Speakers from intergovernmental organizations of developing countries discussed successes and failures from the OECD's inclusive framework on base erosion and profit shifting project during a Tax Justice Network virtual conference entitled Ten years of corporate tax failure? Beyond the OECD proposals.
Negotiations among 141 participating jurisdictions with more than 90% of global gross domestic product have produced a real opportunity for profit sharing, according to Marilou Uy, director of the secretariat for the Intergovernmental Group of 24 on International Monetary Affairs and Development.
"What this process has done is to release the genie from the bottle — the prospect of actually sharing profits with market countries," Uy said. "The task ahead, if there is no multilateral solution in the OECD, is that countries can then explore possibilities to make that happen within their own jurisdictions with, let's say, more sympathetic treaty partners."
The OECD has said the two-pillar plan would require governments from a critical mass of jurisdictions to ratify forthcoming multilateral conventions, or MLCs, on elements outlined in a statement signed by officials from 137 jurisdictions in October. Experts have raised doubts that key nations such as the U.S. will ratify a forthcoming multilateral treaty on Pillar One, which would require them to share taxing rights on 25% of profits above a 10% margin earned by multinational companies grossing over €20 billion ($20.8 billion) globally.
"If the ratification drags out," Uy said, countries may explore "flexibilities within their treaties to improve the taxation at source."
G-24 members Nigeria, Kenya, Pakistan and Sri Lanka each participated in the inclusive framework negotiations, but all four opted not to sign the statement in October, expressing various reservations, including over a mandatory dispute resolution mechanism. On Pillar Two, the plan for an effective minimum tax rate of 15% on income multinational companies grossing €750 billion earn worldwide, Uy said her organization wanted a minimum rate of at least 20% to match higher rates and higher reliance on corporate income tax revenue among developing countries.
Ireland, Hungary and Estonia all opposed a proposal championed by President Joe Biden's administration in early 2021 for a minimum rate of "at least 15%." Irish finance minister Paschal Donohoe said during a news conference that he had succeeded at persuading drafters to signal lower ambitions for hiking the minimum rate during the planned review process by removing the phrase "at least."
"The big problem is that silence is consent, basically, in the existing setting," said Dr. Nara Monkam, who recently left the African Tax Administration Forum and in August will join University of Pretoria as an associate professor of economics. "It is very important that countries join the inclusive framework because they want to join, and not because they have been forced into doing so."
The MLC on Pillar One will require parties to remove "all digital services taxes and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future," according to the October statement. France, the United Kingdom, Turkey and dozens of other jurisdictions levied DSTs outside the bounds of existing treaty arrangements, agreeing to pause and repeal the unilateral measures mentioned in the so-called global tax deal.
DSTs are measures governments have aimed at large multinational corporations with highly digitized operations that use the century-old transfer pricing system to erode tax bases in jurisdictions where real economic activity takes place.
Abdul Muheet Chowdhary, senior program officer on international tax at the intergovernmental South Center think tank, told the audience that the OECD's secretariat cannot function independently enough to address concerns raised by officials from lower-income jurisdictions. In 2013, the Group of 20 countries tasked the OECD with organizing negotiations because wealthier nations faced tax revenue shortfalls during the 2008 financial crisis, which Chowdhary said motivated officials from wealthier nations to bring governments from lower-income countries into the BEPS negotiations.
"Many African governments are concerned that this plan for taxing the digital economy may not go far enough to address the problems they actually face," Monkam said.
For example, the African Union said "to be effective in protecting the African tax base and stemming artificial profit shifting out of Africa," the minimum rate should be at least 20%, according to Monkam.
Monkam said she agreed with Chowdhary that the best path forward would be to create "an independent secretariat that responds to institutions beyond the OECD and G-20," including on technical assistance and capacity-building to help them implement the two-pillar plan, as well as economic impact analyses.
Only a secretariat independent of the OECD and G-20 could have the proper incentives needed to address concerns raised by the United Nations Tax Committee, the African Union, the G-24 and others, panelists said. The global tax deal is evidence that the inclusive framework makes decisions based on consensus, but only among governments in the G-20 and the OECD, panelists said.
Alex Cobham, executive director of the Tax Justice Network, said research by his organization, the EU Tax Observatory, the South Center and others established "a set of facts," which can help assess whether the two-pillar solution makes sense for developing countries.
According to those facts, he said, lower-income countries lose the largest share of their revenues due to corporate tax abuse, have the smallest voice in the international rule settings and have the least access to country-by-country reporting that would allow them to evaluate the OECD proposals.
Cobham mentioned another concern raised by panelists that the inclusive framework does not provide public access to a record of deliberations, which limits researchers studying what took place during the negotiations from both governments and nongovernmental organizations alike.
"As long as we have a consensus-based system in complete secrecy and opacity, the role of big power politics" will drive decisions related to inclusivity, Chowdhary said.
Beyond the U.S. government ratifying, he said, ratification by Japan, the U.K., China, Switzerland and France "is really important to the functioning" of the new taxing right envisioned in Pillar One, known as Amount A.
The OECD secretariat hosted fast-paced, highly technical in-person negotiations in destinations that were prohibitively expensive for governments with less means, showing a disregard for developing countries' needs, Chowdhary and Cobham said.
The U.S. enactment of the Foreign Account Tax Compliance Act
in 2010 similarly disregarded the developing world, according to Monkam.The measure required foreign banks to exchange information on American citizens' accounts or face a 30% withholding tax on payments from the U.S., which effectively penalized jurisdictions that didn't cooperate through bilateral intergovernmental agreements. While the FATCA regime pressured foreign governments to share the troves of data useful for combating tax base erosion, the U.S. government did not reciprocate.
"And you saw that, in the end, it was their way that basically prevailed," Monkam said. "Taxation is a purely sovereign matter. ... We are literally asking these countries to be altruistic and think about others beyond themselves."
The OECD did not immediately respond to a request for comment.
--Additional reporting by Natalie Olivo, Dylan Moroses, Todd Buell, Matt Thompson and Vidya Kauri. Editing by Roy LeBlanc.
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