In an increasingly interconnected global economy, trade continues to shape the nature of interactions at the international level.
As people and nations trade among themselves at the international level and within the framework of existing trade rules and agreed protocols, there is a growing need to explore the operative rules of engagement for resolving disputes within the scheme of the agreed protocols in order to ensure that the international trade architecture delivers the desired result of opening up channels of trade in goods and services, expanded markets as well raising much-needed revenue for governments through taxes.
International trade continues to evolve on a daily basis as rules of engagement are amended and new ones enacted. The need to pay attention to issues of taxation and dispute settlement mechanisms is therefore critical for shaping the global economy. As nations engage in trade agreements and navigate complex economic relationships on the international economic level, it is important to emphasize that a deeper understanding of the implications of taxation and dispute settlements is essential to realizing the full potential of international trade.
To do this effectively, it is important to appraise the mechanisms available for resolving disputes amongst nations and approaches to taxation.
CURRENT DYNAMICS IN TRADE
The current dynamics of trade reflect a landscape influenced by technological advancements, global events, and evolving consumer behaviors.
- Emerging Trends in International Trade: The field of international trade, just like many other areas of human endeavors, has seen considerable transformations in the recent past. These changes have been driven largely by globalization, technological advancements, and the proliferation of trade agreements in the world - both at the regional and international levels.
Some of the emerging trends that are shaping the future of trade include the increasing importance of services trade, the regionalization of supply chains, the adoption of new technologies, and the integration of environmental, social, and governance (ESG) considerations. New technologies, such as artificial intelligence, blockchain, 3D printing, and the Internet of Things (IoT), are transforming the way goods and services are produced, delivered, and consumed. They offer opportunities for efficiency gains, cost reduction, customization, and innovation. However, they also pose challenges for regulation, competition, skills development, and data protection. ESG criteria are becoming more relevant for trade as consumers, investors, regulators, and civil society demand more transparency and accountability from businesses on their environmental and social impacts.
This has resulted in more interconnectivity, driven by the desire to trade at the international level – the world today is more connected than any other period in human history. These interactions at the international level, which are happening through the instrumentality of trade have not only given rise to a number of complex trade relationships but also presented new challenges in the realms of taxation and dispute resolution, especially in terms of the protocols of trade continually being adopted and implemented by nations.
- e-Commerce and the Digital Economy: e-Commerce has been one of the main drivers of trade growth in recent years, especially during the pandemic, when consumers shifted their spending from services to goods and relied more on online platforms to purchase products. This can be accounted for by the rising role of technology in the administration of the economic agenda of nations. Broadly, e-commerce has enabled small and medium-sized enterprises (SMEs) to access international markets and diversify their customer base. The WTO is currently negotiating a plurilateral agreement on e-commerce, which aims to establish common rules and standards for digital trade.
The growth of e-commerce and the digital economy has created unique challenges in taxation, especially for cross-border transactions on digital platforms. This is because, as businesses operate across borders with ease, traditional tax models struggle to capture revenues generated in the digital space. Nations are now grappling with how to fairly tax digital transactions, especially for those happening across international borders, where different sets of laws, rules, and procedures on taxation of revenue may be applicable. There is therefore the need for continuous examination of the rules of engagement to ensure that there is proper appreciation of not only the benefits of increased trade but also of the challenges introduced by the use of technology and other digital platforms to improve trade among nations.
- Supply Chain Disruptions: Recent events, such as the COVID-19 pandemic, and the ongoing war between Russia and Ukraine have exposed existing vulnerabilities in global supply chains. Additionally, the military interventions in African countries such as Niger, Guinea, Chad, Burkina Faso, and Mali have become constraints on global supply chains. These changes in government have been met with sanctions from the Economic Community of West African States (ECOWAS), including border closures – impeding trade. Trade disruptions have the potential to increase the number of disputes over contract enforcement and delivery delays emphasizing the need for robust dispute resolution mechanisms, within the framework of the trade agreements to ensure that disruptions do not unduly affect global trade.
- Trade Agreements and Tariffs: The world has also seen a significant increase in the number of bilateral and multilateral trade agreements. The most recent one is the Africa Continental Free Trade Area Agreement (AfCFTA) whose implementation is already shaping considerably trade relationships in Africa. AfCFTA seeks to remove trade barriers and give African businesses a wider market for the supply of goods and services. Tariffs, trade barriers, and dispute settlement provisions within AfCFTA for instance have direct implications for the international trade practices of signatory countries.
IMPACT OF THESE CHANGES ON TAXATION
Taxation is an important component of international trade for the simple fact that it affects the cost structure, selling prices of goods and services, and profitability of businesses engaged in cross-border transactions. This is made even more complicated when one considers the fact that new and sometimes different sets of rules and laws are applicable in different countries around the world. Some of the implications of the changing face of international trade for taxation in today's trade landscape are discussed below:
- Rules to ensure the Fair Taxation of the Digital Economy: The emerging digital economy presents considerable opportunities as well as difficult challenges for international trade. The borderless nature of transactions in the digital economy has presented various challenges to traditional taxation models known to many countries. This has created the necessity for nations to put in place mechanisms to help them develop new tax frameworks to address these peculiar challenges introduced by the digital economy. For instance, the Organization for Economic Co-operation and Developments (OECD) has endeavoured, through various efforts to establish a global minimum corporate tax rate, to ensure that digital businesses contribute their fair share of taxes to governments in the countries where these transactions happen to ensure that governments raise revenue to support public finance expenditure.
