Over 10 years ago, the U.N. said it wanted to tax the internet. The organization had a straightforward tax in mind, preferably a small levy on all data sent through the internet.
The idea was that the tax would impose minimal costs on individual users but rake in billions of dollars around the world. Those proceeds would pay for internet development in poorer regions.
But the idea stopped cold when the United States threatened to pull some funding to the U.N. and accused the organization of trying to encroach on its tax sovereignty. To drive home the point, U.S. lawmakers introduced legislation blocking the government from funding any U.N. initiative that tried to tax any aspect of the internet or any U.N. effort to impose taxation on U.S. citizens.
Although lawmakers specifically objected to the idea of the U.N. levying taxes on U.S. citizens, the legislative language appeared to object to activity broader than that. Lawmakers didn’t want any U.S. money involved in the internet taxation discourse.
A decade later, we may be on the cusp of a major OECD international tax overhaul that specifically seeks to impose greater tax burdens on digitalized companies no matter where they do business and a global minimum corporate tax.
For all the troubles the OECD is enduring in pushing its new approach — disagreements over scope, a U.S. proposal to implement a safe harbor regime instead of a new taxing right, and a pandemic — the proposal is still alive and kicking.
The timeline is aggressive. The OECD expects to have a consensus by the end of the year, and the stakes are high. But the role the OECD has taken up speaks to the organization’s powerful tax influence and leads to questions about when, how, and why the OECD became the de facto leader in international tax policy.
Developments over the years tell a story of an OECD that had first-mover advantage in many aspects of international tax policy, starting in the 1960s when it drafted its highly influential model tax convention. The OECD’s closest policy competitor would be the U.N., but its policy at times has felt reactionary to the OECD’s activity.
“In what other sector is the OECD as an organization so important? I don’t think in the trade sphere, certainly not for peacekeeping,” Caplin & Drysdale Chtd. member Elizabeth Stevens told Tax Notes. “I don’t think the OECD is the key player among international organizations in any other area aside from tax.”
Wars, Pandemics, and Tax
The world’s first model tax conventions came about in the shadow of a world war and major pandemic.
In 1920 the world was just beginning to emerge from the devastation wrought by World War I and the 1918 flu pandemic, which together claimed millions of lives.
After so much destabilization, Western leaders wanted to create an organization that would promote world peace and diffuse potential future wars. Their solution was the League of Nations.
But the league quickly realized that it could not properly address political cooperation and stability without addressing the specter of double taxation, which threatened to undermine diplomatic cooperation and stability.
In response, the league created a committee on double taxation and ultimately generated several model tax conventions that inspired global tax treaty drafting long after it disbanded.
But the League of Nations’ life was short; it couldn’t live up to its pacifist promises and was quickly rendered moot as World War II erupted. In some respects, the end of World War II mirrored the end of World War I, because countries emerged from the devastation with a strong desire for multilateralism and collaboration.
As the war wound down, dozens of world leaders converged in San Francisco, where in April 1945 they agreed to create the U.N. Three years later, European countries decided to band together and rebuild their war-ravaged countries via the Organization for European Economic Cooperation (OEEC).
At the time, the U.N. was already moving full steam on double taxation and fiscal reform protocols. It didn’t start from scratch; the League of Nations left behind two particularly influential tax treaty models colloquially known as the Mexico model and London model, and specifically picked the U.N. to carry on its work when it disbanded in 1946.
The Mexico model aligned more strongly with developing country interests and allocated greater taxing rights to source countries. The London model more closely followed the interests of developed countries and provided greater taxing rights to residence countries.
It took the OEEC a couple of years to catch up to the U.N. and assemble a fiscal committee and taxation working group. But when it finally did in 1956, the OEEC unexpectedly found itself on its own.
The U.N. fiscal committee had fizzled out two years before, leaving behind a power vacuum that allowed the OEEC and its successor, the OECD, to have first-mover advantage on multilateral tax policy until the U.N. reentered the game in the late 1960s.
The OEEC’s working parties handled several issues including direct taxation of patent royalties and similar payments, taxation of dividends, and methods to avoid double taxation. It drafted four treaty articles addressing double taxation on income and capital. By the early 1960s, it had helped broker 54 bilateral agreements.
That work was amplified when the OEEC added the United States and Canada to the roster and in 1961 officially became the OECD.
Almost immediately, the OECD started to develop its own model tax convention, which drew heavily on the League of Nations’ London model. The organization released a draft in 1963 and an official model version in 1977. In the intervening years, the OECD expanded and rebranded its fiscal committee into the Committee for Fiscal Affairs and established 15 working parties.
The U.N. reentered the treaty game in the late 1960s when its Economic and Social Council created the Ad Hoc Group of Experts on Tax Treaties Between Developed and Developing Countries. The first order of business was a manual to help developing countries negotiate treaties with their developed counterparts (Manual for the Negotiation of Bilateral Tax Treaties Between Developed and Developing Countries). The second order of business was a 1980 model tax treaty (U.N. Model Double Tax Convention Between Developed and Developing Countries), which more closely aligned with the League of Nations’ Mexico treaty model.
