1. Introduction: substantive tax sovereignty and international tax cooperation
The latest developments at the level of the United Nations aiming at promoting more inclusive and effective international tax cooperation underly a significant momentum within the complex dynamics of global taxation. The Resolution1 proposed by the Group of African States and adopted by the General Assembly of the United Nations in December 2023 – notwithstanding the votes against of developed countries2 – has originated an unprecedented process aimed at strengthening the position of developing countries, especially in terms of international tax governance. Although these crucial developments were not its direct focus, the lecture of Prof. Dagan offered a timely and very insightful opportunity to reflect upon the effects that the dynamics of global tax competition have on the legitimate exercise of substantive tax sovereignty, also emphasizing the need to progressively re-balance the inequalities more severely affecting developing countries. Prof. Dagan explained how the global market of tax competition, by conditioning the development of tax policies, has multiple negative consequences not only on an adequate and equal provision of public goods, but also on the sense of community and a co-authored political participation.3 According to Prof. Dagan, there is a breach of substantive national tax sovereignty when – occurring these negative consequences – the social contract between the State and its citizens is breached. This breach of the social contract de-legitimizes the State’s authority.4
Very importantly, Prof. Dagan also recognized that States are not de facto independent from the dynamics of global tax competition. States depend on the actions of taxpayers that are free to move and, consequently, also on the actions of other States possibly offering tax advantages to these taxpayers in order to attract them. In fact, the dynamics of the market of tax competition make States dependent on each other both in terms of development of tax policies and effective implementation of tax measures. Therefore, a legitimate exercise of substantive tax sovereignty is actually conditioned by dynamics external to this exercise as such, exactly because it goes beyond formal independence.5
As a consequence, Prof. Dagan identified international tax cooperation as a possible solution to guarantee a legitimate exercise of substantive tax sovereignty. However, as she explained, international agreements do not necessarily guarantee this result. According to Prof. Dagan, international agreements are illegitimate – as they represent a breach of substantive tax sovereignty – whenever they do not progressively grant competitive advantages to developing countries.6
The objective of the present contribution is to offer a reflection upon this conception of international tax cooperation. More in particular, this contribution aims at proposing an alternative approach based on a global legal pluralist stance. In my opinion, this legal pluralist approach not only fully acknowledges substantive tax sovereignty, but – as will be demonstrated below – also represents a realistic path towards a more inclusive and effective international tax cooperation framework. Therefore, this contribution aims at answering the following main research question: ‘What should be the framework of international tax cooperation that, being inclusive and effective, also guarantees a legitimate exercise of substantive tax sovereignty?’
From a methodological point of view, the analysis of this alternative approach in terms of inclusive and effective international tax cooperation will be conducted also with the objective of addressing some considerations triggered by some of the stances advanced by Prof. Dagan.
Thus, the following paragraph will present global legal pluralism and concretely connect it with the dynamics of global taxation. Through the presentation of a case study specifically concerning international tax cooperation, it will be shown that global legal pluralist dynamics actually characterize the crucial developments in this field. In paragraph 3, through some final considerations, some of the stances advanced by Prof. Dagan will be specifically addressed from a global legal pluralist perspective.
2. Global legal pluralism and the recent dynamics of international tax cooperation
2.1 Conceptualizing global legal pluralism: its descriptive and normative dimensions
Legal pluralism is a doctrinal stance acknowledging the overlaps of legal and non-legal sets of rules as ineluctable dynamics of society.7 Its roots deepen into sociolegal studies acknowledging and describing the dynamics that characterize the relationship between these different overlapping sets of rules in a certain social context.8 Thus, legal pluralists recognize that not only formal law, but also practices, standards, moral perceptions, etc., have an impact on the behaviors of the members of any social group. In order to understand the concrete normative dynamics of any community, it is crucial to acknowledge that there are rules actually perceived as binding and, therefore, concretely having an influence on the functioning of communities, regardless of their formal adoption as law.9 Legal pluralism de-emphasizes the distinction between formal law and “interactional law”, defined as “the purposive practices that groups of people enter into that impact their practical sense of binding obligation”.10 Legal pluralists focus on the impact that both legal and non-legal rules concretely have on the dynamics characterizing a certain social context over time. What is crucial is the concrete impact that legal and non-legal sets of rules have on a certain community and the effects caused by the interaction of these different sets of rules.
