(PHOTO CREDITS: Tax Justice Network Africa)
Background
The OECD Inclusive Framework on BEPS (‘Inclusive Framework’) has been discussing taxation of transnational corporations and tax challenges arising from the digitalization of the economy. The impossibility of ring-fencing only the digital economy means that this has opened up a more fundamental discussion on the design of the international tax system. The ‘Inclusive Framework’ agreed on a Programme of Work, published in May 2019, that outlined their work on these reforms.
These reforms are being discussed in the Inclusive Framework under two ‘pillars’:
- Pillar 1 opens up the more fundamental question on taxing rights and where corporate profits should be taxed. This discussion is crucial for developing countries who have long raised concerns about the issue of allocation of taxing rights being skewed in favour of developed countries.
- Pillar 2 concerns the question of whether profits of transnational corporations should be subject to some sort of a minimum rate of tax.
On 9th October 2019, under pillar 1, the OECD Secretariat published its ‘unified approach’ proposal which starts to outline a new system for allocating taxing rights. The proposal claimed to combine elements of three proposals which were originally put forward by USA, UK and G24, and were included in the agreed work programme of the Inclusive Framework. In reality, the OECD Secretariat’s proposal unfortunately ignored the central elements of the G24 proposal and has been criticized by academics such as Prof. Stiglitz and Prof. Ocampo, for the reform likely benefitting OECD countries at the cost of developing countries’ interests.
On 8th November 2019, under pillar 2, the OECD Secretariat published its ‘Global Anti-Base Erosion’ (GloBE) Proposal. However, since the proposal still leaves a number of key questions unanswered, it remains unclear to what extent pillar 2 discussions would benefit developing countries. It is also unclear whether this proposal might benefit residence countries (where the companies are headquartered) or source countries (where companies do business).
On 31 January 2020, the OECD Secretariat announced that the Inclusive Framework has now agreed to go ahead with the ‘unified approach’. This is now the basis of negotiations at the OECD Inclusive Framework and no longer just an OECD Secretariat proposal. The G24 proposal, championed by several developing countries within the OECD Inclusive Framework, is now effectively off the table.
Having been built on top of the tax practices within the imperial trading blocs of the 1920s, the international tax system has historically been against developing country interests. The direction of current reforms in the OECD Inclusive Framework will only end up reinforcing this status quo. With the OECD Inclusive Framework mandated by the G20 to find a solution by the end of 2020, it is crucial for developing countries to consider how they respond collectively and strategically this year. It is time for developing countries to look beyond the OECD.
