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Two Accounts of International Tax Justice

Published online by Cambridge University Press:  08 June 2020

Ivan Ozai
Ivan Ozai*
Affiliation:
Ivan Ozai, Richard H. Tomlinson Fellow and doctoral candidate, Faculty of Law, McGill University. ivan.ozai@mail.mcgill.ca

Extract

The contemporary international tax regime has been increasingly criticized over the years from varied perspectives, particularly as to the unfairness it produces for developing countries. Some commentators argue it is unjust due to the lack of participation of developing countries in the policymaking process on an equal footing. Others suggest the international tax regime was designed by affluent countries to respond to self-interested goals. Some note that its current institutional design creates opportunities for tax competition and avoidance, which more seriously affect developing economies due to their relative dependence on corporate income tax and their greater vulnerability to capital mobility. Others specifically criticize how taxing rights, that is, the entitlement of countries to tax cross-border transactions, are currently allocated between home and host countries and how they disfavour capital-importing, developing countries.

Information

Type
Research Article
Information
Canadian Journal of Law & Jurisprudence , Volume 33 , Issue 2 , August 2020, pp. 317 - 339
Copyright
© The Author(s) 2020

1. Introduction

The contemporary international tax regime has been increasingly criticized over the years from varied perspectives, particularly as to the unfairness it produces for developing countries. Some commentators argue it is unjust due to the lack of participation of developing countries in the policymaking process on an equal footing. Others suggest the international tax regime was designed by affluent countries to respond to self-interested goals. Some note that its current institutional design creates opportunities for tax competition and avoidance, which more seriously affect developing economies due to their relative dependence on corporate income tax and their greater vulnerability to capital mobility. Others specifically criticize how taxing rights, that is, the entitlement of countries to tax cross-border transactions, are currently allocated between home and host countries and how they disfavour capital-importing, developing countries.

These common criticisms reflect a familiar set of accounts in how justice is perceived and discussed in the political philosophy literature. One account centres around distributive justice, which relates to how burdens and benefits should be distributed throughout society. The other account focuses primarily on political justice and examines the conditions for the democratically legitimate exercise of political power, on the grounds that justice is to be pursued by altering the processes and institutions that produce tax rules and systems. The two accounts are related since democratic legitimacy should comprise, to some extent, the set of conditions for any institution to pursue a just distribution of burdens and benefits.Footnote 1 However, each account builds on distinct normative foundations and entails different requirements.Footnote 2

Relatively modest attention is given to the relationship between these accounts in the political philosophy literature,Footnote 3 and this gap carries over to scholarship on international tax policy, resulting in what may be described as the Legitimacy-Justice Fallacy, that is, the tendency of policy prescriptions to seek either to solve legitimacy problems by addressing distributive justice concerns or, conversely, to solve distributive justice problems by addressing legitimacy concerns. International institutions such as the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU) seem to have historically resorted to this fallacy, first, by imposing allegedly just standards on non-member countries without legitimate decision-making procedures and, more recently, following criticism of that approach, by arguing that an inclusive institutional structure should be seen as delivering just outcomes.

This paper examines the impact of this fallacy on international tax discourse and argues that global tax reform discussions should give greater consideration to distributive justice concerns. Section 2 examines political justice problems in the international tax regime and points to some of its institutional and structural legitimacy deficits. Section 3 examines a set of distributive justice problems that are currently caused or contributed to by the international tax regime. Section 4 demonstrates that legitimacy and distributive justice are not substitutes and that justice requires the simultaneous improvement of international tax policy in both normative realms. Section 5 argues that contemporary rhetoric around justice in the international tax community demonstrates an outsize focus on political legitimacy to the exclusion of a genuine concern for distributive justice, to the ultimate detriment of the pursuit of international tax justice. Section 6 concludes.

2. Legitimacy Deficits in International Tax Policy

Legitimacy deficit here generally refers to the imbalance in how power and influence over international tax policymaking are distributed among countries. The international tax regime poses two types of legitimacy problems that directly affect developing countries. The first, which I call Institutional Legitimacy Deficit, relates to how the design of international governance institutions and processes excludes the participation of many of the countries that are affected or subjected to its rules and standards.Footnote 4 The other sort of problem, which I call Structural Legitimacy Deficit, involves long-standing, entrenched issues in the international tax regime that result in an unbalanced distribution of power and influence. This section will discuss these two legitimacy problems.Footnote 5

Institutional Legitimacy Deficit

International tax policy today is primarily driven by the OECD, and the policymaking process excludes to a large extent the participation of non-OECD countries. Although the OECD has more recently sought to include the participation of non-member countries in some of its tax policy discussions, the reasons seem to have less to do with increasing their actual participation in setting the rules than with securing their engagement and fostering a public perception of inclusiveness.Footnote 6 Participation of developing countries in international tax policy has been mostly circumscribed to the implementation stage, with limited participation in the agenda-setting and decision-making phases.Footnote 7

In recent years, aiming at building a more inclusive forum for international tax policy, scholars, government officials, and tax justice advocates have been calling for a world tax organization with universal membership.Footnote 8 However, setting up a global tax organization requires significant agreement among the most powerful international actors, and attempts for creating such a body have been rejected and undermined by the world’s most powerful countries.Footnote 9

Regional arrangements may provide an effective alternative forum for developing countries. Since it might be easier to achieve cooperation among smaller groups with common interests, regional arrangements may assist developing countries in building capacity to interact with developed countries on an equal footing.Footnote 10 However, it remains to be seen how these alternative regional forums will effectively interact with each other and whether they will gain sufficient political support at a global level. One discouraging example frequently mentioned in the literature is the Andean Model Tax Convention, developed in 1971 by five South American countries, members of the Cartagena Agreement of 1969,Footnote 11 which did not succeed as a basis for bilateral tax treaties because no developed country would accept giving comprehensive taxing powers to source (mostly developing) jurisdictions.Footnote 12

Structural Legitimacy Deficit

Apart from the problem of limited state participation in the international tax policymaking process (institutional legitimacy deficit), the international tax regime seems to pose another type of legitimacy problem. Even if formal equality were achieved at some point through greater participation of developing countries, many tax standards and concepts have already been established in a way that tends to favour developed countries, and some of those standards and concepts may be difficult to change. This kind of problem can be called Structural Legitimacy Deficit. As the term suggests, improvement in developing countries’ participation alone would not solve more structural inequities resulting from differences in power and influence in the global political economy.

Many developed countries which have become involved at an early stage of international tax cooperation enjoy greater influence over international tax policy today due to the costs associated with changing standards and rules once they are first established.Footnote 13 This suggests that the existing agenda, concepts and standards in the international tax regime not only tend to favour more powerful countries but are also less likely to change even if participation in tax policymaking were made equal.Footnote 14 Having entered the discussion as latecomers, developing countries also have reduced experience and resources to keep pace with developed countries.Footnote 15

Another constraint derives from how the international tax regime evolves through bilateral tax treaties. Entering into tax treaties brings significant costs. Both negotiating and administering tax treaties involve opportunity costs in terms of human resources and expenses.Footnote 16 Negotiation, interpretation, and administration of tax treaties is resource-intensive and requires highly skilled staff, which for developing countries means diverting scarce resources away from other important tax priorities.Footnote 17 Tax treaties also frequently require changes in domestic laws and may also restrict existing domestic legislation and limit future tax policy options because of specific rules and provisions, especially as a country’s treaty network grows.Footnote 18 Developing countries also face immediate revenue costs in signing tax treaties. Treaties limit source taxation of income derived by non-residents (inbound income), and since most developing countries are capital-importing jurisdictions, they effectively lose taxing rights as they sign tax treaties.

