Economic and Social Council

Meeting on Tax Matters

8^th & 9^th Meetings (AM & PM)

Officials, Experts Urge International Cooperation Forum on Tax Matters to Help

Developing Countries Mobilize Resources for Governance, Services

 

Economic and Social Council also Launches Updated

Model Double Taxation Convention between Developed and Developing Countries

A well-functioning forum for international cooperation in tax matters was needed to help developing countries mobilize adequate revenues for governance and services in a fair and pro-growth manner, officials and experts told the Economic and Social Council today as it held a special meeting on the issue.

“The lack of a truly global, all-inclusive norm-setting body for international tax cooperation at the intergovernmental level, which would offer developing countries a full seat at the table, continues to be a fundamental gap,” said Alexander Trepelkov, Director of the Financing for Development Office in the United Nations Department for Economic and Social Affairs.

Presenting the Secretary-General’s report on the “Role and work of the Committee of Experts on International Cooperation in Tax Matters”, he said that while each country was responsible for its own tax system, the United Nations had the responsibility to be a catalyst for increased international cooperation in tax matters for the benefit of both developed and developing countries.  For that reason, it was important to strengthen the Committee’s work, to balance the representation of the private sector on that body, and to increase the participation of developing-world representatives through capacity-building efforts.

Delivering the keynote address, Allen Kagina, Commissioner-General of Uganda’s Revenue Authority, said:  “The majority of developing countries are still challenged with raising adequate domestic revenue to meet public expenditure needs.”  Laying out the scope of the problem, she said those countries were barely collecting revenue at rates of 17 per cent of gross domestic product (GDP), compared to the worldwide average of 35 per cent.  Taxation in developing countries was characterized by complex, inelastic, inefficient and unfair systems, which often unfairly burdened medium-sized companies because large firms were able to get exemptions while small businesses hid in the informal sector.

Noting that reforms had taken place over the past two decades, with support from bilateral and multilateral donors, she said the lessons learned from those efforts had shown that coordinated tax reform, rather than piecemeal approaches, was crucial, and that taxation for non-revenue objectives should be discouraged.  It was also necessary to invest in training and information technology, as well as to sensitize the public, she said, emphasizing also the importance of transparency.  She agreed that international cooperation was necessary for further progress, pointing to the partnerships formed by South American countries and other forms of South-South cooperation.

Following those opening presentations, the Council held a panel discussion on the role of multilateral bodies in strengthening international cooperation in tax matters.  It featured panellists from the Organisation for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), the World Bank and regional centres for international tax cooperation.  The Executive Secretary of the Inter-American Center of Tax Administrations stressed that there was a great deal of difference between cooperation and coordination in matters of taxation.  Bringing countries together with regional and international organizations for a coordinated approach to taxation was a priority, he added.

The Acting Executive Secretary of the African Tax Administration Forum emphasized that the basics of administration and operations must be addressed adequately through international cooperation, noting that at present, governance, ethics and transparency tended to receive the bulk of attention.  While those factors were important, there must be a balance, he said, noting that the sharing of information was also critical.

Panellists and other discussants agreed that the United Nations should have a stronger role in all those areas, and that there must be greater participation by developing countries in the existing methods for cooperation in tax matters.

Also taking place today was the launch of the 2011 Updated United Nations Model Double Taxation Convention between Developed and Developing Countries, which addresses cross-border investments and activities liable for taxation by both the country where such activities take place and the country of residence of the company or individual concerned.  Double tax treaty models are used as a basis for negotiating bilateral treaties for allocating taxing rights between the two.

Others participating in today’s discussions were representatives of the European Union delegation, Bahamas (on behalf of the Caribbean Community), Germany, France, Bangladesh, China, Japan (as Chair of the OECD), Brazil, United States, United Kingdom and Mexico.

Michael Lennard, Chief of the International Tax Cooperation Unit in the Financing for Development Office of the Department of Economic and Social Affairs, outlined the key features of the Updated United Nations Model Double Taxation Convention.

The Economic and Social Council will meet again at a time and place to be announced.

Background

Meeting for a special meeting on international cooperation in tax matters today, the Economic and Social Council had before it a report of the Secretary-General on the Role and work of the Committee of Experts on International Cooperation in Tax Matters” (document E/2012/8).  Dated 29 February 2012, it identifies deficiencies and gaps in international tax cooperation and suggests possible ways to address them.  Taking a closer look at the Committee’s working methods, the report analyses strengths and weaknesses, and provides recommendations on how to further enhance the former while effectively addressing the latter.  It also explores opportunities for creating greater synergies between the policy-development and capacity-building work of the United Nations and that of other international organizations and multilateral bodies.

