Universiteit Leiden

nl en

Research project

a New Model of Global Governance in International Tax Law Making (GLOBTAXGOV).

Assessing the feasibility and legitimacy of the current model of global tax governance and the role of the OECD and EU in international tax law-making.

Duration
2018  -   2022
Contact
Irma Mosquera Valderrama

Unlike the former OECD projects that only provide for exchange of information between countries, in the BEPS Project, the EU Anti-Tax Avoidance Directive, the EU state aid investigations and the EU External Strategy, the OECD and the EU focus on substantive issues that when implemented will change the international tax architecture of developed and developing countries. These initiatives aim to ensure that governments engage in fair competition and that multinationals pay their fair share. Even though these objectives are legitimate, these developments raise the questions what is the role of the OECD and the EU in global tax governance? and, under what conditions can the model of global tax governance be feasible and legitimate for both developed and developing countries?  These initiatives have generated tensions between developed and developed countries and between EU and third (non-EU) countries. The tensions call for the articulation of a new framework of global tax governance that is legitimate and based on considerations of fairness for all countries participating. Against this background, my project will first assess the feasibility of the legal transplant of the BEPS minimum standards into the tax systems of 12 countries of research by asking three sub-questions: (i) why are these countries participating in the BEPS Project? (ii) how will the BEPS minimum standards be transplanted into the tax system of these countries? and (iii) how can the differences in tax systems and tax cultures of these countries influence the content of these minimum standards? In the following step the conditions for legitimacy of the role of the OECD and the EU will be provided in light of the theories of legitimacy and governance.

Introduction 

The 2008 economic crisis increased the need for countries and international organizations to find better solutions to tackle tax evasion due to the illicit flow of capital resulting from the use of tax havens and offshore financial centers. In 2009, the OECD with the political mandate of the G20 introduced a global standard on exchange of information. Later on, the OECD introduced a global standard on automatic exchange of information. 101 countries have committed to adopt this standard by 2017 (early adopters) or by 2018.  These developments have also been followed by the EU in the recent amended EU Administrative Cooperation Directive. 

In 2013, news media around the world highlighted a growing crisis in many states: a steady decrease in contributions to public finances by many high profile multinational companies and high net worth individuals. This decrease was associated with the ability of sophisticated taxpayers to shift otherwise taxable income and transactions out of the tax base, in a phenomenon that the OECD has recently labelled “Base erosion and profit shifting”, or BEPS. BEPS refers to “tax planning strategies that exploit gaps in the architecture of the international tax system to artificially shift profits to places where there is little or no economic activity or taxation”. (OECD (2013). BEPS Project and BEPS Action Plan). Examples of artificial profit shifting by multinationals are the tax scandals of Apple, Google, Starbucks, and Amazon. These multinationals have used artificial strategies to shift from higher jurisdictions to lower tax (friendly) jurisdictions. In addition, in some countries such as the Netherlands and Luxembourg, multinationals have been able to conclude agreements (rulings) with the tax administrations in order to approve such corporate tax structures. The result is less tax revenue for countries and also a perceived lack of fairness on the part of public opinion and small companies that multinationals do not pay their fair share.

Solutions to tackle artificial profit shifting and problems of legitimacy, fairness and governance 

Countries and organizations such as the OECD and the EU have come up with unilateral and multilateral solutions to tackle corporate tax structures that result in artificial profit shifting. These initiatives are also a response to the claim by NGOs (Tax Justice Network, Oxfam) and public opinion for more transparency in multinationals including the reporting of profits and the payment of a fair share of taxes. An example of unilateral solutions is the recently introduced diverted profit tax in Australia and the United Kingdom. The diverted profit tax aims to tackle corporate tax structures used by multinationals (e.g. Google) to avoid paying taxes in a specific country by shifting the profit to another country with a lower tax rate.