Another structural legitimacy deficit relates to sanctions. Although many theories of international tax cooperation and competition assume a lack of hierarchy among countries, some have noted that a credible threat by a great power significantly constrains competitive states.Footnote 19 The somewhat arbitrary and obscure way that sanctions and blacklists are put together in today’s international tax policy poses a serious problem in terms of normative legitimacy. The fact that these sanctions are the primarily the only mechanism in place to compel compliance on international tax norms raises an additional issue as to how the powers to impose sanctions are unequal among jurisdictions. Whereas the United States, for example, might be reasonably free to ignore the power of peer pressure exerted by international organizations if threatened with blacklisting and defensive measures, most countries are much more susceptible to these forms of sanction.Footnote 20

3. Distributive Justice Deficits in International Tax Policy

The Revenue Problem

Aside from legitimacy problems, the international tax regime poses some distributive issues that significantly affect developing countries. One key challenge facing today’s international tax policy is the pervasiveness of tax competition, which significantly affects the distribution of income and tax revenue availability among countries. Although some have argued that there might be a potential benefit in tax competition, especially in creating global locational efficiency,Footnote 21 most of the tax literature suggests otherwise. First, by turning countries into competitive players, tax competition undermines the ability of countries to set their tax regimes optimally to promote normative goals.Footnote 22 Second, the main problem with tax competition is not about governments competing to attract direct investment and jobs, but about their assigning of paper profits irrespective of where real economic activity occurs.Footnote 23

Third, the problem of tax competition is not only the underprovision of public goods but its distributional implications.Footnote 24 Tax competition can negatively affect tax equity in three different dimensions.Footnote 25 First, as the ability for relocating income facilitated by tax competition is mostly enjoyed by the rich, tax competition hinders vertical equity.Footnote 26 Second, as the tax burden shifts from capital to labor, taxpayers with the same level of income, one from capital and the other from labour, are taxed differently, which affects horizontal equity.Footnote 27 Third, as countries have different sets of advantages and disadvantages in competing for capital and income, tax competition changes the income distribution not only within but also between countries involved. Because tax competition affects countries differently, it impacts what I call interjurisdictional equity. This latter problem is the main concern of this section.

Economic models demonstrate that larger countries have more to lose with tax competition, mostly because the benefits resulting from capital inflows (tax base effect) in proportion to the revenue lost from the lower taxation of domestic capital (tax rate effect) are higher in smaller countries.Footnote 28 Nonetheless, many studies also show that, in relative terms, tax competition has produced more severe effects on the world’s poorest countries for three main reasons. First, economists have long observed the dependence of developing economies on corporate income tax revenues as a share of all revenues. While in developed countries personal income tax revenues are often three to four times the corporate income tax revenues, in developing countries personal income tax revenues are often lower than corporate income revenues.Footnote 29 Corporate income tax provides a larger contribution to overall revenue in developing countries compared to its much smaller relative contribution to overall revenue in developed countries.Footnote 30 As tax competition is primarily driven by corporate tax cuts, fiscal performance in developing countries is significantly more vulnerable to pressures from tax competition.Footnote 31 Most estimates of the revenue losses suffered by developing countries due to tax avoidance and tax competition exceed by some distance the amount these countries receive in development aid.Footnote 32

Second, developing countries are also more vulnerable to tax competition because of the tax-sensitivity of firms. Some studies indicate that multinationals’ investment and profit levels in developing countries are more sensitive to taxation than in the developed world, making them more vulnerable to increasing capital mobility.Footnote 33 Indeed, while the global decrease of corporate tax rates has not significantly affected corporate tax revenues in developed countries—whether as a share of GDP or as a share of total tax revenues—it has considerably reduced corporate tax revenues in some of the poorest and most vulnerable of the developing countries.Footnote 34 Third, in the tax competition scenario, some types of tax incentives are likely to be more successful than others in attracting investments and generating benefits for the host country. Since designing effective tax incentives is already a challenge for well-resourced tax administrations in developed countries, the risks of serious revenue leakages and negative consequences in developing countries are likely more significant.Footnote 35

Tax competition poses a significant distributional problem that widely plagues most countries due to its race-to-the-bottom effect, but poorer countries are comparatively more affected. Tax competition results in what, for a matter of simplicity, I call the Revenue Problem.

The Allocation Problem

Another important distributional problem for developing countries is that the present allocation of taxing rights among countries significantly favours wealthier nations. The international tax regime consists of a network of bilateral tax treaties—most, to some extent, based on the OECD Model Tax Convention—that determine how taxing rights are divided between residence (mostly developed) and source (mostly developing) countries in cross-border transactions. Some argue that what they do is reallocate taxing rights from source (developing) to residence (developed) countries, since in the absence of such treaties, source countries would enjoy primary taxing rights over income, leaving the residence country to double tax or provide relief for the source country tax.Footnote 36 They strongly advise developing countries not to enter into tax treaties with developed countries, arguing that tax treaties are a “poisoned chalice”Footnote 37 which shift tax revenues to developed countries with often no equivalent benefit (such as increased level of foreign investment) to developing countries.Footnote 38

The OECD tax treaty model was generally based on economic principles that favoured simplicity and reduced barriers for international trade and investment. The model came to dominate the international tax arena, and the costs of not being part of the network gradually increased for late-coming developing countries. The result is that the tax treaty regime has allowed residence (developed) countries to benefit from a model so widespread that it is unlikely to change.Footnote 39 Although competing treaty models may provide a fairer distribution of tax revenues for developing countries, many might be unwilling to join for fears of a decrease in cross-border investment due to the path-dependence effect.Footnote 40

More fundamentally, the tax treaty network provides the legal infrastructure for the principles and concepts that shape the international tax regime today, so that the overall structure of international tax law is based on standards, principles, and methods that lead to an inequitable distribution of taxing rights between developing and developed countries. This results in what I call the Allocation Problem.

Global Distributive Justice

As noted in this section, the existing international tax regime harms developing countries in two different but related ways. First, the current institutional design allows for tax competition, which significantly reduces the collective revenue of countries and more severely affects the poorest ones (the Revenue Problem). Second, the existing regime produces an unbalanced allocation of taxing rights among developing and developed countries (the Allocation Problem). It is beyond the scope of this article to engage in the global justice debate.Footnote 41 However, inasmuch as this section argues that the current international tax system poses global distributive justice problems, some normative baseline for which to judge these issues as morally problematic is called for.Footnote 42

One does not need to embrace a non-relational global cosmopolitanismFootnote 43 to hold the current international tax system as morally unjust. An intermediary position on global justice implies that international cooperation requires minimal mutual respect between political communities, which might not imply full global distributive justice but demands the absence of grave injustices. The main normative requirement deriving from the view of international distributive justice adopted in this paper is that international rules and global institutional arrangements do not worsen the situation of the worst-off countries. There are three main reasons why this is so.

First, the international tax regime increasingly constitutes a strong and largely non-voluntary economic association between countries, which raises special associative duties, that is, duties owed to parties with whom one stands in a robust relationship or interaction.Footnote 44 One of these is the requirement that international institutions do not become sources of privileges to wealthier, more powerful participants.Footnote 45

The second reason relates to the first but is independent and broader. The current level of economic integration of nations has made the global economy a substantial presence in the lives of all states, and economic regulation and policy decisions today take place in a global setting that is inescapably interdependent. The fact that rules made by a state (or by supranational rule-making body) are consequential to other states raises the need for some degree of coordination and equity beyond the national level.Footnote 46

A third reason for distributive justice at the international level points to the causal relationship of globalization to global poverty. Although the argument relies on empirical premises, it seems uncontroversial today that economic globalization is at least partially a factor in global poverty.Footnote 47 This causal relationship implies that some degree of partial correction is required to reduce or eliminate inequalities stemming from global factors.Footnote 48

On this last point, one could argue that the current global economic system has shown a tendency to minimize extreme poverty in the world.Footnote 49 Similarly, one could point to the decrease in global inequality in the last decades and ask whether a change in the current international tax regime is called for.Footnote 50 There are two main reasons why reform of current international institutions is still required to address the existing global poverty and inequality. As for global poverty, although extreme poverty has decreased in the last decades, independent projections by the World Bank and various research institutes suggest that we are a long way from eradicating global poverty.Footnote 51 Moreover, the number of people in extreme poverty in Sub-Saharan Africa has risen, and various projections expect that extreme poverty will be increasingly concentrated in Africa.Footnote 52 As for global inequality, although the world has seen a dramatic decrease in global inequality when countries’ population sizes are taken into account (mostly due to the economic growth of China and India, the two most populous countries in the world), inequality between nations (without population-weighting) has risen in the last decades.Footnote 53

Going back to the view of international justice endorsed in this paper, its main normative requirement is that international rules and global institutional arrangements do not worsen the situation of the worst-off countries. Both the Revenue and the Allocation Problems demonstrate that the present international tax regime violates this normative requirement. First, by allowing the tax competition to continue (the Revenue Problem), it produces significant negative impact on the world’s poorest countries. Second, by allocating taxing rights between countries in a manner that favours the most affluent ones (the Allocation Problem), it produces a distributive impact that is relatively worse for the worst-off.Footnote 54

4. Legitimacy and Justice in International Tax Policy

Sections 2 and 3 focused on a different account relating to international tax justice. Section 2 argued that the institutional design of the international tax regime lacks legitimacy because international tax policy is mostly advanced by international institutions with a limited membership which allows only restricted participation of non-members. Moreover, foundational institutional arrangements give first-movers significant advantage in setting agendas and standards, and late-coming developing countries are pressured to either converge or adapt, generating asymmetrical bargaining strengths between jurisdictions. Section 3 showed that the international tax regime also poses distributive justice problems by allowing for tax competition between countries, which reduces overall tax revenues and more significantly affects developing countries, and allocating taxing rights in a way that favours more affluent countries.

