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doi: 10.1093/jiel/jgy033
Advance Access Publication Date: 31 July 2018
Article
I N TRO D UC T IO N
This article considers the intersection of income tax measures and the nondiscrimi-
nation rules contained in the General Agreement on Tariffs and Trade (GATT). For
many years, tax and trade have been regarded as distinct fields of study.1 However,
this view disregards the multilateral trading system’s aim to regulate nontariff barriers
to international trade. These may well comprise cases of income tax discrimination.
These considerations are particularly relevant in light of the fact that the fight against
tax evasion gained increased impetus through the Base Erosion and Profit Shifting
(BEPS) Project of the Organization for Economic Co-operation and Development
(OECD). States may adopt a multitude of measures under their income tax legisla-
tion or double taxation agreements to avoid profit shifting by multinational
* PhD Candidate, Graduate Institute of International and Development Studies. E-mail: vincent.beyer@
graduateinstitute.ch. The author would like to thank Joost Pauwelyn and Jan Bohanes for their valuable
comments as well as the anonymous reviewers of the Journal of International Economic Law. All errors and
omissions remain the sole responsibility of the author.
1 Arthur J. Cockfield and Brian J. Arnold, ‘What Can Trade Teach Tax? Examining Reform Options for Art
24 (Non-Discrimination) of the OECD Model’, 2(2) World Tax Journal 139 (2010), at 145; H. David
Rosenbloom, ‘What’s Trade Got To Do With It?’ 49 Tax Law Review 593 (1994).
C The Author(s) 2018. Published by Oxford University Press. All rights reserved.
V
547
548 Income Tax and Nondiscrimination in the GATT
enterprises. The outputs of the BEPS Project of the OECD as well as the resulting
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
BEPS in some way sought to widen the arsenal of States in their battle against tax
avoidance.2 While a detailed review of the BEPS package or the Multilateral
Convention exceeds the scope of this article, it appears that intersections between in-
come tax measures and GATT nondiscrimination obligations exist. Ultimately, a
proper understanding of the GATT nondiscrimination obligations with respect to in-
2 See generally the website of the OECD which provides an overview of the 15 measures that were adopted
within the framework of the BEPS Project, http://www.oecd.org/tax/beps/beps-actions.htm (visited 29
May 2018).
3 See generally the Reports in Argentina – Measures Relating to Trade in Goods and Services (Argentina –
Financial Services), WT/DS453, adopted 9 May 2016; the Reports in Colombia – Indicative Prices and
Restrictions on Ports of Entry (Ports of Entry), WT/DS366, adopted 20 May 2009; and Colombia – Measures
Relating to the Importation of Textiles, Apparel and Footwear, WT/DS461, adopted 22 June 2016.
4 See under the GATT, for example, GATT Panel Report, United States – Income tax legislation (DISC)
(1976) GATT BISD 23S/98, adopted 7 December 1981, paras 73f; see also the three related reports
GATT Panel Report, Income Tax Practices Maintained by France (1976) GATT BISD 23S/114, adopted 7
December 1981, GATT Panel Report, Income Tax Practices Maintained by Belgium (1976) GATT BISD
23S/127, adopted 7 December 1981, and GATT Panel Report, Income Tax Practices Maintained by the
Netherlands (1976) GATT BISD 23S/137, adopted 7 December 1981. Since the entry into force of the
SCM Agreement, a number of (alleged) income tax subsidies have been assessed under said agreement
whose Article 1.1(a)(1)(ii) explicitly refers to fiscal measures as well as Annex I item (e) which makes
mention of direct taxes in the context of export subsidies.