An example of a multilateral solution is the introduction by the Committee of Fiscal Affairs of the OECD, with the political support of the G20, of the Base Erosion Profit Shifting project (BEPS) Project and its 15 BEPS Actions.  The BEPS Project aims to ensure payment of fair share of taxes by multinationals by reducing opportunities for artificial profit shifting. The BEPS Project contains four minimum standards which are soft law, thus not legally binding, but there is an expectation that they will be implemented into the tax system of the countries participating in BEPS. The contents of the BEPS Project have been decided and approved by the BEPS 44 group that includes OECD, OECD accession countries and G20 countries. The OECD comprises 34 countries which are developed countries. The G20 is a political forum of governments with 20 countries from Asia, North America, Middle East and Europe including BRICS countries and non-OECD countries such as Argentina, India, South Korea and Saudi Arabia). As of October 2016, in addition to the BEPS 44 group, 41 countries (including developing countries) committed to implement BEPS four minimum standards resulting in a total of 85 countries that adhere to the project. 

Unlike in the past when the United Nations with 193 countries was considered the representative and the voice of developing countries, the BEPS minimum standards developed by the OECD will also be implemented by developing countries. The United Nations (UN) has been left outside mainly due to the failure of developing countries and civil society to upgrade the UN Tax Committee to an intergovernmental body at the July 2015 Financing for Development Conference in Addis Ababa, Ethiopia.  This proposal was rejected due to the argument by developed countries of the leading role of the OECD in international tax law matters. This situation has generated tensions around three points: on the legitimacy of the decision making process of BEPS; on the fairness of the contents of BEPS with respect to developing countries; and over the different needs of developing countries to deal with base erosion and profit shifting which goes beyond the scope of the BEPS Project.

There also are tensions between developed countries mainly due to the recent state aid investigations by the EU Commission on the rulings given by countries such as Ireland, Luxembourg and the Netherlands to multinationals. The recently (2016) introduced EU anti-avoidance package to ensure fair competition has also resulted in tensions between the EU and third (non (EU) countries). This package contains an Anti-Tax Avoidance Directive (ATAD) recently approved by the ECOFIN Council which is based to a great extent on the BEPS Project. In a letter dated 16 May 2016 to the Prime Minister of the Netherlands, tax directors of 83 (high-technology) companies in Silicon Valley stated that the ATAD should have “an impact assessment in order to determine the potential impact of the ATAD on the economy, jobs and tax revenues in the Netherlands and the EU as a whole”. The ATAD will be transposed by the EU member states into their domestic legislation by 31 December 2018.

In the EU anti-avoidance package the EU Commission also introduced the 2016 EU Communication on an External Strategy which addresses the EU’s approach towards third countries in respect of good governance and fair tax competition (COM (2016) 24: 5). This External Strategy has also raised tensions about legitimacy and fairness since third countries are required to adhere to the EU standard of good governance and fair competition as a condition to conclude economic and trade agreements with the EU or with EU countries. Another EU initiative that has also generated tensions is the state aid investigations by the European Commission of the rulings concluded by Apple, Google, Amazon, Starbucks, Fiat, and McDonalds with tax administrations in several European countries (e.g. the Netherlands, Luxembourg, Belgium, Ireland). According to the Commission these rulings resulted in undue tax benefits under the EU state aid rules which affect the level playing field of business in the EU. These investigations have motivated an unprecedented white paper from the US Department of the Treasury which is very critical of the EU Commission approach stating that (i) it departs from prior EU Case Law and Commission Decisions; (ii) it seeks retroactive recoveries which would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries and (iii) the Treasury Department regards this approach as inconsistent with international norms and undermines the international tax system including the progress made under the BEPS Project. (US Treasury White Paper, August 2016).

Overall aim and research objectives

Unlike the former OECD projects that only provide for exchange of information between countries, in the BEPS Project, the EU ATAD, EU state aid investigations and the EU External Strategy, the OECD and the EU respectively focus on substantive issues that when implemented will change the international tax architecture of developed and developing countries. These initiatives aim to ensure that governments engage in fair competition and that multinationals pay their fair share. Even though these objectives are legitimate, these developments raise the questions What is the role of the OECD and the EU in global tax governance?; and Under what conditions can the model of global tax governance be feasible and legitimate for both developed and developing countries?  These initiatives of international tax law making and the tensions between countries call for the articulation of a new framework of global tax governance that is legitimate and based on considerations of fairness for all countries participating, including developing countries. In order to assess the current framework of global tax governance and to provide recommendations for a new framework of global tax governance, my project will have three research objectives.

