For all of international tax’s history, the decision of which country should tax cross-border income has rested upon two fundamental legal concepts: ‘residence’, a tax law doctrine based on the relationship between a taxpayer and a taxing jurisdiction, and ‘source’, a tax law concept based on the location of economic activity giving rise to the income.
Domestic law and tax treaty rules, which use these two concepts to prevent double taxation, have proliferated and to a large extent have been successful (after all, international trade and investment continue apace). Basically, a taxpayer’s residence country has taxing rights in respect of their income unless there is a sufficient connection between the taxpayer’s income-earning activity and the country where the income was earned, in which case the source country generally has taxing rights.
However, with technological change, globalisation, and sophisticated tax planning, in recent decades taxpayers (most notably large multinationals) have used and manipulated the rules for preventing double taxation to instead achieve double non-taxation. And thus for the last decade or so since the last global financial crisis, the international tax community has been particularly focused on the phenomenon of ‘stateless’ income (income of a multinational entity that has a tax source somewhere other than the residence country of the multinational’s parent company and is taxed in neither the parent’s residence country nor the country where the economic activity that generated the income occurred). This focus has resulted in the OECD’s BEPS (‘base erosion and profit shifting’) project, now chugging along into its seventh year of ‘collaborating … to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment’.
This effort has been a boon for tax policymakers and academics, among others, as it has provided an opportunity to rethink some of the fundamentals of the international tax system, including national sovereignty and tax jurisdiction, conceptions of source, and the proper sharing of the fiscal spoils of international commerce.
While stateless income (which actually refers to income that can be sourced in any country) has rightly set the international tax agenda, there has been little analysis of a related phenomenon: ‘extra-national’ income, or income that arises outside of any country’s (tax) borders (for example, income earned in international maritime areas, Antarctica, or outer space). My in-progress PhD seeks to fill that gap.
Sharing the pie from transnational economic activity
Extra-national income does not pose the same fiscal threat that stateless income does, but it does provide a more clear analytical lens through which to re-evaluate established international tax concepts and policy around transnational income. The essential tax issue with both extra-national and stateless income is the appropriate sharing of the fiscal pie from transnational economic activity. As such, the international legal regime for the governance of extra-national spaces (where extra-national income is earned) may provide insights of more general applicability when considering transnational income.
In terms of existing tax rules, extra-national spaces are not tax law voids. A variety of domestic and treaty-based rules bear upon the taxation of extra-national income (for example, source rules of general applicability; specific source rules such as the United States statutory source rules relating to ‘space or ocean activity’; and industry-specific rules such as those relating to income from international transport (Article 8 of the OECD Model Tax Convention). As a broad generalisation, these rules default to exclusive residence (or, sometimes for entities, ‘place of effective management’) taxation. The electivity of such exclusive taxing rules based on residence poses an obvious risk; shipping companies – increasingly taxed only on a residence basis – have largely moved to tax havens.
While residence taxation (backed up by controlled foreign corporation rules) might seem inevitable, such a default outcome does not fully acknowledge the primacy of physical location in allocating taxing rights. If source countries are given preference on the basis that they provide within their borders the infrastructural means by which non-residents earn their income, then it also makes sense to consider the legal and regulatory setting in which extranational income is earned, which includes treaties that impose fiscal obligations.
There is a patchwork international treaty-based legal regime that governs extra-national spaces and which collectively recognizes humankind’s collective interest in extra-national space and its resources. This concept is colloquially referred to as the ‘common heritage of mankind’ and is manifested in a variety of treaty provisions meant to safeguard and redistribute humankind’s collective interest in the global commons and its resources.
For example, the Antarctic Treaty prohibits commercial mineral exploitation. The Outer Space Treaty declares ‘[t]he exploration and use of outer space … shall be the province of all mankind’. The Moon Treaty calls for communal ownership and an equitable sharing of the Moon’s resources. And, most relevantly as of now, the United Nations Convention on the Law of the Sea (UNCLOS) provides for a variety of mechanisms to equitably share the benefits derived from the international seabed’s resources.
The payment regime for deep-sea mining: a global tax resemblance
In a recent paper, I look at the mechanism applicable to a country’s extended continental shelf under UNCLOS Article 82 and its potential first-ever application, to Canada.
The Article 82 regime calls for countries that exploit their extended continental shelf to make payments, based on the amount of natural resource production, to the International Seabed Authority, for redistribution to less developed and land-locked countries. Furthermore, UNCLOS subjects the international seabed beyond any country’s continental shelf to common ownership, administered by the International Seabed Authority on behalf of all humankind, and to be exploited in such a way that the benefits are shared equitably by all. This is all close enough to a ‘global tax’ to make some uncomfortable.
Indeed, the International Seabed Authority itself considers the fiscal responsibilities imposed by these manifestations of the common heritage of humankind’s sharing principle to be like a tax and is using traditional tax policy criteria (efficiency, equity, simplicity) as guiding principles as it develops the fiscal regimes outlined in UNCLOS. As technology is only now enlivening these provisions, it is hoped that the best in tax policy and design prevails as the International Seabed Authority develops and implements these fiscal regimes.
But beyond that, it bears considering whether a fiscal regime applicable to the exploitation of the international seabed has anything to teach us about the taxation of transnational income more generally. As the international tax community grapples with taxing income that respects no national borders, it will be worth watching how the International Seabed Authority ‘taxes’ and redistributes extra-national income.
Further reading
Burch, M 2019, ‘Extranational Taxation: Canada and UNCLOS Article 82‘, Canadian Tax Journal, vol. 67, no. 3, pp. 729-753.
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