Category Archives: OECD

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.

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.

Technical politics, sovereignty and the prospects of tax multilateralism

International tax cooperation is hard. Especially when it challenges national sovereignty. Sovereignty is close to heart for politicians. Taxation remains a cornerstone of the nation-state and of the social contract. Governments are not liable to relinquish absolute authority on tax matters.

So, at least, the story goes. Indeed, the reality – and the associated perception – of taxation as the ultimate prerogative of sovereigns (alongside the use of force) has fundamentally shaped all kinds of analysis of international tax matters. In political science, for instance, the predominant approach to international taxation relies on realist models of inter-state power battles. When tax is the point of discussion, states are the relevant players and power is the game, with sovereignty at the core of the underlying dynamics.

That’s why, it is said, for instance, that the European Union has never been able to take control over direct tax regulation, although its powers span an otherwise extensive array of national legislative agendas.

Sovereignty is also cited as a key criticism of the European Commission’s recently re-launched proposal for a Common Consolidated Corporate Tax Base (CCCTB). The CCCTB, of course, is the Commission’s flagship initiative to harmonise calculation of companies’ taxable profits, ridding the private sector of having to deal with 28 (soon to be 27) different such rulebooks. The CCCTB would revolutionise the corporate income tax system in the EU, moving from one of tax base allocation based on the arm’s length and separate entity principles, towards one based on unitary taxation, with tax base allocation through formulary apportionment, i.e. divided between Member States according to local sales, labour costs and assets.

More importantly, the CCCTB would mean EU Member States surrendering national sovereignty on tax matters. Effectively, rules for deductions, incentives and so forth would come under the control of the EU system, with individual countries having to obey rules agreed at the supranational level, and going the multilateral EU route to any substantial changes.

Whereas the CCCTB has been lamented as largely ‘doomed’ because of the EU’s sovereignty-challenging, hard law, bargaining-based policy process, another major multilateral tax initiative, the OECD-led, voluntary, soft law, consensus-based Base Erosion and Profit Shifting (BEPS) project, has been praised for its speedy and effective solution-building.

However, both projects are indicative of increasing international tax cooperation. They have much more in common than usually discussed, and that tells us something about the general prospects for tax multilateralism. While national sovereignty and power politics are important barriers to tax cooperation, they have been overemphasised at the expense of alternative understandings of the lack of traction for the CCCTB and similar initiatives.

Here, I want to expand on this argument, drawing two key distinctions, namely between political and technical policy arenas, and between legal and effective sovereignty, in understanding the outlook for international tax cooperation.

Technical vs. political levels

Every policy decision, every policy process, develops at the intersection of two key policy arenas: the political arena and the technical arena.

At the political level, we see most clearly the distinctions described above. Hard law vs. soft law; sovereignty vs. cooperation; my country interests vs. your country interests; etc. The primary actors are states, embedded in distributional conflict.

The technical level, however, is different. I have written elsewhere on the topic so I shall keep it short. Suffice to note that the protagonists here are primarily experts and professionals, bureaucrats and advisers, working to build credible technical solutions, with country interests and high politics in the background.

Each level is important in a policy process, although one may weigh more heavily at certain points and in certain settings. But the relation is key. The technical level shapes the political level, and vice versa. Experts influence what can and cannot be proposed and discussed and accepted as policy issues and solutions; politicians influence the framework in and speed of which certain policy topics are taken up, and so forth.

At the same time, the ‘technical’/’political’ distinction should not be overemphasised. What is technical is political: a minor, seemingly technical addition to a policy recommendation may have enormous distributional consequences. And what is political is technical: politicians’ ability to promote technically authoritative arguments in proposing issue solutions is central to policy success.

While popular explanations typically highlight dynamics at the political level – country interests, national sovereignty and distributional politics – as the preeminent cause of policy success or failure, the technical level remains underappreciated.

