Tax cooperation: Reflections from the 13th Annual Columbia International Investment Conference

By Irma Mosquera Valderrama

At the 13th Annual Columbia International Investment Conference: “Rethinking International Investment Governance: Principles for the 21st Century”  organized by Columbia University in New York, we addressed the key priorities and opportunities for international tax cooperation for an investment governance agenda.

The aim was to provide an assessment of international tax cooperation, and to provide some priorities and opportunities for engagement in international tax cooperation and investment governance. We investigating these changes as part of a 5-year project funded by the European Research Council on international tax law making by the G20, the OECD and the EU (GLOBTAXGOV: Global Tax Governance). The main content of the presentation is provided in this blog, since in the conference there were not power point presentations, but rather a roundtable discussion with specific key points.

1. Current assessment of international tax cooperation

International taxation is changing from a bilateral approach towards a multilateral approach. In the past, there have been some regional developments, mainly in Latin America and in Africa (Andean Community treaty, East African Community Treaty), but the use of these treaties is limited.

This is due to the work of the OECD —with the political mandate of the G20— that has introduced multilateral initiatives to change the international tax regime. It started with the global standard on exchange of information and more recently (since 2012) with the international standards of the base erosion profit shifting project (BEPS). BEPS tackles the gaps and mismatches of tax regulations in different parts of the world, aiming to prevent multinationals to engage in aggressive tax planning.

These standards shape today the international tax architecture and as this post is being written, more than 110 countries across the globe are participating in the BEPS Inclusive Framework for the implementation of these standards. In addition, more than 80 countries have signed a BEPS Multilateral Instrument that changes international tax treaties for the countries that have signed this instrument. This instrument is now in force (1 July 2018).

The work of the OECD, as well as that of the Platform for collaboration on tax (World Bank, IMF and UN), have been linked to sustainable development mainly by promoting initiatives to achieve domestic resource mobilization (SDG 17.1). For instance, by providing technical assistance to developing countries to design their tax regimes to implement these standards. This technical assistance has taken place by introducing pilot (twinning) projects and by providing toolkits (e.g. tax incentives, tax treaties, transfer pricing analysis).

Despite the use of these standards by more than 110 countries, the creation of a BEPS Inclusive Framework for the implementation of the standards in developed and developing countries, and the reference to domestic resource mobilization, this current international regime has three shortcomings:

  1. Problems of legitimacy vis-à-vis developing countries: The priority of the G20, OECD is for countries to commit to the implementation of the BEPS Inclusive Framework and to provide technical assistance when needed. The content of the BEPS Project has been decided by member countries of the G20 and OECD including OECD Accession countries (BEPS 44 group). Some countries, mainly developing countries, are committing to this Framework due to their need for technical assistance in transfer pricing, or in tax treaty application. I have argued in the past, that the BEPS Project lacks of input and output legitimacy — see I. J. Mosquera Valderrama (2015), Legitimacy and the Making of International Tax Law: The Challenges of Multilateralism, World Tax Journal 7(3): pp. 344-366.). I have also argued that analysis of the implementation of BEPS demonstrated that a one-size-fits all approach does not work, and that therefore, regional approaches should be implemented — see I.J. Mosquera Valderrama (2015), The OECD-BEPS Measures to Deal with Aggressive Tax Planning in South America and Sub-Saharan Africa: The Challenges Ahead,Intertax 43(10): pp. 615-627 .
  2. Problems of alignment with the 2030 SDG agenda. It is not yet clear how these international standards help to achieve the 2030 SDG agenda, since even in the case of domestic resource mobilization it has not yet been established whether developing countries can benefit from the introduction of these international standards. This is due not only to lack of resources and technical capacity of developing countries to implement these standards, but also to the criticism that these international standards mainly favoured developed countries since multinationals are located in these countries. Issues that are important for developing countries, such as allocation of taxing rights between source and residence, taxation of informal economy, or re-definition of the concept of permanent establishment in line with value creation, have not received the attention they need in the international tax regime. Up until now, no research has been carried out regarding the link between the BEPS Project and other SDGS to which taxation can contribute. These SDGs are in addition to domestic resource mobilization (17.1), also to eradicate extreme poverty (1.1), promoting sustainable economic growth (8.1), reducing income inequalities (10.1), curbing illicit financial flows (16.4), and enhancing SDG capacity in developing countries (17.9).
  3. Problems of accountability and transparency. These concern introduction of these international standards, mainly BEPS Action 5’s request from countries to reduce harmful tax competition. In addition, the OECD has also included the request for countries to reformulate or eliminate some tax incentives (mainly based in the toolkit “Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment”). Therefore, countries are introducing changes to their tax incentives (e.g free trade zone, tax holidays), but it is not yet clear how countries (and mainly developing countries) will benefit by reducing these incentives, since they need the incentives to attract tax investors. For instance, in November 2016, at a regional meeting regarding the BEPS Inclusive Framework with regard to African French speaking countries, the participating countries expressed the importance of establishing the benefits and costs that the implementation of the various BEPS standards  would have on their domestic revenue, and the need for these countries to maintain some of their preferential tax regimes to attract investment  In addition, these countries asked for more flexibility in the time schedule and on the methodology to be used to implement the BEPS standards.

