The BEPS Action 15 backdrop
On June 4, the OECD released public comments received on Action 15 of the OECD/G2o Base Erosion and Profit Shifting (BEPS) project, which concerns the development of a multilateral legal instrument (MLI) for modifying bilateral tax treaties in order to implement treaty-related BEPS recommendations. And on June 7th, the OECD held a public consultation in Paris on the same topic.
Action 15 is one of the most interesting outstanding items in the BEPS project. The multilateral instrument will serve as the umbrella for implementation of BEPS measures related to hybrid mismatch, treaty shopping and, perhaps most importantly, dispute resolution.
However, the OECD request for input that went ahead of the public consultation in fact largely steered clear of the most important political questions, but instead was limited to “technical issues” such as identifying treaty provisions to be replaced, the need for accompanying guidelines and interpretation mechanisms. This is because the MLI’s 96-country ad hoc group is still discussing answers to these key issues, including access requirements and the commitment levels for dispute resolution.
So is there any value in studying this consultation process at all? Absolutely, yes.
To my mind, the interesting thing about the Action 15 public consultation is not necessarily the specific technical questions asked (though they are relevant too). We know (and the OECD staffers know) that mandatory, binding arbitration (in the case of disputes) is the key wish for the US and other states as well as business stakeholders; we know that tax NGOs are strongly against it; and we know largely where different stakeholders stand on the provisions from other BEPS actions to be included in the multilateral convention. (Though I admit I was surprised and intrigued that the Tribute Foundation had gone ahead and found a committed international court to use for BEPS arbitration).
For me, what’s most interesting is the nature and structure of the consultation itself and what it represents. I have written previously on the actors involved in the BEPS policy processes and consultations and what it means for the political economy of international tax governance. And Action 15 neatly illustrates one of the key points I (and others) have highlighted along the way: The BEPS policy process is highly technicised.
The technicisation of BEPS: Participation barriers
The BEPS discussions demand deep, specific technical expertise in order to take part. And the Action 15 consultation certainly evidences that trend. The written comments and (though perhaps to a slightly lesser extent) the Paris meeting, were characterised by detailed technical, often legal, language and arguments. The kind of expertise needed to engage is possessed by tax experts, but not usually by politicians, not by the wider public, and only rarely by civil society groups. In the Action 15 consultation, for instance, there was just one (the BEPS Monitoring Group) civil society input out of 33 comments (3%), which aligns with other BEPS action points, where it has represented less than 5% of comments:
On the other hand, there is a significant proportion of comments from national and international business associations as well as professional associations. The former list includes the prominent BIAC, ICC, BusinessEurope, the British CBI, German BDI and the US Council for International Business. And the latter includes the UK Chartered Institute of Taxation and ICAEW, the Irish Tax Institute and the Tax Executive Institute.
And there are also important interventions from what I have previously termed “lobby centres” – BEPS- or tax-specific lobby groups coordinated by particular, authoritative professionals. In the Action 15 consultation, this includes the above-mentioned BEPS Monitoring Group, spearheaded by Sol Picciotto (of Lancester University and a Tax Justice Network senior adviser), and also the ‘International Alliance for Principled Taxation’ (IAPT), fronted by Mary Bennett (of Baker McKenzie and USCIB, previously the OECD and the US Treasury). The latter, of note, participated at the Paris meeting as the representative of both the IAPT and USCIB and has been, throughout the BEPS project, a favoured representative voice for various interest groups.
This technicised structure of engagement and its effects are recurring in the BEPS processes, but is not inherent to international tax reform as such. At the EU level, for instance, consultations on tax matters often attract a far broader range of commenters. That is not a knock on OECD or the BEPS process, but it reflects the divergent policy process choices and structures of two prominent standard-setting forums in international tax.
The political impacts of technicisation
So why does this technicisation matter – if it matters at all? Some would say it doesn’t. There is an argument that the technical process is just a self-evident part of the policy formulation phase of a standard policy process model:
Agenda setting -> Policy formulation -> Decision-making -> Implementation
Politicians will always delegate some part of the policy formulation to technical experts, often legal experts, in order to translate political agreements into employable rules and regulations. And you might say that this exercise is merely a technical translation, under strict political oversight as politicians have to approve the translated outcome in the decision-making phase.
My alternative proposition as it relates to BEPS is two-fold: Technical experts in BEPS have significant leeway in defining not just the technical translation but also the political direction of new rules. And, given that leeway, technicisation fundamentally shapes politics by conditioning what can be discussed, the criteria for accepted arguments, and who is listened to.
What is technical is political
On the first point, the line between ‘technical’ and ‘political’ in BEPS seems to me a rather blurry divide. (This goes for other global policy reforms as well, but let’s stay on course for now.) For instance, the OECD’s Action 15 request for input on “mechanisms that could be used to ensure consistent application and interpretation of the provisions of the multilateral instrument” might seem like a purely technical issue, but technical solutions could in fact have far reaching political consequences for MLI compliance and adoption measures.
As Ann Nolan of the Irish Ministry of Finance once said: “BEPS is technical in nature but political in flavour“.
Moreover, even if we assume that there is a strict technical/political divide, G20 and national policy-makers have left ample room for technical experts to make politically important decisions by setting out the high-level directions for BEPS actions. BEPS includes some exceptionally tricky, multi-faceted issues, global in scope, which require detailed analyses and discussions to manufacture credible and useful solutions. So naturally policy-makers grant technical experts a large (and possibly larger than in other policy processes) say in the matter.