The success of the BEPS project, for instance, has not merely been down to goodwill from the G20 and OECD nations, but, to a great extent, it is a consequence of dynamics at the technical level, as I have written elsewhere. Consensus around key technical BEPS provisions throughout a significant international community of professionals has played a central role in effective policy uptake. The delivery of technically strong, agreeable solutions from the technical level to the political level, while still needing to be ratified, was essential in inclining political decisions and a major contributor to widespread implementation.

Similarly, while the CCCTB’s difficulty is usually ascribed to power politics, I would argue that it may have as much to do with technical opposition. The Commission’s proposal faces a number of key technical-level barriers. Several specific provisions have received negative scrutiny, in particular the R&D superdeduction. More generally, the CCCTB is an attempt at wholesale replacement of 28 distinct corporate tax systems, each with vested technical stakeholders, along with the complete overhaul of the international tax system and demolition of entrenched, well-established and well-supported legal and economic principles. It is safe to say there is extensive technical-level resistance to the proposal.

Thus, technical-level entrenchment may provide a barrier just as significant as power politics to the CCCTB and EU tax multilateralism in general – even if the interplay of high politics and technocracy is decisively different in OECD and EU. Power politics may play a more significant role during policy formulation and decision-making in the EU compared to the OECD. But there are also important overlaps. For instance, there is significant similarities in the nature and make-up of the community of professionals involved in the technical levels in the EU and the OECD. Differences are, in my view, not so substantial that they undermine the importance of the technical arena in the EU.

Legal vs. effective sovereignty

Another underappreciated distinction in analyses of tax multilateralism is that between effective and legal sovereignty. Many analyses of international tax cooperation have highlighted governments’ aversion to surrendering (legal) sovereignty on tax, their desire to retain the full right to design policy, in explaining lack of traction for tax multilateralism. However, this argument unduly evades the fact that tax multilateralism may, and indeed does, effectively challenge national sovereignty even if it does not do so strictly as a matter of law.

Going back to the BEPS and CCCTB, from a sovereignty perspective, these projects again seem entirely different on the surface. CCCTB is hard law, requires formal pooling of sovereignty, is embedded in the complexities and frictions of the EU system, and has immediate and highly visible inter-nation distributional consequences. BEPS is soft law, based on consensus cooperation, born out of a flexible, technicised OECD process, and has fewer obvious ‘cui bono’ implications.

But although BEPS is seemingly of a softer nature, indications are that it actually behaves similarly to legally binding projects. Countries around the world are implementing key BEPS provisions in a way remarkably close to recommendations. As a matter of law, there was no imperative to do so, but as a matter of practice, there is. The technical-level consensus and dissemination of policy discourse plays a central role here, alongside national political commitments to the OECD and its tax policy processes. Indeed, OECD tax outputs have been known to take on legal ‘hardness’ (cf. 1, 2, 3). Formally, the BEPS recommendations retain ‘soft’ qualities – they can be unilaterally changed at political will – but in practice, there is a strong normative allegiance. As a matter of law, it is non-binding, but effectively… well, if not outright ‘binding’, then certainly something closer to binding than non-binding.

In the same way that international tax competition de facto undermines national sovereignty (effectively constraining national policy choices), while de jure leaving it untouched (nations formally retain the right to design policy), we might say that BEPS de facto is a pooling of sovereignty, although de jure it is not. National sovereignty has effectively been pooled or surrendered as a result of the BEPS process.

Of course, policy-makers may not perceive it as so. They may never articulate it. And they may rightfully hold that the distinction remains crucial. But the increasing trend towards tax multilateralism – indicated by both BEPS, CCCTB and a host of other international initiatives – may well be a result of increasing recognition that pooling of sovereignty is essential in order to improve the international tax system, whether that is effective or legal sovereignty-pooling. As German political scientists Thomas Rixen and Philipp Genschel have argued, countries can only curb tax competition by relaxing sovereignty or unilaterally engaging in double taxation:

Udklip

Thus, the emphasis on governments clutching to legal national sovereignty is perhaps somewhat overemphasised in accounts of tax multilateralism.

