Don’t blame it on WTO law: An analysis of the alleged WTO law incompatibility of Destination-Based Taxes


The idea that corporations should be taxed in the jurisdiction where they make their sales or provide their services is getting more and more attention in the policy debate on international taxation. In 2016, U.S. House Speaker Paul Ryan proposed to introduce a destination-based cash flow tax (DBCFT) in order to reform America’s corporate income tax (CIT). Moreover, in the last few years, more and more countries have considered the adoption of new rules to tax the digital economy in the country where the users and/or the consumers are located.

These proposals differ from traditional direct taxes imposed on corporations. They borrow from the tax design of indirect taxes, such as sales taxes or value added taxes. Consequently, it is difficult to predict whether these sui generis destination-based taxes will fit in with superior legal provisions, in particular international tax and trade law. One recurring legal argument against destination-based taxes is that they are likely to violate the law of the World Trade Organisation (WTO). 

Using the DBCFT as a case study, this Article will assess the different conflicts that could arise between new types of destination-based taxes and international trade law. Based on a critical approach informed by the analysis of the history and case-law surrounding destination-based taxes, this Article concludes that the likelihood for a DBCFT to be found incompatible with international trade law is much lower than past legal scholars have concluded. WTO law does not in itself prevent countries from adopting such taxes. Since this conclusion could be extended by analogy to other, new types of destination-based taxes, this Article could have important implications for policy-makers who are willing to move towards taxation in the country of destination. 

Research Highlight 2019

Are destination-based taxes incompatible with WTO law?

Over the past 15 years, the United States has twice considered introducing a destination-based cash flow tax (DBCFT) as a way of reforming its corporation tax (in 2005 and in 2016/17). The DBCFT has two main advantages over the existing system (and others currently being considered by the OECD): it is economically efficient – leaving business investment, location and financial decisions unaffected by taxation – and it is much more robust to profit shifting.

Despite these advantages, the DBCFT has not (yet) been passed into law. Many issues were raised and discussed in the US tax policy debate in 2016/17; one of these was the question of whether a DBCFT would violate the law of the World Trade Organisation (WTO). Legal scholars have generally argued that there would be such a violation. This research project sets out to analyse the position,  and comes to a different – and, to a certain extent, opposite – conclusion.

The research analyses historical records from the OECD and the Council of the General Agreement on Tariffs and Trade (GATT). This shows that the finding that the DBCFT would be contrary to WTO law is based on misconceptions as to how WTO law interacts with taxation. Indeed, this historical approach helps to show that some of the legal arguments made in past scholarship are also based on a misrepresentation of views expressed in the 1960s and 1970s. The project uses case-law materials to provide an extensive analysis of GATT and WTO law disputes on destination-based taxes.

The main conclusion of the paper is that there is a relatively low risk of the DBCFT being found to be in violation of WTO law. This could have a significant impact on future tax reforms in the United States and elsewhere. By using the DBCFT as a case-study to reflect on the trade implications of taxes imposed in the country of destination, this research also highlights that other new types of destination-based taxes should not be disregarded because of their alleged incompatibility with WTO law

Alice Pirlot ‘An Analysis of the Alleged WTO Law Incompatibility of DestinationBased Taxes’, to be published in the Florida Tax Review.

The DBCFT has been proposed and analysed in detail by the Oxford International Tax Group, chaired by Michael Devereux: see Alan Auerbach, Michael Devereux, Michael Keen and John Vella ‘Destination-based cash flow taxation’, Oxford University Centre for Business Taxation Working Paper 17/01. This will form part of an Oxford University Press book by the group, to be published in 2020.