Tax Cooperation Is Pivotal for International Economic Success

With my retirement now official, I offer some “exit insights” on international tax—both from my time heading US participation in the OECD/G20 Base Erosion and Profits Shifting project from 2013 to 2017, and more recently helping clients at Deloitte Tax to understand the ever-changing international landscape.

Topping my list is how lack of trust between business and governments in the tax space is impeding development of sound tax policy. Consider the expected reluctance by some governments to agree to simplified safe harbors in Pillar Two because of concern that without super complicated rules, businesses will game the system and thwart Pillar Two objectives for a global minimum tax.

The Organization for Economic Cooperation and Development has done some important work under the awkward rubric of “tax morale” and improving “tax certainty.” But these are topics that business and governments must pursue in earnest to build trust, because lack of trust leads both sides to reject sound tax policies.

While the complexity of today’s tax rules largely stems from the complexity of modern business, much of it owes to policymakers’ concerns that less complicated rules will permit aggressive tax planning, however defined. On the flip side, businesses often perceive that governments are adopting unprincipled positions on audit to raise revenue, impeding methods to resolve disagreement, and even using threats of criminal prosecution in what might otherwise be seen as a vanilla tax dispute.

It’s sometimes difficult in this atmosphere for the business community to engage confidently with governments on tax matters. The whole landscape is cluttered with fantastical claims and figures about business practices and their impact on tax revenue that themselves poison the political conversation.

Our globalized economy means that only multilateral efforts are likely to cause major improvements to the international tax landscape, including those that can bridge this trust gap. There are many fine organizations doing that important work, including the OECD, Forum on Tax Administration, International Monetary Fund, World Bank, and United Nations.

Each is fortunate to have bright and able professionals assisting in their work, and there is no reason to cast these organizations against each other.

The OECD has worked hard to help developing countries create and implement tax policies to help raise much-needed tax revenue. Views of UN members need to keep being considered, but the challenge will be finding ways for organizations to contribute productively to international tax policy. Doing this—while considering divergent needs of different economic levels without duplicating efforts or rules that lead to multiple levels of tax on the same items—is easier said than done.

Let’s face it, producing broadly acceptable multilateral results in any space—let alone tax—is a challenge. No “natural law” dictates which countries get to tax what income in a globalized economy, just as there is no agreement on what “fairness” dictates in designing those rules. One country’s perception of its fair share is another country’s perception of overreach.

Multilateral tax cooperation boils down to the age-old issue of the allocation of scarce resources among competing players—nothing more, nothing less. Everyone wants more money, sometimes by directly imposing tax and sometimes by reducing tax burdens to attract investment and jobs. Countries generally will tax what they can, hopefully with an understanding of the tax policies that will grow investment to benefit their populations.

The goal of multilateral cooperation is to ensure that international tax rules promote global welfare, not to detract from it, and that the overall system achieves a certain stasis that is politically acceptable. But asking countries to put aside naked self-interest is some of the hardest work to pursue.

OECD’s work on Amount B of Pillar One is a sort of canary in the coal mine for the future of international tax cooperation. Amount B attempts to answer a straightforward question: When a company distributes products in a jurisdiction for a related company, what is the right amount of profit to attribute to that distributor? It is the bread-and-butter work of transfer pricing specialists, and remarkably most professionals know the answer within a narrow range of possibilities.

Amount B seeks to enshrine those understandings in rules that aim to minimize disputes around these vanilla issues. Developing countries stand to benefit greatly from Amount B, because it would allow them to reallocate their limited tax resources elsewhere. Yet some countries reportedly are balking because they may not get the same revenue under Amount B as they do under the current rules, and they’re unwilling to trade greater global stability on an important issue for a current revenue loss.

If we can’t do simple things multilaterally, what are the chances of doing harder things?

Whether Amount B will be optional or mandatory remains under negotiation. Whatever the outcome, the only broadly acceptable alternative in an interconnected, global economy is seeking multilateral solutions to tough problems, however challenging.

There have been notable multilateral actions, such as the original BEPS project whose changes to the international landscape are now in force; the introduction of the global 15% minimum tax; the adoption of the common reporting standard that built on the US Foreign Account Tax Compliance Act to increase transparency into offshore financial assets; and even the longstanding work at the OECD and the UN in producing model treaties.

You may like or hate these outcomes, but there’s no denying that each demonstrates the possibility for meaningful outcomes when countries unite to solve common problems, especially when it’s hard to identify winners and losers. And that is often a good thing overall, even if it produces some winners and some losers when measured in isolation.

I close by observing that it has been the highlight of my career to work with the wonderful professionals at the institutions referenced above, in addition to the Treasury Department and IRS, as well as officials representing governments all over the world. They taught me a lot for which I am forever grateful. They are up to the task.

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

Bob Stack is retired managing director at Deloitte’s Washington National Tax international tax group and was deputy assistant secretary for international tax affairs in the Treasury’s Department Office of Tax Policy.

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