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Trade, Competitiveness and Taxation: Undercurrents and Influences of a New Multilateralism?

Written by: Scott Wilkie

Caring About Others’ Tax Systems

The Minister of Finance continues to explain Canada’s commitment to multilateral trade with competitiveness in view. Recent news releases by the Department of Finance reflect this. The Minister evidently is equally aware of the possible implications of tax changes, particularly in the United States, for Canadian taxation, no doubt with trade between Canada and the U.S. and Canada’s relative competitiveness directly in mind.[2]

The U.S. tax changes have been broadly understood as possibly overdue, evidently self-interested tax reform to align the U.S. tax system with that of its competitors. There is a concern that consequently the U.S. tax changes will make the U.S. a more attractive place in which to conduct business and that business migration should be expected. The economic effects of the tax changes, however, remain a matter of conjecture. Among a number of notable aspects are several far-reaching international tax changes that are meant to circumscribe the unlimited export of economic, that is trade opportunities. Their apparent objective is to energize the US economy by encouraging the renewed entrenchment of industrial activity in the U.S. and with it the direct benefit in the U.S. capital flows that have been deployed outside the United States by its largest taxpayers engaged in international business. This no doubt reflects a measure of priority for U.S. economic interests which seem to underscore evolving U.S. trade policy. This, no doubt, is what the Minister and his officials are monitoring.

Canada and the United States are not alone in calibrating their tax policy to preserve and advance economic interests with each other’s circumstances in view. But the dynamic tension that has existed for a long time generally between income taxation in an international setting and trade presently may reflect a different kind of multilateralism than is familiar for most who have a narrow view of what “international taxation” entails. A limited perspective may make it harder to discern and understand the implications of tax-related influences on trade and in turn of trade as a significant determinant of the patterns of international taxation. This short note tries to disentangle some of the strands of the tax-trade connection and to notice institutional developments that may reflect a more penetrating appreciation of the connection.

The “TCT” Cocktail – Trade, Competitiveness and Taxation

There is a close connection between “international taxation”, and trade and national competitiveness. “International taxation” is as it is almost trite to say a misnomer. There is no single global tax system or regulator. Rather, what we call international taxation describes a web of intersecting tax laws of countries, dealing with international connections of income earning activities and of the earners. Included are mostly bilateral tax treaties that essentially parse and assign taxing rights to limit excessive taxation – recognizing that tax is a cost – and with it unwarranted tax friction that could impair relatively “free” trade and consequently competitive fairness, neutrality and even advantage. Intersecting tax laws and countries’ responses to them reveal the underlying dynamics of trade and national economic determination and self-interest. Indeed, these are important considerations underlying the modern history of tax treaties, the main provisions of which, interestingly, are materially the same as their earliest models conceived in work initiated by the League of Nations after the First World War. Work on tax treaties to reconcile interesting tax claims – reflections of patterns of trade – was carried on after the League of Nations by the Organisation for European Economic Co-operation and its successor the Organisation for Economic Co-operation and Development (the “OECD”).[3] Now, other contenders in the international tax conversation also are influential including the Committee of Tax Experts at the United Nations, the International Monetary Fund, the World Bank and others.

Taxation Is Not Just “Rules”

Too frequently, particularly in the international context, taxation seems to have its own life, as a kind of puzzle or scientific exercise. But, taxation is an important if not the main means by which a country implements its fiscal policy. Its fiscal policy is derived from and encapsulates its national personality – what broadly may be described as its social welfare choices, the features of its national civility, the ways in which its citizens wish to live collectively, the resources at its disposal to fund and support the choices which animate this personality, in short the elements of its national soul.

It may seem unduly philosophical for a practitioner of tax to see the rudiments and tools of practice this way. But taxation is purposeful; the purposes – the broad purposes and their specific tax law targets – matter even for the most mundane, mercantile applications of the law.

Tax legislation and the provisions of bilateral tax treaties reflect tax and trade policy, influenced by various private and public law considerations. In turn tax policy activates fiscal policy, which is informed by a range of considerations that contribute to a country’s social and economic profile, its outlook on collective consumption and the deployment of or support for its public and private resources including the endeavors of private enterprise with over-arching economic objectives in mind. Fiscal policy is not uniform among nations. Yet, fiscal policy – particularly, differences among countries’ fiscal policies’, countries’ ways of life as it were – gets less attention as such in the international tax debate than examples of how countries “compete” with each other and taxpayers “compete” with countries’ tax regulatory regimes, as if do so was an end in itself rather than the outcome of significant undercurrents.