The first objective is to assess the feasibility of global tax governance, taking into account the differences in tax systems and tax cultures and the differing problems of developing and developed countries. To address this objective, this research will investigate the implementation of the four BEPS minimum standards in 12 of the 85 countries committed to the implementation of these standards. These countries are developed countries (the United States, Mexico, the Netherlands, Spain, Ireland, and Australia) and developing, BRICS and emerging countries (Colombia, Senegal, Nigeria, South Africa, India, and Singapore). These countries belong to common law or civil law tax systems. This research has three sub-questions: (i) why are these countries participating in the BEPS Project? (ii) how will the BEPS minimum standards be transplanted into the tax system of these countries? and (iii) how can the differences in tax systems and tax cultures of these countries influence the content of these minimum standards? I will use comparative legal research theories of legal transplants, legal culture and tax culture. This research will take into account my previous research work that addressed the complexity in the development of an international tax legal order due to differences in tax systems and tax cultures  and the different needs of developing countries to deal with aggressive tax planning which goes beyond the scope of the BEPS Project.

The second objective is to assess in the light of legitimacy, the conditions under which the OECD can set standards in the current model of global tax governance. This objective takes into account the different approaches to fairness from the perspective of developed countries (i.e. OECD countries) and from the perspective of emerging economies, BRICS and developing countries. The third objective is to investigate in this model of global tax governance where the EU stands? and under what conditions can the state aid investigations and the role of the EU in setting up the international standard of good governance and fair competition be legitimate with respect to EU and third (non-EU) countries?  

In order to address the second and third research objectives, I will use the theories of legitimacy and governance developed in political science. In my previous work, I addressed the lack of input and output legitimacy of OECD multilateral initiatives in respect of developing countries. Following up on this work, the second research objective will further assess the process of international tax law making by using the concept of throughput legitimacy (Schmidt, V. (2012) Democracy and Legitimacy in the European Union Revisited: Input, Output and ’Throughput‘, 61 Political Studies, pp. 2-22). The third research objective will use the input and output legitimacy and the throughput legitimacy of the EU. In order to provide recommendations for a new model of global tax governance, my project will explore new models of governance i.e. experimentalist governance (Sabel C. and Zeitlin J. (2010) (eds). Experimentalist Governance in the European Union: Towards a new architecture. Oxford University Press. 386 pages) to propose a framework of goal-setting and the revision through comparative review of implementation experience in diverse local (country) contexts, which will be adapted to the EU and OECD role in global tax governance in order to solve the tensions originated from the setting of international standards by the OECD and the EU.

The study of legal transplants and the differences in tax systems and tax cultures will provide enlightenment to the legitimacy of the model of global tax governance by answering the questions of why countries participate (input legitimacy); how the actors influence the process (throughput legitimacy) and what are the rules that will be implemented (output legitimacy). The relationship among these objectives is explained in the figure below.

Approach and Methods

This research aims at setting a reference and evaluation framework for global tax governance. The socio-legal research method in this research will apply the existing comparative law theories of legal transplant, legal and tax culture and the political science theory of legitimacy to international tax law making. The theory of legal and tax culture will take into account the behaviour, values and attitudes of the relevant actors (tax administration, judiciary, business, etc.) that can influence the transplantation process and the development of tax rules. The theory of legitimacy will identify the goals of international organizations and countries and the different perspectives towards BEPS between developed and developing countries.

The 2008 economic crisis increased the need for countries and international organizations to find better solutions to tackle tax evasion due to the illicit flow of capital resulting from the use of tax havens and offshore financial centres. As a result, in 2009, the OECD, with the political mandate of the G20, introduced a global standard on exchange of information. This then led to the OECD introducing a global standard on automatic exchange of information. 101 countries have committed to adopt this standard by either 2017 (early adopters) or 2018.  These developments have also been followed by the EU in the recent amended EU Administrative Cooperation Directive.

