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.


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.


“We have some doubt whether it would really prove useful.” The origins of UK opposition to a Global Tax Body.

As OECD and G-77 countries debate the status of the UN tax committee at the Financing For Development conference in Addis Ababa, the finger has once again been pointed at the UK and US.

This is from today’s Guardian:

The UK joined the US and several other wealthy countries at the UN financing for development conference in Addis Ababa in a manoeuvre to limit discussions on tax policy at the UN, arguing that the Organisation for Economic Cooperation and Development (OECD) was taking the lead on tax issues.

This is from the Guardian in 2008, at the time of the last FFD conference in Doha:

The Observer has established that the UK is lobbying to remove paragraph 10 from the draft Doha Outcome Document…Paragraph 10 focuses on fighting tax evasion. It aims to encourage global tax information-sharing and simplified tax laws. Most crucially, it wants to upgrade the UN’s tax-expert panel to intergovernmental status, elevating the importance of the issue of individual and corporate tax avoidance and evasion. The UK, together with the US, Canada and Australia, are opposed to the measure, according to sources in the UN.

These positions are hardly new. As the memo reproduced below shows, the UK was opposed to the creation of the original ad hoc group of experts, which became the current UN committee, way back in 1967. The UK view then was that this “technical matter” was better discussed in a “more homogenous group” (the OECD), rather than risking “confrontation” between capital-exporting and capital-importing countries.

The current OECD member state argument is mostly about the cost of a parallel bureaucracy at the UN (see, for example, this EU position statement [pdf]). While that was also present in 1967, it’s interesting that today the UK’s main concern, about confrontation at the UN, is no longer articulated by the UK.

Link to the memo on Slideshare.

A global tax body for what?

The global tax body

It’s only a few days until the start of the Third UN Financing for Development summit in Addis Ababa. This is the key crunch point for discussions on if and how the international tax architecture might change to better accommodate developing countries in decision-making. Although the debate about strengthening the UN tax committee (UNTC) from its current impoverished and non- governmental status has been simmering for years, developing countries and NGOs seem to be throwing themselves into it this time round with more enthuisiasm than in the past. Yet the most recent draft of the Addis outcome document has only two modest commitments:

To this end, we will increase the frequency of its meetings to two sessions per year, with a duration of four working days each. We will increase the engagement of the Committee with the Economic and Social Council (ECOSOC) through the Special Meeting on International Cooperation on Tax Matters with a view to enhancing intergovernmental consideration of tax issues.

Over on his ever-insightful Uncounted blog, Alex Cobham points to three possible outcomes: the OECD retaining leadership, a shift towards the IMF, and the creation of the intergovernmental tax body that campaigners want. This builds on the analysis put together by Eurodad [pdf], summarised in a short post. What I intend to do here is to step back a little from the advocacy messages and think both concretely and theoretically about what that ‘stronger UN’ option really is.

What we have

To begin with, there are no binding global tax rules. There are standards and models, but they only have legal force when countries use them as the basis for national law or bilateral treaties. (Although in some instances international tax rules do arguably have a ‘soft law’ role, such as the way courts may refer to the model commentaries when interpreting treaties, or the way a Kenyan court upheld the OECD transfer pricing guidelines in the absence of national guidance [pdf]). But international norms do have two important strengths:

  1. A significant moral weight. It is easier to justify a new law that might otherwise scare investors, or a tax treaty negotiating position, if it complies with international norms.
  2. Technical sophistication. For a developing country with a small bureaucracy, taking an ‘off the shelf’ set of transfer pricing rules is much easier than developing your own.

In the area of information exchange, there is the Global Forum peer review process, which relies on the threat of counter-measures, and there is the Multilateral Convention on Mutual Assistance, which is binding, but far from universal.

