The OECD's New Role in Global Taxes

It happened so fast, it almost escaped notice. On Dec. 20, the Irish Minister of Finance announced that administrative guidance from the Organization for Economic Cooperation and Development on its 15% Pillar Two global minimum tax–issued two days earlier, on Dec. 18–had already been incorporated into the country’s implementation legislation.

They could update it so quickly through a special process included in the legislation, allowing the Department of Finance to enact OECD updates with few obstacles.

As PwC Ireland Tax Policy Leader Peter Reilly explained in a recent PwC podcast, it’s not that the new OECD guidance automatically becomes the Ireland law. But it’s pretty close to that, allowing the department to issue an order “at any point in time to bring in guidance,” he said. Given that Ireland strongly wants to be seen as in compliance, the OECD’s new guidance can become the country’s de facto law almost instantly.

“It’s kind of like secondary legislation,” similar to U.S. regulations, Reilly added, while noting that the quick turnaround time for this particular case may have been to ensure it got enacted before year-end.

“I would hope that there's probably going to be some consideration and thought given to the way that Ireland really quickly jumped on the December guidance,” he said.

And Ireland isn’t the only country doing this process, sometimes known as “incorporation by reference.”

This isn’t altogether new. While OECD guidelines are technically just recommendations, they sometimes feel like edicts, given the pressure that countries feel to participate in the global economy. Jurisdictions have long been known to all but copy-and-paste OECD language into their domestic law. As I noted in my last newsletter, Germany explicitly uses the OECD’s Harmful Tax Practices designation as the basis for some of its anti-abuse rules.

But this feels a bit different. The OECD’s guidance for Pillar Two may well never be finished, given the plethora of questions and disputes that have already arisen. (It’s still a bit like fine-tuning a car’s engine while it’s already on the highway.) There’s no formal timeline for when to expect updates, or when they’ll stop. And if countries have already put in place processes to make the OECD rules their law at the drop of a hat, then the OECD tax-writers have essentially been given the power to make tax law around the globe.

That’s quite a responsibility, one that the OECD may not altogether want. But it’s where this road has led us.

There’s also going to be the OECD’s Peer Review process for determining compliance down the road, which will become a more and more important part of the Pillar Two framework as time goes on. By determining what is or isn’t in compliance, the OECD will be making decisions about who gets what tax revenue. This is because the different parts of the Pillar Two structure–the qualified domestic minimum top-up tax, the income inclusion rule, and the undertaxed profits rule–are applied by different countries to make the system work. That order has already been set, but if one country’s rule is found to be noncompliant, the next one gets to step in and grab whatever revenue might be at issue. This could be billions of dollars, and the OECD has barely outlined anything about how it will work.

In both of these areas, the OECD has new and in some ways striking power to determine national tax systems.

These dynamics could mean an altogether new level of political focus for the quiet post-WWII intergovernmental organization, which used to take a back seat in public profile to the International Monetary Fund or the World Bank. (“The most powerful organization you’ve never heard of” was an occasional description you’d hear.) As the OECD has become a central target for Congressional Republicans–who are pushing for the U.S. to pull funding–those days may be over.

The OECD’s conservative critics love to describe it as a shadowy, secretive “European” organization trying to usurp national sovereignty. But it’s important to remember, it ultimately comprises only its member countries. Through consensus, they’re the ultimate powers, not the “bureaucrats” or “technocrats.” And in this they’re also joined by the non-OECD members of the Inclusive Framework, a coalition that represents most of the world. (Although many of its poorer members claim they’re not really on equal footing, in practice.) This is why the compliance process is called “Peer Review”--it’s the peer countries doing the reviewing.

The fact that every release needs to be read and approved by the OECD’s 37 member countries, as well as dozens of other nations around the globe (again, in theory), is a big reason why the guidance process has taken so long, and has such an uncertain timeline. Herding cats would probably be easier than getting so many government representatives to agree on anything.

The OECD represents its members. It’s just that it does so through a process with often inscrutable internal politics.

As a non-profit, it’s not always subject to the same public record and open meetings laws as tax authorities. The last public hearing for Pillar Two was more than a year ago. (Though several public consultations are underway in other areas, including Pillar One.) How stakeholders are supposed to raise issues about the minimum tax has become a bit of a mystery, with member countries’ governments often acting as a conduit for complaints.

They have held several webcasts, some that are hours-long, with periods for Q&A. And OECD officials regularly appear at tax conferences where they often respond to questions. I don’t want to make it sound like the rules are issued from stone tablets on mountaintops. But the process is less formal than how most tax authorities operate, and obviously much less open than how legislation is typically considered in most countries.

These issues may iron out over time. It’s not my place to criticize the OECD, and that’s not what I’m trying to do here. But there’s no doubt, these are the issues that will become more and more prevalent in the years to come.

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.

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LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• After months of quasi-silence, the OECD re-committed itself to the June 30 deadline to release text of a Pillar One multilateral convention, in statements from both the secretary-general and the Inclusive Framework co-chairs on May 30. This came after the Group of 7 finance ministers meeting in Italy–where U.S. Treasury Secretary Janet Yellen cast more doubt on the progress, claiming that India and China were the ones holding it up. It’s gotten to the point where I’m not sure there’s much I can add to these back-and-forths and updates–the OECD seems confident it can release a real treaty soon, but that will just confront us with the issue of what happens if the U.S. can never ratify it. Time will tell, or it may not.
• But meanwhile, other parts of the international tax system continue to grind on. On Tuesday the Global Forum on Transparency and Exchange of Information for Tax Purposes–a coalition under the auspices of the OECD, but with 177 members–released a report showing that African nations have raised an additional 3.8 billion euros since 2009 through new tax transparency initiatives. This followed a report the same organization issued on May 30 showed that Latin America raised an additional 27.8 billion through the same programs, which include automatic exchange of information and voluntary disclosures. This shows how the new paradigm of transparency in tax (mostly applying to individual taxation) is reaping benefits outside the U.S. and Europe, although poorer nations still face an uphill climb processing all of this new information.
• For all of the criticisms the Inclusive Framework gets, its membership always seems to be growing, not declining. Both Fiji and Moldova joined the coalition, the OECD announced at the end of May. This brings its membership to 147 jurisdictions.

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