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NAFTA Tax Law and Policy

NAFTA Tax Law and Policy: Resolving the Clash between Economic and Sovereignty Interests

Copyright Date: 2005
Pages: 315
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  • Book Info
    NAFTA Tax Law and Policy
    Book Description:

    InNAFTA Tax Law and Policy, Arthur J. Cockfield analyzes these different tax systems and proposes a number of recommendations to reduce the harm caused by these barriers.

    eISBN: 978-1-4426-8382-2
    Subjects: Business, Law

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-xii)
  3. Tables
    (pp. xiii-xiv)
  4. Preface
    (pp. xv-2)
  5. CHAPTER 1 Introduction
    (pp. 3-8)

    These warnings carry a message of great importance to countries participating in regional economic integration. On 1 January 1994, Canada, the United States, and Mexico implemented the North American Free Trade Agreement (NAFTA) – creating the largest regionally integrated trade and investment area in the world – to promote their economic interests by lowering barriers to international trade and investment.³

    NAFTA strives in part to create an integrated North American capital market where individuals and firms can invest in the most productive businesses. However, as noted in the two excerpts reproduced above, national tax differences are thought to harm or...


    • CHAPTER 2 Background Issues
      (pp. 11-21)

      The purpose of this chapter is to discuss the principal economic and political issues that provide the context for this study. The first part reviews the main economic concerns that arise from the interaction of the different tax regimes in the environment of increased economic integration promoted by NAFTA. Attention then turns to the political hurdles that would need to be overcome to address many of these concerns. The chapter concludes with a review of traditional international tax policy principles that often serve as a guide for reform efforts. The main theme of this study, as framed in this chapter,...

    • CHAPTER 3 The Tax Systems
      (pp. 22-45)

      This chapter reviews the different tax systems of the NAFTA countries. I do not attempt to provide a detailed description of these systems; rather, the analysis is intended to focus attention on specific tax areas that contribute to potential tax integration problems. The chapter is divided into three parts: general federal individual and corporate income tax regimes; subnational tax systems; and the international aspects of each tax system.

      Since the mid-1980s, all three NAFTA countries have undertaken similar tax reform strategies intended to improve the efficiency and equity of their tax systems: tax bases were broadened and taxes were reduced,...

    • CHAPTER 4 Tax Coordination
      (pp. 46-66)

      This chapter discusses the two main international agreements employed to coordinate the tax treatment of cross-border flows among the NAFTA countries. It begins by reviewing the relevant provisions within NAFTA, and then discusses the three tax treaties negotiated between each trade partner.

      Article 2103 of NAFTA deals with tax measures. The provision indicates that nothing in NAFTA affects taxation measures unless it is specifically set out in the article. The main goal behind NAFTA is to gradually eliminate tariff barriers among the NAFTA countries. These taxlike barriers, which include custom duties, anti-dumping and countervailing duties, and importation fees, are not...


    • CHAPTER 5 Taxes and Cross-Border Investments
      (pp. 69-86)

      Under the legal regime that coordinates the tax treatment of crossborder flows the NAFTA countries are permitted to maintain different tax burdens on different types of cross-border economic activity. As we have seen, some believe that the interaction of the tax systems will lead to the misallocation of mobile economic factors such as capital among the NAFTA countries. This chapter begins by establishing the importance to the NAFTA countries of maintaining a tax-hospitable jurisdiction to domestic and foreign investment. It then examines the extent to which taxes are suspected to influence cross-border investment flows. Finally, the chapter reviews a number...

    • CHAPTER 6 The Impact of U.S. Dividend Tax Reform
      (pp. 87-102)

      The preceding chapter investigated the potential for the tax regimes of the NAFTA countries to influence investment decision making. The analysis revealed that each tax regime imposed differing tax treatment on assets and industries as well as on how the investment was financed. Nevertheless, overall results suggest that the NAFTA countries impose roughly similar tax burdens on investment activity. What would happen if this situation were to change?