When the OECD sat down to discuss double taxation in the wake of World War II, it may not have explicitly set out to become the global tax policy standard-bearer that it is now known to be. The organization was more concerned with facilitating economic relationships between its member states and boosting those states economically.
For example, the OECD early on addressed tax and development, but partially within the sphere of how OECD countries could benefit from fiscal incentives in developing countries (Fiscal Incentives for Private Investment in Developing Countries).
The fact that the OECD’s membership represented the world’s most economically powerful countries at the time meant that the organization’s standard became the de facto global standard. The U.N.’s work in this area underscored that reality but also reflected the U.N.’s own responsibility for a much larger pool of countries.
The U.N. Ramps Up
In 2000 then-U.N. Secretary General Kofi Annan wanted to know if the U.N. should establish a forum or organization for international tax cooperation. He commissioned a study and drafted an all-star panel of former world leaders, including former Mexican President Ernesto Zedillo, to determine whether the task could be done and how it might fit into the U.N.’s financing for development strategy.
Around that time, the U.N. decided to get more serious about global development financing and launched its first International Conference on Financing for Development in Monterrey, Mexico, in 2002. Tax factored strongly into the U.N.’s plans; it pledged to strengthen international tax cooperation and coordinate multilateral tax work.
The work ramped up gradually. First, the ad hoc tax committee got an upgrade to a formal 25-member U.N. tax committee reporting to the Economic and Social Council and started to meet twice instead of once annually.
Then from 2005 onward the conversation started to expand beyond treaty work to other issues, like addressing international tax evasion, a transfer pricing manual for developing countries, and generating tax capacity building for developing countries.
Eventually, stakeholders started to suggest that the U.N. host an intergovernmental tax body responsible for developing global tax policy, with representation from all U.N. member states. In 2009 the committee started to work on a transfer pricing manual for developing countries.
The OECD’s Strong Decade
Arguably, the OECD experienced some of its strongest tax policy years a decade before the U.N.’s tax reorganization.
In the 1990s the OECD released a series of influential reports and guidelines on transfer pricing, harmful tax practices, and e-commerce and VAT that set the groundwork for the organization’s even more ambitious base erosion and profit-shifting project.
In 1995 the OECD decided to modernize its transfer pricing guidance, which hadn’t been revisited since 1979 when it published a report on transfer pricing issues. Those 1995 guidelines cemented the arm’s-length principle as the OECD’s transfer pricing method of choice and set the playing field for how it should be applied.
Three years later, at the request of the G-7 the OECD released a highly cited report on harmful tax practices that suggested how OECD countries should identify and eliminate tax policies that could create tax havens or otherwise promote unfair tax competition.
That work, which complemented similar work by the EU’s Code of Conduct Group (Business Taxation), spun off into several other projects, including the OECD Forum on Harmful Tax Practices and its framework for international tax information exchanges between authorities.
Around the same time, the OECD launched a major e-commerce tax reform project that addressed cross-border taxation issues, which marked a turning point in the organization’s leadership, according to Arthur Cockfield, a tax professor at Queen’s University Faculty of Law in Kingston, Ontario.
“It was the first time in history that OECD member states, combined with input from nonmember states, created what came to be known as the Ottawa taxation framework conditions, which were guiding principles that OECD countries agreed would guide the development of any of the organization’s subsequent e-commerce tax rules. So that was a major step forward. It did lead to much more influence globally on the OECD’s behalf,” said Cockfield.
Then came BEPS. In 2013 the OECD decided to address BEPS via a massive package of 15 action plans tackling the digital economy, transfer pricing, and more.
At first, BEPS was a collaboration between the OECD and G-20, but the project later opened up to any country that agreed to adhere to BEPS standards — that new coalition became the OECD/G-20 inclusive framework on BEPS.
Was BEPS a success? In some ways, yes.
“There were countries participating in the OECD dialogue through what is now the inclusive framework that had always been rule takers, they were never rulemakers, but now they had a voice in the rule-making process. And that new inclusiveness makes a big difference,” Stevens said.
“While not every one of the BEPS reports is a clear, cogent, and easy read, I think a lot of the work the organization did was really superlative, given that it was able to get consensus on those documents from such a large group of countries,” Stevens said.
She also pointed to the scores of minimum standards, best practices, and recommendations that came out of BEPS as a sign of the organization’s capability and effectiveness.
But others found much to be desired, since the OECD and G-20 developed the BEPS project and approved all 15 action plans before they decided to invite other countries via the inclusive framework.
Much has been said about the impression that the BEPS negotiation process failed to craft truly inclusive solutions, and some have complained about the speed with which the OECD generated all 15 BEPS action reports in a short two-year timespan.
Some felt the BEPS rules layered onto an already complex system and failed to create more clarity because the underlying system remained the same.
“The main innovations out of BEPS were the administrative agreements like the [BEPS multilateral instrument] and [country-by-country reporting] and those really are important administrative agreements, but they don’t really change the substantive tax laws of any country,” Cockfield said. “It was much easier to get consensus on that because there is really no great threat to fiscal sovereignty or to the ability of a country to determine its own fiscal fate.”
