Category Archives: Global tax governance

UN-doing the OECD’s global tax dominance?

For a couple of decades now, debates over the which international organisation should be in charge of organising global tax policy-making have ebbed and flowed, every once in a while heating up and surfacing in global political discussions, then fading back into isolated debates amongst selected tax stakeholders.

The classic dichotomy is one where the OECD is juxtaposed with the UN. The former is the “rich country’s club”, the informal “global tax organisation” for more than 60 years, the controller of the development of the global tax system. The latter is the “true global”, the “true inclusive” body, more favourable to developing country interests, yet severely underfunded and deprioritised because of resistance by major powers.

A history of discontent

The history of this dichotomoy traces all the way back to the 1950s when, for a brief moment in time, the United Nations did in fact take charge of coordinating international tax policy following World War II and the collapse of the League of Nations, which had birthed the first international tax rules in the 1930s. Martin Hearson’s exploration of the UN’s initial international tax work, and its subsequent downfall, is well worth reading. In short, Hearson notes, the UN’s Fiscal Commission failed due to a “failure to gather institutional momentum, in part due to the lack of effective secretariat support, and lukewarm support from across the board”. In its stead emerged the OEEC’s (later the OECD) Fiscal Commitee, which was able to gather that institutional momentum, strong leadership and coherence.

This, as Douglas Adams said, has made a lot of people very angry and has been widely regarded as a bad move.

While it has never appeared particularly likely, politically speaking, that the UN would take over from the OECD, there have been strong voices calling for the change, and becoming increasingly vocal. In recent history, UN Secretary-General Kofi Annan organised a push for a global tax organisation under the UN auspices in 2003, an idea that has been brought up over and over again at the UN. The idea was prominently reinvigorated at the 2015 Addis Ababa summit, and most recently as the G77 group of developing countries tried (and failed) once again to boost the standing and resources of the UN’s committee of tax experts.

These political attempts have been accompanied by research exploring the potential of and barriers for shifting global tax policy-making away from the OECD. From early work by Vito Tanzi, former tax chief at the IMF, to Dietsch, Rixen, Avi-Yonah and others, calls for a truly global tax organisation – far from the characteristics of the historically technically-driven, closed-off, opaque OECD – are widespread.

Political attempts have also been underpinned and supported by activist mobilisation. As early as 2005, the Tax Justice Network in its “Tax Us If You Can” report, had placed upgrading the UN tax committee among its key policy asks, alongside – read this carefully now – country-by-country reporting (which was materialised), public beneficial ownership registries (which has materialised), general anti-avoidance rules (which has materialised), automatic exchange of information (which has materialised), tax assistance for developing countries (which has materialised), and unitary taxation of corporate profits (which has materialised somewhat). (There were also asks for citizenship-based taxation and general progressiveness of taxes, which have been less succesful.) And the organisation, alongside every other civil society organisation active on the global tax agenda, has continued to be dedicated to increasing the power of the UN in global tax matters.

Yet it is clear that the UN still plays a distant second fiddle to the OECD when it comes to defining the content and direction of global tax policies. And that is perhaps for a very simple reason. This month, the South Centre published a policy brief by Abdul Chowdhary and Sol Picciotto, which tries to chart a path for “bringing the existing plethora of institutions under unified, universal and democratic control through a UN Framework Convention on Tax Cooperation”. While considering technical and institutional approaches to support such a move towards the UN, the authors ultimately concede that the key challenge is political, in that OECD countries are unlikely to give up decision-making power.

This is, incidentally, the typical charge against those pushing for the UN’s global tax power to increase: that it is utopian and unlikely due to the geopolitical balance of power. Moreover, it is hard to escape the fact that in many people’s eyes, the OECD has been remarkably successful at maintaining and developing a well-supported global tax system. In a time where multilateralism is in conflict, in global tax affairs, “states are responding to challenges since the financial crisis by coming together differently, but also – for the time being at least – more effectively“.

These considerations beg at least two questions that bear investigation. First of all, would the UN be a “better” forum than the OECD? Second, is it likely and feasible to move global tax policy-making to the UN?

Is the UN “better” than the OECD?

First, for judging whether the UN would be “better”, we need to ask what “better” means. Why is it that proponent want to more global tax policy-making to the UN, away from the OECD? The OECD’s critics are many, and critisms abound. Yet if we take a crude approach, they can be boiled down to: the OECD is not inclusive of non-OECD interests. This encompasses a lack of concern for developing country interests, and other common criticism such as OECD policy outputs being heavily influenced by a few major powers, businesses, and technical tax experts. Broadly speaking, the UN is seen as the antidote to this. “Unlike the OECD, which is a rich countries’ think tank, the UN Tax Committee is fully open to all countries, and therefore can fairly claim a legitimate mandate to represent the interests of poorer countries“, say TJN.

To assess whether the UN tax committee would, in fact, be a better place for non-OECD interests, we can consider both how the UN tax committee works now, and how the UN tax committee would work in the future if it superseded the OECD as the premier global tax policy-making forum. Those two are of course very different from each other. Today, the UN tax committee resembles the OECD way of working in several respects:

While the OECD is often contrasted with the UN Tax Committee as the latter comprises individuals and the former states, the Steering Group and the UN Tax Committee are more similar than this implies. Both are groups of around 25, mixed roughly 50/50 between OECD and non-OECD origins. Experts participate in a personal capacity and secretariats play a central role in determining group composition. Most practical work is organised through focused working groups. There is only a small overlap between the Steering Group and UN Tax Committee (two people at the time of writing), but many UN Tax Committee members are active members of OECD working parties

At the Table, Off the Menu? Assessing the Participation of Lower-Income Countries in Global Tax Negotiations

Many of the structural barriers to participation are the same, as well: Travel costs, expert capacity, language, geopolitics, and so on. However, there are important differences too, most notably in the formal mandates, resources, as well as mode of decision-making. The latter is particularly crucial: whereas the OECD works by a negotiated “consensus” mode, the UN tax committee adopts a majority vote.

