A technical note published by the IMF on 29 March 2016 considers to what extent the World Trade Organization (WTO) rules affect the freedom of policy makers to frame their tax policy. The paper entitled Is the WTO a World Tax Organization? A Primer on WTO Rules for Tax Policymakers gives an overview of the economic logic behind the WTO rules on taxation and looks at the main WTO agreements affecting border taxes and internal taxes.

The paper examines some inconsistencies in the rules and looks at how they have evolved through the interpretation of the WTO agreements by its Dispute Settlement Body which has ruled in several disputes on taxes affecting trade. The paper also provides guidance to WTO member countries on tax policy to avoid their policies being successfully challenged in the WTO.

WTO rules cover not just import tariffs and to a lesser extent export taxes but also direct and indirect external taxes. A broad range of tax measures have therefore been examined at the WTO and the Dispute Settlement Body has made some major rulings in tax disputes between WTO member countries. WTO rules will therefore continue to be an important factor in formulating tax policy.

The WTO rules leave plenty of scope for member countries to introduce tax measures that may inflict damage on their trading partners or even on their own economies. For example tax incentives for investment are seldom cost effective. These and other tax measures require cost benefit analysis. Greater transparency about the economic effectiveness of such measures would help improve the tax policy of WTO member countries.