India's onslaught highlights 'divide' over UN tax committee's role
While it is clear that a truly global body comprised of developing and developed countries is needed to effectively tackle the problem of tax evasion by transnationals, the rich countries have stymied all efforts to enable the UN with its universal membership to take on this role. Instead these countries have sought to promote the OECD - the 34-member exclusive club of rich nations - as the sole body to set the norms of international taxation. But as the following article by Andrew Goodall reveals, revolt is in the air.
OECD guidelines on transfer pricing and other international tax issues protect the interests of OECD countries only and it is 'improper' to suggest that they represent internationally agreed guidance, the Indian government has claimed.
It was 'extremely important' that the UN Committee of Experts on International Cooperation in Tax Matters be 'upgraded' to an intergovernmental commission, India said in a letter to the UN ahead of a 'special event' on international tax cooperation held on 15 March.
The status of the UN committee continues to divide developing and developed countries despite agreement on the importance of the UN's work, according to a summary of the meeting.
The meeting of the UN Economic and Social Council (ECOSOC) considered a report, 'Role and work of the Committee of Experts on International Cooperation in Tax Matters', in which the UN Secretary-General said the UN's tax work should be focused on providing a leadership role 'in areas where there are gaps'.
'Are the global tax tectonic plates shifting?' the ICAEW (Institute of Chartered Accountants in England and Wales) Tax Faculty asked in an item published before the outcome of the meeting was known, noting that there had been 'much talk in recent years' of upgrading the committee. ECOSOC intended to revisit the issue of international cooperation in tax matters in July.
The Secretary-General wrote in his report: 'The UN, thanks to its universal membership and its legitimacy, can be a catalyst for increased international cooperation in tax matters for the benefit of developed and developing countries alike. Since the great majority of UN Member States are not members of either OECD or the G20, it is the role of the UN to ensure the active participation of developing countries, including the least developed countries, in international tax cooperation activities, which will ultimately be of benefit to them. Only if this level playing field is achieved, can enhanced tax cooperation be truly respected as global.'
The UN tax committee comprises 25 members 'nominated by governments and acting in their expert capacity'. The UN's Financing for Development website says: 'The members, who are appointed by the Secretary-General after notification is given to ECOSOC, for a term of four years, are drawn from the fields of tax policy and tax administration and are selected to reflect an adequate equitable geographical distribution, representing different tax systems.'
'Truly universal and inclusive'
An executive summary of the meeting, published on the UN's Financing for Development website, said: 'Developing countries emphasised the need to establish a truly universal and inclusive body for international tax cooperation at the intergovernmental level, which would embody democratic principles on a level playing field by giving developing countries a "full seat" and "equal voice" at the table and thus supported the conversion [of the UN tax committee into an intergovernmental body].
'Developed countries, on the other hand, opposed the conversion and proposed to focus on improving the effectiveness of the current structure and making sure that existing resources were used most effectively.'
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, 'called for enhanced involvement of the UN Secretariat in the work of OECD, including UN participation as an observer in the OECD Committee on Fiscal Affairs'.
India's representative had confirmed 'India's position that it was extremely important to bring the UN work on international tax matters into the intergovernmental process by upgrading the Committee of Experts to an intergovernmental commission'.
In a 'letter from India' (reproduced below), also published on the ECOSOC website, Sanjay Kumar Mishra, Joint Secretary of the Central Board of Direct Taxes - part of the Department of Revenue in India's Ministry of Finance - said the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines had been developed 'on the basis of consensus arrived at by the government of 34 countries (all developed countries)'.
It was 'inconceivable', he said, 'as to how a standard developed by government of only 34 countries can be accepted by government of other countries as "standard" of sharing of revenue on international transactions between source and resident country, particularly when it only takes care of the interest of developed countries and has seriously restricted the taxing powers of source country'.
A covering note from India's Ambassador to the UN indicated that the letter conveyed the Indian government's views on the Secretary-General's report. The members of the UN tax committee from China and Brazil 'generally supported' the Indian government's position on this issue, said David Spencer, Senior Adviser to the Tax Justice Network (TJN).
The TJN has called for an 'objective analysis' of transfer pricing issues in the context of developing countries, arguing that 'the OECD's theory of the arm's-length principle no longer applies to multinational enterprises which are highly integrated' and that 'comparables in many if not most cases cannot be found'.
The group said a draft Transfer Pricing Manual being prepared by a subcommittee of the UN tax committee referred to an 'information deficiency problem'.
This was, the TJN said, 'the problem faced by developing countries in getting sufficient information, including comparables, about the activities of multinational corporations'.
TheTJN reiterated its support for country-by-country reporting, 'whether countries adopt the OECD's Transfer Pricing Guidelines, or a modified arm's-length principle, formulary apportionment, or a mixed system'.
Andrew Goodall is the News Editor of Tax Journal, from which this article is reproduced (Issue No. 1118, 13 April 2012).
'UN tax committee must be upgraded to an intergovernmental commission'
The following is extracted from a letter dated 12 March 2012 from Sanjay Kumar Mishra, Joint Secretary in the Indian Ministry of Finance, to Alexander Trepelkov, Director of the UN Financing for Development Office. The letter conveyed the Indian government's views on the UN Secretary-General's report on 'Role and work of the Committee of Experts on International Cooperation in Tax Matters'.
INDIA in its comments to the United Nations to the Note Verbal 10/340 dated 1st December, 2010, had stated that it will support Inter-Governmental Commission over the existing Committee of Experts on International Cooperation in Tax Matters. India reiterates its stand on this issue.
