To save content items to your account,
please confirm that you agree to abide by our usage policies.
If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account.
Find out more about saving content to .
To save content items to your Kindle, first ensure firstname.lastname@example.org
is added to your Approved Personal Document E-mail List under your Personal Document Settings
on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part
of your Kindle email address below.
Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations.
‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi.
‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
The raison d’être of this book lies at the crossroads of three overarching international evolutions in particular. These are: intensifying globalization and digitalization, movements towards more regional autonomy within federations, and calls for an overall increase in democratic legitimacy. This is particularly also the case in matters of international taxation, which is the exemplative subject of choice in several parts of this book.
Globalization has increased international mobility and has changed the role and importance of international law in general, and treaties in particular. Whereas the treaties of yore concerned war, peace and territory, binding the Head of State as a personification of the state, contemporary treaties touch upon almost every imaginable subject and directly impact people's daily lives. With regard to the exemplative subject of taxation, globalization has led to an exponential increase in potential double taxation, whereby a person, object or event is submitted to tax in more than one state. This has led to a global treaty network that keeps on growing, but that also provides loopholes for double non-taxation. Digitalization is an added difficulty for contemporary international taxation, the current rules of which were designed for a brick-and-mortar economy. The new kinds of trade and economy impose a search for new and more adequate international standards. Similar observations may be made in other areas of law.
Another development is the increased attention and cry for regional autonomy within many federations. We see this e.g. with the Scots and Northern Irish people in the UK, Basque and Catalan Provinces in Spain, the Belgian Regions and Communities, and with Quebec in Canada. Self-determination and national / regional ‘identity’ have been high on political agendas in recent years.
This trend is also noticeable within the European Union (‘EU’), where in many member states so-called ‘nationalists’ rose to power over the last decade. Their common agenda can be summarized as: ‘less EU, more national/regional sovereignty’.
The EU is, however, an even better example regarding the third reason why this book is relevant; i.e. the renewed attention for ‘democratic legitimacy’ and the EU's ‘democratic deficit’.
The main focus of this book concerned how treaty-making competence and power should be divided in federations between the different levels of government.
This legitimacy question was raised and approached from three different angles. What was referred to as ‘procedural legitimacy’ provided an answer as to, first, how the federation should approach treaty-making and, second, how the (potential) treaty partner should approach treaty-making with federations and their different entities. This procedural legitimacy may be relied on at the pivotal moments in a treaty's lifecycle, i.e. where an action is taken such as its conclusion, amendment or active termination. Because if the communicative action may flow freely between the governed periphery and the governing core of the political system, treaties concluded by this core should be considered legitimate. For the periods in between those pivotal moments, procedure can have no legitimating force and one must rely on the content of the treaty itself for its legitimacy. This was referred to as ‘meritorious legitimacy’. The main conclusions from this theoretical framework are the following.
1. For DTCs to be legitimate sources of law, the government(s) shaping them must be linked to the impacted citizenry and this link should be transparent and direct. In foro interno et in foro externo should therefore underlie the division of treaty-making power in federations. The legitimacy of treaties pursuant to this principle must still be assessed on a case-by-case basis.
2. Because they should uphold a code of conduct that ‘increases the legitimacy of the overall international tax system’, the federation's treaty partners should acknowledge in foro interno et in foro externo and conclude the DTC with the internally competent entity.
3. Federations complying with the in foro interno et in foro externo principle and its treaty partners complying with its mirror principle, may enhance not only the legitimacy of the treaty itself, but also of the states involved and of the international legal system.
4. The theoretical framework does not mordicus demand formal treaty-making competence for the component states, but it does require that the internally competent entities can de facto influence and shape the treaties touching upon their material competences.
At this point, we must turn from competence to power. Indeed, whereas competence is essentially a binary question, the legal framework within which an entity could make use of that competence, delineates its legal power (see supra page 12). For tax treaty-making, this means setting the legal framework within which the federal and component states can actually, given the current legal context, levy taxes and conclude treaties about those taxes.
