International trade has been a cornerstone of global relations since the earliest days of civilization. However, trade and investment have surged significantly since the 20th century, largely due to the removal of trade barriers through the General Agreement on Tariffs and Trade (GATT) negotiation rounds, which the World Trade Organization administered. In the 1970s, the adoption of floating exchange rates further accelerated the globalization of financial markets and investment ecosystem. Currently, a Multilateral Agreement on Investment is being negotiated under the OECD, promising to enhance international transactions further.

With this rapid growth in cross-border commercial activities, well-defined international taxation laws have become all the more crucial. These laws serve a dual purpose: they ensure effective government financing while preventing tax policies from hindering global transactions. This article seeks to analyze the existing international taxation and trading regime, the challenges in its overall implementation and enforcement, and their relevance in today's global ecosystem.
 

Core Principles of International Trade Law

1. The International Trade Law The General Agreement on Tariffs and Trade (GATT), initiated in 1947, was instrumental in forming international trade law by promoting free trade through the reduction of tariffs and trade barriers. It is grounded in essential principles such as Most-Favored-Nation treatment, National Treatment, and transparency, which collectively encourage non-discrimination and fair competition. GATT established a framework for a rules-based trading system that still impacts global trade relations today. The current international trade landscape has evolved through decades of multilateral negotiations, beginning with GATT and leading to the creation of the World Trade Organization (WTO). This modern trade system is founded on four key principles: Most-Favored-Nation Treatment (MFN), National Treatment (NT), tariff binding, and a general ban on quantitative restrictions. Each of these principles is formalized as a distinct rule within GATT, contributing to a cohesive and efficient framework for international trade.
    
2. Treating all Countries Equally: The Principle of Most-Favored Nation The first substantive rule of international trade that we will delve into is known as Most-Favored-Nation Treatment (MFN). Most-Favored-Nation is based on the idea that every member state should treat each of its trading partners equally. For example: if the United States grants a tariff preference to a certain type of product imported from Mexico, it must also grant the same preference to the same type of product imported from all other WTO members, including China, Canada, and the European Union. This ensures that no country receives an unfair advantage due to its geographical location or political relationship. GATT Article I enshrines the MFN principle as a cornerstone of international trade. It mandates that any trade advantage, such as a lower tariff or a relaxed import quota, granted to one trading partner must be extended to all other trading partners. This ensures a level playing field for all countries involved in international trade.
    
3. Treating all Goods Equally within a Given Market: The Principle of National Treatment Like Most-Favored-Nation, National Treatment (NT) is a subset of the principle of non-discrimination. However, National Treatment has a domestic focus. Essentially, National Treatment is based on the idea that a country should treat imported goods the same way as it treats domestically produced goods. For example: If Country B provides subsidies to domestic car manufacturers, it must also provide similar subsidies to foreign car manufacturers operating within its borders. This prevents domestic producers from having an unfair advantage over foreign competitors. National Treatment helps to create a level playing field for both domestic and foreign producers, promoting fair competition and reducing trade tensions. GATT Article III codifies National Treatment through its provisions on Internal Taxation and Internal Regulation.
    
4. Tariff Binding Tariffs are taxes imposed on imported goods. There are two main types: ad valorem tariffs, which are calculated as a percentage of the imported item's value, and specific tariffs, which are charged based on the quantity of the imported item. For example, a 10% ad valorem tariff on a $1,000 car is $100, and a specific tariff of $1 per kilogram of apples is $1 per kilogram.
    
5. Ban on Quantitative Restrictions GATT prohibits quantitative restrictions on international trade to foster trade liberalization. These restrictions, typically in the form of quotas, limit the quantity of a specific good that can be imported. For instance, the United States has historically imposed import quotas on sugar. This means there is a set limit on how much foreign sugar can enter the U.S. market each year.

While this quota aims to protect domestic sugar producers by ensuring stable prices, it also results in higher costs for consumers and reduced competition. Because of the limited supply from foreign sources, the price of sugar tends to be artificially high compared to what it would be in a more competitive market. This example highlights how quantitative restrictions can distort market dynamics, leading to inefficiencies and ultimately impacting consumers negatively, despite their political appeal for protecting local industries.

Hence, International Trade is carried out on basis of certain core principles which are universally accepted. At the same time, it is directly associated with global tax treaties and have a direct influence upon them.
 

Global Taxation Models and the Evolving Digital Economy

In practice, individuals are taxed based on the country where their income is accrued, received, or deemed to accrue. However, in the international context, determining which jurisdiction should tax the income remains a significant issue. One major problem is the risk of double taxation, where income is taxed in two countries.[6] To address this, various international bodies have worked to establish a global taxation framework.