5 See, for example, Asif H. Qureshi, ‘Trade-Related Aspect of International Taxation: A New WTO Code of
Conduct?’, 30(2) Journal of World Trade 161 (1996), at 167; Michael Petritz, ‘National Report Austria’,
in Michael Lang, Judith Herdin and Ines Hofbauer (eds), WTO and Direct Taxation (The Hague: Kluwer
Law International, 2005) 143; Gary Clyde Hufbauer, ‘Tax Discipline in the WTO’, 44(4) Journal of World
Trade 763 (2010), at 769; Asif H. Qureshi, ‘Coherence in the Public International Law of Taxation:
Developments in International Taxation and Trade and Investment Related Taxation’, 10 Asian Journal of
WTO & International Health Law & Policy 193 (2015), at 202f; For a more detailed and nuanced picture
consult Jennifer E. Farrell, The Interface of International Trade Law and Taxation (Amsterdam: IBFD
2013); and Turki Althunayan, Dealing with the Fragmented International Legal Environment: WTO,
International Tax and Internal Tax Regulations (Heidelberg: Springer 2010).
Income Tax and Nondiscrimination in the GATT 549
I . T HE A P P L IC A B IL I TY O F TH E G A TT T O I N CO ME TA X M E A SU RE S
This first section briefly introduces the distinction between direct and indirect taxes
and its continuing relevance in the context of the WTO. This background might
serve to somewhat explain the origins of the belief that the GATT’s nondiscrimina-
tion provisions are not applicable to direct taxes. The subsequent analysis will first
discuss Articles III:2 and III:4, laying down the National Treatment (NT) obligation
and then Article I:1, the Most-Favored-Nation (MFN) provision.
In the context of WTO law, a distinction is often drawn between direct taxes,
which are imposed on producers, and indirect taxes, which are levied on products.
The GATT itself provides no guidance as to the definition of direct or indirect taxes.
The Subsidies and Countervailing Measures Agreement (SCM Agreement), how-
ever, which is equally applicable to trade in goods, defines direct taxes as ‘taxes on
wages, profits, interests, rents, royalties, and all other forms of income’.6
Additionally, the General Agreement on Trade in Services states that direct taxes in-
clude ‘all taxes on total income, on total capital or on elements of income or of cap-
ital’.7 Although neither of these definitions is directly applicable with respect to the
GATT, it follows that direct taxes can be understood to include income taxes, where-
as examples of indirect taxes include taxes such as sales tax and value added tax.
This distinction between direct and indirect taxes continues to be of relevance es-
pecially in the context of border tax adjustments. It is generally held that indirect
taxes, those imposed directly on products, are eligible for border tax adjustments
whereas direct taxes are not. The most convincing explanation for this distinction in
the context of border tax adjustments is based on the ground that indirect taxes are
generally levied ‘according to the principle of destination, in the country of consump-
tion’.8 From this, however, it does not logically follow that tax discrimination be-
tween foreign and domestic goods in the sense of Articles I and III may only occur
with respect to indirect taxes. It appears that valid assumptions, which may hold true
in the context of border tax adjustments, have falsely been imported into the general
nondiscrimination obligations of the GATT without exploring or questioning their
underlying logic. Thus, while this article does not advocate abandoning the distinc-
tion between direct and indirect taxes, particularly in the context of border tax
6 Agreement on Subsidies and Countervailing Measures (SCM Agreement), 1869 UNTS 14, Annex I item
(e), footnote 58.
7 General Agreement on Trade in Services (GATS), 1869 UNTS 183, Article XXVIII(o).
8 Report of the Working Party on Border Tax Adjustments, L/3464, adopted 2 December 1970, para 21;
While there is a rich literature on Border Tax Adjustments a discussion thereof exceeds the scope of this
article.
550 Income Tax and Nondiscrimination in the GATT
adjustments, the following section questions the validity and extent of this distinction
in the context of Articles I and III.