U.N. Tax Body vs. OECD Multilateralism
It’s no coincidence that calls for an intergovernmental U.N. tax body intensified after the OECD released its final BEPS reports.
For civil society organizations and developing countries, their experiences with the BEPS process underscored the need to relocate tax policymaking to the U.N., which they felt would provide a neutral policymaking home.
“Since the great majority of United Nations Member States are neither members of OECD nor of the Group of 20, the United Nations Committee of Experts in International Cooperation in Tax Matters has a key role to play, working with these and other relevant forums . . . ensuring the active participation of developing countries, especially the least developed ones, in relevant activities,” the U.N. said at the time.
In 2015 U.N. members put the issue up for a vote in Addis Ababa at the third International Conference on Financing for Development. It failed, and so did a subsequent discussion at the 14th session of the U.N. Conference on Trade and Development in Nairobi in 2016.
The following year, Ecuador doubled down on the issue after it became chair of the G-77 group of developing countries and made an intergovernmental tax body part of its platform. That time around, China also supported the movement, yet it failed to advance.
The result is that the continual rejection of an intergovernmental tax body essentially keeps the locus of power with the OECD.
In 2019 Christine Lagarde, then head of the IMF, applauded the OECD inclusive framework for drawing over 100 countries into its fold, but said the organization could still do more to account for developing country interests.
She pointed out that developing countries needed a stronger role in the international tax policy discussion because they lose roughly $200 billion annually from profit shifting, according to IMF estimates.
At the time, she positioned the IMF as a problem solver that would fully address the interests of developing countries and promoted its own analysis on international tax reform.
In the meantime, the OECD was doing more collaborative work, chiefly through the Platform for Collaboration on Tax, a tie-up between the OECD, U.N., IMF, and World Bank on international tax policy reform and training.
It was created in 2016 and is focusing on how tax fits into the U.N.’s 2030 sustainable development goals, and how it can develop concrete tools to assist low- and middle-income countries on revenue collection.
This time around the OECD learned from the BEPS example and started its digital economy work in the inclusive framework.
Even so, there are concerns that the final product will miss the interests of developing countries. In several OECD consultations, developing countries have indicated that they feel ignored in the process because they are not primarily market countries and therefore might not benefit strongly from the proposed new rules.
“They have other characteristics; many of them have natural resource extraction. Particularly, there are points about how the transfer pricing rules are working, or you can say not working, with regards to extractive industries. . . . This is an issue developing countries have raised,” Tove Maria Ryding, tax coordinator for the European Network on Debt and Development told Tax Notes. “The fact [that] these issues are not getting taken up at the OECD means there is a very clear space for a U.N. negotiation to look at all the things you cannot look at at the OECD.”
There are disagreements over what kinds of companies should be subject to the OECD’s proposals. The OECD has suggested that the extractives and commodities industry would be carved out because taxes on any extraction profits are considered part of the purchase price paid by the extracting company to the resource owner.
Still to be explored is how potential carveouts for extractives and commodities and beyond might be gamed or negatively affect taxing rights.
Martin Hearson of the International Centre for Tax and Development has pointed out that potential extractives and commodities carveouts could serve as a double-edged sword for developing countries, because the carveouts may work in their favor in circumstances in which they do not have large consumer markets, but also blunt any new taxing rights.
The Path Forward
As the OECD moves forward on its latest reforms, there are some concerns that the organization will generate solutions that lack the sort of real fundamental change that governments might be expecting.
“Many of the things we’re seeing play out during the current negotiations we actually saw under the first BEPS negotiations as well,” Ryding said. “Especially the way that it starts with a compelling narrative, and a very good analysis of the problems, and also some very ambitious language about what the process should achieve. But then, step by step the proposals get watered down to the point where they start to look like the system we started with. That’s why it becomes this tinkering around the edges of the tax system instead of a fundamental reform that we need.”
That may be a function of cooperation within a large organization, or it may be a function of the fact that the organization is working with a limited blueprint.
“With BEPS we had defined actions: Here’s the problem, here’s what we’re going to do about it. Now we have something where not everyone even agrees on what the problem is. I think the OECD Centre for Tax Policy and Administration would benefit from more defined, focused projects that leverage its technical expertise,” Stevens said. “Historically, there’s been a policy decided within the G-20 or among various countries, and the OECD gets a mandate for technical implementation. This time they’re tasked with coming up with a policy and brokering agreement on it in addition to working out the technical details. That’s a pretty tough job.”
Beyond that, it is questionable whether there is a real appetite for the kind of multilateralism necessary to push the OECD’s reform process forward.
“I look at all these outside political developments — we have a global trade war between China and the U.S., all sorts of political trends where countries are going their own way, like Brexit, the rise of nationalism and anti-immigration sentiments,” Cockfield said. “I don’t blame the OECD for any of these broader global trends, but it’s those trends that I see frustrating the OECD processes because the OECD relies on soft law, the self-interest of governments to cooperate. Because of these ongoing political factors I worry that the OECD’s international tax power won’t be like it used to.”