Economic and Social Council Considers International Cooperation in Tax Matters during Special Meeting
Economic and Social Council Considers International Cooperation in Tax Matters during Special Meeting
|Department of Public Information • News and Media Division • New York|
Economic and Social Council
2014 Substantive Session
20th & 21st Meetings (AM & PM)
Economic and Social Council Considers International Cooperation
in Tax Matters during Special Meeting
International cooperation in tax matters aimed at enhancing dialogue among national tax authorities was the focus of a special meeting of the Economic and Social Council today.
Discussions centred on how international cooperation could contribute to the mobilization of domestic financial resources for development and the institutional framework in place to promote such cooperation. Participants included members of the Committee of Experts on International Cooperation in Tax Matters and representatives of international and regional organizations, as well as members of academia, civil society and the private sector.
As the elaboration of a new financing strategy in support of the post-2015 development agenda gained momentum, it had become clear that the mobilization of domestic public resources would be necessary to finance economic, social and environmental goals, said Martin Sajdik, President of the Economic and Social Council.
A lack of funding for the work of the Committee of Experts on International Cooperation in Tax Matters was stressed as a key challenge. Alexander Trepelkov of the Department of Economic and Social Affairs noted that funding issues had resulted in scarce participation from experts of developing countries and insufficient support from the Secretariat for subcommittee meetings.
A collective course of action between the various international and regional organizations involved in the area of international taxation would promote complementarities and avoid duplication of efforts, allowing organizations to better serve the interests of developing countries, said Oh Joon (Republic of Korea).
The session included three panel discussions that explored the role of international organizations in tax cooperation issues, current issues in domestic resource mobilization for development and taxation issues facing developing countries.
Also speaking today were representatives of Costa Rica, Bolivia (on behalf of the “Group of 77” developing countries and China), Greece (on behalf of the European Union), Bahamas (on behalf of the Caribbean Community), France, United States, Australia and South Africa.
MARTIN SAJDIK (Austria), President of the Economic and Social Council, opening the session, said that issues related to the broadening of the tax base of developing countries, as well as strengthening countries’ abilities to combat tax evasion and tax avoidance, were on the agenda of the Committee of Experts on International Cooperation in Tax Matters. There was strong political momentum among developed countries to curtail base erosion and profit shifting, which allowed some multinational enterprises to avoid paying taxes altogether.
As the elaboration of a new financing strategy in support of the post-2015 development agenda gained momentum, he said, it had become clear that the mobilization of domestic public resources would be necessary to finance economic, social and environmental goals. Domestic resource mobilization would need to be enhanced and strengthened through modernized tax systems, more efficient tax collection, the broadening of the tax base and the combating of tax evasion and illicit financial flows. In that context, international tax cooperation was indispensable.
ARMANDO LARA YAFFAR (Mexico), Chairperson of the Committee of Experts on International Cooperation in Tax Matters, reporting on the highlights of the Committee’s ninth session, said that the session’s goal was to continue the productive multi-stakeholder-oriented work of the Committee. The exchange of information remained a substantive issue during the session. In that vein, the Subcommittee on Exchange of Information had been set-up and would report to the Committee at the tenth session in October 2014. The United Nations had a critical role to play in base erosion and profit sharing, which was another substantive issue that had been addressed in the ninth session. One area that had created controversy in the Committee was taxation on services, which would be further addressed in the next session.
Among the more complex topics addressed during the ninth session were transfer prices, he noted. In that regard, work had begun on the second edition of the Practical Manual on Transfer Prices, which would include an annex on technical assistance. Another important subject to developing countries, particularly resource-rich developing countries, was the taxation of extractive industries. A new Manual for Negotiation of Bilateral Tax Treaties was also being developed. The vital role of the Subcommittee structure was reaffirmed during the session and the Committee’s work programme was streamlined. However, although the importance of the Committee’s work was widely recognized, there were still funding shortfalls.
ALEXANDER TREPELKOV, Director of the Financing for Development Office of the Department of Economic and Social Affairs, updated delegates on the Committee’s capacity-building efforts and its work on tax treaties. He stressed that funding remained a major challenge. Although the Council had recognized the need for funding and a trust fund to receive voluntary contributions from Member States had been established, to date, no contributions had been received. The lack of funding had resulted in inadequate participation of experts from developing countries and insufficient support from the Secretariat for subcommittee meetings. Given the limited resources available, he emphasized the work the Committee was doing with various partners to promote complementarities and avoid the duplication of efforts.