This section will consider legitimacy and justice as two paths to evaluate fairness in the international tax regime and focus on the interaction between these normative dimensions, namely how they relate to one another and whether solving one problem dismisses the need for dealing with the other. Do international tax institutions that produce reasonably just outcomes need to be democratically legitimate? From the opposite perspective, do we need to discuss distributive principles of international tax justice in a scenario where international tax institutions are regarded sufficiently legitimate?

4.1. The Need for Legitimacy in International Tax Policy

Discussions on global distributive justice frequently leave aside any consideration of the institutions required to deliver the form of justice they support.Footnote 55 Yet most would arguably agree that democratic values are an important requirement of justice and would hardly favour autocracy even if it may lead to a better outcome in the long run.Footnote 56 One could ask whether a normative evaluation of the international tax regime can preclude matters of legitimacy when it has passed the test for distributive justice. More concretely, if we determine that some normative standards in international tax policy are just, can we apply them to all stakeholders even if they are not derived from democratic institutions and through democratic procedures? Can distributive justice replace democratic legitimacy as a measure for normative evaluation?

Substantive discussions on distributive justice are effective for determining principles of justice, but they are limited when it comes to translating principles into concrete and specific solutions for real-world problems. The problem with a substantive approach that overlooks normative conditions for legitimacy is that it tends to be insensitive to context and frequently fails to appreciate that institutional implementation requires political judgment.Footnote 57 Even if we are able to determine guiding principles for international taxation based on specific conceptions of justice, we still need to discuss how they should apply and be implemented. Given the considerable disagreements on what justice entails, participation in the decision-making process of those affected by policy decisions is necessary to avoid arbitrariness and favouritism. There are several potential solutions for international tax problems which can be justified by a standard of justice. Determining which of these justifiable solutions should be adopted requires a broader discussion through inclusive procedures.Footnote 58

One potential outcome of the lack of an inclusive process is the imposition of unilateral sanctions on countries that do not follow standards based on unilateral understandings of what international tax justice entails. A recent case is the EU list of non-cooperative tax jurisdictions,Footnote 59 which aims at addressing the Revenue Problem and includes countries that do not follow specific standards relating to tax competition.Footnote 60 The list is not limited to a “naming and shaming” approach but is expected to result in the application of defensive measures in case the listed jurisdiction does not make the changes requested by the EU.Footnote 61 The EU’s initiative was based on an idea of “fair taxation”Footnote 62 and the criteria for determining the standards for the list did not include the participation of non-EU member countries. Based on a unilateral conception of distributive justice, the initiative is problematic from the standpoint of normative legitimacy.Footnote 63

4.2. The Need for Distributive Justice in International Tax Policy

From the opposite perspective, one may ask whether we need to discuss distributive justice principles or whether we should leave justice to be determined by the outcomes of democratic procedures. Some philosophers focusing on conditions for fair decision-making procedures forswear detailed accounts of justice on the grounds that stakeholders should themselves decide what justice is.Footnote 64 They argue that since any conception of justice can be disputed and politicized, concerns about global justice should give rise to a quest to democratize systems of global governance.Footnote 65

This section challenges that assumption in the context of international tax policy and argues that legitimacy and justice are not interchangeable. It is true that principles of justice cannot be imposed without proper democratically legitimate procedures. Nonetheless, greater legitimacy in the tax policy decision-making process will not necessarily lead to a just outcome, and an in-depth discussion on distributive justice is also necessary to ensure fairness in international tax policy.

The Gap between Political Equality and Substantive Equity

As noted earlier, in 2016, the OECD introduced the BEPS Inclusive Framework to address institutional legitimacy concerns.Footnote 66 The framework aims to allow non-OECD jurisdictions to participate on an “equal footing” in developing standards, reviewing, and monitoring the implementation of the Base Erosion and Profit Shifting (BEPS) project, which is a comprehensive action plan put forward by the OECD to address tax avoidance and tax competition through a coordinated and collaborative approach.Footnote 67

The Inclusive Framework has been criticized because it limits the participation of non-OECD and non-G20 jurisdictions in reviewing and monitoring the implementation of standards that were in great part already determined through the development of the BEPS project.Footnote 68

However, the main issue with improving the participation of developing countries in those terms is determining what “equal footing” means. The BEPS Inclusive Framework seems to confine the notion of democracy to the idea of equality in the decision-making process, dismissing any consideration of its outcomes.Footnote 69 Instrumentalist defenses of democracy suggest, however, that democratic legitimacy requires that decision-making procedures lead to just outcomes or to the morally best among the alternative policies.Footnote 70

The main problem with equating democracy with equal participation in the decision-making process is that it neglects that giving all stakeholders an equal opportunity to express their preferences sometimes leads to an unfair aggregation of these preferences, as the problem of entrenched minorities often reveals.Footnote 71 Despite the importance of equal participation in democratic procedures, the fairness of the consequences of a decision should also determine its justifiability.Footnote 72

One may suggest that developing countries constitute the great majority of the global community, and therefore giving them an equal say in the decision-making process would ultimately result in a regime that favours less over more affluent economies. However, developing countries face increasing competition for access to foreign investment and markets and are divided by significant levels of political, social, and economic heterogeneity which prevents them from acting collectively. As commentators note, strong economic or political stakeholders, such as powerful states or wealthy investors, frequently take advantage of these divergences to practice “divide and rule” strategies and erode the capacity of weak countries for collective actions by confining them to “different ‘cells’ in a maze of prisoners’ dilemmas.”Footnote 73

Merely ensuring that countries have an equal say in the decision-making process might not suffice to produce a fair result or to include the interests of the less powerful stakeholders, primarily because of background inequalities in resources, technical knowledge, and general bargaining position.Footnote 74 This is illustrated in the ongoing BEPS project, in which the OECD has managed to monopolize the reform process through a top-down approach with agenda-setting on a higher level.Footnote 75 Even within the Inclusive Framework, the project is still under the command of the OECD, and since its secretariat is bound to defend the interests of the OECD, it should not depart much from its institutional aims, which include “achiev[ing] the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy”.Footnote 76 Moreover, political decisions are generally based on the technical work put forward by technical bodies primarily composed by nationals from OECD member countriesFootnote 77 who are expected to hold at least informal commitments to represent the institution’s interests.

An additional problem, noted in Section 2, is the role of path dependence and first-mover advantage in policy decision-making. Initial institutional arrangements commonly produce a significant advantage in setting agendas and standards. Once institutions have started down a track, the costs of reversal become significantly high due to the entrenchments of particular institutional arrangements. Even if an alternative policy could be considered fairer and more efficient from an ideal perspective, the existing institutional arrangements might make it an infeasible alternative. In this respect, commentators frequently note the OECD’s recent use of rhetorical strategy based on the notions of economic substance and value creation not only to strengthen its epistemic and governance authority but primarily to evade committing to a more substantial overhaul of the current system.Footnote 78

In short, political equality does not ensure substantive equity. Improving participation of countries on an equal footing with no consideration to background inequalities and differences in bargaining position might not lead to a fair allocation of taxing rights, particularly for the least developed countries. Unless there is a more serious discussion on distributive justice and substantive equity in how taxing rights are allocated, poorer countries might be left with only a formal right to participate in the policymaking process.

