If you read any new tax policy reports produced by the Organisation for Economic Cooperation and Development (OECD), or listen to its public communications, you are likely to encounter the word “consensus” repeatedly. Sensitive to historic criticisms, the organisation works hard to portray its activities as fundamentally cooperative in nature.

For the OECD and other international organisations that might claim authority to adjudicate particular policy questions, this is not merely public relations. Their very legitimacy is at stake.

The loss of credibility on an issue of primary focus, like international tax rules for the OECD, would spell doom for their relevancy and effectiveness. To understand the importance of this emphasis on consensus, and how recent events have brought it into question, let’s briefly review key developments in OECD history.

OECD focuses on tax competition

The OECD mission is “to promote policies that will improve the economic and social well-being of people around the world”. For a while, this meant in practice that it primarily facilitated trade and addressed double taxation issues. At the tail end of the last century, however, mission creep saw the OECD shift its focus to restricting tax competition, culminating in release of the 1998 report ‘Harmful Tax Competition: An Emerging Global Issue’.

Among other things, authors of the report worried that tax competition “may hamper the application of progressive tax rates and the achievement of redistributive goals”, and considered it harmful if a country was “poaching” investment through use of attractive tax policies.

The report was heavily criticised, particularly within the United States. Congress wrote letters and called hearings, with some questioning the wisdom of annual dues payments to the OECD. Once in office, the Bush administration stridently opposed the anti-tax competition effort. Low-tax jurisdictions also resented the assault on their fiscal sovereignty. Eventually, the OECD was forced to relent. While the project was not exactly abandoned, it never came close to the scale its supporters once envisioned. But instead of quitting, the OECD retooled and revamped its efforts.

How the OECD eventually succeeded

Today, OECD documents and officials routinely reference tax competition in a negative light, bemoan a so-called “race to the bottom”, or otherwise fret over the prospect of low or zero tax rates on certain income. One of the proposals under consideration with the OECD’s work on digitalisation is a global minimum tax, the Holy Grail for high tax nations. So how did we get from the retreat after the Harmful Tax Competition report to the current low point?

Two factors largely explain how the OECD was able to turn things around. First, they stopped challenging tax competition head on and went at it sideways. They made their focus tax transparency and promoted information sharing, knowing full well that this would enable tax administrators to expand their reach into other jurisdictions, leading to pressure for new OECD initiatives to coordinate their efforts. Only after this process was firmly entrenched did they become so emboldened as to begin targeting tax competition openly, such as with the BEPS project.

Second, the OECD undercut the primary objection of low-tax jurisdictions by bringing them into the process. This is where the importance of consensus was introduced. No longer could the targeted jurisdictions complain about violations of fiscal sovereignty if they were part of the decision-making process, the thinking went. The desire to emphasise this arrangement explains goofy project names like the Inclusive Framework on BEPS.

Mitigating the stigma of the OECD as a collection of rich welfare states dictating policy to smaller nations has proven effective. To comply with various OECD ‘standards’, low-tax jurisdictions have drastically altered their laws, joined the requisite number of tax treaties and submitted themselves to the OECD peer-review process. Silly as its name may be, the Inclusive Framework can tout a membership of 130 nations. From the OECD’s perspective, this has all worked wonderfully, except for one looming problem.

A one-sided consensus

Even though low-tax jurisdictions have spent years jumping through the OECD’s hoops, they find themselves targets once again as high-tax nations launch new attacks. Years after the OECD removed the last nation from its list of Uncooperative Tax Havens, the EU in 2017 unveiled a list of Non-Cooperative Tax Jurisdictions, a.k.a. ‘tax havens’. At its unveiling, the list consisted of 17 blacklisted and 47 grey-listed jurisdictions. By June 2019, it was still 11 blacklisted and 36 grey-listed.

Just as the EU’s tax haven blacklist undermines the Global Forum on Transparency and Exchange of Information for Tax Purpose, another proposed list sought to undercut the Financial Action Task Force (FATF). A so-called “dirty money blacklist” targeted 23 countries for failing to meet their standards on money laundering and terrorist financing, the domain of the FATF.

Although the European Commission failed to get the support of its member nations, more activity on the issue is expected. The EU’s tax haven list failed when it was first introduced as well, so the setback provides only small comfort.

The problem is not just that low-tax nations face a sort of double jeopardy, where they might satisfy the OECD but still find themselves labelled “non-cooperative” by the EU or others. It is also that threatening more extreme measures is a way for high-tax nations to dictate terms to the OECD. We are witnessing that very process unfolding on the issue of digital taxes.

In promising a report by the end of 2020, the OECD has adopted an extremely aggressive timeline for its work to reach a “consensus” solution to taxing digital activity, one even Pascal Saint-Amans, the director of the OECD’s Centre for Tax Policy and Administration, thinks “may prove difficult”. They have no choice to be hasty, as France and other high-tax nations have placed Damocles Sword over the global economy by establishing or pursuing their own digital services taxes.

A promise to remove the tax and replace it with the international standard once one is reached is not enough to mitigate the effect of imposing their own tax. They have already forced a negotiation timeline that might have otherwise allowed for more discussion and debate.

If a “consensus solution” is reached that is less burdensome than their current rules, they can just keep them anyway should they choose. Despite this, the OECD pretends that France is just one member no different than any other, negotiating on equal footing and in good faith.

The fundamental issue is that the OECD’s enforcement mechanisms only really work in one direction. There is no peer review process for determining whether a participant nation is making more onerous demands on its neighbours than those it agreed to within the OECD process. There’s no blacklist of rogue blacklisters.

The perception of consensus is thus one big illusion. Low-tax jurisdictions can feel like they have some say in the OECD process, but each high-tax nation gets to decide for itself whether to respect the agreed upon standard or demand more. Just how inclusive can such a process ever be? Unless the OECD polices nations that impose burdens on top of the agreed upon standards, it will never truly be a consensus-based organization. But so long as it can maintain the fiction of inclusion, it will at least remain a powerful tool for high-tax nations in their war on tax competition.