Multilateralism: The Weakest Link?

By Irma Johanna Mosquera Valderrama

Multilateralism and BEPS

Following the 2008 financial crisis, countries decided to enhance international tax cooperation by means of exchanging information, and later on in 2013 by introducing measures to tackle aggressive tax planning (Base Erosion and Profit Shifting BEPS Project). Less than six months ago, countries were still in the path led by the OECD towards multilateral cooperation with several public meetings, public consultation documents, and responses from different stakeholders. Countries were also endorsing multilateral instruments including the signature by more than 90 tax jurisdictions of the multilateral instrument (MLI) to implement some of the BEPS measures in bilateral tax treaties.

At the time of writing of this blogpost, more than 40 tax jurisdictions of the 90 tax jurisdictions have ratified the MLI. In addition, more than 130 tax jurisdictions have committed to implement the BEPS 4 Minimum Standards (i.e. Actions 5, 6, 13 and 14) and to participate in the BEPS Inclusive Framework.

The European Union has also implemented the BEPS 4 Minimum Standards and some of the other Actions of the BEPS Project in the Anti-Tax Avoidance Directive, the Directive on Administrative Cooperation, the Directive on Tax Dispute Resolution Mechanisms and by revisiting the Standard of Good Tax Governance which needs to be met by third (non-EU) countries. This Standard includes since 2018 the commitment of countries to implement the BEPS 4 Minimum Standards (see our blogpost here).

In addition to exchange of information and the BEPS Project, the OECD (with the political mandate of the G20) has introduced two multilateral initiatives in the so-called “BEPS 2.0” Project. The first one is Pillar 1 to tax digital businesses and the second one is Pillar 2 introducing the Global Anti-Base Erosion Project.

The common objective of these projects is to collect more revenue by tackling tax evasion, bank secrecy and aggressive tax planning. Furthermore, the introduction of the “BEPS 2.0” Project aims to tax highly digitalized business without a physical presence in the country, and potentially shift greater taxing rights to market countries in general; and to develop a coordinated set of rules to prevent multinationals to shift profits to low or no tax jurisdictions. These rules complement the BEPS Project by introducing an income inclusion rule and an undertaxed payment rules (see our blogpost here).

Our European Research Council funded GLOBTAXGOV project focuses on global tax governance (GLOBTAXGOV) to highlight the role of countries, regional, supranational and international tax organizations, and of stakeholders within a country (government, business, business associations, tax advisors, judges, scholars, etc.) in international tax law making. The aim of this project is to carry out empirical and interdisciplinary (tax law, and political science) research using as a case study the implementation of the BEPS 4 Minimum Standards in 12 countries (i.e. The United States, Mexico, Australia, Colombia, Ireland, the Netherlands, Spain, India, Nigeria, Senegal, Singapore, and South Africa). These countries are developed, developing and emerging countries belonging to different legal systems and also different geographical regions.

The problems and the solutions

In the development of international tax rules, some of the issues highlighted in the research of the GLOBTAXGOV Project are the lack of output legitimacy, the differences in implementation in the context of the BEPS Inclusive Framework and the lack of technical capacity of developing countries to implement these Minimum Standards, among others. Some of these issues have been addressed in the Platform for Collaboration on Tax – a joint initiative by international organizations (IMF, WB, OECD and UN) to strengthen collaboration on domestic resource mobilization. See working paper (with Wouter Lips and Dries Lesage) on the work of this platform here.

Furthermore, by studying each BEPS Minimum Standard separately, this project has highlighted the differences in countries’ implementation and that BEPS may not provide an answer to the problems faced by developing countries. This has been done for Action 6 Treaty Abuse and Action 5 mainly harmful tax regimes. We will continue in September 2020 with Action 13 Transfer Pricing Documentation and thereafter Action 14 More Effective Dispute Resolution Mechanisms (see presentations here and articles here)

Furthermore, the 2 PhD candidates in this Project are carrying out empirical research in the implementation of the BEPS 4 Minimum Standards, i.e. Frederik Heitmüller in developing and emerging countries and Juliana Cubillos in developed countries including EU countries. Some of these interviews have been already carried out, and other interviews are scheduled soon.

In the recent OECD Tax Talks (May 4) experts from the Centre for Tax Policy and Administration have stated that many developing countries are implementing other BEPS Actions which are not part of the BEPS 4 Minimum Standards i.e. transfer pricing (Actions 8 to 10) and limitation on interest deductions (Action 4)  (See slide 42 presentation). This choice has also been confirmed by Logan Wort, Executive Secretary of the African Tax Administration Forum, in a recent (May 5) virtual consultation on Improving Cooperation in Tax Matters organized by the UN High Level Expert Panel addressing Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda.

In a nutshell, these developments show that countries followed the path towards multilateral tax initiatives either at regional (European Union) or at international (OECD-BEPS) level. The challenge for organizations and governments was to find out how countries including developing countries can benefit from these initiatives, and what needed to be done to also give a voice to developing countries. The COVID-19 crisis has changed this path and the priorities of governments as it will be explained below.


The COVID-19 crisis that started in China at the end of 2019 and spread all around the world at the beginning of 2020 has created more uncertainties in international tax policy making. On the one hand, countries need to act quickly to prevent the spread of the virus, and on the other hand countries need to keep the economy going by providing fiscal stimuli (e.g. tax payment deferral, more generous loss offset provisions, tax exemptions, among others). See for an overview of how COVID19 is affecting the economy in the website of the World Economic Forum available here.

