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OECD as a standard-setting organization: questions remain on cultural acceptance.

With the release of the OECD's BEPS final report, it's an appropriate time to consider how the BEPS Project has affected the role of the OECD as a standard-setter in international tax and how that role is likely to evolve in the future.

The OECD itself has been understandably effusive about the significance of the work undertaken and completed in the BEPS Project and the extent to which it has played out on a global stage. Upon releasing the final BEPS reports on October 5, 2015, OECD Secretary-General Angel Gurria said: "The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: They will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective." The explanatory statement accompanying the reports stated: "The level of interest and participation in the work has been unprecedented, with more than sixty countries directly involved in the technical groups and many more participating in shaping the outcomes through regional structured dialogues."

Whether the BEPS Project will have the fundamental, global impact on international tax rules hoped for by its participants remains to be seen. The project has definitely brought into focus, however, some challenges inherent in being an effective international tax standard-setter in today's world.

OECD's Traditional Role as a Standard-Setter

When viewed historically, there is no question but that the OECD has had a profound impact on those aspects of international tax law for which it has sought to establish standards. The prime examples of that influence have traditionally been its international tax standard-setting instruments, the Model Tax Convention and the Transfer Pricing Guidelines.

When the Model was first developed more than fifty years ago, only a few dozen bilateral tax treaties were in force around the globe, and no single model treaty text or commentaries had achieved widespread consensus. Today, that network has grown to well over 3,000 double tax treaties in force, and their text is based mainly on the OECD Model.

While the UN Model Tax Convention is also, of course, the source for many of the provisions appearing in that network of treaties, it is fair to say that a large proportion of the text of that Model is drawn from the OECD Model. The Commentaries on the OECD Model have been cited as persuasive interpretive guidance by courts in virtually every OECD member country and in a large and growing number of non-OECD jurisdictions. Significant portions of those OECD Commentaries have also been incorporated into the UN Model, giving them further currency. As such, the OECD Model has been broadly successful in achieving the objective set out in its introduction, namely providing "a means of settling on a uniform basis the most common problems that arise in the field of international juridical double taxation."

Likewise, as described in the Commentary on Article 9 (Associated Enterprises) of the OECD Model, the OECD's document entitled Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TPG) "represents internationally agreed principles and provides guidelines for the application of the arm's length principle of which the Article is the authoritative statement." Here, too, the TPG have had enormous influence on the development of transfer pricing law and practice across the globe. While only a handful of countries had transfer pricing rules in place twenty years ago when the modern version of the TPG was first published, that number has now climbed to well over one hundred, and the jurisdictions that do not claim to follow the TPG as their guidelines for applying the arm's length principle are in a tiny minority.

OECD's Strengths as a Standard-Setter

Particular strengths of the OECD as an organization have contributed to its traditional success with these instruments. One is its consensus method of reaching decisions: This means that all member countries must either support the decision or abstain from voting on it before it can be considered adopted. While the organization has obviously developed some creative approaches over the years to achieving that consensus (e.g., by allowing countries to reserve on individual Model provisions or to record "observations" on the Model Commentary), the consensus approach has been a powerful tool to reach coordinated policies on the affected issues and to present those policies as having a strong level of international support. These consensus agreements have achieved an even greater "soft law" status when they are backed up by Recommendations of the OECD Council of Ministers, which are effectively formal and public political commitments on the part of the member countries to adhere to the relevant recommendation (see, e.g., Recommendations C(97) 195/ FINAL on the Model Tax Convention, C(95)126/ FINAL on the Transfer Pricing Guidelines, and C(2008)106 on the Attribution of Profits to Permanent Establishments).

Another strength is the OECD's well-organized committee system (with the Committee on Fiscal Affairs, or CFA, and its various subsidiary bodies being responsible for tax matters), its professional secretariat staff, and its well-developed working protocols. These assets have helped the OECD pursue its self-proclaimed way of working, which involves: (1) data collection, (2) analysis, (3) discussion, (4) decisions, (5) implementation, and (6) peer reviews/multilateral surveillance. While this way of working has come under criticism in the BEPS era for being too slow and too unresponsive to political imperatives from above, it has had the advantage of allowing the OECD to produce documents that have been generally well thought out and the implications of which have been well understood by the governments called upon to endorse them. This has tended, on the whole, to contribute to the persuasiveness, coherence, and stability of the OECD's recommendations.