Campaigners want to change this situation, I think, in two ways. First, they want non-binding standards that better suit the needs of developing countries. This might mean, for example, transfer pricing rules that are easier to enforce, model treaties that give greater scope for source taxation, or a country-by-country reporting standard that entitles all countries in which a multinational operates to the information. Second, they want to create or expand the category of binding global conventions that would force developed countries and tax havens to comply with developing countries’ preferences. This would include for example mandatory global automatic information exchange, mandatory public country-by-country reporting in the home country of a multinational company, and perhaps some kind of mandatory approach to CFC rules that shields developing countries from profit shifting. You can see these two themes in the Eurodad Q&A document:

The overall purpose of the intergovernmental UN tax body should be to ensure that countries do not erode each other’s tax bases, and that the international tax system is transparent, coherent and supports equality and development. In order to do this, the body would have to address a number of different issues, including base erosion and profit shifting, tax and investment treaties, tax incentives, progressive taxation, taxation of extractive industries, harmful tax practices, beneficial ownership transparency, public country by country reporting, automatic exchange of information for tax purposes and alternatives to the arm’s length principle. In order to ensure that the mandate of the tax body is broad enough to tackle all these issues – as well as new issues that might emerge – it’s important that the mandate is not too narrow and specific.

In the longer run, and with a view to ensuring implementation of the decisions of the tax body, we should have a legally binding UN Tax Convention. Developing such an agreement should therefore be one of the key tasks of the intergovernmental body

Why we have it

In international relations thinking, there are broadly three themes that different scholars use to analyse what international institutions are and what function they serve. They boil down to power, preferences and ideas.


From this perspective, international institutions are merely tools through which dominant states exert their power. This would lead us to conclude that any realignment in the politics of international tax will (or will not) happen regardless of what goes on at the UN next week. An upgraded UN committee wouldn’t create change, rather it would simply reflect a shift in the underlying power dynamics. The annex to the UN transfer pricing manual, and the participation of developing countries in the BEPS project, already illustrate this. The way to get better outcomes for developing countries would be to bolster their capabilities, rather than to realign institutions, which would play no causative role in itself.


A second way of looking at things is to put power to one side and think about collective action problems. In this view, states create institutions because they need some kind of coordination mechanism to help overcome the natural incentives that make cooperation difficult. Cooperation to deal with double taxation is described by game theorists as a coordination game (also known as a ‘battle of the sexes‘ or ‘Bach or Stravinsky’): everyone wants to reach an agreement, the difficulty is just finding a ‘focal point’ around which to converge. The model treaties are focal points that represent the widest possible agreement at international level, but leave the hard bargaining on non-consensual issues to the bilateral setting.

If this is the case, international tax institutions’ most important roles are entrepreneurship and signalling. They create focal points around equilibrium solutions from which everyone will benefit. Critics of the current regime argue that even when using the UN model treaty, the resulting treaties benefit capital exporters more than developing countries, who have to make most of the sacrifices of taxing rights. They want to see a more radical (or stripped down) UN model. But if the role of the UN model is to signal an equilibrium point, making it more radical might mean that it ceases to play this important role, because in fact it doesn’t represent a possible equilibrium between different groups of countries any more. This might come at the same time as the OECD instruments cease to play that role because developing countries are also beginning to deviate from them. The goal here would be to find a new equilibrium, from which developing countries benefit more, but on which everyone (or enough countries) can still agree.


The third lens we can use begins from a fundamentally different point of view: that the international context can change the preferences of diplomats, and hence of countries themselves.

As Sol Picciotto states, in International Business Taxation [pdf]:

Perhaps the most important outcome of the inter-war years was to begin to create a community of international tax specialists…a community within which ideas and perspectives as well as economic advantage could be traded. It was these direct contacts between specialists which filled the gap created by the difficulties of resolving by any general principles the issues of international allocation of the tax base of international business.

If this ideational process among tax diplomats is an important part of the puzzle, what role does the UN committee play? Is it a forum through which delegates from developing countries develop their own shared agenda, or one in which they become complicit in an OECD country-led agenda? Consider two pieces of evidence from British civil service files. This first, from a Ministerial briefing note in 1976 on the stalemate in tax treaty negotiations with Brazil, illustrates that some British officials saw the UN as a tool to ‘educate’ developing countries:

Our view, which is shared by the Americans and the Dutch, has been that it is of little use to try to “educate” developing countries – at the United Nations Expert Group on tax treaties and elsewhere – about acceptable international fiscal standards if, when it comes to the crunch, we are prepared to sacrifice principle in order to secure an agreement.

Here, in contrast, is how Kenyan negotiators used the knowledge they gained from attending UN meetings to bolster their argument for a management fees clause in their 1973 treaty with the UK, even though such a clause is only being added to the UN model some 40 years later:

Mr Cropper [from Kenya] said that Kenya’s proposal was only intended to close a loophole and he did not see why there should be any objection to it. It was a point which had been raised by a number of countries in the UN Group of Experts…Mr Cropper said that there had been a big change in developing countries’ attitudes in the UN Group of Experts…Mr Ihiga [also from Kenya] said that modern thinking was that a withholding tax on management fees was justified.