A Normative Framework for Equal-Standing Negotiation

Most international tax reform proposals discussed today, aimed at addressing the allocation of taxing rights among jurisdictions, have an underlying concern with economic substance. They reflect an implicit assumption that states are entitled to benefit from (and thus tax) resources they control and the wealth created in their territory.Footnote 79 However, what frequently goes unnoticed is that the commitment to economic substance is ultimately based on a fundamental conception about justice, that is, on a specific moral standard for determining how the rights to tax should be allocated among countries. Such standard is so entrenched in the literature and the policymaking debates that commentators rarely acknowledge it as a contentious matter of distributive justice.Footnote 80

Policy negotiations involving technical concepts and significant distributional outcomes often result in stakeholders supporting technical arguments which will maximize their share of benefits.Footnote 81 The lack of a normative framework that challenges the dominant theoretical model impairs the ability of less powerful stakeholders to discuss and negotiate policy with equal standing. Reviewing the normative foundations for allocating taxing rights among countries fairly is necessary for improving distributive justice, but it is also vital to allow developing countries to counter rhetoric based on entrenched principles that significantly disfavour them.

Even for an equal-standing negotiation, there is a need for expanding the discussion on the normative criteria to determine the allocation of taxing rights. Limiting discussions to legitimacy concerns might not suffice given the lack of proper theoretical framework and language that help developing countries make a case for improving their taxing rights. A serious discussion on distributive justice is critical to provide a counter-hegemonic framework to shift the balance toward a more equitable division of rights.

Bleak Prospects of Global Democratic Institutions

Another reason why legitimacy discussions should not replace the need for distributive justice concerns is that a scenario where normative conditions for the legitimacy of global governance institutions are fully met seems remote. First, a pervasive problem in international governance institutions is the long chain of delegation from the individual citizen to the international policy decision-making arena, where the impact of popular will on the decision-making process is nominal at the international level.Footnote 82 Second, there is no political structure today that could ensure democratic control over global governance institutions.Footnote 83 Third, an attempt to create such a structure in the form of a global democratic federation would have to rely on existing states as federal units, but since many states themselves lack conditions for state legitimacy, they could not confer legitimacy to a global governance institution.Footnote 84

As noted in Section 2, the prospects for legitimacy in international tax policymaking are poor. The OECD’s BEPS Inclusive Framework, an attempt to increase inclusiveness, has been severely criticized for limiting the participation of non-OECD and non-G20 members in the implementation phase. Calls for a global tax body under the United Nations (UN) are systematically rejected and undercut by the world’s most influential countries, and the UN itself is decried for lacking democratic procedures.Footnote 85 Regional arrangements are another possible solution for improving legitimacy, but it is unclear whether they will gain enough influence at a global level and how they will connect to each other in a way that leads to global cooperation. Given this scenario, even if we were to concede that legitimate institutions should necessarily lead to fair outcomes, forgoing discussions on distributive justice in international tax policy in favour of a democracy-oriented solution implies waiting for legitimate structures to take place when it is not clear if they ever will.

The Reciprocally Supportive Roles of Consent and Content in Stakeholders’ Protection

In most democratic countries, the relationship between distributive justice and political legitimacy is regulated by constitutional rules that lay down certain substantive rights and principles, as well as procedural rules for judicial review.Footnote 86 In a domestic context, such rules are expected to ensure a minimum level of distributive justice when political democracy fails to protect certain individuals due to, for example, unrestrained majorities or institutional corruption.Footnote 87 Similarly, in domestic tax systems, stakeholders have historically relied on fixing substantive principles of tax justice (content) whenever there were constraints in participation and democratic procedures (consent).Footnote 88 Taking consent and content as mutually complementary ways of protecting weaker stakeholders, protection by content acquires an even more critical role where protection by consent is limited.Footnote 89

Given the absence of a global constitution or an international central authority today to ensure the fulfilment of minimum requirements of justice, discussing distributive justice at the international level seems even more relevant than in domestic democracies. In the lack of formal, binding constitutional rules, an ethical normative framework is paramount in the event of inadequate functioning of international institutions. The absence of greater consideration of distributive justice in discussions of international tax policy is likely to lead to a system where consent (political legitimacy) is absolute, with no counter-majoritarian measures or similar devices to protect weaker stakeholders.

5. The Legitimacy-Justice Fallacy and Its Role in International Tax Policy

Although the distributive justice issues presented in Section 3 have long been identified and acknowledged in the relevant literature,Footnote 90 a broad and in-depth discussion on the normative implications of global justice for addressing these tax policy problems is still lacking.Footnote 91 One important reason for this scholarly gap is that the literature tends to conflate legitimacy (discussed in Section 2) with distributive problems (discussed in Section 3).Footnote 92 Proposals to address the latter (that is, reducing the existing inequities of the international tax regime) frequently focus on improving the former (that is, securing greater participation of developing countries in tax policy decision-making). As argued in Section 4.2, whereas improving legitimacy in the international tax regime by strengthening participation of developing countries in the decision-making process is expected to result in distributive improvements, this is not a necessary result, and addressing legitimacy deficits may not suffice to meet the requirements of global justice.Footnote 93

There is a causal gap between the moral requirements for distributive justice and the solutions for addressing legitimacy. Democratic legitimacy primarily focuses on procedural requirements to formally capture the interests of stakeholders and translate them into outcomes and has only tangential connections to just outcomes.Footnote 94 Conditions for legitimacy and justice are grounded in related but different moral values and justifications, and they imply different requirements. Improving legitimacy is likely to help to advance distributive justice due to the mutually supportive roles of consent and content mentioned in Section 4.2,Footnote 95 but attempting to address one issue (the Distributive Justice Problem) with the solution for another (the Legitimacy Problem) neglects the distinct nature of these issues.

Conflating the two normative realms produces what I call the Legitimacy-Justice Fallacy. While distributive justice focuses on how burdens and benefits should be distributed, political justice (or legitimacy) considers who should exercise power and how they should do so.Footnote 96 Collapsing the notion of legitimacy into one of distributive justice undermines the social function of legitimacy assessments.Footnote 97 On the other hand, the problem with an exclusive concern with democratic legitimacy is that it does not seem able to legitimate every result it generates, and it neglects that “outcomes that are undeniably democratic can be palpably unjust.”Footnote 98

The OECD seems to have particularly relied on this fallacy when promoting its goals and standards in international tax policy. In an earlier attempt to tackle tax competition, it built on a unilateral conception of justice to impose specific standards for “acceptable” tax competition and called for defensive measures and economic sanctions against countries that would not comply with its standards.Footnote 99 Although such standards were unilaterally established by the OECD, they applied to both OECD and non-OECD members. The lack of legitimacy in the decision-making process was seemingly taken by the OECD as justified based on its own understanding of “fairness” and “neutrality.”Footnote 100

More recently, the focus has shifted toward legitimacy. The OECD seems to rely on the Legitimacy-Justice Fallacy to circumvent discussions on distributive issues when it suggests that the BEPS Inclusive Framework, aimed at addressing the Legitimacy Problem, might resolve the Distributive Justice Problem. Although not making the argument that the framework aims to produce a fair allocation of taxing rights among jurisdictions, it seems to suggest that it eventually will.Footnote 101 Similarly, when describing its Inclusive Framework, the OECD seemingly takes for granted that it “ensures [developing countries] can influence norms and standards in their favour.”Footnote 102

Generally, the exclusive focus on creating an inclusive framework when discussing fairness for developing countries seemingly indicates an attempt to sidestep a more serious discussion on a fair allocation of taxing rights for developing countries. In a recent public consultation document, the OECD discussed different proposals to reconsider the current allocation of taxing rights by revising profit allocation and nexus rules.Footnote 103 Although acknowledging that the proposals “chiefly relate to the question of how taxing rights … should be allocated among countries”,Footnote 104 the document provided no discussion on how to make the allocation fairer to poorer countries or how the proposed changes would affect their existing rights. Nonetheless, the Inclusive Framework was mentioned 20 times throughout the 29-page document, apparently as a way to emphasize that the fairness of the discussion is implicit in its purported inclusiveness and sidestep distributive justice concerns by framing the process as normatively legitimate.Footnote 105

Normative evaluation of the international tax regime requires that both the legitimacy and the distributive justice dimensions be considered and that specific solutions be discussed for each of them. As noted in this article, given the considerable disagreements on what justice entails, participation in the decision-making process of those affected by policy decisions is necessary to avoid arbitrariness and favouritism. On the other hand, political equality does not ensure substantive equity, and an inclusive decision-making process might still lead to an unfair allocation of taxing rights due to existing inequalities and differences in bargaining position among countries. Moreover, an equal-footing negotiation requires a counter-hegemonic framework based on distributive justice grounds to shift the balance toward a more equitable division of rights. Furthermore, given the bleak prospects for democratic legitimacy in the existing international governance institutions, forgoing discussions on distributive justice in favour of a democracy-oriented solution implies waiting for institutional changes that might never take place.

