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The U.N. Tax Committee And Developing Countries

In the latest episode of Tax Notes Talk, Abdul Muheet Chowdhary of South Centre, an intergovernmental organization of developing countries, talks about how the U.N. Committee on Experts on International Cooperation in Tax Matters could be more transparent and effective for developing countries. 

The post has been edited for length and clarity.

Nana Ama Sarfo: Abdul, thank you so much for joining us on the podcast.

Abdul Muheet Chowdhary: Thank you for having me.

Nana Ama Sarfo: This is a really important time for the international tax world, especially with international tax reform and COVID-19 recovery. It’s also an important time for the U.N. Committee of Experts on International Cooperation in Tax Matters (U.N. Tax Committee), particularly since the current session is winding down and countries are nominating new members. The new committee will be weighing in on these issues.

I’m hoping that you can describe for those who aren’t familiar with the U.N. Tax Committee the tax committee’s mandate and the tax committee’s makeup. How many members are selected? How long are their terms? How is the membership of countries determined? And how is reappointment to the committee determined?

Abdul Muheet Chowdhary: The mandate of the committee is a part of the U.N. Economic and Social Council (ECOSOC). It exists first and foremost take care of this document called the U.N. Model Tax Convention between developed and developing countries. This is used as a basis for negotiating bilateral tax treaties and provides an alternative approach to the OECD’s model tax convention. The two are quite similar, but in some important ways they’re quite different. It’s quite important for developing countries.

For example, the rights of source countries are more prominently emphasized in the U.N. Model Tax Convention as opposed to the OECD convention, which gives more primacy to the countries of residence. Another document the tax committee looks at is the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries. This is what is mentioned in the mandate. 

The tax committee actually has gone through various forms. Earlier it was called an ad hoc group of experts. The resolution which upgraded it from the ad hoc group into what it currently is, it specified this mandate. These two documents are mentioned in the mandate, but over time the committee has produced other documents as well.

They have this transfer pricing manual and they have come out with this handbook on issues in the extractive sector. They keep coming out with documents which are of interest to developing countries, in particular in international tax matters. This is actually part of their mandate that when looking at issues of interest in international tax cooperation it has to give special emphasis to the issues of least developed countries, developing countries, and economies in transition. 

Another set of issues which the tax committee looks at is capacity building and providing technical assistance and in general looking at any other issues which come up. In recent times they’ve branched out into environmental taxation after the Sustainable Development Goals (SDGs) were passed in 2015. 

The committee is made up of members who are acting in their expert capacity. These are not country delegates. These are not representatives, but rather these are experts acting in their individual capacity. There are 25 members. They serve a term for four years, and it’s not very clear as to how exactly the mix of countries is determined.

If you see the previous ad hoc group, which was the predecessor to the current tax committee, it mentioned that there should be 10 developed countries and 15 developing countries and economies in transition. If you look at the current committee, depending on your interpretation, you can broadly argue that there are 15 to 16 developing countries and 10 or nine developed countries, though it’s not very clear again who is a developing country and who is a developed country.

For example, take a country like Singapore. It’s a part of the Group of 77 officially, so in that sense it would count itself as a developing country. In the World Trade Organization they call themselves a developing country. In reality many of the positions they take are in the interests of the developed countries.

There are some ambiguities like that. This is the numerical mix, but which countries actually get to be decided that is not very clear. That is something which needs some transparency.

What is happening now is that there’s a nomination for new members. Countries would make the nominations and the appointment is made by the secretary general “officially” in consultation with the member states. But again the process is not very clear and this is something which needs some transparency. It’s a very important process and, to be able to understand how that works, it’s very important that it’s transparent.

My understanding so far is that broadly, the secretariat takes a call or gives its assessment based on the nomination which it has received. These then go to the undersecretary general of the Department of Economic and Social Affairs. And from there it then goes to the security general. But again, this to my knowledge. It is not clearly documented and it would be welcome to have some transparency in this regard.

Nana Ama Sarfo: As you had mentioned, a new committee is about to be selected. I believe they will start work in July. What are your concerns about the tax committee as it currently operates?

Abdul Muheet Chowdhary: In my article published by Tax Notes, I had outlined these concerns. I will very briefly summarize them once again and add a couple of points which I didn’t mention in the article.

The first point is that when countries are nominating experts, especially for developing countries, it’s very important that they nominate the best candidates possible because these are then going to set, in a way, international standards or shape international standards in tax.

There are no criteria or guidelines at present. For example, it’s not necessary that the nominees should have domain knowledge of international tax. Almost all of the members of the tax committee are with the tax departments. But if there are some criteria or some guidelines that the candidate should have some domain knowledge of especially tax treaties or issues like transfer pricing or exchange of information, and they will have the support of the tax administration, then that would be very helpful.