The first panel discussion, “International tax cooperation: Current issues on the agenda of international organizations”, was moderated by Mr. Trepelkov. Panellists included Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration, Organization for Economic Cooperation and Development (OECD); Márcio Verdi, Executive Secretary of the Inter-American Center of Tax Administrations; and Victoria Perry, Assistant Director for Fiscal Affairs, International Monetary Fund (IMF).
Mr. TREPELKOV, opening the discussion, said that while it was up to each country to manage its own tax matters, it was important for the international community to support countries in building their national capacities. This forum would provide a unique opportunity for in-depth discussions and information sharing on how to bridge the gaps between existing practices and desired results.
Mr. SAINT-AMANS said a key priority would be combating the erosion of the tax base to maintain Governments’ ability to avoid double non-taxation practices in a sustainable way. The international standards that had been developed in the past did not address or protect against double non-taxation issues, although some OECD projects currently under way aimed to address those gaps. The exchange of information was another focal point for the OECD, as it was important to ensure that fiscal administrations could effectively exchange information to ensure that taxpayers could not hide to avoid taxation. Domestic resource mobilization was another crucial area of focus, particularly for developing countries.
Mr. VERDI said tax morals were a major problem in the Latin American region where the tax evasion rate was more than 40 per cent. Tax evasion was often due to a lack of understanding of the role of taxation, as well as the importance of taxation for the development of countries. Tax policies needed to be changed to diminish injustices. Countries needed reliable information and the quality of third party information must be improved. There was no data about tax contributors and a great deal of information remained “secret” and unavailable to the State. Although some countries in the region were highly developed, others had tremendous difficulties in acquiring information technologies, which further complicated the exchange of information. Large disparities also existed in operational capacities, whereby some countries had data, but were unable to process it in a meaningful way.
Ms. PERRY said that the technical work of the IMF was demand-driven and financed through both internal and external donor funds. Strategic direction came from headquarters, although the IMF had numerous regional and technical assistance centres, as well as experts dedicated to special regional assignments. The Fund had identified a set of core challenges facing countries, which included the need to develop broad-based value-added tax and coherent schemes for small enterprises. Countries also needed to address trade liberalization and build effective individual income taxation schemes. Dealing with wealthy individuals and strengthening property taxation and developing analytical capacity within Governments were other challenges countries faced. The IMF had launched a project to provide guidance to national Governments in a consistent fashion, with the realization that tax administrations around the world generally faced similar challenges.
When the floor was opened for discussion, the representative of Costa Rica asked how to avoid a “race to the bottom” on corporate taxes in an effort to attract foreign investment.
Mr. SAINT-AMANS responded saying that fair tax issues were a huge challenge and that efforts needed to be made to ensure that countries could collect corporate income tax in a way that did not promote unfair competition. However, one must bear in mind that corporate tax was usually a marginal source of revenue in most developed countries.
Ms. PERRY said tax competition was an enormous issue and that for developing countries corporate income tax could be an important source of income. The IMF was working with regional groups to emphasize the importance of fair tax competition and to seek agreements that would prevent a “race to the bottom”.
The representative of Bolivia, speaking on behalf of the Group of 77 developing countries and China, reiterated the Group’s call to change the status of the Committee of Experts on Tax Matters, transforming it from experts acting in their own capacity to an intergovernmental subsidiary body of the Council, with experts representing their respective Governments. This transformation was necessary and important to allow all Member States, including developing countries, to have equal say on issues related to tax matters. The Group urged all countries and institutions interested in providing financial assistance to the Committee’s activities to make voluntary contributions to the trust fund.
The representative of Greece, speaking on behalf of the European Union, said domestic revenue mobilization was a key source of financing in developing countries. Support to those countries was high on the European Union agenda, which aimed to promote synergies between taxation and development. The Union welcomed the work of the Committee and supported efforts devoted to enhancing dialogue between national authorities and international organizations.
The representative of the Bahamas, speaking on behalf of the Caribbean Community (CARICOM) and associating herself with the Group of 77, emphasized the need for an informed discussion on tax matters in the context of a meaningful conversation on development. The fiscal pressure developing countries faced due to the world financial crisis emphasized the need for better taxation policies and enforcement. She believed that any dialogue on taxation issues must recognize the unique needs of developing countries. Small States were often invited to participate only after plans and standards had already been developed, rather than during the drafting process. That must change and a level playing field must be established.