If ideas are important, the UN should be seen as a community of experts working not just to find solutions that fit the power balance and national preferences of UN member countries, but rather to change international norms and national preferences, towards a more pro-development orientation.

What we might get

How could a restructured UN Tax Committee achieve that? ‘Upgrading’ advocates generally name three categories of reform. Let’s consider each in turn, in the light of the above discussion.

Intergovernmental status

While it would have some effect on the UNTC’s prestige, funding and composition, the major change that this would create would be to politicise the UN committee. It would mean that national members were more accountable to their home governments and to civil society. Like other issues such as trade and climate change, the shifting balance of power between developed and developing countries would probably increase the areas in which there was a stalemate. Politicisation would also allow campaigners in developed and developing countries alike to work at that national level to act as allies of radically positioned developing country officials, potentially increasing their negotiating capabilities, but crucially also changing preferences at national level.

A second impact would be that it would allow countries to send the most relevant person for a given discussion, and so the UN committee could expand its work onto a wider variety of issues. I don’t believe that it would deliver an international convention that would bind developed countries and tax havens into new rules any time soon, because the power relations are not yet aligned in that way, and because it’s hard to see a solution around which national preferences are aligned.

Changed composition

With more members from developing countries, we might expect that majority opinions that suit developing countries could be forced through the committee more easily. Or, more practically, developing countries might be able to make their case more forcefully in deliberations. But if the aim is to find an equilibrium point that will work in the real world, simply outnumbering developed countries to produce a more radical set of UN instruments without changing the preferences of developed countries will be of limited effect. This is why “tyranny of the majority” is currently a last resort when the committee takes decisions.

More funding

This would create a more autonomous secretariat that might be able to compensate for developing countries’ more limited technical capacity in UN discussions, doing some of the work to assuage objections from developed countries and so find more developing country-friendly focal points. It would also make the secretariat more visible, enhancing the prestige of UN instruments, just as senior OECD secretariat staff travel the world promoting its instruments. More funding for more frequent meetings might allow the committee to work faster, keeping up with changes at the OECD, but this would depend in part on developing countries’ capacity to participate.

In conclusion, the development case for a better-resourced, more transparent UN committee is compelling. But the committee’s impact will continue to depend on the uptake of its instruments by countries in national laws, bilateral treaties, and adherence to any new binding multilateral convention. For this reason, ideas and preferences in developed and developing countries will need to change, alongside developing countries becoming more capable actors in international negotiations. A more dynamic, politicised UN committee might help to create those things over time, but in the meantime I think it is just as much at the national level that campaigners need to focus their attention if they want to change international outcomes.

UN tax committee meets this week: but what is the UN model for?

I’m on my way to the UN tax committee’s annual session in Geneva. This year’s agenda contains quite a few interesting topics. I can’t write about them all, but I thought I might pick out three that seem particularly interesting. Since they are all discussions about the model treaty and its commentary, the common question that they pose is, “what is the purpose of a model tax treaty?” I think you can take three (not mutually exclusive) views about this:

  1. It tells countries what works technically. It combines the wisdom of some of the most experienced tax officials in the world to produce a technically sophisticated template that negotiators can rely on.
  2. It tells countries what is politically palatable. If a provision is included in the UN model, for example, a group of experts from developed and developing countries have all been willing to agree to its inclusion, so neither side is going to consider it too outrageous.
  3. It tells countries what is acceptable behaviour. The models sketch out the concepts and principles that committee members think should underpin a country’s international tax system. It conveys an expectation that a country’s tax rules should be compatible with these concepts and principles.

From an international relations side, we might say that the first two purposes are about reducing transaction costs for negotiations, by providing countries with information ahead of time. The last one, on the other hand, would suggest that treaties act as instruments through which norms about acceptable behaviour are established and diffused within an international community.