A . A R TI CL E II I :2 —NT A ND I N TE RN A L T A X ES
With respect to the NT obligation, the relevant part of Article III:2 reads as follows:
The products of the territory of any contracting party imported into the terri-
As can be seen from the quote, the text of Article III:2 itself does not provide for a
distinction between direct and indirect taxes. It does, however, contain the words
‘directly or indirectly’. Rather than referring to a type of tax, meaning direct or indir-
ect taxes, these terms seek to circumscribe the scope of the impact a tax can have on
a product.10 According to the GATT Analytical Index, the term indirectly could,
hence, ‘cover even a tax not on a product as such but on the processing of the
product’.11 There is nothing in the text itself that would, thus, per se exclude the ap-
plication of the provision to income tax measures. Nevertheless, the argument that
Article III:2 exclusively applies to indirect taxes and consequently excludes income
taxes is not uncommon among trade lawyers and has equally been reiterated by
Panels.12
To determine the proper scope of application of the provision, it is necessary to
have regard to the customary rules of interpretation as mandated by the Dispute
Settlement Understanding.13 Articles 31 and 32 of the VCLTs, widely regarded to
codify these customary rules,14 require the determination of ‘the ordinary meaning
to be given to the terms of the treaty in their context and in the light of its object
and purpose’.15 Only if the approach under Article 31 leaves the meaning ambiguous
or obscure, is it warranted to have recourse to the travaux préparatoires of the treaty
in question.16
With respect to the ordinary meaning of the terms of Article III:2, it is important
to bear in mind that the Appellate Body (AB) explicitly acknowledges that the ‘prin-
ciples of interpretation neither require nor condone the imputation into a treaty of
9 General Agreement on Tariffs and Trade 1994, 1867 UNTS 187 (GATT), Article III:2.
10 Althunayan, above n 5, at 161.
11 WTO, GATT Analytical Index, https://www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_
art3_gatt47.pdf (visited 29 May 2018), at 141.
12 See, for example, Panel Report, Indonesia-Certain Measures Affecting the Automobile Industry, WT/DS54/
R, adopted 23 July 1998 in which it was stated: ‘When subsidies to producers result from exemptions or
reductions of indirect taxes on products, Article III:2 of GATT is relevant. In contrast, subsidies granted
in respect of direct taxes are generally not covered by Article III:2’ (emphasis added).
13 Understanding on Rules and Procedures Governing the Settlement of Disputes, 1869 UNTS 401 (DSU),
Article 3.2.
14 See, for example, WTO Appellate Body Report, United States – Standards for Reformulated and
Conventional Gasoline (US – Gasoline), WT/DS2/AB/R, adopted 20 May 1996, at 16f.
15 DSU, Article 3.2.
16 Vienna Convention on the Law of Treaties, 1155 UNTS 331 (VCLT), Article 32(a).
Income Tax and Nondiscrimination in the GATT 551
words that are not there’.17 Thus, in the absence of any explicit direction as to the
provision’s application to income taxes, it is necessary to inquire if any distinction be-
tween income and product taxes is implicit in the wording adopted in Article III:2.
In this respect, the context of the provision is of relevance. Here, according to the
AB Article III:1 constitutes such relevant context.18
Article III:1 articulates the fundamental principle underlying the whole of Article
III that WTO Members may not adopt measures ‘so as to afford protection to do-
17 WTO Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical
Products (India – Patents (US)), WT/DS50/AB/R, adopted 16 January 1998, para 45.
18 WTO Appellate Body Report, Japan – Taxes on Alcoholic Beverages (Japan – Alcoholic Beverages II), WT/
DS8/AB/R, adopted 1 November 1996, at 17f.
19 GATT, Article III:1.
20 Japan – Alcoholic Beverages II, at 17.
21 Panel Report, Brazil-Certain Measures Concerning Taxation and Charges, WT/DS472/R; WT/DS497/R
(circulated 30 August 2017), para 7.63; the report is currently under appeal.
22 See, for example, the WTO Appellate Body Report, United States – Measures Affecting the Production and
Sale of Clove Cigarettes (US – Clove Cigarettes), WT/DS406/AB/R, adopted 24 April 2012, para 173
where it was found that the preamble of the TBT Agreement constitutes relevant context for the inter-
pretation of Article 2.1 of the TBT Agreement.
23 This contradiction was noted in Farrell, above n 5, at 50.
24 GATT, Article XVI(4) states: ‘contracting parties shall cease to grant . . . any form of subsidy on the ex-
port of any product [. . . that] results in the sale of such product for export at a price lower than the com-
parable price charged for [like domestic products]’.
25 GATT Working Party Report on Provisions of Article XVI:4, L/1381, BISD 9S/185, adopted 19
November 1960, at 186f.
