China’s challenge to international tax rules and the implications for global economic governance

I have a new paper in International Affairs written with Wilson Prichard. In scholarship on international economic governance – areas such as trade, the monetary system and development assistance – a lot of attention is now devoted to the rise of China. This literature appears to be settling on a consensus that China is a cautious reformist rather than a supporter of more dramatic change, and that it pursues outside options where existing institutions do not serve its interests. Meanwhile, work on the politics of the international tax regime is still largely preoccupied with the power that the US, as a ‘great power’, wields on the international tax regime. Our view is that this underestimates the influence a rising power can wield, and so we try to link the two literatures up. We focus on the Arm’s Length Principle, which underpins OECD-led international agreement on the distribution of multinational companies’ tax bases through transfer pricing. This international regime differs from areas such as trade and aid, which have fragmented in recent years, because it is a cooperation regime characterised by strong incentives for states to find and follow multilateral agreement.

Interests: Chinese exceptionalism

We begin with China’s interests. They align neither with developing countries, despite official rhetoric to that effect, nor with OECD countries. This is partly because China is undergoing an economic transition, summarised in table 1: its past, present and future interests differ from each other. In bilateral tax treaties, China has been able to manage this situation by adopting different negotiating stances with developing countries compared to developed countries. It faces more of a challenge in multilateral negotiations.

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China’s interests are also different because of what it calls its location specific advantages (LSAs). As a tax administration document states:

China has a huge population and a fast-growing middle class that form a great market capacity and huge consumer groups. This factor is unique in the world and inimitable by other small and medium-sized developing countries.

By arguing that the LSAs firms obtain from operating in the Chinese market (roughly divided into location savings for manufacturing, and market premiums for retail) are unique to it, China avoids the need to choose between its old and new interests. It has simply begun to claim a larger share of multinational firms’ taxable profits. We quote from an article written by some staff of the law firm Baker Mackenzie:

Most multinationals do not realize that their strategy of allocating ‘routine profits’ to China is under severe attack. To quote a Chinese tax director who has negotiated extensively with the Chinese tax authorities, ‘[i]t became clear that the State Administration of Taxation believes China has unique factors, including location savings and market premiums, that are not addressed by the OECD Transfer Pricing Guidelines […]’.

Capabilities: often underestimated

China has a particularly strong position in international tax negotiations because the same economic transition that is changing its preferences is also strengthening demand from multinationals to access its markets. Previous work by Lukas Hakelberg and Wouter Lips has focused on absolute market size, where China lags behind the US and EU, but we think three other variables also matter:

  1. Growth. China is undergoing huge economic and social shifts that make it a uniquely attractive place to do business, whether measured by the exploding size of its middle class, or its ascendency towards the top of the patent registration league tables. China’s attraction to investors is thus about future potential as well as present performance.
  2. Profitability. Its fairly new and rapidly growing consumer market is relatively untapped in many areas, has a taste for foreign goods and services, and is more willing to pay a premium for higher-quality products.
  3. Value-chain positioning. Chinese manufacturing has become indispensable to the production of a huge proportion of products consumed in the West, most iconically the iPhone, and this position is becoming increasingly institutionalized.

For these reasons, China can afford not to take too seriously any threats from multinational companies and foreign governments if it differs from international tax norms, giving it the kind of autonomy that only the US was thought to possess.

Strategies: Janus-faced

LSAs allow us to analyse how China has interacted with the established institutions of global tax governance. We conclude that its approach is neither conciliatory nor confrontational, but both, simultaneously. China adopts a rhetoric of common cause with developing countries, but pursues an agenda that is designed to maximize only its own share of the tax ‘pie’. It flirts with outside options such as the United Nations, while enjoying a privileged position within the G20-OECD complex at the heart of international tax rulemaking, and diverging from existing rules when it finds this to be in its interest. “China needs to strike a balance between conforming to international conventions and acknowledging its unique situation in transfer pricing legislation and practice,” wrote Chinese officials in a United Nations document in 2017. In practice, however, its actions have been more aggressive than this might imply.

