OECD v. UN: The Dawn of Tax Justice?

Campaigning for the League of Nations was such a passion for President Woodrow Wilson, it may have killed him.

Having failed to keep the U.S. out of World War I, the “Great War,” he was determined to see that the bloodshed was not in vain, but would lead to an era of peace. Barnstorming the U.S. to bolster support for the multilateral treaty establishing the League, he suffered a stroke, and never fully recovered before his death in 1924.

Of course, the League didn’t last much longer than he did, ultimately disbanding in 1946 after World War II proved its irrelevance. One of its unexpected lasting legacies was the international tax system, which the League helped to establish nearly 100 years ago, and has been more or less a sturdy backbone of the global economy ever since.

Reading the history, though, reveals some nuances in this story. As Columbia Law Professor Michael Graetz noted in his 1997 paper “The ‘Original Intent’ of U.S. International Taxation,” it was actually the International Chamber of Commerce which began discussions about a model tax treaty, before the League ultimately sanctioned it in 1928.

That basic tension between international business, and loftier ideals of multilateralism and equity, has always been present in global taxes. What is the purpose of the international tax system–to support globalization, or to ensure fair taxation of the largest corporations? Are these even different goals?

Another legacy of the League of Nations, of course, is the United Nations, an organization which has likewise struggled to justify its existence, despite lasting decades longer than the ill-fated League. But could the U.N. take a more active role in international taxes? That’s something which non-governmental organizations have long been pushing for, claiming that the Organization for Economic Cooperation and Development, currently the global standard-setter in taxes, is too focused on its Western membership.

They scored a moderate victory last month, after the U.N. General Assembly unanimously passed a resolution, proposed by Nigeria and the U.N. African Group, to begin discussions on creating a new forum for international tax negotiations.

Specifically, the resolution said the U.N. would "begin intergovernmental discussions ... on ways to strengthen the inclusiveness and effectiveness of international tax cooperation through the evaluation of additional options, including the possibility of developing an international tax cooperation framework or instrument that is developed and agreed upon through a United Nations intergovernmental process, taking into full consideration existing international and multilateral arrangements."

The resolution stated there was a "need to strengthen international cooperation on tax matters in a more inclusive intergovernmental forum," a backhanded (though toned-down) rebuke of the OECD's membership, although other parts of the resolution praised the organization's role.

That OECD supporters such as the United States did not outright object to the resolution, despite expressing concerns, could indicate that a major shift is on the horizon. Or it could be another round of jockeying between the two bodies, which has gone on for years without much consequence.

The exercise does add yet more pressure on the OECD to produce tangible results with its current global minimum tax and international taxation project–or face potentially existential risks to its authority.

Like the U.N., the OECD emerged from the wreckage of WWII, one of the many multilateral institutions created in the hope of linking nations economically and legally to make future conflict less likely. Initially created as the Organization for European Economic Co-operation to help administer the Marshall Plan to reconstruct Europe, the OECD gained a new name and purpose as a global aid for development in the 1960s. It now comprises 38 members, from North and South America, Europe and Asia. (But not Africa.)

Its mission is stated in its name–it’s an organization “for” economic cooperation and development. While much of its bureaucracy is devoted to research, its role in tax standard-setting is part of its campaign to promote growth around the world. Its model treaty is ultimately meant to prevent double taxation–companies are less likely to make international investments if they think both countries will tax all of their income, eventually leading to 100% effective tax rates. Creating standards to prevent that, supported by all countries, paves strong highways for global business to grow.

There’s always been tension between the OECD and the United Nations, but they’ve reached a détente in recent years. The U.N.’s similar model tax treaty states that it is meant mainly to supplement, not replace, the OECD model, with an eye towards developing countries who may not feel they’re negotiating on a fair playing field.

“The United Nations Model Convention is not intended to be prescriptive, but to equip decision-makers in countries with the information they need to understand the consequences of these differing approaches for their country’s specific situation,” the most recent version of the model, released in 2017, said.

Nevertheless, many non-profit advocacy groups have claimed that the U.N. would be a better organization to negotiate future tax matters, and address inequities and tax avoidance. The OECD's membership is too lopsided with rich Western nations to create fair rules for all, they claim. (There’s also the Independent Commission for the Reform of International Corporate Taxation, created in the past decade to become its own forum and OECD alternative.)