These institutional differences are a key reason why the UN tax committee has undoubtedly fostered the most significant policy win for lower-income countries in global taxation in recent years, namely the inclusion of an article on technical services fees in the UN Model Tax Convention (“12A”). As colleagues and I have shown, UN-specific norms (e.g. anticipation of developing country concerns) and its decision-making structure were central to make this happen. It wouldn’t have happened at the OECD.

In that sense, it is likely that the UN tax committee, as it functions today, is “better” at developing policy outputs that are inclusive of non-OECD interests, especially developing country interests. (It is worth noting though that the diffusion and adoption of UN tax policy outputs are more limited than those of the OECD, and thus policy wins at the UN travel less far than policy wins at the OECD. It is also worth noting that, although it is not always, international tax policy is often a zero-sum game focused on the allocation of taxing rights, and as such any organisation that is better at taking care of non-OECD interests will probably also be somewhat worse at accommodating OECD interests.)

It is not likely, however, that the UN tax comittee would continue to function as it does today, if it was upgraded to a true intergovernmental body and superseded the OECD. And so perhaps the right question is whether the UN would be “better” than the OECD at representing developing country interests in the hypothetical scenario where it gains power.

This is much more speculative, but we can say with a good degree of certainty that the UN tax work would become subject to many of the same contextual factors that mark the OECD’s current tax work, including geopolitical hierarchies and politicization. Major powers would still be major powers, and thus likely to dominate policy-making in the UN, even in the face of the UN’s broader membership, which would ensure a greater number of countries around the official table than at the OECD today. And broad political interest would mean a greater level of stakeholder engagement, and thus political fighting, than in the UN committee’s current more depoliticised state. This would mean facing the difficult dilemma of inclusiveness vs. coherence. In that respect, one of the things the current UN tax committee has “going for it” is that, simply, it is the UN tax committee (and not the OECD).

How much those contextual factors, which may well limit the influence of developing countries, would then interact with (and likely weigh against) the UN’s distinct mandate, norms and decision-making, which could enable developing country influence, is anybody’s guess.

Is it feasible to trade the OECD for the UN?

In practice, the more relevant question may not be whether the UN is better, but whether it is actually possible, or even likely, that we could move global tax policy-making to the UN? For all the debate, this point is rarely considered.

As noted, the typical dismissal of any suggestion of moving global tax policy-making to the UN is that it is utopian: global power dynamics are the way they are, there is institutional inertia and path dependency etc., which mean the powerful actors that support the OECD’s dominance today will continue to do so tomorrow.

Both positions, however, are extreme. The UN will not take over from the OECD in an instant. But equally, although majors powers dominate global governance, things are not totally static. Global power shifts are empowering non-OECD countries, and so global institutions are always changing – the tax policy-making landscape too. The way global governance changes today is rarely with big booms; it is more subtle, usually with ever-more multiplex “regime complexes” characterised by overlaps in mandates and work, competition and cooperation. The global tax policy landscape is a fine example of that, not just marked by UN-OECD competition but also increasingly the EU, as well as the World Bank, the IMF and others.

Consider that, in some respects, the UN has already increased its power in global tax matters over the last years. The UN committee of tax experts has, despite limited resources and political support, managed to produce several significant policy outputs that go directly against OECD-consensus policies (the most signifcant being Article 12A of the UN model tax convention). And the committee continue to push on such agendas, including with ongoing work on an Article 12B, which, again, goes directly against OECD-consensus policies. The UN has also managed to shape discussions through its FACTI Panel, which has adopted what I have called a “European Parliament” type of approach, making political noise and using innovative activist approaches to draw attention to specific policy issues, as a way to overcome the lack of its formal decision-making authority.

This UN influence has come not necessarily at the expense of the OECD, but in addition to it. And this is an important way an empowered UN can realistically shape global tax policy-making without taking full control of it. We know that overlapping institutional work, such as that done by the UN, can put normative pressure on dominant organisations, such as the OECD, to pursue more progressive (and inclusive) policy-making.

While we cannot ascribe recent advances in the inclusiveness of global policy-making at the OECD entirely to the UN’s, the pressures placed on the OECD by non-OECD powers, in particular the G-20 and developing countries more broadly, have been key to the OECD creating its “Inclusive Framework”. The IF now encompasses more than 140 countries, and while effective participation remains an issue, a formal seat at the table is a radical change from just a few years ago when 30-something OECD countries effectively decided global tax policy on their own.

Ironically, the creation of the Inclusive Framework will probably make it less like the UN takes over a more central role in formal global tax policy-making processes, given that it will be seen as appeasing calls for more inclusiveness.

At the same time, it illustrates the succesful influence of work by the UN and others that have pushed for institutional reforms that better accommodate developing country interests. In that respect, the UN doesn’t need to take over from the OECD entirely in order to shape global tax policy-making. That path to influence is much more likely, in the short term at least, than a wholesale shift away from the OECD.

Things take time, direction of travel matters

To wrap up, the UN tax committe today has proven more capable than the OECD of accommodating developing country preferences – the stated aim of many proponent of empowering the UN tax committee. Yet, that capability would likely be somewhat limited if the UN took on the role envisioned by its supporters, taking over for the OECD, and coming to face similar structural constraints from geopolitics, politicization, and the (limited) availability of financial and expert resources.

But the UN can still be – and it has shown itself to be – effective in influencing global tax policy-making to better accommodate developing country preferences, despite its standing and resources continuing to be limited. Innovative policy outcomes like Article 12A, the FACTI Panel, and the UN’s – and the broader non-OECD community’s – role in enabling the creation of the Inclusive Framework, all evidence this point.

For proponents of a global tax body hosted by the UN, this is worth celebrating, and supporting. And it is worth recognising that things are moving further in this direction: Just 10 years ago, the UN played a smaller role than it does today.

