03/08/2016 1:26 PM IST | Updated 05/08/2016 8:39 AM IST

Why India Must Keep This International Tax Reform On Top Of BRICS Summit Agenda

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The annual BRICS Summit of the five major emerging national economies -- Brazil, Russia, India, China and South Africa -- will take place on 15-16 October 2016 in Goa. And this weekend, negotiators from the five governments will meet in Bhopal to continue discussing which issues should be on the agenda later this year.

Though it's still to be seen how relevant and influential this five-nation group will be in the long term, BRICS countries have become a crucial voice on issues related to international tax. This year, BRICS countries are in a unique position to show leadership on a proposal that developing countries have been demanding for years: an intergovernmental tax commission at the UN.

Flawed global tax architecture

You probably wouldn't be surprised to learn that loopholes in the international financial system let corporations and wealthy individuals get out of paying their fair share of taxes. You might even know that there are some significant reforms taking place to try and close the gaps in the system. But did you know that these reforms aren't being discussed in a global forum where everyone can participate?

Does it really make sense that 20% of the world's countries are writing the rules for the whole globe?

Instead, reforms are being led by the Organization for Economic Cooperation and Development (OECD), a group of 34 mostly high-income countries; these recommendations are then endorsed by the G20. Developing countries have consistently highlighted their problematic exclusion from these intergovernmental standard setting processes, and have demanded an inclusive institution at the UN to lead these processes so all countries are on equal footing in designing such standards.

They have continually asked a question we often ask ourselves: does it really make sense that 20% of the world's countries are writing the rules for the whole globe?

Considering developing countries are often most adversely impacted by illicit financial flows, ensuring they are included on equal footing is crucial to move towards an effective global financial system that works for everyone. Instead, the OECD, after excluding over a 100 developing countries from decision-making in the agenda setting and design process, is now keen to include everyone at the implementation stage, once the ink is already dry.

The OECD is doing important work and will continue to remain a key forum in the global tax architecture along with other institutions and regional groupings working on these issues. The gap is the lack of a global intergovernmental forum that follows fundamental principles: neutral with no membership to please, democratic, and transparent to citizens and journalists so governments can be held accountable for their negotiation positions (OECD negotiations are behind closed doors).

Key differences between BRICS and OECD on international tax

The issue of allocation of taxing rights is always raised by developing countries as a fundamental flaw in the international tax system. They claim that this flaw favours countries where corporations are headquartered (mostly OECD and G20 countries) as opposed to "source" or developing countries. Kim Brooks, an Australian professor, notes that each of the BRICS countries prioritize taxation at source, and despite being increasingly capital-exporting nations, are more likely to continue to preserve source-based taxation. BRICS countries have been vocal in challenging the dominance of OECD standards, especially in areas such as transfer pricing and tax treaties.

[A]cademics see BRICS as the "necessary counter-force" to the OECD's tax policies...

Other academics see BRICS as the "necessary counter-force" to the OECD's tax policies, further noting that in today's international tax world it makes little sense to promote cooperation on matters that are important for OECD countries, following "their" compatible standards, without opening discussions up to issues important to non-OECD countries. The National Institute of Public Finance and Policy (NIPFP), in analysing the implications of the OECD BEPS Action Plan for India, noted that while welcoming the initiative, it is important to keep in perspective that the OECD is a forum for rich countries who will not come to the "rescue of the developing world." The Indian tax administration has also highlighted their disappointment with the discussions at OECD where their impression was that real issues were being swept under the carpet in favor of superficial ones.

BRICS support for a UN Intergovernmental Tax Commission

The Third Financing for Development negotiations in 2015 saw the G77 (a grouping of 134 developing countries) push strongly to upgrade the current UN Tax Committee to an intergovernmental body under ECOSOC, which was finally blocked by a small handful of OECD countries. While Russia's position on the issue is not known (there are no public statements), Brazil, China, India and South Africa have strongly supported this institutional reform.

On behalf of G77 and China, the statement by South Africa to the United Nations noted:

"The position of the Group is also on record that there remain a number of issues of principle that are important to, and fully endorsed by the Group that have not been adequately accommodated in the current text, including, but not limited to.... The need to fully upgrade the Tax Committee into an intergovernmental body..."

Submission by the People's Republic of China to te United Nations:

"Given the institutional deficiencies of the Committee, China agrees to reforming the institutional arrangement of the Committee, and upgrading it into an intergovernmental organization subordinate to ECOSOC to improve its authority and effectiveness in handling and coordinating international tax matters."

Statement by the Republic of Brazil, Third International Conference on Financing for Development:

"Brazil has been highly engaged in the Global Forum on Exchange of Information for Tax Purposes, as well as in the G20/OECD exercise on Base Erosion and Profit Shifting. Those are important mechanisms of cooperation and represent a change in attitude towards tax evasion and aggressive tax planning. But they are limited in composition and take only in a very limited manner into account the very different realities of developing countries.

A genuine global tax body would, therefore, make tremendous sense in a transformative post-2015 development agenda. It is high time to further strengthen and revamp our work on tax matters at the UN, including through the upgrading of the existing committee to an Intergovernmental Committee of Experts in Tax Matters."

Statement by Government of India, Third International Conference on Financing for Development:

"If this is truly a universal agenda, then all of us must have an equal seat at the table to legislate on global issues.

The lack of an ambitious decision on upgrading the UN Committee of Experts on international cooperation on tax matters into an intergovernmental body, in our view, is a historic missed opportunity."

BRICS 2016 is an opportunity for these countries to re-group on the issue and ensure it stays on the global agenda, building on the momentum from last year. Past leadership on both the primacy of the United Nations and the need to reform international financial architecture place the BRICS nations in a unique position to advocate for the UN Intergovernmental Tax Commission at the BRICS Summit 2016. The Summit could serve as a moment to unite the ongoing efforts of member nations, and for BRICS to play a leadership role in forging a more equitable global financial system for all countries.

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