6. Conclusion

The main argument made in this paper is that justice requires not only improving inclusivity of less affluent countries in the current tax policy decision-making (political justice) but also establishing a normative framework that provides them with differentiated taxing rights based on their different levels of development (distributive justice). One noteworthy example is how responsibilities in addressing climate change are shared between countries. In climate change discussions, countries agreed to a general normative principle according to which responsibilities should be distributed among countries based on their different capabilities.Footnote 106

Stating a similar principle in international tax policy will not alone shift how taxing rights are presently allocated, especially because the power differences and political constraints that have led to the current international tax regime will remain influential to the outcomes of the decision-making process. That said, establishing such a principle should help lower-income countries to make a case for improving their taxing rights and gradually shift the focus from political equality to substantive equity.

International organizations, including the OECD, have made increasing efforts that demonstrate a concern for addressing global inequality in the last few years.Footnote 107 Nonetheless, an allocation of taxing rights among countries based (completely or partially) on their different levels of development has not so far been advanced in international tax policy discussions. If it becomes clear that addressing international inequality requires differentiated taxing rights to developing countries rather than simply greater inclusivity in the decision-making process, prospective reform proposals should eventually benefit less affluent countries.

Footnotes

For helpful comments on previous drafts, special thanks go to Laurens van Apeldoorn, Alice Chessé, Allison Christians, Peter Dietsch, Frédéric Mérand, and Catherine Walsh. This article comprises work that forms part of the author’s research at McGill University. The author gratefully acknowledges financial support from the Fonds de recherche du Québec sur la société et culture (FRQSC), the Centre for International Governance Innovation (CIGI), the Centre d’études et de recherches internationales de l’Université de Montréal (CÉRIUM) and McGill University.

1. Keith Dowding, “Are Democratic and Just Institutions the Same?” in Keith Dowding, Robert E Goodin & Carole Pateman, eds, Justice and Democracy: Essays for Brian Barry (Cambridge University Press, 2004) 25.

2. The distinction addressed in this paper between justice and legitimacy is not to be confounded with the distinction between input (process) and output (outcome) legitimacy. Similar to an assessment based on justice, output legitimacy is concerned about outcomes of institutional processes. However, output legitimacy is still about legitimacy in the sense that it requires outcomes of institutional processes to be aligned with stakeholders’ interests. It is still a democratic question of how well institutions connect with interests. In other words, conditions for legitimacy focus either on including individuals’ inputs in the process (input legitimacy) or achieving results that realize those same interests (output legitimacy). On the other hand, distributive justice follows a different philosophical tradition and, despite also focusing on outcomes, speaks to how benefits and burdens can be fairly distributed throughout society. Whereas outcome legitimacy builds on the democratic tradition and speaks to the accountability of a given institution to stakeholders, distributive justice consists of a moral evaluation of a given distribution rather than on whether such a distribution aligns with stakeholders’ interests. For a more comprehensive discussion on the legitimacy-justice distinction, see Keith Dowding, Robert E Goodin & Carole Pateman, eds, Justice and Democracy: Essays for Brian Barry (Cambridge University Press, 2004).

3. See Keith Dowding, Robert E Goodin & Carole Pateman, “Between Justice and Democracy” in Keith Dowding, Robert E Goodin & Carole Pateman, eds, Justice and Democracy: Essays for Brian Barry (Cambridge University Press, 2004) 1 at 1 (noting that political philosophy has historically focused on one and then the other of these two themes and rarely succeeded in holding them jointly) and Simon Thompson, “On the Circularity of Democratic Justice” (2009) 35:9 Philosophy & Social Criticism 1079 at 1080 (pointing out that little attention has been given to the relationship between these two normative dimensions).

4. This paper leaves aside the fundamental question in democratic theory about who should be included in the collective decision-making process—commonly known as the boundary problem, the problem of inclusion, or the problem of constituting the demos—not only because it goes beyond the scope of this article, but also because most would agree that at least those who are subjected to the decision should take part in making it. For an overview, see Robert E Goodin, “Enfranchising All Affected Interests, and Its Alternatives” (2007) 35:1 Philosophy & Public Affairs 40.

5. A deeper discussion on these two forms of legitimacy deficit is provided in Ivan Ozai, “Institutional and Structural Legitimacy Deficits in the International Tax Regime” (2020) 12:1 World Tax J.

6. In 2013, the OECD started the Base Erosion and Profit Shifting (BEPS) project, a comprehensive action plan to address tax avoidance and tax competition, and, in 2016, the OECD introduced the Inclusive Framework on BEPS, which allows the participation of non-OECD jurisdictions in the decision-making processes related to the BEPS project. See OECD, OECD/G20 Inclusive Framework on BEPS: Progress Report July 2017-June 2018 (OECD, 2018) at 6. Although the Inclusive Framework aimed to address legitimacy concerns, it has been criticized by many commentators for its limited scope. See Allison Christians & Laurens van Apeldoorn, “The OECD Inclusive Framework” (2018) 72:4/5 Bull Intl Tax 226 at 233 (noting the risks of the Inclusive Framework being dismissed as mere rhetoric in the absence of greater transparency as to what goals the OECD aims to achieve with its initiative).

7. See Sissie Fung, “The Questionable Legitimacy of the OECD/G20 BEPS Project” (2017) 10:2 Erasmus L Rev 76 at 84 (concluding that “only at the implementation stage of the BEPS Package are all countries treated as ‘horizontal equals’ in order to ensure its proper execution”); Dirk Maarten Broekhuijsen, A Multilateral Tax Treaty: Designing an Instrument to Modernise International Tax Law (PhD Dissertation, Leiden University, 2017) at 59-60 (arguing that participation of non-OECD countries have been mostly limited to the endorsement phase); Eurodad, Q & A on the Intergovernmental Tax Body (Brussels: Eurodad, 2016) (arguing that, at best, the Inclusive Framework provides a restricted influence of developing countries on a predetermined and very limited agenda).

8. Some suggest that a global tax body with universal membership could be achieved by upgrading the existing UN Committee of Experts on International Cooperation in Tax Matters (UN Tax Committee). See, e.g., Reuven S Avi-Yonah & Haiyan Xu, “Evaluating BEPS” (2017) 10:1 Erasmus L Rev 3 at 9 (“OECD and/or G20 is not the truly global platform for comprehensive reform of international tax law. To transform the current BEPS project into truly global, coherent, coordinated and inclusive actions, UN should undertake the leadership in the next stage of international tax law reform.”); Annet Wanyana Oguttu, “Resolving Treaty Disputes: The Challenges of Mutual Agreement Procedures with a Special Focus on Issues for Developing Countries in Africa” (2016) 70:12 Bull Intl Tax 724 at 741; “Statement on Behalf of the Group of 77 and China by Carola Íñiguez, Undersecretary of International Organizations of Ecuador, at the ECOSOC Special Meeting on International Cooperation in Tax Matters” (New York, 7 April 2017), online: http://www.g77.org/statement/getstatement.php?id=170407b [perma.cc/6H3Z-B2GW]; Eurodad, supra note 7; Oxfam, “Business Among Friends: Why Corporate Tax Dodgers are not yet Losing Sleep over Global Tax Reform” (2014) 185 Oxfam Briefing Paper at 15 (arguing for linking the BEPS project to the UN Tax Committee to improve inclusiveness of non-OECD countries).

9. See JC Sharman, “Seeing Like the OECD on Tax” (2012) 17:1 New Political Economy 17 and Tarcísio Diniz Magalhães, “What Is Really Wrong with Global Tax Governance and How to Properly Fix It” (2018) 10:4 World Tax J 499 at 514.

