Triplet 13

International Tax Authority

By Shiva Kant Jha

May 1, 2009

A lot of concern has been expressed to arrest and stop the massive tax evasions, the theft of economic resources, the parking of ill-gotten gains outside done by crafting sinister devices through the tax havens and offshore financial centres spread over the world around. The beneficiaries of this morbid opaque system resist/evade transparency with stealth and ease excelling in excellence and efficacy the technique that Mephistopheles adopted to trap Faust. The extent of the damage done to the nations is massive. The gruesome extent of such money, stashed elsewhere and generated through the opaque system set afoot through the tax havens and offshore financial centres, is now widely known. What is needed is an effective step to stem this evil for the weal of people and for the sake of public morality now touching a low ebb. Some steps have been taken by some assertive governments, and an articulated schedule of action is now in place after the G-20 Economic Summit recently held in London . It is obvious that the steps contemplated to be taken are neither adequate nor fully effective. But it is good that something has been done to end this evil. What is saddening that the Government of India remained an almost silent listener on this point at best merely pretending to lend some inaudible murmur to the chorus of protest against such dark areas raised by the USA , France , Germany, and the U.K with a varying degree of sincerity. Reasons for this studied reticence are too obvious to require recounting.

The points, which deserve our attention most, are how to devise an effective and vigilant system to stop the abuses aforementioned. Of these, the thorniest is tax evasion resorting to devices forged in such tainted centres. It is time to establish an International Tax Authority (ITA) with global jurisdiction.. This author had concluded the second leaf of the Triplet XII observing the following:

“Mere agreements to exchange information is not enough unless there is a strong political will to compel derelict jurisdictons to transparency. It seems the appropriate means to do so would be to set up International Economic Surveillance Authority, and International Tax Authority under the U.N. system.”

Now this leaf is used to present an outline of this suggested ITA. This can be set up through the provisions of an International Tax Convention drawn up under the U.N. mandate. It can be structurally modeled on t he International Seabed Authority (ISA) constituted under the United Nations Convention on the Law of the Sea (1982) read with the 1994 Agreement as to the Implementation of Part XI (seabed provisions) of the Convention. The ISA was established ‘to organize and control all mineral-related activities in the international seabed area beyond the limits of national jurisdiction' holding income thereof for promoting international welfare the details of which need not be set out here.

The ITA can be granted through a convention authority to levy and collect the following taxes:

(i)  Levy of tax, as once suggested by James Tobin in 1970s, on transactions in the currency market (this species of tax can be called ‘transaction tax') [this will dampen exchange rate volatility, and would take care of many other pathological manifestations of the present-day financial system.)

(ii)  Levy of tax on all transnational transactions, and to include in the ken of taxation the levy of tax on the income of non-residents, and corporations incorporated outside the territory whether directly or through subsidiaries.

(iii)  To exercise exclusive tax jurisdiction on the cyberspace income-generating spaces, and wealth amassing vaults.

The ITA may consist of an Assembly of all states signatories to the Convention; a Council consisting of 5 executive members, elected by the members of the Assembly to function as the apex executive agency of the ITA ; a Tribunal designed to work as a court of law whose orders to operate effectively even under the domestic jurisdictions; a Directorate of Investigation with powers to conduct investigation even in the domestic jurisdictions exercising the powers of the civil court which are exercised by the domestic tax authorities. The ITA may be granted competence to appeal to the International Court of Justice which may be given jurisdiction on all states coming within the province of the charge of international taxation under the proposed convention. If a particular state is non-cooperative various ameliorative or punitive measures can be suggested by the ITA to the specified UN authority for necessary actions (which may even involve a reference to the Security Council)..

The earnings from international taxation can go to the Consolidated Fund of the ITA out of which resources can be used, at the resolution of the United Nations, for various purposes of global welfare including these:

(i) To finance all international organizations including the United Nations but excluding those specifically excluded on policy considerations (such as the WTO or IMF) ;

(ii)  To grant resources for international humanitarian operations, and poverty alleviations;

(iii)  To maintain a fund to meet some unprecedented crisis caused whether by nature's wrath or on account of institutional failures.

(iv)  To assist through various ways in the creation of better conditions of living amongst the poor world over;

(v)  To set up, if need be a security system in order to protect, if so authorized by the U.N., such peoples who are subjected to unjust sufferings and treatment.

