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International taxation, tax competition, earnings-stripping, historical development of tax systems, sourcing

Subject Categories

Law | Taxation | Taxation-Transnational | Tax Law


The Article offers a new perspective on the way international income tax has developed from its nascency, 85 years ago, to the present day. Its main claim is that, due to the lack of a clear normative tax agenda, trade considerations unduly eroded the income tax base. Such trade considerations highlight the importance of reducing tax obstacles on trade and investment to liberalize and integrate international markets. These considerations penetrated international income tax discourse during the Cold War period, when liberalizing trade was part of a broader western agenda to establish dominance through the liberalization of international markets. The Article demonstrates that the tax allocation conventions developed in the periods prior to the Cold War—and thereafter—were unable to counter successfully an endemic trend of tax erosion. To establish this claim, the Article frames three novel chronological phases and shows how different themes governed each phase. It then connects each theme and the relevant parallel global geo-political occurrences of that phase. The Article presents an original "macro" perspective of the development of international taxation sourcing conventions. It encapsulates this broad topic by focusing on a number of key issues arising from the conventions regarding the allocation of interest income. Access to foreign capital markets and foreign lenders is paramount to economic growth. Therefore, the tax treatment of interest income has always been a pivotal and controversial issue. The centrality of interest income allocation conventions and their modifications over the years make them a good proxy for understanding the more general evolution of international tax law. Since tax law research is the art of tying big themes with devils hiding in the details, the Article engages in an in-depth critical analysis of a number representative interest allocation mechanisms to demonstrate the dynamics of the income tax erosion it identifies. The Article builds on its historical analysis to open a wider discussion over the proper allocation method for taxing financial income. The mobility and tax sensitivity of capital assets make them the subject of tax planning (by taxpayers) and tax competition (by sovereigns). This renders the analysis important and interesting, but also more multilayered and difficult. The Article concludes with a discussion of the principled normative pillars of any future reform in the allocation of tax revenues arising from financial income. This discussion promotes the notion that, at least in the case of financial transactions within multinational enterprises, there is a need for an immediate strategic shift, if tax authorities wish to maintain the integrity of the corporate income tax.