Questions were raised about where large tech companies should be paying taxes — the country of residence (predominantly US) or markets such as India? To forge consensus, the OECD kept going back to the drawing board to only come up with more complex solutions.
The inexplicably low rates of tax paid by multinationals stirred a row after the global financial crisis. In response, the G20 mobilised the OECD’s technical wherewithal to address some of the concerns. The last decade was dedicated to the cause and the OECD anchored the work of creating a profit-shifting programme. Fifteen action points to ensure transparency in cross-border income reporting and anti-avoidance measures were recommended. The organisation opened its gates to low-income countries to participate on an “equal footing” with its developed peers at the Inclusive Framework (IF). The seat at the table was made available not only because the world was changing and markets mattered, but also because tax competition among developed countries had intensified. They competed to offer low tax hubs while bilaterally negotiating treaties with preferential terms with developing countries.
The bonhomie lasted until countries ran into a messier terrain of redistribution of taxing rights. Questions were raised about where large tech companies should be paying taxes — the country of residence (predominantly US) or markets such as India? To forge consensus, the OECD kept going back to the drawing board to only come up with more complex solutions. More efforts were made to live up to the ideal of inclusivity, officials from developing countries such as Jamaica co-chaired the IF and many, including from India, voiced their concerns. Yet, this anonymised process of consensus building began to tire members. Disillusioned countries and regional groups demanded a shift. They proposed it was time for an intergovernmental tax body at the UN.
In a momentous move, 125 countries, including India, voted in favour of a UN global tax convention in 2023. However, 48 countries, including the UK and US, rejected the proposal. Despite resistance from developed countries, the UN proceeded to work on the terms of reference. The final version, released on August 15, was rejected by only eight countries but still included the US and UK. EU countries that initially opposed and remained divided on the agenda, abstained from voting on the final draft of terms of reference.
There is no doubt that the UN is poised to assume prominence in international tax negotiations. However, two aspects will determine its fate. First, time and money have been invested in building institutional frameworks at the OECD that have ensured exchange of information, quick adoption of anti-abuse measures in treaties and cross-country information sharing. Would it be wise to duplicate this work unless the current system is riddled with flaws — an issue that EU countries have raised? The convention also acknowledges this overlap and recommends that the committee consider synergies. It remains to be seen how this is managed. Second, economic interests between and within groups of countries will continue to diverge. Forging consensus on cross-border matters can be difficult, especially if the sovereignty of countries in tax policy-making is to be preserved. The iterative revisions to the UN tax convention are material for scope. For example, the language was revised in specific aspects — a shift of focus to tax avoidance and evasion by high-net-worth individuals. It also emphasises sovereignty, while committing to fair allocation of taxing rights and meeting SDGs. The recognition of fair allocation of taxing rights is a shift in international tax thinking, although the concept of fairness remains undefined.
The UN breaks away from the practice at IF by establishing formal processes including that of election of members of the negotiating committee on an equitable basis. Public information on country votes also lends transparency. It allows experts and civil society to identify and engage with the naysayers. A pragmatic approach will include cross border services including digital services and illicit financial flows. The challenge will be to get acceptance from countries such as the US and UK. It is doubtful that they would adopt the protocols especially since countries will have the flexibility to sign.
The writer is associate professor, NIPFP