When these members are nominated, then this again ties up to the issue of the committee being an expert body. They are sort of working on their own, and this is especially the case for developing countries. But if there could be some sort of criteria when you nominate somebody, then the tax administration should also support them in their work. This would really make it much more helpful, especially for members from developing countries, so that they can do their best with the support of the tax administration.

Another issue is that the agenda is decided with limited input from the members. You have a new nomination, you have a new set of members, and then the secretariat puts forward the agenda and [they either say] yes or no. They don’t really have very substantive inputs into how exactly the agenda will be crafted. This is another issue which has been raised in the 21st session, which just ended. The inputs of U.N. member states should be solicited when deciding the agenda. This is very important.

The staffing of the secretariat is an issue because there is a preponderance of staff from OECD countries. Some of them are even actually from the OECD and former OECD officials. This is a big problem because in practice . . . it’s very difficult to let go of that ideological baggage which you have. The committee has a mandate to give special interest to developing countries and economies in transition. These then obviously will be issues which are of interest to source countries and somebody from the OECD who their whole life has spent fighting for the rights of residence countries or developed countries. It’s not very practical to expect them to suddenly turn around and start being very concerned about the developing countries.

Another issue is that it is not very clear on what basis somebody can be reappointed. This again is a process which needs some transparency. These are some of the issues which I mentioned in the article.

Another issue which I wanted to actually share is that some of the committee members, especially those who are from developed countries, are wearing two hats. If these people are coordinators of a subcommittee or co-chairs of a subcommittee in the U.N. system and co-chairs or chairs of a working party in the OECD inclusive framework that creates a sort of tension. In a way it’s actually like a conflict of interest. This is something which should be avoided.

If a member is there, then they should have only one clear responsibility. Either you’ll be a coordinator of a U.N. subcommittee or a co-chair of a U.N. tax committee or body, or you be within the OECD inclusive framework system. But having both . . . results in a system where ideas of one are being transplanted into the other and usually it’s a one-way flow of information. This is also something which is a problem actually and which should be avoided in the U.N. Tax Committee.

Nana Ama Sarfo: What you’ve unpacked there I think really drives at the heart at some potentially substantial changes within the tax committee if they are addressed as you are advocating for.

Now as you had also explained in your piece, the U.N. Tax Committee has issued so many valuable resources for developing countries. Right now it is working on its own digital tax proposal, a very well-known model treaty provision that addresses automated digital services. It’s seen as a counterpart to the OECD BEPS 2.0 project, and the committee has done its digital tax work and all of its other work under its mandates with a lack of resources.

Can you share the ways in which the tax committee is under-resourced and what resources you think it needs to progress with its work?

Abdul Muheet Chowdhary: I think we can begin by looking at the staff. To my knowledge the U.N. Tax Committee has about two full-time staff, maybe a few more. I don’t think it would be more than seven or eight people. If we contrast that with the OECD’s staff in the Centre for Tax Policy and Administration, they might have around 150 or more. That gives you a very concrete idea of the differential between the two institutions and the kind of work that, by implication, both institutions are capable of.

Another thing which we can look at is the budget. How much budget is given to the OECD’s Centre for Tax Policy and Administration and how much funding does the U.N. Tax Committee have? There was a trust fund which was set up for the U.N. Tax Committee some years ago. To my knowledge only one country in the whole world has contributed to it. I think that’s India. It’s given about $200,000 so far. With that the committee is doing what it can, but it really gives you an idea.

Now this has some practical implications. The first thing is that the members as mentioned are experts acting in their individual capacity. This individual capacity phrase can be interpreted in a very literal sense in that they’re literally doing the work by themselves. Given that they are also tax officials and quite senior at some of them — some of them are even the heads of the revenue service — they have a huge amounts of responsibilities already.

To expect that these members will be able to do this very complex work by themselves is not very easy. They need some help. But if the tax committee doesn’t have that amount of staff or they have not much money to hire consultants, then the amount of help which they can give to the members is also limited, which affects the output.

The second question comes that even if you have staff, then what kind of staff are those? As mentioned, a lot of the staff either come from developed countries or OECD countries, which are one and the same, or they come directly from the OECD formally. If you’ve spent your whole life fighting for the rights of residence countries, then it’s very difficult to do a U-turn and suddenly become concerned about developing countries. If a member from a developing country is trying to work on an issue and take that forward, and the secretariat member they are working with is of completely the different mentality, then it’s not very easy to go forward. It would be a tense relationship. You would say one thing, but then you would get something which says the opposite of it or at least is not taking your perspective forward.