Therefore, countries unilaterally have introduced their own (and different) measures to alleviate business, self-entrepreneurs, and in some cases to also create new ways of revenue (e.g. taxing wealthy individuals e.g. in Argentina and a proposal for African countries). The responses are different in content, approach and goals (see IMF website policy responses and OECD report tax and fiscal policy).

Even though there are guidelines by international organizations (IMF, World Bank and the OECD) how to address tax policy issues in the COVID-19 crisis, the recent measures adopted by countries show that countries are addressing these issues unilaterally. Furthermore, some of the measures have received criticism from NGOs (see for example Tax Justice Network’s view on COVID-19 tax measures here)

In addition, companies are now being supported through state aid rules that in principle are contrary to the internal market, but are now receiving a temporary (framework) exemption from state aid from the EU Commission (see here). In the case of these state aid rules, countries are also introducing their own limitations, for instance, the prohibition in Denmark and Poland from accessing financial (state) aid to companies that are registered in tax havens (see here).

Finally, and as a result of the COVID-19 crisis, digitalization is taking an important role for business, employees and consumers. The reason is the number of customers that are now subscribing to digital platforms, customers using online shops, and the use of more online resources to carry out business. Some countries may see this as an opportunity to argue that despite the lack of physical presence, the market is the one that creates value, and that therefore, the highly digitalized business should be taxed in the country where the consumer (market) is located  (see for instance the response of Indonesia seeking to boost the economy amid COVID-19 pandemic and therefore seeking to tax digital companies such as Netflix and Spotify regardless of the existence of a legal entity in Indonesia).

Multilateralism: the weakest link

As a result of the COVID-19 crisis, countries are introducing unilateral measures aiming to support taxpayers and to ensure business continuity. In April, 2020, the OECD submitted a  report to the G20 with an overview of the COVID-19 tax and fiscal policy measures introduced by countries worldwide.

In the report and press release the OECD highlighted that  “The unprecedented nature of the crisis should prompt debate on how wide-ranging tax reforms, including solidarity levies, carbon taxes and supporting greater progressivity across the tax system, can help governments better restore public finances. Low-income countries could benefit from new international efforts to address the challenges they face in taxing cross-border activity and offshore assets. Addressing the tax challenges posed by digitalisation of the economy, and ensuring that Multinational Enterprises pay a minimum level of tax, will become more prominent issues after the crisis. The increased use of digital services and the need to collect more revenues could provide new impetus to efforts to reach agreement internationally

In the recent OECD Tax Talks (May 4), experts from the Centre for Tax Policy and Administration stated the importance to continue the work on BEPS and on reaching a consensus on Pillar 1 and Pillar 2, in addition to the COVID-19 measures. For the OECD, the objective is to deliver a consensus-based solution by the end of 2020. Therefore, some virtual meetings will take place including the BEPS Inclusive Framework meeting in July 2020 to agree on the adoption of Pillar 1 and Pillar 2 OECD Secretariat Proposals. See also recent blogpost by ICTD on the impact of COVID-19 on global digital tax negotiations.

However, with the ongoing COVID-19 measures, it is uncertain that a consensus can be reached, and also whether and how countries will participate in these virtual meetings. While some developed countries are already introducing measures to help the economy including corporate bailouts, other countries (mainly developing countries) are seeking help from international organizations such as the IMF for emergency financing and debt relief (see overview IMF here).

Despite the attempts of international organizations to provide for common COVID-19 measures, countries are acting independently. This has also affected trade and investment, since countries are introducing their own restrictions to the movement of persons, goods, and services. Therefore, one may argue that unlike the BEPS project, these measures are not being adopted in a multilateral setting, instead governments are adopting these measures unilaterally. See recent blogpost by José Antonio Ocampo highlighting the weakness of economic multilateralism here.

At EU level, countries have failed to provide a common approach to COVID-19 despite attempts by the European Commission to have a coordinated approach to counter the economic impact of COVID-19. Instead there are concerns by some countries that within the EU they are not being treated fairly, and other countries are claiming that each country should bear its own responsibility in arranging their finances (see for some views from EU countries here and here).

Final remarks

The OECD has stated that despite the COVID-19 crisis, meetings are still taking place remotely, and that the work on BEPS and Pillar 1 and Pillar 2 is still ongoing. Nevertheless, the COVID-19 crisis raises several questions about what will happen afterwards: Will all multilateral proposals go ahead? Or will countries decide to act unilaterally? And what happens with BEPS, Pillar 1 and Pillar 2? Will these initiatives still be in the list of priorities by governments, or will business be affected in such a way, that introducing more rules will create an extra burden of compliance, that business do not need since they will be busy trying to recover from COVID-19?

In April 2020, Pascal Saint-Amans, Director Center for Tax Policy and Administration and one of the public faces of the OECD in the BEPS Project, stated that “Multilateralism is much more at risk. . . . I can tell you that the landscape has changed,” he said. “The dynamic is quite different from [what] it was back in 2008-2009.”

Therefore, we should be asking whether multilateralism is the weakest link. Only time will tell, but what is true is that there are some indications that the dynamics of international tax law making and global tax governance have changed, and it is not yet clear, how long it will take for countries to recover from COVID-19, and what would be the role of BEPS, Pillar 1 and Pillar 2 in this recovery.

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