In particular, China’s implementation of LSAs chips away at a core norm of the international tax regime, the Arm’ Length Principle (ALP). OECD rules require that the ALP be applied to each subsidiary of a multinational in isolation, in comparison to a locally owned independent enterprise. By contrast, the Chinese position is that:

With more and more companies poised to conduct business as groups, economic activities are more and more likely to take place in the inner circle of MNE groups. It is nearly impossible to take out one piece of a value chain of an MNE group and try to match it to comparable transactions/companies

This has ruffled some feathers, as can be seen in this quote from the United States’ former international tax negotiator, Robert Stack:

The OECD countries all ascribe [sic] to the arm’s-length standard and to what they call the basic OECD principles. Other countries have not signed on to the full implementation of the arm’s-length standard and the OECD guidelines, even countries that are in the G-20. And the reason this is very important is the question of market premium and intangibles that relate to markets and things like location-specific advantages that are specifically talked about in the OECD guidelines … [China should] not pick a rifle-shot issue that favors a large-market country and try to gerrymander the debate from that narrow issue.

The destabilising effect of China’s actions could lead to one of two outcomes, we suggest. In the first scenario, China would behave very much like the United States, throwing its lot in with the G20-OECD complex. Its growing influence would allow it to use a combination of incremental changes at global level and selective unilateralism to adapt as its place in the global economy evolves. In the second, by design or by accident, China’s approach could destabilise the core norms of the international tax regime. By opening cracks in the existing system, LSAs may induce other countries—perhaps led by other large emerging markets—to seek their own accommodations, thus placing increasing strain on the multilateral foundations of the international tax system. It remains to be seen whether China’s successful challenge to the ALP will similarly prompt subsequent challenges from elsewhere.

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The European Union’s tax treaties with developing countries: leading by example?

Yesterday a report I wrote for the European United Left/Nordic Green Left (GUE/NGL) group in the European Parliament was published. It was used as input for a hearing of the Parliament’s TAX3 committee, at which Hannah Tranberg from ActionAid, Eric Mensah from the Ghana Revenue Authority and UN Tax Committee, and Sandra Gallina of DG Trade spoke. (This link is to a video of the hearing, which begins with Margaret Hodge and Tove Ryding discussing Brexit, then moves on to the tax treaties discussion at around 16:30).

When the GUE/NGL approached me about working with them on this report, I jumped at the chance. It uses the Tax Treaties Dataset, a project funded by ActionAid and launched in 2016. Earlier this year I had used much of the same analysis in a European Commission workshop for treaty negotiators, and the comparative element certainly caught some of their attention. Just last week I used the dataset at a workshop of African treaty negotiators organised by the Organisation Internationale de la Francophonie, at which it helped them to begin the process of analysing their treaty networks and developing renegotiation strategies.

But the EU is partiuclarly important. Most of the world’s tax treaties – and 40% of those with developing countries – have an EU member as signatory. Combined with its commitment to policy coherence for development, this makes the EU uniquely placed to ‘lead by example’. Indeed, the European Parliament has already called for “Member States to properly ensure the fair treatment of developing countries when negotiating tax treaties, taking into account their particular situation and ensuring a fair distribution of taxation rights between source and residence.”

 

The report has two main messages, from my perspective. The first is that, while the recent attention paid to treaty shopping is most welcome, the basic balance between ‘source’ taxing rights – which allow countries to tax inward investment from the treaty partner – and ‘residence’ taxation in tax treaties with developing countries is also a problem.

The dataset, which includes over 500 tax treaties signed by developing countries, includes a measure how much of a developing country’s source taxing rights each treaty leaves intact. It turns out that EU treaties remove more source taxing rights than average, even when compared with other OECD members.

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What’s more, the difference is growing.

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Source/residence has been the elephant in the room in the debate over international tax rules in recent years, as we saw when it was dropped from the BEPS process at an early stage, only to re-emerge in the context of digital taxation. Countries conducting ‘spillover analysis’ or otherwise analysing their treaty networks need to take this into account.

