OECD, UN Should Align on Pro-Growth International Tax Reforms

Both the Organization for Economic Cooperation and Development, through the Inclusive Framework, and the United Nations, through negotiations for the Framework Convention on Tax Cooperation, are doing serious work in developing the most significant reforms to international taxation in a century.

But why are two organizations doing what seems to be similar work? Are they ships in a deep fog, hurtling toward each other, in danger of a collision that could upend international tax norms?

While there does appear to be some rivalry in the two efforts, there are hopeful signs of cooperation as well—and an overriding need for each to continue their work, ideally with common aims that set a foundation for tax reforms encouraging growth and development.

The OECD has a Model Tax Convention, forums on tax transparency and harmful tax practices, and the Base Erosion and Profit Shifting framework. While the UN has less experience in tax overall, it also has a Model Tax Convention and several manuals on international taxation. Both organizations work on harmful tax practices, the digital economy, and cross-border services.

Of course, they have differences in approach. Many developing countries hope the UN negotiations will give them greater voice and taxing rights than did the OECD process. They also wish for faster progress toward new protocols and rules of international taxation.

Many developed countries focus instead on prioritizing the BEPS process—which involves highly complex negotiation and implementation—and reinforcing existing norms of international taxation.

The US’ unique example, in some ways, highlights the benefit of having two separate processes. The OECD historically has focused more on the interests of advanced economies and multinational corporations. It’s hard to imagine the UN negotiating a separate side-by-side agreement with the US, as the OECD just did.

But there are equally significant similarities in the groups’ work.

Each is represented and participates in the other’s negotiations to reduce the risk of divergence and highlight the need for eventual alignment. Although the UN has a greater emphasis on the developing world, both advanced and developing economies benefit when each focuses on how tax policies can promote investment and growth—a common concern in an era marked by sluggish growth.

Each organization can develop a checklist of common issues that should top their agendas. Here is mine: avoidance of double taxation; transparency; digitalization of tax systems; fairer and quicker dispute resolution procedures; fair, non-discriminatory allocation of taxing rights (particularly in the digital economy); clear transfer pricing guidelines; and simplified, broad-based tax systems.

Not all of those will form parts of a Framework Convention, but each is essential to promote an international tax system that encourages investment for growth.

Negotiating a Framework Convention will be difficult. But the convention is just that—a framework. It leaves the implementation to national law.

By definition, the Inclusive Framework—which countries may join and leave—and a UN Framework Convention require national consent to become operational. This should put a certain measure of discipline on negotiators: If the solutions recommended are too radical or threaten tax sovereignty, fewer countries will adopt them.

If the UN and OECD can advance tax frameworks that maintain focus on investment and growth in some way, foreign and domestic investors will benefit. Divergence in policies and guidance remains possible but is reduced to the degree that the two processes proceed in parallel, with communication between the two, constant consultation with stakeholders, and participation in each other’s work.

Multinational corporate taxpayers and investors have concerns over potential risks that have, at times, been a priority of the UN negotiations and the OECD process. They include wider use of withholding taxes that become final taxes, shrinking definitions of permanent establishment that discourage companies from entering new markets, and the danger of gross receipts taxes as opposed to taxes based on actual profits.

The UN process would benefit from a greater focus on what it takes to attract investment in a competitive world. Equally, the OECD process has raised concerns over taxation of the digital economy and treatment of safe harbors, among other issues.

The bottom line is that both organizations should focus on their core mission of reforming international taxation in ways that encourage—or at least don’t discourage—investment, employment, and growth. If the UN and OECD can advance tax frameworks that do this, it will help domestic and foreign investors and taxpayers.

Architectural achievements such as the Florence Cathedral or the Taj Mahal are a reasonable analogy for where the two tax frameworks stand. We marvel at the skill necessary to build them and their innovation. Too often we forget that the scaffolding to construct these wonders took a long time to build as well. Construction also likely had a few false starts that had to be corrected to create something enduring.

Now imagine if the architects of these buildings had collaborated and shared experiences. That’s my hope as the UN’s and OECD’s efforts to reform international tax continue.

Multinational companies, developed countries, and developing countries agree on the need for revenue that comes from growth. The path forward is continued collaboration, communication, and learning from each other, rather than focusing on the differences in emphasis—or worse, promoting rivalry between the efforts.

Each process should constantly return to first principles. For the developing world in particular, prioritizing tax policies that drive investment would advance the UN’s Sustainable Development Goals, of which the first is the most important—no poverty. That can only come from promoting economic growth.

The danger in international tax negotiations arises not from having two processes but in missing the forest for the trees.

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

Author Information

Daniel A. Witt is president of the International Tax and Investment Center headquartered in Washington, DC, and has worked on tax policy and administration reforms in transition and developing countries since 1993.

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