I may hasten to mention that the suggested Convention is not a new version of a double taxation avoidance convention which is, with a few exceptions, merely a bilateral act. This should be comprehensive convention superseding all tax conventions. This would be an inevitable legal consequence if the ITA becomes integral to the U.N system. Article 103 of the Charter of the U.N. says: “In the event of a conflict between the obligations of the members of the U.N. under the present Charter and their obligations under any other international agreement, their obligations under the present Charter shall prevail”. I may state in passing that in some context Dr Nagendra Singh, who later on became a Judge of the the International Court of Justice, had suggested to me to take up a research project to structure a viable protocol for a multilateral double taxation convention. But this could not be done. I wish if someone undertakes such a project. Reflecting from the Indian observation-post, I say without reservation that th ere are good reasons to believe that such bilateral tax treaties involve a nexus of sin operating under an opaque administrative system outside Parliamentary scrutiny, and not known to our people or even our courts. In the U.K. a tax treaty is done through an effective Parliamentary process, and in the USA the presidential transmission to conclude a tax treaty is deliberated and approved by the Senate. In India every government, whose deeds are known to us, systematically and assiduously promoted, protected and pleaded for the system now at work despite its ‘democratic deficit' and amenability to corruption and misuse.

I may mention, before I conclude this Triplet, that once a Convention is operative, all the authorities under domestic jurisdictions will be bound by it. I have not been personally persuaded that this view is correct, but most governments of the world are seen to subordinate their laws and constitution to treaties! In the USA , there are laws which may conflict with this view but the problem can be got over easily as under the US law subsequent treaties prevail over prior statutes. When all is said, it turns largely on the political will and commitment of the hegemonic powers to bring about an effective regulatory system. If with a shocking ease they could subject Germany to an unjust and humiliating Treaty of Versailles, if our Executive government could rue, yet dance to compliance under an overt and covert external pressure, to accept the unworthy and unequal Uruguay Round Final Act, or if, only a short while ago, it turned grim and gaga (as if under the spell of bhang ) to enter into the useless and deceptive Nuclear Deal with the USA, why can't the great powers of the day subject the tiny tots to accept discipline pro bono publico under a multilateral convention?

The purpose of this short leaf is to initiate a discussion on the points suggested. If this ever happens, my drudgery is well rewarded.

II

Use of Dictionaries

AS far back as 1886 in R. v. Peters [886) 16 Q.B.D. 636 at p.641 Lord Coleridge observed:

“I am quite aware that dictionaries are not to be taken as authoritative exponents of the meanings of words used in Acts of Parliament, but it is a well-known rule of courts of law that words should be taken to be used in their ordinary sense, and we are therefore sent for instruction to these books.”

In determining the meaning of the commonly used words, dictionaries are of great assistance. They are more so now when the lexicographers identify words and their senses by using effectively data processing equipments. H. M. Seervai has aptly stated: “The present writer does not share the current fashion which looks upon the reference to a dictionary as playing the lexicographer's role which is somehow below the dignity of constitutional interpretation. Glowing words like “the significance of words is not formal but vital,” and that “we must think things rather than words” do not help in finding the correct meaning of words and thereby gathering the intention which lies behind them. Khanna J. perceptively said:” it has not yet been erected into a legal maxim of Constitutional construction that words were meant to conceal thoughts.”

But there is a vital difference between dictionaries and dictionaries on encyclopedic principles. The distinction inter se these was drawn in the preface of the very first edition (1911) of the Concise Oxford Dictionary by H.W. Fowler, a dictionary most often cited in the courts of law as is acknowledged by R.E. Allen in the preface to the 8 th edition of the COD):

“The book is designed as a dictionary, and not as an encyclopedia; that is, the uses of words and phrases as such are its subject matter, and it is concerned with giving information about the things for which those words and phrases stand only so far as correct use of the words depends upon knowledge of things. The degree of this dependence varies greatly with the kind of word treated, the difference between cyclopedia and dictionary treatment varies with it, and the line of distinction is accordingly a fluctuating and dubious one.”

The dictionaries written on encyclopedic principles should be used with greater measure of care because the concepts are explained in specific contexts where the subject matters denoted or connotated by the terms are important. It deserves to be examined if the statutory provisions under a legal system admit of such senses, or warrant adoption of meaning as suggested. An excellent example of a dictionary on encyclopedic principle is A S Hornby's Oxford Advanced Learner's Dictionary. Another example is Oxford Advanced Learner's Dictionary, encyclopedic edition . This dictionary “ gives full and detailed information on English lexis, grammar and usage within a controlled defining vocabulary, but at the same time offers wider reference coverage than other such dictionaries currently available.”

It is often useful to examine words by consulting dictionaries which provide the sequence in the usage of such words, and cite illustrations from the texts of the standard writers. A lawyer may at times acquire a valuable insight by scanning carefully such examples. The most standard, and most commonly consulted dictionary on historical principle is New Shorter Oxford English Dictionary of Modern English ( often cited as NSOED).

