Injecting noise into the discussion

Michael Lennard, Chief of International Tax Cooperation and Trade in the Financing for Sustainable Development Office (FfDO) of the United Nations, examines the role of tax toolkits for developing countries from a personal perspective.

The Platform for Collaboration on Tax (PCT) involving the UN, OECD, IMF and the World Bank, is certainly a good example of international associations coming together to achieve a common tax goal. It works on the basis that If you are trying to achieve the same thing, then try and achieve it in a uniform way.

This is the whole ethos behind the development of ‘toolkits’ designed to provide guidance on areas of international taxation that particularly impact developing countries. The toolkit on the Taxation of Offshore Indirect Transfers (OIT), released in June 2020, tackles the issue of how to deal with the taxation of indirect transfer of assets such as mineral rights and licensing rights for telecommunications.

As a particular area of concern for developing countries, where the UN Tax Committee’s Handbook on Taxation of the Extractive Industries took a leading role, this toolkit proposed that location countries may wish to tax offshore indirect transfers of at least those assets which are immovable – within the meaning of current UN and OECD model treaties – and perhaps additional assets that also generate location-specific rents. If location countries do wish to extend taxing rights to such transfers, the toolkit suggests two models for domestic legislation which such countries may adopt.

So the PCT plays a valuable role in bringing together our individual expert views to achieve an agreed and common goal on issues that could negatively impact developing countries. While it’s not a replacement for the individual work of each international organization (the UN Tax Committee is expected to add a bilateral treaty provision on OITs to its Model Tax Convention in 2021, for example), it plays an important role in trying to make sure we don’t plough the same field twice.

Indeed mandates and input policies of members may be different, as well as the direction we may get from our governing bodies. What is important is to be clear about those differences, articulate and discuss them to come up with a consensus approach – as far as is possible and without diluting the message itself. For our own part, we see ourselves as injecting developing country friendly “noise” into the discussion and the guidance products, rather than policy creation. As a Secretariat, we leave that to the UN Tax Committee.

The recently released Toolkit on Transfer Pricing Documentation is another good development, as is the UN-led draft Toolkit on Tax Treaty Negotiations.  The PCT site also has links to PCT partner COVID-19 resources. Looking further ahead, taxation of the digitized economy is a challenge the PCT may look to tackle, but there needs to be a certain commonality of approach to sustain such an adventure, and time will tell if that exists.

Lenders beginning to play their part

Lenders are now more concerned about developing countries taxation rights when involved in financing of certain projects locally. As part of their risk analysis, there is huge emphasis on the fact that indeed it is certified that the right level of tax is paid in those developing countries by the parties involved in these projects.

Erik Stroeve, Mazars Financial Services Tax Leader

Digital Challenge

Developing a tax model for the digitized economy poses a particular challenge for the PCT as it requires a wider range of informed approaches. Not least is that individual countries are still grappling with incorporating aspects of the digitized economy into their own tax regimes. Some say a more collaborative approach to dealing with such complex issues would be to encourage external observers from academia and business, as well as encouraging UN Tax Committee members and others from developing countries to interact more closely with the PCT (as has been happening recently)platform. Such an approach would not only bring valuable expertise and different viewpoints to the table, it would also help demystify the inner workings of the PCT and promote greater understanding of working towards a common goal on taxation models for the digitized economy.  Whatever the modalities that emerge, the PCT partners are aware of the importance of those voices to building sustainable tax systems that keep confidence over time, and to giving accompanying guidance.

COVID-19 response

As noted above, there has been some good work done by the OECD and the IMF in particular on country responses to COVID-19 – linked to on the PCT site. But with any multilateral system, it’s hard to respond quickly to an unexpected and urgent situation such as presented by COVID-19. So perhaps there’s a place for a rapid response mechanism within the PCT where decisions are made more quickly, while at the same time ensuring its decisions don’t damage the end goal of greater tax certainty in the long term. While we have witnessed some innovative unilateral responses from developed countries to provide tax relief during the COVID-19 crisis, developing countries with less financial reserves and huge debts have less scope to manoeuvre and could perhaps benefit from a toolkit approach that takes such disadvantages into account.

Creating a partnership

Going forward, it’s important that any international tax norm deliberation or guidance development is conscious of becoming more reflective of different economic situations and realities. This not only means encouraging more diversity in terms of country, gender, age and experience, it also means recognising the role business, advisers  and other stakeholders can play in sustainable development so that there is more of a tax partnership between developed and developing countries. At the same time, developing countries need to work together in a more proactive way to reinforce this partnership and build their own constructive alliances.

It’s about giving confidence to developing countries that they have a valid contribution to make as a whole and that it will be heard. To achieve this, we need to put in the work to convince developing countries that tax regulation will work for them and is not going to lead to unexpected and poor results. To succeed we need to continue to support and offer training so that developing countries enjoy the same levels of expertise, administrative effectiveness and ability to influence the environment, as developed countries, including the time and thinking space to analyse how tax regulations being put forward impact them over time, and what alternatives exist. If we assist them in putting their best foot forward in negotiations, then they are more likely to abide by the results.