This directional of travel matters. Any shift that empowers the UN in global tax policy is likely to be a slow, incremental process. Institutional change is part of a paradigm shift, but paradigm shifts take time. While it’s underway, we can take stock and assess how best to bring about desired preferences in both the current and future institutional environment. As we write in “At the Table, Off The Menu?“:

Achieving truly inclusive global tax governance institutions will take decades. In the meantime, a pragmatic approach entails asking which of lower-income countries’ priorities from international cooperation can be achieved through the [OECD] IF, and which require a different type of institution.

Ain’t nothin’ but a G7 thang

This weekend, the Group of Seven (G7) finance ministers completed a “historic deal”, a new “global tax agreement” that will truly bring the international tax system “into the 21st century”.

Or so, at least, is the narrative presented by some of the G7 folk (most prominently UK chancellor Rishi Sunak), which has been swallowed by large swathes of journalists and observers, hook-line-sinker.

Yes, certainly, if we look purely at the content of the G7 announcement, it looks transformative: A global minimum corporate tax of at least 15%, and a reallocation of taxing rights for the largest and most profitable multinationals towards market jurisdictions, where sales are made.

But the significance of the G7 announcement has been massively overblown and oversold, in both political and normative terms. There are at least four parts to this argument worth highlighting.

First, the G7 just isn’t as important as it once was for the making of international tax reform. The G7 used to be the prime high-level political forum, the most important gathering of ministers and state leaders, setting out the direction for technical negotiations conducted by the OECD, and making the key decisions in turn.

But following the global financial crisis, the locus of global tax governance shifted from the G7 towards the Group of Twenty (G20) – and with significant implications. The G20 includes not just the ‘old’ powers of Europe and America but also the ‘rising powers’ of China, India, Brazil and others, bringing together a much more powerful and diverse geopolitical coalition.

It is this expanded power base, the might of the G20, that has made it possible for the international community to even consider such comprehensive and progressive reforms as a global minimum corporate tax. The shift to the G20 has meant global tax reform initiatives have far more teeth in recent years, with a stronger and more credible threat of sanctions for those unwilling to follow along (e.g. tax havens). If this were still a G7 world, we probably wouldn’t be having these discussions.

But because the G20 includes other countries than the G7, with different interests in international taxation, the contents of global tax reform are also shifting, less defined exclusively by the ‘old’ powers, increasingly marked by the preferences of ‘rising’ powers, whose voices are becoming harder and harder to ignore.

Thus, framing the G7 agreement as some sort of endpoint, as a final stop for global tax reform, fundamentally betrays these empirical and political development, and overlooks the importance of the G20. (Yes, of course, it is a significant political signal that seven of the most politically powerful countries agree on principles of reform, but in truth this doesn’t mean much unless China, India, Brazil and the rest of the G20 are on board. (They will likely be, but for other reasons I’ll get to in a second, not because “the G7 said so”.))

Second, there’s another important shift of political power that means it’s not all G7: that from the OECD to the “Inclusive Framework”. Ten years ago, negotiations on reforming the global corporate tax system was practically conducted at the OECD amongst its 30-something member states, where the G7 all feature prominently. So you could’ve been forgiven for saying the G7 pragmatically decided things. But that’s no longer the case.

Today, negotiations fall under the auspices of the “Inclusive Framework”, a forum established in 2016 under the OECD, at the behest of the G20. It has a vastly expanded membership, now gathering 139 countries and jurisdictions, all formally on an “equal footing” to decide the direction of the international tax system. While significant inequalities in power and resources remain, the dynamics of the Inclusive Framework have unquestionably shifted decision-making authority away from the ‘old powers’ and towards emerging economics and developing countries.

So, again, when the G7 are presented as the ultimate brokers of a global agreement, as the key decision-makers, it is indicative of a significant misunderstanding both of the raw political process and the shifting power relations of global tax governance. The G20 and the Inclusive Framework are the key decision-making authorities here, not the G7.

Third, content-wise the G7 announcement simply doesn’t entail much noteworthy new information. Let’s look at the bits of the G7 “tax deal”. The first component is a global minimum tax of “at least 15%”. The global minimum tax itself has been under discussion at the G20 and the Inclusive Framework since 2018, and the member states have reaffirmed in status reports, in high-level communications, and in negotiations several times their commitment to the principle, so we already knew they were supportive (although inevitably much technical work remains – the G7 announcement doesn’t change that.) The “at least 15%” bit is sort of new, but if you paid close attention you’d have noticed it came out of discussions at the Inclusive Framework’s Steering Group – a 24-country committee including China, India, Brazil, Nigeria and others alongside six of the seven G7 members – rather than the G7 itself.

The second component is a reallocation of taxing rights for the largest and most profitable multinational companies, with 20% of their profits above a 10% margin awarded for market jurisdictions (where sales are made) to tax. Hmm, where we have heard that before? Oh right, it’s been the basis of negotiations at the Inclusive Framework for more than a year, and that direction of travel is only reaffirmed by the G7 announcement, as it has been again and again previously in other communications. The specification that it is “the largest and most profitable” firms that are in scope is a recent change arising from Joe Biden and Janet Yellen’s interventions but again something that is being discussed primarily at the Inclusive Framework’s Steering Group, not the G7.

Thus, while the political signal of the G7’s formal announcement certainly carries weight, the content of that signal has been interpreted as much, much more novel and groundbreaking than it really is.

Fourth, beyond the misrepresentation and misinterpretation of the political proces, the political power relations, and the substantive content of the announcement, the portrayal of the G7 as key, final decision-makers is a significant problem from a normative perspective. The G7 can’t decide but also the G7 shouldn’t decide how to reform the global tax system.

Inevitably, global tax governance reflect established power structures and the fundamental inequalities between countries in terms of their ability to influence global policy-making. And so it is obviously the G7 who stand to gain the most from the “historical global tax deal” that they have brokered.