Because of that, some of the developing country members find it difficult to rely extensively on the staff of the secretariat itself. That was also one of the issues which was raised in my article. The staffing of the secretariat should have more people from developing countries and the developing world. It may be poor, but there is a lot of talent. There are a lot of very eager and enthusiastic and intelligent people who can really be brought into the tax committee and who have a lot to offer actually. That would actually reduce the load on the developing country members and it would make it easier for them to take the help of the secretariat and produce more work.

First, the committee doesn’t have all that much money. They have limited resources. Secondly, the resources they do have are highly OECD- or developed-country-oriented, including some of the staff. That makes it difficult for the developing country members to take the agenda forward.

Nana Ama Sarfo: Now you described in your article, I thought very effectively, a series of solutions that the tax committee can implement to become more inclusive and effective. Taking a step back here and looking at the bigger picture, what is at stake if nothing changes within the tax committee? If things remain as they are?

Abdul Muheet Chowdhary: It’s very important question. It’s interesting to see that many of the reasons why the tax committee has come into the limelight recently is because they have offered a solution to a pressing problem by the initiative of the tax committee on Article 12B, which is the proposed solution on automated digital services. Even some of the work, which is being undertaken on taxing software payments as royalties, they have tapped into what is arguably the key discussion in international tax.

This has happened really because of the individual drive of two or three tax committee members at the most. When the next set of members is chosen, there’s no guarantee that you would again have members who are extraordinarily committed to stepping up and providing this sort of initiative.

Speaking of the digital economy specifically, for the longest time the U.N. Tax Committee’s approach was, “Let’s see what’s happening in the inclusive framework.” It was the role of a passive observer. Due to the initiative of a few members, this changed and they actually started providing their own perspective.

If these kind of changes are not made through which the tax committee can become more effective, then there’s a danger that it would once again relapse into its passive role and just observes what the OECD is doing. This would be a very dangerous thing because developing countries would have no way to voice their concerns [or to] voice an alternative. It would be reliant upon the OECD solution. 

Look at the most basic question, such as the question of nexus. If you look at the proposal in pillar 1, there is I think — in India there are these seven levels of hell in Hindu mythology. After which you finally reach the end you have this bottomless pit of thresholds, after which you can finally say, “OK, this company now is eligible for a nexus.” It would be very, very difficult for most developing tax administrators to administer. It would severely exclude many of the tech giants and the highly digitalized companies. Article 12B just says that it has no threshold. It automatically be deemed to arise once the automated digital service has been provided.

This is really the difference when you have a solution which is prepared by developing countries and when developing countries have to rely on this enormously complicated apparatus within the OECD system. Even in the U.N. Tax Committee there are developed countries as well and their points of view have also been raised on article 12B.

The larger point is that if the U.N. Tax Committee is not reformed and if these changes don’t take place, then developing countries would lose a very valuable site to which they can raise their concerns, and this would deprive them of revenue. We are living in a time when there is so much economic collapse and recession, and it would be really unthinkable. I shudder to think of what would happen to the developing countries if this option is taken away.

Nana Ama Sarfo: Abdul, your article points out that the tax committee members can be stretched very thin because they have to juggle their U.N. duties alongside their regular jobs. What support do you think that member states and the U.N. can provide? I know you already touched a bit on the funding issue, but for example, are secondments a realistic option in this case?

Abdul Muheet Chowdhary: That’s a very good solution. Secondments would be a great idea because one of the implications of that would be that the committee members can be much more focused. As a result, they could perhaps even have shorter terms instead of a four-year term. It could be a two-year term. They can really be devoted to this full time. Hopefully the committee would also be able to come up with decisions quicker, which would also be much more helpful.

This is definitely a very practical option. It’s open to question whether that means that the members should come to the U.N. in New York and work there. Another equally interesting option would be that they stay in their own countries and they keep working from there, and they are paid an allowance. But secondments is a very good idea.

Apart from that, when the member state is nominating the nominee, then the tax administration can also try to support them to the extent possible so that their workload is reduced. In developing countries that’s a bit difficult because usually these departments — international tax divisions — are staffed thin. They have a few people doing a lot of different things, but to the extent possible they could provide them with support would be very welcome.

Nana Ama Sarfo: What about funding for the trust fund that you had mentioned? Do you have any ideas on that?

Abdul Muheet Chowdhary: It’s really unfortunate that only one country has contributed to this so far. It’s in the interest of more countries, especially those which are being affected by illicit financial flows, to come forward and contribute to the trust fund.

Nana Ama Sarfo: Your article made me think about access and transparency. I’m wondering if you think if there’s room for the tax committee to reform and how it interacts with the public. Is there a room for the committee to be more transparent with the public about the work that it’s doing and soliciting feedback?