552 Income Tax and Nondiscrimination in the GATT
reports, which apply Article XVI(4) found the existence of lower export prices as a
result of an income tax subsidy.26 As no conclusive economic evidence was proffered
in any of the cases, this finding was admittedly based on the presumption that the
subsidies contained in the illustrative list of the 1960 Report had this effect.
Consequently, it appears difficult to defend the proposition that for the purposes of
Article III, product prices are never affected by income tax measures while simultan-
eously in the context of subsidies product prices are always affected. GATT Article
As economic theory concurs that income taxes may affect products and their com-
petitive relationship with like products, the provision’s object and purpose supports a
wide reading of Article III:2. Therefore, an interpretation of Article III:2 under the
customary rules of interpretation appears to lead to the conclusion that both direct
and indirect taxes are covered by the aforementioned provision.
As the application of VCLT Article 31 neither leaves the meaning of GATT
Article III:2 ambiguous or obscure nor leads to a result that is manifestly absurd or
B . A RTI C L E I I I: 4—N T A N D L A WS , RE GU LA TI ON S , AN D
R E QUI R EM EN TS
Even if one were to rely on the textually unfounded distinction between direct and
indirect taxes for the purposes of Article III:2 and interpret the provision to exclude
direct taxes, the much broader language adopted in Article III:4 appears to, nonethe-
less, cover income tax measures. Article III:2 refers to internal taxes and internal
32 See, for example, the preparatory works in Havana Reports, UN Doc ICITO/1/8 (September 1948), at
63, para 44.
33 Gary Clyde Hufbauer, ‘Tax Discipline in the WTO’, 44(4) Journal of World Trade 763 (2010), at 769.
34 M Petritz, ‘National Report Austria’ in Lang et al., above n 5, at 143.
35 Panel Report, Argentina – Hides and Leather, above n 31, para 11.159, relying on the Working Party
Report on Border Tax Adjustments, above n 30.
36 In this context, it may be recalled that GATT, Ad Article III provides that a measure applying to imported
and like domestic products ‘and is collected or enforced in the case of the imported product at the time
or point of importation, is nevertheless . . . subject to the provisions of Article III’.
554 Income Tax and Nondiscrimination in the GATT
charges of any kind, as explained above. The language in Article III:4 is much wider
by referring to ‘all laws, regulations and requirements’. The weak argument that one
should exclusively adopt a historical interpretation does not hold in the context of
Article III:4 due to the difference in wording. The provision reads in relevant parts:
Rules relating to income taxes may in this context be understood to constitute laws
and regulations. Even if one follows the above interpretation of Article III:2, subject-
ing income tax measures to said provision, there would still be room for the applica-
tion of Article III:4 in the context of income taxes. Article III:2, thus, applies to taxes
themselves, including tax rates and rules relating to the determination of the tax
base, in essence, the provision is all about the money. Article III:4 then additionally
encompasses, for example, administrative requirements on the filing of tax returns or
transfer price documentation as will be explained below. Therefore, there are two
ways one could conceptualize the respective scopes of application of Articles III:2
and 4. The preferred interpretation is to subject all taxes that directly or indirectly af-
fect products, including income taxes, to the requirements of Article III:2 and all
other nonprice-based measures to Article III:4. Under a different interpretation, in-
come tax measures are generally excluded from Article III:2 and subjected entirely to
Article III:4, this time including price-based measures.38
To better understand the scope of application of Article III:4, it is necessary to
briefly explain the terms ‘affecting’ and ‘less favorable treatment’. First of all, with re-
gard to ‘affecting’ the Panel in Italy-Agricultural Machinery found that ‘the text . . .
referred . . . to laws and regulations and requirements affecting internal sale, purchase,
etc., and not to laws, regulations and requirements governing the conditions of sale or
purchase’.39 Later, the AB affirmed this reading by stating that the term affecting has
‘a “broad scope of application”’.40 In fact, according to the AB in China—Auto Parts,
the measure need not even be aimed at regulating the sale of the product concerned
to fulfill the requirement of affecting its sale.41 Even more broadly, the panel in
Canada-Autos, referring back to the GATT 1947 Panel in Italy – Agricultural
Machinery states that ‘any laws or regulations which might adversely modify the
42 Panel Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/R, adopted 19
June 2000, para 10.80.
