International Tax Law and the Rule of Law – An Aspirational Goal or Ironic Compound Oxymoron?

Common to the many popular understandings of ‘ rule of law ’ are two benchmark
principles – a sharp dichotomy between the body that makes laws (the parliament)
and the body that administers them and a guarantee of certainty in laws that impose
liabilities and potential penalties on persons.
The former provides protection to taxpayers from arbitrary imposition of laws made up by the agency responsible for administering the law and the latter provides both the persons subject to laws and persons who administer them with clear boundaries to potential liability under the laws. Tax laws generally satisfy the two principles, with legislation passed by the parliament providing explicit guidance in many areas and (in Anglo jurisdictions) judicial
doctrines built on the doctrine of precedent, implicitly accepted by the legislature or
overruled where the legislature rejects judicial concepts, filling in the gaps. The notable exception to the observation is the system for allocating profits of multinational enterprises adopted unilaterally by almost all countries hosting parts of these enterprises and reinforced by treaties built on two models that also incorporate the almost universally used system. The system first artificially deems each element of a multinational enterprise to be a separate economic entity and then requires taxpayers and tax administrators to construct imagined commercial arrangements between the parts of the enterprises based on hypothetical prices that would be used if
arm ’ s-length parties were to enter into similar arrangements. As the arrangements in question will only happen within consolidated multinational enterprises, the hypotheticals are entirely imagined, providing no elements of certainty for the parties and effectively providing the agencies that administer the law with the opportunity to make it as well or at least negotiate an outcome based on their idea of what the law should be. An alternative
system for allocating profits is available and has been adopted in other national profit
allocation systems. Moving to that system would lead to a fairer system that honoured
rule of law principles.