The status of the OECD transfer pricing guidelines

When the 2010 update to the UN model treaty was being finalised, there was some controversy around article 9, which deals with transfer pricing and the arm’s length principle. The commentary to the previous version of the UN model stated that the OECD’s transfer pricing guidelines were “internationally accepted guidelines” and recommended that countries should follow them. A minority of committee members didn’t accept this view, and so rather than resolve the conflict, the commentary now records that [pdf] “The views expressed by the former Group of Experts have not yet been considered fully by the Committee of Experts, as indicated in the Records of its annual sessions.” Unusually, the record of the discussion identifies the dissenters as the Chinese, Brazilian and Indian members of the committee. It is worth noting that none of these three individuals are still members of the committee.

The new committee is going to discuss a proposed wording to resolve those differences. This wording states only that the OECD guidelines “contain valuable guidance” and adds that

the Committee has developed the United Nations Practical Manual on Transfer Pricing for Developing Countries which pays special attention to the experience of developing countries, reflects the realities for such countries, at their relevant stages of capacity development, and seeks broad consistency with the guidance provided by the OECD Transfer Pricing Guidelines.

There is a furious letter [pdf] from the US Council for International Business, which seems to be targeted directly at India, China and Brazil:

It seems inconsistent for G20 countries and other non-OECD countries that are now advocating for their views to be reflected in the OECD Transfer Pricing Guidelines to accept concessions from others participating in the development of those Guidelines and then undercut the very outcome of those negotiations by arguing elsewhere for positions that were rejected in that forum. If any notion of “fairness” has relevance in international tax, surely it should include the concept that acceptance of an invitation to bargain on an equal footing over a set of rules carries with it the good faith obligation to live by those same rules.

The letter argues that the UN Manual was not produced with enough participation from businesses, that the OECD guidelines are now formulated with input from “a broad spectrum of countries”, and that the proposed UN aim of “broad consistency” will permit “multiple, inconsistent applications of that principle, will lead to multiplied disputes, increased double taxation, and ultimately to serious damage to the cross-border trade and investment that fuels economic growth and development.”

This might be an argument based on purpose 1, 2 or 3 above. On 1, USCIB is arguing that the changes will create technical problems. On 2, it is arguing that the political signalling effects of the OECD and UN models undermine each other when countries agree to one thing at the OECD and push a different position at the UN. Finally, on 3, it is clearly concerned about diluting the clear message sent by the treaty commentaries at present, which is that the OECD guidelines are the only internationally accepted authority when it comes to transfer pricing.

Capital gains

Both as a discussion in its own right [pdf], and through a paper for the Extractive Industries subcommittee [pdf], there’s a lot of discussion of “indirect transfers”, where a capital asset in a developing country is sold, but the transaction takes place through the sale of a holding company located in another country. I have written about an example of this recently, and it was highlighted in the recent IMF spillovers report. As I observed, it doesn’t look like the G-20/OECD processes are going to look at this problem in any depth, so this is an instance where the UN committee is examining an issue of clear concern and interest among developing countries.

The discussion focuses on article 13(4) which covers the sale of a company whose value consists principally of immovable property. This may include a mine, or a capital-intensive business such as a mobile phone network. The UN papers highlight a range of administrative issues: how a developing country can know if a sale taking place abroad falls within the scope of this article, how to value the gain, how to define “immovable property” since the model treaties are not as clear as they could be on this matter.

What interests me most is the question of how to actually collect the tax, when the payment is made outside the country, and when by definition the company making the gain may no longer have any assets in the country. As the extractives paper observes:

While both the UN and OECD Models now contain optional Assistance in the Collection of Tax Debt Articles for countries wanting to provide for this in bilateral tax treaties, and there is a multilateral OECD/ Council of Europe Convention on Mutual Administrative Assistance in Tax Matters on the subject, this is not yet something most developing countries have provision for in their bilateral or multilateral relationships.

This is something tax authority officials from developing countries are definitely seeking from renegotiations. In the meantime, the extractives paper describes alternatives, which include asking the purchaser (who by definition will have assets in the country) to withhold the capital gains tax when paying for the transaction, and refusing to grant export licenses until the capital gains tax has been collected.

I don’t know how controversial this is going to be, but insofar as it is about providing advice to developing countries, I think that makes it a matter of purpose 1.

Services taxation

The committee is going to discuss a draft article [pdf] that would allow developing countries to tax technical services. This is a provision that exists in some form in many tax treaties already, and has been introduced into models such as the East African Community’s new model treaty. But neither the UN nor OECD model treaties include it. From a technical point of view (purpose 1), this new addition should be a good thing: since these provisions are fairly popular among developing countries’ tax treaties already, having an international Committee of Experts formulate a model provision built on their collective wisdom is surely a good thing.