Identifying salient undercurrents arises from asking hard questions.

First, are Canada’s social welfare and concomitant economic priorities and the resources at her disposal to pursue them the same as other countries? To say it slightly differently, is the way of life to which Canadians aspire – in all its aspects – the same as that for other countries?

If, as is likely, Canada’s priorities and aspirations to have and perpetuate a particular kind of national civility are not the same as those of other countries, another hard question arises.

To what extent and how should Canada’s choices effectively be influenced by those of other countries, who would effectively be able to impose or enforce their choices in a variety of ulterior ways, including through trade and tax policy?

Multilateralism and Convergence: Animating the Undercurrents

Now, let’s interpret the Minister’s – the Canadian government’s – attention to trade and competitiveness and the Canadian government’s active or implicit awareness of the role taxation may play in achieving Canada’s national objectives on Canada’s terms – or at least with due regard for Canada’s points of view. Canadian aspirations are not exceptional in this context. Most countries are concerned with the relative health of and external influences on their social and economic prospects. And, in fact, this is what gives rise to the tax undercurrents that are most commonly considered with reference to familiar tax practice

Manifest most recently in ongoing work by OECD and the G-20 to deter “base erosion” (the “Base Erosion and Profit Shifting”, or “BEPS” project) arising from the inevitably imperfect intersection of countries’ tax and legal systems to result in the limit in reduced taxation anywhere – in effect what economists might call a “dead weight loss” – is an understated expectation that countries’ tax systems should somehow converge. This initiative portends both multilateral coherence of substantive tax laws that otherwise are the sovereign domain of the countries whose tax laws they are, and robust information exchanges among tax authorities with the effect that “all who need to know, know everything” in common and contemporaneously. This has the effect of fostering an expectation that tax systems should converge – in effect, that there is a multilateral norm for taxation that engages possibly a degree of homogeneity beyond the sympathetic reactions and accommodations of tax systems to each other that a matrix of bilateral tax treaties (now selectively overlaid by the “Multilateral Instrument” to implement elements of the OECD’s BEPS project) would orchestrate according to historical standards.

This is even more textured a development than it may seem. Co-operation among countries to mitigate excessive taxation, in effect to co-ordinate the distributional effects of their tax systems, is not new. It is something different in tone if not kind, however, if there is an evolving expectation that through their tax and trade policies countries are essentially parsing and dividing up an economic pie in which by a higher order they should all be taken to be equivalently interested according to mutual underlying standards. \

As the history of income tax treaties reflects, the international community generally rejected multilateralism in tax, opting instead to rely on numerous bilateral tax treaties to reconcile countries’ relative and reciprocal interests, even though treaties follow common patterns. As tax treaties developed, trade regulation followed a different, more overtly multilateral course to bridle self-interested trade policy, as the work of the United Nations following the Second World War demonstrates. This comparatively more institutionalized path first culminated in the General Agreement on Tariffs and Trade in default of succeeding to establish an International Trade Organization, and now from 1995 the World Trade Organization with its various Agreements and institutionalized dispute resolution mechanism. The same institutionalized multi-country approach also can be seen organizing relations among countries in the European Union. In particular the Treaty on the Functioning of the European Union contains provisions that limit member countries’ entitlement to act exclusively in their self-interest, including through domestic tax policy considered even in systemic terms to be capable of selectively influencing and “aiding” – and therefore distorting – trade.