Opening Remarks

MILOŠ KOTEREC (Slovakia), President of the Economic and Social Council, welcomed the meeting’s participants, introduced the speakers and expressed hope that the discussion would result in concrete proposals on cooperation in tax matters.

Introduction of Report

ALEXANDER TREPELKOV, Director, Financing for Development Office, United Nations Department for Economic and Social Affairs, introduced the Secretary-General’s report, outlining the development-financing role of international tax cooperation and speaking in detail about gaps and deficiencies.  “The lack of a truly global, all-inclusive norm-setting body for international tax cooperation at the intergovernmental level, which would offer developing countries a full seat at the table, continues to be a fundamental gap in this area,” he said.  Identifying incomplete sharing of information and collaboration among partners as some of the gaps, he added that insufficient donor coordination could result in duplication of efforts and conflicting policy advice.

He went on to emphasize the importance of strengthening the Committee’s work for a number of reasons, including a lack of funding, the limited number of its face-to-face meetings, and the disproportionate representation of the business sector in some meetings.  Those factors had negatively affected the pace of progress in the Committee’s work, he said, calling for increased participation by experts from developing countries on the body’s subcommittees, the funding of which should be done from additional resources.  Capacity-building was necessary in enabling developing countries to take advantage of the Committee’s outputs, he said, pointing out that the body was uniquely positioned to play an important role in that respect because of its knowledge, expertise and networking among its members.  While each country was responsible for its own tax system, the United Nations had the responsibility of acting as a catalyst for increased international cooperation in tax matters for the benefit of developed and developing countries, he said.

Keynote Address

ALLEN KAGINA, Commissioner-General, Revenue Authority of Uganda, spoke about the current challenges, priorities and experiences of developing countries in tax matters.  “The journey is not smooth, given the magnitude of challenges faced by developing countries,” she said, noting that taxation in those countries was characterized by complex, inelastic, inefficient and unfair tax systems that were barely collecting revenue at rates of 17 per cent of gross domestic product (GDP), compared to the worldwide average of 35 per cent.  In response, reforms had been undertaken over the past two decades, with support from bilateral and multilateral donors, she said.  Most developing countries had formed semi-autonomous taxation structures, introduced value-added tax (VAT), reduced import duties and abolished export taxes to encourage trade liberalization.  They had also undergone business process reviews and introduced information systems, in addition to integrating tax-administration processes and systems.  Important factors were the segmentation of the taxpayer population into large, small and micro-payers, she said, adding that efforts were under way to train and sensitize the public in tax matters and human-resource building, including through change and communications management for integrity and professionalism.

The lessons learned from those efforts showed the crucial importance of tax reform, rather than piecemeal approaches, she said, stressing that taxation for non-revenue objectives should be discouraged.  Also critical was national ownership of reform, although international technical assistance was needed.  It was necessary to invest in training and information technology.  Petroleum and mining operations needed particularly well-designed tax regimes, balancing risk and revenue.  In the process of liberalization, a phase-in period was needed to ensure that revenues were replaced, she said.  Despite reforms, however, “the majority of developing countries are still challenged with raising adequate domestic revenue to meet public expenditure needs”, she cautioned.  Some countries imposed an impossible burden on the private sector, which forced businesses to close or operate informally.  Tax literacy was still low, and transparency was also a major problem, she added.

There was a comparative lack of medium-sized companies, since large firms could secure tax exemptions and small businesses were hidden by their informal nature, she said.  However, there were grounds for optimism, she said, pointing out that several South American countries had made progress and developing countries were forming partnerships in South-South cooperation.  Civil society was playing an increasing role in highlighting exemptions, forcing Governments to review them.  Tax agencies were becoming more consultative, and formalization was being encouraged through access to credit and other advantages.  Transactions were increasingly viewed through a multinational and regional lens, she noted.  Strengthening domestic resource mobilization, inclusiveness, good governance and social justice remained priorities, she stressed.  The answer was not “one-size-fits-all” solutions, but strategies that promoted State-building and a fair distribution of the tax burden.

