Based on another spectacular ‘about-turn’ by the OECD, who last year admitted major shortcomings in its widely touted Arm’s Length Principle as the best way to combat base erosion and profits shifting (BEPS), I suggested that it is time to have a multilateral organisation manage the international tax agenda.
Today on Twitter high profile members of the TaxJustice lobby have questioned whether developing countries should turn their backs on the OECD.
The call was made on the heels of today’s post by Richard Murphy in Tax Research UK blog, which states in part:
“I have to say that, as most campaigning organisations working in this area agree, the story of BEPS and developing countries is overall a pretty sorry tale. In its February 2013 report the OECD relegated the issue to the final page of a near 90 page document. This time, no doubt having heard the collective NGO outcry, they have tried to do better but there is little in this report that is greatly encouraging.”
I thought it might be useful to re-blog my post because it addresses familiar issues about the appropriateness or otherwise of the OECD as the world’s chief international tax policy-maker and standard-setter working in consort with the G20, acting as the enforcement arm of the OECD.
Is It Now Time for a World Tax Organisation (June 19, 2012)
In another about-face the OECD has finally acknowledged the major deficiencies of its Arm’s Length Principle (ALP) promoted by it as the best means of combating base erosion and profit shifting. (For another example see http://franhendy.com/2012/05/08/another-failed-oecd-initiative-well-theres-a-surprise/)
The OECD, though insistent that its aim is to create better policies for better lives to stimulating growth and equality, has again failed to properly take into account the needs of the developing world in its rule-making.
Speaking at a conference on transfer pricing co-hosted by the Finnish government, Marlies De Ruiter, Head of Tax Treaties, Transfer Pricing and Transactions Division of the OECD agreed that the ALP was ineffective on its own to solve the complex issues associated with the use of hybrid entities, low tax jurisdictions, shifting intangibles, transfer mispricing and lack of information sharing.
Importantly she admitted that although the developed countries of the OECD and non-OECD countries faced the same problems the best solutions may not be the same in both cases.
Still a ‘Closed-Club’
Surely this is the real problem – a ‘closed-club’ seeking to multilateralise disciplines of its own creation and for its interest on complex issues affecting OECD and non-OECD countries alike.
Surely it is precisely the lack of inclusiveness in the design and application of these rules which has again led to an admission by the OECD that their ‘one-size fits all’ transfer pricing regime, of which the ALP is key, is just not workable.
Efforts by the OECD to include non-members in various so-called ‘Global Forums’ such as the one on Transfer Pricing and the better known one on Transparency and Exchange of Information for Tax Purposes are poor substitutes for properly constituted international bodies capable from the outset of recognising that similar problems often demand different solutions and not the present system of small-group, narrow-interest analysis of global problems.
The long-standing work of the Organisation for Economic Development and Cooperation (OECD), a group formed in the aftermath of World War II to service the special needs of the Marshall Plan countries – though it now includes some larger emerging economies – is still not fully representative of the 183 sovereign countries that constitute the international community of states.
Participation ‘By Invitation’
Despite its efforts at inclusion, it is clear that the process of involvement ‘by invitation’, or indeed coercion, favoured by the OECD in rule-making, absent the equal accommodation of participants in the constituent organs of the OECD affecting how the organisation deals with issues like dispute settlement has resulted in significant time-wasting and resource depletion.
The back-tact by Ms. De Ruiter illustrates the point that this style of standard-setting though useful at the regional level is sub-optimum at the international level and invariably leads to the same conclusion that the rules are deficient when applied by non-OECD members, either voluntary or on pain of ostracism by its most powerful members.
The dominance of the OECD in areas of singular importance to developing countries is no longer a sustainable model of state-to-state interaction and in the face of the recent short-comings of its methodologies, most notably in relation to the G-20 sanctioned transparency and tax information exchange agenda, demands its abandonment.
Whatever the short-comings of the multilateral model of global governance, typified by the United Nations and other all-inclusive bodies where each country has equal footing, reinforced by the ‘one country –one vote’ principle, is still the best way to find effective solutions that serve the interests of the many and not the few.