Tax Disputes under Institutional Instability: Theory and Implications
| Published date | 01 July 2012 |
| DOI | http://doi.org/10.1111/j.1468-2230.2012.00914.x |
| Date | 01 July 2012 |
| Author | Eduardo Baistrocchi |
Tax Disputes under Institutional Instability:
Theory and Implications
Eduardo Baistrocchi*
This article aims to offer the first structural analysis of tax disputes under institutional instability
using a core element of the international tax regime as an example. It offers a theory grounded
on Mancur Olson’s seminal contribution to group dynamics, the logic of collective action. It
also suggests implications of this theory that might help to address key enforcement issues
faced by the international tax regime in a frequent context worldwide: institutionally unstable
countries.
INTRODUCTION
The international tax regime finds itself in the midst of a creeping transition from
rules to standards.1The self–enforcing, rule–based arm’s length pr inciple, which
by the early 1930s2had obviated all problems of allocation of the international
income tax base, has gradually mutated into a procedural, standard–based arm’s
length principle that has been particularly visible since the world’s first bilateral
advance pricing agreement (APA) was concluded between Australia and the
United States in the 1990s.
*Law Department,London School of Economics. This article has benefited greatly from the comments
of Reuven Avi-Yonah, Yariv Brauner, Hernán Caire,Alejandro Chehtman, Carsten Gerner-Beuerle,
Werner Haslehner,Martin Hevia, Tomás González,Pablo Ibañez-Colomo, Liliana Lerchundi,Demian
Macedo, Emiliano Marambio Catán, Sergio Muro, Celia Lerman, Guido Pincione, Diane Ring,
Eduardo Rivera López, Ian Roxan, Andrey Shpak, Catalina Smulovitz, Ezequiel Spector, Horacio
Spector,Tom Ulen and the anonymous referees,all of whom I thank.Views,errors, and omissions remain
my own.
1 The literature on the inter national tax regime is immense and can be highlighted here.Excellent
surveys follow.R. S. Avi–Yonah, International Tax as International Law.An Analysis of the International
Tax Regime (Cambridge: Cambridge Tax Law Series, 2007); Y. Brauner,‘An International Tax
Regime in Crystallisation – Realities, Experiences and Opportunities’ (2003) 56 Tax Law Review
259;I. Roxan,‘Limits to Globalization – Some Implications for Taxationin the Developing World’
(unpublished paper in the files of the author, 2003); M. Graetz,‘Taxing International Income:
Inadequate Principles, Outdated Concepts,and Unsatisfactor y Policies’ (2001) 54 Tax Law Review;
R. Vann, ‘International Aspects of Income Tax’ inV. Thuronyi (ed), Tax Law Design and Drafting
(Washington DC:International Monetar y Fund, 1998); S. Piccioto,Inter national Business Taxation,
A study in the internationalization of business regulations (London:Weidenfeld and Nicolson, 1992); A.
Ogley, The Principles of International Tax: A Multinational Perspective (London: Intl Infor mation
Services Inc, 1993).
2 M. B. Carroll, ‘Taxation of Foreign and National Enterprises’ (Vol IV) in Methods of Allocating
Taxable Income (Geneva: League of Nations,1933) (the Car roll Report) para 628. OECDTransfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations (Paris: OECD, 2010) (OECD
Guidelines) para 4.93. See E. Baistrochi and I. Roxan (eds), Resolving Transfer Pricing Disputes: A
Global Analysis (London: Cambridge UP, forthcoming).
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© 2012The Author.The Modern Law Review © 2012 The Modern Law ReviewLimited. (2012) 75(4) MLR 547–577
Published by BlackwellPublishing, 9600 Garsington Road, Oxford OX42DQ, UK and 350 Main Street, Malden,MA 02148, USA
Today, this transition entails important consequences for the structure of
transfer pricing dispute resolution. It includes shifting ultimate decision–making
down the legal hierarchy (through reliance on APAs, tax litigation, and other
similar procedures for solving international tax disputes)3and the consequent
increasing importance of state intervention to administer the arm’s length
principle.4
The international tax regime’s legal transition raises fundamental enforcement
problems in countries facing institutional instability. An unstable institutional
context may increase the likelihood of having the transfer pricing legal system
administered in such a way as to produce effects incompatible with the interna-
tional tax regime. Problems of unsolved international double taxation are a case
in point.5This article aims to offer the first structural analysis of tax disputes
under institutional instability. It provides a theory grounded on the logic of
collective action.6It also suggests implications of this theory that might help to
increase the understanding of central enforcement issues faced by the interna-
tional tax regime in institutionally unstable countries.The exper ience of Argen-
tina in transfer pricing dispute resolution over the 1932–2011 period is used as
a representative example.7
The central theory of this article offers a framework to predict how the
local tax bureaucracy will probably administer the tax system in a context
of institutional instability. A country facing institutional instability is one that
has been exposed to political volatility over a substantial period of time.
The average tenure of the members of the highest local court might be used
as a proxy to measure institutional stability. For example, if the oscillation
between military and democratic governments matches the instability of the
highest court in a given country, that countr y should be considered institu-
tionally unstable.8The central theory predicts that this context inherently leads,
all other things being equal, to the following three internally related core
effects.
First, institutional instability produces greater freedom for the tax bureaucracy
because there is less systemic oversight and the tax bureaucracy is a monopolistic
supplier of tax collection.
Second, greater freedom, in turn, induces the tax bureaucracy to implement
(with increasing organisational speed) an incremental rent–seeking strategy as a
quid pro quo for administering the tax system. For example, this context may
trigger the emergence of bargaining for tax collection between the Executive and
3OECD Guidelines 23–30.
4 See section headed ‘The Root of the Transfer Pricing Problem’ at pages 550–553,below.
5OECD Guidelines 145–146 (para 4.44).
6 M. Olson, The Logic of Collective Action.Public Goods and the Theory of Groups (Cambridge: Harvard
UP,1971). See also M. Olson,The Rise and Dec line of Nations,Economic Growth,Stagflation, and Social
Rigidities (New Haven:Yale UP, 1982).
7 This ar ticle uses the John Stuart Mill method for establishing causal claims. See M. H. Salmon,
Introduction to Logic and Critical Thinking (New York: Harcourt Brace College Publisher, 1995)
151–167.Transfer pricing disputes in Argentina are the example reviewed in this article because it
is a tax dispute area where there is relatively more information available in this country.
8 See section headed ‘Conceptual Framework’ at pages 553–558,below.
Tax Disputes under Institutional Instability
© 2012 TheAuthor.The Moder n Law Review© 2012 The Modern Law Review Limited.
548 (2012) 75(4) MLR 547–577
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