      This chapter reviews the implications of U.S. tax reform in 2003, which significantly reduced tax rates on dividends received by individuals. Canadian policy makers paid close attention to these reform efforts, due...


    • CHAPTER 7 Lessons from Europe
      (pp. 105-127)

      Europeans have been struggling with cross-border tax issues under regional economic integration at least since the Treaty of Rome was signed in 1957. As a customs union with a broad political and economic integration agenda, the member countries of the European Union have considered whether they should sacrifice tax sovereignty by agreeing to a set of common tax rules. These countries have had limited success in overcoming the sovereignty hurdle and proceeded with partial VAT harmonization as of 1 January 1993; they have had even less success in the area of corporate income tax harmonization. Accordingly, the European experience offers...

    • CHAPTER 8 E-Commerce Tax Policy
      (pp. 128-142)

      Nowhere is the clash between sovereignty and international tax policy more pronounced than in the new environment of electronic commerce (e-commerce) the world’s first truly borderless form of commerce. E-commerce enables companies to post a website and sell digital goods and services into foreign markets without having to set up branch operations: these goods and services pass through national borders without detection. The advent of the Internet and the proliferation of digital goods and services thus pose a number of challenges to traditional international tax rules and principles.

      This chapter discusses the initial efforts by Canada and the United States...


    • CHAPTER 9 Balancing Economic and Sovereignty Interests
      (pp. 145-159)

      The drive towards regional economic integration invariably leads to tension between two often-conflicting values: the desire to obtain greater economic efficiencies and the desire for sovereign control over government policy making. As indicated in the introduction, Karl Polanyi has called this tension the ‘double movement’ that propels modern society.¹ Endemic to international trade discussions, it is perhaps no more pronounced than with respect to potential tax integration initiatives among nations. Governments considering such initiatives find the prospect of ceding the power to shape tax policies – policies traditionally used to pursue domestic political, social, and economic goals – unnerving. However,...

    • CHAPTER 10 Modelling NAFTA Tax Competition
      (pp. 160-174)

      The last chapter suggested that a policy of heightened multilateral coordination is the appropriate tax policy response for the NAFTA region. Such a policy avoids any movement towards the harmonization of the tax bases or rates and departs from the approach that is often advocated for the European Union. This chapter addresses more explicitly the reasons why tax harmonization is not warranted within North America. It begins by discussing theoretical concerns about international tax competition and notes that the recent OECD and EU reform efforts focus on inhibiting ‘harmful’ tax competition while permitting more benevolent types of competition to go...

    • CHAPTER 11 Recommendations
      (pp. 175-184)

      Heightened multilateral tax coordination is appropriate for the NAFTA countries in the current environment of increased economic integration. This chapter sets out possible elements of the coordination approach, including efforts to curtail transfer price abuses through an arbitration procedure, trilateralize tax treaty negotiations and harmonize treaty policy, reduce barriers to cross-border capital flows by abolishing withholding taxes on parent/subsidiary dividends, move towards multilateral agreements to enforce collection obligations on e-commerce sales, and to improve administrative cooperation among national tax authorities. Building on analysis in previous chapters, the recommendations emphasize removing tax barriers for highly integrated North American firms and represent...

    • CHAPTER 12 Conclusion
      (pp. 185-190)

      NAFTA reflects the desire of the North American governments and their citizens to benefit from greater economic efficiencies by reducing barriers to the cross-border flow of trade and investment. Concerns have been expressed that national tax differences distort investment activity away from productive uses, reduce corporate income tax revenues through the process of tax competition, and facilitate tax arbitrage schemes employed by multinational firms to improve their economic welfare. As economies become more closely entwined, the cost of maintaining the current regime appears to be escalating.

      A way to resolve these problems could involve a NAFTA-wide agreement on common tax...

  10. Notes
    (pp. 191-230)
  11. Select Bibliography
    (pp. 231-244)
  12. Index
    (pp. 245-249)