From a global perspective, legal pluralism acknowledges the co-existence of overlapping international, regional, national and subnational legal and non-legal systems. This overlapping co-existence makes the global environment intrinsically characterized by conflicts and contestation. This description of the global reality is – indeed – particularly suitable to the global tax environment, characterized by the transnational activities of taxpayers creating, for example, the conditions for competition between different tax jurisdictions.
Therefore, legal pluralism – including its global dimension11 – is first of all defined by this descriptive approach that acknowledges overlaps and contestation as factual starting points of an analysis aiming at understanding the interaction between different sets of rules and its impact on a specific socio-legal context. As a consequence, legal pluralism considers unrealistic the eradication of these overlaps and contestation. Therefore, global legal pluralism considers both a sovereigntist as well as a universalist position untenable. A sovereigntist approach is based on the conceived possibility of attributing competence over a certain instance to one specific national jurisdiction. On the contrary, universalism is based on a fully harmonized conception of law applicable beyond single local authority. Global legal pluralism is a middle way between these two positions, acknowledging and building upon the constant interaction between local and foreign sets of rules.
From a normative perspective, legal pluralism considers the eradication of overlaps and contestation even undesirable. Legal pluralism recognizes the existence of conflicts between different sets of rules as a value to be preserved being an expression of diversity and, therefore, also of the different interests held by the different parties involved in the conflict, including States. Thus, global legal pluralism considers the conflicts existing within the global environment as an opportunity to guarantee normative spaces to different and even conflicting legal and non-legal systems. By guaranteeing these normative spaces for overlaps and contestation, global legal pluralism creates the conditions for an iterative dialogue between overlapping legal and non-legal systems. Consequently, global legal pluralism considers jurispathic any approach aiming at guaranteeing the prevalence of only one normative system or single measure over the others (for example, in our context, normative solutions favoring developed countries over developing countries, but also the other way around).
The crucial consequence of acknowledging a reality of overlaps and contestation is that the concept of authority is intrinsically conceived as relative. The different parties involved in the conflict – including States – have exactly the same authority to claim certain positions. Indeed, if different sources of (perceived) binding rules are considered relevant, then the concept of authority cannot be accepted as absolute. Therefore, conflicts and contestation, as expression of a concept of authority intrinsically relative, prompt an iterative dialogue between overlapping legal and non-legal systems.
From this normative perspective, Berman, one of the leading exponents of the legal pluralist doctrine, points out the possibility to develop procedural mechanisms, institutions and practices aiming at managing conflicts by preserving spaces for contestation, i.e., guaranteeing pluralism. Regardless of the concrete approaches12 described by Berman, what is relevant for the purposes of the present contribution is that the idea behind this proposed procedural pluralism is that the inevitability of these conflicts will trigger a more concrete willingness of the parties involved to find a “mutual accommodation”.13 The aim of Berman is not to find a common substantive solution to the conflict (for example, a harmonizing legal provision). In fact, procedural mechanisms, institutions and practices should not aim at erasing overlaps and contestation. It is exactly by virtue of this hybridity that States are concretely triggered to accept limits to their own authority and claims. Therefore, the objective of Berman’s procedural approach is to manage conflicts by preserving the fundamental value of pluralism.
