- Introduction
A jurisdiction („Jurisdiction“ denotes both the power to set and enforce law and the body holding that power. The latter is used in a tax law sense, which does not necessarily coincide with the notion of a sovereign State in public international law. The Cayman Islands, for example, form a tax jurisdiction of their own although they are a British Overseas Territory rather than a sovereign State. Where ‘jurisdiction’ and ‘State’ appear interchangeably, the former is to be read in this broader sense.), as the sovereign over its people and territory, has to some extent the right to exclude other jurisdictions from exercising their powers. The justification for this, however, remains highly debated. In tax law, the concept of jurisdiction can be seen as protecting the (domestic) tax base of a country as well as its domestic economy. In addition, jurisdiction could be seen as protecting individuals from foreign powers. This raises the question of whether the concept of jurisdiction protects only the rights of other jurisdictions, or also individual rights. It could be seen as having two dimensions. On the one hand, it works horizontally, by allocating taxing powers between states and limiting the reach of one country’s tax authority against another. On the other hand, it can also work vertically, in the relationship between the taxing state and the individual subjected to its powers. Whether the requirement of a sufficient connection (often referred to as a ‘genuine link’ or ‘nexus’) exists only for the benefit of competing states, or whether it also grants a protective standard to the taxpayer, is far from settled. If jurisdiction were understood purely as a rule allocating rights between states, the individual could not rely on its absence. If it also has a protective dimension, however, the lack of jurisdiction would itself give the taxpayer a means of defence. Where the protective dimension is lacking, the question arises as to how taxes are justified towards individuals and whether such justification is needed at all. In this regard, a state can be seen as the organic state of human existence, requiring no justification for taxes needed to sustain itself, or a as a contractual relationship between citizens, limiting taxes to extend necessary to fulfil its duties.
Due to the elusiveness of the concept, the term “jurisdiction” is often described rather than defined (PCIJ, 1927; Ryngaert, 2008; Allen et al., 2019). For the matter of this study, jurisdiction is defined as the power to set and enforce law, i.e. to “regulate” a certain matter, (U.S. Supreme Court, 1904; U.S. Supreme Court, 1908; Mann, 1964) and, where the context so requires, as the body holding that power. The term can be further broken down into three types of jurisdiction with regard to a given matter: legislative (prescriptive) jurisdiction, adjudicative jurisdiction, and enforcement jurisdiction (Ryngaert, 2024). In this study, the focus lies on prescriptive and enforcement jurisdiction.
After this introduction, the concept of jurisdiction in international tax law is analysed. The study then turns to the vertical relationship and asks how taxes are justified towards the individual, contrasting the organic and the contractual theories of the state before concluding with a summary.
- Justification of Taxes Towards Jurisdictions
The horizontal function of jurisdiction stems from its function of protecting other sovereigns. That there needs to be a link between jurisdiction and sovereignty can be regarded as the minimum consensus in the international literature (Allen et al., 2019).
As an argumentative starting point, jurisdiction is the right of a sovereign (Mann, 1964). The power (Kurkin, 2021) and the right (Mann, 1984) to set and enforce law are the essence of sovereignty (Mann, 1984). Sovereignty, in turn, requires independence (PCA, 1928) and constitutes an a priori requirement for statehood (Mills, 2014). To act in fiscal matters, jurisdictions hold a “fiscal sovereignty” that also encompasses the right to tax, (Ryngaert, 2024) independently of other jurisdictions. For sovereign states to exist, they need to be able to impose taxes. They can therefore, in a first instance, in relation to other jurisdictions, impose and collect taxes as they see fit.
They are, however, limited by negative sovereignty. A jurisdiction can defend itself against the exercise of foreign powers within the scope of its sovereignty (Sternberg, 2019). The right to tax that follows from sovereignty simultaneously entails the duty not to impede the taxing rights and economic well-being of other states and thus their sovereignty, (Hongler, 2019) as taxation carries with it the potential to disturb the peaceful co-existence of sovereign states (Hattingh & Hongler, 2024). Benefits, however, may be granted more generously (BVerfG, 1962). The equality among states requires that the rights of other states/sovereigns serve as a limit (Allen et al., 2019). Deviating from the general rule, jurisdictions are, therefore, limited in their power by the existence of other jurisdictions (Costelloe, 2019) and the prohibition of interfering in the affairs of other states (Mann, 1964).
As a consequence, for a jurisdiction to tax, there needs to be a sufficiently close connection, i.e. some form of a nexus or genuine link to it (Kokott, 2022). The existence of a nexus justifies the taxes as actions that could potentially harm other jurisdictions. What exactly constitutes such a nexus or genuine link is still disputed. Some even argue that there is insufficient consensus within the community of states to affirm a requirement of a “sufficient connection” with a state (Avi-Yonah, 2004; Monsenego, 2012).
Such scepticism, however, does not reflect the prevailing view in the international literature. As a matter of principle, states have jurisdiction unless a rule of international law prohibits it; (Mann, 1964; Szigeti, 2017) the requirements for a nexus must therefore not be drawn too narrowly. States may not exercise their powers within the territory of other states; within their own territory, however, they may also address conduct occurring abroad (PCIJ, 1927). The limit is reached only where there is no connection whatsoever between the state and the subject of regulation (Szigeti, 2017; Lang, 2021). What matters, in other words, is a close connection, not the closest one (Mann, 1964). Enforcement jurisdiction, by its very nature, is subject to narrower requirements. Absent a corresponding treaty basis, states may not send tax officials abroad in an official capacity (to assess or enforce tax claims) (Mann, 1964).