The OECD in recent years has undertaken high-profile projects to address concerns about the tax system, in the 2015 Base Erosion and Profit Shifting project, and now in its “Two-Pillar Solution” on taxation in the digital economy. Those have been ambitious, especially when compared to the OECD’s usual technical role. But according to critics, they haven’t gone far enough to truly uproot and replace the global system. And, at any rate, the Two-Pillar solution is far from completed.

Alex Cobham, chief executive of the Tax Justice Network, blasted the OECD for failing “to deliver after nearly a decade of promises and work,” and claimed the OECD’s projects have “been widely identified as exclusionary by countries outside the core membership of rich countries,” in a statement supporting the U.N. resolution after its passage.

There's definitely some truth to the claims that the OECD's project neglect the developing world's concerns--but I also think it's more complicated than that simple narrative. In some ways, these discussions about the proper tax forum are really proxy debates on the underlying tax policies.

Many of the loudest critics of the OECD advocate fundamentally leaving the arm’s-length standard that underpins transfer pricing and international taxation. They support formulary apportionment, an agreement which would allocate taxable income between countries based on metrics such as workforce or sales. It’s an option which the OECD ruled out early it the Two-Pillar negotiations, provoking a backlash among NGOs and some developing nations. The United Nations, giving more weight to the concerns of poorer countries, would perhaps be more open to the possibility.

At least, that’s the case being argued.

But while the OECD’s nature and history as a European-centric organization focused on promoting globalization may bias its work products, it also gives them teeth. Despite not having any formal powers–it’s ultimately just an advisory group which produces new standards only by consensus–the OECD creates recommendations that countries are normally quick to adapt. They’d better, if they want to enter the global economy based on its agreed-upon rules. Would the U.N.’s theoretical rules carry the same weight?

Not that the OECD’s word is global law. Countries have moved ahead with digital services taxes to address alleged non-taxation in the tech sphere, even as they aren’t sanctioned by the OECD and arguably violate its basic tenets. That’s why the Two-Pillar project, which is meant to give countries an alternative to unilateral DSTs, has felt like a do-or-die effort from the OECD. If DSTs persist, it could lead countries to assume that the OECD rules are no longer worth following.

The charges that the OECD is a rich countries’ club aren’t new. Many made the same claims about its 2015 project–and the criticism stung, apparently, as the OECD made a point to include more countries in the process this time around. During negotiations over the design of the Two Pillars, OECD officials claimed that they would only move forward if the full “Inclusive Framework,” a coalition of 141 jurisdictions, approved. In theory this meant that virtually any country in the world–from Andorra to Zambia–could have scuttled the whole deal.

Ultimately, the OECD moved forward with its agreement despite failing to receive endorsement from Nigeria, Kenya, Pakistan, and others. But it’s still likely true that a coalition of smaller countries–or even one really adamant nation–could have stopped the OECD project in its tracks. No countries did, at least during the process, because they faced immense global pressure to move forward.

And that’s the rub–it’s the same pressure they’d face at the U.N., or anywhere. Would changing the forum really change the underlying power dynamics? That’s the Catch-22–if global powers took the U.N.’s tax committee seriously, they’d seek to determine its results. That’s just how power works.

Diplomacy, like politics, can be a cynical, brutal business. But the alternatives could be far worse.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

Likely the biggest international tax news from the past week is the European Court of Justice's ruling that some provisions of Luxembourg's requirements for public transparency of entity beneficial ownership violate European Union privacy laws. Beneficial ownership, the ultimate "owner" or interest in a financial entity, is one of the key underpinnings of the financial exchange system that has revolutionized global money laundering and tax evasion enforcement. Is this yet another case of the EU courts taking on an outsized role in tax policy?

I just barely missed this in my last newsletter before Thanksgiving, but the U.S. Treasury Department on Nov. 18 issued a notice of proposed rulemaking regarding its foreign tax credit rules. The latest announcement doesn't address many of taxpayers' key concerns, so don't expect the controversy to die down soon.

The OECD released Nov. 22 new statistics on global tax dispute resolutions. One key finding--more cases are being closed and fewer are arising, but they're still taking a long time to process.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Silver Streak, who first appeared in Silver Streak #3 in 1940. (What were the first two issues about?) A taxi driver who was hypnotized by a swami...and also resurrected after being killed by a giant insect...so he could drive the swami's best car, "Silver Streak," and also use superpowers through a "secret fluid" in his blood...that he could transfer to other people as well as his pet falcon....OK I'm totally lost here. But he seems pretty cool, and he got to meet Winston Churchill. (See below.)