Very interestingly for the purposes of the present contribution, Berman identifies “jurisdictional redundancies”14 as such as a relevant mechanism to manage overlaps and contestation. Berman highlights the relevance of conflicts values. The fact as such of the existence of overlapping claims over the same instances creates the precondition and is, therefore, an incentive to find a mutual accommodation. This result may be the consequence of the broader interest to assure the functioning of the global system as intrinsically characterized by overlaps and contestation.
The case study presented in the following paragraph will show that this management process based on “jurisdictional redundancies” is concretely going on within the framework of inclusive and effective international tax cooperation. Therefore, the case study below will actually show the concrete relevance of a legal pluralist approach within the framework of global taxation.
2.2 An iterative global legal pluralist dialogue within the framework of inclusive and effective international tax cooperation: a case study
The dichotomy between taxation at residence and taxation at source has traditionally characterized the dynamics of international taxation as a consequence of the conflicting claims advanced by both capital exporting and capital importing countries. In a tax treaty context based on bilateral agreements, these overlapping jurisdictional claims have substantially resulted in the prevalence of the positions of capital exporting (i.e., normally developed) countries by favoring taxation at residence.15 With the OECD/G20 Project on Base Erosion and Profit Shifting a significant step forward has been made at international level in terms of coordinated actions.16 Also thanks to the contributions of various stakeholders, awareness increased on the need to tackle tax avoidance and aggressive tax planning more effectively through coordinated actions.17 Developing countries adhered to the project as well by committing to implement the relevant minimum standards. This pluralist involvement of countries holding different and even opposite interests has given input to conflicts and contestation. In fact, the project has also evidenced challenges and criticism from the side of developing countries. Some measures resulted to be too complex for developing countries with consequent delays in implementation, lack of efficacy or non-implementation.18 Developing countries also expressed concern about their possibility to maintain competitiveness.19 More in general, it has been recognized20 that the BEPS measures did not comprehensively focus on the most relevant issues for developing countries.21
Especially with the work on the two-pillar solution, coordination has been embedded in the functioning as such of the relevant tax measures, thus becoming an essential condition of their existence (Pillar One) or effectiveness (Pillar Two). It is exactly this need of coordination that, by requiring broad participation at global level, has exacerbated the conflict between developing and developed countries. Different stakeholders,22 including academics,23 participated in the debate emphasizing critical aspects for developing countries. These critical issues concerned not only substantial aspects of the two-pillar solution, but also tax governance within the OECD/G20 Inclusive Framework.24 From a legal pluralist perspective, at least in principle, the Inclusive Framework can be seen as a mechanism offering opportunities for dialogue and contestation. However, the legitimacy of the decision-making process and the effective inclusion of developing countries on an equal footing is severely contested.25
This has resulted26 in important developments at the level of the United Nations. An ad hoc intergovernmental committee has been established and this committee has adopted the draft terms of reference for a United Nations framework convention on international tax cooperation.27 During its 79th session, the General Assembly of the United Nations has adopted a ‘Pact for the Future’ containing an express commitment to “continue to engage constructively in the process towards developing a United Nations framework convention on international tax cooperation”.28
This brief summary29 of the developments in matters of inclusive and effective international tax cooperation shows how overlapping claims – as a result of a pluralist global environment – have given rise to an iterative dialogue – involving States, the OECD, the United Nations, and several other stakeholders – actually resulting in a step-by-step progression towards a tax cooperation framework paying more and more attention to the interests of developing countries. In fact, exactly the need of addressing global tax issues (including global tax competition) on the basis of coordinated approaches has led to an increase of pluralism, especially through the inclusion of developing countries holding different and even opposite interests compared to developed countries. The increase of pluralism has consequently increased conflicts and contestation. These dynamics in terms of conflicts and contestation (i.e., “jurisdictional redundancies”), with the participation of several different stakeholders, have led to a path-breaking process interrupting the substantial exclusivity of the OECD/G20 leadership in matters of international tax cooperation.30
3. Global legal pluralism as a framework for inclusive and effective international tax cooperation: some final considerations in light of the Montesquieu lecture
Very interestingly, during her lecture Prof. Dagan emphasized that the formal autonomy of States, far from meeting the conditions of a legitimate exercise of substantive tax sovereignty, is actually at the origin of the dynamics characterizing the market of tax competition.31 States – as sovereign entities – are free to compete with each other. In global legal pluralist terms, the overlapping normative dynamics of States aiming at attracting and/or retaining certain categories of taxpayers, investments and, more in general, tax revenues trigger conflicts and contestation. Therefore, also Prof. Dagan acknowledges a reality of pluralism as fundamentally underlying and determining the relationships between States.
