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BRICS Nations Must Blaze The Way For A UN Tax Body To Challenge An Unfair System

12/08/2016 11:05 PM IST | Updated 22/08/2016 9:12 AM IST
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Sergei Karpukhin / Reuters

On 22 July, the UN Conference on Trade and Development's (UNCTAD) 14th Quadrennial Conference came to an end. The conference is held every four years and is UNCTAD's highest decision-making body. The present global economic situation, with unprecedented levels of inequality, large scale tax evasion by the rich, increasing trade volatility and a growing decline in multilateralism set the stage for an explosive event. The increasing decline of the West -- and subsequent rise of the East, particularly India and China -- meant that negotiators from developed countries, particularly Western ones, came prepared to give no quarter.

The responsibility for governing the international tax system must be with the UN and not with the OECD as is presently the case.

The Conference lasted five days and witnessed pitched battles over the negotiating text, which in this case was the outcome declaration. The key antagonism was between the Organization for Economic Cooperation and Development (OECD) and the Group of 77 including China (G77 + China). The OECD represents 35 of the world's richest countries, including leading tax havens such as the USA, UK and Luxembourg. The G77 + China represent 135 developing countries, including India and Brazil. During the conference, the OECD members were in two blocs: the European Union (EU) and JZ, which meant non EU nations such as the USA and Japan.

Of all the battles fought, the fiercest one was over taxation. The OECD nations have drawn a ring of fire around the issue of international taxation and are willing to go to any lengths, including threatening poor countries with cuts in Overseas Development Assistance (ODA), to ensure that their norm-setting monopoly -- which is directly opposed to the interests of poor countries -- remains unchallenged.

This year the issue of international taxation made global headlines, especially after the Panama Papers. As a result the OECD countries were especially frantic and thus fanatically determined to maintain the status quo. The G77 put in a series of proposals in the negotiating text on how UNCTAD as a body could help reform the global tax system to make it fairer. These were all rejected by the OECD and in the end entire paragraphs were replaced by a whimpering line that "UNCTAD should also continue its work on taxation as it relates to investment policy" (emphasis added).

This article thus seeks to shed light on: i) the G77 proposals on the role of UNCTAD in international tax reform ii) the road ahead and some political strategies that can be adopted by developing countries.

Role of UNCTAD in international taxation

Before going any further, one thing must be made crystal clear: the responsibility for governing the international tax system must be with the UN and not with the OECD as is presently the case. The current system is utterly exploitative and has been devised purely so that tax revenue is stolen from poor countries and transferred to the OECD nations. The scale of theft is staggering with annual estimates ranging from $100 billion to $1 trillion.

The G77 put in a series of proposals on how UNCTAD could help reform the global tax system to make it fairer. These were all rejected by the OECD...

The key question therefore is how exactly the UN will take over the OECD's responsibilities. The developing world's representative, the G77, has demanded that the UN Committee of Experts on International Cooperation in Tax Matters, a body under the Economic and Social Council (ECOSOC), be upgraded into an intergovernmental tax commission. Such a body would have universal and democratic representation and thus the norms made by it would carry legitimacy and be acceptable to all.

In the run up to the Quadrennial Conference, the G77 took a strategic decision that UNCTAD's mandate should include some aspects of taxation. This strategy was primarily motivated by the need to wrench tax power away from the OECD. However the details of this strategy have not yet been developed and it is unclear how this sits with the existing demand for an intergovernmental tax commission. It is therefore necessary to examine and analyse the tax powers envisaged by G77 for UNCTAD and the proposed commission.

In essence, the powers proposed for UNCTAD are as follows:

  1. Assist developing countries in enhancing their capacities and capabilities in international tax matters.
  2. Support their participation on an equal footing in global initiatives in international taxation.
  3. Provide assistance to countries in ways and means of reducing tax avoidance, including drafting of tax treaties, so that all companies, including multinationals, pay taxes to the governments of countries where economic activity occurs and value is created.
  4. Assist developing countries with taxation of extractive industries.
  5. Establish a standing intergovernmental group of experts to address the above issues.

As mentioned, none of the demands were conceded to and UNCTAD was "permitted" to continue with its existing work on tax as related to investment. In the language of the OECD this effectively means that low taxes for rich corporations are to continue.

Particularly shameful was the deletion of the phrase "equal footing" in demand #2. It exposed the hypocrisy of the OECD which claims to invite developing countries to discuss its proposals on the Base Erosion and Profit Shifting (BEPS) system on an "equal footing". The BEPS consultations are an eyewash as the key decisions have already been taken and so there is no "equal footing" in setting the goals and developing countries can only offer suggestions on the means of their implementation. Thus when faced with "equal footing" that had real meaning (as it would in UNCTAD), the OECD negotiators ruthlessly ensured its removal.

When faced with "equal footing" that had real meaning (as it would in UNCTAD), the OECD negotiators ruthlessly ensured its removal.

This setback though is not permanent and can still be pursued. The issue is how these powers compare with those of the proposed ECOSOC intergovernmental tax commission. The details of these are contained in draft resolution E/2010/L.10, introduced by Yemen on behalf of G77 in the year 2010.

In essence, the powers proposed for the commission are as follows:

  1. Make recommendations to the Economic and Social Council on issues concerning international cooperation in tax matters, including, inter alia, the formulation of norms and the promotion of cooperative policies and practices in this area.
  2. Keep under review United Nations manuals and model conventions on international tax issues and shall cooperate with other international and regional organizations on new and emerging international tax cooperation-related issues.
  3. Convene its first meeting in 2010, in Geneva, and meet biannually thereafter, in New York, and endeavour to hold technically focused meetings of its subsidiary bodies at more frequent intervals.
  4. In its first year of operation, invite the members currently appointed to the Committee of Experts to participate in the new Committee as advisers in their personal capacity.

