International Tax Coordination

An Interdisciplinary Perspective on Virtues and Pitfalls

Martin Zagler

• Publisher: Taylor & Francis
• Year: 2010
• Print ISBN: 9780415569484
• eBook ISBN: 9781136952456
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

International taxation is a major research topic, and for a field of research at the intersection of so many disciplines there has been surprisingly little done across disciplinary boundaries. This book fills the gap by combining teams from business, economics, information science, law and political science to offer a unique and innovative approach to the issue of international tax coordination. All the chapters are written in collaboration between at least two authors from two different disciplines. This approach offers a rich and nuanced understanding of the many issues of international tax coordination.

The book collects seven papers, each one a valuable contribution in itself, beginning with current problems of international taxation and finishing with potential solutions. The essays explore current EU legislation, tax avoidance and tax fraud, as well as double tax agreements, dividend repatriation and hybrid finance and tax planning. Providing methodological answers to the question of how to conduct interdisciplinary research, the book also gives an accessible introduction into research questions and answers that are important in related disciplines for scholars in various areas.

This book will be of interest to postgraduates and researchers in the fields of economics, business, informational science, law and political science, as well as to professional accountants and tax lawyers.

1
Introduction

International tax coordination – an interdisciplinary perspective on virtues and pitfalls

Martin Zagler

1.1 Motivation

International taxation is a major research topic. Indeed, scholars from business, economics, law, history, political science, sociology, psychology and a number of related fields have extensively investigated the issue of international taxation. For a field of research that is at the intersection of so many disciplines, it is surprising that very little has been done across disciplinary boundaries. This book attempts to fill the gap between some of these disciplines by presenting interdisciplinary research on international tax coordination. We believe that this book can contribute to the advancement of knowledge in each discipline through its interdisciplinary approach.

Issues of international taxation are a growing concern in a world of integrating economies such as the enlarged European Union, and these issues have undergone an evolutionary process themselves. When the European Union was set up, we saw the Neumark Report’s vision of a single economic area where only economic parameters would be taken into account in individual allocative decisions. Differences in taxation are an obstacle to the optimal allocation of resources within the Union, which is why the harmonization of tax systems was the choice for international taxation at that time. Such a positive approach toward harmonization is still found in recent documents, mainly driven by anticipated effects such as a significant reduction of tax compliance costs and the “neutrality” and “efficiency” of tax regimes. The tax harmonization view interprets differences in taxation as a hindrance to the optimal allocation of resources.

The opposing idea of tax competition has been extensively discussed by economists (Tiebout 1956; McLure 2001). However, European institutions started to consider this line of argument only in the early 1990s. In this concept, the idea of competition is extended to sovereign players that offer individuals or firms different ranges of tax costs. With both approaches – harmonization and competition – having potential benefits from an economic point of view, international tax coordination is seen to cover the whole range between tax harmonization and tax competition.

Tax coordination differs from tax harmonization by allowing a certain degree of national freedom in designing the tax regime. International tax coordination is perceived to increase transparency, thus making competition more visible, which may bring markets toward equilibrium and may improve economic welfare. In this aspect, tax coordination may be superior to tax competition. However, tax coordination may also be superior to tax harmonization, in particular if different countries have different preferences for the size of the public sector. In this case, a harmonized level of taxation would induce one country to have a public sector larger than desired and the other to cut public expenditures below its social optimum.

This book focuses on various issues in the area of international tax coordination, but has a clear research question: What degree of international tax coordination within the European Union and in relation to third countries is suitable for solving problems arising from national tax sovereignty, and what problems may arise from tax coordination itself?

Measures of tax coordination fill the gap between tax harmonization and tax competition. The contributions in this volume will combine interdisciplinary teams from business, economics, information science, law and political science to offer a unique and innovative interdisciplinary approach on the issue of international tax coordination. All the chapters are written in collaboration between at least two authors from two different disciplines.