However, prof. Dagan opposes to these pluralist global dynamics a self-reflexive national perspective on the basis of which the effects of pluralist dynamics are considered exclusively in terms of the relationship between the State and its citizens, possibly leading to a violation of the social contract between them and, consequently, to a breach of substantive tax sovereignty. However, if the breach of substantive tax sovereignty is exclusively built upon the violation of the social contract, the only effect of an illegitimate exercise of substantive tax sovereignty is to de-legitimize – and therefore weaken – the State vis-à-vis its own citizens.
Furthermore, Prof. Dagan connects these severe consequences to the fact as such of States being part of the market of tax competition, while recognizing at the same time that retreating from these dynamics would result in equally harmful consequences in terms of legitimate exercise of substantive tax sovereignty.32 Arguably, the fact that States are substantially conditioned by the dynamics of the global economy would deserve further consideration.
In my opinion, a position exclusively building upon a national perspective is not completely satisfactory in light of the objective of effectively tackling the detrimental effects that Prof. Dagan connects to global tax competition. Within the present legal and economic post-national context – necessarily characterized by formal and substantive limits to the exercise of national tax sovereignty both at EU and international level – we should foster a gradual, but appropriate transition to new constitutional models that, by acknowledging these limits to the exercise of national tax sovereignty, equally support the function of taxation to guarantee equity within and between States. Consequently, in my opinion it is necessary to develop and foster a constitutional model that builds upon a pluralist approach conceiving national tax sovereignty in light of the necessary interactions between overlapping systems, including other sovereign entities.
This aspect underlies a crucial difference between Prof. Dagan’s position and my global legal pluralist proposal. Prof. Dagan’s approach does not consider the global dynamics as possibly contributing to and integrating a renewed conception of national sovereignty and its legitimate exercise. A global legal pluralist approach acknowledges pluralism as an unavoidable reality and, consequently, embeds this reality into the concept of legitimacy itself. In fact, from a global legal pluralist viewpoint, legitimacy is the result of the interactions between States as parties equally participating in the iterative dialogue aimed at managing conflicts and contestation. Therefore, legitimacy is not only the result of protecting the interests of its own citizens, but also of acknowledging the equal authority of the other States involved in the iterative dialogue. In my opinion, fully acknowledging substantive tax sovereignty necessarily implies to accept the fundamental value of pluralism and, consequently, the relative character of its own authority as functional to guarantee other States’ national sovereignty to be exercised legitimately.
This is exactly the strength of global legal pluralism. Having as a starting point the acknowledgement of pluralism characterizing the global context, it proposes a renewed constitutional conception of the relationship between national interest (including identity) and supra-national dynamics tending to see States united under the same umbrella of principles and values. In fact, and very importantly, global legal pluralism not only denies as unrealistic an exercise of national tax sovereignty aiming at attracting exclusive competence on certain overlapping instances, but it also highlights the risks connected to universalism as the prevalence of only certain values, principles and identities. On the contrary, legal pluralism sees a constant normative dialogue between national interest and supra-national harmonizing pursuits. It is exactly this constant tension between the two spheres that tends to keep perspectives in balance. For this reason, from a legal pluralism perspective, the proposal of Prof. Dagan consisting in accepting as legitimate only cooperative agreements progressively advantageous for developing countries would result to be both unrealistic and undesirable. Unrealistic because it does not integrate the pluralist global reality and undesirable because it undermines the tension between national and supra-national pursuits that is necessary to guarantee the jurigenerative iterative dialogue between the two dimensions.
