UN competition could help make the OECD’s two-pillar solution viable in the developing world, where many governments are much more dependent on corporate tax revenue.
The OECD proposals for the digital economy are part of a global plan, but it has to fit different circumstances and conditions around the world. A one-size-fits-all approach may not be workable, especially for countries with very different economic interests.
Tax policymakers at the OECD are pushing ahead with the mission to complete pillar one by the summer. The two-day OECD conference this week will present the findings of a new impact study on pillar one and pillar two.
This is a crucial time when the success of pillar one will be determined, and it may also be the last time that the OECD can play such a role in international tax with very little competition.
It’s almost four months since the UN General Assembly unanimously agreed, on November 23, a resolution granting the organisation a mandate to begin intergovernmental talks on tax.
Not only did this momentous resolution suggest a much greater role for the UN in global tax, it also made the case for a UN convention on tax and the creation of new global tax institutions and cooperation frameworks.
It’s no wonder that this was proposed by the African Group, the bloc representing the 54-member state African Union. A UN convention to tackle tax avoidance and evasion could help developing countries better respond to challenges posed by the digitalisation of the global economy.
The UN resolution poses a historic challenge to OECD dominance of international tax standards and could set up a potential clash between the UN and the OECD, which has dominated the global tax landscape for 60 years.
In the worst outcome, this division could derail the two-pillar solution and set back global tax reform. A much more hopeful view is that the UN and the OECD will be able to reach a synthesis; it doesn’t have to be an either/or.
Alternative power centres
The UN is a much more open forum for emerging economies, as the OECD has just 38 member states. Many of the OECD’s critics from the developing world see the organisation as a “club for rich countries”.
Of course, the OECD is not just made up of economies like the US and its European partners. Non-European members include Australia, Chile, Japan, Israel, Mexico, South Korea and Turkey.
Even still, all but three of these countries are developed. Chile, Mexico and Turkey are outliers at the OECD, while important regional powers such as Brazil, China and India are still left out. But this could change.
The OECD has engaged more with developing countries on the two-pillar solution through the Inclusive Framework. This is how it managed to secure the support of 137 countries for pillar one and pillar two.
The Brazilian government could continue to pursue OECD membership if it reforms its tax system. And, if Brazil gains OECD membership, the Paris-based organisation may start to be seen differently by critics because it would include a leading Latin American country.
Meanwhile, India has increasingly turned to the UN Tax Committee as an alternative forum to the OECD for tax policymaking. Many African, Asian and Latin American countries support this turn to the UN. But this is not the only option for such countries.
Colombia may be set to host the first Latin American global tax summit in July. This conference could be an opportunity for the region to make its own demands heard in the international community. Otherwise, countries like Colombia could be drowned out.
At the same time, China has been developing its own influence on tax policy through the Belt and Road Initiative (BRI). One example of this is Chinese support for BRI signatory states to create special economic zones along the trade routes.
All of this suggests that the future of tax will be more contested than it has been in the past. One way for the OECD to stay relevant is to continue its work with countries and blocs outside of its membership and deepen those ties.
OECD policymakers made history with the two-pillar solution, but there is still a lot of work to do before the project is complete. The final details of pillar one will have to account for the differences between developing and developed economies.
This is where the UN may be able to play a key role in ensuring African, Asia-Pacific and Latin American countries adopt pillar one, though it may have to be on their terms. A UN tax convention could be an opportunity for the OECD to ensure its digital tax project is truly global.