It is proper to keep in view, whilst trying to expound the import of legal provisions, the guiding norms thus stated by Lord Simon in Maumsee v. Olins (1975) A.C. 373:

“(The golden rule ) is sometimes put, (sic) that in statutes dealing with ordinary p eople, in their everyday lives, the language is presumed to be used in its primary ordinary sense, unless this stultifies the purpose of the statute or otherwise produces some injustice, absurdity, anomaly or contradiction in which case some secondary ordinary sense may be preferred so as to obviate the injustice, absurdity, anomaly or contradiction, or fulfill the purpose of the statute; while in statutes dealing with technical matters, words which are capable of both bearing the ordinary meaning and being terms of art in technical matter of legislation will presumably bear their primary meaning as such terms of art (or, if they must necessarily be modified, some secondary meaning as terms of art.”

But the trends of social mores, and the imperatives of socio-political contexts require an adoption of the technique of “flexible construction”, as our Supreme Court named this approach in Madras v. Gannon Dunkerlay & Co (Madras) Ltd AIR 1958 SC 560. I would refer in this context to two decisions of great importance. The Privy Council in Minister of Home Affairs v. Fishe r (1960) A.C. 319 (P.C.) was called upon to interpret the term ‘child' as used in the Bermuda Constitution in certain context of human rights entitlement. The Government pleaded that the term ‘child' could mean only legitimate child. But the Privy Council held that the term now admitted of a wider import and warranted a liberal construction. The Privy Council noticed that the changing realities of social behaviour over the 19 th and the 20 th centuries narrowed the distinction inter se the legitimate and illegitimate child for the protection of human rights. This was the adoption of a functional technique in preference to an out and out analytical technique. But the recent decision ( March 3, 2009) of our Supreme Court (coram: S H Kapadia And H L Dattu JJ. ) in CIT-IV, Tamil Nadu Vs B. Suresh 2009- 2009-TIOL-35-SC-IT explores the technique of flexible or generic interpretation in the context of a tax statute. It declared that the objective of Section 8O-HHC was to earn foreign exchange. It felt that the objective was promoted by adopting a functional and creative approach. It took into account the changing pattern of trade and commerce in this phase of Economic Globalisation. Without mincing matter, the Court observed with clarity and crispness thus:

”…. Earning of income depends on sale of goods and services. Today the difference between the two is getting blurred with globalization and cross-border transaction. Today with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles……..Hence such "rights" would certainly fall in the category of articles of trade and commerce, hence, merchandise.”

III

The Economists as the decision-makers

IN this phase of Economic Globalisation, things have conspired to subjugate the political realm to the economic realm. This is a natural consequence of the emergence of ruthless capitalism after the Industrial Revolution, especially during the 19 th and 20 th centuries. The subordination stands completed after the adoption of the neo-liberal economic paradigm in the 1980s and its waxing triumphant for some years till the recent economic crisis which has questioned its hitherto sacrosanct economic fundamentalism. During these years the economists, who emerged as the ruthless but suave leaders in politico-economic decision making in the leading countries of the world, have shown a style which invites some reflections. While doing so I have in mind not only the Bretton Woods , deliberations and the Uruguay Round Final Act, but also the recently held G-20 Economic Summit in London ..

Whilst considering how our economic experts and their imitators and pretenders behave in their economic decision-making my mind goes to an apocryphal story about three scientists --a physicist, a chemist, an economist ---marooned on a deserted island. David Korten, in his celebrated When Corporations Rule the World:

‘Assumptions' and ‘assertions' seem to rule the roost in economic deliberations. The abracadabra of Friedeich von Hayek, or a Milton Friedman, and the birds of the same feathers kept the minds of leaders like Ronald Regan, Margaret Thatcher and Manmohan Singh in soporific captivity.

Adopting John Bright's saying, it can be said: “that the trouble with great thinkers [ as adverised] is that they usually think wrong” and the trouble with realistic appraisal is that it usually lacks in reality. The reality in country is that we have two Indias , justified by our compradors on the analogy of China , which works on the modality of one country but two systems. Such economists invoke the mysterious “trickle-down” economic benefit theory painting a rainbow of hope till the bones of millions become bereft of flesh. My reader would excuse my audacity if I quote Edmund Burke who had said that in the “age of sophisters, economists, and calculators”, democracy of people is under the risk of being “extinguished for ever”. The wisdom with which the economists have guided the governments in the recent years bring to mind the deserved indictment by Prof. Galbraith made thus in his, A History of Economics, The Past as the Present; to quote --

“Here another great constant in economic life: as between grave ultimate disaster and conserving reforms that might avoid it, the former is frequently preferred”.

Einstein wrote to Lorentz in Holland “that men always need some idiotic fiction in the name of which they can face one another. Once it was religion, now it is the State”. On scanning the present realities, shouldn't we say: “Once it was religion, then it was the State, now it is the Market, Pax Mercatus”. Market is ruled by corporate oligarchy with which our government seem to have an evident symbiotic relationship. It is an immanent irony of our situation that though we know that the consequences of deeds can never be evaded, yet we incessantly work trying to escape their inexorable operations!

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