43 Lothar Ehring, ‘De Facto Discrimination in World Trade Law: National and Most-Favoured-Nation
Treatment – or Equal Treatment?’ 36(5) Journal of World Trade 921 (2002), at 925.
44 WTO Appellate Body Report, European Communities – Measures Affecting Asbestos and Products
Containing Asbestos, WT/DS135/AB/R, adopted 5 April 2001, para 100.
45 Panel Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/R, adopted
20 May 1996, para 6.10.
46 WTO Appellate Body Report, Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines,
WT/DS371/AB/R, adopted 15 July 2011, para 135.
47 For further examples of income tax cases submitted to the GATT/WTO see, for example, Asif H.
Qureshi, ‘Trade-Related Aspect of International Taxation: A New WTO Code of Conduct?’ 30(2)
Journal of World Trade 161 (1996), at 171ff; and M Daly, above n 28, 9ff.
48 Italy – Agricultural Machinery (1958), above n 39, para 25.
49 The second example could also potentially be understood to constitute a prohibited subsidy under the
SCM Agreement that prescribes a local content requirement.
556 Income Tax and Nondiscrimination in the GATT
50 WTO Request for Consultations, Turkey – Taxation of Foreign Film Revenues, WT/DS43/1, at 1.
51 WTO Notification of Mutually Agreed Solution, Turkey – Taxation of Foreign Film Revenues, WT/DS43/3.
52 Note the language in the Request for Consultations, above n 50, ‘taxation of revenues . . . in a manner
less favourable’ which is parallel to the wording in Article III:4.
53 Dirk Pulkowski, The Law and Politics of International Regime Conflict (Oxford: Oxford University Press,
2014) 168.
54 Appellate Body Report, US – FSC (Article 21.5), above n 40, para 212f.
55 Ibid, para 216.
56 Ibid, para 220.
57 WTO Request for Consultations, China – Certain Measures Granting Refunds, Reductions or Exemptions
from Taxes and Other Payments, WT/DS358/1 (2 February 2007), at 3.
58 WTO Notification of Mutually Agreed Solution, China – Certain Measures Granting Refunds, Reductions or
Exemptions from Taxes and Other Payments, WT/DS358/14 (4 January 2008), at 3.
Income Tax and Nondiscrimination in the GATT 557
total of eight measures that were challenged under various provisions of the GATT
and the GATS. These measures inter alia sought ‘to protect Argentina’s tax base by
preventing tax evasion, tax avoidance, and fraud’.59 One of these measures was
alleged to be in breach of GATT Article III, namely the requirement to apply the
transfer price regime to transactions between Argentinian taxpayers and persons
from uncooperative countries.60 The tax base of the Argentinian taxpayer was, thus,
assessed on basis of the transfer price regime, which in addition to fiscal consequen-
domestic market. This part of the report, however, was not appealed and it is, thus,
unknown if the Panel’s assessment would have withstood scrutiny by the AB.
The opinion that most income tax measures will not sufficiently affect products
so as to be subject to the NT obligation in Article III is not uncommon in academic
writing.66 However, it should also be clear from the above that a large number of in-
come tax measures seemingly not within the scope of Article III may be subject to
scrutiny under said provision if properly interpreted. Earlier academic writing dis-
C . A RT IC L E I : 1—M F N T RE A TM EN T
The MFN obligation with respect to goods is set out in Article I:1 of the GATT.
Most importantly for the purposes of this article, the provision covers all matters fall-
ing within the scope of Articles III:2 and III:4 of the GATT. Thus, to the extent that
income tax measures fall within the purview of the NT obligation, they are equally
subject to the obligations set out in Article I:1. Much like Article III, the provision is
concerned with the protection of expectations of equality of competitive opportuni-
ties between like imported products.67 It equally applies to de facto and de jure less fa-
vorable treatment.68 The above examples of WTO case law, hence, could also serve
to illustrate potential violations of the MFN treatment clause where the measure dis-
tinguishes between products on basis of their different foreign origins.
