Daniel N Erasmus, Adjunct Professor, Thomas Jefferson School of Law, USA
State Responsibility in Taxation Matters
Hans Pijl in his interesting article, ‘State Responsibility in Taxation Matters’ states that international tax law is part of international law. The engagement of state responsibility in cases of breaches of tax-related treaties is an element of international tax law. The article gives an overview of the rules of state responsibility in international law.
The article takes further some of what I have taught on a 'rule of law' approach in applying international tax principles to facts in the greater international law arena.
In one interesting case, where US resident shareholders of a Barbados Co. invested into a company in South Africa, SARS (the tax authority) are refusing to refund overpaid tax, paid in error. The shareholders in the company are disinvesting, and SARS, by refusing to refund an overpayment of taxes (made by mistake by the company), will indirectly affect the US shareholders.
Once the company has exhausted its options in the court system in South Africa, assuming they do not win, the US shareholders may approach the State Department of the USA to exercise their discretion to invoke "diplomatic protection" on their behalf against the South African government and claim reparation and damages, for failure to repay the overpaid taxes (unjust enrichment) in terms on international law.
In another interesting case, APEH of Hungary are imposing harsh record keeping VAT provisions on marketing functions performed by a consumer product company to promote its product, applying old Hungarian tax rules that are contrary to EU law.
Under the international doctrine of "diplomatic protection", once this company has exhausted in Hungary its VAT dispute through the court system, and assuming it gets no positive result, its shareholders, at different levels, as there are a number of intermediate companies to the holding company, can approach the most sympathetic State to intervene on their behalf, and institute action against the State of Hungary for reparation and restitution for the VAT, penalties, interest and any other foreseeable damages caused, by virtue of the wrongful conduct of APEH enforcing the VAT provisions contrary to EU law.
Both South Africa and Hungary would be embarrassed having to face such an action, as the plaintiff would be another State.
For more information about this topic, or any international law and international tax law related issue, please do not hesitate to make contact with me at firstname.lastname@example.org.