As published on law360.com/tax-authority, Friday 19 June, 2020.
The United Nations' tax committee opens its annual meeting Monday facing fresh challenges posed by COVID-19 and the shifting landscape for global tax discussions even as it contends with lingering issues affecting developing countries, practitioners said.
While the coronavirus pandemic's impact will be felt in the virtual nature of the five-day meeting, a similar sense of immediacy surrounds the committee because of questions about the relevance of tax policy talks through the Organization for Economic Cooperation and Development.
The OECD, consisting of 37 wealthy nations, has sometimes seemed to eclipse the committee as the world's premier talking shop for tax policy makers, according to developing countries' representatives. They have sought to shift prominence to the U.N. panel — formally the U.N. Committee of Experts on International Cooperation in Tax Matters — on the grounds that their concerns are better addressed in that forum.
At a recent webinar organized by the Independent Commission for the Reform of International Corporate Taxation, scholars including economists Joseph Stiglitz and Thomas Piketty discussed having the United Nations play a greater role in international tax policy.
The OECD, already under pressure to reach a consensus among its members and over 100 additional countries and territories on how to tax the digital economy, drew new questions about its efficacy after news that the U.S. had withdrawn from those negotiations. A day before Tuesday's revelation, the U.N. committee received the last of the comments it had solicited from civil society groups in a consultation about the OECD's push to modernize corporate tax rules.
Several of the international organizations that responded in writing to the May 30 consultation said the committee would help developing countries get their fair share of tax revenue from digital services if it rejected the consensus-driven approach of the OECD's inclusive framework on base erosion and profit shifting.
At its 20th session next week, the civil society groups wrote, the committee should seek alternatives to residence-based taxation along with its scheduled agenda items of updating the U.N. model tax treaty and transfer pricing manual, developing new tax products and generating guidance on tax implications of the digitalized global economy.
While it welcomed the committee's focus on digital taxation, the BEPS Monitoring Group, a nongovernment group composed of tax experts, said in its consultation response that the OECD-led effort "has produced little to benefit developing countries."
The group's letter added that "even the current negotiations in the inclusive framework for BEPS continue to be dominated by OECD countries, and to favor residence-based taxation."
Developing countries have historically argued against a purely physical definition of a permanent establishment, or taxable presence in a given jurisdiction, the group noted. Those concerns, it explained, have been heightened because the shift in transactions for goods and services to online platforms has meant lost revenue for these countries.
"Taxing income where activities take place means giving priority to source taxation, which has always been the concern of developing countries, as reflected in the U.N. model convention," the BEPS Monitoring Group stated.
The group also wrote that there are flaws in how the OECD's inclusive framework deals with income allocation by multinational corporations. Its letter said standards for bilateral and multilateral tax treaties have been dominated by capital-exporting countries, which crafted them to restrict source taxation and prioritize investors' countries of residence. But large multinationals, it said, "exploited the concept of residence to design complex tax avoidance structures, while the [multinationals'] home countries weakened and have effectively dismantled their rules on controlled foreign corporations."
It called on the committee to focus on attributing multinationals' profits to permanent establishments and reviewing Article 5.3.b of the U.N. model treaty, which allows taxation of income from services provided by personnel physically in the jurisdiction.
The U.N. committee has identified as its chief complaint about the BEPS project the inability to let jurisdictions, using the criteria for permanent establishment in treaties, tax profits of corporations' new business models that didn't require a physical presence in markets where profits were made.
Other consultation responses to the committee focused on complexities in the OECD's two-pillar approach for valuing digital services. The Civil Society Financing for Development Group advised the committee to reject the OECD's approach on the basis that several aspects would make digital business profits virtually untaxable in developing countries, whose tax administrations are lacking in resources.
The Pillar One approach, published by the OECD in October, proposes a three-tiered method for allocating profit to be used by consumer-facing businesses and providers of automated digital services on three groupwide profit categories in market jurisdictions.
But the Civil Society Financing for Development Group said it objects to the so-called unified approach because of its complexity, the OECD's "flawed" transfer pricing guidelines, the high global revenue threshold of €750 million ($838 million) a year for multinationals and the splitting of profits into "residual," or nonroutine business, and "routine" categories.
The organization's letter urged the committee to back a digital tax proposal from the Group of 24, which coordinates developing countries on monetary and development issues. In November, the G-24 submitted comments to the OECD expressing concern over representation and pushing for a system that would use withholding taxes to administer a simpler formula for allocating corporate profits in a jurisdiction.
The African Tax Administration Forum expressed concern in its letter to the U.N. committee about the difficulty of identifying entities in the first of the OECD's three Pillar One income categories. The category, Amount A, would represent a new taxing right for market jurisdictions, based on sales and allocation of the affected company's nonroutine, or residual, profits.
The ATAF, which earlier this month said it would soon publish guidance for African countries considering digital services tax legislation, said it saw complexities in determining which entities should pay Amount A and which jurisdictions should receive relief for Amount A.
The tax administrators group didn't endorse an approach for taxing digital services, but it said such levies could be an option for countries desperate for revenue because of the pandemic. It said waiting for the outcome of the OECD's global initiative carries "significant risk" of delays for African countries to enact digital taxes.
Another group, the South Centre, which advocates for developing countries, said the OECD had offered "no rationale" for Amount A's removal of routine profits from allocation to market jurisdictions. It told the U.N. committee that the unified approach under Pillar One "does not provide either methodology or theoretical justification or data sets through which this distinction can be enforced."
The South Centre also objected to the €750 million global revenue threshold, saying it could result in developing countries being unable to subject multinationals to the proposed new taxing right. The group said it supports having only local revenue thresholds, without a corresponding global floor or a de minimis amount for a multinational's total global profit.
A representative of the U.N. tax committee didn't respond to a request for comment.