We recently published a letter TJN has sent to Britain's Financial Secretary to the Treasury
expressing our anger at Britain's attempts to obstruct the upgrade of the UN Tax Committee. For those not familiar with this Committee, it is important, and we will explain why. This blog below was written by Professor Sol Picciotto, who attended a meeting of the UN Tax Committe in Geneva last week. This provides some background, and we'll be writing more on this before too long.
Last week marked a watershed for the UN Committee of Tax Experts
, which was holding the 4th annual meeting since it was upgraded from an Ad Hoc Group of Experts. It became a standing Committee of Experts following the Monterrey UN conference on Financing for Development (FfD)
held in Monterrey, Mexico, in 2002, recognising the key importance of taxation for providing self-sustaining resources for developing countries. But this upgrade was a relatively minor change, falling far short of the original proposal in the Zedillo report
for an International Tax Organisation (here's an interesting document
published in preparation for that 2002 meeting).
Overall, the UN Committee can only be said to have made relatively minor achievements in the past four years. Most of its efforts have been spent on finer points of drafting the revised UN Model Treaty and its Commentaries, although much of this work has just followed in the slip-stream of the OECD, whose tax department is far better resourced and whose Model Tax Treaty is more favourable, unsurprisingly, to OECD countries. While focused on the finer points of detail, the UN Committee has neglected the much wider agenda it should be concerned with, in the interests of all countries: strengthening tax capacity to provide sustainable financing for states, especially developing countries, and establishing effective international cooperation to combat tax evasion and avoidance. This lack of attention to the big issues has been due partly to its serious lack of resources, and above all to the reluctance of some states to make political commitments for its work. TJN will continue to press for a new approach, at the forthcoming Doha conference and beyond.
Although it was given a relatively wide mandate
the Tax Committee has in practice stuck to the relatively narrow and technical work of its predecessor, trying to agree the text of a Model tax treaty especially suited to developing countries. Developing country members have found it hard to participate fully even in this narrow range of work, due to lack of resources. They are usually officials, holding down big jobs in their own countries. UN funds are available for only one meeting of 5 days per year, and the time of less than two support staff. So much of the work during the year (done through subcommittees to prepare reports) is done by members from developed countries, and even outside experts, often from the big accountancy firms. This obviously poses the risk that developing countries will see rules tilted in ways they would not like.
So TJN is supporting a major effort to press for a further upgrading of this Committee, at the Doha FfD Review conference
. This has received widespread support from developing countries, and civil society organisations like TJN. The proposed upgrade headed the agenda
of the Tax Committee’s meeting which began in Geneva last Monday, 21st October. Having explained the issues, the chairman proposed that a letter be sent to the UN from the Committee supporting the upgrade.
What followed was an amazing process of obstruction. First, the observer from Liechtenstein raised a number of `questions’: what would be the nature of the new body, would it be universal (with representatives of all states) or a limited membership, experts or politicians? This tactic was obviously disingenuous. A quick look at the Ecosoc website would have revealed that the umbrella body in the UN under which the Tax Committee sits is the Economic and Social Council (Ecosoc), which has several Commissions dealing with technical and complex issues, such as Population or Narcotic Drugs, which are also recognised as politically important.
The next surprise came when Andrew Dawson, the UK Expert member of the committee, said that he agreed with Liechtenstein! Although such experts are supposed to serve in their personal capacity, they usually follow the line of their government, so Andrew Dawson, who is a Treasury official was presumably following the UK government line.
In addition to the developing countries, some of the developed country participants supported the upgrading with cogent arguments. The German representative in particular stressed that becoming an intergovernmental committee would give international tax issues more political importance and visibility, and improve the transparency of the committee’s work. On a vote called by the chairman a majority of 8-3 supported the upgrading, the minority being Ireland
and the UK
. The UK member continued to obstruct, and insisted in no uncertain terms that the letter should give the voting figures, including abstentions - obviously aiming to water down its impact.
In subsequent discussions with TJN observers at the meeting, Dawson defended his position, saying that he feared an intergovernmental committee might start to "lay down international tax rules". This is pandering to the populist line taken by some politicians, that international cooperation on taxation somehow reduces national sovereignty. In fact, as TJN has repeatedly pointed out, it does exactly the opposite: improved international coordination and cooperation on taxation are essential to preserve sovereignty by maintaining national tax capacity of states, especially in the face of economic globalisation. We challenge Mr Dawson to defend his opposition to the upgrading of the UN Tax Committee.
As mentioned, we have also written to his boss
, UK Treasury Minister Stephen Timms, asking for an explanation.
