THE RISE OF THE OECD AS INFORMAL 'WORLD TAX ORGANIZATION

Yale Journal of Law and Technology Volume 8 Issue 1 Yale Journal of Law and Technology Article 5 2006 THE RISE OF THE OECD AS INFORMAL 'WORLD TAX ORGANIZATION' THROUGH NATIONAL RESPONSES TO E-COMMERCE TAX CHALLENGES ARTHUR J. COCKFIELD Follow this and additional works at: https://digitalcommons.law.yale.edu/yjolt Part of the Computer Law Commons, Intellectual Property Law Commons, and the Science and Technology Law Commons Recommended Citation ARTHUR J. COCKFIELD, THE RISE OF THE OECD AS INFORMAL 'WORLD TAX ORGANIZATION' THROUGH NATIONAL RESPONSES TO E-COMMERCE TAX CHALLENGES, 8 Yale J.L. & Tech (2006). Available at: https://digitalcommons.law.yale.edu/yjolt/vol8/iss1/5 This Article is brought to you for free and open access by Yale Law School Legal Scholarship Repository. It has been accepted for inclusion in Yale Journal of Law and Technology by an authorized editor of Yale Law School Legal Scholarship Repository. For more information, please contact . COCKFIELD: THE RISE OF THE OECD AS INFORMAL 'WORLD TAX ORGANIZATION' THE RISE OF THE OECD AS INFORMAL 'WORLD TAX ORGANIZATION' THROUGH NATIONAL RESPONSES TO E-COMMERCE TAX CHALLENGES ARTHUR J. COCKFIELD* ABSTRACT This paper assesses national and internationalresponses 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 case) 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 participatingnations, may be misplaced *Associate Professor, Queen's University Faculty of Law. The research for this paper was supported by a grant from the American Tax Policy Institute. A complete version of this paper was first presented as part of the Symposium on the Contemporary Relevance of Sovereignty as well as a Center for Law, Business and Economic seminar at the University of Texas School of Law on April 15, 2005. Drafts of this paper have also been presented at seminars and conferences at Tsinghua University, the China University of Political Science and Law, the University of Toronto, Queen's University, as well as an American Tax Policy Institute roundtable in Washington, D.C.. The author is grateful for comments he received at these fora. The author would like to thank Walter Hellerstein, Charles McLure, Jr., Daniel Mitchell, Alex Easson, Amin Mawani, Ronald Mann, Stephen Shay, Ben Alarie, Larissa Katz, Ken Anderson, Cherie Metcalfe, Robert Wolfe, David Rutenberg and Yoshiro Masui for comments on earlier drafts. Published by Yale Law School Legal Scholarship Repository, 2006 1 Yale Journal of Law and Technology, Vol. 8 [2006], Iss. 1, Art. 5 THE RISE OF THE OECD AS INFORMAL 'WORLD TAX ORGANIZATION' TABLE OF CONTENTS IN TRO D UC TION .......................................................................................... 138 I. OECD E-COMMERCE REFORM PROCESS AND DEVELOPMENT OF NEW TA X R ULE S ........................................................................................ 140 A . PR O C ESS ............................................................................................ 140 B. M ODEL TREATY CHANGES ............................................................... 142 C. OECD VAT REFORM EFFORTS ....................................................... 148 II. NATIONAL AND EUROPEAN UNION REACTIONS .................................. 149 A. NATIONAL LAWS, ADMINISTRATIVE GUIDANCE, AND JUDICIAL D E CISIO NS ................................................................................... 149 B . E UROPEAN U NION ............................................................................. 160 C. POSSIBLE EXPLANATIONS FOR THE LACK OF REACTION ............... 162 III. LESSONS FROM THE OECD's E-COMMERCE TAX REFORM PROCESS AND O UTC O M E .................................................................................. 166 A. HEIGHTENED INTERNATIONAL COOPERATION THROUGH INFORMAL IN STIT UTIO NS .............................................................................. 166 B. INFORMAL VERSUS FORMAL WORLD TAX ORGANIZATIONS .......... 175 C. THE ROAD AHEAD: THE NEED FOR MORE FORMAL OUTREACH... 183 C O N CLU SIO N .............................................................................................. 186 https://digitalcommons.law.yale.edu/yjolt/vol8/iss1/5 2 COCKFIELD: THE RISE OF THE OECD AS INFORMAL 'WORLD TAX ORGANIZATION' YALE JOURNAL OF LAW & TECHNOLOGY SPRING 2006 INTRODUCTION Beginning with a 1996 U.S. Treasury Department discussion paper, national tax authorities issued reports that queried whether international ecommerce 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.' 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 governments have not yet passed any significant laws or administrative guidance with respect I See OFFICE OF TAX POLICY, U.S. DEPT. OF THE TREASURY, SELECTED TAX POLICY IMPLICATIONS OF GLOBAL ELECTRONIC COMMERCE 7.2.3.1 (1996) [hereinafter Treasury Report] (discussing the difficulties in taxing commercial activity that takes place on the Internet); see also AUSTRALIAN TAX OFFICE, TAX AND THE INTERNET: DISCUSSION REPORT OF THE AUSTRALIAN TAX OFFICE ELECTRONIC COMMERCE PROJECT (Aug. 1997); MINISTER'S ADVISORY COMMITTEE ON ELECTRONIC COMMERCE, ELECTRONIC COMMERCE AND CANADA'S TAX ADMINISTRATION 2.4.3.3. (April 1998); INLAND REVENUE AND HM CUSTOMS AND EXCISE, ELECTRONIC COMMERCE: UK TAXATION POLICY 10 (Oct. 1998). See generally Arthur J. Cockfield, Balancing National Interests in the Taxation of Electronic Commerce Business Profits, 74 TUL. L. REV. 133, 167-212 (1999) (discussing policy challenges described within government reports along with reform options). 2See, e.g., David R. Tillinghast, The Impact of the Internet on the Taxation of International Transactio (...truncated)