The UN Tax Committee holds out the begging bowl
by Sol Picciotto
This piece was first posted by the International Centre for Tax and Development.
Last week the UN Committee of Experts on International Tax (UNTC) met at the United Nations HQ in New York, a few metres from the Security Council meetings on Syria, followed by a special session on tax of the Economic and Social Council (ECOSOC).
Most of the meeting dealt with detailed technical issues, as the Committee hurried to finalise its work on revision of the UN model tax treaty, and other key documents, before the changes in its membership due this summer. The highlight of the new model is a new article on taxation of fees for technical services, which a number of developing countries said they would like to include in their treaties. Work was also completed on a new edition of the UN Practical Manual on Transfer Pricing, as well as a new handbook on Extractive Industries Taxation.
As the IMF pointed out in its influential Spillovers paper in 2014, tax treaties significantly restrict the rights of countries to tax activities where they take place, ‘at source’. This reduces the corporate tax base of capital-importing states, which are mostly developing countries. So the IMF’s diplomatically-worded advice is that developing countries should exercise ‘considerable caution’ before signing any. Academic commentators have gone further: as long ago as 1974 Charles Irish described tax treaties as ‘aid in reverse’, and the case against them was argued again in 2015 by Brooks and Krever. Some countries have been reviewing their treaty policies, for example Uganda, as discussed in ICTD Working Paper 50.
Yet tax treaties are still dysfunctional. This is mainly because of competition between countries to attract investment, especially by transnational corporations (TNCs). While capital-exporting countries remain reluctant to accept provisions expanding source taxation rights, they have moved to ‘territorial’ systems, exempting foreign source income to make themselves more attractive as residence countries of TNCs. For example, the UK moved to a largely territorial system in 2012, and the US has become de facto territorial by allowing unlimited deferral of tax on unremitted foreign income. Thus, the traditional aim of preventing double taxation, to encourage international investment, has resulted in treaties facilitating double non-taxation, or tax avoidance. Countries with extensive treaty networks can also act as ‘treaty hubs’ to become conduits for investment, e.g. the Netherlands, Switzerland and the UK. More recently they have been facing competition from newcomers such as Mauritius, Singapore and the UAE.
In 2013 the G20 world leaders gave their support to the OECD project on base erosion and profit shifting (BEPS), with the mandate to ensure that TNCs could be taxed ‘where their economic activities occur and value is created’. This has resulted in a number of proposals to strengthen international tax rules, but unfortunately it has so far failed to provide agreed clear rules for allocating the tax base of TNCs. The OECD has now created an Inclusive Framework, open to all countries, both to supervise implementation of the BEPS project outcomes and to continue the remaining work. The treaty-related outcomes of the BEPS project have been incorporated into a multilateral convention, which is open to all countries (even if they do not join the Inclusive Framework).
This has created a dilemma for developing countries. Joining the Inclusive Framework would require a commitment to implement rules they had no part in formulating, even if some may be to their advantage. It has also turned the OECD into a de facto global tax body, at least for some purposes. Nevertheless, pressure is continuing for the creation of a truly global intergovernmental tax body at the UN, through the G77 Group and China.
The undercurrent of the detailed technical discussions this week has been this crisis of global tax governance. The grand-sounding Addis Tax Initiative included a commitment to double the aid for tax issues to developing countries, in the context of domestic resource mobilization. Despite this, very little has come to the UNTC, though it was agreed to let it meet twice a year. Michael Lennard remains its one full-time professional official, though he now has half the time of a new appointee (Tatiana Falcao, from Brazil). It still has no money to fund meetings of its subcommittees, or to give them secretariat support. Meanwhile of course the OECD has around 130 professional staff, coordinating myriad activities. The UN Financing for Development Office also has staff working on capacity building, and announced this week that they would be joined by Jacques Sasseville, following his retirement from the OECD. Indeed, the bulk of ODA in the tax area goes to capacity building, helping developing countries to apply existing rules, rather than enabling them to contribute to improving the system.
A side meeting was organised during the week by the International Tax Compact, run by the German government. The aim was to get donors to contribute to the UNTC’s Trust Fund, which so far has had zero income. Michael Lennard held out his begging bowl, presenting a modest budget of some $680,000 per year, but no donors showed up to the meeting. Funds are needed especially to facilitate the work of subcommittees, which are essential to work through technical details. Lacking travel funds, it is difficult for developing country members to attend, and the shortage of staff makes it hard to provide secretarial support. At several points during the meeting of the Committee there was frustration that an issue was being raised which had received no or insufficient attention in a subcommittee, and some work was not completed as a result.
A couple of days later, there was a more political meeting called by Ecuador, which now chairs the G77 group at the UN, to continue the push for a global tax body. There was a lot of stirring rhetoric, but no sign that the proposal will make any headway, especially as OECD countries remain opposed. Even if an upgrading were agreed, it may not result in any additional resources, but without such an upgrade, the UNTC secretariat can only resort to the begging bowl. At the meeting of ECOSOC, there was much self-congratulation. But the problem of resource starvation was cloaked in a discreet silence.