The second message is that there’s a great deal of variety within and between countries’ treaty networks. There’s loads of variation within each EU Member’s treaties, and between the average values for EU members. The same is true when drilling down to individual provisions. So there is plenty of potential to ‘level up’ based on precedent

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The report echoes the European Parliament in arguing that, if the EU wants to be a leader on policy coherence for development, Member States need to level up the source taxing rights across the different provisions of their treaties with developing countries. Simply saying that on balance their treaties are no worse than anyone else’s – a point the report questions when looking at the EU as a whole – is not enough. The four summary recommendations are for Member States to:

  1. Conduct spillover analyses incorporating reviews of their double taxation treaties, based on the principle of policy coherence for development and taking into account guidance from the European Commission and other bodies.
  2. Undertake a rolling plan of renegotiations with a focus on progressively increasing the source taxation rights permitted by EU members’ treaties.
  3. Reconsider their opposition to a stronger UN tax committee, as the Parliament has previously requested.
  4. Formulate and publish an EU Model Tax Convention for Development Policy Coherence, setting out source-based provisions that EU member states are willing to offer to developing countries as a starting point for negotiations, not in return for sacrifices on their part.

“A gathering of international chatterers for the purpose of chattering.” The birth of the OECD’s Committee on Fiscal Affairs.

In my previous post I explored the United Nations’ brief post-war flirtation with a Fiscal Commission, which came stuttering to a halt in 1951 due, it seemed, to the lack of a compelling purpose that might have motivated states to fight to retain it. The United Kingdom had supported a Russian proposal to wind up the UN’s tax work, a position that seems consistent with its subsequent opposition to the creation of what is now the UN Committee of Experts on International Cooperation in Tax Matters two decades later. It’s perhaps more surprising that, as we will see, the British were initially opposed to the creation of a Fiscal Committee at the Organisation for European Economic Cooperation (OEEC), the predecessor of the OECD, as well. Today the UK is a strong supporter of the OECD’s position as the dominant site of international tax cooperation, but it did not start out that way.

We begin, as the League of Nations’ tax work did, with a resolution of the Executive Committee of the International Chambers of Commerce resolution, in 1954. The resolution identified double taxation as a “serious obstacle” to trade and investment in Europe, and for OEEC members to take steps to relieve it. It asked for unilateral measures, bilateral treaties and, ideally, a multilateral convention. The OEEC’s secretary general was sceptical that the organisation could add any value here, especially given that the UN had not at this point formally dissolved its Fiscal Commission.

He also set out another surprising objection to the ICC’s proposal. It is often asserted that the OEEC picked up the League of Nations’ London draft model bilateral tax treaty, which favoured the interests of capital exporters, rather than the capital importer-favouring Mexico draft. While it is probably true that the eventual OECD model is closer to the London than the Mexico draft, the ICC’s proposal that the OEEC use the London draft was actually a problem for the OEEC, because not all of its member and associate countries had endorsed it. “If an approach of this kind were to be adopted by the OEEC, therefore,” concluded the Secretary General, “it would be necessary for the Organisation to set up an expert body charged with the duty of attempting to produce a more acceptable draft.”

Extract from OEEC Secretary General's memo, 12 November 1954

Soon after this, Switzerland and the Netherlands began to circulate proposals for a fiscal commission. In a curious echo of the current debate around digital taxation, these proposals all expressly mentioned turnover taxes, increasingly imposed by states on the rendering of services, as the main new problem motivating their concerns.

The Dutch note circulated in 1955 noted that “the number and extent of problems relating to taxation has been steadily increasing, not only in the national field but also and especially, in connection with the gradual intensification of international economic relations, in the international sphere.” It advocated work under the umbrella of the OEEC because it was consistent with the organisation’s mandate, and because of the need to discuss in “a smaller circle than the United Nations.” In December 1955 the Netherlands and Switzerland were joined by Germany, publishing a joint memorandum proposing the creation of a expert committee of “specially qualified high-ranking Government representatives,” and in January 1956 an ad hoc committee was created to conduct a study into the matter. The ad hoc committee immediately recommended the creation of a full committee, citing “ample evidence that there are cases of double taxation which constitute obstacles to international trade and investment, and that action to remove these obstacles should be possible within a group of like-minded nations such as the members and associated countries of the OEEC.”