10. Paddy Carter, “Row Over UN Tax Body Is a Needless Distraction for Developing Nations,” The Conversation (21 July 2015), online: https://theconversation.com/row-over-un-tax-body-is-a-needless-distraction-for-developing-nations-44943 [perma.cc/Y6EV-ESYU]. But see H David Rosenbloom, Noam Noked & Mohamed Helal, “The Unruly World of Tax: A Proposal for an International Tax Cooperation Forum” (2014) 15:2 Fla Tax Rev 57 at 75-76 (arguing that membership of regional organizations is generally based on geography and members might not have shared interests in tax policy).

11. See, e.g., Eduardo A Baistrocchi, “The Use and Interpretation of Tax Treaties in the Emerging World: Theory and Implications” (2008) 4 British Tax Rev 352 at 372-73.

12. Footnote Ibid (pointing out that the Andean model became virtually irrelevant in international taxation); Martin Hearson, “Developing Countries’ Role in International Tax Cooperation” (2017) Intergovernmental Group of Twenty-Four Working Paper, online (pdf): G24 https://www.g24.org/wp-content/uploads/2017/07/Developing-Countries-Role-in-International-Tax-Cooperation.pdf [perma.cc/XZF8-GMEN].

13. This phenomenon is commonly called path dependence, which refers to the causal relevance of preceding stages in a temporal chain of events. It suggests that once institutions have started down a track, the costs of reversal become significantly high due to the entrenchments of certain institutional arrangements. See Paul Pierson, “Increasing Returns, Path Dependence, and the Study of Politics” (2000) 94:2 American Political Science Rev 251 at 252. See also Sunita Jogarajan, Double Taxation and the League of Nations (Cambridge University Press, 2018) at 254-56 (providing a historical analysis of the League of Nations’ work in the 1920s which led to the current international tax regime and suggesting that reform discussions are often guided by a desire to maintain the status quo).

14. See Tsilly Dagan, International Tax Policy: Between Competition and Cooperation (Cambridge University Press, 2018) at 173-74 (“In other words, in designing the treaty mechanism to favor countries of residence in the allocation of tax revenues, the network initiators were able to extract monopolistic rents at the expense of late-coming developing (host) countries.”). See also Ranjit Lall, “Timing as a Source of Regulatory Influence: A Technical Elite Network Analysis of Global Finance” (2015) 9 Regulation & Governance 125 (pointing out the importance of first-mover position in setting the agenda in global rulemaking, especially in influencing distributional outcomes by ensuring that proposals made by first movers are increasingly difficult to change at later stages of rulemaking).

15. Irene Burgers & Irma Mosquera, “Corporate Taxation and BEPS: A Fair Slice for Developing Countries?” (2017) 1 Erasmus L Rev 29 at 38.

16. Victor Thuronyi, “Tax Treaties and Developing Countries” in Michael Lang et al, eds, Tax Treaties: Building Bridges Between Law and Economics (IBFD, 2010) 441 at 442-43.

17. Ariane Pickering, “Why Negotiate Tax Treaties?” in UN, Papers on Selected Topics in Negotiation of Tax Treaties for Developing Countries (United Nations, 2014) 1 at 26.

18. Footnote Ibid at 23-25.

19. Lukas Hakelberg, “Coercion in International Tax Cooperation: Identifying the Prerequisites for Sanction Threats by a Great Power” (2016) 23:3 Rev Intl Political Economy 511.

20. Fung, supra note 7.

21. Mitchell B Weiss, “International Tax Competition: An Efficient or Inefficient Phenomenon?” (2001) 16 Akron Tax J 99; David C Elkins, “The Merits of Tax Competition in a Globalized Economy” (2016) 91 Indiana LJ 905. I thank an anonymous referee for raising this point.

22. See, e.g., Reuven S Avi-Yonah, “Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State” (2000) 113:7 Harv L Rev 1573; Peter Dietsch, Catching Capital: The Ethics of Tax Competition (Oxford University Press, 2015); Laura Seelkopf & Hanna Lierse, “Taxation and Inequality: How Tax Competition Has Changed the Redistributive Capacity of Nation-States in the OECD” in Melike Wulfgramm, Tonia Bieber & Stephan Leibfried, eds, Welfare State Transformations and Inequality in OECD Countries (Palgrave Macmillan, 2016) 89 at 96-97. For a normative analysis, see also Ivan Ozai, “Tax Competition and the Ethics of Burden Sharing” (2018) 42 Fordham Intl LJ 61.

23. Thomas Rixen, “Tax Competition and Inequality: The Case for Global Tax Governance” (2011) 17:4 Global Governance 447.

24. Hans-Werner Sinn, The New Systems Competition (Blackwell, 2003) at 56.

25. Seelkopf & Lierse, supra note 22 at 92-93.

26. Anthony C Infanti, “Tax Equity” (2008) 55 Buff L Rev 1191 at 2000.

27. Seelkopf & Lierse, supra note 22 at 92-93.

28. See, e.g., S Bucovetsky, “Asymmetric Tax Competition” (1991) 30:2 J Urban Economics 167 and John D Wilson, “Theories of Tax Competition” (1999) 52:2 Nat’l Tax J 269.

29. See Richard M Bird & Eric M Zolt, “Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries” (2005) 52 UCLA Law Rev 1627 at 1656.

30. See Michael Carnahan, “Taxation Challenges in Developing Countries” (2015) 2:1 Asia Pacific Pol’y Stud 169 at 176.

31. See International Monetary Fund, “Spillovers in International Corporate Taxation” (2014) IMF Policy Paper at 7.

32. OECD, Promoting Transparency and Exchange of Information for Tax Purposes: A Background Information Brief (9 January 2010), online (pdf): http://www.oecd.org/newsroom/44431965.pdf [perma.cc/968E-XY93].

33. Clemens Fuest & Nadine Riedel, “Tax Evasion, Tax Avoidance and Tax Expenditures in Developing Countries: A Review of the Literature” (2009) Report Prepared for the UK Department for International Development, online (pdf): http://r4d.dfid.gov.uk/.

34. Michael Keen & Alejandro Simone, “Is Tax Competition Harming Developing Countries More Than Developed?” (2004) 34 Tax Notes Intl 1317.

35. Carnahan, supra note 30 at 177.

36. See, e.g., Kim Brooks & Richard Krever, “The Troubling Role of Tax Treaties” in Geerten MM Michielse & Victor Thuronyi, Tax Design Issues Worldwide (Kluwer Law International: Alphen aan den Rijn, 2015) 159 at 166.

37. The description of tax treaties as a “poisoned chalice” for developing countries has been first suggested by Martin Hearson in a presentation at Strathmore University Business School in Nairobi in September 2013. See Martin Hearson, “Double Tax Treaties: A Poisoned Chalice for Developing Countries?” (12 September 2013), online: https://martinhearson.net/2013/09/12/double-tax-treaties-a-poisoned-chalice-for-developing-countries/ [perma.cc/7EMS-5498].

38. Brooks & Krever, supra note 36. But see Eric M Zolt, “Tax Treaties and Developing Countries” (2018) Oxford University Centre for Business Taxation Working Paper 18/05 (arguing that developing countries might have a reason to enter into treaties if they are able to secure meaningful withholding rates and safeguards against treaty abuse and suggesting an alternative view where tax revenues are not transferred from developing to developed countries but picked up by foreign investors in form of tax incentives).

39. See Dagan, supra note 14.

40. For a description of path dependence in international tax governance, see Section 2.

41. This is one the most discussed topics in the recent political philosophy literature. For a brief summary, see Samuel Scheffler, “The Idea of Global Justice: A Progress Report” (2014) 20 Harv Rev Philosophy 17. For a more comprehensive account, see Gillian Brock, ed, Cosmopolitanism versus Non-Cosmopolitanism: Critiques, Defenses, Reconceptualizations (Oxford University Press, 2013).

42. I thank an anonymous referee for pushing me to say more on this point.

43. I borrow this term from Andrea Sangiovanni, “Global Justice, Reciprocity, and the State” (2007) 35:1 Philosophy & Public Affairs 3, which refers broadly to the works of early, global egalitarians such as Charles Beitz, Political Theory and International Relations (Princeton University Press, 1973) and Thomas W Pogge, Realizing Rawls (Cornell University Press, 1989).