Prof. Dagan’s severe restriction of the spectrum of legitimate cooperative agreements would result in fostering unilateral approaches in terms of tax competition with all the detrimental effects outlined during her lecture. In fact, if we conclude that States should not accept other agreements than those progressively favoring developing countries, otherwise they would violate their own substantive national tax sovereignty and thus result to be delegitimized vis-à-vis their citizens, we excessively limit the space for countries to negotiate (in legal pluralist terms, the space to manage contestation).
In fact, in my opinion the success of inclusive and effective international tax cooperation between developing and developed countries necessarily implies broader spaces for the acknowledgement and management of pluralism, which implies equal recognition of the different identities and interests of all the involved parties, and therefore of both developing and developed countries without the prevalence of ones over the others.
I also consider more realistic an approach that, beyond immediately ideal cooperative solutions, builds upon a step-by-step progression, always acknowledging and recognizing the different identities and positions of States.
This is exactly the iterative dialogue going on within the framework of inclusive and affective international tax cooperation, as shown above. This case study is the demonstration that we should realistically foster the ongoing process towards inclusive and effective international tax cooperation through a step-by-step approach managing pluralism. For this reason, and differently from Prof. Dagan’s proposal, in my opinion also agreements not immediately re-balancing the position of developing countries should be accepted as legitimate to the extent that, by acknowledging the fundamental value of pluralism, they contribute to the progression towards this objective.
Notes
[1] United Nations, General Assembly, ‘Promotion of inclusive and effective international tax cooperation at the United Nations’, A/RES/78/230, (2023).
[2] United Nations, General Assembly, ‘Macroeconomic policy questions: promotion of inclusive and effective international cooperation on tax matters at the United Nations’, Report of the Second Committee, A/78/459/Add.8, (2023).
[3] Tsilly Dagan, ‘Substantive Tax Sovereignty under Globalization’ (Montesquieu lecture), (2024) 28/21 Tilburg Law Review 1, 4–6.
[7] The literature on legal pluralism is vast. For an overview, see, for example, Paul Schiff Berman, ‘Understanding Global Legal Pluralism: From Local to Global, from Descriptive to Normative’ in PS Berman (ed), The Oxford Handbook of Global Legal Pluralism (online edn, Oxford Academic 2020); Paul Schiff Berman, ‘Jurisgenerative Constitutionalism: Procedural Principles for Managing Global Legal Pluralism’, (2013) 20 Indiana Journal of Global Legal Studies 665; Nicole Roughan, ‘Pluralist Authority and the Relation between Plurality and Pluralism’ in PS Berman (ed), The Oxford Handbook of Global Legal Pluralism (online edn, Oxford Academic 2020); Frédéric Mégret, ‘International Law as a System of Legal Pluralism’ in PS Berman (ed), The Oxford Handbook of Global Legal Pluralism (online edn, Oxford Academic 2020); Neil Walker ‘Law Unbounded? The Shifting Stakes in Global Normative Order’ in PS Berman (ed), The Oxford Handbook of Global Legal Pluralism (online edn, Oxford Academic 2020). For a more specific application within the field of taxation, see Carla De Pietro, ‘Beneficial Ownership, Tax Abuse and Legal Pluralism: An Analysis in Light of the CJEU’s Judgment Concerning the Danish Cases on Interest’, (2020) 48 Intertax 1075; Carla De Pietro, ‘Tax Abuse and Legal Pluralism: Towards Concrete Solutions Leading to Coordination Between International Tax Treaty Law and EU Tax Law’, (2020) 29 EC Tax Review 84.
[8] Paul Schiff Berman, ‘The New Legal Pluralism’ (2009) 5 Annual Review of Law & Social Science 225.
