Speakers in Economic and Social Council Articulate Views on Fortifying Institutional Structures to Promote Global Cooperation in Tax Matters
A more efficient, transparent, inclusive and harmonized international system on tax matters was a critical part of financing for development and the post-2015 agenda, the Economic and Social Council heard today during a day-long high-level meeting, where a sharp divergence of opinion emerged on the best institutional way forward.
Given that the Committee of Experts on International Cooperation in Tax Matters was the only United Nations body dealing exclusively with that subject, there were strong synergies and linkages between its work and the financing for development follow-up process, said Alexander Trepelkov, Director of the Financing for Development Office of the United Nations Department of Economic and Social Affairs, introducing the report of the Secretary-General on further strengthening the work of the Committee (document E/2015/51).
He said the latest report built on the analysis and findings of previous ones which concluded that the Committee played a unique role in considering the policy and administration of international tax cooperation from the point of view of developing countries. Following intense discussions, Member States did not agree on a proposal to convert the Committee into an intergovernmental body under United Nations’ auspices.
The synthesis report of the Secretary-General on the post-2015 development agenda, he noted, had once again recommended the establishment of such a body, with proposals focusing specifically on better integrating the Committee’s work into the Council’s programme of work to effectively contribute to that agenda. The Committee’s “weak relationship” with the Council was identified as a shortcoming, due partly to the timing and venue of the Committee’s annual session, which took place during the main part of the General Assembly in Geneva. Moving the annual session to New York would allow for better integration.
Opening today’s segment, Vladimir Drobnjak (Croatia), Economic and Social Council Vice-President, presenting a statement from the Council President, said that the outcome of the deliberations would provide important input to the preparatory process for the third International Conference on Financing for Development to be held in Addis Ababa, Ethiopia, in July.
The meeting, organized in follow-up to Economic and Social Council resolution 2014/12, which recognized the need for continued consultations to explore options to strengthen institutional arrangements promoting international cooperation in tax matters, was a valuable opportunity for such dialogue among stakeholders in the field, he said.
During general statements, speakers voiced a range of views on the need for creating an intergovernmental body on tax matters. The representative of South Africa, speaking for the “Group of 77” developing countries and China, called for upgrading the Committee from one of experts, acting in their private capacities, to an intergovernmental subsidiary body of the Council, which would allow for participation by all Member States.
Disagreeing, the representative of the United States stressed that such a body would overlap with work already being done by international institutions such as the International Monetary Fund (IMF). The representative of the European Union delegation, too, considered the current structure of the Committee as appropriate and was against a proliferation of institutions when greater efficiency of existing mechanisms was required.
Also making general statements were the representatives of the Bahamas, Bangladesh and Panama. A representative of civil society also spoke.
The morning session also comprised a panel discussion on “The role of international tax cooperation in mobilizing domestic financial resources for development”. Two such discussions were held during the afternoon, respectively, on “Tax incentives and tax base protection issues for developing countries”; and on “Taxation of intellectual property rights and other intangibles: Issues for developing countries”. Interactive segments were held after each discussion.
Panel Discussion I
Mr. Trepelkov moderated the panel, which featured Grace Perez-Navarro, Deputy Director of the Centre for Tax Policy and Administration of the Organisation for Economic Co-operation and Development (OECD); Victoria Perry, Assistant Director of the Fiscal Affairs Department of the International Monetary Fund; Marijn Verhoeven, Lead Economist, Governance Global Practice, World Bank Group; Márcio Verdi, Executive Secretary of the Inter-American Center of Tax Administrations, Panama; and Lincoln Marais, Director of Strategy and Planning of the African Tax Administration Forum, South Africa.
In introductory remarks, Mr. TREPELKOV said that the panel aimed at facilitating input from all relevant stakeholders towards domestic resource mobilization for sustainable development, including through effective tax systems and international tax cooperation, which featured prominently in the zero draft of the outcome document of the Addis Ababa Conference.
Ms. PEREZ-NAVARRO said those two elements — international cooperation and domestic resource mobilization — were indeed key to the discussion. It was important, she said, to think about how to mobilize domestic resources, particularly towards tackling tax evasion and illicit financial flows, providing comparable revenue data to facilitate global comparisons and building capacity. She noted that more than 90 countries had committed to the taxation standards established by OECD. Among its many projects in that area was one to combat erosion of the tax base, in particular by multinationals, known as “base erosion and profit shifting”, and another known as “Tax Inspectors without Borders”, meant to reinforce national capacities at the request of countries.