That’s not the view taken by the International Chamber of Commerce in a letter [pdf] that outlines the main arguments likely to be raised against a withholding tax on management fees. The ICC is opposed to such a tax per se, but it emphasises that it is even more concerned about the double taxation that might result if countries impose such a tax it unilaterally. Here is what it says:

Given that it is the unanimous view of OECD Member States that the source basis taxation is not appropriate for services performed by a nonresident outside that State, it is unlikely that the country where services are performed will give up its right to tax and therefore such a provision is unlikely to serve as an effective model for bilateral agreements. While the UN Model reflects different interests than the OECD Model and different rules are therefore appropriate in some cases, it should be considered if deviating from a rule in the OECD Model that reflects unanimous agreement among OECD member countries will inevitably lead to conflicts in treaty negotiations. Doing so will likely encourage countries to take aggressive unilateral positions (in the absence of a treaty). The adoption of this rule on a unilateral basis will increase double taxation, reduce cross-border trade and increase costs for local consumers.

This is an argument that really goes to the heart of what the UN model is for. I think the ICC’s concern is that including an article sanctioning withholding taxes on technical fees in the model treaty will embolden developing countries to insist on the right to levy such taxes, and that this will make it harder for them to reach agreement with developed countries. That’s purpose 3.

An opposite argument, of course, would be that the UN committee, with members from OECD and non-OECD countries, should be in a good position to formulate an article that reconciles the concerns of OECD members and non-members. That’s purpose 2.

Following the ICC’s argument cited above, the model treaty’s job is not to provide a template that is to be used where countries do agree to include a particular provision. It is about circumscribing a definition of what is considered reasonable behaviour by a developing country. Keep it out of the model, they are saying, to discourage developing countries from doing it altogether.

What is the UN tax committee for, anyway?

In January, the UN tax committee sent out a call for submissions [pdf] to the update of its transfer pricing manual. The subgroup working on this update will be drafting additional chapters on intra-group services, management fees and intangibles, all topics that greatly interest developing countries and civil society organisations grouped around initiatives such as the BEPS monitoring group.

So who made submissions to the UN consultation? Four private sector organisations, two academics, the World Bank and the Chinese government. Not a single NGO. Meanwhile, considerable effort has been expended by civil society groups in drafting submissions to and reports about the OECD’s BEPS process, lamenting how issues of concern to developing countries are likely to be left by the wayside.

I think this is a pretty strange prioritisation. Why focus all your energies on a process that you suspect is not going to deliver results for developing countries, and ignore entirely a process with a specific mandate to do so? I debated this a bit on twitter earlier this week with, among others Alex Cobham of the Centre for Global Development, who told me he considered it “self-evident that BEPS is relevant to developing countries’ tax base in a way that UN Transfer Pricing Manual may not be.” (We were also discussing automatic information exchange, which I’ve discussed before).

I don’t agree with Alex on the detail. But let’s consider this from first principles. How do (or should) NGOs prioritise their campaigning resources? I suppose the equation is something like:

Importance = 1. Magnitude of potential impact x 2. Likelihood of success + 3. Effect on long term balance of power

In the short-to-medium term it’s important to take into account both the size of what is at stake and the capacity of civil society groups to influence it. But there’s a long term dynamic too that means it may be strategic (unstrategic) to work on something that is unlikely (likely) to succeed in itself but will contribute towards (undermine) a long term strategy.

When I ask them, NGO folks often suggest that they don’t want to prioritise the UN because it scores low on all three counts. That is:

  1. It’s just a talking shop, without the same influence as the OECD
  2. In any event, the UN’s track record shows that the OECD countries have got all the decisions sewn up
  3. And in the long term the UN would be too unwieldy and bureaucratic a forum to be a viable home for international tax politics

I’m going to try to explain why I think this calculation is wrong.

1. It’s just a talking shop, without the same influence as the OECD

Both the OECD and the UN are soft law bodies when it comes to tax treaties and transfer pricing. They set standards in the form of model treaties and guidelines, but these have no binding effect on countries unless they choose to use them in treaty negotiations and in their domestic transfer pricing rules. This applies to the outcomes of OECD deliberations just as much to those of the UN. (Nothwithstanding the OECD’s proposal for a mutlilateral convention to implement the treaty aspects of BEPS, which will presumably be offered as a fait accompli to developing countries, including negative as well as positive aspects for them).