The representative of France, associating himself with the European Union, said his country was active in efforts to promote international cooperation in the area of taxation. France believed targeted rules would make it possible for the fair taxation of profit and that country-by-country reporting should emerge as the international standard. The United Nations had a central role to play in that regard. Developing countries faced unique challenges in combating fiscal fraud, although such efforts were essential for development. New rules would be successful only if they were balanced, feasible and based on the economic realities of specific countries.
The representative of the United States noted that the exchange of tax information was as essential tool for the successful implementation of domestic tax legislation. By working together, a more stable and accountable global financial system would become the reality. The United States did not support the establishment of an intergovernmental body within the United Nations to address international tax issues, as the work proposed for such a body would substantially overlap with that already being performed by other institutions.
The panel discussion “Current issues in domestic resource mobilization for development: Base erosion and profit shifting” was moderated by Hugh Ault, Professor, Boston College Law School. Panellists included Mr. Saint-Amans; Carmel Peters, Coordinator, United Nations Subcommittee on Base Erosion and Profit Shifting Issues for Developing Countries; Brian Arnold, Senior Adviser, Canadian Tax Foundation; and Phensuk Sangasubana, Head of the International Tax Division, Revenue Department, Thailand.
Ms. PETERS said the mandate of the Subcommittee was to draw on the experience of its members and engage with other relevant bodies, in addition to monitoring developments on base erosion and profit shifting. Those developments were then communicated to leaders in developing countries with a view towards keeping them informed. Information was shared through workshops and forums, as well as an information sheet. The Subcommittee’s other goal was to facilitate input from developing countries into the work of the United Nations and the OECD in dealing with base erosion and profit shifting challenges.
Mr. ARNOLD said six base erosion and profit shifting papers on topics of particular interest to developing countries were being developed. Three additional papers on tax incentives, the taxation of capital gains realized by non-residents and the taxation of services performed by non-residents were also being developed. The project was designed to complement ongoing work, as well as provide information to and strengthen the capacity of developing countries to protect their tax bases. The initiative was different from work already being done by OECD and focused only on actions of primary interest to developing countries. It excluded transfer pricing issues covered under separate capacity development projects. A workshop would take place in Paris in September 2014 to discuss the drafts of the six papers, which would then be finalized, reviewed and edited.
Mr. SAINT-AMANS said corporate income tax represented a higher share of revenue in developing countries than in developed countries. The world was made up of areas of tax sovereignty, which resulted in taxation gaps. Efforts should now focus on making sure there were not “black holes” that would attract taxable profits. The OECD’s action plan on base erosion and profit shifting focused on bridging gaps between different tax systems, identified actions that addressed deficiencies in transfer pricing and explored issues of tax cooperation between Governments and between individual taxpayers and Governments.
Ms. SANGASUBANA said Thailand taxed both inbound and outbound transactions. The largest flows of foreign direct investment into the country came from Japan, the Netherlands, the United States, China and Malaysia, with the largest direct investment flows from Thailand going to Hong Kong, the Cayman Islands, the United States and Japan. Thailand was at risk of base erosion and profit shifting and must adapt to current international trends. Further, it must have clear guidelines and better mechanisms to address potential tax disputes, including through closer coordination with treaty partners. Transfer pricing was an important base erosion and profit shifting issue and had not been effectively addressed. Thailand believed simplified rules dealing with transfer pricing would be more effective, as would greater anti-avoidance measures. The balance between maintaining the investment climate and tax policy design remained a challenge for her country.
In the ensuing debate, the representative of Australia said base erosion and profit shifting were issues that cut across regions and created challenges for developed and developing countries. Her country supported the G20’s efforts to evaluate how low income countries and others with low capacity could address base erosion and profit shifting more effectively, as well as participate in the automatic exchange of tax information. She asked panellists to elaborate on the key challenges being faced by developing countries with regard to base erosion and profit shifting.
The representative of South Africa said it was important to take into account the views of developing countries. He believed that using questionnaires to learn about tax policies in those countries was not an effective way of gathering information and that more engaging methods of surveying countries must be implemented.
Ms. PETERS, in response, said tax rules were set by Governments and businesses could find gaps between those rules, resulting in double non-taxation. For developing countries, the guidance and solutions provided by outside organizations must be realistic and recognize the capacities of those countries. She believed that although the input was limited, the information gathered through tax-related questionnaires completed by Governments had proven useful.
Mr. ARNOLD and Mr. SAINT-AMANS noted that capacity-building was the number one issue facing developing countries with regard to tax issues.
