Abdul Muheet Chowdhary :
The United Nations Committee of Experts on International Cooperation in Tax Matters (UN Tax Committee) is an important and influential subsidiary body of the Economic and Social Council (ECOSOC) that shapes standards and guidelines on international taxation. These are the rules through which Multinational Enterprises (MNEs) are taxed.
Its role post-Covid has become even more important as countries struggle to raise revenue. Despite being under-resourced, it has produced valuable guidance, especially on the crucial question of the digital economy. As a new Membership of the Committee is about to be selected, this brief provides practical recommendations on how the Committee can be reformed to be made more effective, especially for the interests of developing countries.
If foreign MNEs do not pay the rightful taxes due, owing to tax evasion or avoidance, then it results in a higher burden on domestic firms, leading to competition concerns. Foreign firms end up with more funds at their disposal through which they can carry out predatory pricing or buyout rivals
The United Nations is the foremost international organization, setup in the aftermath of the Second World War to help build a new world. One of its six principal organs is the Economic and Social Council (ECOSOC), tasked with advancing the three dimensions of sustainable development – economic, social and environmental. In that sense it plays a major role in the achievement of the Sustainable Development Goals (SDGs), which the world has committed to.
Nestled within ECOSOC is a little-known but vitally important subsidiary body with the somewhat archaic and lengthy title of “Committee of Experts on International Cooperation in Tax Matters”, popularly known as the UN Tax Committee (UNTC).
The UNTC is responsible for nothing less than reviewing and recommending standards on international taxation, notably the rules through which non-residents, particularly Multinational Enterprises (MNEs), may be taxed.
As is well known, in today’s world there is a growing concentration of wealth and corporate consolidation, with one company even reaching a staggering market valuation of USD 2 trillion. This is juxtaposed with an estimated $427 billion in tax revenue lost each year to international corporate tax abuse and private tax evasion. This makes the taxation of these MNEs (and non-residents more generally) an important source of revenue for the countries where they operate.
There is also the aspect of a level playing field, because if these foreign MNEs do not pay the rightful taxes due, owing to tax evasion or avoidance, then it results in a higher burden on domestic firms, leading to competition concerns. Foreign firms end up with more funds at their disposal through which they can carry out predatory pricing or buyout rivals.
The disruption of local businesses has many negative effects, with one of them being reduced consumer demand owing to job losses. This is harmful even for the foreign MNE as it means less demand for their goods and services. Thus, non-payment of taxes leads to a vicious cycle of economic slowdown, while tax compliance means fairer competition, higher consumer demand and more capacity of governments to provide public goods, leading to a virtuous cycle of prosperity.
Thus, international tax standards are of critical importance, as they enable countries to effectively tax MNEs and raise the revenue needed for providing public goods and financing the SDGs. Improved capacity for tax collection is in fact target 17.1 of the SDGs.
The UN Tax Committee, housed within ECOSOC, hence has a crucial role to play for the world at large. It is also the only standard shaping body on tax that is within a genuinely universal organization, the UN. The other major body, the OECD, remains to this day an organization ultimately controlled by 37 of the world’s richest countries. Hence the UNTC is the only body where developing countries have something close to a level playing field and the Committee’s membership is almost evenly divided between developed and developing countries.
Though far less resourced than the OECD, the UNTC has performed admirably, producing standards such as the UN Model Double Taxation Convention between Developed and Developing Countries, Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries, Practical Manual on Transfer Pricing and Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries. These documents provide much-needed guidance to countries, particularly developing countries, in strengthening their international tax policy frameworks.
The recent sessions of the Committee have seen a spurt of activity as some of the more active Members, all from developing countries, have taken the lead in finding solutions to some of the burning issues of the day. Nowhere has this been more apparent than in the taxation of the digitalized economy, arguably the single most important issue in international tax today.
The digitalized economy can no longer be hived off into a sector; it is increasingly a part of the ‘real’ economy and as such calls for major changes to international tax rules. The OECD has been trying for years to find a solution through its “Inclusive” Framework on BEPS, but there is no end in sight as discussions continue endlessly. Meanwhile developing countries are ever more stressed for funds, particularly in these times of recession and Covid-19.
While the OECD, with its enormous resources and Secretariat, continues to struggle to find a practical and acceptable solution, the more modest UNTC, in its 20th and 21st Session has come out with a simple and realistic proposal for taxing income from Automated Digital Services, one that has been prepared entirely by developing country members. That the Committee could provide such a solution in a relatively short period of time with all its constraints is a testament to its relevance, but more importantly unfulfilled potential.
(Abdul Muheet Chowdhary is Senior Programme Officer with the South Centre Tax Initiative (SCTI), part of the South Centre, a Geneva-based intergovernmental organization of developing countries).
