Building a more inclusive tax model

Michael Lennard, Chief of International Tax Cooperation and Trade in the Financing for Sustainable Development Office (FSDO) of the United Nations, discusses, from a personal perspective, a range of key issues on the UN’s approach to transfer pricing.

In 2019 the United Nations Tax Committee issued draft guidance on financial transactions. It was finalized in 2020 and will be a Chapter in the forthcoming 3rd Editon of the UN Transfer Pricing Manual. In it, the UN’s draft note provides procedures for arriving at an arm’s length remuneration for loans and guarantees, taking into account external and internal funding options. The UN’s approach does not set out to take a different approach to, say, the OECD. Equally, there’s no point in duplicating work, particularly when resources are stretched. However, there is a place for second opinions that can offer insights based on particular expertise and focus, and the Committee has chosen examples particularly relevant to developing countries.

A focus on developing countries

As far as the UN’s expertise and work are concerned, while we consider the needs of developed countries, we have a particular focus that takes into account the interests of developing countries. So when we started doing capacity building on transfer pricing, one area of feedback was to look more closely at the whole area of loans and guarantees and, in particular, the difficulties developing countries have in working out arm’s length pricing.

Growing awareness shown by financial services

Our FS clients are more aware of the nuances between the OECD and UN positions and do work on understanding and complying with the requirements of developing countries. Not only from a risk perspective but also from a corporate responsibility viewpoint, which is at least equally important to our clients.

Erik Stroeve, Mazars Financial Services Tax Leader

Test views

So it’s about developing guidance to help understand transfer pricing issues more thoroughly, as well as helping to identify good and bad practice. When several associations work on the same issue, it’s sometimes a case of what looks like a major difference often isn’t. But there’s definitely value in giving members of a Committee the freedom to point out areas of improvement where needed, as this helps paint a more comprehensive picture and a greater understanding of the issues for all parties concerned. Better UN guidance improves OECD and other guidance.

A question of expertise

One of the areas we are keen to promote is phraseology used in tax law. It’s important that we phrase taxation rules in a way that the majority of people, not just a few, can understand most of the time. For tax professionals in the developed world who regularly work on transfer pricing issues, they often have a level of expertise and understanding way above those in the developing world who are just as capable, but perhaps just beginning to get to grips with complex tax issues such as transfer pricing, and lacking the same resources and information. It’s important, therefore, that we bear this in mind when developing tax regulation.

Familiar processes

Other considerations would be how changes in tax rules impact treaties, or in locations where the tax regime is good, but administration is slow. So we aim to raise issues that resonate with developing countries into discussions during the capacity building phase. Where possible, we try and put forward proposals that developing nations are more comfortable with, which is why we favoured the comparable uncontrolled price (CUP) method for transfer pricing. Ultimately, it’s often better to stick with a general rule that can be applied 99% of the time. If you start listing all the exceptions, you can begin to dilute the importance of the general rule.

A double-edged sword

In terms of gathering views and bringing more developing countries to the discussion table, the use of technology has been advantageous. As we have seen with COVID-19, the increase in virtual meetings can help developing country members to participate in important discussions without travelling, which previously could have been seen as prohibitive. More, younger and more diverse gender participation is possible.  But it can be a double-edged sword. For example, there may be language and cultural barriers that are harder to navigate via video. There are also timezone and bandwidth challenges to contend with.  And it is harder to build relations of trust and cooperation.

If we strive to be inclusive and understand tax-related issues from a wider range of viewpoints, then we can perhaps begin to develop a global tax system that is fair from everyone’s perspective. It is more likely to survive and benefit taxpayers and tax administrations both if it is built on the rock of “felt” consensus than the sand of superficial but unsupported agreement.