The OECD and the UN at a cross road on tax

What will developing and emerging economies work for?

The G24 statement issued in October already alluded to the need for a ‘more inclusive multilateral cooperation’. The document focuses on three tax concepts intended to be beneficial for developing and emerging economies:

1. Withholding taxes on digital and remote transactions, including digital services taxes (DSTs)
2. A significant taxable economic presence
3. Under Pillar 2, the subject to tax rule with a scope encompassing services and capital gains.
   

Didn’t the Inclusive Framework on BEPS (IF) just achieve an historical agreement among 137 countries, including developing and emerging economies?

In presenting the resolution, the representative of Nigeria stated the need for a truly inclusive global framework on tax and transparency. He added that after 10 years of work at the Organization for Economic Cooperation and Development (OECD), it is clear that there is no substitute for the global, inclusive and transparent forum provided by the UN. He barely recognised the role of the OECD: “the OECD has played a role in these areas”. He then urged the Parisian institution to be supportive of the UN efforts. It is not a friendly start to the discussion on how international tax reform should be conducted.

Why didn’t the OECD Countries vote against this?

The US put forward an amendment arguing that a new body would undermine the OECD work. The amendment was rejected with 97 votes against (developing and emerging economies), 55 votes in favour, and 13 abstentions. At the meeting, the UK stated that significant progress was achieved at the OECD with the Global Forum on Transparency and Exchange of Information, the IF and its two‑pillar solution, adding these are significant steps towards a fairer tax system, including for developing countries. Despite voting in favour of the specific US amendment, the UK delegation joined consensus on the broader draft resolution presented by Nigeria.

Although the resolution was approved unanimously, possibly because this is just the first step in a longer process, most developed economies supported it ‘with reservations’, aligning with the UK and US’s view and adding that a second forum would distract already scarce resources. With such a divisive start on the role of the two institutions, the UN and the OECD will likely compete instead of collaborate on the same topics, probably working with different principles.

Key Takeaways

The negotiation on Pillar 1 and 2 seems to have opened the door to even broader discussions on international taxation but overall, it is unclear why a new forum would be able to achieve broader consensus than the current IF and hence, a more cohesive and efficient international tax system. Nonetheless, withholding taxes (e.g., on software payments and royalties) and gross-basis taxation (such as DSTs) so far have received limited focus at the OECD, but could become more prominent in some developing and emerging economies, especially noting that a UN body would operate by majority, potentially making it easier to adopt certain measures. This is likely to imply a more fragmented and higher-tax environment in the medium term, especially for large businesses with a customer/user base in emerging and developed economies and businesses characterised or planning to develop an important online presence (e.g., marketplaces and online sales of physical goods (e.g., fast moving consumer goods, B2B ecommerce), online sale of intangible goods (e.g., software), online provision of services (e.g., travel, education, consultancy)).

To discuss these developments in more detail, please contact me directly, or speak to your usual PwC contact.