Statements

PASCAL SAINT-AMANS, Director, Centre for Tax policy and Administration, Organisation for Economic Cooperation and Development (OECD), emphasized the need to focus on working to eliminate double taxation, ensuring better government and collecting taxes from everybody.  Domestic-resource mobilization was a priority, he stressed, noting that international tax matters were only one “tiny” aspect of the taxation issue.  “We shouldn’t lose sight of the growing shift of indirect taxes,” he said.  Tax incentives and tax inequalities were imperative challenges shared by both developed and developing countries, he said.  That was why it was important to acknowledge the differences between developed and developing countries in addressing double standards.  “Better cooperation is the goal we need to achieve,” he said.

OECD was glad to have the United Nations as an observer, he said, adding that it recognized that the process was not a “one-way street”.  It was “sharing what we’re doing and in turn we would like to take into account the views of developing countries.”  Enhanced cooperation and collaboration was essential to progress in the international tax policy process, and it was to be hoped that the United Nations would respond to the OECD Secretariat’s letter, he said.  “We would be more than happy to welcome the United Nations into this partnership.”  Furthermore, it was important to hold follow-up events with specific goals in mind, he said, emphasizing the importance of working more efficiently and ensuring that taxpayer’s money was spent wisely.  Funds could be saved by limiting the number of Committee meetings, which could be done through further cooperation and ongoing communication.

MICHAEL KEEN, Deputy Director, Fiscal Affairs, International Monetary Fund (IMF), said the objective was not just the long-term mobilization of revenue, but also the building of fairer, simpler, more efficient and more transparent tax systems in both policy and administration.  There was a need to address worsening tax compliance, help taxpayers to cope, strengthen fiscal institutions and prepare for the crisis of failed States and challenges in emerging economies.  Outlining IMF’s role, he said it focused on providing administrative and legal advice, strategic vision, technical assistance and close coordination with tax organizations.  Technical assistance was embedded in the Fund’s continuous communications with developing countries, he continued, pointing out that it had missions in more than 100 countries in addition to eight technical assistance centres around the world.  The IMF had seen a rapid growth of 40 per cent in the last year, largely because it was increasing its participation in member countries, he said.

It was clear that a much more serious evaluation of what worked and what did not was needed, he said.  One of the challenges was that technical-assistance advice was confidential, which, on the one hand, allowed the Fund to be more honest and frank, while making it more challenging to share information on the other hand.  The IMF provided a variety of books, policy papers, technical notes, manuals and conferences as opportunities to build global partnerships, he added.  International cooperation must be based on comparative advantage, he emphasized, noting that demand for advice was growing, as was the capacity to receive and deliver.  “Everyone has a comparative advantage in something, but no one has a comparative in everything,” he stressed.  Moreover, managing relationships was important because of the increasingly large group of players interested in the tax matters of developing countries.  However, managing new players was a challenge, he said, adding that coordination must be based on a much more complicated set of relationships.

RICHARD STERN, Global Program Manager, World Bank Group, said there was much to learn from what was happening on the ground.  “We have really good ideas coming into the country, but only when we listen to the needs of the country do we know what has not been done.”  Outlining the World Bank Group’s work, he said the goal was to help tax systems evolve so that they facilitated growth instead of hampering it.  Although the traditional goal was to raise revenue for Government expenditure, the World Bank Group’s programme added a new dimension of development and growth goals by creating a “culture of taxation”, regularizing the rule of law and enhancing tax transparency.  That was done to increase the size of the formal sector and to promote growth, he said.  On the country and subregional level, the focus was on country and sector programmes, including “green” ones, he said.

He went on to say that global initiatives focused on tax and development, domestic-resource mobilization and tax transparency.  There were two different work-streams, on core tax and tax transparency, he said, adding that he worked on issues that he hoped would promote greater compliance.  Most of the work focused on tax administration, and the most challenging task was limiting the misuse of regulatory fees as revenue tools, especially at the sub-national level.  He said he also worked in the areas of small-business tax reform, risk-based audit system, reform of tax incentives and international taxation.  One of the challenges was to satisfy all stakeholders, he said, adding that the World Bank had adopted tax transparency reform with a focus on improving the detection of transfer-pricing violations as well as strengthening accounting standards and reporting obligations.  He said that, in his experience, all forms of communication and collaboration were essential, and the only way to get results.

