Making the UN Tax Committee more effective for developing countries
By Abdul Muheet Chowdhary
The United Nations Committee of Experts on International Cooperation in Tax Matters (UN Tax Committee) is an important and influential subsidiary body of the Economic and Social Council (ECOSOC) that shapes standards and guidelines on international taxation. These are the rules through which Multinational Enterprises (MNEs) are taxed. Its role post-COVID-19 has become even more important as countries struggle to raise revenue. Despite being under-resourced, it has produced valuable guidance, especially on the crucial question of the digital economy. As a new Membership of the Committee is about to be selected, this Policy Brief provides practical recommendations on how the Committee can be reformed to be made more effective, especially for the interests of developing countries.
Base Erosion and Profit Shifting in the Extractive Industries
By Danish and Daniel Uribe
Developing countries with significant natural resources have not fully utilised them for financing their development aspirations. Extractive industries and the revenue generated from their extractive activities need to constitute a larger share of domestic resource mobilisation. However, the sector remains beset with massive tax base erosion and profit shifting by large multinational companies. This policy brief therefore looks at the extractive industries, and the potential impact of their practices on the national policies and regulations in developing countries. It further also considers some current initiatives at the international level for enabling countries to obtain more revenue from natural resource extraction, and offers some observations on the policy options available to developing countries.
The Role of South-South Cooperation in Combatting Illicit Financial Flows
By Manuel F Montes
Developing countries bear the brunt of costs from illicit financial flows (IFFs). These losses are the result of the facilities that the global system provides transnational companies, operating in multiple tax jurisdictions, to move their profits to favorable locations. International cooperation has been seen to be a key ingredient in restricting IFFs. However, a difference in interests in the treatment of many types of transactions between developed and developing countries is an obstacle to a fast solution of the problem. Developing countries must seek to seize the initiative to restrict their losses from IFFs. They can deploy various joint and concerted actions, within the umbrella of the principles of South-South cooperation for this purpose.
Addressing Developing Countries’ Tax Challenges of the Digitalization of the Economy
By Monica Victor
This Policy Brief sheds light on some of the implications for developing countries concerning the new international taxation global governance structure and the ongoing corporate tax reform process under the Organisation for Economic Co-operation and Development and the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Project umbrella in the context of the digitalization of the economy. The objective is to inform developing country tax authorities on the issues that may require further South-South cooperation and action to protect taxing rights that are of vital importance for the achievement of the Sustainable Development Goals. Firstly, the new international collaborative mechanisms created after the BEPS Project – the Platform for Collaboration on Tax and the Inclusive Framework on BEPS – are described. Secondly, the international tax reform proposals under negotiations in the Inclusive Framework on BEPS are outlined. The final remarks will address the challenges for developing countries to participate in the ongoing international tax reform effectively.
Gender, Tax Reform and Taxation Cooperation Issues: Navigating Equity and Efficiency under Policy Constraints
By Dr. Mariama Williams
This policy brief has sought to present a review of the state of thinking and research on a pressing issue of the day: tax reform and tax cooperation and its gendered impacts. There is undeniably widespread agreement amongst all the entities of global governance with responsibility for a role in macroeconomic, financial and trade policies that gender equality and women’s empowerment are important to sustained growth and development. Increasingly, these same voices are articulating and researching on how fiscal policy both on the budgetary and on the revenue side can be made more efficient, gender sensitive and gender responsive. Taxation is the latest area of focused attention in this regard. There is now a quite strong body of work, including case studies, that demonstrates how the tax system can work to the disadvantage of socio-economic development and social goals including gender equality and women’s empowerment.