Extract from Dutch memo to the OEEC, 11 July 1955

In March 1956, the Fiscal Committee was created, against the judgement of the British and Scandinavians. Britain’s attitude throughout had been sceptical, but acquiescent. The British representative, Sir Hugh Ellis-Rees, “criticised the memorandum for being vague and for not revealing what the usefulness of the study would be, nor what were its precise objectives.” On the other hand, he told the Inland Revenue, “I think that in our position in the organisation it would be tactically unwise to try to suppress at this stage a movement which has some support however ill-founded it may turn out to be.” Two handwritten notes in the Inland Revenue files are worth quoting at length here. One is from Alan Lord, who eventually sat on the Committee for the UK.

We regard the whole idea as, if I may borrow the FO [Foreign Office] words, “futile and unrewarding” or, in cruder terms, as a gathering of international chatterers for the purpose of chattering.

We must, in the interests of international unity, agree to attend a meeting, which is [illegible] but if anything on this should turn up with Mr Daymond and [illegible] you will no doubt determine your answer by reference to our Policy of being Against It.

The author of the second note is unidentified, but it shows how the UK viewed the Swiss and Dutch proposals, as well as – in the third paragraph – a pessimism that seems rather anachronistic when compared to the kind of work conducted by the OECD today.

1. Insofar as I can discover from this rather Crazy Going file, the pace is being made by: (i) the Dutch, who seem to be resentful about the liquidation of the Fiscal Commission of UN (which we ourselves regard as a Good Thing) and so want to set up a new Committee or Commission to discuss, inter alia, fields, spheres and bases, & (ii) the Swiss, who seem to be engaged in a private brawl with the French.[…]

2. If this be so, the answer to (i) is that we regard this exercise, to use the FO phrase, as “futile and unrewarding” and (ii) that this is a private fight in which we do not wish to join.

3. There seems to have been later on a ganging up of Germans, Swiss and Dutch to give a regrettable academic flavour to the whole thing and to discuss domicile, “classification of income” and “localisation of income”, whatever these terms may mean. Presumably some attempt to reach, for example, agreement on whether interest should be charged by reference to origin or residence, an exercise which long experience has shown to be pointless.

The British concerns were, I think, unfounded, as the new committee raced through a list of five thorny areas within a year, finding consensus on topics such as permanent establishment and the taxation of shipping and airlines, which are recognisable today as core components of the OECD model convention.

The most recent document in this particular file is an interim report from the Fiscal Committee in 1957. It shows how within 18 months the committee was already consolidating its ways of working (Working Parties on each specific issue, just as the OECD has today) and forming a clear raison d’être. In the excerpts below, I’ve picked out three things that struck me from the committee’s interim report. First, how forcefully it began to make the case for tax cooperation, as European economies became more integrated. Second, the recognition that other countries might be incentivised to follow Europe’s lead, because of its “placement in the world economy.” It is interesting to reflect on how much this echoes the EU’s tax cooperation efforts today, perhaps more so than the OECD, for which the economic power of its members complicates its authority.

Extract from interim report of the OEEC Fiscal Committee, 3 July 1957

Finally, the committee members had already begun to “harmonise their views”, perhaps the first conscious expression of what would become a powerful driver of successful tax cooperation: the formation of a consensus about how to do tax among an international community of practitioners.