But there is an obligation to point that out, to question and critique it, rather than accept and buy into it. There is a real chance, with the emergence of the G20 and the Inclusive Framework, to build more inclusive, more democratically accountable, and more sustainable global tax rules. And there are already signs that we are headed in that direction, though it is still very far from reality.

Acknowledging that it is not the G7 that decide these matters is an important starting point here. Acknowledging that emerging markets and developing countries do have a voice, and should have a voice, is an important starting point. That, in addition to the raw political realities, is why we should not simply accept the prevailing narrative around the G7’s “historic tax deal” from this weekend.

The Paradise Papers should lead us towards a new global tax system

Last week, I published an op-ed in Danish newspaper Politiken with my colleague Saila Stausholm. I reproduce it below, liberally translated, for those interested. Given the op-ed format, it naturally has certain limitations and a certain style that differs from my usual writings on this blog – so take that into account. Here we go:

The Paradise Papers should lead us towards a new global tax system

Last Sunday, the International Consortium of Investigative Journalists (ICIJ) lifted the dam that had been holding back a new giant offshore leak, the Paradise Papers.

While the stories of tax haven usage do not necessarily reveal any illegal activity, the reactions tell us that citizens and politicians are outraged by the implications in the leaks of leaders and elites in the world’s richest countries.

Exactly because much of this activity is legal, the leak highlights the massive chasm between what ordinary people see as reasonable, and what the global elite can do within the limits of the law.

The Paradise Papers thus clearly showcase the structural problems of a nationally anchored tax system that works globally for mobile capital.

It is outdated, and there is a need for not just outrage and political attention, but also new, concrete ideas and the courage to change the system radically.

Small “quick fixes” here and there are not enough. On the contrary, we need to change the tax system fundamentally in order for it to match the ongoing reconfiguration of the global economy.

As illustrated by the tax haven leaks of the past few years, the opportunities to use tax havens and the offshore world are a key symptom of a tax system where regulation has not kept pace with globalisation.

Before the Paradise Papers, we had the Panama Papers, which created outrage in 2016, implicating the Icelandic Prime Minister, the Saudi Arabian king, the Pakistani Prime Minister, football world star Lionel Messi, and actor Jackie Chan.

In Denmark, too, the Panama Papers had consequences: The Danish tax administration is continuing its investigations into the affairs of at least 500 Danes.

Before the Panama Papers, we had the LuxLeaks, which revealed that PwC had helped a string of global corporates attain hugely favourable tax terms in Luxembourg. This had happened while current European Commission President Jean-Claude Juncker was Prime Minister in the Grand Duchy.

LuxLeaks also fostered significant political reactions, and became the starting point for Margrethe Vestager’s high-profile state aid cases against Luxembourg involving Amazon, Fiat, and McDonald’s.

And again before LuxLeaks, we had the Offshore Leaks in 2013. In addition, we have had the SwissLeaks and the Bahamas Leaks. These many leaks must be viewed in light of the increasing focus on tax havens and the issues created by the international tax system for both rich and poor countries.

Since the global financial crisis broke out in 2007-08, nation-states have increasingly identified the strengthening of national and international tax systems as a central part of the solution to the economic challenges we face today: debt crisis, public budgets under pressure, low growth and growing inequality.

As a consequence, both national governments and the international community has ramped up political initiatives against tax havens, against aggressive tax planning, against money laundering, and against tax evasion.

Today, we have much more transparency and better international exchange of tax information; we have closed some of the worst loopholes; and we have changed what is acceptable in terms of bank secrecy, shell companies, etc.

But the political reforms from the past decade have not really taken on the fundamental causes of the problems we are seeing today in tax havens and in the international tax system.

All the key components of the international tax system, established in the early 20th century, have not changed substantially.

Countries can still undermine each other by commercialising their sovereignty and offer favourable terms to foreign capital and thus reduce the economic and democratic capacity of their neighbours. And despite initiatives in the EU and the OECD, international cooperation is still relatively limited and, to a large extent, controlled by a small core of actors from the world’s richest nations.

Global corporations are still, essentially, taxed like they were 100 years ago, when they were small regional networks primarily trading physical goods.

This means that global capital – large corporations and rich individuals – are still able to structure tax liabilities with little friction across borders, while governments are largely bound by geographical and territorial borders.

If we want to address the fundamental challenges facing the international tax system today, we need a complete overhaul of the system. We need global innovation. Innovation is needed because old solutions will not do. And global scope is needed because solutions need to encompass all relevant countries and interests, if we harbour any ambition of finding sustainable and lasting answers.

First of all, we need innovation in terms of more and better inclusion of various interests in political decision-making processes. This is particularly relevant at the international level, where the group of decision-makers involved has historically been very narrow.

Our research has shown that a small group of actors play a disproportionate role in international tax policy-making. And that a core group of technical experts contribute to setting a course for regulatory initiatives that widely differs from the perceptions and goals of the general public and of politicians.

International tax policy is very important, and should have broad participation in all phases from the public, from civil society, from researchers, from interest organisations, and from politicians from all sides. This is not the case today. This would improve the quality of the democratic system and the political decision-making.

One model for such an expansion of participation is a World Tax Organisation. Today, taxation is just about the only major global political issue area where we do not have a global organisation with active participation from across the globe, where global challenges can be discussed, and common guidelines can be laid out.

We have a World Trade Organisation, a World Bank, a World Health Organisation, and so forth. But we do not have a World Tax Organisation.

This is not to say that these organisations are flawless, nor that a new organisation will solve all of our problems on its own. It is just one suggestion and just one part of the solution. What such an organisation does provide is a common global forum, where a broad range of issues can be raised and addressed, which simply does not exist in the area of taxation.

The “global” political discussions we have today largely take place in the OECD, the G20 and the EU; they play a key role in setting the agenda.

This makes it difficult for other countries and other stakeholders to join and influence discussions, despite the fact that many of the issues caused by the current international tax system hit emerging and developing countries disproportionately hard.

Without assuming the full design of a World Tax Organisation, we can at least imagine that it would function as a global forum that could take up key questions about international tax policy and tax havens, start political reform discussions, carry out global consultations, set out global guidelines, etc.

