Designing a Developing Country Agenda on International Tax Cooperation
The developing countries should have a say in global discussions and decisions on taxation issues. They have until now been mainly excluded. The South Centre organised a workshop for tax policy makers and experts from developing countries to discuss what are the taxation issues of interest to the developing countries that should form the basis of a global agenda. The following is a report of the workshop.
By Manuel F. Montes
On 4 and 5 February 2016, fifteen senior tax policy makers and experts explored, in a two-day meeting convened by the South Centre in Geneva, the elements of a developing country agenda on international tax cooperation.
Recent events created the need to create a space to advance a developing country agenda on international tax cooperation. The meeting conclusion was that it is timely to create such a space.
At the Third International Conference on Financing for Development in Addis Ababa in mid-July 2015, developed countries blocked a proposal to create an intergovernmental tax body in the United Nations (UN) to replace a purely advisory committee of experts now operating in the UN. This leaves the OECD as the sole body for setting norms and standards on tax cooperation at the international level. As non-members in the OECD, developing countries do not participate in agenda setting and do not have the same standing as members in decision-making.
In October, the outcomes of the G20 and OECD project called Base Erosion and Profit Shifting (BEPS) did not respond to the most critical needs of developing countries in tax cooperation, such as profit-split methods between residence and source taxation, taxation of technical services (administrative, management, technical support) and the treatment of enterprises in extractive industries, which are very important for developing countries.
The two-day meeting at the South Centre considered these topics and other critical topics of interest to developing countries.
A developing country agenda in international tax cooperation can potentially contribute in three ways: (1) to assist country authorities in undertaking better research, upgrading local capacity and in designing effective tax policies for their own countries; (2) to strengthen and better coordinate developing country engagement in negotiations in international tax cooperation activities such as in the OECD-G20 processes, the UN tax cooperation work, and regional cooperation activities where there are operating fora in Latin America and Africa, but not in Asia; (3) establish international tax cooperation mechanisms among developing country authorities, arriving at agreed norms and mutual action.
None of these activities are in conflict with OECD, or UN, or other international engagements, but these activities would strengthen developing country voices and contributions to other processes. Expanding South-South cooperation unleashes the possibility of identifying tax policies more in tune with needs and with greater effectiveness in developing country contexts. To be valuable, it is important that South-South cooperation be undertaken in a regular process, such as being anchored in annual meetings, and not done in an ad hoc manner as it is now.
In his lead-off remarks, Jose Antonio Ocampo, economics professor at Columbia University and former Colombian minister of finance, highlighted the ruinous tax competition among developing countries seeking to attract foreign investment including quite costly tax incentives for foreign investors. Upgrading cooperation and coordination (especially at the regional level) and applying other means to attract investment can be pursued as a South-South cooperation objective. On the accusations by OECD countries that developing countries are hosting tax secrecy jurisdictions that undermine their tax systems, Ocampo pointed out the largest and most harmful tax havens are located in territories under the umbrella of developed countries (such as the UK’s crown territories) and these are indispensable components of the financial centres that developed countries play host to.
Logan Wort, Executive Director of the African Tax Administration Forum (ATAF) based in Pretoria, emphasized that an indispensable step, even before worrying about the negative or positive impact of tax cooperation and treaties, is the strengthening of domestic tax laws.
Ms. Anita Kapur (former Chairperson of the Central Board of Direct Taxes of India) and Mr. Flavio Araujo (Coordinator General of International Relations, Secretariat of the Federal Revenue of Brazil) discussed the work of the tax administrators of the BRICS countries in tax cooperation. The two of them shared many of innovations in their countries that have not been recognized or considered by OECD as consistent with its approaches, even when these could be more practical for developing countries. For example, Brazil imposes differential withholding taxes on transactions with an official list it maintains of tax havens, based on legislated criteria. The OECD has not managed to keep countries on its list of “uncooperative tax havens.”
BRICS countries are also capital exporters, unlike many other developing countries. One thing that BRICS countries could contribute is to “do no harm” to the interests shared among developing countries to obtain more revenue from source taxation.