2. The link between investment and international tax cooperation

Tax incentives  are one of the topics that can be discussed from a tax and investment perspective, since they may also influence foreign direct investment (FDI).

The link between tax incentives and foreign direct investment (FDI) is not always clear. For instance, the World Investment Report 2018 states that the FDI into Algeria, which depends heavily on investment in oil and gas, fell 26% to US 1.2. billion, despite the bundle of incentives offered by the country’s new investment law. Conversely, Kenia FDI increased to US 672 million up 71% due to domestic demand and inflows of ICT industries (from South Africa ICT investors but also from US tech-oriented investors) (WIR at 40). As in Algeria, Kenya government also introduced additional tax incentives to foreign investors, but only in Kenya increased the FDI which was due to some extend to the industry (i.e. ICT) developments.

Notwithstanding the above, tax incentives and tax reforms still play an important role in FDI, for instance the above mentioned report stated that “the United States tax reform bill, adopted in December 2017, could have a significant impact on global investment patterns, given that almost half of global FDI stock is either located in the United States or owned by United States multinationals”( WIR at 16). Due to the Tax Cuts & Jobs Act including the corporate income tax cut, US multinationals are being encouraged to bring overseas funds back to the United States, in other words a  repatriation of funds.  The report stated that therefore, the investment decision by US multinationals in 2018 will affect global investment patterns.

Finally, another element to be kept in mind is the relationship between BEPS Action 5 and harmful tax regimes, which can also be applicable to incentives and developing countries practices. For instance,  countries continue to create fiscal and financial incentives (Korea, Lao, Morocco, Nigeria, Thailand and Tunisia) and of special economic zones (Bangladesh, Congo, Egypt, Vietnam, Zimbabwe, Thailand) to attract investors (WIR at 83).  If these countries are members of the BEPS Inclusive Framework (which is the case for Korea, Nigeria, Thailand, Tunisia, Congo, Egypt, and Vietnam), these incentives will need to be in line with BEPS Action 5. Whether these incentives will pass the peer review of Action 5 is still to be seen.

3. Key priorities and opportunities for international tax cooperation for an investment governance agenda

A. Are we ready for multilateral approaches?

The BEPS Project is an important step towards multilateral solutions in taxation, a field that in general terms is restricted by tax sovereignty and the idea of “no taxation without representation”. However, in my view, the OECD/G20 BEPS initiative should be tailored to the needs of developing countries and should include a regional approach due to the different needs of African English-speaking countries, African French-speaking Countries, Latin American and Caribbean countries, and Central and Eastern European countries.

The G20 and the OECD should consider the differences between countries, which may result in a different implementation of the BEPS four minimum standards. The lack of regional tax coordination has been addressed by Asian countries, which are very concerned about the differences among the countries in the region and their needs. Asian countries have referred to collaboration as including “sharing how jurisdictions are making effective use of the data with respect to risk identification, intelligence and measuring the ongoing size and scale of BEPS” (M. Konza & R. Thomson, BEPS Challenges in Asia and Australia’s Response, in Asian Voices: BEPS and Beyond ; S. Sim & M-J. Soo eds., IBFD 2017 Online Books IBFD) This also applies to countries in Africa, and in Central America and Latin America.

