Don't Blame It on WTO Law: An Analysis of the Alleged WTO Law Incompatibility of Destination-Based Taxes

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Alice Pirlot


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 the United States’ 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 Organization (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 that a DBCFT would 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 policymakers who are willing to move towards taxation in the country of destination.

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