How The OECD Inclusive Framework Shaped A New World Tax Order

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tax notes’ Robert Golder, Nana Ama Sarfo, and Stephanie Soong Johnston discuss the OECD’s inclusive framework – how it came into being and where it is going in the future.

This transcript has been edited for length and clarity.

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Robert Golder: Welcome to the latest edition of “In the Pages”. This month’s featured article is titled, “A New World Tax Order: The Inclusive Framework and Its FutureWe are co-authored by Nana Ama Sarfo, a contributing editor. tax notes, and Stephanie Soong Johnson, chief correspondent with tax notes, Ladies, welcome.

Out of curiosity, when did you start working on this article?

Nana Ama Sarfo: We started in May. From May to November we did a lot of research, talking to many different people to understand what the framework is and what stakeholders really thought about the process.

Robert Golder: The article references a date: October 8, 2021. That’s when the OECD achieved high-level political commitment to the Pillar One and Pillar Two resolutions. Historically, is the tax community undermining the importance of an inclusive framework?

Stephanie Soong Johnson: There is often a tendency to get overly excited about things, but in this case it seems worth it. I have been covering this topic for almost 10 years. The inclusive framework is important because it is really the first time that so many countries have come together and managed to agree on something so controversial as tax rights. These are the key concepts that NGOs have been calling for years, even decades, for some of these concepts.

The fact that around 140 countries ironed out their differences to reach an agreement is a remarkable achievement. The only time I can think of is the global forum on tax transparency and exchange information for tax purposes when countries come together in such a format.

Robert Golder: Let’s talk about what constitutes an inclusive framework. It started in 2016, but the final [base erosion and profit-shifting] The report was released in late 2015, less than a year earlier. How do we reach an inclusive framework from those BEPS reports? Why didn’t someone say, “Hey, BEPS was enough. We’ve already done it. Let’s call it a day and go home?”

Nana Ama Sarfo: You’re right; It did not happen. To provide some background on the BEPS project, it was a joint initiative between the OECD and the G-20. The final report you mentioned was just part of the package, as the next step after the report was published was implementation. That stage has a long tail; It continues even today.

The OECD and the G-20 decided that four of those 15 action items were to become the minimum standard. The OECD felt that in order to adequately address BEPS, as many countries as possible needed to sign up to the project and implement minimum standards.

The problem was that most of the world was not involved in the BEPS process. You had G20 members who were not OECD countries and had to pay a fee and get a special status to participate in the BEPS negotiations, as we highlighted in our article. Nevertheless, some developing countries and observer organizations such as the African Tax Administration Forum (ATAF) were allowed to oversee the negotiations and provide some input.

Ultimately, the opinion of the OECD and the G-20 countries gave a verdict. In that light, the OECD could not say then that it wanted the whole world to implement these BEPS standards without any kind of buy-in. The place where it could give its say to other countries was on implementation, and that’s how the inclusive framework came into existence.

Robert Golder: The OECD is ending the year at a high point. But the project was a long, rough road. What was the low point?

Stephanie Soong Johnson: I was wondering what Pascal Saint-Amans said during a recent conference. , , That the “safe harbor” proposal the Treasury Department had proposed was a poison pill for negotiations.

It stopped everything. Why would a country agree to a solution to tax digital companies when the multinationals that would be in the purview could simply exit? This was a low point as it threatened to derail the entire conversation. That was a big obstacle.

Then came the Biden administration. He is credited with removing the blockage by proposing a wider scoping idea. This got rid of the need to differentiate between automated digital services companies and consumer-facing business companies.

The basic idea for column one was to target only those companies, but the question is how do you differentiate between companies that are in scope and those that are not. This will cause a lot of lobbying, hair pulling and tantrums. The broad scoping idea that the Treasury put forth was instrumental in unlocking progress.

Nana Ama Sarfo: This may be an unpopular opinion, but I actually thought the OECD’s July 1 statement on the initial agreement was a bit underwhelming.

We noticed that there were some holdouts. Kenya and Nigeria refused to sign that deal, then later we saw they also refused to sign the final deal, period.

When Kenya and Nigeria decided to abstain, it certainly raised some questions as to whether other countries could be different. That’s when we saw that disagreements with some of the bigger economies were on the rise.

Robert Golder: You see the inclusive framework as a grand experiment in multilateralism. Is it ironic that this happened when many one-way impulses push in the opposite direction?

Stephanie Soong Johnson: It all goes back to a concept the OECD has called the “tax paradox”. This is where multilateralism is essential for countries to maintain their tax sovereignty. They should cooperate with other countries to protect their interests. It’s contradictory, but I think it’s true. This is the driving force of an inclusive framework. It also makes me wonder whether the pandemic has pushed multilateralism to a positive outcome. This shows how connected we all are to each other.

Nana Ama Sarfo: I think the whole inclusive profiling process really showed how people can come to the same conclusion in different ways.

You decided to have the United States join at a later stage because it wanted to unilaterally limit digital services taxes. Meanwhile, the initial distinction that the OECD wanted to differentiate between digital companies and non-digital companies was not working as many multinationals have both business models.

It would have been really confusing to find out if the new tax rules were in place. Here we see that Treasury has simplified the process so that it is applicable to the top 100 companies globally.

On the other hand, we had an increasing number of countries in the EU and elsewhere adopt their own unilateral digital service taxes, and the US decided it was going to ban countries with DST. For those countries, it makes sense to engage multilaterally so that they can have some sort of agreement with the US

robert golder: If you look at the structure of the inclusive framework, it’s more or less the same as what we have in other bodies, like the World Bank, the IMF, or the United Nations. The world already had institutions available to take up this project, yet it decided not to use them. Why was it like that?

Nana Ama Sarfo: It is important to look at the make-up and mandate of those other institutions. For example, there has been an urge to move global tax policy making to the United Nations because the United Nations is open to all countries, whereas the OECD now has, what are 38 member states?

The United Nations has its own tax body, the United Nations Tax Committee, but the committee does not reflect the broad membership of the United Nations. There are only 25 experts, or so, who sit on the committee – they act in their capacity to specifically address the tax concerns of developing countries.

The IMF cares about the tax because it is involved in lending to countries, and has an interest in monitoring its economic and fiscal policies. The World Bank is dedicated to helping low-income and middle-income countries. Given the very specific work they do, it would make no sense to move international tax policymaking to those bodies.

One place where, I think, it is understandable would be the United Nations but that idea has not taken off. There are a lot of political conflicts at play there.

Stephanie Soong Johnson: Even if the responsibility of standards-setting is transferred to the United Nations, countries will still face the same political problems as an inclusive framework. Changing the venue may not remove any of those challenges.

Robert Golder: Thinking about BRIC (Brazil, Russia, India and China) or the developing economies that would be affected by Pillar 1 and Pillar 2, was the framework inclusive enough from their point of view?

Stephanie Soong Johnson: Many of those countries…

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