What's at Stake in the Sovereignty Debate?: International Tax and the Nation-State

The international tax problems of today are typically beyond the scope of a single nation to solve. However, the prospect of multinational problem solving, often under the auspices of an international organization, unleashes objections grounded in sovereignty. Despite widespread reliance on sovereignty arguments, little attention has been directed at what precisely is meant by sovereignty and what place it has in international tax policy. This article contends that a loss of sovereignty undermines both significant functional roles played by a nation-state (revenue and fiscal policy) and important normative governance values (accountability and democratic legitimacy). Whether these limitations are severe enough to demand that a sovereign state recall its taxing powers from an international body (or not surrender them initially) depends on the nature of the powers in question and the necessity for a coordinated global response. Part I develops the basic nexus between sovereignty and taxation. Part II examines the use of sovereignty in the debates and analyses surrounding three international tax case studies. Drawing upon the case studies, Part III considers how sovereignty claims are manipulated in tax debates, how states think about sovereignty in taxation, and what their decisions, in turn, suggest about the future of international tax and the prospects for international cooperation. INTRODUCTION No significant issue in international tax can be discussed without raising the question of “sovereignty.” Does a particular outcome or position harm or infringe upon a nation’s sovereignty? Is sovereignty advanced by the proposed tax plan? Should a sovereign nation participate in multilateral tax cooperation to solve shared problems? The larger question, however, is what exactly is meant by sovereignty and what is at stake as we think about the place of sovereignty in international tax. Why does sovereignty matter? Sovereignty takes center stage in international tax because much of the debate over both rules and policies involves and impacts other nations. As is widely recognized, nations do not act in a vacuum in conducting international tax policy. Even purely domestic actions can have significant ramifications abroad. Moreover, much effective tax policy implementation requires the interaction, even cooperation, of two or more nations. Almost a century of bilateral tax treaties evidences the longstanding need for something more than unilateral action in solving international tax problems. Often efforts have proceeded on a multilateral scale. The OECD (Organisation for Economic Cooperation and Development) itself has served 1 The observation that domestic tax legislation on matters of cross border taxation does not exist in a vacuum does not imply that such legislation and policy is carefully coordinated with the rules of other countries. 2 See, e.g., Abram Chayes & Antonia Handler Chayes, THE NEW SOVEREIGNTY 26-27 (1995) (pervasive nature of interdependence among states); Alan James, SOVEREIGN STATEHOOD 177-79 (1986) (impact of interdependence in understanding sovereignty). 3 See, e.g., Michael J. Graetz & Michael M. O’Hear, “The Original Intent of U.S. International Taxation,” 46 DUKE L. J.1021, 1066-1089 (1997) (describing the historical development of tax treaties); Michael J. Graetz, “Taxing International Income: Inadequate Principles, Outdated Concepts and Unsatisfactory Policies,” 26 BROOKLYN J. INT’L L. 1357, 1395-1397 (history and growth of tax treaties).