A more expansive idea of such an organisation could, like the World Trade Organisation, be entrusted with the power to assess and enforce whether any one country’s tax system would live up to globally agreed minimum standards, in order to ensure that it did not harm other countries with its policies or allow harmful discrimination of certain persons or companies.

In addition to creating a better forum for the negotiation of common ground rules, we also need to rethink how we tax cross-border activities in the global economy of today.

Today, global corporations and rich individuals have particularly large scope to lower their tax bills by manipulating mobile income across borders because our tax systems are still based around outdated ideas of how and where value is created in a global economy.

For instance, a substantial part of global corporate assets today are intellectual property: patents, copyrights, etc. In short: ideas.

In contrast to traditional assets such as factories, ideas and mobile and malleable. Where and when does an idea originate, and how does it create value?

Despite hundreds of pages of guidelines and regulation, multinational companies retain a great deal of flexibility in answering these questions and thus determining the location and size of their taxable incomes.

Large and complex global ownership networks equally allow corporations to move ideas, services and profit relatively friction-less across borders.

This is why taxation of corporations, and individuals, who effectively operate on a global scale, should also work effectively globally.

In the area of corporate taxation, one proposal in this vein is unitary taxation, where global corporations’ taxable income is consolidated at the global level, before it is distributed to each country of operation based on a predetermined formula.

In this way, it becomes far less important where corporations locate their profits, and thus harder to avoid tax liabilities as in today’s system.

In the area of personal taxation, a truly global tax regime might utilise multilateral tax assessments and audits for globally mobile individuals.

Again, these proposals are not silver bullet panaceas that will solve everything in a second. But they may be part of the solution, and they serve as important pointers towards a positive future for tax systems.

In order for these innovations to realistically happen, we also need a complete rethinking of attitudes to national sovereignty.

A key cause of today’s relatively limited international cooperation in tax matters, and of continued resistance towards a World Tax Organisation, is that governments across the world are terrified to surrender absolutely sovereignty over their tax systems.

However, as German philosopher Peter Dietsch has illustrated, international tax cooperation is not about surrendering sovereignty, it is about strengthening it.

Today, we have de facto lost sovereignty when tax havens induce limitations on our economic and political latitude. And yet we refuse to challenge their rights to do so.

Paradoxically, this insistence on the absolute sovereignty of others’ in tax matters thus weakens our own sovereignty.

If we are to achieve the needed global innovation in tax matters, we need to acknowledge that global cooperation provides a unique opportunity to regain lost sovereignty.

Another acknowledgement that is required for global tax innovation is that international tax politics is not a zero-sum game.

Today, many governments resist good ideas for change because they fear an absolute reduction in national tax revenue.

The Danish government, for instance, has expressed skepticism about a common European corporate tax system, proposed by the European Commission, which has the purpose of eliminating many of the most important current channels of tax avoidance used by large corporations in Europe. This skepticism is caused by a fear that Danish tax revenue would suffer due to our small market size.

There are many good reasons to be skeptical of the European Commission’s proposal, but tax revenue fears must be understood in the context of the long list of indirect benefits to the Danish public coffers, which are likely to outweigh any direct, absolute revenue losses. These include administrative cost savings and reduction in tax avoidance.

There are countless examples of hesitation around new political ideas because of this zero-sum mentality in tax matters.

But it is crucial that we view global innovation in tax policy as a unique opportunity to ensure a sustainable international tax system for the future.

Global tax innovation can be a critical way to future-proof our tax systems and thus our public finances. With a typical Treasury expression, the dynamic effects of global tax innovation are potentially enormous.

A World Tax Organisation and a global tax system will not solve all of our problems on their own, but they are a important steps in the right direction – and it is unlikely that we can effectively address our current challenges without effective organisational support and global policies.

However, global fora and global politics of this kind today are also plagued by large inequalities in resources, competencies and capacity between national representations. This will not be solved by establishing a new global organisation or new global policies.

This is why we also need to acknowledge the broader global political inequalities that lead to lack of cooperation, both in terms of a lack of will and in terms of lack of capacity.

For instance, a key reason that many small island states have historically pursued “tax haven strategies” is that they simply have not identified or been able to execute viable alternative strategies for economic development, and that they have been encouraged to do so, for instance by successive British governments.

Another challenge lies in the dominance that large Western states exercise in global politics. They tailor global tax rules to their advantage, while small tax havens and developing countries have almost no influence on international standards and regulation.

This gives substantial incentives to defect and to counteract global cooperation.

The USA, for instance, has played a key role in reducing bank secrecy in Switzerland, but in parallel it has strengthened its own secrecy industry at home, effecting what political scientists Lukas Hakelberg and Max Schaub have called “redistributive hypocrisy”.

We need to recognise and address these types of global political inequalities if the fight for global tax innovation is to succeed.

And there are good reasons for trying to do just that. The Paradise Papers and the increasing public attention to the challenges of tax havens and the international tax system underline the necessity of altering the current political course.

Small “quick fixes” of an outdated international tax system will not do.

We are hoping that the continuing stream of offshore leaks will not just lead to outrage but also to fundamental disruption of our whole approach to questions of global political inequality, globalisation, and, specifically, global taxation.

There is a need for broader and better participation in global political discussions of tax havens and tax systems. A World Tax Organisation would be a great place to start.

And there is a need to move towards tax systems that are truly anchored at the global level in order to deal with global economic activity.

There is also a need to rethink our approach to national sovereignty and to depart from the zero-sum mentality.

And finally, we need to address the global political inequalities that pose such a significant barrier to progress in the fight against tax havens.

If we can begin to move in this direction, just a bit, the future suddenly looks much brighter for the international tax system, for public finances, and for the modern global economy.

The new political economy and geography of global tax information exchange

The OECD has recently released information on the two most important recent global networks of global tax information exchange. They are, respectively, the networks of exchange of country-by-country reporting (CBCR) and exchange of financial account information (through the Common Reporting Standard, CRS).