Further, to prevent double taxation, tax treaties are typically established between the relevant states. These treaties, often bilateral, adhere to the principles set out in the Vienna Convention on the Law of Treaties (1969)[7] and cover both income and capital taxes.

1. OECD Model Tax Convention on Income and Capital
   • A key tool in negotiating and interpreting these treaties is the OECD Model Tax Convention on Income and Capital, which has had a considerable impact on global tax treaty negotiations.
   • The OECD Model has brought several advantages:
     • Since 1957, OECD member countries have largely conformed to this model, leading to an increase in tax treaties concluded or revised based on OECD recommendations.
     • The OECD Model has expanded beyond member countries and now serves as a foundation for tax treaties between member and non-member states alike.
     • It has played a key role in shaping the UN Model Double Taxation Convention between Developed and Developing Countries, which focuses on promoting mutual cooperation and assistance.
     • The widespread recognition of the OECD's commentaries has made them authoritative guides for interpreting tax conventions globally.
   • Article 2 of the OECD Model Treaty states that the treaty applies to all taxes on income and capital imposed by a Contracting State, its political subdivisions, or local authorities, irrespective of how they are levied.
   • Articles 4 and 5 define critical terms such as Resident and Permanent Establishment, which are essential for taxation.
   • The model also covers issues related to dividends and multinational enterprises, reinforcing the concept of an international taxation system.
      
2. UN Model Double Taxation Convention
   • The UN Model Double Taxation Convention aims to reduce double taxation, focusing specifically on investments.
   • It ensures that both the country where the investor resides and the country where the investment occurs share taxing rights.
   • The UN Model emphasizes cooperation in combating tax avoidance and evasion.
   • Differences from the OECD Model:
     • The UN Model has a more limited scope and lacks a provision for mutual assistance, which is included in Article 27 of the OECD Model Treaty.
     • The mutual agreement procedure under the UN Model has a broader scope, addressing more areas than the OECD version.
   • Despite their contributions, these treaties are non-binding, and compliance by states is not assured.
   • An emerging issue is the taxation of digital goods and services, which can be transferred across different jurisdictions in real-time.
      
3. Taxation of Digital Businesses
   • Scholars have proposed various solutions to address the taxation of digital businesses, which have been on a constant rise globally.
   • Some suggest a Digital Services Tax (DST) on the revenue of large digital companies with significant user bases in specific countries.
   • Others propose a Consumption Tax based on the customer's location.
   • Challenges:
     • DSTs could stifle innovation and harm smaller digital producers.
     • A Consumption Tax would be challenging to implement due to difficulties in determining the user's location.

As of now, municipal laws govern digital companies within their own jurisdictions, and the prospect of uniform international tax laws in this area remains distant. Apart from this, there are several challenges that arise while dealing with the interrelationship between International Trading and Taxation regimes.
 

Disputes and Challenges in Trade and Tax Interrelationships

This area of global trade and global tax policies is being developed and has many disputes since countries have different interests and are changing global architecture. Features include the following but are not only to the following issues namely, - transfer pricing, digital services tax (DST) carbon taxation, and subsidies on trade-related activities.

• Transfer Pricing and Profit Shifting
  One of the primary causes of trade tax conflict is the disputes in transfer pricing. Multinational Corporations (MNCs) employ a strategy known as profit shifting, where they move profits earned in one country to another jurisdiction with lower taxation. This practice, often called 'base erosion and profit shifting' (BEPS), causes conflicts with national tax authorities who are losing their tax base. The OECD BEPS program, in an attempt to reduce these activities, has introduced more rules based on specific Guidelines. However, the practice in individual countries, such as the MAS vs Rai Kuch and GEPL case, where Enterprise tax abuse is combined with re-investment Tax abuse, remains complex and often leads to legal battles, as seen in the case of Apple Inc. So far, there is sufficient evidence in the EU that Irish tax laws grant unwanted tax advantages based on selective treatment.
   
• Digital Services Tax (DST)
  Increased technological changes and advancements in the systemic aspects of our economies have brought about the rise of new products and services like the Digital Services Taxes, which multinational states have introductorily enacted and have targeted at various internet multinational corporations; for instance, these services have been employed against countries like France, the UK, and India among others. These initiatives have generated controversies primarily in the United States.
   
• CBAM - Carbon Border Adjustment Mechanisms
  Another controversial issue involves carbon taxes, exemplified by the introduction of the European Union's Carbon Border Adjustment Mechanism (CBAM), which will now tax carbon-intensive imports from countries with even looser environmental regulations. CBAM was in place to avoid carbon leakage but, at the same time, has been strongly criticised by many developing countries for being protectionist under the guise of environmental policy. These disputes will likely escalate with countries considering carbon taxation in conjunction with trade agreements, weighing their environmental goals against economic competitiveness.
   