When establishing theoretical frameworks and benchmarks one must keep in mind certain realities to avoid that they remain nothing more than an exciting, but nonetheless Utopian figment. For them to be functional, the practical limitations and constraints stemming from the current (legal) realities that govern present day international tax law and tax treaty-making processes must be recognized. After all, the very existence of representative democracy as the pinnacle of modern-day democracy is in itself already an inescapable concession from the ideal of the law's addressee who is also its author.
In this section, the current legal framework within which (in particular) tax treaties must be negotiated and concluded is addressed; especially from a Belgian point of view, as the Belgian example is at present the only one which adheres to the in foro interno et in foro externo principle.
The VCLT does not add much to the legitimacy of treaties. Indeed, where it provides that ‘every state possesses capacity to conclude treaties’, it has led authors to argue that only Westphalian states can conclude treaties. It has been pointed out that this is not the case, but that it merely means that the VCLT itself only covers treaties concluded by ‘states’ as defined under the VCLT, and that this term can arguably include component states as well. International law does not dictate which entity of a federation is to conclude treaties, but it does accept a renvoi to domestic legislation in this regard. If the federal constitution confers on component states the competence to conclude treaties, then this is accepted under international law. It does not, however, compel other actors to actually conclude treaties with them (supra).
This book is an updated and developed version of the PhD thesis “Tax Treaty Making in Federations”, defended by Rik Smet on 23 June 2020 at the University of Antwerp Faculty of Law, Belgium. It contributes to the discussion on alternative solutions for the difficulties that currently exist in the treaty making practice of federal states. The author develops a new theory on how tax treaty making competence and power should be distributed between the different levels of government in federations. This work is outstanding for at least three reasons.
First, Rik Smet starts his PhD with a story about birds migrating between Canada and the southern United States. These birds were shot and killed during their migration somewhere above the centre of the United States. He explains how this triggered the anger of American ornithologists and animal activists. Starting from that bird story, the author makes the bridge to federal states and tax treaty making competences. People who can creatively connect two such, at first sight totally unrelated, topics, are scarce, but Rik Smet is certainly one of them.
Second, this PhD smoothly integrates a philosophical framework with a legal one. The author finds a delicate balance between the abstract philosophical theories of Habermas, Dworkin, and Rosanvallon on the one hand, and legal realities that govern international tax law on the other hand. Building on Rosanvallon, he introduces the new concept of “meritorious legitimacy”, which means that the legitimacy of tax treaties not only requires a suitable democratic process, but also concerns the question of whether treaties that have been concluded in the past still retain the support of society today. This triggers, for example, the question of whether countries still approve of treaties concluded years ago with tax havens. So far, these questions have remained largely unaddressed, and this PhD is an explicit call to deal with these problems.
Finally, Rik Smet does not limit his research to law in the books, but also looks at treaty making practice. Based on interviews with key actors and stakeholders, he identifies multiple practical problems and limitations, like a huge capacity issue within the Belgian department of the Federal Public Service Finance that is responsible for tax treaties.
This book must also assess the level of democratic legitimacy of treaties in general, and as the example of choice, DTCs in particular. Whereas legality refers to what the law is, legitimacy refers to an abstract quality of that law, the assessment of which requires not a legal but a theoretical framework. That is what is established in this chapter. So how and why are the works of Jürgen Habermas, Ronald Dworkin and Pierre Rosanvallon relevant in this regard?
The reason for this trichotomy lies in the fact that there are three different dimensions to the legitimacy question, in particular for bilateral treaties. Indeed, over a treaty's lifespan there are several ‘active’ moments, where explicit actions are taken. These include its conclusion, amendment or termination and are also referred to as ‘pivotal’ moments. There are, however, also periods where no actions are taken, but the treaty merely endures. Habermas and Dworkin come into view when the legitimacy question is assessed at those pivotal moments where the treaty partners actively ‘make’ international tax law. This ‘making’ of international (tax) law by concluding bilateral treaties requires two sides, i.e. the federation itself and its treaty partner(s). The federation's side of the legitimacy question is approached from a Habermasian perspective, whereas the treaty partner's side thereof is approached from a Dworkinian angle. Rosanvallon then provides the insights to assess the legitimacy of treaties in between those pivotal moments. This third dimension of the legitimacy question focusses on the treaty content and not on the parties that have concluded it.