These networks give a unique look into the new political economy and geography of global tax information flows. CBCR and CRS data are, arguably, the cornerstones of modern global tax information cooperation, providing crucial data on the foreign activities of national individuals and companies. The CBCR is an annual report for large multinational groups (revenue +€750m) that states their jurisdictions of operation, the nature of business in each country, the tax paid along with a host of economic activity indicators. The CBCR is typically filed in the corporate headquarter’s country of residence, then shared on request with other countries as needed. Through the CRS, each government compiles data from national banks on the financial accounts (balances, interest, dividends, and financial asset sales proceeds) of non-citizens, which is then exchanged automatically with those citizens’ home competent authorities.

Therefore, it is also highly interesting to look at the global network of these information flows – who has access, who doesn’t, and who is connected.

So I scraped the data off the OECD website and analysed it. And what I found provides a very interesting picture of the modern tax information networks.

At the time of writing, there were around 700 (CBCR) and 1600 (CRS) bilateral exchange agreements established. (I’m not sure why OECD say 1800 CRS agreements because there’s only 1600 unique agreements in their data). Given that the CRS was launched four years ago and CBCR only two, the discrepancy is natural. Taken together, the 2300+ agreements are a quite fascinating data set. Let’s look at each in turn, and then the two together.

First, however, a key caution must be noted. While the CBCR and CRS provide key recent mechanisms of tax information exchange, they are by no means the only mechanisms. Preceeding the new CBCR and CRS networks are established networks of bilateral “by request” exchange of information networks (the previous OECD standard), bilateral tax information exchange agreements (TIEAs) and tax treaties with info exchange clauses. Given that these have been in place for much longer, they are naturally more dense than the new networks. Still, CBCR and CRS are the frontier and are replacing these older standards exactly because of their limitations. Thus, the analysis below provides a picture of the emerging state-of-the-art within global tax information exchange.

The global CBCR exchange network

I tweeted out the network the other day, and it looks like this:

cbcr network

(Size by degree (number of links); node colour by region; and network layout by ‘ForceAtlas2‘.)

There are a few caveats to be noted before drawing lessons from this picture. First, the novelty of CBCR shapes the network look substantially. The picture is dominated by European countries, but that is understandable given 55% of all CBCR exchange agreements are formalised by EU Directive 2016/881/EU on automatic exchange of tax information (the rest are individually negotiated CBCR MCAAs). Second, the absence of the USA is noteworthy. While the USA has been reluctant to commit to reciprocal information exchange of bank account data, that is not the cause for CBCR. Simply, US CBCR filing requirements will kick in on 31 December 2017, as in most jurisdictions, but later. It is almost assured that the US will develop an extensive exchange network to protect US MNEs from local filing demands. Other countries with late filing requirements that will be expected to build substantial exchange networks as we go include Hong Kong, Japan, Russia and Switzerland. The whole network is expected to increase substantially over the next few years, as the remaining CBCR MCAA signatories (as of today, there were 57) conclude and report agreements.

That said, what we can see is that the current global CBCR network is all about Europe, OECD members, and a few small offshore centres. That picture likely won’t change too much. The almost complete absence of South America (beyond Brazil and Uruguay), Asia (beyond Malaysia), and Africa (beyond South Africa and Mauritius) stands out. This has attracted renewed criticism that the OECD tax policy-making processes are not inclusive of developing countries. However, it should be noted that the OECD has moved in the direction of bringing developing countries more closely in to its tax work, including through the BEPS Inclusive Framework, so there is potential for a broadening of the geographical concentration in the CBCR exchange network.

It is also worth noting that the picture indicates a very clear “you’re either in or you’re out” trend. There are currently 45 countries exchanging CBCR data, and none of these have less than 23 agreements (maximum of 43). If you are set up to exchange CBCR data, you are ready to exchange it with many partners.

More broadly, I think the network shows quite nicely the varying allegiance to the OECD international tax consensus. The European Union, in particular the European Commission, has become an increasingly autonomous player in international tax affairs but also a close ally of the OECD on many counts. The centrality of Europe in the global CBCR network is a representation of this position.

The global CRS exchange network

CRS exchange network.png

(Again, size by degree (number of links); node colour by region; and network layout by ‘ForceAtlas2‘.)

The global CRS network provides a somewhat more developed but not substantially different picture of the new political economy and geography of global tax information exchange. The fact that we have 62 countries (as opposed to 45) and more than twice the number of exchange agreements makes for a more pronounced illustration.

Again, it is worth noting some points on the data. Once more, EU is massively present. This is partly because of its speed in implementing effective CRS legislation. Thus, 35% of CRS exchange relation are down to EU instruments, including EU Directive 2014/107/EU. However, EU members have also been active in concluding agreements with non-EU members. The remaining 65% of exchange relations are concluded as individually negotiated CRS MCAAs, plus ten exchange agreements through the UK CDOT (Crown Dependencies and Overseas Territories International Tax Compliance Regulations). We can also see that, again, the US is absent. However, here we should not expect it to develop a network at a later stage. Due to the presence of FATCA, the US’ own financial account information standard, there has been no desire to also sign up to the CRS. Finally, the CRS network is also expected to increase and broaden its geographical scope over the coming years as the remaining of the AEOI-committed countries (100 at the time of writing) conclude and report on exchange agreements.

Beyond that, the political geography of the CRS network is notably similar to that of the CBCR network: It’s all about Europe and OECD members, with a few small offshore centres mixed in. Like the CBCR network, the absence of developing states has also contributed to criticism of the CRS standard. Once again, we can also see that it’s very much an “you’re in or you’re out” picture. 62 countries have CRS exchange agreements, and only one (Bonaire, Saint Eustatius and Saba) has less than 29 agreements in place.

