“Researchers at the OECD are not free to think the unthinkable. They have to take account of the interests of each and every member state.” Or at least that’s what a recent paper in the Review of International Political Economy concludes from its interviews with civil servants. Yet thinking the unthinkable, or at least “thinking out of the box” is just what the OECD secretariat promised to do in its jargon-tastic paper on “Base Erosion and Profit Shifting” yesterday. (It has clearly already had some governmental approval, judging from the extensive footnotes expressing different countries’ reservations about the legal status of Cyprus).
The paper certainly managed to win cautious praise from both Tax Justice Network and the business community, which is no mean feat. Peppered with dramatic quotes such as “what is at stake is the integrity of corporate income tax” and that the principles underlying international tax rules “may not have kept pace with the changing business environment,” at first sight it seems to merit the “crackdown on tax avoidance” headlines that it generated in some newspapers. Richard Murphy told the Guardian that “[t]he tone of the report is enough to suggest that mere tinkering…will not be enough this time: the OECD realises fundamental reform is required.”
Yet Vanessa Houlder at the Financial Times [£] is in the unusual position of being more sceptical than TJN, writing that there is “no sign of going back to the drawing board in this report” and noting instead a “lack of enthusiasm for a radical rethink.”
So I read it. This quote seems quite reflective of the contents:
There is no magic recipe to address BEPS issues, but the OECD is ideally positioned to support countries’ efforts to ensure effectiveness and fairness of tax rules and, at the same time, provide a certain and predictable environment for business.
While there are definitely new plans to look at some growing problems, such as e-commerce and hybrid mismatches, what BEPS looks like at present is a new tone and frame of reference, an ordering principle for the OECD’s current and planned work. It is certainly interesting that some of the discussion revolves around the principles on which the international tax system is based, not just the rules layered on top. But I can’t see anything at this point that looks like fundamental reform.
A few miscellaneous comments follow:
- The focus within transfer pricing is on specifics, such as intangibles, while also including a “broader reflection” on the rules. That leaves the door open to something more fundamental, but there’s enough elsewhere to make clear that nothing big is going to change in the underlying framework.
- There’s a lot of emphasis on the challenges created by e-commerce, which is interesting because the OECD has already looked at this issue 10-15 years ago, when it was already obvious where things were going. I wonder how much serious momentum there is to revisit that decision, given that OECD members (UK, US) specifically opposed it at the UN tax committee last year. Maybe they just opposed it being looked at through the UN.
- “The balance between source and residence taxation” is mentioned several times, but it looks like it’s more in terms of the need for coordination between countries. Emerging markets, in particular India and China, might have strong views about this…but will this process be one designed to appease them, or to try to bring them into line?
- Harmful tax competition gets quite a bit of space. Essentially, the OECD stands by the technical definition it developed in 1998, but no specific plans are mentioned to rekindle the project that was spiked by the Bush administration. That said, with the European Commission keen to revive the issue, it’s one worth watching.
- I’m a bit anxious about the idea of moving quickly to find creative ways to avoid having to renegotiate 3000 tax treaties. I appreciate the concern, but it could risk railroading developing countries into changes to tax treaties that may not be in their best interests. For example, “increased efficiency of mutual agreement procedures and
arbitration provisions” could work against developing countries, the UN committee having taken the view that they’re likely to do worse out of arbitration clauses.
I’ll write more next week on developing countries in international tax politics. For now, the point for me is that what works for the BRICS may not be what smaller developing countries need. The annexed text on developing countries (page 87, if you’re looking) makes clear that the OECD thinks BEPS plus capacity building will be enough for developing countries. But, in the midst of the delicate negotiations that the BEPS discussions will entail, will anyone be taking their interests into account?
Martin Hearson 
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