According to the current state of the international law literature, jurisdiction is, therefore, in principle, a result of sovereignty. Under this point of view, overstepping jurisdiction mainly affects the relationship to other jurisdictions, not to individuals (Kurkin, 2021). This is also largely reflected in the international jurisprudence. The German BVerfG stated in the context of tax law that the prohibition of executing acts of state on foreign territory only protects the sovereignty of the foreign jurisdiction, not the individual (BVerfG, 1983). The US Supreme Court sees the jurisdiction to tax as only referring to the relationship to other nations/jurisdictions (U.S. Supreme Court, 1933). A similar view was expressed by the Supreme Court of Israel in the Eichmann case on the subject of criminal law. Adolf Eichmann, a key participant in the Holocaust, was abducted in Argentina and brought to Israel, where he was tried. The Israeli Supreme Court argued that through the abduction and the violation of sovereign rights only the rights of Argentina, not those of the individual, were violated (Supreme Court of Israel, 1962). Lastly, this is also expressed in the only case of the PCIJ that ever dealt explicitly with jurisdiction. International law, and therefore also jurisdiction, according to the PCIJ only governs relations between independent States (PCIJ, 1927). Taken together, these decisions follow the same opinion: where a state exceeds the limits of its jurisdiction, the harm is committed against the other sovereign, and it is for that sovereign, not for the affected individual, to protest against the breach.
- Justification of Taxes Towards Individuals
Even if one follows this opinion, this does, however, not mean that taxes do not need to be justified towards the taxpayer. The horizontal allocation of taxing powers and the vertical relationship between state and taxpayer concern two different questions. The former asks which state may tax, the latter why the individual owes anything at all. If one would deny the individual a right derived from jurisdiction, this does therefore not remove the need for justification; it shifts that burden onto the substantive theory of the state.
When looking at the question whether taxes need to be justified towards the taxpayer, and if so, how they can be justified, the chains of argumentation are based on one of two theories on the nature of states. One can either assume that nations building states are part of human nature and therefore form a living organism that needs taxes as a prerequisite to exist (organic theory). The nation is the end, not the means. Or one can assume that governments (Throughout this paper, the term “government” denotes the public authority that levies taxes and provides benefits to its members, in keeping with the Anglo-American public-finance tradition (see, e.g., Buchanan, The Pure Theory of Government Finance, Journal of Political Economy 1949, 496). The term “state” is retained where the argument refers to the state as a theoretical construct, in particular within the organic theory of the state (Staat), as well as in the established expressions “statehood” and “constitutional state” (Rechtsstaat).) are nothing but the (quasi-)contractual assembly of humans, justified only by the benefits they provide to their members (contractual theory).
The organic theory was especially popular in nineteenth-century German states but still has some adherents (Murphy & Nagel, 2002) nowadays. The state was seen as the fulfilment of human nature, (Müller, 1809; Schmoller, 1863) and by that a purpose on its own (Müller, 1809). It was the whole, while individuals were merely the limbs of a body (Schäffle, 1867). Trade and economic activity are not only undertaken as individuals but also serve the community, such as a family or the government (Schmoller, 1863). Therefore, taxes do not merely constitute a consideration in return, but rather a sacrifice for a common interest that must be distinguished from private interest (von Neumann, 1887). The question was not whether taxes in general were justified. As a necessity for fulfilling human nature through nation building, their existence could not be questioned. The only remaining question was how the tax burden is distributed among the members (Schmoller, 1863). However, the works of those authors should be considered in light of the historical context. In the nineteenth century, German states were not only discussing a possible unification and democratization, but also the introduction of a progressive income tax (Vogel, 1988). They tried to argue for a comprehensive tax base.
Most contemporary authors follow the contractual approach. While it is generally accepted that taxes are the fundamental prerequisite of statehood, in particular of the liberal constitutional state (Tipke, 2000) and for civilized societies (U.S. Supreme Court, 1927), according to the contractual theory the government must provide a benefit to the people to justify taxes. The government as the collective of people (de Viti de Marco, 1936) is merely the trustee of the individuals (Mill, 1885; Dodge, 2005). This leads to the duty of the government to compensate the individuals for the contributions made (Dalton, 1951).
While a taxation according to the exact benefits provided is neither desirable (Buchanan, 1949) nor possible, (Dodge, 2005) the contractual theory is preferable as it places the individual, and not the government, at the centre. It is therefore more inclined to safeguard individual (human) rights and protect fundamental rights. Taxes experience their justification by the sum of the benefits provided to the people. As long as the individuals most impacted by taxation are still overall profiting, the tax is justified (Rawls, 1971). Indirectly, this also affects the horizontal taxing power. If a state taxes without any genuine link, it provides no corresponding benefit and can hardly justify the burden imposed. If the protective dimension was denied at the level of jurisdiction, it may thus re-emerge as a requirement of justification.
- Conclusion
According to the prevailing opinion of the international literature and jurisprudence, the concept of jurisdiction, i.e. the power to set and enforce law, is merely protecting the sovereignty of other jurisdictions. Whether this is actually the case requires further research. If jurisdiction is confined to the horizontal dimension, the individual cannot invoke its absence; the question then shifts to the vertical relationship and to the substantive theory of the state. The protective dimension is therefore displaced rather than removed. Independent of the outcome, taxes still need to be justified, at least morally, by providing sufficient benefits to the individuals. A government is merely the collective of people and not a bearer of organic rights. Its actions towards the people therefore always need to be justified by providing a benefit to the people, even those affected the most by the taxes.
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