The Rise of the OECD as Informal 'World Tax Organization' through National Responses to E-Commerce Tax Challenges

By Cockfield, Arthur J. | Yale Journal of Law & Technology, Spring-Fall 2005 | Go to article overview

The Rise of the OECD as Informal 'World Tax Organization' through National Responses to E-Commerce Tax Challenges


Cockfield, Arthur J., Yale Journal of Law & Technology


ABSTRACT

This paper assesses national and international responses to tax challenges presented by cross-border electronic commerce. Ten years after these challenges were first identified, a survey of national government reactions shows that many countries have not passed any significant tax legislation or administrative guidance with respect to the taxation of global e-commerce. This lack of action at the national level can be explained in large part by the leadership role taken by the Organization for Economic Cooperation and Development (OECD) in developing the guiding principles and, subsequently, the tax rules to confront the e-commerce tax challenges. The OECD's general success with e-commerce tax reform demonstrates the OECD's ability to act as a kind of informal (lower ease) world tax organization, which emphasizes deliberation, consensus-building and the use of non-binding mechanisms such as the OECD model tax treaty. Moreover, the OECD's success suggests that calls for a more formal (upper-case) World Tax Organization, which could impose binding tax rules on participating nations, may be misplaced.

TABLE OF CONTENTS

INTRODUCTION

I. OECD E-COMMERCE REFORM PROCESS AND DEVELOPMENT OF NEW
     TAX RULES
  A. PROCESS
  B. MODEL TREATY CHANGES
  C. OECD VAT REFORM EFFORTS

II. NATIONAL AND EUROPEAN UNION REACTIONS

  A. NATIONAL LAWS, ADMINISTRATIVE GUIDANCE, AND JUDICIAL
  DECISIONS
  B. EUROPEAN UNION
  C. POSSIBLE EXPLANATIONS FOR THE LACK OF REACTION

III. LESSONS FROM THE OECD's E-COMMERCE TAX REFORM PROCESS
    AND OUTCOME
  A. HEIGHTENED INTERNATIONAL COOPERATION THROUGH INFORMAL
    INSTITUTIONS
  B. INFORMAL VERSUS FORMAL WORLD TAX ORGANIZATIONS
  C. THE ROAD AHEAD: THE NEED FOR MORE FORMAL OUTREACH

CONCLUSION

INTRODUCTION

Beginning with a 1996 U.S. Treasury Department discussion paper, national tax authorities issued reports that queried whether international e-commerce developments would lead to revenue losses or other adverse outcomes such as an increased use of tax havens for tax evasion or tax avoidance purposes. (1) Tax observers similarly scrutinized whether traditional tax laws and principles would need to be reformed to take into account the new commercial environment. (2) All of the sound and fury, however, has led to very little action at the national level. (3)

This paper surveys steps taken by governments to address these challenges and shows that, as of December 2005, many govemments have not yet passed any significant laws or administrative guidance with respect to the taxation of international e-commerce. (4) The lack of action at the national level was influenced by the lead role undertaken by the Organization for Economic Co-operation and Development (OECD) in establishing the guiding principles and tax rules to govern the tax treatment of international e-commerce transactions. By acting for the first time as a kind of informal (lower case) world tax organization through the promotion of unprecedented international tax cooperation, the OECD effectively addressed international tax policy concerns. (5) The OECD's success also offers support for the view within the international tax literature that prefers multilateral tax cooperation and coordination over more formal processes such as the use of binding international agreements to harmonize tax bases and/or rates.

Part I discusses the e-commerce reform efforts undertaken by the OECD that resulted in changes or proposed changes to the OECD model tax treaty, including steps to amend provisions concerning: (a) the characterization of income; (b) permanent establishments; (c) corporate residence; (d) 'group' permanent establishments; and (e) cross-border service income. Moreover, the Part discusses unprecedented efforts by the OECD to promote consensus among the international tax community for Value-Added Tax reform efforts. Part II surveys national legislative, administrative and judicial action taken to confront international ecommerce tax challenges and reveals that governments have for the most part approached reform efforts with caution, often issuing pronouncements that refer back to the OECD reform efforts. …

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