Originally published: February 2024
The OECD has been the leading organisation for international tax for as long as people can remember. Its role grew as it took on the BEPS project and then the Two Pillars. The Two Pillars sought to resolve long-standing conflicts on the allocation of tax base on topics where the world’s leading economies had different views. The attempt to take a big stride forward was risky and as the OECD committed to a certain path, it ruffled feathers and attracted criticism and revived old lines of critique too. Pillar 1 looks more like a compromise proposal that pleases neither the defenders of the status quo and their critics.
In the US, Republicans often complain about the Treasury Department selling out US interests at OECD level. They mostly would like to go back to a more combative stand, where any rule change that could adversely affect US MNEs is fought tooth and nail, confident that the US would win any showdown. In essence, that means not giving away any position that allows (implicitly or explicitly) other countries to tax profits of US MNEs, except in narrow case where the US MNE earned those profits in such country (determined consistent with the arm’s length principle (ALP)). The Two Pillars go against that approach. They particularly dislike UTPR and its potential to tax US MNEs.
Outside the developed world, there is a growing support for the UN to take over the leading role of the OECD on taxes. Many of those voices favour an international tax system that deviates from the ALP (or at least OECD’s version of ALP). More broadly, they favour allowing ‘source countries’ (an unclear concept: https://lnkd.in/efqU-uWk) to tax income more directly, without the present constraints of ALP as contained in double tax treaties. Some think P2 didn’t go far enough. For instance, this week, ATAF argued UTPR should be the primary P2 rule, applying in priority of IIR, to allow developing countries to collect more tax revenue (https://lnkd.in/gZy-SyTJ).
There are common themes in attacks on the OECD, as opponents decry the OECD’s arrogance, question justifications for OECD’s position, reject OECD’s approach of seeking consensus through diplomatic pressure and are seeking for freedom to allow their country to follow their own tax policy. But ideologically, these represent opposite ends of the spectrum of the debate: rejecting the Two Pillars because they constrain taxing too much or not enough. But being “shot by both sides” (https://lnkd.in/g-zSn_dr), the OECD risks being weakened. Do the critics have something in common, like a horseshoe theory of tax policy (ie where the extremes meet)? Have they come to “a secret understanding”? For the OECD stuck in the middle, it may feel like that.
Obvious disclaimers: this is not advice. These views are my own and do not necessarily represent my employer.
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