13 final reports issued in 2015 profoundly impacted the international tax landscape.

The implicit objective of the BEPS project was to save corporate income taxation, heavily eroded by tax competition between jurisdictions and the associated corporate tax planning. Corporate income taxation may be viewed as an important part of a viable tax system in that it constitutes an essential tool permitting effective taxation of shareholders’ return on capital. To put it bluntly, corporate taxation, especially when applied to MNEs, as opposed to purely local SMEs, is ultimately a tax on the rich. Foregoing it means that nations are left to rely on wage taxation or on regressive consumption taxes to finance public services. The French 2018 “yellow vest” tax revolt illustrates, to some extent, the risk of such policy.

The stated objective of the BEPS project was to align taxation with “value creation” to set aside situations where a significant part of a MNE’s consolidated income is reported in a low-tax jurisdiction, where it has no significant economic presence and where no meaningful value has been created. It was, therefore, meant to deal with „abusive” situations and not to shake the underlying rules for division of taxing power between the state of „residence” and the state where income is “sourced”, which is the cornerstone of the international taxing scheme since the 1930s.

It must be understood that an income tax is different from a consumption tax which is to be paid in the consumer’s state, in other words where the market (demand) is. An income tax is meant to be levied on the ability-to-pay of a person, shifting attention to the supply side of the economic chain. The original assumption is that the state of residence of a person, i.e. a state to which it owes economic allegiance and with which it has logically the stronger nexus, is the best placed to assess that ability and should, therefore, tax the taxpayer’s worldwide income. In contrast, the „source” state can tax a non-resident taxpayer only if it has some meaningful physical connection to that state and not merely because its clients are in that state; this requisite nexus being labelled as “permanent establishment” in tax parlance. To give a simple example, a corporation residing in Poland is not liable to the German corporation tax on profits derived from the sale of an industrial equipment to a German client, if it merely ships it from Poland without having a permanent establishment in Germany.

When dealing with MNEs, organized as a network of distinct legal persons (group), the same rules apply but under the subsequent assumptions:

– each entity in a group is respected for tax purposes, which means that other group members, including the ultimate parent company are, as a rule, not taxed on another entity’s income,

– transactions between related entities are also respected for tax purposes, but must follow the transfer pricing rules, i.e. must be carried out at arm’s length; in other terms, related entities must deal with each other as if they were independent (which they are not economically, since they are controlled by the same interest).

In the long run, while assuring sufficient legal security, the system turned out to encourage aggressive tax planning. Through an appropriate set up of intragroup transactions, instead of being taxed in the state of the „market” (source) or the state of the „mind” (residence) a group’s income may end up being taxed in a low-tax jurisdiction subsidiary at a rate close to zero. What became a classic „stateless income” tax planning would consist of extending sales to clients in high-tax market jurisdictions while avoiding the permanent establishment threshold there, from a single subsidiary resident, say, in Ireland or Luxemburg and then strip its base by means of deductible payments of interest and/or royalties to the benefit of a low-tax jurisdiction subsidiary (e.g. in Bermuda), which would conveniently hold the income-generating debt-claim and/or the intellectual property right[11]. An alternative variant of the scheme would consist of doing business in the „market” jurisdiction through a locally resident subsidiary while burdening it with high base eroding expenses. In both cases, the scheme would be successful provided no anti-abuse rule would apply in the state of the ultimate parent (where allegedly the „mind” of the group is) to currently tax the undistributed income of the low-tax jurisdiction subsidiary.

Such planning strategies lead to a full divorce between recognition of income for tax purposes and what might be considered as creation of value. It is this divorce that the BEPS project was meant to cure. To that effect, three particular aspects of the BEPS project outcome stand out.

Firstly, identification of the said divorce will be easier through a new „country-by-country” reporting (CbCR) obligation put on big MNEs. All interested tax administrations will now have access to the aggregate tax and financial data of a MNE, featuring both the consolidated figures and their breakdown per jurisdiction. For example, an administration might now easily spot that a MNE reports 20% of its consolidated income in a zero-tax jurisdiction where it has neither employees nor tangible assets, which might constitute an indicator of abuse.

Secondly, the OECD transfer pricing guidelines were amended so as to limit the possibility to contractually assign risks, and associated high returns, to an entity unable to control it for lack of sufficient substance in terms of e.g. human staff or equipment (which will be generally the case for a low-tax jurisdiction cash-box entity).

Thirdly, anti-abuse rules in tax treaties were revamped through a multilateral convention amending existing tax treaties (commonly referred to as MLI), signed on June 7, 2017, which should, to a larger extent, prevent the routing of a base eroding payment from a high-tax entity to a low-tax subsidiary within a group. As a rule, it is impossible to make a direct payment, e.g. of a royalty, to a low-tax jurisdiction without attracting a high withholding tax in the high-tax source jurisdiction, given the absence of a tax treaty between the two states. Against this backdrop, a common tax planning strategy is to route the payment through another subsidiary (conduit) set in a high-tax transit country whose domestic law provides for no withholding tax on outbound payments of interest or royalties independently of their destination (the Netherlands were frequently used for that purpose). To achieve this goal, it is, however, necessary that the transit jurisdiction have a double tax treaty with the high-tax source state so as to set aside the withholding tax there. Now, if the conduit company was artificially introduced in the transaction, it can be reasonably assumed that this tax treaty was abused. With the MLI, this pattern, commonly referred to as treaty shopping, shall be more easily tackled by tax administrations. Poland has manifested great interest in the MLI since it was among the first five jurisdictions to have completed the ratification process[12].