[9] PS Berman, ‘Understanding Global Legal Pluralism’ 1–3; Wibren van der Burg, ‘Conceptual Theories of Law and the Challenges of Global Legal Pluralism: A Legal Interactionist Approach’ in PS Berman (ed), The Oxford Handbook of Global Legal Pluralism (online edn, Oxford Academic 2020) 320–321.
[12] PS Berman, ‘Jurisgenerative Constitutionalism’ 665, 680–694; PS Berman, ‘Global Legal Pluralism. A Jurisprudence of Law Beyond Borders’, (Cambridge University Press 2012) 152–189.
[15] See, for example, United Nations, ‘Promotion of Inclusive and Effective International Tax Cooperation’, Report of the Secretary General, A/78/235 (2023), 2.
[16] IBFD, ‘Promotion of Inclusive and Effective Tax Cooperation at the United Nations’ (2023), 25 and 67. Available at https://financing.desa.un.org/sites/default/files/2023-08/IBFD%20Report%20-%20final.pdf (last access 30 September 2024).
For an overview of the BEPS project, see Allison Christians and Stephen Shay, ‘General Report’ in A. Christians and S. Shay (eds), Assessing BEPS: Origins, Standards, and Responses (IFA Cahiers vol. 102A, 2017).
[17] See OECD, ‘Base erosion and profit shifting (BEPS)’ available at https://www.oecd.org/en/topics/base-erosion-and-profit-shifting-beps.html#related-publications (last access 29 September 2024). See also IBFD (n17) 67; Carla De Pietro, ‘Beneficial Ownership, Tax Abuse and Legal Pluralism’ 1075, 1084.
[22] See, for example, IBFD (n17) 89; South Center, ‘Statement by the South Centre on the Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’ (2023). Available at https://www.southcentre.int/sc-statement-two-pillar-solution-28-july-2023/ (last access 30 September 2024); ATAF, ‘130 Inclusive Framework countries and jurisdictions join a new two-pillar plan to reform international taxation rules – What does this mean for Africa?’ (2021). Available at https://www.ataftax.org/130-inclusive-framework-countries-and-jurisdictions-join-a-new-two-pillar-plan-to-reform-international-taxation-rules-what-does-this-mean-for-africa (last access 30 September 2024).
[23] See, for example, Tsilly Dagan, ‘GLoBE: The Potential Costs of Cooperation’ (2023) 51 Intertax 638; Philip Baker, ‘Human Rights and the Two-Pillar Solution’ (2022) 50 Intertax 574; Annet Wanyana Oguttu, ‘A Critique from a Developing Country Perspective of the Proposals to Tax the Digital Economy’ (2020) 12 World Tax Journal 799.
[25] Rasmus Corlin Christensen, Martine Hearson and Tovony Randriamanalina, ‘At the Table, Off the Menu? Assessing the Participation of Lower-Income Countries in Global Tax Negotiations’ (ICDT 2020). Available at https://www.ictd.ac/publication/at-table-off-menu-assessing-participation-lower-income-countries-global-tax-negotiations/ (last access 30 September 2024); IBFD (n17) 17.
[27] See United Nations, ‘Report on the Second Session of the Ad Hoc Committee to Draft Terms of Reference for a United Nations Framework Convention on International Tax Cooperation’ (A/79/333), available at https://financing.desa.un.org/un-tax-convention/second-session?_gl=1*oi4olw*_ga*NTY3MDIwODg1LjE3MjQ3ODA4ODM.*_ga_TK9BQL5X7Z*MTcyNDc4MTAzMS4xLjEuMTcyNDc4MTE2MS4wLjAuMA (last access 30 September 2024).
Competing Interests
The author has no competing interests to declare.
Author Information
She is also an approved expert on the UNDP ExpRes Roster, a consultant deployment mechanism at the United Nations within the framework of the United Nations Development Programme to realize the Sustainable Development Goals.