Another nugget that I found quite interesting in the data: There are around 350 CRS agreements that are only reported by one of the two jurisdictions to the OECD. All other relationships are reported by both jurisdictions. For instance, Anguilla’s CRS exchange agreement with Argentina is only reported to the OECD by Anguilla, not Argentina. And there is a certain trend with these 350 agreements. They are all reported by the following countries: Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Croatia, Cyprus, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Monaco, Montserrat, Netherlands, Romania, Saint Vincent and the Grenadines, Turks and Caicos Islands. Most of these countries are small (island) states with noteworthy financial centres, or what some might label tax havens.

There are a few possible explanations, but my guess as to what is going on here is this: Countries most at risk of reputational damage and political wrath from non-compliance are making sure they report all of their exchange relations to the OECD as soon as possible. They simply want to make sure it is noticed when they are conforming to expectations, when they are “doing good”.

The global tax information exchange network (CBCR + CRS)

Total global information exchange network

(Size by weighted degree (number of links, weighted by strength); node colour by region; and network layout by ‘ForceAtlas2‘.)

Here, I’ve added the CBCR and CRS relationships together, giving us a picture of who is truly able to access modern global tax information flows. The bolder the link, the more weight it has, indicating access to both CRS and CBCR information from international exchange.

Having noted caveats to the data above, the picture that emerges here is, as we might have expected, more pronounced but similarly indicative as the individual CBCR and CRS networks. The observations barely need repeating, but for good measure: there’s EU/OECD dominance with a few financial centres mixed in, an absence of the US and developing countries, and a strong in-or-out dynamic.

Given the current structural factors contributing to this network layout, the main factor with potential to substantially change this picture is change in the overall political economy of global tax governance. This may yet happen, e.g. through the BEPS Inclusive Framework, but may also very well not happen due to geopolitics or other factors.

There will be more analysis to do on this data, and it will be interesting to follow the longitudinal development of these networks. I will certainly continue my work in this area, as I’m sure others will. For now, however, a very interesting picture is emerging of the new political economy and geography of global tax information exchange.

Book review: Global Tax Governance – What is wrong with it and how to fix it

One of the major 21st century challenges for politicians and polities at both the national, regional and international levels is the governance of ever-more global, mobile and flexible economic and financial flows. No more so than in the area of taxation, which looks likely to remain the last bastion of entrenched perceptions of national sovereignty, an undisputed cornerstone of the independent and authoritative government, the undeniable prerogative of national policy-makers in the face of growing global economic integration.

Or perhaps world leaders are slowly warming to the fact that they need international co-operation, if they want to address tax competition and the pilloried global tax system in any meaningful way? Peter Dietsch and Thomas Rixen’s recent edited volume on Global Tax Governance (sub-titled “What is wrong with it and how to fix it” – straight to the point) certainly seeks to leave you with the feeling that it is both desirable and irrefutable, “an idea whose time has come”, with reform proposals waiting for the Obamas and Merkels of this world to wake up and smell the coffee.

Global Tax Governance comprises fifteen chapters from a very strong line-up of contributors across the disciplinary divides, compiled by Dietsch and Rixen into 350-or-so pages of excellent reading. International tax competition and co-operation are not simple issues; they are multifaceted, difficult, wicked phenomena, so the diversity of inputs is both welcome and necessary. The chapter authors include economists, legal scholars, political scientists, and political philosophers. This provides a well-rounded gathering of perspectives, which covers many of the key stories of both the problems and solutions related to global tax governance. But there is no denying that this is first and foremost a political economy book – the pure economic and pure legal perspectives, for instance, are marginal. Still, for anyone looking for an intermediate dive into tax competition and the state and issues of international tax governance, this is, to my mind, the top place to start today.

Compared to other recent books on global tax issues, this one scores as the least morality-born but most refined in terms of its problem-identification and solution-building. While Thomas Pogge and Krishen Mehta’s Global Tax Fairness covers more ground and is provocative in its content at times, Global Tax Governance is a more academic book (incidentally because they are more academic authors), with a greater focus on succinct analysis and structure, and probably greater overall coherence. And compared to Dietsch’s previous Cathing Capital, as a compilation it is much more diverse and yet more detailed, though the reading flow is obviously worsened by its amalgamative nature.

Dietsch and Rixen have both written extensively on the topic before, and the book emanates with their footprints. Dietsch’s work on political philosophy and economic governance, which has often touched upon taxation, provides the backdrop to many of the normative and ethical arguments throughout the book, while Rixen’s research on the nature of tax competition and the international tax system as well as his proposed institutional framework solution (an International Tax Organisation) feature especially in the opening and closings of the volume. Moreover, the flavour of Dietsch and Rixen’s close associates (including Philipp Genschel and Laura Seelkopf) shine through. A quarter of the book chapters are written by this group, and several more are based on or build directly on their work. Which is okay (it is their book after all), though you might get the feeling that this analysis and solutions are the only game in town (and of course they won’t tell you otherwise).

The purpose of the book is to identify the need for global tax governance (i.e. the cause problem), take stock of the current international institutional make-up and its shortcomings, set out the normative foundations for a new direction, and propose specific political solutions. The book is divided into four parts to reflect these purposes.

In Part One, we’re treated with two superb walkthroughs by top tax economist Kimberly Clausing and Genschel/Seelkopf on the economic and political nature of tax competition and its impacts. Tax competition is damaging on national coffers and on the economy, we’re told in resounding detail. And it is widely harmful, except for capital and everyone in small open democracies, of course. But it’s a negative-sum game, so in the end the world is worse off. So why haven’t we fixed it? The “winner group” – small economies and capital owners – have powerful voices. And that voice includes the argument that every country has the sovereign right to set their tax rates as they see fit – a significant argument in a world apparently stuck in 1648 Westphalia. And besides, as Lyne Latulippe argues in chapter three, national policy-makers tend to internalise the idea (with a nudge or two from the “winner group”) that they must keep their tax offerings competitive, just like a firm’s market offering must be competitive, no matter that it is probably an awful and damaging analogy. Latulippe’s argument that national tax policy discussions are soaked with competitiveness discourse is something I have also shown for the international level in the OECD/G2o BEPS project.