To take another prominent BEPS Action – number 13 – as example, the road from the G2o Lough Erne declaration’s words on country-by-country reporting:
“We will work to create a common template for multinationals to report to tax authorities where they make their profits and pay their taxes across the world”
.. to the BEPS Action Plan’s words:
“The rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template”
.. to the final CBCR report:
.. was primarily paved with technical discussions, but had profound political implications. The decisions, for instance, to grant information access only to tax authorities (not to the public), to require home country rather than local filing, and to exclude several data points from the originally proposed CBCR template all favoured certain technical arguments and interests over others (a meaty research topic on its own).
Now, of course there was a feedback mechanism between the technical experts and policy-makers in this policy formulation process. Technical experts are not left to confined quarters, to emerge with white smoke at the consensus achievement, the solution readily accepted by ministers around the world. There are checks and controls by responsible politicians. The point is, again, that technical experts are provided leeway (deliberately or unintended), and that leeway means consensus standards agreed at the technical level will, if not outright dictate political decisions, then at least take a central position, requiring significant political opposition to overturn.
Complexity shapes politics: Crowd pleasing, octopuses and network centrality effects
On the second point – that technicisation shapes the policy process – there are several mechanisms through which this happens. There is a more extensive literature to read on this (I recommend starting here and here), but I want to highlight three: The technical, policy-relevant discussions are conditioned by the types of professionals involved (the crowd pleasing effect), the strength of individuals’ career diversity (the octopus effect), and the relations of technical experts (the social network effects).
The crowd pleasing effect is the effect that discussions will naturally sway towards types of topics and arguments favoured by most of the people involved. When everyone in the room is a lawyer, accounting arguments are proportionally less likely to take hold. In BEPS, where private sector tax lawyers are in the clear majority, legal arguments are simply more numerous and more liable to be accepted by the wider technical community. For instance, the distribution of work roles, sector (realm) and formal education of experts involved in BEPS Action 13 illustrates this:
Again, I avoid judgment as to whether this is “good” or “bad” but note that it fundamentally impacts politics. How so? Lawyers have certain perspectives on BEPS reforms. They are (and this is a crude characterisation, I realize, but bear with me) concerned with legal principles, legal certainty, and how to navigate within the legal rules. They are less concerned, at least in the professional capacity, with perspectives of economic efficiency, distributional consequences, geopolitics, growth and development strategies, financial quantification impacts, data availability, and so forth – any of which arguably have just an important stake in the BEPS policy process.
As the figures show, BEPS (Action 13) is not an all-legal affairs. Of course, accounting, economic, transfer pricing and other logics are also important, and arguments made based on these expertises were treated accordingly. The point here is the illustrate the crowd pleasing importance of the total volume of expertise. As noted above, technicisation means only certain (groups) of people can meaningfully engage in the policy discussions. And the result is that we end up with a policy process in which arguments based on certain expertises possessed by the technical experts are comparatively favoured over others.
The octopus effect is the effect that experts with diverse careers (which I call octopuses) are more likely to be listened to. The importance of career diversity is two-fold: it equips professionals with different expertises, which are needed to push central arguments in the reform debates, and it provides opportunities to build and extend key relations to other stakeholders. I’ll discuss the latter point below.
While legal arguments may be paramount in certain BEPS discussions, being able to formulate arguments based several expertises, is even more effectful. Technical experts involved in the BEPS reforms that can access, for instance both tax law and transfer pricing arguments from multiple sector perspectives, are well-positioned. The phenomenon of ‘revolving doors‘ plays a central role here, as moving strategically between work roles contributes to diversity of expertise and network-building.
A rough, fictitious illustration, which I have previously used for BEPS Action 13 and country-by-country reporting:
In the consultation process, a top US transfer pricing professional with experience from working in the IRS, the OECD and a private law firm, arguing against expansive country-by-country reporting based on private sector, legal and economic expertise, is more likely to be successful with that claim than a development official, who has worked in an animal shelter, the Environmental Protection Agency, and an NGO, arguing for expansive country-by-country reporting because it is ‘fair’ for the public to know MNCs’ tax payments.
Referring back to the recent Action 15 consultation, the octopus effect was evident at the Paris consultation (video available here). Those who spoke the most, beyond the OECD representatives, included the strongly expertised Mary Bennett (discussed above), Will Morris (the highly respected GE Tax Director and BIAC tax committee Chair), and the famous Philip Baker QC.
Finally, the network centrality effect is the effect that actors central to social networks are more powerful. I shall not attempt a detailed deliberation on the social network theory or social psychology behind, but suffice to draw on their relevance for present purposes. First, experts at the centre of networks are proportionally more exposed to information, exchanges and ideas moving through the network, which affords greater potential to learn new ideas (thus gathering more knowledge), influence communications, and transmit messages. It also allows central actors to broker, mediate and gatekeep between other actors and/or pieces of information. Moreover, network central actors will have more relations to other technical experts, which may reinforce their image as important, authoritative and influential, including due to social confirmation, bandwagon and cheerleader effects.
Will Morris (noted above), for instance, is not just well-knowing, he is an absolutely network central actor in the technical BEPS community. A tax lawyer working for a major US MNC, he holds prominent positions in the BIAC and CBI tax committees, he is a member of the European Tax Policy Forum, is an engaged stakeholder with the UK HMRC, and privately he hosts regular gatherings of international tax professionals for discussion and networking. Few, if any, are as well-connected throughout international tax and transfer pricing networks. And he is clearly looked upon as an important figure. His network centrality is important for being heard at the OECD, and allows Morris to enjoy influence with key decision-makers and technical experts in the BEPS community.
The bigger picture?
The natural upshot of the above analysis might be to ask: Is this a problem? This normative point I have thus far refrained from addressing. A topic for another detailed blog perhaps, but clearly, there are democratic, economic and social implications, at the very least. Who benefits from this structure of technical engagement? Should it be changed and, if so, how? Can it be changed? I leave these questions for your perusal, thought and comment for now, while promising more to come on this topic in the future.