Historically, the United Nations (UN) has played a secondary role to the Organisation for Economic Cooperation and Development (OECD) in international tax policymaking. However, the OECD’s informal title as the “World Tax Organization” may soon be contested. This follows decades in which the OECD has shaped international tax rules. Most recently, in 2021, the OECD introduced a two-pillar reform to the cross-border taxation of multinational enterprises. The new rules are meant to deal with the tax challenges of digitalization and profit-shifting. Pillar One of the OECD’s proposal creates a new taxing right for source countries – the countries where companies earn profits. This taxing right is based on revenue and profitability thresholds. It allocates a portion of a multinational enterprise’s residual profits to the source country. Pillar Two imposes a global minimum tax rate of 15% on offshore income, targeting tax havens and profit-shifting practices. It is applied by intertwining rules that either impose a top-up tax or deny an intra-group deduction between related entities.
To achieve a broad consensus on the new rules, the OECD has operated through an Inclusive Framework on Base Erosion and Profit Shifting: a collaboration of over 135 countries to implement the outputs far beyond the OECD’s membership. An Inclusive Framework agreement was achieved in 2021, with a plan to implement the new rules in 2024. Nevertheless, the two-pillar reform has generated significant controversy. The OECD has drawn criticism for its lack of inclusivity and transparency and for solely representing the world’s wealthy, developed economies. It does not promote the interests of the world’s poorer, developing economies that do not have a meaningful way to participate in the direction of the organization or its policymaking. Representatives of developing countries have pushed back against the OECD’s framework, conveying that it does not provide them with equal-footed participation. Furthermore, the OECD’s outputs produce very limited benefits to developing countries, offering almost no redistribution of taxing rights on profits.
The inequities exacerbated by the OECD’s work have prompted the consideration of new possibilities in multilateral cooperation that could better represent developing countries and their interests. In December 2022, the UN General Assembly adopted a resolution for the “Promotion of inclusive and effective international tax cooperation at the United Nations.” The resolution, introduced by a 54-member African Group, requests that the UN Secretary-General prepare a report outlining the steps for an intergovernmental committee to strengthen the inclusiveness of international tax cooperation. The report will be considered in the UN General Assembly’s 78th session, scheduled for September 2023.
The UN has generally lacked the resources and broad political support that the OECD has enjoyed. However, it is inherently a more inclusive framework for developing countries in international tax matters. Developing countries do not have voting rights in the OECD but have voting rights in the UN, which operates on a one-country one-vote basis. Also, the UN model taxation convention provides greater taxing rights to source countries than the OECD model. Source country taxing rights are a noteworthy issue for developing countries. Developing countries are typically the source countries rather than the countries of residence for multinational enterprises. The UN is better positioned to address the distinct needs of developing countries by building capacity and allocating greater taxing rights to source countries. Whereas the OECD largely focused on profit-shifting and tax havens, a UN framework should focus on a broader, institutional reform of international tax principles. Notably, the UN should look at the traditional international tax norms that have not been revisited since the 1920s. These include residence-source principles and the permanent establishment doctrine. Creating a new framework, in which developing countries have voting rights, is a good start to more inclusive policymaking.
You can read more in my article International Tax Reform: Who Gets a Seat at the Table?, 44 U.Pa. J. Int’l L. (forthcoming, 2023).
Author: Dr. Assaf Harpaz
Visiting Assistant Professor at Drexel University, Thomas R. Kline School of Law.
Bio: https://drexel.edu/law/faculty/fulltime_fac/Assaf%20Harpaz/.
SSRN: https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=3878936.
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