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Friday, July 26, 2024

Weekly SSRN Tax Article Review And Roundup: Saito Reviews The Conflictual Core Of Global Tax Cooperation By Oei & Ring

This week, Blaine Saito (Ohio State; Google Scholar) reviews a new work by Diane M. Ring (Boston College; Google Scholar) & Shu-Yi Oei (Duke; Google Scholar), The Conflictual Core of Global Tax Cooperation.

Blaine saito

In Momentum has grown around Pillar Two created through the OECD/G20’s inclusive framework. But this growing moment of unity masks the conflict between developed countries and developing countries. In their piece, The Conflictual Core of Global Tax Cooperation, Shu-Yi Oei and Diane Ring shows how developing country critics of the inclusive framework and Pillar Two and developed country proponents of it seem to talk past each other. They also show that international tax issues need to fall within the broader frames of tensions between developing and developed nations that exist outside of tax as well.

OThe current two pillar project grew out of the part of the original BEPS program of the OECD to address the digital economy. Eventually, the OECD created an inclusive process to include non-member countries. The proposal that is closest to fruition is Pillar Two, which basically institutes a 15% minimum tax. It also includes some exceptions meant to help developing countries, like the Substance-Based Income Exclusion (SBIE), which allows for a lower effective tax rate for income earned from certain substance-based activities, and the Subject-to-Tax Rule (STTR), which allows source countries to override tax treaties if certain qualifying income is taxed below 9% in the jurisdiction receiving the payment.

But developing countries have criticized Pillar Two. Developing countries raised concerns that they may not get additional revenue and if they do, most of the revenue gains from Pillar Two will flow to rich countries. They worry about the effect on Foreign Direct Investments (FDI) and their tax incentives. There is concern that the minimum rate may be too low. Many developing countries also have said that Pillar Two is too difficult for them to administer given their capacities, and that they were never meaningfully included in the process.

The OECD and other rich countries have countered saying Pillar Two benefits developing countries because it reduces competition between developing countries for tax revenue. But what the counterarguments miss is the wide gulf between the developing and developed world based on power, context, and history. The responses thus focus on the issues.

Oei and Ring examine a set of contexts that explain and unify the seemingly disparate critiques of developing countries. First, the project of the inclusive framework and BEPS stemmed from a growing concern about globalization and inequality within developed countries. That ignored the inequality between developed and developing countries. But between country inequalities are large even with the growth of a set of dynamic middle-income emerging economies. This continuing wide gulf and the shift in developing countries to focus on within country inequality creates some of these conflicts.

Another part of this gulf is that developing countries rely much more on corporate taxes than developed countries. The reason is that developing countries have a larger informal sector. Tax incentives in developing countries also tend to be simpler policies, like tax holidays that Pillar Two disallows, rather than complex provisions, like loss carry-forwards that developed countries favor and Pillar Two allows. Developing countries also prefer to conduct industrial policy through tax incentives rather than loan guarantees or grants, because developing countries do not have funds to spend upfront. That means too that Pillar Two can have outsized effects on developing countries ways of operating, and hence also explains the critiques.

Conventional wisdom has also shifted, but many developing countries, for various reasons, have not adopted it. Prior to the 1970s, the conventional international development wisdom was to tie tax incentives to FDI, unlike the now common broaden base and lower rates view. But all of that advice has potentially created some whipsaw for developing countries and may not have displaced some of the old views. Developing countries also still occasionally hear advice that is in line with the older view of using tax incentives to attract FDI. Thus, developing countries still hew to the old conventional wisdom.

Additionally, developing countries have concerns about the structure of the process. Developing countries entered into the discussion late in the game. Developed rich countries set the agenda. Indeed, much of Pillar Two was already designed prior to the concerns of developing countries. SBIE and STTR are tinkers that came later that only partially address the developing countries’ concerns.

Overall, what the wide gulf shows is not only the coherence of the developing nations’ critiques, but an overall narrative of historical marginalization of developing countries within the international system. Missing this context is why proponents of Pillar Two seem to be talking past the developing countries.

Oei and Ring then discuss normative implications. Developing countries have agitated to move global tax issues out of the OECD to the U.N. Oei and Ring point though that such a move may not lead to quick solutions. Not only would the U.N. need to build its own tax capacities, which is currently limited, but the power dynamics of power, history, and context are still there even in the U.N. Most crucially, tax reform alone cannot overcome aspects of the wide gulf in wealth and other issues that separates the views of developed countries from developing countries.

Oei and Ring’s contribution is thought provoking. First, the focus on the wide gulf and the broader context of tax policy is something that we tax people tend to miss. Tax does not just appear sui generis but grows out of a context. A lot of the problems and unfairness to developing countries in the current round of international tax reforms stems from a sort of blinders and amnesia here. Tax is connected to history, power, and other institutional factors. Ignoring these other matters can thus create a papered over cooperation when lurking behind the surface are real issues.

Additionally, the piece also forces us tax policy people to think more broadly. Tax may need to move away from its vacuum and interact more with other parts of international development and international relations. The conflicts here should also have us think about how tax can contribute to creating a dynamic that allows the voices of developing countries and their citizens to get uplifted in all manner of international discussions. It should force us to think about what institutional design mechanisms are needed to allow the concerns of developing countries to get raised. And it may require some of us to cede power in some ways to the developing world.

Here’s the rest of this week’s SSRN Tax Roundup:

https://taxprof.typepad.com/taxprof_blog/2024/07/saito-the-conflictual-core-of-global-tax-cooperation-oei-ring.html

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