Abdul Muheet Chowdhary: I think there is a lot of scope as mentioned. For example, how the mix of countries is determined. Who is a developing country? As mentioned, Singapore, which is ostensibly a developing country, has really not taken any positions in favor of the developing countries.

Some transparency is needed on which countries are determined and whether they are counted as developed or developing countries. Some transparency is needed on how the members are appointed specifically and what the exact process is. How is a member reappointed? 

If you want to see how voting decisions are taken, that’s not very clear actually. To my knowledge, you have to go to the reports. I don’t know what frequency they come out with these reports based on what was discussed. I guess after each session the session reports where they say, “OK, this is how the discussion went, and this is how the voting took place.” It’s not very clear for example, which member voted how. That information is not readily available. How voting takes place should be more transparent.

There should be more time for public consultations. We see often that the turnaround time is not that much. For example, you have an upcoming committee session. The agenda is not yet up. Soon we’ll see that the agenda will be up and this would be quite close to the actual meeting itself.

Then there’ll be some time to comment on the documents, but it won’t be that much time. And we need some more time actually to comment on documents. For developing countries which don’t have a huge tax administration, they would need some time to process and digest the issues which are going on. And this applies even to civil society from the developing world, from the global south. I mean, academics and civil society organizations do need some time actually.

And then there’s the other options. One is the inputs which would come from the outside. But then how will the committee process it? How will the secretariat process it? If you look at the inclusive framework for pillar 1, they had some 3,000 or 4,000 pages of documents from the public, but they also had a staff of 450 people who could digest that information. But if the U.N. Tax Committee is understaffed, then how will they digest that information? That’s the other side of the issue. That because it’s under-resourced.

Nana Ama Sarfo: Right now, as we all know, the whole world is waiting for the OECD to release its BEPS 2.0 solution. That process has raised many questions about standard setting. Who should set the rules and why? As far as collaboration or coexistence with the OECD is concerned, what kind of relationship do you think that the U.N. Tax Committee and the OECD should have with each other?

Abdul Muheet Chowdhary: This is a very interesting question. The U.N. High Level Panel on International Financial Accountability, Transparency and Integrity (FACTI) panel, for example, recently came out with its recommendation that the Global Forum [on Transparency and Exchange of Information for Tax Purposes] could perhaps be incorporated into the U.N. system, similar to how the International Organization on Migration was incorporated into the U.N. system.

I think that’s a very interesting idea because the global forum is working on an issue which is of a lot of interest to countries — exchange of information transparency. And this component of the OECD system, I think, could definitely be this recommendation of the FACTI panel can be taken forward.

For many of the other aspects of the OECD’s work, if you look at the inclusive framework and the steering group, we come back to the issue of transparency. It’s not very clear how the steering group works and how decisions are taken. Given this reality, it’s unclear what would be the effects of closely merging the two bodies and what that would mean. It should not be the case that the constraints which are upon the OECD should also be imposed upon the U.N.

As it stands with all of its limitations, the U.N. Tax Committee still does give developing countries a forum for an alternative perspective, an alternative voice. If somehow by a closer integration or collaboration that voice gets stifled, then that will not be a good thing. So it [requires] some careful thought as to what should be the terms of engagement. But I think the FACTI panel’s recommendation on the global forum is definitely a concrete suggestion for taking things forward.

That being said, the FACTI panel also has recommended that the U.N. Tax Committee should be converted or upgraded into an intergovernmental body and an inclusive intergovernmental body. That is actually a much better avenue of thought.

Instead of scratching our heads wondering how the OECD can become truly inclusive, when ultimately the OECD was set up to administer the Marshall plan after the destruction of Europe in the second World War with all that history legacy, we have the U.N., which was set up by the whole world. It’s a genuinely universal body. Why not make that the forum for setting the tax rules and where everybody can come — developed and developing countries? And then there’s no need for, “OK, how is the steering group constituted? And how are decisions taken?” And all those complexities can be set aside for the OECD to keep thinking. The U.N. Tax Committee can be made into an intergovernmental body.

Nana Ama Sarfo: Abdul, you raised some really interesting points and especially bringing up the FACTI panel. It’s very much appreciated because that report definitely should be read by international tax practitioners to get an idea of the breadth of the panel’s recommendations, but also the sheer creativity involved in that. I also thank you as well for raising these ideas and raising awareness about how the U.N. Tax Committee can become more effective.

For those who haven’t read Abdul’s piece, I very highly recommend that you do. The name is “Making the U.N. Tax Committee More Effective for Developing Countries.” And you can find that in Tax Notes International. So Abdul, we really enjoyed having you today. Thank you so much for coming on the podcast.

Abdul Muheet Chowdhary: Thank you so much for the invitation. It was my pleasure.

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