Additionally, Article I:1 prohibits discrimination with respect to ‘charges of any
kind imposed on or in connection with importation or exportation’ as well as ‘all
rules and formalities in connection with importation and exportation’. In this respect,
it has been observed that ‘a case would have to be very persuasive to establish that a
direct tax is imposed “on or in connection with” the exportation or importation of a
good’.69 This difficulty of showing a connection to importation or exportation is
illustrated well in the Argentina-Financial Services Dispute. One of the measures at
issue in the dispute concerned a presumption of unjustified increase in wealth for
any funds that entered from noncooperative countries.70 Panama unsuccessfully
argued that this measure is a rule or formality in connection with exportation or al-
ternatively imposes charges in connection with exportation. The Panel rejected this
line of argument as the measure applied to any entry of funds, not only those that
constituted payment for exports. The Panel observed that ‘[t]he presumption . . . is
applied according to the geographical provenance of the funds and not according to
whether or not they derive from export operations.’71 Consequently, the measure’s
66 See, for example, Michael Lennard, ‘The GATT 1994 and Direct Taxes: Some National Treatment and
Related Issues’ in Lang et al., above n 5, at 101.
67 WTO Appellate Body Report, European Communities – Measures Prohibiting the Importation and
Marketing of Seal Products, WT/DS400/AB/R, adopted 18 June 2014, para 5.88.
68 WTO Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/
AB/R, adopted 19 June 2000, para 78.
69 Farrell, above n 5, at 56.
70 Argentina – Financial Services, paras 2.17-18.
71 Ibid, para 7.989.
Income Tax and Nondiscrimination in the GATT 559
core feature is not its relationship with exports.72 As stated above, however, Articles
III:2 and 4 do not require this connection to exports or imports. It would, thus, often
be easier to rely on the reference to these provisions contained in Article I:1 rather
than seeking to establish that an income tax measure constitutes a rule, formality or
charge ‘imposed on or in connection with importation or exportation’.
To conclude on the nondiscrimination provisions, Article I and III of the GATT,
any measure that de facto or de jure favors domestic over imported goods or goods of
II . TRA N S F ER PRI C E A D J U ST ME N TS A ND T HE G AT T
N ON D I SC R IM I NA T IO N R UL E S
The following section seeks to apply the general considerations on discriminatory in-
come taxes to the concrete issue of (im)proper transfer pricing between related enti-
ties. This section, thus, first and foremost seeks to illustrate how complex income tax
measures may, under certain circumstances, modify the conditions of competition
contrary to the requirements of Articles I and III. Before doing so, however, some
additional background is provided on what transfer pricing is and why it is so rele-
vant in the context of international tax.
Where an enterprise establishes multiple presences in different tax jurisdictions,
‘the relationship . . . may permit the group members to establish special conditions
in their intra-group relations that differ from those that would have been established
had the group members been acting as independent enterprises operating in open
markets’.74 Base erosion may occur where, for example, a company buys products at
inflated prices from foreign affiliates or underprices the products it sells to its foreign
affiliates. In both cases, the company effectively shifts profits out of the reach of the
domestic tax authorities. Countries generally object to such practices by its residents.
72 Ibid.
73 For income tax exceptions in the GATS, see generally, Vincent Beyer, ‘Direct Taxes and the GATS:
Substantive and Procedural Defences for Non-compliant Income Tax Measures’, 52(3) Journal of World
Trade 351 (2018).
74 OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD
Publishing, 2017) 16.
560 Income Tax and Nondiscrimination in the GATT
To preserve the domestic tax base, tax authorities have the power to make determi-
nations as to the appropriateness of transfer prices for goods or services provided be-
tween related entities. Where these are considered not to reflect the prices that
would have existed if the related entities had acted at arm’s length, competent author-
ities may make adjustments to determine a company’s taxable income.75
According to the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations (OECD Guidelines), ‘[t]he arm’s length prin-
A . TR A NS F ER P R IC I NG D IS P U TE S U N D ER TH E G A TT
For the GATT to be applicable to transfer pricing disputes, it is indispensible that
the dispute concerns the transfer price of goods rather than exclusively services or
intangibles such as patents or trademarks. The difficulties relating to arm’s length
transfer prices are particularly pronounced in the field of services and hard-to-value
intangibles due to their often highly specific nature.79 Nevertheless, this should not
distract from the fact that transfer mispricing also occurs with respect to goods that
are commonly regarded to be highly homogeneous such as raw materials or basic
commodities. Conservative estimates find that commodity mispricing results in bil-
lions of dollars of losses, particularly to developing countries.80 One can imagine that
75 OECD, Model Tax Convention on Income and Capital 2014 (OECD Publishing 2015) (OECD Model Tax
Convention), Article 9(1).