Mr. Ignatius Kawala Mvula, Assistant Director at the Zambia Revenue Authority, and a member of the UN Committee on International Cooperation in Tax Matters, led the discussion on the taxing rights over services – such as administration, management, and technical services – provided to subsidiaries from headquarters. The UN tax committee has made excellent progress in proposing a different treatment compared to the OECD approach which relies on a separate entity principle and is about to promulgate a set of expert suggestions. This would be a major milestone, the introduction of a new article (Article 14) in the UN tax model.
Eric Mensah, Chief Inspector of Taxes, Ghana Revenue Authority, discussed, how, at the end of the commodity boom, developing countries, especially in Africa, have started an effort to change their policies to make sure that the country obtains its fair share of the benefits from a commodity boom. These countries are also seeking to coordinate better their investment and tax policies so that potential mining investors do not play off one country against another to obtain a favorable treatment.
Erika Siu, independent consultant, discussed issues around transfer pricing and taxing multinationals as single firms. Developing countries have a material interest in relying on taxation of income at the source instead of by residence. Disciplines on private transfer pricing practices are of paramount interest to developing countries because of its effect on the source tax base of these practices. UNCTAD estimates that developing countries ‘lose’ $100 billion per year in revenues as a result of transfer mispricing; the OECD estimate for all countries is $100 to $240 billion per year.
Prof. Annette Oguttu, Professor of Law, University of South Africa, led the discussion on illicit financial flows. Upgrading transparency, international cooperation and sharing information on investors are important steps. African countries are seeking to agree on standards of cooperation to combat these flows and protect their public revenues.
In leading the discussion on tax competition and tax cooperation post-BEPS, Dereje Alemayehu, Chair of the Global Alliance for Tax Justice, said that it is a mistake to take the view that the BEPS action points, even though they are many and detailed, constitute the kind of response in the priority list of developing countries. BEPS was concluded hastily and is incomplete and unsatisfactory in many aspects but now the global community is being asked to implement it. The manifold pressures and maneuvers on the part of OECD member states, especially its dominant countries such as the United States, to locate all tax cooperation decision-making to the purview of the OECD is not in the interest of developing countries, being inherently disadvantaged in this arena.
In discussing “Next steps: Research and Advocacy Priorities,” Mr. Alvin Mosioma, founding direction of Tax Justice Network Africa, identified key priorities to include: (1) tax competition and tax incentives; (2) the ineffectiveness of existing transfer pricing standards; (3) BEPS gaps, international dominance, and legitimacy; (4) ignorance at the highest policy levels on the part of developing country authorities on the linkages between tax policy/cooperation with the overall development challenge; (5) what are efficient and effective tax policies applicable to developing countries; (6) how to elevate and contextualize alternatives that are more congruent with developing country needs and priorities.
There appeared to be a general view that upgrading and regularizing tax cooperation among developing countries is a workable project.
The BRICS discussion suggests that South-South cooperation is working and is possible and can be expanded among developing countries. It is important to recognize the political dimensions of tax cooperation, including among developing countries.
Any agenda among and for developing countries will include issues where there is common ground and other issues where there will be uncomfortable discussions, such as that of tax competition. Any developing country forum must incorporate both kinds of issues and confront problems that are created by developing country policies themselves. This is why it is important to create a safe space where developing country officials can discuss things candidly.
A developing country forum must create value for tax administrators and policy makers. The two-day meeting identified quite a few examples of tax policies and practices that would be of interest to administrators and policy experts. A developing country forum should be able to draw on the expertise in developing countries. It would be helpful if these successful practices could be documented and shared among developing country officials though publications and policy briefs.
An overall conclusion was the unqualified support on the part of the participants for additional follow up efforts to try to create a regular forum among developing countries on international tax cooperation. This forum could serve as a venue to improve coordination among developing countries in their participation in international activities such as at the UN, the IMF, and the OECD. A regular annual forum could provide the space to share and analyze effective practices more appropriate for developing country constraints, even if these practices are not recognized by developed country tax authorities.
Manuel F. Montes is the Senior Advisor on Finance and Development at the South Centre.