MARCIO VERDI, Executive Secretary, Inter-American Center of Tax Administrations, said 40 countries from different continents now worked with the Center, which had been started by 17 countries in the Americas.  Beyond cooperation in tax, coordination was much more difficult, he stressed, adding that the key was building confidence and promoting synergies.  An intersection of common interests was needed, despite individual agendas.  Resources must be optimized and costs minimized, he said, adding that States should seek efficiencies for that reason.  There were compliance tax-administration costs, as well as costs for adhering to domestic and international agendas, he added.

At the international level, there was a complex network of forums at the moment, and the participation costs for developing countries were prohibitive, he said.  Regional coordination was one way to reduce them, and that was a priority for the Center, which was actively involved with international organizations for that purpose.  They included IMF, World Bank, Economic Commission for Latin America and the Caribbean (ECLAC), International Tax Compact and OECD, which had provided much training and technical support.  He said he looked forward to more joint action, both inter-regionally and between different tax bodies.

LOGAN WORT, Acting Executive Secretary, African Tax Administration Forum, said that the body’s first meeting in 2008 had shown the continent’s need for regional cooperation on tax matters, in order to mobilize adequate national revenues and provide comprehensive services to taxpayers.  The Forum coordinated with international financial organizations and other regional bodies.  He stressed the importance of ensuring that cooperation and technical assistance from such organizations was balanced better.  The basics of administration and operations must be addressed, as must governance, ethics and transparency, which were already receiving much attention.  Information-sharing was also critical, he said, calling for proper coordination of support, and urging the United Nation to improve its capabilities for that purpose.

General Discussion

In an ensuing discussion, the representative of the Bahamas, speaking on behalf of the Caribbean Community (CARICOM), said international tax cooperation was a main aspect of the global economy of major interest to CARICOM.  It was clear that important gaps remained unaddressed and that existing norm-settling arrangements did not provide for the representation of developing countries.  Countries must have the right to participate in processes that affected them economically, she said, stressing:  “This must be a right and not a privilege.”  While recognizing that there had been useful progress, including the 2011 Update of the United Nations Model Double Taxation Convention and its Commentary, being launched today, she also emphasized the significance of technical assistance to developing countries.

The observer of the European Union delegation said international cooperation in tax matters was particularly important for raising revenue in a globalized economy and a way to deal with artificial tax avoidance and evasion as well as corruption.  He called for the strengthening of international cooperation in tax matters and stressed the three key principles of good governance in the tax area — transparency, exchange of information, and fair tax competition.  It was important to strengthen donors’ coordination both at Headquarters and in the field.

The representative of Germany recognized that the Committee was limited in resources and staff, and pledged his country’s continuous support for it.

The representative of France underlined the recent successes of international cooperation, presenting the Group of Twenty (G-20) cooperation in combating fiscal erosion as an example.  The availability of information and the local administration of information exchange should be used to fight tax evasion and other tax matters.

The representative of Bangladesh said that funds from increased regional and international trade, as well as from foreign investment in developing and least developed countries, had helped start businesses and create new forms of tax revenues.  However, those developments had also caused opportunities for tax avoidance and evasion.  That was an increasing challenge, he said, calling on the Committee to address those concerns and work closely to safeguard developing and least developed countries.

The representative of China, stressing the importance of strengthening international cooperation on tax matters, said he was in favor of upgrading the Committee to an intergovernmental organization under the Economic and Social Council in hopes of improving its efficiency and increasing its impact as a leader in that field.

The representative of Japan, speaking in his capacity as Chair of the OECD, said taxes were a simply technical issue, but a key building block in mobilizing resources.  Domestic-resource mobilization required considering the individual development level of each country, he said, adding that many related challenges were based on the implementation of international standards.  International cooperation would be enhanced once the United Nations engaged on those issues, and could help realize better cooperation among international organizations dealing with tax matters.

The representative of Brazil said he also favoured turning the Committee of Experts into an intergovernmental body, stressing that only the United Nations could bring the perspective of developing countries in that area to the table and ensure their involvement in the process.

The representative of the United States said he did not support upgrading the Committee, and emphasized the importance of increasing efficiency without creating a new intergovernmental United Nations body, which would risk duplication and inefficiency.

The representative of the United Kingdom stressed the importance of involving developing and emerging countries in the tax dialogue.

The representative of Mexico said he supported upgrading the Committee, but was open to discussion and debate on the issue.