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“Futile and unrewarding”: the wilderness years of the international tax regime

Almost all histories of the international tax regime begin with the League of Nations: from the model conventions issued by its Fiscal Committee in 1928, to the Mexico and London draft model conventions.  The latter was agreed by a group of primarily European countries in 1946 at Somerset House, just across the road from where I am now. The League never reconciled the differences between the two conventions, and so the modern history of the regime is usually dated from 1963, when the OECD’s Fiscal Committee first agreed an OECD model bilateral tax convention. For the last 50 years, the OECD model has been the foundational text of the international tax regime, even forming the template for its United Nations equivalent.

While I knew that the United Nations initially tried and failed to pick up the League’s work, the interregnum between 1946 and 1963 is often raced over quite quickly in tax history stories: Sol Picciotto devotes five pages to it in his magisterial International Business Taxation [pdf]. So I decided to sit down in the British National Archives to see what I could find out about this intervening period. The transition from the League to the OECD is important because it is often stated that the OECD picked up and ran with the London Draft, which suited the interests of its members. The Mexico draft, largely agreed among developing countries, fell to one side, according to this account, paving the way for an international tax regime that has a bias in favour of capital exporting states. While I will shed a bit of (sceptical) light on this in what follows, I am mainly going to tell the story through some of the more colourful excerpts from the archives. Today we will look at the UN Fiscal Commission, and I’ll follow this up next week with the OEEC (later OECD) Fiscal Committee to which the baton passed.

Part 1: The “Imperialist” powers’ efforts fail at the United Nations

The sense one gets from both the official reports of UN Fiscal Committee meetings between 1947 and 1951, and the British participants’ own readouts, is that political divisions between groups of states were less problematic than the lack of a clear and compelling mandate to achieve anything in particular. In the committee’s first session, it was the participant from the United States who drafted the proposals for further work that made their way into the final draft, even though he also initiated a protracted (and familiar) discussion about being realistic given limited secretariat resources. Indeed, at the second session, “the secretariat work had been unevenly done and was on the whole badly presented”, said the British participant, WW Morton, who regarded the secretariat’s approach as “over-academic”. (There is a theme of hostility towards things being ‘academic’ in these Inland Revenue files, which I am not taking personally).

By this point, cold war divisions had already emerged, although the sense from the British accounts is that they were not insurmountable, since the Soviet group was content on occasions to make its statements and then abstain from votes, or else be outvoted. Still, here is a flavour of the kind of thing, taken from Morton’s readout. He describes the member from the USSR stating that international work on double taxation put “pressure on the under-developed countries to the advantage of highly developed countries” since it primarily reduced the taxation of their investors.

Extract from British participant's report of the UN Fiscal Committee's second session

Of the second session, Morton observed that “the session was not very productive” but was keen to support anything that might allow the UK to conclude more tax treaties with developing countries. Everyone could agree to support information gathering and dissemination, and the translation of the secretariat’s compendium of international tax agreements into Spanish was something the British supported enthusiastically, keen as they were to obtain tax treaties with Latin American countries (more on that here).

Extract from British participant's report of the UN Fiscal Committee's second session

 

It is in the Commission’s third session that we can first see a divide between developed and developing countries. The International Civil Aviation Organisation (ICAO) had brought a proposal for reciprocal exemption of airlines, by which companies operating flights would be exempt from taxation in the countries to which they fly, paying it only in the country where they were based. India, Pakistan, Venezuela and Cuba raised objections, pointing out that if only one country signing the treaty had an airline, “reciprocal exemption is quite unfair.” The ICAO proposal was, however, consistent with the treaty policy of the UK, and other countries with their own airlines. The ICAO proposal fell after a vote in which the developing countries were joined by the Soviet group, but Morton attributed this to a “procedural tangle” and poor chairing, rather than an insurmountable division. “As will be observed, the work of the Session was only modestly productive. Nevertheless, it is probably worth holding.”

When the Commission’s work reached the ECOSOC, however, it appears that sentiment had changed. Morosov, the Russian participant (also its representative on the Commission itself) expressed his familiar objection that the Commission’s work on double taxation “was in reality intended to promote economic conditions favourable to the activities of British and American monopolies,” concluding that the Commission “was engaged in futile operations, and that it was therefore useless to keep it in existence.” According to his Polish counterpart, “the majority of the Commission had, by certain of the recommendations adopted by that body, tried to exploit the authority of the Economic and Social Council to relieve investors from the highly-industrialised capitalist countries of the taxation which those less highly developed countries were entitled to enforce.”