Demands #1 and #2 clearly give the Commission the norm-setting power that the OECD currently has. Demands #3 and #4 are vaguer and the phrase "technically focused meetings" in #3 hints either at more detailed norm setting (such as preparing guidelines) or at direct capacity building.

An examination of the two sets of powers shows an emerging picture: the ECOSOC Commission is to set norms while UNCTAD is to assist in their execution by providing training, capacity building and technical assistance to the Member States who would actually implement them.

The merits and demerits of this proposed relationship between the two bodies must be evaluated. The key question that arises is why all powers cannot be given to either body so as to ensure unified decision-making and execution. This is relevant especially as coordination within the UN is a real obstacle and can weaken the UN's ability to govern international taxation.

Tax powers in the UN can be distributed between ECOSOC and UNCTAD such that the former sets norms and the latter assists in their execution.

The alternative of a unified body however is unviable. If UNCTAD is chosen, that would mean that it would have norm-setting functions well. These must be made by a democratically elected body. This cannot be housed inside UNCTAD as it would mean two bodies of equivalent power within each other.

If ECOSOC is chosen, it could carry out the functions envisaged for UNCTAD. This would mean a greatly expanded secretariat, which is not an insurmountable obstacle. However the key demerit of this approach is that in ECOSOC tax would be seen as a silo-ized issue, at best seen as a part of financing for development, whereas in UNCTAD it would be seen in conjunction with trade and debt, two issues that have an intimate relationship with taxation. Giving UNCTAD the power of assisting states to execute tax policy would mean that the assistance would be part of a larger narrative of fair trade and debt resolution geared towards developing countries, not exploitative and unaccountable creditors.

The other advantage would be that UNCTAD is housed within the General Assembly while the commission would be under ECOSOC. There would thus be two forums for action, "spreading" the power across the United Nations, rather than restricting it to a particular body. This would mean wider inputs and participation, translating into greater legitimacy.

Another reason for UNCTAD's involvement would be that the history of an institution cannot be divorced from its proposed future. UNCTAD has traditionally been a rallying point for the developing world and though weakened, continues to hold crucial significance for them. Infusing the essential power of taxation into this body would, like a draught from the mythical Fountain of Youth, greatly rejuvenate it and strengthen the overall movement towards a New International Economic Order.

Thus it can be concluded that tax powers in the UN can be distributed between ECOSOC and UNCTAD such that the former sets norms and the latter assists in their execution. The problem of coordination is essentially a managerial one and can be overcome with appropriate clarity of roles, relevant institutional mechanisms (such as quarterly joint sessions) and use of the latest technology.

Political strategies for the road ahead

There are three major forums where this battle is to be fought, with two of them in the UN itself: 1) ECOSOC 2) UNCTAD 3) the international theatre.

The High Level Political Forum, which is ECOSOC's highest decision-making event, passed by with no reference to this crucial issue. Preparation must begin for the next substantive session, with the goal being to rally the numbers necessary to get a resolution passed setting up the intergovernmental tax commission. Under article 67 (2) of the UN Charter, ECOSOC resolutions require a majority of those present and voting.

The BRICS nations can be a powerful force for mobilizing support. India and Brazil have boldly led the G77's movement against the injustices of the OECD...

UNCTAD's next decision-making event will take place in 2020. In the meantime the body must squeeze out whatever it can from the just-ended quadrennial conference. Two decisions are of particular value.

The mandate to work on tax as it relates to investment policy can be interpreted in favour of developing countries. UNCTAD can continue to produce research on the harmful effects of the present tax-investment relationship (especially the deadly "race to the bottom"). In this manner it can counter the propaganda of the OECD.

The new Inter-Governmental Expert Group has been tasked with Financing for Development "as reflected in the Addis Ababa Action Agenda and UNCTAD's work". This is an opening which must be milked for all it is worth. It gives UNCTAD a chance to immediately put into action its proposed mandate of building capacity of member states on tax issues. Of key importance is paragraph 28 of the Addis Agenda which calls for "strengthening of regional networks of tax administrators". UNCTAD can provide assistance to emerging regional forums such as the African Tax Administration Forum and the proposed Asian Tax Forum.

Coming to the international theatre, the BRICS nations can be a powerful force for mobilizing support. India and Brazil have boldly led the G77's movement against the injustices of the OECD while Russia and China have offered tacit support. Their annual summit will be held from 15-16 October 2016 in India. Three major decisions can be taken during this meet.

The first can be a declaration that makes an outright call for ending OECD monopoly and for shifting tax norm-setting power to the UN. This would send a strong political statement.

[BRICS nations could] send the firm message that the present international tax system, which robs the poor and subsidizes the rich, is nearing its end.

The second can be to mandate the New Development Bank (NDB) to sanction grants to those countries that are most dependent on Overseas Development Assistance (ODA) from the OECD members. The threat of ODA fund cuts has been used to coerce poor countries, mostly from Africa and the island nations, into silence. The NDB can be used to assure these countries that they would be provided the money lost from opposing the OECD countries. A certain portion of the Bank's funds can be set aside for grants to these vulnerable nations. They will then be protected from the bullying tactics of OECD and hence able to vote freely in favour of the UN intergovernmental tax commission.

The third can be the establishment of a BRICS tax task force. This can consist of leading academics and bureaucrats from the BRICS countries. Such a task force will not be bound by the constraints of the UN system and can provide a counter-narrative to OECD propaganda. It can provide a BRICS perspective on BEPS, make its own recommendations and provide supportive services to countries. The task force can be housed as a bureau within the NDB itself.

These three strategies would cumulatively deal a mighty blow to OECD dominance. It would send the firm message that the present international tax system, which robs the poor and subsidizes the rich, is nearing its end.

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