Why I love the United Nations tax committee
Martin Hearson, who attended a UN tax committee meeting held in Geneva on 15-19 October, provides a glimpse of the continuing battle between the rich and poor countries on the issue of international taxation and explains why this issue goes to the heart of global political economy.
INTERNATIONAL tax, the way countries coordinate and negotiate tax rules between themselves, is often talked about as if it's about finding technical solutions to technical problems. But it's not. Just as the tax system inside a country is at the absolute core of its political debate, so you can look at international tax and see right to the heart of global political economy. What I love about UN tax committee meetings, such as the one I attended in October, is that you can see this in action.
Take transfer pricing, the system through which, in most cases today, the right to tax multinational companies is divided between the countries in which they operate. The pre-eminent international standards defining how this works in practice are the guidelines set by the Paris-based OECD, broadly speaking the world's 'developed' countries. The OECD's guidelines are facing a number of challenges.
Many of these challenges are technical, because the foundations of the transfer pricing were laid at a time when most international trade revolved around physical commodities, whereas today much of the most valuable parts of the economy are intangible and footloose things such as business services, finance and intellectual property. These criticisms and proposals for alternative systems were given a good airing at a Tax Justice Network conference in Helsinki earlier this year.
But transfer pricing also faces a political problem. The OECD itself can no longer count many of the most significant economic players amongst its members. Take note in particular of China, India and Brazil. These countries aren't content to be 'rule takers', and their economic weight means that they don't need to be too concerned about the repercussions of diverging from international standards. Instead, they use OECD guidelines when it suits their interests, but are quite willing to do their own thing at other times.
These countries and the OECD have been locked in a battle for some time over the UN tax committee's new practical manual on transfer pricing in developing countries, approved by the committee on 15 October despite howls of protest from the United States Council for International Business. The eventual document asserts its consistency with the UN's model convention, which in turn refers to the OECD guidelines, despite USCIB's anxiety that parts of it 'undercut' the OECD. But it also includes an appendix which outlines the Brazilian, Chinese, Indian and South African approaches.
So far, so timid, but as someone said on 15 October, 'the baby has been born'. The UN now has a foot in the door on transfer pricing, and over time it would be possible for its manual to gradually diverge from the OECD's guidelines, just as its model convention and that of the OECD have been diverging for some time.
All this is important because of fundamental differences between the characteristics of developing and developed countries' economies. Larger developing countries are choosing to remake the transfer pricing system, not just with a few technical fixes, but to make a grab for a greater share of the 'taxing rights' over multinational businesses. The Chinese approach, for example, starts from the idea that value is distributed unfairly within the global economy, and quite explicitly seeks to correct for this in its transfer pricing system. The fundamental basis of the OECD approach to transfer pricing is that taxing rights should follow the distribution of value in the free market.
In tax language, this is the balance between 'source' and 'residence' taxation. A typical example to explain these terms is a multinational company with its HQ, or residence, in the US, and some of the business activities that are the source of its profits taking place in India. (It gets more complicated, because the countries I'm talking about here, in contrast to smaller developing countries, have enough multinational companies of their own that they are also residence countries vis-a-vis much of the world.)
At the UN tax committee, participants talk openly about the balance between source and residence taxation. Shifting the balance towards source taxation would mean that less developed countries gain more. Indeed, it was in exactly these terms that a proposal to update the UN's model tax convention to allow source countries to tax technical service, management and consultancy payments made to someone abroad was discussed at the October meeting. Conversely, changes made by the OECD to its model convention have previously been rejected by the UN committee for inclusion in its updated convention because they pulled the balance towards residence and away from source.
The really interesting question is what will happen to this international tax architecture in the future. Will the OECD manage to bring the BRICS (Brazil, Russia, India, China and South Africa) inside its tent, will they continue to do their own thing and drive a movement towards a more multi-polar international tax system, or will the UN emerge as the forum in which the interests of source and residence countries are reconciled through inclusive international standards?
The October meeting of the UN tax committee saw an interesting exchange tinged with a certain irony.
In the run-up to the meeting, the United States Council for International Business had written a pretty angry letter to the committee, copying in half the US Treasury, complaining about the committee's new practical manual on transfer pricing. USCIB has some process concerns, and wants a public consultation, but its content issues focus on trying to excise any remaining text in the manual that is not watertight in its endorsement of the OECD transfer pricing guidelines.
In the tax committee's parent body, the UN's Economic and Social Council (ECOSOC), a debate has been raging for some time about the committee's 1) funding and 2) status. As the responses to last year's consultation show, developing countries want 1) more funding and 2) an intergovernmental status for the UN's tax work, while the OECD countries want 1) no more funding and 2) no change to the committee's status.
So it was amusing to hear the tax committee's Mexican chair respond to USCIB's concerns by stating that the committee 1) had no funds to organise a public consultation, and 2) wasn't obliged to take on board any comments, since it is purely a committee of experts expressing their individual opinions, not an intergovernmental body. 'Please keep your intervention short, as there is no room for negotiation on this,' was his last word to USCIB. I wonder if business will consider supporting increased resources and status for the committee as a result?
The committee then agreed the manual as drafted, although this was followed by a remark from the United States official observer to the meeting suggesting that, since the manual is a 'living document', it might seek to implement USCIB's suggested deletions after the membership of the tax committee changes next year.
This wasn't the only US-versus-the-World moment of the tax committee meeting. On 16 October the committee agreed to start work on a new article for its model convention that would give developing countries the right to tax payments for technical services, management and consultancy fees made by their taxpayers to people resident overseas. Depending on how it's done, this could be seen either as a step to help tackle 'base erosion and profit shifting' (a form of tax dodging that we can refer to as 'BEPS') or as a fundamental shift in the balance of taxation towards developing countries.
Numerous developing-country representatives spoke up in what was an animated session, all describing the pressing need for this change to help them tackle BEPS. In contrast, official observers from the US and UK (two countries that are probably big recipients of the kinds of fees to be taxed) not only argued for the need to clarify between the two possible aims, but also cast doubt on the developing countries' argument that there was a problem at all.
The committee noted their objection and carried on regardless.
Martin Hearson is a doctoral researcher in the international relations department of the London School of Economics and Political Science with a focus on the political economy of international taxation in developing countries. The above is reproduced from a posting that appeared over two parts on his blog martinhearson.wordpress.com.
*Third World Resurgence No. 268, Dec 2012, pp 30-31