To influence the distribution of the international tax base, then, you need to influence bilateral treaty negotiations and national lawmaking. When it comes to treaty negotiations, at the level of standard-setting you can do two things: influence the developed country position (the OECD model) and influence the developing country position (the UN and regional models). The former will be harder, but will it have a bigger potential impact than the latter?

As I mentioned in my post a couple of weeks ago, a recent IBFD study shows that, where the model treaties diverge, the OECD model seems to be used more often than the UN model, which seems like a logical outcome of differentials in negotiating strength. So before even looking at how the model treaties might be changed, the best outcome for developing countries is surely to increase the prevalence of UN model provisions in negotiated treaties. In any event, the UN model is by no means ignored. Some of its most distinctive provisions, such as the services permanent establishment and source state taxation of royalties, have been adopted quite widely..

Turning to transfer pricing, you might remember that the first edition of the transfer pricing manual created some waves. This was mainly because of its inclusion of a annex on the ‘country practices’ of China, Brazil, India and South Africa, which emphasised their points of dissatisfaction with the OECD’s predominant transfer pricing guidelines. It is perhaps too early to see how influential the UN manual will be.

Accept for a moment the view, propounded by NGOs and sketched out in Chapter 10 of the UN manual, that OECD transfer pricing rules deprive developing countries of tax revenue because of enforcement troubles and an inherent bias towards countries that can capture the intangibles and high-value services. In that case an official document written by government officials discussing these issues and articulating alternatives is clearly very useful. Some people have suggested to me that the authors of Chapter 10 might be using it mainly as a tool to influence the OECD, but on the other hand there’s definite interest in its content from developing countries. South Africa indicates in its contribution that it is considering some aspects of the Indian and Chinese approaches.

2. In any event, the UN’s track record shows that the OECD countries have got all the decisions sewn up

I realised last October that although OECD members are in a minority on the UN committee, once you include the G20 members who are full partners in the BEPS process, the figure rises to 16 out of 25. And many of the individuals in key positions on the UN committee are the same people who represent their countries in the relevant OECD committees. So it would appear that for the UN to articulate any kind of alternative to the OECD, some of these people would need to set aside narrow national interest. Cynics feel that this is unlikely.

And yet the UN is doing alright. In the face of stiff opposition from a number of developed countries and the private sector, it’s ploughing ahead with a new article in its model treaty giving source countries the right to tax technical service fees. Developing countries often want such an article included when they negotiate, and they’re more likely to get it if it’s in the UN model.

I noted above that the UN’s transfer pricing manual is quite critical of the OECD approach, if only in its annex. Early plans for the manual proper had included greater divergence from the OECD approach, including discussion of fixed margins and formulary apportionment. During the drafting process these points were largely eliminated or relegated to the aforementioned annex.

If NGOs feel let down by what they see as the timidity of the UN committee, they might do well to study how their own (lack of) engagement in processes like this contributes to the outcomes in which they express disappointment. Having sat in on several sessions of the committee, I’m in no doubt that when matters like this come up for debate they stand or fall on the strength of feeling among the committee’s members, who in turn listen to the views of lobby groups. Business groups certainly think so, as evidenced by their submissions to the transfer pricing manual consultation.

If UN committee members were being lobbied at committee meetings, held to account in their home countries, and barraged with written submissions, all on the basis of a coordinated and specific agenda such as NGOs have developed for BEPS, the outcomes really would be different. That more confident exploration of unorthodox approaches proposed for the UN transfer pricing manual, for example, might well have made it into the final draft.

3. And in the long term the UN would be too unwieldy and bureaucratic a forum to be a viable home for international tax politics

I have less to say about this, because my experience of the UN is limited to the tax committee we have today. Most international relations theories accord power to international organisations in their own right, not just the sum of their members. An organisation’s power might come from its technical dominance, by exerting social pressure as monitoring reports from the OECD and IMF do, and through agenda setting, which is also a power that NGOs have. How much attention NGOs show towards an international organisation most certainly affects that organisation’s capacity to set the agenda, and its authority to speak about developing country issues.