The Prospects of Tax Multilateralism

So what does this mean for the prospects of tax multilateralism more broadly?

In my view, the lack of traction for the CCCTB, due to continued challenges at the political and technical levels, should not be seen to crumble the overall prospects of tax multilateralism in the EU or beyond.

On the contrary, it seems to me that the underlying dynamic of political-technical interplay in international tax provides fertile ground for tax multilateralism, as both BEPS and the attempt at CCCTB testifies to. The lesson, rather, is that tax multilateralism has to happen under the right circumstances.

The CCCTB may be a dead fish, but this may be less about absolute adversity towards pooling/surrendering tax sovereignty than it is about adversity towards the particular modality and scope of pooling/surrendering tax sovereignty in the CCCTB case. It is the specific characteristics of the CCCTB – the extensive scope of the overhaul, the distributional implications, etc. – that explains its inability to get off the ground, while BEPS has shot out of a cannon. The long list of technical issues associated with the CCCTB regime, alongside the political squabbles, is not a recipe for success. In that sense, the CCCTB may be more fraught than BEPS ever was, asking for a more expansive and apparently unappealing pooling of sovereignty, underpinned by slow and friction-filled decision-making processes, compared to the perceived speediness and efficiency and technical OECD discussions.

Thus, while existing initiatives international tax cooperation may fall flat, we should not take that as evidence that tax multilateralism is failing. We should take it as evidence that we have yet to hit the right approach in the interplay of technical politics and political politics.

We’re changing the equation of tax competition and corporate profit shifting

Within tax economics, one of the central arguments for tax competition and low(er) taxes on capital, including corporate profits, is that it leads to increased investment and growth (at least in some countries, mostly small open economies).

Why? In short, we know that corporate tax rates and rate changes have behavioural effects. Capital income may change legal forms (between two corporate forms or between corporate and non-corporate forms), firms may change their debt/equity ratios, they may shift profits abroad or increase/reduce investments. It is the nature and size of these effects that determine the result of corporate tax increases or decreases. The ‘go to’ for empirical evidence on this is De Mooij & Ederveen’s 2008 “reader’s guide”. Their literature review finds that, in an average situation surveyed by the literature, the total semi-elasticity of the corporate tax base for these effects (i.e. the % change in the tax base from a 1% increase in the relevant tax, see below) is -3.1, with profit shifting (-1.2) the largest single effect:

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I.e. if the statutory corporate tax rate increases by 1%, the corporate tax base is predicted to shrink by 1.2% from increased profit shifting.

There are a myriad of potential arguments to question the certainty and applicability of these findings, but that is for another potential blog; suffice to note here that these figures represent the most accepted available evidence in economic literature on the behavioural effects of corporate taxation.

Based on this evidence, it is regularly argued that corporate tax rate reductions in isolation and tax competition more broadly positively support economic growth as facilitators of investment and eliminators of tax avoidance (again, in some countries at least).

Now, a key element in such assertions is that the status quo is taken for grantedCurrent behavioural effects (tax elasticities) are assumed as universally true. Rather than endogenous to economic tax competition models (i.e. “they can be changed”), behavioural effects are treated as exogenous (i.e. “this is how the world is”). As my review of Peter Dietsch’s recent book on tax competition notes:

One of the key points in Dietsch’s dismissal of tax cooperation as economically inefficient concerns optimal tax theory. Proponents of tax competition that leverage optimal tax theory hold that lowering taxes will result in increased labour supply and decrease tax evasion and avoidance. Analytically, the consequence is less need for tax cooperation to stem a race to the bottom of capital taxation. And this may be empirically true today. But these elasticies (the extent to which the labour supply and evasion/avoidance change with tax rate changes) are (partly) institutionally determined, and thus Dietsch argues there is no reason to assume today’s elasticities for tomorrow – they can be modified through policies and thus we can change the factors in the optimal tax calculation. For instance, by introducing stronger international cooperation on capital tax evasion, it is possible limit the tax evasion elasticity, and thus make tax systems more progressive by increasing the optimal levels of capital taxation, shifting the tax burden back on to mobile capital factors.”