The distinguishing feature of the book is its clear interdisciplinary approach. All the authors have been collaborating during the past six years in a special research program funded by the Austrian Science Fund. During this period, the authors have come to realize that the essence of many questions in international tax coordination cannot be solved within a single discipline. An interdisciplinary approach offers a strenuous but worthwhile approach to the understanding of many issues of international tax coordination. It must be emphasized that interdisciplinary tax research that goes beyond the mere coexistence of the disciplines that are involved is hardly ever found. In this regard, the book adds considerably to existing literature and gives new insights into international tax coordination.

Further, the book contributes novel aspects to the understanding of international taxation. It provides methodological answers to the question of how to conduct interdisciplinary research, and introduces research questions and provides answers to those that are important to related disciplines.

1.2 Interdisciplinary research in international taxation

Many current researchers have emphasized that the production of interdisciplinary knowledge is a major issue that needs to be considered in today’s “knowledge-based society” (Gibbons et al. 1994). The debate on interdisciplinarity is still young and the process of interdisciplinary research is still being developed. However, a growing community of interdisciplinary researchers stimulates vivid debate aimed at developing means to deal with ensuing challenges in research.

Nowadays, interdisciplinary research is strongly promoted as a desirable direction in the development of sciences, in terms of both teaching and research. This is true not only in the natural sciences but also in the social sciences, which are said to benefit tremendously from interdisciplinary approaches. These approaches may help overcome artificial boundaries and improve the overall quality of social science research. As Popper (1963) points out, “We are not students of some subject matter, but students of problems. And problems may cut right across the borders of any subject matter or discipline.”

Sciences and society are confronted with problems that cannot be fully comprehended by a simple deterministic disciplinary view. The main issues nowadays have a high level of complexity that requires insights from multiple disciplines. Interdisciplinary research and education are mainly and traditionally inspired by the drive to solve complex questions and problems generated by scientific curiosity or by society. They guide researchers from different disciplines to meet and work at the interfaces and frontiers of those disciplines, and even cross such frontiers to create new disciplines.

Obviously, not all subjects lend themselves to interdisciplinary research. International taxation, however, has always been a topic of interest in more than one discipline. Because taxes are introduced by law, legal scholars certainly have an interest in the issue. Taxes influence business decisions, so researchers in business administration examine it. Moreover, in turn, taxes have an impact on the economy. Hence, economists, too, have an interest in the subject.

The growth of scientific and technical knowledge in recent decades has prompted researchers from various disciplines to address complex problems that require deep knowledge from different perspectives. The results obtained so far confirm the high level of productivity and effectiveness of research teams composed of partners with diverse expertise.

On the one hand, the attempt to solve complex problems on the one hand may be considered the main factor that has led to the growth in the application of interdisciplinary research methods. On the other hand, increasing social interest in such research may be attributed to the following factors:

• It is argued that research performed in an interdisciplinary context is likely to be more creative and innovative. Mixing people with different backgrounds and/or ideas from different fields is likely to generate “breakthrough” and “innovative” research results.

• Second, interdisciplinary research has been emphasized as being more likely to lead to applicable results because it is compatible with problem-solving approaches (Foray and Gibbons 1996).

• Moreover, there is concern that disciplinary research has become too narrowly specialized, leading to diminishing returns for this traditional research approach.

• Furthermore, it is now increasingly recognized that the prevalent tendency in most disciplines for narrow, deep specialization tends to make research less relevant to laypeople or to society, fosters imperialism rooted in ideological thinking and limits the exchange of ideas across disciplines, ultimately impeding the progress of science.

For all these reasons, interdisciplinary research has become a real subject of interest for science policy in recent times. The following statement explains why interdisciplinary research is highly relevant in the current scientific debate:

Interdisciplinary research is an appropriate form of research when searching for science based solutions to problems in the lifeworld with a high degree of complexity in terms of factual uncertainties, value loads and societal stakes. Through bridging different scientific and social knowledge components, it can significantly improve the quality, acceptance and sustainability of such solutions. However, deliberation about facts, practices and values are ongoing when bringing results to fruition in the lifeworld as well as in scientific communities.