It’s only one part of a bigger picture, of course, but nonetheless, development NGOs’ propensity to engage in media battles with Pascal Saint-Amans, and to attend OECD meetings in force, even if making critical comments, reinforces the idea that the OECD is where the action is for developing countries too. Of course the OECD can make technical reforms that help developing countries, but, since international tax is also about political settlements, I think it’s a strategic error to focus the overwhelming share of NGOs’ resources there at the expense of the UN.

Oxfam goes for the full Tanzi…but is that far enough?

“Revenue is the chief preoccupation of the state. Nay more it is the state”
– Edmund Burke

I spent the weekend with some old friends from the development sector. One of them, it now turns out, is working for a public relations consultancy. There was an awkward moment when I explained that I was working on international tax and my friend asked, with a sheepish grin, whether I was following BEPS. We were both following it from, well, different angles.

The most interesting moment in our conversation came when my friend mentioned clients’ fear of the ‘Margaret Hodge effect’. I can understand that, I thought. No company wants to see its executives thrown to the wolves in the Public Accounts Committee. But I had misunderstood.

“What my clients are concerned about,” said my friend, “is political interference in corporate tax policymaking.” I found this quite startling. Is it possible that businesses consider corporate tax policy to be a matter for private negotiations between them and the government, rather than the subject of public (and even parliamentary) debate as part of the government’s budgeting process?

The UK’s corporate tax regime has been dramatically overhauled over the last ten years, with a plummeting corporation tax rate and vast swathes of the multinational tax base exempted. This is a serious structural change in our tax system, yet there’s been barely a peep about it in public debate. And we continue to sign tax treaties, with only a cursory discussion in parliament each time. The public attention is only ever caught by the ex post impact of policy decisions in the tax returns of multinational firms. Hence why Pfizer’s bid for Astrazenica, and not the policy reforms that encouraged it, has been front page news.

I had this in mind as I read Oxfam’s new briefing paper on “Why corporate tax dodgers are not yet losing sleep over global tax reform” and Duncan Green’s blog post discussing it. Oxfam’s entry into the tax justice campaign has brought some fresh and interesting perspectives, and this is no exception. The paper argues that developing countries are unlikely to benefit from BEPS, for two main reasons:

Firstly, the business lobby currently has a disproportionate influence on the process, which it uses to protect its interests. Correcting the rules that allow the tax dodging practices of global giants like Google, Starbucks and others that lead to tax revenue losses in OECD countries will be difficult, given the size of the corporate lobby. But worse, perhaps, is that the interests of non-OECD/G20 countries are not represented at all in these negotiations.

It goes on to analyse the contributions to OECD consultations to demonstrate the overwhelming contribution from wealthy countries and business organisations. The paper calls for a three-pronged solution:

  1. Fully engaging non-G20/non-OECD countries in BEPS decision making
  2. Working towards a World Tax Authority to improve governance of international tax, along the lines proposed many years ago by Victor Tanzi.
  3. Widening the scope of the BEPS Action Plan to incorporate tax competition concerns, the redistribution of taxing rights, and reconsideration of the arm’s length principle

Oxfam, like other development NGOs, is keen to fix the problems it has observed with the OECD’s way of doing things. It is looking to change international institutional arrangements as a way of achieving this. The paper’s only real discussion about what happens at national level concerns “helping developing countries strengthen their fiscal administrations.”

This is all important stuff, but it’s missing something: a strategy to increase political engagement with corporate tax policymaking. International institutions can shape countries’ preferences and strategies, but the decisions they take (and maybe even the ways they work) are still products of the different positions taken by their member states. National politics matters.

If, as Oxfam argues, the business lobby has a disproportionate influence at the OECD, that influence won’t only be exerted at international level: it must also be applied inside the member states, who ultimately make the decisions at the OECD council. Is it wise to open up the source/residence debate within the BEPS process, as Oxfam proposes, when businesses favour reduced source state taxation? There is certainly a case for re-examining the political settlement at the heart of international tax institutions, but the outcome of such a process will surely follow the distribution of power among its participants.

If, as Oxfam also argues, developing countries are not participating in the decisionmaking, that isn’t just because the space for them is limited. It is also because they aren’t making the most of the opportunities available to them. Many of the UN tax committee’s most developing country-friendly initiatives in recent years have been led not by its developing country members but by members from OECD countries putting themselves in developing countries’ shoes, or by members from emerging economies whose interests do not always coincide with developing countries. That’s fine so long as international tax is a technical exercise, but an inclusive political process would cast these conflicts of interest in sharp relief.