Ms. PERRY said the International Monetary Fund (IMF) had been working on the issue of domestic revenue mobilization for more than 50 years through technical assistance that was available to any country requesting it. That assistance was demand-driven and covered tax policy, revenue administration, fiscal regimes for natural resources and fiscal aspects of climate and the environment. The Fund had recently developed a tax administration diagnostic assessment tool that was intended to provide an objective, standardized performance assessment of a country’s tax administration, which was envisaged as a global public good.
Mr. VERHOEVEN said the World Bank was interested in domestic tax and revenue issues because a bank was meant to invest and get returns on its investment. Reducing tax evasion resulted in a “very big bang for the buck”. The development agenda had focussed on the need for domestic revenue creation as a driver of development. While the Bank was able to perform many of the same types of activities as other international organizations on taxation issues, it also could provide funding. So, if, for example, IMF might have left a blueprint of things to be done, the Bank could step in and provide money.
Mr. VERDI said mobilization of resources entailed cooperation and coordination, in which the Inter-American Center of Tax Administrations, was engaged. The introduction of the United Nations Manual and double taxation conventions in Spanish was proof of the cooperation, as it was difficult to find people who could study a complex issue in a foreign language. On South-South cooperation, the Center had carried out more than 30 bilateral missions with the help of the Italian and German Governments. His organization was working with OECD to promote the base erosion and profit shifting programme as a bridge to adjust the concerns of smaller countries and smaller economies looking at their particular needs and challenges. Base erosion and profit sharing action plan was an opportunity to discuss various economic issues, such as bank secrecy, and in a multilateral way.
Mr. MARAIS said African countries had moved from being “informed” to being “consulted” and now to being “collaborated with”. Much could have been done if that collaboration had started at the outset. Considerable work was under way with the World Bank and IMF in areas that were of importance to African and developing countries. His organization called on the African Union to consider setting up a commission on tax matters as a way of according the matter greater emphasis, urging all to be real agents of real change in the real lives of ordinary people.
During the ensuing interactive discussion, the representative of Bangladesh expressed concern that the least developed countries might again be left to finance their own development needs as had happened with the Millennium Development Goals. Germany’s representative asked for more information on the OECD conference on tax aspects of climate. The representative of the United States asked for follow-up on the Tax Inspectors without Borders programme.
Responding, Mr. TREPELKOV said there were no regional organizations on the matter in the Asia-Pacific region, although there was discussion on forming such a regional group.
Ms. PEREZ-NAVARRO said in response to Bangladesh that the objective was not to eliminate aid, but to use it in a smarter way, which could be focused on tax issues. Ms. PERRY said that the first of the IMF technical regional sections had been established in the Pacific, headquartered in Fiji, and IMF had many bilateral projects with countries of the region. Mr. VERHOEVEN said a conference planned for early June would focus on the Asia-Pacific region with the hope that it would kick-start a regional tax administration organization. Mr. Verdi similarly noted work towards creating a regional organization for Asia-Pacific.
Mr. MARAIS discussed the specific process undertaken by his organization for its establishment five years ago. African countries had started it on their own initiative to focus on the continent’s specific needs. Member countries sacrificed resources to establish it and then sought out international funding. He was prepared to share experience on the matter. Mr. TREPELKOV added that all regional and international organizations on tax matters had been working together for the benefit of their memberships and of development and would continue to do so in the run-up to Addis.
Panel Discussion II
Moderated by Eric Zolt, Professor of Law, UCLA School of Law, University of California the panel featured Victoria Perry, Assistant Director of the Fiscal Affairs Department of IMF; and Blanca Moreno-Dodson, Lead Economist, Global Lead for Tax Policy, Macroeconomics and Fiscal Management, World Bank Group; with Kim Jacinto-Henares, Commissioner, Bureau of Internal Revenue, Philippines, as lead discussant.
Mr. ZOLT said the purpose of the panel was to introduce the work of IMF and the World Bank on tax base protection and tax incentives. As background, he noted that a project on base erosion and profit shifting, which had begun about a year ago, would produce a handbook on the matter and that there would also be a workshop on tax incentives.
Ms. PERRY, noting that she was speaking for herself and her staff rather than for the management of IMF, said that, since the 1950s, professional consensus was against using certain kinds of tax incentives. Although their use was increasingly common, the fact was that they were only efficient if they increased the net amount of investment and compensated for what was lost in the process. Also important was their impact on job creation and the degree to which they increased a country’s wealth, as well as whether there were spill-over benefits, such as in technology and skills that the country would not have had without it. Environmental costs should also be considered, as well as the distortion created in the rest of the economy. Incentives could also be redundant, as countries often had assets that would have drawn the investor anyway, although that was difficult for a country to know in advance. A forthcoming report would present analyses and practical tools to help countries assess the value of incentives.