76 OECD Transfer Pricing Guidelines, above n 74, at 36.
77 See generally, OECD Model Tax Convention, above n 75, Article 9.
78 See generally, Chapter II of the OECD Transfer Pricing Guidelines, above n 74; the chapter explains in
detail the three traditional transaction methods (comparable uncontrolled price method, resale price
method, and cost plus method) as well as the transactional profit methods (transactional net margin
method and transactional profit split method). Additionally, it provides insights as to the preferable
method for establishing an arm’s length price in a particular situation.
79 As a result of the specific difficulties resulting from intra-group services and intangibles a large part of the
OECD Guidelines introduces specific considerations in this respect. See particularly chapters VI and VII
of the OECD Guidelines dealing with intangibles and intra-group services, respectively.
80 See, for example, Alex Cobham, Petr Jansky and Alex Prats, ‘Estimating Illicit Flows of Capital via Trade
Mispricing: A Forensic Analysis of Data on Switzerland’, Centre for Global Development Working Paper
350 (2014), https://ideas.repec.org/p/cgd/wpaper/350.html (visited 29 May 2018), where the most
conservative estimate is that commodity exporting developing countries are facing a capital loss of 8 bil-
lion a year alone in their trade with Switzerland.
Income Tax and Nondiscrimination in the GATT 561
these difficulties only increase where tax authorities have to deal with highly special-
ized goods.
An associated issue relates to the question why a transfer pricing dispute would
end up in the WTO. Transfer pricing disputes that concern a particular taxpayer are
generally resolved through the so-called Mutual Agreement Procedure (MAP) gener-
ally provided for in double taxation agreements.81 The MAP is a highly successful
procedure of institutionalized diplomatic dispute settlement whereby the tax author-
81 See Article 25 of the OECD Model Tax Convention, above n 75, and Article 9(2), the latter particularly
with respect to transfer price adjustments.
82 For detailed statistics on the number of cases, the average time of resolving disputes, the agreed outcome,
etc. consult http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm (visited 29
May 2018).
83 The perhaps best-known example is Convention 90/436/EEC on the Elimination of Double Taxation in
Connection With the Adjustment of Transfers of Profits Between Associated Undertaking, OJ 1990 L
225/10; the Convention provides for binding arbitration where transfer pricing disputes have not been
resolved under the MAP within two years.
84 The example of Argentina may be illustrative in this respect. The attempt to deal with the tax haven
Panama, including matters involving transfer pricing documentation was ultimately subject to dispute
settlement in WTO proceedings. For more details on the Argentina – Financial Services dispute, see above
the section I.B. on Article III:4.
562 Income Tax and Nondiscrimination in the GATT
from the perspective of the purchaser of the goods, the net price of the imported
goods.
Usually, adjustments only occur with respect to foreign goods. From the perspec-
tive of the tax authorities, the transfer price of domestic goods is, assuming a single
corporate income tax rate, irrelevant as both related entities will be taxed domestical-
ly. The profits will not leave the country. When inputs of manufactured goods are
imported, however, an inflated price will have the result of eroding the domestic tax
85 GATT Panel Report, Canada—Administration of the Foreign Investment Review Act (1983) GATT BISD
30S/140, adopted 7 February 1984, para 5.5.
86 European Commission, Netherlands-Alleged Aid to Starbucks C(2014)/3626final (11 June 2014); the
Netherlands and Starbucks have brought proceedings against the Commission’s decision. Both cases are
currently pending. For more information on the proceedings, see http://ec.europa.eu/competition/elo
jade/isef/case_details.cfm?proc_code¼3_SA_38374 (visited 29 May 2018).