Developing countries’ failure to take advantage of the opportunities that are already available to them can be seen in the tax treaties they have negotiated, comprehensively studied in an IBFD report for the UN tax committee [pdf]. Many significant clauses from the UN model treaty, which would confer on developing countries greater taxing rights, are absent from most of the tax treaties signed by developing countries. There are some examples in the chart below. I don’t know (yet) why developing countries often get such poor outcomes, but what happens in bilateral negotiations would surely occur in international negotiations too.

Use of UN model provisions in tax treaties between OECD and non-OECD countries

Source: IBFD for UN tax committee

Duncan Green situates the BEPS process in the later stages of the “Policy Funnel” (below), when “the technical content gets greater, and the chance to mobilize the public declines.” But corporate tax policy has been at that end of the funnel since the 1920s. The aim should be to drag it back towards a public debate.

The Policy Funnel (Source: From Poverty to Power)

The Policy Funnel (Source: From Poverty to Power)

What Oxfam is proposing would lead to an even larger technocratic tax community at international and national levels (a world tax organisation, and more tax authority capacity in developing countries). That may well be necessary. But what we need even more is for politicans and the public in each country to hold the technocrats to account. It seems to me that this can be done more effectively by beginning at the national level, looking at domestic tax rates, tax incentives, and tax treaties. Until that happens, I don’t think that the politicians of developing countries will pay enough attention to BEPS or anything of its ilk to get stuck into the politics and shift the centre of gravity of international corporate tax policy.

Satellites in geostationary orbit: a new tax justice issue?

Side view of Geostationary 3D of 2 satellites ...

Side view of Geostationary 3D of 2 satellites of Earth (Photo credit: Wikipedia)

When I made an amused reference to item on satellites in the new UN tax committee’s agenda, I wasn’t really sure what it was about. Richard Murphy thought it might be a plan to create tax havens in space. But, now that the UN secretariat have released some preliminary documents for the committee meeting next month, I think it may be a very good example of the differing interests of developed and developing countries in international tax.

In the most recent update of the OECD’s model tax treaty, there’s a discussion about whether a satellite in geostationary orbit (that is, always above the same point on the earth’s surface) could be a permanent establishment (taxable entity) in the country over which it orbits, or to which it transmits signals. Here is the full quote from the OECD model treaty as given in the UN document [pdf]:

5.5 Clearly, a permanent establishment may only be considered to be situated in a Contracting State if the relevant place of business is situated in the territory of that State. The question of whether a satellite in geostationary orbit could constitute a permanent establishment for the satellite operator relates in part to how far the territory of a State extends into space. No member country would agree that the location of these satellites can be part of the territory of a Contracting State under the applicable rules of international law and could therefore be considered to be a permanent establishment situated therein. Also, the particular area over which a satellite’s signals may be received (the satellite’s “footprint”) cannot be considered to be at the disposal of the operator of the satellite so as to make that area a place of business of the satellite’s operator

The OECD position is unanimous and, so it suggests, inevitable based on other aspects of international law. But consider this: most of the world’s commercial satellites are owned by companies resident in OECD countries. Many (perhaps all) developing countries have satellites permanently orbiting over them and broadcasting signals onto their territory, while down at ground level they have no companies making profits from this industry. Under the OECD position, there is no possibility of developing countries raising corporate income tax from this sector.

There may be a philosophical discussion that is much broader than tax, as the OECD commentary suggests, about ‘how far the territory of a State extends into space’. But I imagine that the consequence of the point about the satellite’s ‘footprint’ is that a state has no right to treat a satellite as a taxable entity if it is, say, broadcasting commercial TV to its residents, or providing GPS positioning to people on its territory.

If my assumptions are correct, that makes for quite an interesting discussion. A quick hunt around online suggests, for example, that the fixed position of a satellite in geostationary orbit means that it is not considered as movable property as far as US state tax is concerned – which might imply that it is a fixed place of business for international tax purposes. What would be the positions of the BRICS, some of which have their own burgeoning space sectors? Already, an OECD consultation document [pdf] implies that there were disagreements on this issue among its members.

I would guess that smaller developing countries have not considered this matter at all. In any event, I will certainly look forward to the discussion in October!