Shift In Global Tax Dynamics From OECD To UN Could Benefit Countries Like India

On November 22, 125 members of the United Nations voted for the historic resolution brought by the African Group, seeking to shift decision making powers relating to international taxation from the Organisation for Economic Cooperation and Development (OECD) to a more equitable and inclusive platform. India voted in favour of the resolution, aligning with other BRIC nations – Brazil, Russia, China and South Africa.

The resolution titled ‘Promoting Inclusive and Effective International Tax Cooperation at the United Nations’ was passed in a ratio of 125:48.

Despite last-minute efforts by affluent Western nations and the European Union (EU) bloc to thwart the plan, the UN General Assembly demonstrated overwhelming support for the resolution. Notable dissenters included the world’s richest nations - the United States, the United Kingdom, the Netherlands, Switzerland, Japan, France, and Germany.

If implemented successfully, the move could save US$5 trillion from being lost to tax havens over the next decade, according to London-based advocacy group Tax Justice Network.

The November 22 resolution calls for setting up an ad-hoc inter-governmental committee, with no more than 20 member nations on board, that will prepare the terms of reference to develop a new UN Framework Convention for international tax cooperation.

Shift In Tax Dynamics

The new arrangement is proposed to ensure a fair distribution of taxes to source jurisdictions, a development that could benefit countries like India. The prevailing rules relating to international countries are seen as favouring rich countries that are capital exporting and are home to a majority of global companies.

Currently, most regulations governing the international tax system stem from bilateral tax treaties established between different countries. More than 3,000 bilateral income tax treaties are currently in effect, and the number is growing.

The overwhelming majority of these treaties are based in a large part on the United Nations Model Double Taxation Convention between Developed and Developing Countries (United Nations Model Convention) and the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (OECD Model).

However, there is criticism suggesting that the rules outlined in the OECD model tend to favour countries with significant capital exports. For many years, the OECD consisting of 38 mostly affluent nations, including the UK and the US, has held significant influence over international tax policies.

 

Role Of Base Erosion And Profit Shifting (BEPS)

In recent times, globalisation has brought business opportunities and increased investments, with world trade volume and value growing at annual pace of 4 per cent and 6 per cent respectively since 1995. However, this interconnectedness has posed challenges for fair global taxation.

Cross-border profit shifting by multinational enterprises (MNEs) and heightened tax competition have strained the century-old tax systems. The MNEs have disproportionately exploited gaps in tax rules, engaging in base erosion and profit shifting (BEPS), thus affecting developing countries reliant on corporate income taxes.

About a decade ago, the OECD and G20 initiated a comprehensive reform process known as the "Inclusive Framework" (IF) on BEPS. This initiative had over 100 countries as participants. The BEPS framework, structured around a 15-point action plan, gave rise to three major international initiatives: the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), Pillar One, and Pillar Two.

The MLI took effect in 2018, with 102 jurisdictions joining thus far, and 85 of them ratifying, accepting, or approving the MLI. It covers approximately 1,900 bilateral tax treaties. However, the implementation of Pillar One and Pillar Two is still pending.

Pillar 1 seeks a global agreement to change how business profits are taxed, expanding the taxing rights of jurisdictions on profits exceeding US$ 125 billion. Pillar Two aims to introduce a new international tax regime for multinational enterprises, ensuring that they face minimum global tax burden and a level playing field in the realm of corporate taxation.

 

Road Ahead

The adoption of this resolution marks a historic moment in international tax for several reasons.

Firstly, it's a groundbreaking shift as the UN, for the first time in international tax history, has independently taken the initiative to examine and bring about change.

Secondly, at a political level, the resolution signifies a struggle between the developed and developing worlds, revealing a potential shift in power dynamics in favour of developing countries.

Emerging economies stand to gain increased capacity to mobilise domestic resources for development projects and social welfare programmes.

For developed countries, it offers the prospect of a level playing field, curbing instances of tax evasion that undermine economic fairness.

Although the resolution represents a substantial commitment by the UN to shape international taxation norms, it's premature to predict the outcome definitively.

Apart from subsequent confirmation processes, the road ahead will heavily rely on the composition, work, and results of the inter-governmental committee responsible for setting the agenda for international tax reform.

(Aseem Chawla is an independent tax consultant. Views expressed are personal)