(Wiesmann et al. 2008)

Interdisciplinary research can be one of the most productive and inspiring human pursuits in the sense that it provides the connections that can lead to new knowledge. The potential of conducting research this way is very useful in terms of new discoveries and technologies.

1.2.1 A brief historical overview

Interest in interdisciplinary research has not been always so vivid. In ancient times, education and philosophy were interdisciplinary in the sense that philosophers did not accept any boundaries or limitations to the validity of their truths. Aristotle was the first to introduce a division of knowledge by splitting it into the theoretical and the practical, thus balancing “pure” thinking (rhetoric, logic, mathematics, ethics, etc.) with the observation of nature (physics, astronomy, etc.). This first division of “philosophical” knowledge paved the way for the further division of knowledge into more and more specialized fields of science. It seemed that the unity of knowledge had been irrevocably lost.

In the early twentieth century, a new philosophical school of thought under the name “logical positivism” emerged in Germany and Austria. Some of the logical positivists were committed to the idea of a “unified science” based on the development of a universal scientific language. Science was considered to be an interdisciplinary enterprise. This led to the question of how the knowledge of the natural sciences could have been used to further understanding in the social sciences. For the positivists, all the academic disciplines share the same universal scientific rationality.

Another development in modern philosophy of science has been the rise of the “descriptive history of science”. Postmodernists who felt it important to divide scientific knowledge for the purpose of serving the interest of their respective knowledge communities placed serious limits on the possibility of interdisciplinarity. In the late 1980s, a new school of thought, so-called social epistemology, claimed that the disciplines are efficient in producing new knowledge and in maintaining rigor of inquiry, which would be lost in an interdisciplinary science (Bridges 2006). All these theories argued that the rules of testing and validating hypothesis are different among disciplines and that there are obvious constraints in doing disciplinary synthesis.

By contrast, in the social sciences the new school of the so-called interdisciplinarians (Newell 2001; Thompson Klein 2004) focuses on the problem that academic work generally happens within narrow and arbitrary or artificial disciplinary boundaries, which sometimes prevents academics from seeing the close connections between different phenomena and the different disciplines. Moreover, they claim that complex discipline-transgressing phenomena cannot be understood adequately by using reductionist disciplinary approaches.

According to this new orthodoxy, scientists should aim to develop fruitful relationships with disciplines other than their own and perhaps should even transcend disciplinary thinking altogether.

The natural sciences were the first to introduce the concept of complexity to shape their methodology (Prigogine 1980; Casti 1994). The idea was that knowledge is no longer simple, and this raises the need to combine different kinds of knowledge or different points of view to describe a phenomenon. Different disciplines have to work together to outline objects in a scientific way. In addition, a phenomenon has to be seen as a whole whose parts work together.

Despite this apparent mutual interest, joint interdisciplinary research is rare in international taxation. In Central Europe, law and economics were historically thought of as Staatswissenschaften (state sciences). The division into Nationalökonomie (national economics) and law came before interdisciplinarity emerged as a modern approach to conduct science. By that time, public economists were following the Anglo-Saxon tradition in economics, and ignored most of legal science. Only recently have the disciplines moved closer to each other. This book is certainly a step in this (in our view, correct) dir...

Table of contents

• Routledge international studies in money and banking
• Contents
• Figures
• Tables
• Contributors
• Acknowledgments
• Abbreviations
• 1 Introduction
• 2 Rethinking tax jurisdictions and relief from international double taxation with regard to developing countries
• 3 How to combat tax evasion in tax havens?
• 4 Double tax avoidance and tax competition for mobile capital
• 5 Intra-firm dividend policies
• 6 Cross-border hybrid finance and tax planning
• 7 Investigating the shift toward a value-added-type destination-based cash flow capital income tax (VADCIT)
• 8 The case for and against an EU tax
• Bibliography
• Index