Cross-Border Arbitrage: The Good, the Bad and the Ugly
Posted: 7 Sep 2007
Abstract
This brief essay served as an introduction to longer papers by other authors at a 2006 University of Chicago tax conference. It poses a series of questions about the phenomenon known as "international tax arbitrage" taking advantage of differences in domestic tax laws to achieve special benefits for cross-border transactions.
Among the questions posed are whether arbitrage presents a legitimate issue of tax policy, what that issue is, and what can be done about it. The essay generally adopts a skeptical position: it repeats the author's previously expressed view that arbitrage should not be a top policy objective of the United States. It argues that arbitrage in international tax matters is born of inevitable differences among countries in the details of their tax systems, and that taxpayers, equally inevitably, will seek and find the resulting interstices between such systems.
The author maintains, contrary to views of some observers, that there is no overriding principle to the effect that all income should be taxed once. Furthermore, the extensive network of tax treaties should not be seen as embodying that principle because taxpayers cannot be required to adhere to treaties that increase taxation above the taxation that applies under domestic laws. Thus, although treaties approach the closed system reflected in the notion of a single tax principle, they exist independently of domestic tax laws and are without leverage to eliminate arbitrage, or even to restrict it.
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