GLOBAL GOVERNANCE, TAX TREATIES, AND CREDIBLE COMMITMENTS/Gobernanza Global, Tratados Tributarios Y Compromisos Creibles

By Johnson, Austin P. | World Affairs, Spring 2018 | Go to article overview

GLOBAL GOVERNANCE, TAX TREATIES, AND CREDIBLE COMMITMENTS/Gobernanza Global, Tratados Tributarios Y Compromisos Creibles


Johnson, Austin P., World Affairs


In the presence of economic globalization, control of certain areas of public policy by sovereign governments is weakening, resulting in a need to restore policy sovereignty. This issue is due, in large part, to the rise of multinational corporations and large financial institutions, which are blurring national distinctions in commerce (Reinicke 1998). The solution to this dilemma, thus far, has been to increase the breadth of governance. In recent years, governments across the world have been devolving powers into horizontal systems of governance, such as collaborations with nonprofit organizations; and now many of these same governments have also been extending systems of governance vertically to include supranational organizations and other international institutions. In combination, these grand forms of governance, or "global governance," extend across borders and include an assortment of domestic, foreign, and international actors--all of whom are now in a position to influence global policy processes (Cerny 2001; Kettle 2002; Yee 2004). A key policy instrument that arises from these global processes is a treaty, which can not only facilitate a shift in control of policy to a system that reinvigorates policy sovereignty but also share it with treaty partners (Mamudu and Studlar 2009; Stone 2008).

In application, ratified treaties have the capacity to make policy guidelines that arise from global forums into domestic law. Treaties cover a variety of policy domains, such as environmental policy, but scholars of global governance regard research into global commerce as the most mature area of the field (Stone 2008). However, this small literature on global commerce has paid little attention to international tax policy, and I contend that a case study on this topic will advance our working knowledge of global governance and policy. In keeping with this supposition, I emphasize in this article the crucial role that the thousands of double taxation treaties (hereafter "tax treaties") play in implementing global norms on international taxation. These tax treaties are promulgated by international organizations for the purpose of systematically dividing cross-border taxable base, between-countries, to eliminate market distortions from inharmonious domestic tax policies. However, this area of global governance, commonly referred to as the "international tax regime," does not have any conventional outside enforcement (Rixen 2008). Without outside enforcement, signatory countries can ignore treaty provisions with impunity, disrupting proper global governance.

The lack of enforcement powers on the part of the international tax regime is associated with the problem of "anarchy" at the international level (Milner 1991). As a result of this problem, state autonomy opens a window for some countries to behave in a predatory fashion in relation to foreign assets (Eden, Lenway, and Schuler 2005). An indirect form of predatory expropriation involves taxation (Jensen 2003), and tax treaties can resolve this problem under certain contingencies. Naturally, the credibility of tax treaties then becomes vital to foreign investors and policy makers for this very reason. However, a near complete lack of anecdotal evidence suggests that virtually all governments respect these treaties in spite of there being no formalized method for retaliation against predatory countries. In short, the structures that underlie the international tax regime are proving to be surprisingly robust for a system populated by numerous, weak bilateral institutions.

I propose that the robustness of this weak system of governance originates in an assortment of noncompliance and audience costs, which lead to these treaties functioning as credible commitment tools. However, there is mixed empirical evidence in the literature on the relationship between tax treaties and foreign investment. In short, researchers have frequently found null effects when examining foreign investment in fixed assets or large stakes in foreign enterprises. …

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