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IFA 2022: IBFD director slams OECD model

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Belema Obuoforibo, director at non-profit IBFD, has criticised the policy design of the OECD’s two-pillar solution at an IFA panel.

The International Bureau of Fiscal Documentation’s director has slammed the design of the OECD’s global two-pillar project during a panel discussion at the IFA Congress in Berlin today, September 5, claiming that the starting point of the policy should be the interest of developing countries.

Obuoforibo said that despite the “promising” statements made by the Inclusive Framework (IF), some missing details in theprogress report, published by the OECD in July, could jeopardise pillar one and two.

“The underlying policy concern is that in designing the global framework, the starting point is the interest of developing countries,” she explained. “Perhaps there is still some middle ground that policymakers should look into when looking at developing countries.”

For pillar one, developing countries are concerned around the scope; the size of expected tax revenue; withholding taxes; and the treatment of losses.

These countries call for a wider scope that catches more jurisdictions and greater revenue. They also support for the implementation of Article 12B of the UN Model Convention rather than Amount A of the OECD model, according to Obuoforibo.

Under Article 12B of the UN model, any business – regardless of size – would be subject to automated digital services tax (DSTs).

Many African countries consider the UN model to provide a simpler and easier policy for tax administrations and taxpayers, but policymakers argue this could lead to a rise of unilateral DSTs.

Amount A ‘battleground’

Obuoforibo also pointed out some key issues within July’s progress report on Amount A of pillar one.

Amount A is designed to address the risk of double counting, in which Amount A is applied despite a tax having been already administered, but countries are debating whether withholding taxes should be considered in the policy rule.

“That’s a big issue. Developing countries reject the idea of including withholding tax. Amount A is also a new taxing right that overlays a taxation system,” said Obuoforibo.

“When a lot of countries signed up to the IF, there was no indication at the time that withholding tax would be taken into account. For it to show up now, it’s causing issues – it calls for further enquiry,” she added.

The discussion around the inclusion of withholding taxes in Amount A will be a “very serious battleground”, according to Obuoforibo.

Pillar two and more

As for pillar two, developing nations also deem the agreed minimum rate of 15% to be too low for its implementation to be fully beneficial.

“Many developing countries have rates of between 20% and 25% already,” said Obuoforibo.

In the meantime, developing countries are also calling for an expansion and levelling of withholding taxes, as they find them easier to administer.

However, the extension of withholding tax should not become an alternative to transfer pricing (TP), according to Obuoforibo.

A robust TP system aligned with the arm’s-length principle and withholding taxes could be the ideal combination.

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