Ms. MORENO-DODSON said tax incentives were often granted out of fear that a company would go to a neighbouring country. Private companies encouraged such tax competition, even when they had decided where they would invest. Only a coordinated effort could avoid such a “race to the bottom”. Thus, she stressed the need for regional policy. Policymakers should consider whether foreign direct investment was replacing domestic investment, and whether there were benefits to the economy. Incentives might be worthwhile if their combined revenue and social benefits compensated for the net loss they caused and the indirect costs of granting them. She touched on other key policy questions, including whether incentives would undermine the overall investment environment by encouraging other potential investors to seek incentives. She suggested that countries compile an inventory of tax incentives; determine who administered them and how; measure the costs; conduct an investor motivator survey to avoid redundancy; and revise policy to possibly eliminate the need for incentives.
Ms. JACINTO-HENARES said her country had been providing tax incentives for 50 years. Every year, a list was presented to the President for approval, providing for income tax holidays and economic zones. Some 211 special laws gave incentives to different industries and 14 authorities, with more proposals under consideration. That was ridiculous. Politicians want to earn “brownie points” by forgoing tax revenue, she said, stressing that there were no reliable figures over the long term. In 2011 alone, 1.49 per cent of gross domestic product (GDP) had been forgone, a trend that continued. That money could have addressed issues that impeded investment, such as poor infrastructure, weak human resources and political instability. There was tension between the Departments of Trade and Finance, she said, which would not have existed if tax revenue was not a sacrificial lamb. Globally, there was recognition that tax incentives were a subsidy, and therefore, should not be provided. However, since everyone was offering such incentives, there was little appetite to change things. That needed to be resolved by bringing all stakeholders together to “agree not to kill each other”. Shuffling portfolios between ministers of trade and finance might also help. After 19 years of reform efforts, the Philippines continued to press legislation mandating transparency and accountability.
In the ensuing discussion, the representative of Bangladesh noted that his country was trying to get out of “exemption culture”. He encouraged more information sharing, specifically in the Asia-Pacific Region.
The representative of Ghana said his country had reviewed its free zone regime and discovered that most of the participating countries would have invested in Ghana anyway. He asked for a suggested minimum incentive for potential investors and how to distinguish companies that needed incentives from those who did not.
The representative of the Inter-American Center of Tax Administrations, also noting conflicts among Government entities on incentives, said that during his time in Government, a law on fiscal responsibility had been adopted.
Responding, Ms. JACINTO-HENARES said that, in the context of reforms, there was interest in proposing a similar bill, but the national leadership said that it would be even harder to pass such a bill than the two that had been passed. Had they been able to pass the fiscal responsibility bill there would have been no need for the incentive rationalization bill.
The Expert Committee Chair asked about avoiding the misuse of a tax incentive. Was it necessary, for example, to create infrastructure in a free trade zone, to prevent abuse by a company that functioned both within and outside of such a zone?
Another expert asked about the refusal of certain States to include tax-bearing credits in treaties for countries that had tax holidays.
Ms. PERRY, said that many countries wanted to get out of the exemption culture, which was entrenched. Knowledge sharing was important. She suggested agreements among countries to withdraw from incentives. On the tug of war between ministries, she said that perhaps all incentives should be centred in the Ministry of Finance. She noted that many countries did not even know what tax incentives had been granted. Acknowledging that leakage was a major problem with free zones, she said their use as anything but free export zones was difficult. Increasing their attractiveness through such measures as infrastructure improvement might be helpful. Taxes that supported the economy should not be eliminated, she said.
Ms. MORENO-DODSON said the solution for countries like Bangladesh was to act regionally. A country could not face a company on its own. Improving global cooperation was critical to furthering reforms. In negotiating with companies, countries should put forward their many assets, which could be better than a tax break. If incentives were granted, they should be exposed. For example, an account could be created from which a company could only withdraw once it had created jobs.
Mr. ZOLT said leakages from free zones were also a problem for other types of tax incentives. On the question from Ghana, he spoke of a tax credit account, from which relief would be granted a company once they had tax liability. The investor would have to file taxes like any other taxpayer, which would lead to transparency. Also, if the taxpayer never generated any profits, it would not be costly to the economy.