Another feature of the OECD, its limited membership, is often criticized but in a certain sense has contributed to its historical effectiveness as a standard-setting organization. Its thirty-four member countries primarily represent advanced market economies. This relative commonality of economic perspective and legal, commercial, and administrative sophistication has traditionally helped the members reach consensus on how to handle international tax issues. This is not to say that the OECD has been blind or deaf to the needs and interests of emerging or developing economies. Indeed, most of the non-OECD G20 countries have been highly engaged participants in the work of the Committee on Fiscal Affairs and its Working Parties for a decade or more, and the OECD Center for Tax Policy and Administration (CTPA) has long devoted a very substantial portion of its budget and time to fostering an ever-deepening dialogue with developing countries across the globe. But it is fair to say that, until recently, its main efforts to set standards in substantive international tax law have primarily focused on the perspectives of the developed economies.

How To Be More Inclusive While Still Playing to Its Strengths

So what challenges to the OECD's role as a standard-setter have arisen, both from within and from forces outside the BEPS Project?

One challenge is clearly the emergence of large, nonmember jurisdictions (e.g., Brazil, Russia, India, and China, or the BRICs) as important players in the world economy. The OECD has been grappling for years with the issue of how to involve those countries in the process of standard-setting when there is still a mutual hesitation to make them full members of the organization, with all of the commitment to OECD standards that entails. A related phenomenon is the increasing focus on how international tax rules affect developing economies. OECD officials have been justifiably proud of their success in having all the nonmember G20 countries participate actively and on an equal footing with OECD member countries in the BEPS discussions, and they have specifically noted that they reached a full agreement on the final BEPS reports among the more than sixty countries (including more than a dozen developing countries) directly participating in the project.

Assuming that all those countries were granted full voting equivalence with OECD member countries in approving the BEPS package, one would hope that they all have the same level of commitment to adhering to the recommendations as the OECD members. At this point, however, there is no mechanism comparable to an OECD Council Recommendation to provide transparency into that question, and one cannot help but notice, for example, that the final report on BEPS Actions 8-10, which recommends changes to the TPG, includes an indication that Brazil will continue to apply its fixed margin approach to determining transfer prices (rather than the TPG's approved methods) and will "use the guidance in this report in that context." In the longer term, if the OECD hopes to continue to be successful as an international standard-setter, it will have to develop a framework by which it can combine the all-to-be-desired, more inclusive decision-making approach with the kind of full and transparent political commitment on the part of the participating countries that allows the new standards actually to achieve the status of soft law.

How To Be Pragmatic About What Standards It Should Set

In deciding how far to go in responding to the complaints that the OECD's standard-setting is not inclusive enough, the organization will also have to make decisions about how and by whom it expects its standards to be used. It was interesting to note the pragmatism in the response of OECD CTPA Director Pascal Saint-Amans to the complaints that the BEPS Project's country-by-country reporting recommendations did not adequately represent the desires of developing countries for more information; he basically said that if the OECD had had to wait for everyone to come to the table, nothing would have happened, and the agreement reached will provide information about ninety percent of the worlds corporate revenues.

That sort of pragmatism will be useful in deciding many of the questions that will arise about the organization's standard-setting in the years to come. For example, some commentators are asking whether there should be a move toward having one model tax convention for use globally, rather than continuing to develop the OECD and UN models separately. Whether the OECD would or should support a move in that direction could depend on whether it makes more sense to maintain a separate UN Model for treaties between developed and developing countries, or whether the preferences of the developing countries should be sufficiently infused into the OECD Model to make it more palatable for that purpose, rather than tailoring its provisions to the high volume trade and investment occurring between developed countries. The OECD will need to think hard about what the appropriate "market" for its standards will be, recognizing that effectiveness does not necessarily lie in trying to be all things to all people.