Extract from ECOSOC discussions of the report of the third session of the UN fiscal commission

 

Morton, the British representative on the Commission, had previously reported an informal conversation with Morosov from which he concluded that this language was more of a formality, and that Russian objections were far from fatal to the Commission. It was thus the British who really plunged the knife in to the Commission, responding that the UK was “in agreement with the Soviet Union and Polish delegations as to the desirability of winding up the Commission’s activities, although for other reasons than those advanced by them.” The UK wanted to see preparatory work for ECOSOC discussions carried out by “small groups of experts with the assistance of the Secretariat,” rather than by a permanent functional commission serviced by a dedicated secretariat. This would appear to have been the death knell for the UN Fiscal Commission, which was wound up in 1954.

So in this quick look through the archives, we’ve seen that the demise of the UN Fiscal Committee was not only a product of inter-country rivalry (though that produced some entertaining diplomatic fireworks). Perhaps more significantly, it was a matter of failure to gather institutional momentum, in part due to the lack of effective secretariat support, and lukewarm support from across the board. The UK and US were never strongly in favour of a permanent international committee examining taxation issues. As we will see in part 2 next week, this was not merely scepticism of the UN: the British also opposed the creation of a “gathering of international chatterers” at the OEEC, which eventually became the OECD Committee on Fiscal Affairs…

 

The Colombia UK tax treaty: 80 years in the making

Today at 2.30pm, the UK parliament’s Third Delegated Legislation Committee will debate tax treaties with Lesotho and Colombia. It will be interesting to see how much debate really takes place, a matter on which I’ve commented before once or twice.

The hearing gives me a chance to plug my article in the British Tax Review last year [pdf], which traced the UK’s attempts to obtain a tax treaty with Colombia over 80 years. Its overtures were frequently rejected, at first because Colombia was not interested in tax treaties, then because it was bound by the terms of the Andean pact, and finally because it could not agree on terms with the UK, especially over technical service fees, an area where the UK position has changed. Since the article was published I had the chance to speak with a Colombian tax official, who told me that Colombia’s change of heart on technical service fees is a change of view about tax policy, rather than a concession forced by OECD membership, as I speculated in the article. Of course, the two developments might not be totally independent.

Here is how the article concludes:

The demands of OECD membership, combined with the unusually liberal use of MFN clauses during an era of less-than-strategic negotiation, seem to have backed a country once insistent on a “red line” over technical service fees, and before that sceptical of accepting the limitations on its taxing rights that come with a tax treaty, into a corner. Having been constrained in its negotiating position by the pro-source taxation stance of the Andean community, Colombia now finds itself pulled in the other direction by the OECD. Is this further proof that the world is moving inexorably towards an OECD-type tax system? The gradual but steady expansion of the OECD, given a fillip most recently by the announcement that Brazil would begin accession talks, might lead us to such a conclusion. In contrast, however, the continued expansion in the use of the technical service fees Article by developing countries, together with its imminent introduction into the UN Model Treaty, point towards a growing divide between states on this topic.

The long history of negotiations between the UK and Colombia perhaps demonstrates more than anything the extent to which the tax treatment of international transactions today is a product of historically specific events. Each side’s positions changed radically over time, from a refusal to accept each other’s terms to a willingness to concede them outright. The UK’s constant enthusiasm for a treaty with Colombia stands in contrast with the latter’s oscillation between hot and cold. If Colombia turns cold again, however, it will be left with a fossilised relic of its negotiating position in 2016. Given the rarity with which tax treaties are terminated or their terms substantially renegotiated, treaty networks are collections of these fossils. Hence Colombia is stuck with its MFN [most favoured nation] clauses, regrettable outcomes of its negotiating spree in the 2000s. The biggest irony, however, is reserved for the UK. Despite its apparent willingness in the 2000s to forgo a treaty with Colombia over withholding taxes on technical service fees, Britain retains, as a legacy of its negotiations from 1973 until the turn of the century, the largest number of treaties of any OECD Member containing just such a clause

Who will chair the new UN tax committee?

