The Organisation for Economic Co-operation and Development (OECD) has gradually carved for itself a central role in global tax matters over the last two decades. Today, its many initiatives impact global economic activity in a variety of ways. OECD Watch summarizes and analyzes the organization’s recent activities relating to international finance and tax matters.
Base erosion and profit shifting
As part of its “Inclusive Framework on BEPS,” the OECD released guidance on Action 4 (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments). The guidance includes the design and operation of the group ratio rule, consistent with the conclusions reached in the 2015 report. It also solicited comments on draft examples for follow-up work on the interaction between the treaty provisions of Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) and the treaty entitlement of non-CIV funds, and requested input for Stage 1 of the peer review on Dispute Resolution under Action 14 as it relates to the Mutual Agreement Procedure for Austria, France, Germany, Italy, Liechtenstein, Luxembourg and Sweden.
The OECD also released key documents that will form that basis of the peer review of Action 13 County-by-Country Reporting and for the Action 5 transparency framework. As the basis on which the peer review processes will be undertaken, they include Terms of Reference with criteria for assessing the implementation of the minimum standard, and the Methodology laying out how jurisdictions will complete the peer review, including the process for collecting the relevant data, the preparation and approval of reports, the outputs of the review, and the follow-up process.
Seven new jurisdictions signed the Multilateral Competent Authority Agreement for Country-by-Country reporting (Action 13). The seven countries are Gabon, Hungary, Indonesia, Lithuania, Malta, Mauritius and the Russian Federation, and bring the total number of signatories to the CbC MCAA to 57.
Meanwhile, Swiss voters in February rejected a referendum on corporate tax reform that would have implemented many BEPS recommendations. In response, OECD Centre for Tax Policy and Administration Director Pascal Saint-Amans said that “if Switzerland does not move relatively soon, the report will say ‘you are not implementing your commitments. Is it a blacklist? No. Is it naming and shaming? Yes.” The OECD wants to pretend that it merely provides recommendations, acts on consensus and respects national sovereignty, but it keeps proving that not to be the case.
Platform for collaboration on tax
Citing “great momentum around international tax issues,” the Platform for Collaboration on Tax was launched in April 2016 by the OECD, IMF, UN and World Bank Group. The program’s concept note calls it a “central vehicle for their enhanced cooperation, enabling them to develop a common approach, deliver joint outputs, and respond to requests for a global dialogue on tax matters,” but tellingly not until after it observes that “significant additional tax revenues, raised in fair and efficient ways, are required to meet the global development challenges.”
The Platform has released reports on Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment and on Enhancing the Effectiveness of External Support in Building Tax Capacity in Developing Countries.
In January, the Platform released a draft toolkit titled A Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analysis to assist developing countries on transfer pricing and solicited feedback. The toolkit is said to be “an important part of the Platform’s effort to increase the capacity of developing countries to apply the principles of the G20-OECD Base Erosion and Profit Shifting (BEPS) project.”
Economic surveys promote higher taxes
The OECD released economic surveys for Australia, Italy, Sweden, Portugal and Mexico. As usual, they included numerous policies designed to increase tax burdens and grow governments.
Among the lowlights, the OECD called for an inheritance tax in India, which as a tax on capital is very bad for growth. Siding with tax collectors, the OECD also wants Italy to lower the threshold on allowable cash payments back to the restrictive EUR1,000 set in 2011 after it was recently lifted to EUR3,000.
Overall, the OECD continues to confuse the causes of tax evasion by encouraging more onerous enforcement and compliance efforts over the superior and more pro-growth solution of lowering tax rates. The reports also place heavy emphasis on ideologically driven social agenda items like income and gender inequality, and then promote policy solutions that undermine individual liberty and economic growth.
Potential U.S. opposition
After the recent election, a change in tax policy in the U.S. is expected and could even result in a more aggressive opposition to the agenda of the OECD. Republicans are not historically enamored with the OECD’s agenda, and the new administration is especially skeptical of international organizations that encroach upon national sovereignty.
One way in which that might be achieved is to reduce or eliminate the funding provided by the U.S. to the OECD. There is every reason for lawmakers to stop subsidizing the OECD. Not only is the work it is doing on BEPS, automatic exchange, and against tax competition decidedly against the interests of the United States, but the OECD frequently lobbies for policies within the U.S. that are against the stated preferences of the Republican Party. So they are effectively subsidizing their own opposition.
Last year, the Center for Freedom and Prosperity led 20 organizations in a call to defund the OECD. Since the United States provides the largest share of the organization’s funding, it would be compelled to take such threat seriously if it seemed like funding cuts were on the table.
Members of the new administration have expressed openness to the idea of cutting OECD funds, but have not yet committed one way or the other.
As of the end of 2016, The OECD boasted of 1,300 bilateral exchange agreements for the automatic exchange of information under the Common Reporting Standard, with more relationships to be published throughout 2017. It has made available a list of all activated bilateral exchange relationships currently in place for automatic exchange. The first exchanges are to take place beginning September 2017.
As the automatic exchange apparatus comes online, and BEPS implementation rolls forth, we can expect an increasingly aggressive OECD willing to target financial privacy wherever it may be found.
For instance, when Chilean lawyers objected to requests from the tax service for privileged client information, Pascal Saint-Amans weighed in on behalf of the OECD to side with the government: “It is very important to identify the use of aggressive tax planning through the use of tax havens, so tax intermediaries have the responsibility to promote and collaborate with the fulfillment and provision of this information.”
This crusade against so-called tax havens, which the OECD generally uses to mean low- or no-tax jurisdictions, has been driving OECD policy for two decades. In that time privacy rights have been eviscerated, fiscal sovereignty has taken a backseat to the agenda of global tax collectors, and the international economic environment has suffered as a result.
Unfortunately, things are likely to get worse before they get better thanks to the automatic exchange reporting standard, BEPS, and whatever terrible ideas result from the new collaboration between the worst international organizations when it comes to tax. The wild card is the United States and whether it will lead to a new wave of opposition to the OECD’s agenda.