The highlighted part is, in fact, exactly what is happening today and what has been happening for the past decade in particular. We’re changing the equation of tax competition and corporate profit shifting. Numerous and continuous reforms to combat tax evasion and avoidance are contributing to this evolution (even if some commentators questions their effectiveness). This includes regulatory initiatives (such as (automatic) exchange of information, FATCA and the CRS, the OECD MCAA, the revised EU Parent Subsidiary and Savings Tax Directives, the OECD Harmful Tax Campaign, Dodd-Frank, country-by-country reporting, the BEPS project, the EU ATAD and the EU tax state aid investigations) and voluntary standards (EITI, PWYP and the Fair Tax Mark), but also other significant developments (such as the Offshore Leaks, LuxLeaks and PanamaPaper).

Not just in their material effect but also in their normative impact do these reforms and events lessen the ability and willingness of corporations to shift profits as part of tax and regulatory arbitrage, thus decreasing the predicted elasticities (i.e. the positive corporate tax base effect from decreased corporate tax rates). This is not an unreasonable assumption, in any case. To my knowledge, there is still no systematic studies of the effects of these regulatory and normative changes on corporate tax elasticities.

This realization is what led Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, to make the following comments in to the Wall Street Journal this week:

“For the past 30 years we’ve been saying don’t try to tax capital more because you’ll lose it, you’ll lose investment. Well this argument is dead, so it’s worth revisiting the whole story,” Pascal Saint-Amans, the OECD’s tax chief, said in an interview.

“In the past people, notably with international income, could use foreign bank accounts to receive and make payments and their home tax office would never know. That era will be over,” Mr. Saint-Amans said optimistically. “In the lead up to this new regime some countries have allowed their citizens to declare their foreign income without penalty, that alone has raised 50 billion euros in extra tax.”

Saint-Amans’ comments also come on the back of the OECD’s release of a new report entitled “Tax Design for Inclusive Growth“, which, as a lead up to this weekend’s G20 Finance Ministers meeting in China, breaks with the advice of prior decades, arguing that the case for low capital taxation and tax competition are “not as clear-cut as previously thought” (p. 40). Although this specific messaging was not included in the G20 meeting communique, the report’s section on capital income taxation is highly recommendable for those interested, and there is no understating the language used here and its policy implications.

The OECD is sending a message, which is likely to become increasingly prevalent: As reforms squeeze regulatory room for and normative consequences of tax competition, capital is less likely to flee national boundaries, and thus countries can, just perhaps, slowly start to ease the foot off the tax competition throttle.

* POST-SCRIPT JUNE 2018 *: A new paper by the IMF was released on this exact topic recently. I shared some thoughts on the paper on Twitter, which provides a relevant addendum to this blog post. To read, see below:

The bark IS the bite, but ..: Why tax haven blacklists are not the answer

The OECD has been working on criteria for a tax haven blacklist. At the request of the G20 Finance Ministers, this has been a work in progress since April of this year. And the results are set to be presented at the G20 finance minister’s meeting in China next month.

This morning, the FT reports that those criteria are now set, and I turned to Twitter to evaluate the news:

My immediate thoughts were aligned with comments I’ve previously made, which are clear on these types of blacklists:

Why the skepticism? Surely, tax haven blacklists are a strong and effective tool? Indeed, they are. For certain purposes.