Launch of Updated Model Double Taxation Convention

According to the Financing for Development Office, the United Nations Model Double Taxation Convention between Developed and Developing Countries addresses cross-border investments and activities that are liable for taxation by both the country where the activities take place and the country of residence of the company or individual concerned.  Double-tax treaty models are used as a basis for negotiating bilateral treaties on the allocation of taxation rights between the two.

ARMANDO LARA YAFFAR (Mexico), Chair, Committee of Experts on International Cooperation in Tax Matters, said the updated model represented a significant achievement after more than a decade of work.  Important factors in that effort had been the maintenance of a dialogue on the double taxation issue and the avoidance of obstructions to the flow of finance between countries.  The sharing of knowledge between developed and developing countries, and the provision of technical assistance to developing countries, were also critical, he said, inviting observers and civil society to participate in the Committee’s work and bring their useful experience to the table.

Describing the Committee’s work, he said its numerous sub-committees had been created to deal with technical areas, from dispute resolution to capital gains to considerations of climate change.  The main areas of change in the Updated Model were in the areas of binding arbitration, exchange of information, assistance in the collection of taxes, taxation of capital gains, and rules clarifying the establishment status of entities, among other areas.  Consensus had been reached in some but not all areas, he said, expressing hope that the update would help developing countries sign up to tax treaties, which would facilitate the realization of their development goals.  He stressed that adequate funding was needed so that the Committee could keep the model current.  “I wouldn’t like it to take 10 years to develop the next version of the model,” he added.

Mr. TREPELKOV, Director, Financing for Development Office, said double taxation treaties played a key role in encouraging investment while allowing Governments to retain appropriate taxation rights over the income derived from those investments.  The aim of the Model Double Taxation Convention was to facilitate developing countries’ entry into bilateral tax treaties, consistent with their development goals.  To that end, the Model Double Taxation Convention sought to help those countries draft and negotiate their treaties, with a view to maintaining the desired balance between obtaining more tax revenues from foreign investment and maintaining an investment-friendly climate.  The growth of investment flows between countries depended on the existing investment climate, he said, adding that preventing or eliminating international double taxation was an important aspect of such a climate.

He went on to warn that international double taxation may, in fact, have a negative effect on the exchange of goods and services, the movement of capital and persons, and the transfer of technology.  He also outlined the role of the Updated Model in protecting taxpayers against double taxation of the same income, promoting the flow of international trade and investment, providing a framework of legal and fiscal certainty to investors, preventing discrimination between foreign investors and local taxpayers, and improving cooperation among tax authorities.  The Model Double Taxation Convention between Developed and Developing Countries and the Organisation for Economic Cooperation and Development Model Convention on Income and on Capital were two instruments that formed the basis for most of the several thousands of tax treaties currently in force, he said, explaining that the aim was to protect taxpayers against double taxation, while retaining appropriate Government taxation rights.

MICHAEL LENNARD, Chief, International Tax Cooperation Unit, Financing for Development Office, outlined the key features of the Updated Model, explaining that double taxation could be avoided in many ways by balancing source- and residence-country taxing rights.  The impact on domestic-resource mobilization and the ability to ensure that reserves could cope with shocks could be quite different for the source countries, he said, noting that there were differences in interpretation between countries as to how the treaty operated.  Such differences could lead to double taxation, he cautioned.

Under tax treaties, residence countries must generally give credit for source-country taxes allowed by the treaty, and only have residual taxing rights, he said.  OECD countries tended to be net capital exporters, and the OECD Model generally favoured the residence country.  The United Nations Model favoured the retention of more source-country taxing rights, he said.  Regarding the exchange of information, he said the main difference made clear that the purpose of exchanging information was to help combat both tax avoidance and tax evasion — which made it useful since there seemed to be no consistent use of those terms.

Discussion of 2011 Updated Model

Following the launch of the Updated Model, expert members of the Committee emphasized the hard work, spirited discussions and compromises that had gone into it.  One member said its real value lay in the fact that it was based on the same format as the OECD Model but had incorporated different approaches because of those compromises.

Another expert commented, however, that in order for all views to be properly represented, more resources were required.  Additionally, India’s representative emphasized that Member States must approve such guidelines in an intergovernmental forum before they were adopted.  Following deliberations by an expert panel, the resulting recommendations should go to an intergovernmental process, he said.  However, India was particularly concerned over the use of the OECD guidelines on transfer pricing in that context.

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For information media • not an official record