Carlos Correa, who leads South Center, said policymakers in developing economies need more fiscal space, given the COVID-19 pandemic and the war in Ukraine. His remarks came a day after he spoke at a high-level meeting of major nations on monetary affairs. Correa said the Group of 24 on International Monetary Affairs and Development, or G-24, should adopt a tougher stance at global forums where it's an official observer regarding the so-called global tax deal, a political agreement signed in October to fundamentally rewrite international tax rules.
"The South Center joins ranks with fellow Global South organizations like [the African Tax Administration Forum] in supporting developing countries who reject the deal and opt for alternative solutions," Correa told the G-24, according to a statement dated Tuesday.
South Center is a Geneva-based intergovernmental organization funded through voluntary contributions from a pool of 54 developing countries. Since 1995, it has consulted with governments and organizations to coordinate efforts and expertise that promotes their members' common interests within international groups such as the Organization for Economic Cooperation and Development and the United Nations.
The OECD, funded by 38 mostly wealthy member countries, brought developing economies into the fold through the so-called inclusive framework on base erosion and profit shifting for the global tax deal. OECD officials have said the deal would help stabilize the global tax system, but Correa noted the global economic picture has changed dramatically since last fall.
"The tremendous cost of the pandemic response and the pandemic-induced collapse of government revenue have diminished massively the fiscal spaces in developing countries," he told the G-24 on Tuesday, according to the statement. "Therefore, they had no capacity to mount meaningful stimulus packages to spur economic growth which is the main driver of tax revenues, the primary and most reliable source of domestic public resource mobilization."
Nigeria, Kenya, Pakistan and Sri Lanka "outrightly refused the 'two-pillar solution,'" the South Center said, referring to the global tax deal facilitated by the OECD, which involves both a reallocation of taxing rights among countries and a global minimum tax. The developing country group noted that half of Africa aren't members of the organization's inclusive framework, which includes 141 countries and territories. Only 137 signed the most recent political agreement.
"Thus, the deal is far from global, and developing countries have a wide range of tax policy options available to them for taxing the digitalized economy apart from Pillar One," the South Center told the G-24.
Pillar One of the global deal, an attempt to base a share of taxing rights on where sales are made, rather than where companies attribute profits under the transfer pricing system, includes a broad, permanent ban on unilateral measures it would replace if enacted. The ban covers all measures similar to digital services taxes, which are attempts by governments to recapture money multinational corporations siphon from economies through remote sales.
"The sovereign rights of these countries to tax [multinational enterprises] as they see fit must be respected," the South Center told the G-24 on Tuesday.
In March, senior officials at several international organizations said developing countries should not have to abandon their digital tax measures while the global deal hinges on U.S. ratification.
Unilateral "coercive measures" to limit countries' rights to impose such taxes, which the U.S. government has threatened to levy under Section 301 of the Trade Act of 1974, "must be unambiguously condemned," the South Center told the G-24.
Correa said any "action taken by the United States in order to prevent countries from putting in place unilateral measures is clearly illegitimate."
The U.S. Trade Representative has, for many years, targeted governments of China and India, both South Center members, in the so-called Special 301 report, a congressionally mandated annual review of intellectual property rights protection and enforcement around the globe.
The World Trade Organization has been tasked by member countries to develop rules governing international trade and to resolve disputes.
Many inclusive framework members have voiced concerns, saying it's unclear what they'll receive in return for giving up digital services taxes — working solutions to the problems the deal hopes to solve — beyond certain rules part-and-parcel to the deal's proper functioning, which may or may not favor them depending on details not yet publicly finalized.
Either way, experts have said the U.S. Congress is highly unlikely to pass such a deal that would reallocate tax payments by American companies to foreign governments regardless of their tax structures.
On Tuesday, the G-24 published a communiqué with views on the global economic situation, including positions on greater access to COVID-19 vaccines, the challenges posed by digitalization and actions by the International Monetary Fund. The communiqué does not include any direct references to taxes.
The OECD did not immediately respond to a request for comment.
The USTR did not respond to a request for comment.
The G-24 did not respond to a request for comment.
--Editing by Neil Cohen.
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