So where we have gone wrong? In a lot of places, Part Two tells us. Enforcement of international tax governance is a mess (Richard Woodward, chapter five); it will only succeed when, once in a blue moon, the US gets its act together (Lukas Hakelberg, six and Itai Grinberg, seven); and even current international tax reforms are unlikely to succeed (Richard Eccleston and Helen Smith, eight). Woodward emphasises the national implementation dimension of international tax governance, arguing that tax havens do “mock compliance” to OECD’s tax information exchange standards, feigning alignment while muddling enforcement behind their backs. As we’re also seeing in the current BEPS project and elsewhere, the national take-up of global tax standards is highly varied, so this is an interesting point to follow – and Richard has promised more work on this topic, which is absolutely welcomed.

Aside from technical and political shortcomings, Dietsch (in particular) and Rixen often emphasise the normative underpinnings of international tax governance. It’s not enough to say the system doesn’t work, we need to say, ethically, why it must work differently. Thus, Part Three takes us through the ethical case for global tax governance. Miriam Ronzoni (chapter nine) weighs global justice arguments in political philosophy, sketching out why and how either of various positions should address tax competition. And Laurens van Apeldoorn (10) discusses in detail different notions of sovereignty and how they relate to the argument for tax governance. While work by both Rixen and Dietsch (see my book review) have contended that national sovereignty isn’t harmed by tax competition, Apeldoorn mounts the stronger claim that tax competition outright harms national sovereignty, discussing sovereignty recast as a responsibility (rather than a right), requiring not merely non-interference in extraterritorial affairs but a positive obligation to support sovereignty and democracy abroad. Dietsch’s chapter (11) is essentially a shortened version of part I of his previous book, though without a discussion of implementation through an International Tax Organisation (you’ll see why shortly).

The book testifies to that fact that national sovereignty seems to have emerged as the favourite argument against tax competition/for tax governance among the Dietsch/Rixen et al. group (even if they discuss different types of sovereignty and related arguments). The sovereignty-focus has been picked up from earlier work on tax havens, such as that by Alan Hudson and Ronen Palan, but it aligns rather poorly with the political discourse of today. The book does tune into, occasionally, the popular stories of tax competition’s effect on inequality or the national coffers of developing countries, financial system risk or human rights, but those are peripheral to the sovereignty argument. I did say this book is less morality-borne than others, but in arguing their cause, it is strange to see so many well-known and well-founded arguments lay idle.

Having thoroughly assessed the issue and outlined the burning platform, Part Four finally gives us the solutions. To be honest, my hopes weren’t high for the final chapters, as I feared they would merely re-state old proposals. And indeed, the chapters pick up on existing reform ideas – unitary taxation and formulary apportionment (Reuven Avi-Yonah, chapter 13), financial transactions tax (Gabriel Wollner, 14), and an International Tax Organisation (Rixen, 15) – while not considering other fundamental questions of the international tax system (e.g. source v. residence). But still, I was to be pleasantly surprised. The chapters do a very good job of not only explaining the proposals in the context of the book, often the authors provide specific links back to the first three parts of the book, explaining to the reader why a given solution addresses current shortcomings identified in Part Two, or why they would fulfill the normative cases of Part Three.

Markus Meinzer (chapter 12), a Tax Justice Network board member and an academic, provides a strong and thorough study of and argumentation for the failure of tax haven blacklists (something I have also discussed). Not merely an advert for the TJN’s Financial Secrecy Index, his chapter is a detailed exploration of historical blacklist shortcomings, the moral and political foundations for change, and the needed response. Meinzer’s illustration of blacklist issues is very useful:

Udklip

Reuven Avi-Yonah, who has published an infinite (it seems like) number of pieces on unitary taxation proposes, as we would expect, to heal the broken global tax system through unitary taxation with formulary apportionment (UT+FA). However, here Avi-Yonah is more compromise-seeking than elsewhere, where he has mostly proposed UT+FA as a “system overhaul”. His short ‘sweeping away’ of UT+FA criticism leaves something to be desired, but he puts forth the applicability of the UT+FA solution to the current issues (including as identified throughout the book) with usual pomp. Rather than promoting a full UT+FA installment, he proposes here a compromise with the prevailing arm’s length standard (ALS), using the UT+FA method selectively (within the confines of the current ALS system, notably), in situations where transfer pricing requires profit split attribution, and he discusses the need for further reconciliation between the two approaches.

Rixen himself rounds it all off, detailing the institutional solution to others’ material policy proposals. And of course, it is the International Tax Organisation (ITO), untouched by Dietsch in chapter 11 but brought back to the surface here. Rixen’s ITO is a WTO-style arbitration/enforcement solution with a forum-capacity, just as described by Dietsch in his recent book (who has the idea, I believe, from Rixen in the first place). The novelty for regular Dietsch/Rixen readers is modest, but he does engage in a much more detailed explanation of the proposed institutional design, which may serve as a blueprint for policy-makers.

Still, while Part Four contains good chapters, it remains a compilation of various proposals with Rixen’s institutional shell, and not really a coherent solution on how to “fix” global tax governance, as the book’s sub-title promises.

All in all, though, this is a fine body of work, recommendable and readworthy. It provides the fundamentals of tax competition, the burning platform, and a number of well-known policy proposals, all nicely wrapped in a book that explains well what it wants and where it is going. It can be read as a whole or as individual chapters, each of stands on their own as contributions to the literature. There are some odd chapters here and there, and there is a definitive bias in favour of certain argument (e.g. sovereignty), which leaves some interesting points and explorations on the table. But those are minor appeals in the grander scheme. The authors have told us why tax competition is damaging, why international tax cooperation is needed, and the direction of travel for policy-makers. Now, I think the authors would agree, it is up to policy-makers, academic colleagues and other interested parties to take up and discuss their ideas more widely.