87 Furthermore, if such measures should indeed fall under Article III:8(2), they would equally be exempted
from Article I:1 to the extent that a complainant relies on the ‘all matters referred to in paragraphs 2 and
4 of Article III’ phrase of the provision as clarified by Panel Report, European Communities—Measures
Affecting Trade in Commercial Vessels, WT/DS301/R, adopted 20 June 2005, para 7.90.
Income Tax and Nondiscrimination in the GATT 563
88 Reuven S. Avi-Yonah, International Tax as International Law: An Analysis of the International Tax Regime
(Cambridge: Cambridge University Press 2007) 113, where the author states, ‘customary international
law . . . embodies the arm’s length standard’.
89 See, for example, US – Clove Cigarettes, para 176 where the AB referred to the GATT to determine the
meaning of Article 2.1 of the TBT Agreement.
90 See generally on the technique of cross-referencing as employed by the AB, Isabelle van Damme, Treaty
Interpretation by the WTO Appellate Body (Oxford: Oxford University Press, 2009) 235ff.
91 GATT, Article VII(2)(a).
92 Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994
(Customs Valuation Agreement), 1868 UNTS 279, Article 1(2).
93 SCM Agreement, Annex I, item (e), footnote 59, second sentence.
564 Income Tax and Nondiscrimination in the GATT
Consequently, as a matter of fact rather than law, the arm’s length principle will
be relied upon for almost all international transactions. Thus, it is not so much the
interpretation of the nondiscrimination obligations that ultimately incorporates the
standard but rather the member states’ actions of widely relying on the principle that
would subject any deviation therefrom to scrutiny under the nondiscrimination pro-
visions. If a member consistently utilizes the standard to assess the appropriateness
of transfer prices between related entities, any departure to the detriment of foreign
94 Alberto Vega, ‘International Governance Through Soft Law: The Case of the OECD Transfer Pricing
Guidelines’ (2012) Max Planck Institute for Tax Law and Public Finance Working Paper 2012–05,
http://dx.doi.org/10.2139/ssrn.2100341 (visited 29 May 2018), at 19 considers the guidelines ‘a basic
tool for the application of the arm’s length principle’.
95 Appellate Body Report, Brazil-Aircraft, WT/DS46/AB/R, adopted 20 August 1999, para 181; The
OECD Arrangement was applied under the first paragraph of item (k) of Annex 1 of the SCM
Agreement and not as foreseen by the Agreement itself under the safe haven provision of the second
paragraph.
96 See, for example, Argentina – Financial Services, para 7.715.
97 OECD Transfer Pricing Guidelines, above n 74, at 163.
98 Ibid.
99 Reuven S. Avi-Yonah, Advanced Introduction to International Tax Law (Cheltenham: Edward Elgar
Publishing, 2015) 29, considers that the 1979 judgment in El Dupont de Nemours & Co. v Commissioner
221 Ct.Cl. 333 (1979) ‘was the last unequivocal IRS victory in the transfer pricing area’.
Income Tax and Nondiscrimination in the GATT 565
C. TR A NS F E R P R IC I N G D OC U ME N TA TI ON
The question of transfer price documentation may raise related concerns. Excessively
burdensome documentation requirements could find challenge under the nondiscri-
I I I. C ON C LU S IO N
This article attempted to provide tentative answers on the reach of the GATT non-
discrimination provisions into the field of income tax. It has been argued that the
100 WTO Request for Consultations, Colombia—Customs Measures on Importation of Certain Goods from
Panama, WT/DS348/1 (20 July 2006), at 2.
101 Argentina – Financial Services, para 7.1038–1049.
102 OECD Model Tax Convention, above n 75, Commentary to Article 7, para 26.
103 OECD Transfer Pricing Guidelines, above n 74, at 229ff.
104 OECD, Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 - 2015 Final Report,
OECD/G20 Base Erosion and Profit Shifting Project (OECD Publishing, 2015).
105 OECD Transfer Pricing Guidelines, above n 74, at 501ff.
566 Income Tax and Nondiscrimination in the GATT