Neither Rules Nor Standards

Specifying the content of a requirement or a prohibition up front--e.g, replacing a "reasonable speed" requirement with a fifty-five miles per hour speed limit--can make life easier for enforcers and citizens alike. Recent efforts to substitute international tax rules for decades-old standards may do just the opposite, jeopardizing the "miracle" that is today's international tax regime. Enhanced information exchange and formulary apportionment will undermine the legitimacy that is essential to the success of any international legal regime. A better solution would overhaul the century-old benefits principle to weave enforcement deep into the fabric of the international tax regime. Only then will it meet today's tests as successfully as it once rose to the challenge of double taxation. INTRODUCTION H.L.A. Hart observed that the laws that govern our behavior draw strength from principles that operate unseen in the background. As he put it, the spark of "rules of recognition" can transform a lifeless "regime of primary rules" into a dynamic "legal system." (1) Without more than a mere collection of rules to guide them, he concluded that a community would stagnate, unable to shed outdated requirements or to embrace new constraints when needed. (2) For international law, Hart concluded that his insight offered grounds for both optimism and pessimism. On the one hand, "the absence of an international legislature, courts with compulsory jurisdiction, and centrally organized sanctions" does not necessarily mean that international law cannot exist. (3) On the other, he suggests that crafting a principle--"a basic rule of recognition"--sufficient to assuage "doubts about the legal 'quality' of international law" would be tantamount to catching lightning in a bottle. (4) International taxation demonstrates the truth of both perspectives. No World Tax Organization exists, (5) yet a skein of treaties and laws lays claim to the title of "international tax regime" and forms a bulwark against double taxation. (6) As a result, what should be an intractable problem--allocating global tax revenues among sovereign states--has been anything but. (7) The benefits principle (8) may not be the catalyst Hart believed capable of transforming an assemblage of international tax rules into a vital system of laws, but the success and stability of the international tax regime over nearly a century suggests that it comes close. (9) Unfortunately, unlike a true basic rule of recognition, the benefits principle has not helped the international tax regime evolve over time. (10) The resulting mismatch between the demands made of the international tax regime and its capacity has rendered it impotent in the face of today's challenges. (11) The ongoing struggle to replace the international tax regime's standards with rules will only accelerate that failure. (12) The international tax regime has no shortage of problems or proposed remedies. (13) Today, the solutions tend to bet on the precision of rules. Transnational enterprises remain square pegs to the round holes presented by national corporate taxes. (14) Formulary apportionment--the chief rival of the more established arm's length method of allocating corporate profits among jurisdictions--promises the clarity and ease of administration transfer pricing has long denied taxpayers and tax administrators. (15) Seeking to dispel the threat posed by tax havens, enhanced information exchange offers tax administrators hope that they may soon receive the same predictable diet of insight regarding the behavior of taxpayers from abroad that they obtain domestically. (16) Although not characterized in such terms, both reforms seek to replace a standard (the arm's length method and treaty-based information exchange) with a rule (formulary apportionment and enhanced information exchange). (17) In theory, trading standards for rules has much to recommend it. …