As I write this post, the new UN tax committee is in closed session, choosing its new chair. This first act of the committee feels like it will have an important tone-setting impact. There is much speculation about who is the preferred candidate among members from OECD countries, and an assumption that those members will have arrived with a pre-agreed nominee. In contrast, while one name in particular among the members from developing countries is being mentioned in informal chat, there does not seem to be a consensus, a consequence perhaps of politics and of the fact that these members do not know each other so well. This dynamic is especially important, because the composition of the committee has changed, with members from the OECD now significantly outnumbered for the first time.

The last committee was finely balanced, with 12 members from OECD states and 13 from outside the OECD. Having said that, four more were G20 members, meaning that 16 of the committee came from countries that had seats at the high table of international tax rulemaking, while only nine were outside that particular tent. Looking at it by country income group, 13 were from high income countries, despite the UN tax committee’s developing country remit.

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If we consider the members personally, eight of them were officers of an OECD tax committee, including the chair and vice-chair of Chair of OECD Working Party 1 on Tax Conventions and Related Questions, two bureau members of OECD Working Party No. 6 on the Taxation of Multinational Enterprises, and two bureau members of the OECD’s Committee on Fiscal Affairs itself. Many of these eight were among the most vocal and active members, chairing the UN tax committee itself and several of its subcommittees.

This time around, I can count only eight members from OECD countries, and a clear majority of members from developing countries. There’s a caveat, however, which is that, as the OECD has invited more countries to participate in its Committee on Fiscal Affairs, a further seven members come from countries that are CFA participants or associates. There are now only five committee members who are officers on OECD committees, including both Vice-chairs of WP1 and two CFA bureau members. It’s a measure of how things are changing that one of these is from Argentina, which is not yet an OECD member. All of this means that, largely as before, only 10 of the 25 committee members come from countries that do not have a seat in the OECD and G20’s main tax discussions. Many of those ten, of course, are members of the Inclusive Framework and other OECD forums.Capturenew

So there is still some truth to the idea that the UN tax committee is essentially a forum in which many of the same people discuss many of the same topics, but with a different mandate and to some extent a different balance of power. For example, some UN committee members from OECD countries had reputations for actively supporting positions that differed from the OECD consensus, but were favoured by developing countries, in UN deliberations.

How ‘equal’ the ‘equal footing’ granted by the OECD is in practice is a question often raised. But it is also worth noting that at the UN committee, not all members have equal influence. Much of this variation is due to the personal capacity in which members attend. As a result, outcomes are a product of, among other things, their experience in international negotiations, how much of a mandate they have from the country that nominated them to adopt contentious positions, the strength of their informal relationships, their fluency in English, and how effectively they caucus in blocs. There is often a trade-off, for example, between seniority and technical knowledge.

This feels like a critical moment for international tax governance. The BRICS (or at least China and India) are becoming increasingly confident in articulating an autonomous position that diverges from that of the OECD, and many other developing countries are becoming more confident and experienced in international tax policy. The OECD’s offer of limited but significant participation to developing countries might be seen as a threat to the UN. But with a growing rift between the US and Europe on digital taxation, as well as between the OECD and emerging markets, a committee without US and UK membership for the next four years will have a different centre of gravity, and may therefore be more likely to carve a different path. If these terms still mean anything, the UN committee is now much closer to ‘source’ countries and further from ‘residence’ countries.

Update: The committee elected two co-chairs: Eric Mensah from Ghana and Carmel Peters from New Zealand.

Developing Countries’ Role in International Tax Cooperation

Developing Countries' Role in International Tax CooperationOver the past year I’ve worked with the secretariat of the Intergovernmental Group of 24* on a paper that discusses how developing countries could engage with a range of international tax cooperation issues. The paper can be downloaded here: Developing countries’ role in international tax cooperation [pdf].