Ms. SANGASUBANA said gathering the political support to amend national laws was especially challenging for developing countries.
The third panel discussion, “Extractive industries taxation issues for developing countries”, was moderated by Michael Lennard, Chief, International Tax Cooperation Unit, Department of Economic and Social Affairs. It featured presentations by Ms. Perry; Liselott Kana, Head of International Taxation, Internal Revenue Service, Chile; Stig Sollund, Director-General, Deputy Head of Tax Law, Ministry of Finance, Norway; and Eric Nii Yarboi Mensah (Ghana), Coordinator, Subcommittee on Extractive Industries Taxation Issues for Developing Countries.
Mr. LENNARD noted that the Subcommittee on Extractive Industries Taxation issues, formed last November, involved both United Nations entities and non-governmental organizations. The issues were important because extractive industries were not always producing the expected benefits, owing to certain tax rules.
Ms. KANA said the mining sector was a pillar of the Chilean economy. Her country produced more than one third of the world’s copper and 12 per cent of Chile’s gross domestic product came from extractive industries, half of that amount from copper mining. Clear, transparent rules for foreign investment in mining and other industries, which provided some tax benefits, were established in the 1970s. In Chile, the normal tax rate for repatriated profits of foreign investors was 35 per cent. In 2005, a new law introduced a specific tax on mining activities, levied on operational income. It amended the previous law — Decree 600 — setting a 42 per cent fixed tax rate for 10 years plus the VAT-free import of machinery and equipment. Investors with long-term investments often opted for the higher, long-term rate for the first several years of operation, and then later switched to the lower rate. In 2012, the domestic law was changed to tax capital gains on immovable property.
Mr. SOLLUND discussed petroleum taxation in Norway. During the industry’s early stage, the Government subjected petroleum production profits to the ordinary corporate tax and a royalty. In 1975, when oil prices rose dramatically, it introduced a special petroleum tax to capture the additional profits. From 1985 to 1988, the State’s cash flow from petroleum was negative. Since 2000, the royalty was eliminated in favour of a net petroleum profit tax combining the corporate tax and the petroleum tax as the main tax instrument. All State revenue from oil and gas production went into the Government Pension Fund, which was valued at more than $850 billion at present. Norway’s Oil for Development programme, launched in 2005, promoted economically, environmentally and socially responsible management of resources and revenue in some 20 developing countries to date. It had mining tax cooperation agreements with mine—producing countries such as Angola, Bolivia, Ghana, Mozambique, Sudan, and South Sudan, among others.
Ms. PERRY said distinct financial regimes for the extractive industries had been set up due to the industries’ substantive rents, pervasive uncertainty, asymmetric information, high sunk costs, long production periods and the extensive involvement of multinational companies in some countries. Such regimes aimed to maximize the present value of Governments’ net revenues and balance the timing of receipts. Among the fiscal instruments for the extractive industries, she cited bonuses, royalty, corporate income tax, explicit rent tax and State participation. IMF recommended countries impose a mix of a royalty on gross revenue, a tax explicitly on rents, and normal corporate income taxes. Regarding the work of IMF to promote tax transparency, she said the Fund’s Guide on Resource Revenue Transparency was being revised and the Extractive Industries Transparency Initiative had achieved some successes.
Mr. YARBOI MENSAH said the Subcommittee on Extractive Industries Taxation Issues for Developing Countries was formed to give those countries a voice in taxation matters and to tailor tax policies to meet their specific needs. The Subcommittee was working on an overview to guide such countries with taxation, based on best practices in places like Norway and other parts of the developed world. The Subcommittee had prepared a template for its members, which would be used to draft the guidance notes for its annual session in October. It expected to have two sets of notes for adoption during that session. Most developing countries were interested in gathering tax revenue from extractive industries immediately. The Subcommittee studied the issues of valuation of commodities, double taxation to bolster Government revenue, tax incentives and knowledge gaps in taxation.
OH JOON (Republic of Korea) said the session underscored the importance of broadening tax bases and effective combating of tax evasion and avoidance, as well as illicit financial flows from developing countries, for domestic resource mobilization. International tax cooperation could play a significant role in contributing to financing for sustainable development. A collective course of action between the various international and regional organizations involved in the area of international taxation would promote complementarities and avoid duplication of efforts. The meeting had emphasized the central role of the Council in strengthening the work of the Committee of Experts on International Cooperation in Tax Matters, as well as its cooperation with concerned multilateral bodies and relevant regional and subregional organizations.
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