First of all, one indeed has to assess the legitimacy question from the federation's point of view, particularly at those pivotal moments. Which requirements should be met for the internal division of competences and the allocation of treaty-making competence (and power) to be considered legitimate? Habermas provides answers to this question.
Second, if the federation's allocation of treaty-making competence can be considered legitimate, this will only offer the federation and/or its component states the still hypothetical possibility of entering into legitimately concluded treaties.
As the proof of the pudding is in the eating, not only theory, but also practice should be taken under revision. A quick recapitulation of the general framework provided by the VCLT leads the way for an analysis of the Belgian tax treaty-making practice and how this relates to what the Cooperation Agreement requires.
DIFFERENT PHASES IN TREATY MAKING IN GENERAL
A. NEGOTIATING PHASE
Treaties are, almost by default, the final result of negotiations between representatives of the contracting states. The text of the treaty is adopted by the consent of all the states participating in its drafting. After the text is adopted, it must be authenticated. This is done by signature, signature ad referendum or initialing by the representatives of the treaty partners, unless the treaty text provides another procedure.
B. CONSENT TO BE BOUND
After authentication, the text is definitively drafted. The next step is for the treaty partners to express their consent to be bound by the treaty. Consent to be bound by the treaty can be ‘expressed by signature, exchange of instruments constituting a treaty, ratification, acceptance, approval or accession, or by any other means if so agreed’. This flexibility to express a state's consent, implies that it can e.g. be provided tacitly and show from the state's conduct. The signature will represent a state's consent to be bound by the treaty, when i) the treaty provides that it shall have that effect, ii) it is otherwise established that it should have that effect, or iii) the intention to give such effect to the signature appears from the full powers of the state's representative, or was expressed during negotiations.
Consent to be bound by a treaty is expressed by an exchange of instruments constituting a treaty, if i) those instruments provide that their exchange shall have that effect, or ii) such is otherwise established. The same is true for consent expressed by ratification, acceptance or approval, with the addition that ratification, acceptance or approval is also required if iii) the representative has signed the treaty subject to ratification, acceptance or approval, or iv) the intention of the state to sign the treaty subject to ratification, acceptance or approval appears from the full powers of its representative or was expressed during the negotiations.
As mentioned (Chapter 1, section IV ‘Working Definitions’) sovereignty is a precondition for the division of competences within a state. For if a state is not sovereign, how could it determine independently how competences are distributed over different levels of government or between different organs of the state? It is the constitutional system of the sovereign state that is, therefore, the ultimate source of any competence. Sovereignty thus internally refers to the highest possible authority and externally refers to the freedom of conduct for the state in the international legal order. It is up to the federation itself to determine how (in this case, tax) competences are distributed.
The subtle, but essential difference between competence to tax and power to tax has previously been pointed out and the fact that terminology is a considerable source of misunderstanding has also been established. ‘Jurisdiction to tax’ is then the generic English term that may refer to both the competence and the power to tax.
In international law, the distinction between the competence to tax and the power to tax, in a certain sense is a matter of ‘who could’ versus ‘who can’. Whereas rules regarding the competence to tax determine in abstracto which entities could tax if they wanted to, the power to tax refers to what they actually can do with this authority, i.e. the (potential) in concreto use of this competence in line with the overarching legal framework.
Competence to tax, then, refers to the origins of the state's taxing powers. There can be no power to tax without competence to tax. An entity must first be competent to tax, before it can choose to indeed make use of it. The power to tax, then, concerns the way in which the state may legally make use of that competence.