The G-24 plays a caucusing role for its members in the IMF and World Bank, and so tax cooperation is becoming increasingly important for it as those organisations’ profile in tax work increases. There were some interesting presentations at the G-24’s last technical group meeting in February, and its most recent ministerial communique [pdf] includes the following statement, a mix of welcoming current initiatives and noting areas where they are insufficient for emerging markets and developing countries (‘EMDCs’):

We welcome ongoing initiatives on international tax cooperation such as the Automatic Exchange of Information (AEoI) initiative and the Base Erosion and Profit Shifting (BEPS), and call for a framework that ensures effective participation of EMDCs. We support the development of a digital global platform with least compliance cost for implementation of AEoI. We appreciate the work of the UN Tax Committee and encourage multilateral support to upgrade the Committee to an intergovernmental body to enhance the voice of EMDCs on international tax policy matters. We also call for more attention to developing fair tax rules to guide the taxation of multinational corporations and for international cooperation to prevent harmful international tax competition, negative spillovers from shifts in tax policies in major countries, and illicit financial flows.

One of the interesting elements of this project was the diverse positions and interests within an equally diverse group of ‘EMDCs’. Below, for example, is a table showing participation in international tax organisations and institutions. This was such a moving target that we had to set a ‘freeze date’ of 25th May 2017.

G-24 participation in international tax initiatives, May 2017

I hope the report provides a good overview of the state of play and issues involved on that date. Below is the text of the recommendations section, which gives a flavour of the document.

The G-24 has highlighted the importance of effective international tax cooperation to support developing countries’ efforts to mobilise domestic resources, so that they can achieve their development goals.  It could build on this recognition by setting out to develop a pro-active agenda for international tax rule reform that meets the needs of developing countries, and identify different international forums through which to achieve it. G-24 members could work together within existing forums such as the UN tax committee and OECD to put their issues of concern on the agenda. The UN tax committee’s potential has yet to be fully realised by developing countries, and there may also be new opportunities created by enhanced participation in OECD initiatives. G-24 members could strengthen their engagement by enhancing national political oversight of UN and OECD tax work, as well as advocating a stronger, upgraded UN tax committee when the opportunity next arises.

On tax avoidance and evasion, G-24 members could consolidate their participation in multilateral conventions on information exchange and mutual assistance, and could share their knowledge and experiences in this area to build each other’s capacity to benefit from their participation, as well as to identify reforms to international tax standards that might reduce the administrative hurdles to benefit.  Where necessary, this could lead to alternative, but compatible, standards in areas such as transfer pricing and tax treaties that give a greater share of the tax base to developing countries.

As some G-24 countries are capital-exporters to other developing countries, they could take up the IMF and OECD’s recommendation to perform ‘spillover analyses’ of the main aspects of their tax systems that have the potential to adversely affect other developing countries’ tax revenues, whether by encouraging tax competition or increasing incentives for tax avoidance. Also with regard to tax avoidance, G-24 members could share experiences across regional economic groupings such as ASEAN and MERCOSUR to advocate codes of conduct on tax competition, as well as working through ECOSOC for the adoption of the UN tax committee’s proposed code of conduct on exchange of tax information.

Above all, the G-24 provides a political platform for forging common views on international development issues among developing countries, in which tax coordination is a main concern.  It is able to work with the OECD within its inclusive framework, and a number of G-24 members are now participating in many of its initiatives. It can also support the efforts of the UN and other forums in which developing countries can more actively engage so that they can benefit more effectively from international tax rule reforms and cooperation.  A sustainable approach to international tax cooperation in the long term requires international institutions that reflect the increasingly diverse needs of countries with an interest in international tax standards.

*Just as there are 19 countries in the G-20, and 134 countries in the G-77, there are now 26-and-a-half countries in the G-24. The ‘half’ is China, which has the status of ‘special invitee’.