Taxes

Global Tax Tug of War: Comparing the UN and OECD Approaches

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It is difficult to coordinate an international agreement on tax policy. Just ask the Organisation for Economic Co-operation and Development (OECD) how smoothly things have gone with the global tax deal. While implementation of the global minimum tax (Pillar Two) is moving forward in dozens of countries, there is much less tangible success when it comes to Pillar One.

Now, a major development could add more uncertainty to the OECD’s project: the United Nations (UN) is preparing to flex its muscles on international tax policy. Several developing countries say the OECD’s approach favors richer countries at their expense, and the UN hopes to fix this.

But will the UN be any better at producing satisfactory policy outcomes for all countries involved? And how would this change of venue impact cross-border trade and investment?

Well, it depends on what countries want to accomplish. If the goal is to achieve a unified policy outcome (based on widely shared principles and a common understanding of the problem), then it does not matter whether the UN or OECD is guiding the process. A unified policy outcome can likely be achieved in either venue.

But, if there is a lack of consensus on the problem, solutions, or underlying tax principles, then neither the UN nor the OECD will likely be able to create a “fair” solution that satisfies all parties. In this case, achieving a policy consensus relies less on coordination between like-minded countries and more on negotiation between the economically powerful and the less powerful.

This is the challenge the OECD is currently facing.

Since 2018, OECD members and more than 100 other countries have been slowly negotiating a fundamental change to how multinational companies are taxed through Pillar One’s Amount A and Amount B rules. Over time, the design, the target, and arguably the tangible objective of these rules have evolved. The initial goal was to tax large digital companies, but then it shifted to automated digital services and consumer-facing businesses. Today, the rules target the approximately 100 largest and most profitable multinationals.

However, the common problem or underlying principles motivating Amount A remain unclear. Broadly, the motivation for countries involved in negotiations is simply to make multinational companies pay more tax in their respective countries. Inevitably, companies will be paying less tax in some countries and more tax in others. Some countries, therefore, are more committed to gaining something new under the pending rules while others are more interested in preserving what they already have under the current rules.

This push-and-pull dynamic is impossible to eliminate from negotiations unless countries themselves choose an inferior tax base for the sake of limiting the possibility of tax and trade wars.

This is the OECD’s argument for its project. Now, the UN is making a different one.

The UN’s recently released draft report on “Promotion of inclusive and effective international tax cooperation at the United Nations” provides a helpful framework for analyzing the dynamics of multilateral tax policy coordination.

The report lays out three potential scenarios for future global tax conversations:

  1. A legally binding multilateral agreement that determines which countries get to tax which profits of multinational companies
  2. A legally binding agreement that sets a process for incremental changes to tax rules that are less comprehensive than the first option
  3. A non-binding approach to setting tax norms where voluntary bilateral or regional approaches are the implementation mechanisms

Each scenario depends on differing levels of political consensus among members, but consistent across the three is the goal of universal participation and equal standing for influencing the policy agenda.

The document does not deal with the potential for larger economies that have shaped the OECD agenda to shape the UN’s tax agenda despite formal arrangements aiming for equal standing of participants. But in the three scenarios, one can see how negotiations that stall due to political and policy differences might be put aside for more pragmatic approaches that aim to resolve narrower policy questions.

Sometimes international coordination is less about achieving a grand solution and more about incremental change.

Tax rules influence cross-border investment decisions, and it’s hard to deny how complex those rules have become. Policies like the global minimum tax only add to these complexities. The OECD is trying to change how multinationals are taxed to prevent tax and trade wars from proliferating, while the UN wants to make sure developing countries’ concerns are addressed.

It’s possible both forums achieve their goals. The OECD could finalize an agreement that forestalls tax and trade disputes, and the UN could broker a deal that gives non-OECD countries more of what they desire. In that scenario, the world ends up with two multilateral forums with differing rules and negotiating frameworks, leaving businesses stuck navigating different standards in parallel for any given cross-border transaction.

If neither forum achieves its goal, tax and trade disputes could spiral well beyond what any arbitration authority could manage.

And that is where the UN’s third scenario could provide lessons going forward. Instead of either the OECD or the UN trying to create a massive, one-size-fits-all tax treaty, why not move forward incrementally and support willing countries in coordinating tax and trade relations among themselves?

The OECD’s approach has been too ambitious, dragging countries and companies along for extended negotiations over policies with increasing complexity.

The UN’s report opens with two important paragraphs that show the tensions between domestic policy preferences and the rules that constitute an international tax system. Those tensions will continue.

The stakes for the negotiations are high whether they occur at the OECD or the UN. Cross-border investment is necessary to support countries as they become wealthier, put new technologies into place, and modernize. The 2023 UNCTAD World Investment Report notes specifically that developing countries are attracting less than one third of the investment they need in the renewable energy sector.

Better cross-border tax policies are not the only solution to this challenge, but the OECD and the UN could create more complexity and higher costs of doing business that will decrease the profitability of trade and investment.

Endless hours have been spent at the OECD trying to negotiate a comprehensive treaty for Amount A. It’s possible (likely?) that the treaty will never be agreed to or widely implemented. In economic terms, there are both opportunity costs and sunk costs. What else could have been accomplished with that time?

Now may be the time to abandon the comprehensive approach and move back to incrementalism. Policymakers could address more narrowly defined problems and find solutions that help, not hamper, business investment and long-term growth.

In the words of the great Yogi Berra, “When you come to a fork in the road, take it.”

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