When an international development conference in Addis Ababa almost collapsed last week, the confrontation emerged from an obscure and unlikely source. Who knew that the status of the UN Tax Committee could so stir the emotions?
After taking negotiations to the brink, the G77 group of developing countries climbed down on demands for a global tax body and the rich countries got their way. Campaigners called it a tragic day for developing countries.
If you thought that, you would have needed a very optimistic view of the UN’s abilities in this area.
Campaigners hope for a new global tax system under which developing countries would receive a larger slice of the pie. The slogan at Addis Ababa was: “if you are not at the table, you are on the menu” which may have some truth to it, but does not make the politics of pie slicing any easier.
The political dynamics around this issue in Ethiopia’s capital city illustrate that. It is wishful thinking to think countries are going change their spots just because they find themselves sat in a UN tax plenary.
The good news is that much can still be done under existing structures. There is no such thing as global tax law – the nearest we have are binding multilateral conventions that countries sign up to voluntarily. Instead, entities like the OECD produce models and guidelines – and these are used as the basis for national tax legislation (and sometimes to guide court decisions in the absence of relevant legislation).
The UN already produces alternative models, including a tax treaty and a transfer pricing manual, that deviate from the OECD norm, and there is nothing to stop developing countries adopting these.
Some of the BRICS countries, who were amongst those pushing hardest on tax in Addis, already use transfer pricing rules that they argue are easier to implement in developing countries contexts than the OECD guidelines and help them lay claim to a larger share of the multinational tax base. These countries could do more to develop and promote these alternatives.
Taking the lead
As things stand, developing countries can participate in OECD-led processes that address some aspects of international tax reform – and they have much to gain from doing so. But it is all very much on OECD terms: participating developing countries can push for reforms that would help them, so long as they do not much impinge on the economic interest of rich countries.
When the US would not give emerging economies the representation they wanted at the World Bank, they went ahead and set up their own development banks (the BRICS countries’ New Development Bank launched this week in Shanghai and the China-based Asian Infrastructure Investment Bank (AIIB)) which will have capital of $100 billion.
Developing countries could take inspiration from this and collaborate with each other, perhaps adding policy and political muscle to regional tax administration bodies such as ATAF in Africa and CIAT in Latin America, to develop tax rules more to their liking.
This is not to advocate tax war: effective international taxation requires international cooperation, which means collaboration rather than conflict with the OECD is in the interest of developing countries. Some developed countries are inclined to be helpful – for example the Netherlands recently reopened its tax treaties for renegotiation on more favourable terms with 23 developing countries – so friendly relations can bear fruits.
But if developing countries were to invest more in their own capacity to engage on international tax matters, they could interact with the rich world on a more equal footing. The UN is not the only vehicle for international politics.
It is also worth remembering that high-level policy reform means little if countries do not have the capacity to implement it. There are many other constraints on effective taxation in developing countries. The largest returns, in terms of tax revenue flowing into treasuries, are likely to come from dedicating more resources to tax administration, providing technical assistance and reforming policies such as the inefficient use of tax incentives. The Addis Tax Initiative, launched in Addis last week, to double international support in these areas, should be applauded.
All this said, when it comes to taxation things that once seemed impossible (such as the automatic exchange of information, country-by-country reporting, and registries of beneficial ownership) have a habit of materialising. Some of the more ambitious ideas still out there, like completely changing the basis on which multinational corporations are taxed, may require something like the UN to find the path to implementation, and so the idea of a global tax body should live on.
But developing countries and campaigners need to keep things in perspective and make full use of the arsenal of weapons still at their disposal.