Improving Transfer Pricing Audit Challenges in Africa through Modern Legislation and Regulations
By Thulani Shongwe
Auditing multinational enterprises often involves a broad range of complex technical issues, and transfer pricing (TP) is often the most important one. This policy brief looks at some of the key aspects of the modern TP legislation and illustrates how different drafting of regulations can assist in additional revenue collection as well as increased compliance. It further provides practical examples from real cases to show where poor legislation has given rise to tax planning and to profit shifting. Lastly, the brief offers practical solutions to some of the transactions illustrated through the African Tax Administration Forum (ATAF) Suggested Approach to Drafting Transfer Pricing Legislation.
Developing Countries and the Contemporary International Tax System: BEPS and other issues
By Marcos Aurélio Pereira Valadão
This policy brief addresses the design of international taxation and tax cooperation in the context of issues presented in the Organisation of Economic Co-operation and Development (OECD)/Group of Twenty (G20) Base Erosion and Profit Shifting (BEPS)Project. It further considers their significance for developing countries and provides the Brazilian approach to those issues. The brief concludes by exploring the importance of regional cooperation vis-à-vis international organizations and highlights relevant considerations for developing countries engaging with the contemporary international tax system.
Illicit Financial Flows: Conceptual and Practical Issues
By Hon. Irene Ovonji-Odida and Algresia Akwi-Ogojo
The issue of illicit financial flows (IFFs) is of great significance for many countries looking to mobilize domestic resources for achieving their development goals. The High Level Panel on Illicit Financial Flows from Africa, led by H.E. Thabo Mbeki, brought the issue into the global spotlight, notably since the release of exposés like the ‘Panama Papers’. This policy brief elaborates on the conceptual underpinnings of IFFs, its sources and the development costs they generate. Building on the report of the High Level Panel, it provides recommendations to stem IFFs from developing countries.
The Definition and Treatment of Tax Havens in Brazilian Tax Law between 1995 and 2015
By Alexandre Akio Lage Martins
Over the years, a number of ‘tax haven lists’ have been created at the national and international level, with varying definitions and criteria used to identify jurisdictions falling under their scope. This policy brief presents the experience of Brazil in compiling their national list of tax havens, the road map they followed for its implementation, and the impact that it has had on their foreign investment flows. It also provides the lessons learnt from this experience, which can be positively utilized by other developing countries.
Exchange of Information: Indian Experience, Developing Country Implications
By Jahanzeb Akhtar
Exchange of tax-related information between countries is a critical tool for addressing information asymmetries between governments and taxpayers that facilitate tax evasion/avoidance. However, the existing system of information exchange has been essentially designed and implemented by the OECD, without the participation of developing countries. This policy brief thus discusses India’s experience with implementing information exchange for tax and other purposes, with lessons being drawn for other developing countries grappling with base erosion and profit shifting.
Interaction of Transfer Pricing & Profit Attribution: Conceptual and Policy Issues for Developing Countries
By Dr. Vinay Kumar Singh
Till 2010, model tax conventions treated profit attribution to permanent establishments and transfer pricing under different articles, and profit attribution under Article 7 allowed sales to be taken into account both in the direct accounting method as well as the indirect apportionment method. However, the revised Article 7 in the 2010 update of the OECD Convention approximated profit attribution with transfer pricing and omitted the option of apportionment, thereby undermining sales and contributions made by market jurisdiction to business profits. When a tax treaty retains Article 7 based on the UN Convention or the earlier OECD Convention, Contracting States can take sales into account and also opt for apportionment. Developing countries need to fully understand these implications of Article 7 in their tax treaties, and opt for informed choices for transfer pricing and profit attribution to permanent establishments, including apportionment that takes sales into account.
Transfer Pricing: Concepts and Practices of the ‘Sixth Method’ in Transfer Pricing
Many developing countries are particularly concerned with problems of transfer pricing in the extractive industries, which are often significant components of their economies. Similar to other sectors, profit attribution may be highly dependent on the valuation of commodity exports. For this reason, a number of developing countries have adopted the ‘Sixth Method’, following the Argentine experience. This method aims to establish a clear and easily administered benchmark and avoid the need for subjective judgment and discretion.