44. These duties are sometimes called relational duties. See Andrea Sangiovanni, “On the Relation Between Moral and Distributive Equality” in Gillian Brock, ed, Cosmopolitanism versus Non-Cosmopolitanism: Critiques, Defenses, Reconceptualizations (Oxford University Press, 2013) 55.

45. Darrel Moellendorf, “Cosmopolitanism and Compatriot Duties” (2011) 94:4 Monist 535. See also Darrel Moellendorf, “Human Dignity, Associative Duties, and Egalitarian Global Justice” in Gillian Brock, ed, Cosmopolitanism versus Non-Cosmopolitanism: Critiques, Defenses, Reconceptualizations (Oxford University Press, 2013) 222.

46. Joshua Cohen & Charles Sabel, “Extra Rempublicam Nulla Justitia?” (2006) 34:2 Philosophy & Public Affairs 147 at 165.

47. This view is sometimes called “explanatory pluralism” and rejects that global poverty can be wholly explained as either a product of domestic factors (explanatory nationalism) or a result of global factors (explanatory globalism). See Chris Armstrong, “Defending the Duty of Assistance?” (2009) 35:3 Social Theory & Practice 461 at 468-69.

48. Building on luck egalitarianism, Cappelen argues for what he calls a principle of equalization at the international level, according to which the opportunities different countries have to pursue their goals be equalized, so that differences stemming from global factors be eliminated. See Alexander Cappelen, “Responsibility and International Distributive Justice” in Andreas Follesdal & Thomas Pogge, eds, Real World Justice: Grounds, Principles, Human Rights, and Social Institutions (Springer, 2005) 215. See also Jon Mandle, Global Justice (Polity Press, 2006) at 102 (arguing that this duty of justice is stronger among wealthy states and those that played a historical role in making the social order unjust such as through colonialism).

49. This is shown, e.g., in Max Roser & Esteban Ortiz-Ospina, “Global Extreme Poverty” (2019), online: www.ourworldindata.org/extreme-poverty.

50. I thank an anonymous referee for making this point and pushing me to discuss this further.

51. See Roser & Ortiz-Ospina, supra note 49.

52. Footnote Ibid .

53. See Branko Milanovic, “Global Income Inequality by the Numbers: in History and Now—An Overview” (2012) The World Bank Policy Research Working Paper 6529, online: The World Bank http://documents.worldbank.org/ [perma.cc/S48Z-RCNK].

54. Even a less generous account of global justice, such as the one espoused in Rawls’s Law of Peoples, will concede that international institutions should be set in a way that is non-exploitative, so that wealthier economies would not benefit from unjustified distributive effects between nations. The current inequitable allocation of taxing rights between developing and developed countries, to the extent that it results in a distribution that significantly favours the latter at the expense of the former, likely violates what Rawls would consider as a “duty of non-exploitation”.

55. Dowding, Goodin & Pateman, supra note 3 at 5.

56. For a different position, see Richard J Arneson, “Democracy Is Not Intrinsically Just” in Keith Dowding, Robert E Goodin & Carole Pateman, eds, Justice and Democracy: Essays for Brian Barry (Cambridge University Press, 2004) 40 (arguing that the value of democracy is dependent on its ability to produce justice according to an independent standard of assessment and that the choice between autocracy and democracy should be determined based on which delivers morally superior results).

57. As Nancy Fraser points out, adopting a “mindset of latter-day philosopher kings” implies ignoring the political aspect of justice and the plurality of reasonable perspectives on how best to interpret the requirements of justice. See Nancy Fraser, “Social Justice in the Age of Identity Politics: Redistribution, Recognition, and Participation” in Nancy Fraser & Axel Honneth, Redistribution or Recognition?: A Political-Philosophical Exchange (Verso, 2003) 7 at 71. For a similar position in international tax policy, see Magalhães, supra note 9.

58. See Allen Buchanan & Robert O Keohane, “The Legitimacy of Global Governance Institutions” (2006) 20:4 Ethics & Intl Affairs 405 at 410, n 10 (arguing that legitimacy provides a “focal point” that helps stakeholders select one equilibrium solution among others).

59. The original list and subsequent adjustments are available at: https://ec.europa.eu/taxation_customs/tax-common-eu-list_en [perma.cc/5SZN-3GTU].

60. EC, Council Conclusions on the criteria for and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes, [2016] OJ, C 461/02.

61. Footnote Ibid .

62. EC, Council Conclusions on the EU list of non-cooperative jurisdictions for tax purposes, [2017] OJ, C 438/04.

63. The list has sparked criticism for lack of both transparency and objective criteria as it omits EU member states as well as some countries that are commonly viewed as tax havens. See, e.g., Daniel Boffey, “EU Blacklist Names 17 Tax Havens and Puts Caymans and Jersey on Notice”, The Guardian (5 December 2017), online: www.theguardian.com [perma.cc/3ZZL-ACKY] and Francesco Guarascio, “EU Adopts Tax Haven Blacklist, British Territories Spared”, Reuters (5 December 2017), online: www.reuters.com/article/us-eu-ecofin-tax/eu-adopts-tax-haven-blacklist-british-territories-spared-idUSKBN1DZ172 [perma.cc/T6TC-GDGB]. See also Allison Christians, “Sovereignty, Taxation and Social Contract” (2009) 18:1 Minnesota J Intl Law 99 at 101 (observing that the naming and shaming in harmful tax competition is problematic and represents the decision of taxing rights of sovereign nations by a relatively small and elite group of individuals). For general criticism of the practice of blacklisting, particularly by supranational institutions, see Lucas de Lima Carvalho, “The Ills of Blacklisting for International Taxation” (20 September 2018), online: Kluwer International Tax Blog http://kluwertaxblog.com/2018/09/20/ills-blacklisting-international-taxation [perma.cc/P3KD-PSRD].

64. Thompson, supra note 3.

65. See, e.g., Heikki Patomäki, “Global Justice: A Democratic Perspective” (2006) 3:2 Globalizations 99. A similar argument is advanced in the international tax literature in Magalhães, supra note 9 (“Philosophers, like the ones discussed below behave as experts when they put disagreement and political deliberation aside and perform the monological role of enlightened philosopher kings, offering her [or, more usually, his] own view of what justice consists in, what rights we have, what fair terms of social co-operation would be, and what all of this is based on.”).

66. OECD, OECD/G20 Inclusive Framework on BEPS: Progress Report July 2017-June 2018 (OECD, 2018) at 6. Along with the group of 46 countries (OECD and G20 members), 83 jurisdictions have joined the Inclusive Framework, amounting to a total of 129 participating jurisdictions. See OECD, Members of the Inclusive Framework on BEPS (Updated December 2019), online (pdf): https://www.oecd.org/ctp/beps/inclusive-framework-on-beps-composition.pdf [perma.cc/3ZMN-E8N3].

67. See OECD, Addressing Base Erosion and Profit Shifting (OECD, 2013).

68. See, e.g., Irma Johanna Mosquera Valderrama, “Legitimacy and the Making of International Tax Law: The Challenges of Multilateralism” (2015) 7:3 World Tax J 343 at 350.

69. This conception of democracy is sometimes known as the proceduralist perspective. For a firm defense of the proceduralist account of normative legitimacy, see Fabienne Peter, “Democratic Legitimacy and Proceduralist Social Epistemology” (2007) 6:3 Politics, Philosophy & Economics 329.

70. See, e.g., Richard J Arneson, “Defending the Purely Instrumental Account of Democratic Legitimacy” (2003) 11:1 J Political Philosophy 122 and Steven Wall, “Democracy and Equality” (2007) 57:228 Philosophical Q 416.

71. Footnote Ibid at 437.

72. Arneson, supra note 70 at 124. Arneson does point out that the instrumentalist approach takes various forms and argues for a specific version which holds that a political decision is legitimate only if over the long haul it produces morally superior results to ones that would result from any feasible alternative.

73. Eyal Benvenisti, The Law of Global Governance (The Hague Academy of International Law, 2014) at 208-09 (also noting that the term “global governance” in itself indicates that global regulators do not simply implement consensual commitments but rather “govern” through the exercise of discretion).

74. Participation in international governance itself is questioned as genuinely voluntary, considering the costs weaker states would suffer by not participating. See Buchanan & Keohane, supra note 58 at 414 (“Of course, there may be reasonable disagreements over what counts as substantial voluntariness, but the vulnerability of individual weak states is serious enough to undercut the view that the consent of democratic states is by itself sufficient for legitimacy”).

