Corporate Tax Negotiations at the OECD: Shifts to Ensure Symmetry and Equity

The negotiations on corporate taxation at the Organization for Economic Cooperation and Development’s (OECD) BEPS Inclusive Framework initiative have rightly generated much discussion, both on the process and on the proposed changes in tax policies. Allison Christians has pointed to several concerns that developing countries have with both: the proposal is one that has maximum acceptability by the great powers; the process has been significantly influenced by multinational corporations (MNCs) that obviously have incentives to shape the “consensus” to their preferred position; and, possibly as a result, the proposal by the G24 countries—of including significant economic presence in the formula for apportioning profit—has been “completely excised without explanation.” In response, the OECD’s Ben Dickinson has argued that the role of the great powers is only a small part of a more complex picture, with several new alliances at play creating continual flux. Since several countries are threatening unilateral measures to impose taxes on gross income flows, there is a greater sense of urgency to the process, which would provide collective benefits to all those involved in the consultation.

Both sides make valid points. There is certainly something to be noted, even celebrated, in the process so far: Most of all, the important recognition that global profits of MNCs should be taxed according to multilateral agreements, thereby ending tax competition and the use of tax havens. However, it is equally evident that, of the three original proposals from the US, UK, and G24, the outcome has generally tended toward the first one, largely disregarding the concerns of developing countries. This reinforces the need for a joint negotiating position by developing countries, especially to address the central issues of asymmetry and inequity that are missing from the discussion thus far.

Consider first the issue of negotiating asymmetry. If all participants in a set of negotiations (which are notably not the same as “consultations”!) have the same information and voting rights, then there is clear symmetry. At the “Inclusive” Framework, however, there are major asymmetries. First, information is asymmetrical; both with regard to the underlying data with which costs and benefits of proposals can be judged, and in the professional skills needed to analyse that data. Second, size is also asymmetrical; in terms of ability to persuade other players, derived not only from geopolitical strengths and/or weaknesses but also from size of the economy, scale of investment, number of multinational enterprises (MNEs) headquartered, and their importance, etc. Third, interests are asymmetrical; because beyond the common interest in reducing tax competition and eliminating tax havens, fiscal interests differ depending on whether countries are capital importers or exporters, technological leaders, or followers, etc.

Such asymmetries could be overcome in two ways. First, the OECD itself could 1) reduce information asymmetry by sharing data and analytics in a much more transparent way, 2) ameliorate bargaining asymmetry by listening to and supporting developing countries, and 3) balance asymmetry of interests by openly recognizing and modelling them differently accordingly. Thus far, none of these changes have occurred. And so the second route becomes important, which would involve recognition of the legitimacy of the position of groupings (such as the G24) and explicitly organizing the Inclusive Framework as a negotiating forum rather than as a “consultation.”

What about ensuring equity and fairness in this process? This is a complicated matter, especially as there is a collective action problem in taxation, with tax havens and MNCs as free riders. Though all countries gain to some extent, the gains are different for distinct groups according to their relationship to international investment. For example, capital exporters and capital importers obviously have different interests. Because profits of MNCs are essentially global rather than local, the allocation of taxable profits can be arbitrary or at best opportunistic. This is clearly true if only “residual” profits are considered, but that is deeply problematic and enables transfer pricing misuse to continue even as it treats MNC profits differently from profits of purely domestic companies. But it is also true if all profits (including “routine” profits) are considered.

The other important criterion for taxation is equity; and indeed, both G20 and the OECD Working Party (WP) stress “fairness.” We can distinguish between horizontal (like for like) and vertical (rich versus poor) equity. The criteria for ensuring horizontal equity could include the allocation of taxing rights according to size of economy; very roughly, this could translate into some sort of sales plus employment formula. Negotiating this would necessarily require cooperation of developing countries against the US and the EU. The argument is even stronger with respect to vertical equity, a concept that is implicit in federal fiscal arrangements within nations. In the terms, if taxing rights are global, then they are rights pertaining to the world population. So, vertical equity in its extreme form would require the distribution of taxes to be equal on a per capita basis. In practical terms, this means building a bias towards developing countries.

Both of these issues underline the importance of the right of developing countries to negotiate collectively. Ideally, therefore, these tax negotiations should be transferred to an appropriate body within the United Nations system.