Wednesday, March 28, 2012

Guest blog on rifts between the OECD and United Nations on international tax

Guest blog by David Spencer, TJN Senior Adviser.

This is adapted from an article with a different headline first published by the International Enforcement Law Reporter, Volume 28, Issue 5, May, 2012 and is reprinted with permission

ECOSOC, the Economic and Social Council of the United Nations, held a Meeting in New York on March 15 on International Cooperation in Tax 
Matters and Institutional Arrangement to Promote Cooperation. The main issue to consider was the status of the Committee of Experts on International Cooperation in Tax Matters, commonly referred to as the “UN Tax Committee,” and in particular whether this Committee should be upgraded to an intergovernmental entity. The G77 group of developing countries and China, representing 131 UN member countries, want the UN Tax Committee to be upgraded from a mere Committee to a more powerful intergovernmental commission, with additional resources from the UN budget. The OECD and the EU adamantly oppose that.

The current mandate of the UN Tax Committee is to: 

• Keep reviewing and updating the United Nations Model Double Taxation Convention between Developed and Developing Countries (“UN Model Income Tax Treaty”);
• Provide a framework for dialogue, to enhance and promote international tax cooperation among national tax authorities;
• Consider how new and emerging issues could affect international cooperation in tax matters and develop assessments, commentaries and appropriate recommendations;
• Make recommendations on building capacity and providing technical assistance to developing countries and countries with economies in transition; and
• Give special attention to developing countries and countries with economies in transition in dealing with all the above issues.
The UN Tax Committee’s main task has been to update the UN Model Income Tax Treaty. The Treaty generally follows the OECD Model Tax Convention on Income and on Capital (“OECD Model Income Tax Treaty”), but the UN Treaty grants more taxing rights to “source countries” -- that is, countries where the income has its source, generally developing countries, as opposed to ‘residence countries’ where the multinational corporations are resident (which usually means wealthy countries; see our briefing paper on Source- and Residence- taxation for more details.) The OECD Model Income Tax Treaty grants more taxing rights to the “residence countries.”

The UN Tax Committee also has a major project to develop a Transfer Pricing Manual for developing countries (see our Transfer Pricing page for background).

The UN Tax Committee has 25 members: tax experts nominated by twenty-five countries and chosen by the UN Secretary General. Twelve (12/25 or 48 percent) were nominated by and are from OECD countries, and thirteen (13/25 or 52 percent) are from non-OECD countries. This composition does not reflect UN membership: the 34 OECD members represent only about 18 percent of the 193 member countries of the United Nations, while the remaining 159 represent 82 percent.

ECOSOC had in 2010 requested the U.N. Secretary General to submit a report by March 2011 “examining the strengthening of institutional arrangements to promote international cooperation in tax matters, including the UN Tax Committee.”

The Secretary General issued his report on February 28, 2011. It concluded:
75. There currently exists no single entity with the global legitimacy, resources and expertise to serve as a single coordinating body for international tax cooperation. The possibility of establishing such single norm-setting body has found little support in practice. In the absence of such an entity, organizations active in this area must work together with a view to meeting common tax and development goals in the most efficient, responsive and participatory ways.

76. While each country is responsible for its own tax system, the U.N. universal membership and legitimacy can be a catalyst for increased international cooperation in tax matters to the benefit of developed and developing countries alike. Since the great majority of U.N. member countries are not members of either OECD or the G-20, the U.N. has a key role to play, working with these and other relevant fora such as the Bretton Woods institutions and regional associations of tax administrations, towards ensuring the active participation of developing countries especially the least-developed ones, in relevant activities.

