Global Players, UN Challenge OECD’s Original Vision of Tax Policy

When le grand architecte of the BEPS plan envisioned Pillar Two, one might presume the biggest hurdle was how to achieve consensus to implement it, setting a minimum threshold for what the dreamers of Versailles thought was a fair international tax system.

What makes a fair international tax system is often defined through political debate, which might not be feasible if we expect everyone to agree.

The designers of the OECD’s global minimum tax for large multinational enterprises came to embrace realpolitik in the tax arena. Pillar Two of its two-pillar solution, which establishes the global minimum tax regime, doesn’t need consensus or the agreement of the economies being plundered by it. Pillar Two just needs a critical mass of countries to adopt it, so its effects can’t be avoided by the rest.

To an extent, the Organization for Economic Cooperation and Development’s bid was successful. Under the cover of the Inclusive Framework comprising over 140 countries and jurisdictions, it gave Pillar Two the appearance of legitimacy.

With the resolute support of the EU, Japan, and South Korea, among others, it achieved a critical mass of countries to make Pillar Two impossible to avoid.

Not properly considered was that implementing such a tax revolution without effective commitment from the US, China, or India just isn’t politically sustainable.

And neglecting the historical relevance the concept of tax sovereignty has for former colonies is just bad judgment.

Tax Chaos on the Horizon

With that in mind, the beginning of 2024 is unavoidably headed toward tax chaos.

Leading the revolt against the OECD initiative, the African Group of UN member states released a draft resolution calling for the establishment of a “Member State-led, open-ended ad hoc intergovernmental committee for the purpose of elaborating a comprehensive convention on international tax cooperation.”

While the call for a binding convention would weaken the effectiveness of measures such as Pillar Two, its most important effect is that it’s intended to drive tax policy discussions away from the OECD and to the UN.

As so often happens with revolts, there was an attempt to quash it. The European bloc, led by the UK, presented a draft resolution to eliminate the notion of a convention from potential UN-led work.

With only 55 countries supporting the amendment proposed by the UK, and 125 siding with the African Group, however, the UN has a clear mandate.

As important as the resolution itself is understanding who voted for what. With a few abstentions, most noticeably from Costa Rica, Mexico, Norway, and the UAE, most of the emerging markets sided with Africa.

In addition, Brazil, China, India, Indonesia, Thailand, the Russian Federation, Qatar, Saudi Arabia, Egypt, and South Africa seem to agree an international tax convention is needed and “that respect for tax sovereignty implies international tax cooperation that allows all countries to effectively participate in developing the rules, by right and without preconditions.”

The resolution championed by Nigeria seems to move the focus from needing a fairer tax system to needing a fairer decision-making space for tax policy. The resolution noted that “inclusive and effective international tax cooperation requires legally established and transparent decision-making structures,” with “clear, transparent” rules to “ensure that all participants are on an equal footing procedurally and have the same ability to engage meaningfully in decision-making.”

The US situation is complicated, as it voted with Europe against the Nigerian resolution, wanting to keep the international tax policy work under the OECD’s ambit, but without ultimately implementing such work, as seems the case with Pillars One and Two.

The US reaction isn’t entirely surprising. Though it could be argued the US hasn’t successfully influenced the design of Pillar Two, the OECD as a forum seems to suit it better.

Chile is another interesting example, as it has committed to implementing the OECD’s Pillar Two, to create a tax system within Latin America to protect its regional interests. It has also voted with the African Group in favor of a UN-led convention. Those are a lot of commitments to honor.

What to Make of This

Even though 145 countries do participate in the Inclusive Framework, having 125 jurisdictions at the same time indicating their trust in the UN could be interpreted as a vote of no-confidence in the OECD. At the very least, it’s a sign that countries haven’t decided on what they consider to be a fair tax system, but they do know what they don’t want: an unfair policy-making process.

While multilateralism is indeed challenging, the analytical work of international organizations should by no means be discouraged.

For instance, a 2023 paper published by the Inter-American Development Bank concluded the effective average tax rate for Latin American and Caribbean countries was 23.9%, compared with an average of 21.9% for the OECD economies—explained in no small measure from distortions arising from the differential tax treatment of certain assets, for example intangibles. How should those distortions be addressed?

Likewise, the OECD concluded last month that high-tax jurisdictions account for 53.2% of all global profits currently taxed below 15%, with low-tax jurisdictions, typically capital importers, accounting for only 18.7% of such low-taxed profits. Has the focus of international tax policy on profit shifting been in the right direction?

The analytical capacity of international organizations is key to the success of tax policy, and whether the UN can provide an extra layer of legitimacy to the design process of such rules remains to be seen.

In the meantime, will early adopters of Pillar Two ward off the chaos they are about to unleash and wait for the UN? Perhaps it won’t be until next year that we understand what fair tax policy means for everyone.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ignacio Gepp is partner with Puente Sur in Chile.

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