75. Tim Büttner & Matthias Thiemann, “Breaking Regime Stability? The Politicization of Expertise in the OECD/G20 Process on BEPS and the Potential Transformation of International Taxation” (2017) 7:1 Accounting, Economics & L.

76. Convention on the Organisation for Economic Co-operation and Development (14 December 1960) (entered into force 30 September 1961).

77. See OECD, “Frequently Asked Questions—Jobs”, online: OECD http://www.oecd.org/general/frequentlyaskedquestionsfaq.htm#JOBS [perma.cc/53VY-8QGS].

78. See, e.g., Büttner & Thiemann, supra note 75.

79. For a discussion on this assumption and a critique from a philosophical standpoint, see Laurens van Apeldoorn, “Exploitation, International Taxation, and Global Justice” (2019) 77:2 Rev Social Economy 163.

80. For a critical assessment, see Allison Christians, “Taxing According to Value Creation” (2018) 90 Tax Notes Intl 1379 (portraying economic substance and value creation as well-worn tax mantras and noting it camouflages the distributive nature of the international tax system as neutral and apolitical).

81. From the perspective of political legitimacy, the lack of distance between “author” and “subject” of international law is sometimes seen as problematic and resulting in states proceeding in a self-interested manner when crafting legal obligations for themselves. See Jaye Ellis, “Stateless Law: From Legitimacy to Validity” in Helge Dedek & Shauna Van Praagh, eds, Stateless Law: Evolving Boundaries of a Discipline (Ashgate, 2015) 133.

82. Buchanan & Keohane, supra note 58 at 414-15. See also Ellis, supra note 81 (arguing that access to the structures and processes of international law by civil society remains limited and concentrates on organizations rather than on individuals and informal groups).

83. Buchanan & Keohane, supra note 58 at 416.

84. Footnote Ibid .

85. See Fung, supra note 7 at 81 (pointing out that proposals to hand the BEPS Project over to the UN do not solve all the democratic deficits of international law-making and are most likely utopian); Magalhães, supra note 9 at 533 (noting the UN has repeatedly failed to act on behalf of poor countries); Robert O Keohane, “Global Governance and Legitimacy” (2011) 18:1 Rev Intl Political Economy 99 (pointing to the lack of transparency and accountability of the UN). See also Rafael Domingo, The New Global Law (Cambridge University Press, 2010) at 59 (arguing that the UN hands over the governance of the world to an exclusive club of sovereign powers and excludes an entire group of global actors who are dismissed as simple consultants).

86. For an interesting analysis of some of the perils of this type of constitutional choice, see Charles Delmotte, “Tax Uniformity as a Requirement of Justice” (2020) 33:1 Can JL & Jur 59.

87. For an overview of recent theories of institutional corruption, see Dennis F Thompson, “Theories of Institutional Corruption” (2018) 21 Ann Rev Political Science 495.

88. See Wolfgang Schön, “Taxation and Democracy” 72 Tax L Rev (forthcoming) (noting that while decision-making in tax matters is hardly constrained by any material constitutional limitations in the UK and the US, European and Latin American countries have largely resorted to hard-wired constitutional constraints on tax legislation to ensure a high degree of judicial review by constitutional courts).

89. Footnote Ibid (arguing that a content-oriented principle of tax equity should take charge of those who are not entitled to make tax policy dependent on their consent).

90. For the Revenue Problem, see, e.g., Reuven S Avi-Yonah, “Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State” (2000) 113:7 Harv L Rev 1573; Nita Rudra, Globalization and the Race to the Bottom in Developing Countries: Who Really Gets Hurt? (Cambridge University Press, 2008); Dietsch, supra note 22. For the Allocation Problem, see, e.g., Thuronyi, supra note 16; Dagan, supra note 14; Martin Hearson, “When Do Developing Countries Negotiate Away Their Corporate Tax Base?” (2018) 30:2 J Intl Development 233.

91. Two notable exceptions are Dietsch, supra note 22 and Dagan, supra note 14.

92. The tax literature rarely discusses separate solutions for these two issues. Calls for improving legitimacy in the international tax regime frequently eclipse an in-depth discussion on solutions focused on distributive justice. See, e.g., Richard Collier & Nadine Riedel, “The OECD/G20 Base Erosion and Profit Shifting Initiative and Developing Countries” (2018) 72:12 Bull Intl Taxation 704; Richard M Bird, Reforming International Taxation: Is the Process the Real Product? (2015) 15-03 International Center for Public Policy Working Paper; Burgers & Mosquera, supra note 15; Avi-Yonah & Xu, supra note 8.

93. See Dowding, Goodin & Pateman, supra note 3 at 5 (noting that there is nothing inherent in democracy that necessarily makes it just).

94. Footnote Ibid at 5-6.

95. Thompson, supra note 3 (arguing that justice and legitimacy stand in a circular relationship, where democratic political arrangements constitute a requirement of justice, but democratic deliberations should meet the standards of justice).

96. Simon Caney, “Justice and the Basic Right to Justification” in Rainer Forst, ed, Justice, Democracy and the Right to Justification: Rainer Forst in Dialogue (Bloomsbury Academic, 2014) 147 at 152-56.

97. See Buchanan & Keohane, supra note 58 at 412 (arguing that there are two reasons not to mistake legitimacy for justice, the first being that there is sufficient disagreement on what justice entails so that a standard for legitimacy requires a different concept for securing coordinated support for valuable institutions, and the second that withholding support from institutions because they fail to meet the demands of justice would mean ignoring that progress toward justice requires effective institutions).

98. Robert E Goodin, “Democracy, Justice and Impartiality” in Keith Dowding, Robert E Goodin & Carole Pateman, eds, Justice and Democracy: Essays for Brian Barry (Cambridge University Press, 2004) 97 at 98. See also Lukas H Meyer & Pranay Sanklecha, “Legitimacy, Justice and Public International Law: Three Perspectives on the Debate” in Lukas H Meyer, ed, Legitimacy, Justice, and Public International Law (Cambridge University Press, 2009) 1 at 12.

99. See OECD, Harmful Tax Competition: An Emerging Global Issue (OECD Publications, 1998). For a comprehensive and critical analysis of the OECD’s harmful tax practices initiative, see Christians, supra note 63.

100. See OECD, supra note 99.

101. OECD, supra note 66 at 14 (pointing out that although “BEPS measures do not necessarily resolve the question of how rights to tax are shared between jurisdictions … the OECD/G20 Inclusive Framework will continue working towards a consensus-based long-term solution”).

102. Footnote Ibid at 28.

103. OECD, Addressing the Tax Challenges of the Digitalisation of the Economy (13 February 2019) Public Consultation Document.

104. Footnote Ibid at 5.

105. Similarly, a more recent document released by the OECD in May 2019 acknowledges that the international tax reform proposals currently discussed “will have an impact on revenues and the overall balance of taxing rights” and mentions the Inclusive Framework 43 times throughout its 40 pages. See OECD, Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy (OECD, 2019). However, the report gives no consideration to whether or how reform could address the existing inequities in the current allocation of taxing rights between developed and developing countries.

106. The Paris Agreement provided that a solution for climate change should “recogniz[e] the specific needs and special circumstances of developing country Parties” and that it should be implemented “to reflect equity and the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances.” See Paris Agreement (22 April 2016) TIAS 16-1104 (entered into force 4 November 2016). The agreed principle is now broadly known as the Common but Differentiated Responsibility and Respective Capabilities (“CBDR-RC”) principle and stands in contrast to the idea that the burden of climate justice should be shared equally by all societies regardless of background conditions. For discussions on the moral justifications of the CBRD-RC principle, see Simon Caney, “Climate Change and the Duties of the Advantaged” (2010) 13 Crit Rev Intl Soc Pol Phil 203; Henry Shue, “Global Environment and International Inequality” (1999) 75 Intl Aff 531, 534-35. See also Ivan Ozai, “Tax Competition and the Ethics of Burden Sharing” (2018) 42 Fordham Intl LJ 61 (applying some of the ethical principles developed in the literature on climate change to tax competition).

107. The UN’s 2030 Agenda for Sustainable Development (Res 71/1, A/70/L1), particularly its Goal 10 to “reduce inequality within and among countries,” is but one example.

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