In effect, whether informal – through outgrowths of the OECD continuing work on BEPS – or according to the more institutionalized parameters of trade and competition regulation, there is an undercurrent of multilateralism and de facto convergence of tax and legal systems which is not obvious. That undercurrent is understated in taxation, but it is there and it does have the capacity to influence trade. It may or may not reflect more deeply seated changes in the rules and practices of customary public international law. But it does offer a point of reference for considering the questions posed above, and identifying what may be deep seated and even fundamental conflicting tendencies in international tax and trade policy.[4]

The U.S. political economist Dani Rodrik, a professor at Harvard’s Kennedy School of Government, has illuminated two important aspects of multilateralism which may help to understand the dynamics of how countries may struggle to reconcile the strongest tendencies of “globalisation” – multilateralism bordering on homogeneity – with legitimate national self-interest commonly described with reference to sovereignty. [5]  National self-interest may and most likely does include being consciously and deliberated interested in the prospects of other countries and their economic actors, but at least in part from a self-interested perspective. In their trade and tax policy, countries invest national resources including through enterprises of their economic actors, to returns that benefits the national economy by enabling is fiscal undercurrents. As Rodrik explains, globalization – and with it multilateralism – possibly come at the expense of self-determination, that is the pursuit of domestic policy in the national interest.

Rodrik comments on two phases of multilateralism associated with the systematic reduction of trade barriers. The first is the period after the Second World War until, he would say, 1980. In that period the notions of free trade and multilateralism might be likened to the contemporary evolution of international tax policy. Countries co-operated to reduce trade (as well as tax) frictions while effectively (because of limitations on enforcement in the trade context) remaining relatively free to pursue domestic fiscal and economic policies. I refer to this as benign or benevolent multilateralism: recognition that countries have reciprocal self-interests which they may pursue while still determining for themselves their policy and legislative responses to global economic affairs.[6] After 1980, Rodrik notices a different kind of multilateralism, a tendency to expect measures of homogeneity exemplified, for example, by the creation in 1995 of the World Trade Organization with a different and more effective enforcement mechanism. Indeed, as discussions of tax policy in North America in the last two years have reflected, the compatibility of various income tax proposals with WTO regulation has been a serious subject of discussion.

We might ask whether we are in a new phase of multilateralism, one that is a hybrid of sentiments of the first two. Said another way, are we carrying on as if we are in the second phase of multilateralism which augurs in favor not just of reciprocal accommodations but common standards, while in fact being influenced by a defensive outlook for national priorities that more closely reflects the first phase?

In the BEPS context, for example, we see expectations that in their national tax laws and not just international tax relations countries will adopt similar if not the same substantive law approaches, domestically, to base erosion challenges, while at the same time in some important areas that are fundamental to the reach of income tax jurisdiction notably countries like the United Kingdom, Australia and the United States are going their own ways with bespoke legislation that may transcend the accepted limits of income taxation according to which international tax co-operation depends. Similarly, self-interest fueled by doubt about the effectiveness of international institutions may attenuate reliable multilateral trade regulation, at the same time however that that countries still wish to retain important vestiges of connection and reciprocal reliance.

Possibly confusing tendencies of various manifestations of co-operation (or not) among countries reflect conflicting undercurrents of present trade and tax policy: the desirability of multilateral trade , but trade that is respectful nevertheless of the unique requirements of trading partners whole social and economic personalities – which is what fiscal policy captures and animates.  Are we in fact engaged in an unspoken contest between the two phases of trade regulation that Rodrik mentions? Is international tax both an instrument and a battleground for this tension?

Hard Questions

These are hard questions. At their core, they are fiscal questions first, and trade and tax policy questions second.

In the international tax area – tax being intrinsically an element of international trade – there may be an underlying but understated concern that countries are losing the capacity to effectuate trade and tax policy in their own interest (which includes, the reciprocal interests of other countries) because the prevailing “rules of the game” are anachronistic and national interests by force of circumstances are taking on a subnational flavor that may constrain effective national trade and tax policy responses. [7] In effect, are countries drawing back to a perception of multilateralism closer to that underlying trade policy immediately after the Second World War, while contending at the same time with multilateral forces that may be reshaping the expectations of international trade and tax policy?

It is interesting to speculate whether in some areas the current international tax policy discussion reflects a vestigial if not nostalgic awareness of these tensions. The lively and controversial debate about how tax systems should apply to transfers affected via the much used but highly imprecise “digital economy” is an important example. The foundational issue is not so much digital technique and technology, as it is how to detect where and to what effect economic activity – trade – takes place and in whose interest. Where is taxable value (added) created? What is “value added”; is it different in kind or its dynamics from trading patterns as we are accustomed to perceiving them?[8] Are the parameters of tax jurisdiction – of the connection of activities and persons to taxing jurisdictions, i.e., countries or more broadly national economies– consequently so arcane and outdated that in fact multilateralism in various guises as the success to the imprecise “globalization” is overtaking us?