Panel Discussion III
The panel discussion on “Taxation of intellectual property rights and other intangibles: Issues for developing countries” was moderated by Mitchell Kane, Gerald L. Wallace Professor of Taxation, New York University. The panellists included Giammarco Cottani, Office-Advisor on International Tax, Central Assessment Directorate, Italian Revenue Agency; Vicki Bales, Group Transfer Pricing Manager, SABMiller, United Kingdom; and Nishana Gosai, Manager, Transfer Pricing (Large Business Centre), South African Revenue Service.
Introducing the panel, Mr. KANE described the topic as one of the most complex and confounding in the contemporary international tax debate. For the foreseeable time, developing countries would rely on source-based taxing. However, determining source for intangibles was hard and involved aggravating factors. While there was no consensus on how to approach those issues, the panellists would attempt to come up with ideas.
Mr. COTTANI said intangibles were the key drivers of value around the world, but created complications of their own. It was important to consider whether legal ownership of an intangible was relevant to tax purposes. Other considerations included location savings, identification of parties entitled to share in returns associated with development and exploitation of intangibles. Those, in turn, underscored the relevance of risk allocation in transfer price analysis. Location savings arose when relocating certain functions from a high-cost to a low-cost environment, he said, providing an overview of the various approaches in practice.
Ms. BALES said her company, the second largest beer producer in the world, had its origins in South Africa and recently moved to the United Kingdom. Over 70 per cent of its revenues and profits and 67 per cent of its tax collections were generated in developing countries. The majority of the company’s brands and business was local and the majority of the profits remained in the country. About 20 per cent of the company consisted of an international brand with central brand owners with their own brand costs. There, too, market execution was handled in-country, where much of the profits existed. Thus, the company felt confident about its straightforward model, which sometimes was lost in the larger debate. The commercial and tax world was changing and both had now become more demanding. It was not easy to translate the complex language of commercial people into tax policy, which, in turn, made it difficult to meet the expectations of everyone in the tax debate. The solution would have to be found in joint work between taxpayers and tax authorities. Since the reputation of brands was closely tied to transparency, companies like hers were working hard on self-assessment.
Ms. GOSAI said that when it came to intellectual property, the starting point was often taxation rates. However, the primary focus should be on what the royalty was being paid for. Citing the case of a taxpayer that paid royalty for decades, she said that, upon audit, it was discovered he had been making those payments on something losing money year after year. In other situations, intellectual property was fragmented, where, in one case, there were separate royalty requirements on the outside visuals on the box, the packaging, and the brand name. Asked about the recipe of the product itself, the taxpayer said that had no value at all. That underscored the challenge faced by tax authorities. South Africa also dealt with legacy issues stemming from the apartheid era where companies were allowed to migrate abroad to avoid sanctions and repatriate taxes. In the post-apartheid era, paperwork and memories had lapsed. A greater understanding of the complexities through timely information could avoid an adversarial relationship. But, taxpayers tended to provide information they want to give, not what the taxing authority required.
Mr. KANE said determination of something as an intangible had far-reaching implications that defied easy answers. The points made by the panellists underscored the value to sticking to legal categories. Mr. COTTANI said there were key aspects of the discussion that needed to be further discussed, stressing the value of the principle of proximity to location in making any determination. Ms. BALES said that, given the complexities involved, it might be helpful to devise a set of questions by which taxpayers could go forward.
During discussion, Mr. COTTANI asked audience members from developing countries how they viewed intangibles and what kind of guidance they would like moving ahead. The Committee Chair said many subsidiaries had developed processes and skills that generated revenue, all of which went to the parent company abroad. Guidance on rewarding intangibles like goodwill would be helpful.
The representative of African Tax Administration Forum said that was a priority subject, especially for developing countries. Aside from royalties, services also were a problem, which was huge for tax administration. He saw base erosion and profit shifting as an opportunity. Methods being proposed, such as distribution of profits and profit splitting, were unacceptable for a small country that lacked information on which to base a decision. They often had to pay royalties to get a new release of software, for example, without knowing what the country’s share would be. It was impossible for a multinational corporation to give that information.
In closing, Martin Sajdik (Austria), Chair of the Council, said there was always something mind-blowing for a diplomat in listening to the discussion of tax experts. They were speaking from real life. All delegations would benefit from hearing those pieces of reality as negotiations progressed. In that light, he hoped the idea of raising the level of the Committee would succeed, as that would help discussions on increasing the tax base for countries at the global level.