B. Are these standards what developing countries need?

In my view, changes in the agenda to benefit developing countries should take place. I have argued in the past that the agenda and content have been decided by member countries of the G20 and OECD (developed countries) and do not address the needs of developing countries. Therefore, it is important to redefine the international tax regime in order to provide more allocation rights to source (developing) countries. Developing countries, when implementing the BEPS Minimum Standards, are using the limited resources (personnel, technical capacity) of the tax administration to attend OECD meetings, to participate in pilot projects, and technical assistance meetings. However, other problems that are also important are, for instance, tackling informal economy, tax evasion by individuals or companies (mainly as a result of the Paradise and Panama papers), or increasing tax revenue by reinforcing the tax collection by tax administrations. These are tax issues, but they are not related to BEPS and multinationals, but to domestic taxpayers.

Therefore, countries (and mainly developing countries) should ask if the implementation of international standards is what they need.  We have argued in the past that there should be a cost/benefit analysis, and developing countries should only prioritize signing up for this framework depending on (i) their level of income, and (ii) their place in multinationals’ global value chains. This should always be a country’s own decision, and not the result of external pressure. (Mosquera Valderrama I.J., Lesage, D., Lips & W. (2018), Tax and Development: The Link between International Taxation, The Base Erosion Profit Shifting Project and The 2030 Sustainable Development Agenda (. Institute of Tax Law and Economics, Faculty of Law, Leiden University), no. W-2018/3. Brugges, Belgium: UNU Institute on Comparative Regional Integration Studies).

OECD and G20 countries should expand the agenda for developing countries. Thus, not only via toolkits and consultative frameworks that aim to improve the ability of the states of collect taxes by restricting BEPS practices, but also through initiatives tthat achieve fairness for developing countries. This means, then, that OECD and G20 countries should be prepared to develop: (i) initiatives for sharing revenue among developed and developing countries, (ii) a new way to allocate taxing rights between residence and source, and also (iii) specific and tailored tax competition that goes beyond the OECD approach towards harmful tax competition while still allowing developing countries to be attractive for investors.


4. Some recommendations

  • The role of the UN should be reinforced, for it is very limited in this process; and since the UN is the representative of all countries, it should also have an important role in the design of this international tax regime. However, for this to happen, the UN Tax Committee should have an intergovernmental body status as suggested at the Addis Ababa Conference in 2015. At said conference, this status was rejected by most developed countries, mainly due to the leading role of the OECD in tax issues. This should change, and the participation of the UN should be as representative of developing countries but also free of political considerations. For instance, in the February conference organized by the  Platform for Collaboration on Tax, even though it took place at the UN headquarters, the predominant role was given to the IMF and World Bank in the agenda, acceptance for attendance, and presentations given during the conference.  The meeting in February was a nice opportunity to achieve a dialogue between governments, business, civil society and international organizations. However, for the dialogue, the format of the meeting could have been more interactive, and also allowing more time and opportunities for countries (public) participations.
  • A dialogue should be established, and common research projects should be encouraged to analyse the link between tax and development. We are organizing this dialogue in a seminar that will take place on the 14th of January at the United Nations University-CRIS in Brugges, Belgium with representatives of the EU Commission Taxation Unit and Development Cooperation Unit. Both units can work together to design an agenda that link tax and development in the achievement of the 2030 SDG Agenda. The knowledge and experience of tax law experts, development experts international political economy experts and investment experts is relevant. The solutions require a multidisciplinary approach.
  • Further research should be carried out by scholars, business, civil society and organizations on how to find the right balance between granting tax incentives and to protect their tax base; how to provide tax certainty to taxpayers, and for countries how to design tax regimes that are still competitive to attract investors. Is the answer to abolish all tax incentives? Or should these tax incentives be reduced? Or linked to specific performance criteria (creation of jobs, profit taxable), and/or more transparency and accountability of the law maker for instance in respect of stability agreements clauses provided to the extractive industry and other multinationals.

To conclude: What needs to be done to achieve investment governance for developing countries?

Developing countries should re-evaluate their stability agreements and the excessive number of free trade zones that they have, taking into consideration their usefulness in encouraging sustainable investment. Tax incentives in developing countries should also be re-evaluated to establish their benefit for the country, as such incentives often only result in tax base erosion. One of the risks of the extensive use of tax incentives and stability agreements is that enterprises may leave the country in question once the tax incentive or agreement is no longer available. However, this should not be dealt with in BEPS Action 5 but, rather, by adopting a regional approach that takes into account the needs of countries in a specific region and the design of tax incentives in a coordinate way to prevent unfair tax competition in the region.