77. ECOSOC may wish to consider three options analyzed [below] or any other modalities for the strengthening of institutional arrangements within the U.N. to promote international cooperation in tax matters, including [the UN Tax Committee]. Ensuring that the U.N. plays its proper role in international tax cooperation in terms of its institutional capacity would be a significant contribution by ECOSOC to enhancing domestic resource mobilization for development. It would respond to a real opportunity, and an urgent need, for greater international cooperation in tax matters for the benefit of both developed and developing countries in their common pursuit of achieving the MDGs [Millennium Development Goals] by 2015.
The 2011 Report suggested three options. First, strengthening the existing arrangements within the United Nations while retaining the current format of the UN Tax Committee; second, converting the UN Tax Committee into an intergovernmental Commission as a subsidiary body of ECOSOC; and third, creating an intergovernmental Commission and retaining the current UN Tax Committee as a subsidiary body of the Commission.

ECOSOC met in New York on April 26th, 2011, to consider these options. In general, the G-77 and China favored [and continue to favor] a universal, intergovernmental commission. The EU countries, the OECD including the United States opposed and continue to oppose that adamantly. In view of the divergent positions, negotiations continued, but unsuccessfully.

In February this year, the UN Secretary General issued a second report further detailing the arguments for strengthening the UN Tax Committee. It concluded:
71. The universal membership in the United Nations, as well as its history and expertise in the area of international taxation, make it well-placed to continue, through the Committee of Experts on International Cooperation Tax Matters [the UN Tax Committee] to make a distinctive, practical and enduring contribution to improving international tax cooperation, which is increasingly understood as a key path to sustainable development. The distinct and unique role of the Committee is well accepted. Likewise, the existing working methods of the Committee are appreciated by the international community as a generally efficient way of meeting its mandate to the greatest extent possible, from within current resources. While there is inevitably room for the improvement of its methods, there is a widespread agreement among the Committee members and more broadly that additional resources are urgently needed to support its work and to enable it to meet its mandate. These increased resources are necessary, inter alia, to strengthen the Secretariat’s capacity to support the work of the Committee and its subcommittees and to ensure that the subcommittees are sufficiently balanced, representative and able to meet their specific mandates to the satisfaction of the Committee and the United Nation Member States.

72. While each country is responsible for its own tax system, the United Nations, thanks to its universal membership and its legitimacy, can be a catalyst for increased international cooperation in tax matters for the benefit of developed and developing countries alike. Since the great majority of United Nations Member States are not members of either OECD or the Group of 20, it is the role of the United Nations to ensure the active participation of developing countries including the least developed countries, in international tax cooperation activities, which will ultimately be of benefit to them. Only if this level playing field is achieved, can enhanced tax cooperation be truly respected as global. At present, there appears to be a moment in time when the proper application of resources could bring that goal within reach.

73. To that end, the United Nations tax work should be focused on providing leadership role in areas where there are gaps, including in term of the voice and participations of developing countries, which the Organization is uniquely placed to address. Such a leadership role would best be achieved by working cooperatively with others, recognizing their distinct roles and the relationship between those roles and that of the United Nations.
At the March 15, 2012 meeting in New York of ECOSOC, the differences between the OECD/EU countries and the rest of the world remained severe. In adamantly opposing the upgrading of the UN Tax Committee, the OECD/EU countries are in effect trying to concentrate and monopolise the debate on international tax matters within the OECD Global Forums (see our paper on the OECD Global Forum here). The Group of 77 and China argue that only the United Nations has the universality and legitimacy to serve as a forum for the consideration of international tax matters. Reaching a consensus on this issue seems difficult.

Also significant at the March 15, 2012 meeting of ECOSOC was a statement by the Ambassador from India that the UN Tax Committee’s Transfer Pricing Manual for Developing Countries should not be based entirely on the OECD’s Transfer Pricing Guidelines which represents the interests of only the 34 countries members of the OECD. The Indian language was quite strong: for example:
"It is inconceivable as to how a standard developed by Government of only 34 countries can be accepted by Government of other countries as 'standard' of sharing of revenue on international transactions between source and resident country, particularly when it only takes care of the interest of developed countries and has seriously restricted the taxing powers of source country."
The members of the UN Tax Committee from China and Brazil had also generally supported the position of the Indian Government on this issue.



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