Tax policy and developing countries – a 2016 update

I’ve been having a number of discussions about how successful the OECD project on Tax and Development has been and the challenges it faces. It was clear from inception that the inherent challenge in the project is that the interests of developed countries do not coincide with those of developing countries in many policy areas. As a result the project is only customer driven to the extent it coincides with the interests of developing countries.

The genesis of the project was the competition to be the global standard setter in taxation amongst multilateral organisations in a period when different tax treatments were giving rise to more disputes between countries .Given the change in the global economy balance starting roughly 10 years ago, these multilateral organisations have all  sought  to be key players in setting standards. However, none of them have a position where they can do this in an inclusive way due to their constituencies.

The OECD  has represented the developed world since its inception in 1961 and its global tax standards are unsurprisingly focussed on its members who are largely capital exporters and owners of significant intellectual property. Before tax and development came along it was concerned with the allocation of taxing rights within its members. Due to the sophistication of its member nations economies, the standards are detailed and complex.

The UN tax committee seeks to represent the interests of the developing nations ( G77 ). It takes different positions on tax to the OECD with a greater emphasis on host country taxation. The development of some developing economies has created economies with great economic strength and importance in the global economy such as China, India, etc. These countries form a group which has different tax policy interests to both OECD and developing countries.

The IMF and  World Bank focus on aid to developing countries, but this includes advice on tax systems and tax policy.

This new world order has led to the OECD trying to ensure that the UN does not become the lead standard setter in this area and that OECD retains this role. The OECD has engaged with BRICS and G77 because it has to, and needs to stop the UN, but its starting point is the interests of its members and persuading others to accept OECD standards, policies and projects such as BEPS.

Speaking to tax authorities in developing countries their concern has been that the various projects under the auspices of the OECD have only allowed their participation when policy issues have largely been determined.

This is corroborated by The Independent Commission on Aid Impact in its recent report “UK aid’s contribution to tackling tax avoidance and evasion” published 27 September 2016

“DFID’s efforts to make the international standard-setting processes more inclusive of developing countries were, nonetheless, only partially successful. DFID supported the participation of developing countries in various G20 and OECD processes, including the OECD Tax and Development Task Force and the Global Forum on Transparency and Exchange of Information. However, key stakeholders from both OECD and developing countries agree that developing countries gained little practical influence over the new standards. Consultations with developing countries occurred late in the process, when the priorities had already been agreed.”

It goes on to state:

“DFID has helped developing countries to participate in various international tax processes; however, their ability to influence the content of the new standards was limited, and the international tax reform agenda failed to address a number of important issues for DFID’s partner countries.

We found that DFID does not have a clear approach to promoting ‘policy coherence for development’ in the tax area. It has not assessed areas of potential tension between UK tax policies and the needs of developing countries, nor made explicit decisions as to which issues to raise in cross-government dialogue.

Our evidence suggests that DFID has not actively pursued policy coherence for development in the tax arena. A number of policy positions taken by the UK government, including a strong commitment to tax transparency, have been helpful to developing countries. However, the literature suggests that there are potential areas of tension between UK policies and developing country interests, including those concerning international tax competition and bilateral tax treaties.”

This sums up the inherent problem at the heart of the OECD project on Tax and Development. While some elements of the work will benefit developing countries like tax transparency, there is a conflict between the economic interests of most developed and developing countries in the allocation of taxing rights. DFID finds itself in a difficult position as it does not control the OECD process.

This conflict is exacerbated by the insistence by the OECD that developing countries adhere to tax standards which are too complex for the tax administrations in some countries due to their lack of resources. Promoting these standards may indeed weaken the position of some developing country tax administrations when faced with the resources of multinationals operating in their countries. I proposed that a simpler version of the standards should be produced which could be used for allocating taxing rights between developing countries and between developed and developing countries at the beginning of the BEPS process, but this was rejected by OECD.

A number of commentators have suggested that it would be in the interest of developing country tax administrations if cross border transactions were taxed on a safe harbour basis for a transitional period of time. So long as this was accepted by OECD countries and BRICs, etc then this could be a practical way to proceed. It would also allow developing countries to focus resources on other aspects of capacity building in tax (which I will write about shortly).

The world does need global tax standards to ensure the allocation of taxing rights between countries and to avoid double taxation. Given the evolution of the global economy, this has to be global. However, there is a danger in the current quasi-colonial approach to the process with the developed world determining the standards and telling the rest of the world what is best for them. This may be in the interests of OECD member countries, it is questionable whether it is a robust long term approach.


© Chris Lenon and  2014-2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chris Lenon and with appropriate and specific direction to the original content.

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