Of Mazes and Layers: Can a UN Convention on Tax Change the Rules of the Game?

The Maze

Last month, the United Nations (UN) General Assembly’s Economic and Financial Committee (Second Committee) tabled a draft resolution calling for the elaboration of a UN convention on international tax cooperation. Lauded by civil society as “a chance of legitimate, inclusive rule-setting” the initiative is yet to be remarked on, or acknowledged by, the Organisation for Economic Co-operation and Development (OECD). Silence from the historical custodian of the international tax system tells us very little about whether civil society’s optimism is warranted or not. However, a closer look at the OECD’s actions in the last ten years provides a good yardstick against which to measure the extent of its willingness (or lack thereof) to cede, or even just share, the international tax spotlight.

This post explores how the complexity of the reform efforts undertaken by the OECD in this area is likely to be used as an argument to prevent reform at the UN level, despite the significant problems that OECD led reforms pose for developing countries.

The G20/OECD Base Erosion Profit Shifting (BEPS) Project launched in 2013 marked the onset of a new paradigm in international taxation. From a narrow focus on avoidance of double taxation to an earnest recognition of the perils of double non-taxation, the OECD has made substantive strides to reform problematic features of the international tax regime. However, the complexity of those reform efforts have also meant that initial aspirations of streamlining the regime now seem utterly misguided and unfilled. That complexity is reflected in the fifteen BEPS Actions, one Multilateral Instrument (MLI), one Inclusive Framework, a Two-Pillar Solution (with new Model GloBE Rules) and a plethora of commentary.

These reforms mean that the international tax regime has become a maze which is not tailored for practical implementation by governments grappling with resource constraints. The departing point of thousands of bilateral agreements in place pre-BEPS is now compounded by a myriad of potential legal outcomes that arise from the agreements’ interaction with the MLI and its astonishing amount of allowed reservations. As if a matrix of possibilities per each pair of countries was not enough to signal the regime’s convolutedness, further layers of rules, definitions and obligations have been devised in the last few years. So far, at least three additional multilateral instruments are anticipated to be included in the existing web of norms.

The post-BEPS international tax architecture can claim many wins, including its ability to convey the highly desirable message that corporate taxpayers must contribute their fair share to societies around the world. Arguably, though, the most significant victory relates to its power to discourage complete departures from the status quo such as that envisioned by the UN with the proposed new convention.

The Game

Former US president Harry S. Truman is famously credited with the quote “if you can’t convince them, confuse them” while referring to a commonly employed tactic by his political opponents when attempting to win votes. As opposition can only be born out of understanding and subsequent disagreement, confusion can really work wonders in preventing dissent.

In view of the 2008 financial crisis, and successive document leaks confirming the sheer scale of corporate tax abuse, inertia ceased to be an option for the OECD over a decade ago. That the institution could not remain aloof to criticism did not mean, however, that it would, or has taken all opprobrium equally into consideration. The Secretariat has evidently spent some time reflecting on which aspects of the international tax structure are so foundational that they must be insulated from change, and which ones can be tweaked or done away with without eliciting much chagrin. So long as continuously enacted rules can broadly be seen as taking us all in the right direction, competing initiatives can successfully be precluded on the basis that work is still in progress.

The problem with such discourse is that it implies homogeneity of voices and, worse, uniformity in criticism, which is decidedly not the case in the landscape of international taxation. Developing countries have long denounced the OECD’s lack of representational authority, as well as the non-inclusive and opaque nature of its procedures, even in the BEPS Inclusive Framework era. Preliminary analyses of the Two-Pillar Solution, for instance, have emphasised that the initiative accords limited to no gains to developing countries. In this scenario, UN efforts – not in the least its Model Conventions, and the work done by the Committee of Experts on International Cooperation in Tax Matters – have been instrumental in drawing attention to the challenges faced by developing countries when confronted with the international tax regime’s overbearing complexity.

Yet, as noted before, the post-BEPS world spearheaded by the Inclusive Framework conspicuously embraces layers upon layers of unconsolidated guidance. Ironically, both the UN and the OECD have relentlessly spoken of the need to build the capacity of tax officials in developing countries. Sadly, no amount of capacity-building shall ever be enough under the current paradigm. Governments that cannot afford to maintain a dedicated branch to matters pertaining to international taxation and that do not participate in rulemaking and deciding on equal footing will simply have to undergo perennial training almost by default. A cycle of dependence is then established whereby complex rules are drafted despite arguments to the contrary, more capacity-building is required as a consequence and meaningful participation in subsequent rulemaking is ever forestalled.

The Way Out

Conceiving complexity as a strategy rather than an intrinsic quality of international taxation allows for a few tentative conclusions about the OECD’s willingness to be side-lined by a UN convention. If and when its engagement is formally requested, the organisation will likely make three fair points while negating the need for a new multilateral initiative. First, that its Secretariat has extensive expertise on the subject and is already knee-deep in initiatives on tax cooperation as it is. Secondly, that irrespective of its tangled nature, the BEPS/post-BEPS agenda undeniably represents the culmination of a lot of work, both technical and political. It would therefore be manifestly reckless to see all this hard work go to waste simply in the name of a UN-led scheme instead. Thirdly, that, if anything, an additional framework and forum will only complicate matters further.

So, are we then to believe that enthusiasm surrounding a UN convention on international tax cooperation is misplaced? Not quite. For one, the OECD itself naturally does not get a say on whether a UN convention is enacted or not. But, more fundamentally, OECD member states have very little power, if any, to prevent the adoption of a new UN instrument. While the OECD is largely tethered to consensus decision-making, the UN General Assembly can ultimately adopt resolutions by a vote through a simple majority if consensus cannot be reached. This would perhaps suggest that a UN convention could still see the light of day even in the absence of OECD member states’ support. But, without their support, would the outcome still be practically relevant? It depends.

Mundane as it may sound, the only true antidote against complexity is simplicity. As we presently stand, the aim and scope of the convention are yet to be determined. If the UN chooses to overlap efforts and re-write parts of existing norms to completely shift the centre of gravity of international taxation, the OECD will be perfectly vindicated in its (likely) claims. If, however, the UN uses the convention to strategically assert itself as the rightful birthplace of a new permanent inter-state dispute resolution mechanism, an important power transfer can still take place without the political fatigue that comes with direct confrontation. Unlike the UN, the OECD cannot properly claim to have adjudication expertise, and defending the integrity of current mechanisms on the basis of their adherence is hardly admissible. But what is more, the prerogative to design a fresh adjudication system must be taken for what it can offer: a real chance at changing the configuration of the maze and the dynamic of the game.