• Trade-Related Subsidies
  Trade-related subsidies have been another controversial subject at the interface of trade and tax. Countries use such subsidies to boost their industries, distorting global trade by giving an edge to local producers. These usually lead to disputes within the framework of the WTO as countries argue that such measures violate trade rules aimed at fair competition.

For example, the US and the EU[21] have been clashing on subsidies in agriculture and space for decades. The WTO had decided that both parties had given each other's aerospace titans illegal subsidies in the landmark case of Boeing vs. Airbus. A few examples show how tax policies favouring domestic industries get into a fight on the world's trade grounds[22].
 
Conclusion
In essence, as the world economy undergoes increased interdependence, trade and tax policies intersect in complications with both opportunities and challenges. International trade agreements accelerate a faster free trade policy while the disparity in tax policies, transfer pricing, digital taxation, and environmental conditions represented by CBAM creates disagreement. Multilateral cooperation, therefore, remains an important part of such organizations as the OECD and WTO for harmonization. These emerging issues in digital economies, environmental issues, and state subsidies will continue to pose complex challenges that need adaptable and visionary solutions to global governance.

End-Notes:

1. Gillian Moon, Trade and Equality: A Relationship to Discover, Journal of International Economic Law, Volume 12, Issue 3, September 2009, pp 617–642, https://doi.org/10.1093/jiel/jgp028
2. Article I, General Agreement on Tariffs and Trade 1994 (GATT 1994), 1867 U.N.T.S. 187.
3. N.1.5.4 Philippines — Distilled Spirits, para. 148 (WT/DS396/AB/R, WT/DS403/AB/R)
4. Lorand Bartels, Binding Tariff Preferences for Developing Countries Under Article II Gatt, Journal of International Economic Law, Volume 13, Issue 4, December 2010, Pages 969–995, https://doi.org/10.1093/jiel/jgq051
5. Tracy Murray, Quantitative Restrictions, Developing Countries, and GATT, 11 J. World Trade L. 391 (1977)
6. Richard Vann, International Aspects of Income Tax, Tax Law Design and Drafting (volume 2; International Monetary Fund: 1998; Victor Thuronyi, ed.) Chapter 18, International Aspects of Income Tax p 8
7. Vienna Convention on the Law of Treaties, 1155 U.N.T.S. 331; 8 I.L.M. 679 (1969)
8. OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Paris, https://doi.org/10.1787/g2g972ee-en
9. John F. Avery Jones, Understanding the OECD Model Tax Convention: The Lesson of History, 10 FLA. TAX REV. 1 (2009).
10. Irene J. J. Burgers, The New OECD Approach on Profit Allocation: A Step Forward Towards Neutral Treatment of Permanent Establishments and Subsidiaries, 10 FLA. TAX REV. 51 (2009).
11. Article 2, OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Paris
12. Article 4, OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Paris
13. Article 5, OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Paris
14. United Nations Model Double Taxation Convention between Developed and Developing Countries 2017 Update, Department of Social and Economic Affairs, United Nations, ST/ESA/PAD/SER.E/213, available at: https://www.un.org/esa/ffd/wp-content/uploads/2018/05/MDT_2017.pdf
15. Edwin S. Todd, Double Taxation, 14 TAX MAG. 528 (September 1936).
16. Article 27, OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Paris
17. Young Ran Kim, Digital Services Tax: A Cross-Border Variation of the Consumption Tax Debate, 72 ALA. L. REV. 131 (2020).
18. Michael J. Graetz, The Myth of Effective Tax Reform, 88 Harv. L. Rev. 465 (2018).
19. David M. Wittenberg, The Digital Services Tax: A New Era of Taxation for the Digital Economy, 51 Tax Law. 405 (2021).
20. Christopher A. Hartwell, Carbon Border Adjustments: A Way Forward for Global Trade, 39 Envtl. L. Rep. (Envtl. L. Inst.) 10,012 (2019).
21. European Union, Regulation (EU) 2021/1119 of the European Parliament and of the Council (2021).
22. U.S. Dep't of Commerce, Report on the WTO Dispute Settlement Proceedings (2019).

Written By:

1. Parth Verma, 4th Year BBA LLB (Hons) Students from CHRIST (deemed to be University), Bengaluru.
2. Aditya G Sabhahit, 4th Year BBA LLB (Hons) Students from CHRIST (deemed to be University), Bengaluru.
3. Syed Muqhtadir Hussain, 4th Year BBA LLB (Hons) Students from CHRIST (deemed to be University), Bengaluru.