The rest of the Committee’s work last week continued its narrow agenda of revision of the UN Model tax treaty. Even here, it is hampered from developing the broader perspective which could enhance its work, since it mostly plays catch-up with the OECD. This is especially harmful in discussions of the principles for international allocation of tax rights, where the UN Model historically gave a higher priority to source taxation, to protect capital-importing countries. The distinction between source-based and residence-based taxation is important. We have written a TJN Briefing Paper
on the subject, but a simplified example helps illustrate it.
Imagine a British engineering company working on construction sites in Zambia. The profits it makes on this work are made in Zambia, which is the source
of those profits. The company is based in the UK, which is its residence
. Who gets to collect the taxes on those profits: Zambia, or Britain? Source or residence? It is clearly unfair for both countries to tax the same income, so countries sign bilateral tax treaties with each other to agree how the taxes are levied.
A fully source-based model would give Zambia the tax revenues in this example, and a residence-based model would see them flow to Britain (in fact, this example is oversimplified, and in the real world you tend to get a mixture of both; it's a question of emphasis - but even that can have big impacts. Business profits are taxable at source if earned through a "Permanent Establishment". This is defined more narrowly by the OECD Model, which would not cover work done on temporary sites, especially if not owned by the company concerned. The UN Model has a broader definition, which is preferred by capital-importing countries.
The richer, capital-exporting countries prefer the residence principle, especially of income from capital or international investment, and the OECD model reflects this. However, as discussed in the TJN briefing paper
on source and residence taxation (TJN here: we'll write more on this shortly), residence-based taxation is easier to avoid, by routing foreign income through entities in tax havens. The UN model, more representative of the wishes of developing countries, likes it the other way around.
So it was surprising to find that a subcommittee proposed that the UN Committee should delete article 14 of the UN Model, which allows source
taxation of income for independent personal services. OECD had already made this deletion in 2000, on rather technical grounds. The subcommittee’s report did mention that one of its members preferred to retain article 14 "in the circumstances of his country”, but the report gave little consideration to the arguments for this. In fact, this opposition to deleting Article 14 had come from the Chinese expert, who at the meeting had given comprehensive and cogent reasons for the retention, and he was supported in this by representatives from India, Vietnam, Malaysia and others (the expert from Tunisia had been unable to take part in the work of the subcommittee due to lack of resources.)
This subcommittee’s proposal to delete the article 14 clearly showed how the views of the OECD countries tend to dominate, even though they have only 10 of the 25 members of the UN Committee, and it is supposed to formulate an alternative
to the OECD treaty, suitable for developing countries. Many would argue that far from abandoning article 14, it should be revised to strengthen tax at source of income from services. A new subcommittee was set up to consider this, but the work is likely to take several years.
Much more relevant and important was the Committee’s work on strengthening exchange of information. This is clearly in the interests of all countries, except tax havens! The Committee finalised its work on revision of Article 26 of the Model, which significantly expands the scope for information exchange. In particular, it now makes it clear that information should be supplied that would be helpful in combating tax avoidance, and that a state cannot refuse to supply information solely on the grounds of bank secrecy, or because it relates to ownership interests in a legal person. This wider scope could be very important, but of course much depends on the willingness of states not only to include these provisions in their treaties, but also to develop effective mechanisms for putting them into practice.
The Committee also approved proposals for a Code of Conduct on cooperation in combating tax evasion, which had been drawn up by Prof. Michael McIntyre (who wrote about this for TJN here
), and which TJN strongly supports. However, several of the participants quibbled about some of the principles, which suggests that even developing a non-binding Code will meet some difficulties.
It was very timely that the Geneva meeting overlapped with the conference on the fight against international tax evasion and avoidance, organised in Paris by 17 OECD countries. Some of the committee members had come on to Geneva from the Paris meeting, notably the French and Mexican experts, and they emphasised the strong nature of the conclusions
of that meeting, and their backing by Ministers of Finance. The Swiss newspapers that morning had headlined the statement by the German Finance Minister that sanctions would be considered especially against Switzerland, if it continued to use bank secrecy to refuse to provide information to combat tax avoidance. A number of representatives at the Geneva meeting announced that their country would insist that tax treaties now include the new provisions for information exchange that are broader in scope.
The Liechtenstein representative limited himself to noting that these proposed provisions are in the context of double-taxation treaties. The implication of this was that they have limited relevance to the main tax havens (such as Cayman Islands or Lichtenstein), which have no such treaties - unless the OECD countries would be willing to extend treaty benefits to them, in exchange for some information exchange. This is an issue that has been raised by the havens in the negotiations which OECD countries have been attempting with them (so far with little success) to sign free-standing Tax Information Exchange Agreements (TIEAs: “free-standing" means that they are not part of a wider treaty for preventing double taxation).
It seems clear that the only way to make progress on penetrating the havens’ secrecy is to activate the threats of sanctions against them, which have been more strongly expressed in the declaration of conclusions
from the Paris meeting.