2. India would like further to state that the Inter-Governmental Commission with a balanced representation from the Governments of developing and developed countries, could play a crucial role in fostering dialogue and cooperation between national tax authorities and in promoting North-South, South-South and multilateral cooperation.
3. The United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model Convention), while avoiding double taxation, allocates a greater share of tax revenue to the source country. Contrary to this, the OECD Model Tax Convention on Income and on Capital (OECD Model Convention) does not recognise the right of taxation of the source country in many cases.
3.1 In the case of Transfer Pricing, although it is governed by domestic legislation of each country, the OECD countries have agreed on common transfer pricing guidelines known as OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Transfer Pricing Guidelines). These guidelines on transfer pricing only reflect the agreements amongst Government of those countries that are members of OECD (developed countries) and accordingly tend to take care of interest of only developed countries. The guidelines do not give right of taxation to source countries accordingly eroding taxing rights of developing countries.
3.2 Even though OECD Transfer Pricing Guidelines do not address the concerns of developing countries, paragraph 3 of the proposed UN Model Convention Commentary of Article 9 indicates that the former non-governmental Group of Experts (year 1999) had stated that all the countries including developing countries will follow the OECD principles as set out in the OECD Transfer Pricing Guidelines for the reasons that these guidelines represent internationally agreed principles. The former expert group had also recommended that the Guidelines should be followed for application of the arm's length principles. However, it has been clarified in the new commentary that 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 session. India believes that the Committee of Experts does not have jurisdiction to decide the critical issue of whether the OECD Transfer Pricing Guidelines agreed by Governments of developed countries should be followed by the Governments of the developing countries when these Governments are not party to the OECD Transfer Pricing Guidelines. India does not believe that the decision of the former Group of Experts can be interpreted that subsequent revision of OECD Guidelines (after 1999) will automatically become the internationally agreed standards and United Nations guidance will automatically change without participation and agreement by non-OECD countries. India believes that taking such a decision was not within the purview of the non-governmental Committee of Experts (1999) and should be revoked immediately.
3.3 The Committee of Experts has constituted a sub-committee consisting of 13 members of the developed and 7 members of the developing countries with a mandate to develop a practical manual on transfer pricing based on the following principles:
(a) That it reflects the operation of Article 9 of the United Nations Model Convention, and the Arms Length Principle embodied in it, and is consistent with relevant Commentaries of the UN Model.
(b) That it reflects the realities for developing countries, at their relevant stages of capacity development.
(c) That special attention should be paid to the experience of other developing countries.
(mandate as provided by 5th Annual Session of Committee, 19-23 October 2009)
It is evident from above that the mandate does not require that United Nations guidance should be based on OECD Transfer Pricing Guidelines. However, there is a strong view in the sub-committee that due to the decision taken by the earlier group of experts in 1999, the sub-committee should not deviate from existing OECD Transfer Pricing Guidelines. India believes that OECD Transfer Pricing Guidelines cannot be imported to UN guidance particularly when such recommendations of the group in 1999 are not considered by the present committee and are beyond the scope of the non-governmental committee. It is important to note that contrary to the inter-Governmental composition of OECD, at present, all the experts of the UN Committee are working in their individual capacity. Since the majority of members of the sub-committee are from OECD countries who are also Government representatives in WP6 of the OECD, there is a tendency to discuss only OECD work, ignoring practices in developing countries.
3.4 In view of the above, India requests that the United Nations may consider constituting Inter-Governmental Commission (including subcommittees), having representatives from Governments of the developed and developing countries, on various issues relating to International Taxation and Transfer Pricing, to develop guidelines on the basis of consensus amongst Government of all countries which take care of the interests of the developing countries. Further, in developing such guidelines, the recommendations of the Committee of Experts (1999) that the OECD principles as set out in the OECD Transfer Pricing Guidelines should be followed, must be ignored.
4. India further believes that in the revision of the UN Model Convention, which is due to be released on 15th March, 2012, concerns of developing countries have not been taken into consideration, as it has been developed by the Group of Experts and sub-committees having non-governmental representatives and disproportionate representations from OECD countries. India will submit its detailed comments once the revised UN Model Convention is made public.
5. India is also aware of the concerns of the OECD on the work of the United Nations to develop standards in the areas of international taxation and transfer pricing due to the reason that it would be duplication of work. India does not agree with this concern for the following reasons:
(i) The OECD Model Tax Convention and OECD Transfer Pricing Guidelines have been developed on the basis of consensus arrived at by the Government of 34 countries (all developed countries). These guidelines only protect the interests of OECD countries which are parties to such convention. Since the Governments of developing countries are not party to the Guidelines, it is improper to suggest that they represent international agreed guidance knowing fully well that concerns of developing countries have not been taken care of in the OECD Model Convention and OECD Transfer Pricing Guidelines.
(ii) It is inconceivable as to how a standard developed by Government of only 34 countries can be accepted by Government of other countries as 'standard' of sharing of revenue on international transactions between source and resident country, particularly when it only takes care of the interest of developed countries and has seriously restricted the taxing powers of source country.
(iii) Views of OECD and UN on sharing of tax revenue by developing and developed countries are not the same and accordingly concerns of duplication of efforts should be ignored.
6. The above steps would require additional resources and strengthening the Secretariat. India supports the fundraising efforts for this purpose and is of the view that it should not only be on the basis of voluntary contribution. India further offers technical support by way of experts and staff for the Secretariat.
7. India also offers technical assistance including by way of providing space and resources for training facility in the areas of international taxation and transfer pricing for training the officers and staff from developing countries.
*Third World Resurgence No. 268, Dec 2012, pp 27-29