How To Set Standards That Affect Countries' Domestic Substantive Tax Law Choices

Another challenge relates to the effort, first undertaken seriously in the BEPS Project, to set substantive tax law standards that can be implemented only through domestic legislation. As mentioned above, the OECD's substantive tax law standard-setting in the past had focused on treaty issues (i.e., the content of the OECD Model and the application of Article 9's arm's-length standard under the TPG). In the course of the BEPS Project, the OECD really for the first time waded into the challenging waters of considering standards for aspects of countries' domestic substantive tax law, an area typically zealously guarded as within countries' sovereignty. This proved to be particularly difficult, and it is clear that the "minimum standard" agreements emerging from the BEPS Project (i.e., the points on which all participants agreed to conform) did not include any of those topics (i.e., no minimum standards agreed for the digital economy, hybrid mismatch rules, controlled foreign corporation regimes, or interest deduction limitations), with the exception of harmful tax practices. One is tempted to conclude that the success in reaching a minimum standard agreement on the latter issue, which has had a strong European flavor throughout, was perhaps attributable to the fact that the EU carries a bigger stick than the OECD in this area. Ultimately, if the OECD hopes to be a standard-setter for countries' domestic substantive tax law rules, it will have to develop more of a cultural acceptance of its role in that area among governments and a mechanism for recording and monitoring countries' adherence to the domestic law standards it hopes to set. Its growing success in setting and monitoring the implementation of standards for countries' domestic law administrative issues in the tax area (e.g., information reporting and information exchange) may well help to pave the road in that direction.

How To Balance Political Relevance With Effective Policy Development

OECD officials have been very candid about their view that any success the BEPS Project may have in altering the international tax landscape will be attributable to the high-level political interest brought to the topic by the G20. Indeed, the organization has successfully harnessed that political momentum to bring to fruition a number of work projects it had on its plate well before the word "BEPS" was ever heard (e.g., hybrid mismatches, the permanent establishment definition, the transfer pricing of intangibles). The downside of riding the political wave has probably been the need to meet unrealistic time demands and in some cases to decide upon outcomes before analyzing what the best solutions might be to the real problems that exist. One can only praise the Herculean efforts of the OECD staff and delegates in producing as much output as they have over the past two years, but one can also question whether the pace and unabashedly top-down direction have produced recommendations that will stand the test of time. To be sure of a successful future as a standard-setter, the OECD will have to strike an appropriate balance between responding to the political demands of the moment and developing solutions that have benefited from the kind of thorough policy analysis at which the OECD has long excelled.

How To Ensure Successful Implementation of the Standards That Are Set

The final BEPS reports are full of discussion of implementation, and this should be welcomed as a clear sign that the organization hopes to see its standards applied faithfully and consistently. The OECD as an organization has long used the mechanism of peer reviews to monitor its members' implementations of the standards it sets, but it has made surprisingly little use of such monitoring to date in the tax area, outside the context of exchange of information. So the coming months will reveal the fascinating process of efforts to develop new monitoring mechanisms for the minimum standards agreed in BEPS. The OECD would be well advised to involve the business community liberally in that monitoring process. Much more than fellow tax administrations, businesses are likely to be the canary in the mine that will quickly know when problems are arising with implementation efforts. The coming year will also see the laudable effort by the OECD to develop a multilateral treaty designed to amend thousands of existing bilateral treaties in streamlined fashion to introduce the BEPS-inspired treaty changes. There, too, consultation with business will likely help identify the landmines that will have to be cleared for that complicated document to be completed within the one-year deadline.

Five Key Takeaways

The OECD has a number of strengths that probably make it better placed than any other organization to be the premier international tax standard-setter in the years to come. That being said, the organization will have to pay attention to a number of challenges to be successful In that regard.

1. It will have to develop a framework by which It can combine a more Inclusive decision-making approach with the kind of full and transparent political commitment to those standards on the part of the participating countries that allow the new standards actually to achieve the status of soft law.

2. It will need to think hard about what the appropriate "market" for its standards will be, recognizing that effectiveness does not necessarily lie in trying to be all things to all people.

3. If the OECD hopes to be a standard-setter for countries' domestic substantive tax law rules, it will have to develop more of a cultural acceptance of its role In that area among governments and a mechanism for recording and monitoring countries' adherence to the domestic law standards it hopes to set.

4. It will have to strike an appropriate balance between responding to the political demands of the moment and developing solutions that have benefited from the kind of thorough policy analysis at which the OECD has long excelled.

5. It will have to develop effective monitoring mechanisms, with liberal involvement of the business community to provide guick notification when problems of Implementation arise.

Mary Bennett is a partner at Baker and McKenzie LLP in Washington, DC.

(The views expressed herein are the personal views of the author and do not necessarily reflect the positions of Baker & McKenzie LLP or any of its clients.)
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Title Annotation:The Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting Final Report, part 2
Author:Bennett, Mary
Publication:Tax Executive
Date:Nov 1, 2015
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