The competence to tax requires some kind of nexus, meaning that only taxable objects or subjects with a sufficiently close connection to the state can be subjected to tax. This is perhaps not a positive rule of international law – at least not yet – but it is a principle that is consistently taken into consideration by national (tax) legislatures.
This chapter addresses the question: ‘Which entity or entities within federations possess treaty-making competence?’. This question is analyzed from an international and a domestic law perspective. Some supranational points of particular attention are also addressed.
The first step in eliciting an answer to this question is determining whether the current state of affairs of international law accepts the possibility for component states to enter into treaties in abstracto. And if it does, does it do so unconditionally or not? The same questions arise regarding supranational law, in this case EU law. Non-EU federations, such as the USA, Australia or Canada are typically not confronted with such supranational level, so that the latter can neither set limitations to the way they divide treaty-making competences within the federation. Switzerland is in this regard a noteworthy peculiarity, because even though it is not a member of the EU, it has built up an extensive bilateral treaty network with the EU, with the inevitable cross-pollination of values and legal principles.
The second step is, if that be the case from an international law perspective, to approach the component states’ treaty-making competence from the selected federations’ national perspectives. Do the different federal constitutions provide their component states with treaty-making competence? And if they do, is this limited or not, and to which degree? This assessment will show that the Belgian view on treaty-making competence for component states is specifically outspoken and peculiar, warranting a more detailed analysis of the Belgian example. In line with the terminology used in the Vienna Convention on the Law of Treaties (VCLT), reference is also made to ‘treaty-making capacity’ in this first section. This should be considered interchangeable with the notion of ‘treaty-making competence’.
TREATY-MAKING AND FEDERATIONS FROM AN INTERNATIONAL LAW PERSPECTIVE
It is uncontested that federations are ‘states’ and can therefore make treaties. Article 6 VCLT reads: ‘Every state possesses capacity to conclude treaties’. The question whether component states possess this capacity and if they do, whether they then act as an organ of the federation or of their own accord, has given rise to a much more lively debate in both the VCLT preparatory works and meetings, as well as in legal literature. It is this question that is addressed hereunder.
Tax law is all too often perceived as a set of highly detailed legal provisions with a very technical content, the coherence of which is not always clear. This observation points to an increasing need for understanding the foundations of tax law.
The purpose of this series is to create a collection of concise and easily accessible monographs on general legal concepts and principles underlying contemporary tax law. It deals with fundamental principles and principles around which a number of fundamental rules that govern tax law can be grouped. It aims to showcase, for instance, scientific contributions covering legal topics such as the following: the concept of tax, the principle of legality, the principle of equality, the principle of legal certainty, the ne bis in idem principle, the interpretation of tax provisions, the public policy nature of tax law, the principle of territoriality, the temporal effect of tax laws, the division of tax competences in a (federal) state context, etc.
In this series, which originally contained only contributions written in Dutch or French, English-language books will now also be published. The subject matter of this series is not limited to domestic tax law, but also extends to international and European tax law. In this way, an attempt is made to identify in depth the fundamental principles governing tax law in the broad sense of the term and to highlight the coherence between the many tax provisions or the possible lack of coherence between them.
International affairs no longer constitute a separate, stand-alone policy area. They have come to permeate virtually every aspect of society, from their origins as primarily territorial, war and peace considerations to regulating everything from consumer protection to agriculture and the environment today; this phenomenon is amplified in the European Union where there is an extra layer of supra-national legislation. In the federal state structure, where material competences are attributed to both federal and component states, the difficult question arises as to which of these levels of government should act on the international stage. Federations have to find a balance between federal unity in international affairs on the one hand and component state autonomy in their attributed material competences on the other.
This question regarding the legitimacy of treaties has received insufficient attention until now. In this book, this fundamental question and its consequent permutations and impacts are addressed from a theoretical perspective as well as from a strictly legal perspective. The more abstract theoretical analysis put forth is then applied by way of reference to the example of the sensitive subject of double tax treaties. Whilst this book does not address fiscal federalism per se, it touches upon its externalization reflected in the division of treaty making power.