Tax haven blacklists have been one of the key international tax policy tools to combat illegitimate and harmful tax competition throughout the past decades. Starting with the OECD ‘Harmful Tax Competition’ (HTC) project, campaigns by international organisations to ‘name and shame’ uncooperative states has been very successful. There is no doubt that the HTC project, along with similar action by the Financial Action Task Force, the G20, the EU and others, have brought about significant compliance by states around the world to international tax standards.

Jason Sharman, in his excellently titled “The bark is the bite“, explains why exactly ‘naming and shaming’ works: It creates a discourse of illegitimacy and damages the reputations of non-compliant states and those associated with them, creating key psychological and material disincentives for tax haven behaviour. Of course, we still have tax havens, so it’s not an “be all, end all” tool, but blacklists advanced the agenda of harmful international tax competition probably more than any other tool in the 1990-2010 period.

My main contentions today with tax haven blacklists and my suspicion of their effectiveness can be summed up as follows:

  • Blacklists target small states, but not larger states with proportionally greater influence
  • Blacklists are inherently political, a reflection of geopolitics and national power
  • Blacklists express the pathologies of international organisations, rather than strictly

On the first and second points, you have to look no further than the current ‘gold standard’ for international tax haven blacklists: the OECD’s list of commitments to automatic exchange of tax information:

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Three small island states are non-compliant: Bahrain, Nauru and Vanuatu*. Oh, and then the United States of course, but they are only mentioned in a footnote. In short, if you’re big and powerful, or if you have the right friends, you will not end up in any international tax haven blacklist; if you’re small and powerless, you risk the blacklist treatment.

That is why the United States, the UK (City of London etc.), Switzerland, Luxembourg, the Netherlands and others will not end up on the tax haven blacklists of the OECD or the EU, even though they are widely considered key tax havens.

To be fair, a completely factual reason these states do not figure on tax haven blacklists is that they comply with the established blacklist criteria (with the notable US exception, of course). But that is exactly the point – the established criteria favour certain states in their design, while disadvantaging others.

And it makes perfect sense. International organisations and their member states don’t want to upset key trading partners. International trade and diplomatic relations are simply prioritised over naming and shaming on tax. I can understand that train of thought. I think most people can, in fact. But when you are trying to nudge the world towards less ‘harmful international tax competition’, this approach causes a fundamentally ineffective solution. We may name and shame small islands states all the way to tax haven extinction, but we are not addressing the wealth of similar activity generated through larger, more powerful states.

Finally, international tax haven blacklists are not, although one might think so, based on “objective” criteria. There is no such thing. When OECD and EU staff members and their member state counterparts are constructing blacklist criteria, they are surely doing what they think is “objectively” correct, but they are also influenced by their organisational, professional and national environments. They have different purposes for and ideas about the blacklists. They are influenced by organisational pathologies.

When the EU Member States publicised national tax haven blacklists in 2015, France labelled eight countries, Portugal labelled 80, Denmark didn’t offer a list. And, by the way, only eight Member States had Panama on their list.  And whenever the OECD makes a blacklist, the criteria conveniently revolve around subscribing to OECD tax standards (on information exchange, on harmful tax practices, on administrative cooperation, on transparency minimum standards, etc. etc.). This makes sense from an OECD perspective. But as Richard Woodward and Eccleston have written, the organisational culture of the OECD (and other international organisations) and the internal focus can lead to weak, lowest common denominator standards in tax. As such, while the blacklists might make sense for the individual or the organisation, it does not necessarily provide an effective solution if the goal is to diminish harmful international tax competition.

More than anything else, the new OECD tax haven blacklist criteria will probably lead small states to expand their subscription to OECD tax governance standards. Most of them already cooperate with OECD standards, but maybe they don’t subscribe to all three requirements. Currently there are eight countries past review that are not “largely compliant” with information exchange standards. And there are three* countries uncommitted to automatic exchange of information (see above). So how much will this move? I have my doubts.

(*Endnote: As Christian Hallum pointed out to me, there are in fact no longer any jurisdictions defined as non-committed.)