An insight on Global tax governance in the G20 and the OECD: What can be done?

By Irma Mosquera Valderrama

One of the objectives of the project on Global Tax Governance (GLOBTAXGOV) is to investigate international tax law making by the G20 and the OECD and to develop a new model of global governance. This is done not only by doing desk research on international and political science theories, but also by participating actively in these forums. The participation of GLOBTAXGOV in these meetings has been made possible thanks to the  Starting Grant  awarded to the principal investigator of this project by the European Research Council (ERC).

The first example is the participation in the Think20 (T20) summits under the G20 presidency of Argentina in Buenos Aires and also the contribution as one of the authors to the tax policy brief on Tax Competition. In a nutshell, the Think20 (T20) is a network of research institutes and think tanks. The T20 provides research-based policy advice to the G20, facilitates interaction among its members and the policy community, and communicates with the broader public about issues of global importance. In the said brief on tax competition, “we recommended the G20 leaders to take action to strengthen multilateral and cooperative approaches to taxation, curtail harmful tax competition and protect their own tax base as well as that of developing countries”.

The second example is the participation as one of the academic experts at the OECD meeting on certainty and treaty policy that took place last week (12/13 September) at the OECD headquarters. This meeting gathered academic experts, OECD and government officials with the aim to find ways to achieve certainty in tax treaties and also to contribute to solve some current problems in tax treaties.

The OECD, with the political mandate of the G20, has started two of the main international tax law projects in the last decade. The first one is the introduction of the standard of exchange of information and the second one is the introduction of the BEPS Project to prevent profit shifting by multinationals. Due to the number of countries including developing countries taking part in these initiatives (more than 100 of the 193 countries around the world), it is important to assess whether these initiatives can be improved to achieve legitimacy and fairness vis-à-vis developing countries.

By participating in these events, there are some preliminary observations that can contribute to understand how international tax law making is taking place?, and what needs to be done to take into account the needs of developing countries?

The first observation is that even though tax issues have been important in the G20 Agenda in the last decade, the issues addressed are the ones highlighted by the OECD Secretariat and by the agenda of the country having the G20 Presidency at that time. Two examples can illustrate this, first during the German Presidency attention was given to tax certainty which was also developed in a T20 Policy brief presented during the German Presidency to the G20. Tax certainty has been taken upon by the G20 in the 2017 Leader’s Declaration. In the declaration, the G20 leader’s stated their willingness to work on enhancing tax certainty. This has been also followed by the OECD in the current agenda, as well as in the update on tax certainty provided in an Annex July 2018  report by the OECD to the G20 stating the following initiatives to achieve tax certainty:

“For this update, the data obtained from the OECD business survey of 2017 was re-analysed to try and understand the importance of tax certainty for developing countries. Also, a workshop held in Tanzania in 2017 highlighted the importance of tax certainty for governments in developing countries. Several initiatives are discussed in the 2018 Report that aim to enhance tax certainty in developing countries, such as toolkits by the Platform for Collaboration on Tax, Medium-Term Revenue Strategies, the wide array of IMF technical assistance work in revenue mobilization (tax policy design, legal drafting, and tax  administration),  and  the  progress  made  with  the  tax  administration  diagnostic  assessment  tool  (TADAT).”

— July 2018 OECD Secretary General Report to Finance Ministers (at 9).

The second observation is that in the G20 Argentinian Presidency attention was given to trade and economy including the challenges arising from digital economy rather than to the issues raised by the T20 such as for instance tax competition.

Unlike the issue of tax certainty which was taken upon by the G20 during the German Presidency, the issue of tax competition addressed in the T20 policy brief has not been taken upon by the above-mentioned March/ July 2018 Communiqués of the Finance Ministers neither by the OECD nor by the September 2018 T20 Communiqué.

Accordingly, the March and the July 2018 Communiqués of the G20 Finance Ministers and Central Bank Governors refers to the OECD March Interim Report of the G20/OECD Inclusive Framework on BEPS on the Tax Challenges arising from Digitalisation and to the two  (March and July) 2018 OECD Secretary-General Report to Finance Ministers.

In respect of taxation, the T20 Communiqué presented on 18th September 2018 proposes to “Strengthen cooperation on corporate taxation and set up an intergovernmental panel on taxation in the digital economy to promote a fair international tax regime” (Proposal 14). The Communiqué contains “the engagement groups  public policy recommendations which the group believes should be priorities at the G20 Leaders meeting at the end of the year.

The July 2018 OECD Secretary General Report to Finance Ministers focuses on the development of a more coherent and transparent (regional) processes for the granting of tax incentives mainly in the framework of harmful tax competition. According to the July 2018 OECD Report (at 92) at the Consultative Workshop on Tax Certainty that took place on 25 to 27 October 2017 in Tanzania, one of the conclusions of the delegates was that “the discretionary powers with regards to the introduction of tax incentives should be with the Ministries of Finance, supported by tax administrations. Delegates concluded that cost based incentives are preferred over profit based incentives, and that some regional cooperation is required (e.g. codes of conduct with guiding principles to prevent harmful tax competition”.

Following these developments, some questions that should be addressed are for instance: are the consultative workshops including the 2017 workshop in Tanzania and the  September 2018 OECD meeting on tax certainty organized by the OECD sufficient to achieve legitimacy and fairness for developing countries? is the work of the OECD and the Platform for Collaboration on Tax sufficient to address the needs of developing countries? and if not what can be done to achieve global tax governance?

In my view, the agenda for global tax governance is an OECD-G20 policy driven agenda. In this process there is a misalignment between what developing countries need and want to achieve with global tax governance and what developed (OECD and G20) countries have done to ensure that the needs of developing countries are being met. The best example is that the discussion in global tax governance focuses on ways to reduce harmful tax competition and profit shifting by multinationals but there is not yet proof that these initiatives will help developing countries to reduce the inequalities between countries  which is one of the goals of the 2030 Sustainable Development Agenda (SDG10). Even though there is attendance and participation of developing countries in international tax conferences and consultative workshops, there is still a lack of resources for these countries to participate in all conferences/workshops including participation in training abroad regarding BEPS, tax treaties, and tax incentives.

Therefore, we call for the OECD and G20 countries to expand the agenda for developing countries. Thus, not only toolkits and consultative frameworks that aim to improve the ability of the states of collect taxes by restricting BEPS practices, but also initiatives to achieve fairness for developing countries. This means then, that OECD and G20 countries should be prepared to develop initiatives for revenue sharing among developed and developing countries, provide developing countries with adequate financial resources to participate in decision-making fora, develop new ways to allocate taxing rights between residence and source, and addressing tax competition beyond the OECD approach to harmful tax competition taking into account the need of developing countries to be attractive for investors.

To discuss Tax Competition and Tax Expenditure in the context of the Argentinian Presidency of the G20, as well as introducing the work of the Global Tax Governance (GLOBTAXGOV) project, we will be organizing a T20 Associated Event  Seminar on the Pathways to global tax governance. Perspectives from the Netherlands and the Think20 network. This seminar will take place on the 7th of November at the Leiden University Campus in the Hague, the Netherlands (more information soon).

Note: An edited version of this article was originally published on the Leiden Law Blog.