- Transfer Pricing and Base Erosion: The digitalization of trade rules in the digital global economy presents both challenges and prospects including transfer pricing. Transfer pricing as a concept involves setting prices for intercompany transactions in a manner that directly affects the tax liabilities of companies engaged in such practices. Therefore, tax authorities, not just in Africa but also in other parts of the world are increasingly vigilant about preventing base erosion and profit shifting, which are meant to influence tax obligations. This has made it exceedingly necessary for businesses to comply with transfer pricing regulations in the countries where they operate to guarantee compliance with the rules and ensure the long-term business survival of businesses.
- Value Added Tax (VAT) and e-commerce: Countries around the world are taking steps to ensure that they increase revenue mobilization by taking advantage of the increase in trade within the framework of the opportunities presented by the digital economy, especially through e-commerce. Value-added tax (VAT) regulations for e-commerce transactions are evolving. Countries are adopting various approaches to collect VAT on digital goods and services, in order not to lose out on much-needed revenue. This has huge implications for the pricing and competitiveness of businesses in the digital space, as the cost of production is invariably impacted by these tax rules governing e-commerce within the digital economy.
IMPLICATIONS FOR DISPUTE SETTLEMENTS
Disputes and disagreements are some of the unavoidable consequences of human interactions, especially when it comes to the exchange of goods and services for valuable consideration. Trade rules are continually being challenged by new developments including the disruptions to the global supply chain caused by the COVID-19 pandemic, the ongoing war in Ukraine, and as mentioned earlier military interventions in Africa resulting in economic sanctions. These changes have seen borders closed and meant that in some cases goods cannot be supplied within the time agreed to between the parties. Therefore, dispute settlement mechanisms are absolutely essential to efforts aimed at maintaining the stability of international trade relations in the world. Given the complexities of modern trade, these mechanisms must adapt to address emerging challenges:
- WTO Dispute Settlement Reform: The World Trade Organization (WTO) recognizes the fact that an effective and functioning dispute resolution process is important for resolving trade disputes among contracting parties and ensuring compliance with international trade rules. In this regard, the WTO is currently working on reforming its dispute settlement system to help address issues like the Appellate Body crisis which undermines the essential values of the dispute settlement mechanisms within the WTO trade rules.
- Dispute Resolution Rules in Bilateral and Regional Agreements: The world has seen many bilateral trade agreements in recent years. Many countries rely on bilateral and regional trade agreements that have provisions for dispute resolutions. An example of these multilateral agreements is AfCFTA, which is now in effect and has created the single largest trade bloc in the world with over 50 countries. These bilateral and regional trade agreements each have avenues for resolving trade disputes outside of the WTO framework.
- Investor-State Dispute Settlement (ISDS): These Investor-State Dispute Settlement rules are extremely important in formulating the necessary framework for ensuring that investors can enforce their claims against sovereign states for breach of any trade agreements it has with any investor across the world. Fundamentally, Investor-State Dispute Settlement provisions in trade agreements allow investors to seek arbitration against host countries and provide the mechanism for enforcing any claims that may be granted against the state. Sometimes conflicts do arise in terms of the competing interests between the need to attract investors and ensuring that these investors pay the necessary revenue due to the state. These rules are by no means settled as they continue to evolve, with time, thereby underscoring the need for emphasis on balancing investor rights with the regulatory sovereignty of host nations, within whose borders and territories the investors operate.
CONCLUSION
It is important to recognize the fact that international trade is evolving. This process of evolution has fundamentally changed and will continue to challenge the traditional rules of trade within international architecture. These changes in international trade present both challenges and opportunities for taxation and dispute resolution within the broader scope of the expansion of trade opportunities across multinational borders. As the digital economy grows, tax models must also a matter of necessity adapt to ensure fairness and sustainability, especially for small and medium-scale businesses that will now be exposed to competition with globally competitive and widely acclaimed brands.
There is also the need to ensure that dispute resolution rules are made adaptive and sufficiently responsive to these changing climates to effectively address the diverse range of issues that can arise in modern trade relationships, especially for cross-border transactions. Recognizing that the world economy is more connected now than at any time in the history of humanity is also key to formulating the needed rules for ensuring the effective determination and resolution of trade disputes. It is therefore important that nations continue to collaborate, negotiate, and innovate in their approaches to taxation and dispute resolution within the framework of the emerging changes to international trade, both in terms of practice as well as the underlying rules of engagement.
Countries need to focus on building consensus on issues like tax and dispute resolution among others, all of which are essential for building a stable and prosperous global trading system that benefits all stakeholders. In order to do this effectively there is the need to appreciate the nature of the changes that are taking place globally in the area of trade and the underlying factors that are driving the conversations in order to ensure that appropriate policy measures are put in place to respond to these changes.
The increase in trade opportunities as a result of the increase in multilateral and regional trade agreements has fundamentally altered the contours of existing trade arrangements by for instance helping to remove trade barriers and also creating new markets for goods and services. Government tax receipts have also potentially increased as a result of the rise in global trade and, especially through the e-commerce and digital trade which have all made it sufficiently easier for governments to trace and collect tax revenue. However, there is a need for all stakeholders to work at achieving a uniform set of rules to deal with and address effectively the various tax issues confronting the global trade economy.
Disputes arising out of international trade also present new challenges, especially for the survival of existing trade protocols and frameworks. There is therefore the need to ensure that countries and other stakeholders take advantage of the dispute resolution provisions contained in the World Trade Organisation protocols as well as other bilateral and multilateral trade agreements to facilitate the speedy determination and resolution of disputes so as to promote compliance and ensure business survival.
ABOUT THE AUTHOR
GAFARU ALI is a Senior Associate at SUSTINERI ATTORNEYS PRUC (www.sustineriattorneys.com) a client-centric law firm specializing in transactions, corporate legal services, dispute resolutions, and tax. His practice areas include Disputes Resolution, Tax, Natural Resources, and Energy including Renewables, and Mining. He welcomes views on this article at gafaru@sustineriattorneys.com