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By Matt Thompson
Law360 (December 11, 2019, 5:44 PM EST) –
Tax justice advocates lined up Wednesday to criticize the Organization for Economic Cooperation and Development as failing to adequately consider the needs of developing countries in its proposals to change international tax norms. Jayati Ghosh, an economics professor, was critical of the OECD's process for changing international tax norms during an online conference hosted by the Tax Justice Network.
Despite the OECD's attempts to give more countries a seat at the table in recent years, speakers at an online conference hosted by the Tax Justice Network asserted the standards-setting process is still skewed toward developed countries and against historic colonies. “Developing countries may be at the table but their job is to shut up and listen,” said Jayati Ghosh, an economics professor at the Center for Economic Studies and Planning at Jawaharlal Nehru University in New Delhi, India.
The OECD has been accused of being too concerned with defending the interests of developed countries and giving too much credence to the views of the U.S. — a criticism echoed by Alex Cobham, director of the Tax Justice Network, who during the conference referred to the organization as a rich countries' club. The inclusive framework was developed in part to address this complaint during a previous overhaul of the international tax system known as the Action Plan on Base Erosion and Profit Shifting. The BEPS project, which finalized a number of new treaty and transfer pricing provisions in 2015, included input from many nonmember countries such as Brazil, China and India. While only 35 countries are OECD members, more than 130 jurisdictions are members of the inclusive framework.
The online conference Wednesday focused on the OECD's current global tax project, an attempt to revamp the international rules to allocate more income to market countries — jurisdictions where companies have customers but not necessarily a physical, taxable presence. The OECD is floating approaches under two “pillars,” the first concerned with the redistribution of taxing rights and the second comprising a minimum tax.
Ghosh questioned whether a method of fractional apportionment, one idea raised under pillar one, was necessary. “If this is a global tax, could it not be apportioned per capita?” Ghosh asked, going on to say the alternative looks like apportioning tax to developed countries based on criteria they have devised rather than on any notion of fairness. In addition, people concerned with global justice and an equitable settlement should not necessarily be bound by the thinking of the so-called unified approach, the OECD's latest iteration of its proposal for redistributing taxing rights, said Edmund FitzGerald, professor emeritus of international development finance at Oxford University and a member of the Independent Commission for the Reform of International Corporate Taxation. “We need to have a wider debate and not necessarily accept the terms set out by the OECD,” FitzGerald said.
Earlier this year, the OECD published three approaches that roughly tracked the views of the U.S., the U.K. and members of the Group of 24 developing countries. One approach, a modified residual profit split method, would have isolated a multinational company's nonroutine returns — the amount left over after affiliates have been paid for their routine contributions — and allocated to market jurisdictions a portion of the nonroutine profit to reflect value not recognized under the current rules. Another, a fractional apportionment method, wouldn't have distinguished between routine and nonroutine profits but would have used a formula to allocate a company's global profits based on employees, assets, sales and users. A third, distribution-based approach would have allocated a baseline of profit into a market jurisdiction that could rise or fall based on the overall company's profitability.
The G-24 proposals didn't feature in the unified approach, representing an unwelcome return to the norm for the OECD, Ghosh said. But David Bradbury, the head of tax policy and statistics at the OECD, said the proposals, in adopting a formulary element that departs from the traditional arm's-length transfer pricing standard, represent a win for developing countries. Under the arm's-length principle, companies within the same group must price transactions with each other as if they were dealing with unrelated companies. Developing countries have long opposed the standard, which they see as subject to manipulation by multinational companies. “Each of these elements would have been heretical taken alone just a short time ago,” Bradbury said, “but they're all in the proposal.”