Asking the questions this way – identifying the confluence of trade, competition and tax undercurrents of otherwise seemingly disparate debates about each – may help to understand the restive policy debate that implicates these three dimensions of economic life in very direct and current ways. Some of the stresses we sense have identifiable undercurrents that are not homogenous – uniformly or internally coherently multilateral – despite possibly conflicting impressions in a world whose institutional borders as they may be relevant for trade, competition and tax regulation are increasingly more difficult to discern or preserve.


[1] Scott Wilkie, Partner, Blake, Cassels & Graydon LLP; Distinguished Professor of Practice, Osgoode Hall Law School, York University; Executive Fellow, School of Public Policy, University of Calgary.

[2] Karina Roman, CBC News (Posted on CBC News, September 12, 2018 6:47 PM). A recent study by PWC commissioned by the Business Council of Canada analyzes and attempts to measure the possible effects of U.S. tax changes on Canada’s economic position; see PWC, The Impacts of US Tax Reform on Canada’s Economy: .

[3] In the mid-1940s, two arms of the new United Nations were engaged in the development of trade and tax policy at the same time, in some respects each contending for hegemony with respect to the other’s direct sphere of influence. A point of particular contention between the nascent International Fiscal Commission and International Trade Organization was the intersection of trade and income taxation, the latter as an influence on trade dynamics and distortions. Ultimately there was neither an International Fiscal Commission nor an International Trade Organization. While, as noted below, trade adopted an institutionalized legal framework first evidenced by the 1947 General Agreement on Tariffs and Trade, the interconnectedness of countries’ tax system was dealt with differently, ostensibly by bilateral tax treaties undertaken by countries whose interests in relation to each other were served by them. This history is developed in Jennifer E. Farrell, The Interface of International Trade law and Taxation, (Amsterdam, The Netherlands: International Bureau of Fiscal Documentation, 2013). One can fairly ask whether a web bilateral tax treaties that more or less look the same has a multilateral aspect, even though not institutionalized as such.

[4] See, for example, Joost Pauwelyn, Ramses A. Wessel and Jan Wouters, When Structures Become Shackles: Stagnation and Dynamics in International Law Making, The European Journal of International Law Vol 25 no. 3 (EJKLIL (2014), Vo. 25 No. 3, 733-763.

[5] Dani Rodrik, The Globalization Paradox, Democracy and the Future of the World Economy, (New York, London: W.W. Norton & Company, 2010), in particular chapter 4, and Straight Talk on Trade

[6] Canada’s tax treaty policy as reflected this. Tax treaties typically contain a “non-discrimination” clause, meant to reflect some measure of equivalent treatment of residents and non-residents of a taxing country whose circumstances otherwise are equivalent. In fact, non-discrimination clauses allow for a measure of institutionalized discrimination to ensure sufficient independent to implement fiscal policy in which generally non-residents are not interested and in whom the taxing country is not interested in the same way as for its residents. In other words, anti-discrimination articles are framed to avoid impairment to fiscal policy. Historically, at the onset of the development of Canada’s now vastly developed tax treaty network, this was Canada’s view. See, for example, Gérard Coulombe, Assistant Director, Personal & International Tax Division, Department of Finance, Ottawa, Certain Policy Aspects of Canadian Tax Treaties, Canada’s new Tax Treaties, 1976 Conference Report Canadian Tax Foundation (Toronto: Canadian Tax Foundation, 1977), 290.

[7] See, for example, Richard M. Bird and J. Scott Wilkie, Tax Policy Objectives, in Tax Policy in Canada, Eds. Heather Kerr, Ken McKenzie, Jack Mintz (Toronto: Canadian Tax Foundation, 2012), 2.1 – 2.39, notably 2.35 – 2.39.

[8] We see the relevance of this question not only in the continuing work of the OECD arising from the BEPS project but immediately in debates that concern Canada about how many times components of goods cross the Canadian border before the “final good” is exported by Canada and imported by somebody else. In other words the “value additions” may no longer be linear and singular, reflecting a new kind and degree of composition that requires other ways of measuring the elements of transfers and their value.