Again, the stated objective of the BEPS project was to tackle tax avoidance and not to change the fundamental distributional rules of international taxation, especially those concerning the balance of taxing rights between the state of source and the (real) state of residence, once the tax incidence of recourse to artificial subsidiaries in low-tax jurisdictions has been eliminated. Its overall effect was, nevertheless, to favour source jurisdictions, the first victims in the process. Doing that, it contributed to relaunch a vigorous debate as to the appropriateness of the current jurisdictional rules, which the BEPS project was precisely not meant to impact.

It is fair to say that, focusing on tax avoidance, the BEPS project advocated for the single tax principle: the income should be taxed once, not less, no more. However, inevitably, several questions popped up: taxed once, but where? Where value is created, but what is really meant by „value creation”? This is where the BEPS project laid ground for a brand-new struggle. Its main battlefield is in the tax consequences of the digitalization of the economy[13].

It is now well understood that the digitalization of the economy has enabled business models allowing for a concentration of functions in a limited number of highly mobile entities while permitting them to derive important income from markets without establishing any physical presence there. Such models were technologically impossible a few decades ago when international tax rules where established. In addition, digital business sectors have a tendency of rapidly turning into a monopoly or oligopoly. The ultimate tax risk is, therefore, to have only one meaningful global player per sector, taxable exclusively in its state of residence, which at the same time manages to supress all local competition on the market. In such a world, one jurisdiction will reap all the tax revenue and the others will be left with nothing.

If one were to transpose this logic to the well-known Google example, the question would be whether the essential part of Google’s European income should be taxed in Bermuda (which would be difficult to sustain in the light of the BEPS and the 2017 US Tax Reform), in Ireland (jurisdiction of the operating subsidiary which enters into contracts with clients worldwide), in the United States (ultimate parent company), in France, Germany or Poland (where the market is but no permanent establishment under current rules) or perhaps, to some extent, in all of them (except Bermuda?)[14].

This example, therefore, explains the current hot debates surrounding the possible introduction of „significant digital presence” as a new permanent establishment criterion or of some alternative means of taxation, such as the proposed EU Directive on a Digital Services Tax as well as surrounding the theories which consider that data provided by users from market jurisdictions is essential to the value creation of digital businesses. It also sheds light on the tensions around the discussions of the all-important proposal of the Directive for the Common Consolidated Corporate Tax Base (CCCTB) at the European level.

In the field of taxation, we are definitely living in interesting times and it is important that states do not miss the opportunity to influence the ongoing debates which might shape the outlook of international taxation in the 21th century.


[1] Mandatory levies refer to taxes and social security contributions.

[2] OECD, Tax Policy Reforms, 2018.

[3] R. Avi–Yonah, Globalization, Tax Competition, and the Fiscal Crises of the Welfare State, „Harvard Law Review” 113, May 2000, p. 1573.

[4] Global Forum on Transparency and Exchange of Information for Tax Purposes,, (accessed: December 17, 2018).

[5] See in particular the Directive 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.

[6] I. Grinberg, The New International Tax Diplomacy, „Georgetown Law Journal”, 104, 2016, p. 1137.

[7] As an illustration, a recent French parliamentary report on business tax avoidance (Assemblée Nationale, Report no. 1236, September 12, 2018) urged that France use all possible means to influence the discussions and the decision-making in the different International and European tax fora.

[8] The OECD peer review reports show that over a three-year period (2013–2016) France made 8 117 EOI requests and received 2 381. Over a comparable period (2011–2013) Poland received 1 445 requests.

[9] Cour des comptes [Court of Auditors], les régularisations d’avoirs à l’étranger gérées par le service de traitement des déclarations rectificatives (STDR) Report, October 2017, available at:, (accessed: December 17, 2018).

[10] Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer Reviews,, (accessed: December 17, 2018).

[11] E. Kleinbard, Stateless income, „Florida Tax Review” 11, 2011, p. 699.

[12] Signatories And Parties To The Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion And Profit Shifting,, (accessed: December 17, 2018).

[13] See in particular J. Hey, Taxation Where Value is Created and the OECD/G20 Base Erosion and Profit Shifting Initiative, „Bulletin for International Taxation” 72, 4/5 2018; W. Schön, Ten Questions about Why and How to Tax the Digitalized Economy, „Bulletin for International Taxation” 72, 4/5 2018.

[14] E. Kleinbard, op. cit., pp. 701-715.

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