It would seem however that the measures described above have not gone far enough. Increasingly, and particularly since 2013, news media around the world have continued to highlight a growing crisis in many states, namely the steady decrease in contributions to public finances by many high profile multinational companies and high net worth individuals. This decrease has been associated with the ability of sophisticated taxpayers to shift otherwise taxable income and transactions out of the tax base, in a phenomenon that the OECD has recently labelled “Base erosion and profit shifting”, or BEPS. BEPS refers to “tax planning strategies that exploit gaps in the architecture of the international tax system to artificially shift profits to places where there is little or no economic activity or taxation” (OECD 2013).

The ERC funded research project aims to assess the feasibility and legitimacy of the current model of global tax governance, and the role of the OECD and EU in international tax law-making. The role of the EU and OECD is of increasing significance as governments and organizations struggle to tackle artificial profit shifting by multinationals and bid to increase domestic resource mobilization to achieve post-2015 Sustainable Development Goals (SDGs). This therefore necessitates the need for this project to be multi-disciplinary in nature, touching upon themes not only confined to tax law and practices.

Are the EU and OECD legitimate actors to set rules for all countries, irrelevant of their situation and status as either developing or developed? Are the rules that they proscribe enforced in the same manner across different countries in different regions, and how do these new rules fit into a new framework and environment of international global tax governance. This project will seek to research these questions and go further still in order to create a new reference and evaluation framework for global tax governance.

The 2008 economic crisis increased the need for countries and international organizations to find better solutions to tackle tax evasion due to the illicit flow of capital resulting from the use of tax havens and offshore financial centres. As a result, in 2009, the OECD, with the political mandate of the G20, introduced a global standard on exchange of information. This then led to the OECD introducing a global standard on automatic exchange of information. 101 countries have committed to adopt this standard by either 2017 (early adopters) or 2018.  These developments have also been followed by the EU in the recent amended EU Administrative Cooperation Directive.

It would seem however that the measures described above have not gone far enough. Increasingly, and particularly since 2013, news media around the world have continued to highlight a growing crisis in many states, namely the steady decrease in contributions to public finances by many high profile multinational companies and high net worth individuals. This decrease has been associated with the ability of sophisticated taxpayers to shift otherwise taxable income and transactions out of the tax base, in a phenomenon that the OECD has recently labelled “Base erosion and profit shifting”, or BEPS. BEPS refers to “tax planning strategies that exploit gaps in the architecture of the international tax system to artificially shift profits to places where there is little or no economic activity or taxation” (OECD 2013).

The research project will set out to answer the question;

What is the role of the OECD and the EU in global tax governance?; and Under what conditions can the model of global tax governance be feasible and legitimate for both developed and developing countries?

First research objective

To assess the feasibility of global tax governance taking into account the reasons for countries to transplant BEPS and the differences in tax systems and tax cultures

Outputs related to the First Research Objective

1. Publications:

 

2. Presentations

 

Second research objective

To assess the (throughput) legitimacy of global tax governance by the OECD and to provide recommendations for the conditions under which this model of global tax governance can exist?

Outputs Related to Second Research Objective

1. Publications

2. Presentations

Third research objective

To assess the legitimacy of global tax governance by the EU in respect of EU and third (non-EU) countries and to provide recommendations for the conditions under which this model of global tax governance can exist?

Outputs Related to Second Research Objective

1. Presentations

Principal Investigator
Dr. Irma Johanna Mosquera Valderrama

PhD Candidates
Adrian Grant
Frederik Heitmüller

PostDocs
(T.B.A.)

Non-Academic Staff
Ciaran Hickey

  • Prof. Jeanne Pia Mifsud Bonnici. Professor in European Technology Law and Human Rights, University of Groningen, the Netherlands
  • Prof. Eleonora Lozano Rodriguez. Professor of Tax Law and Director of the Ph.D. in Law at the Faculty of Law,  Los Andes University, Bogotá, Colombia
  • Prof. Kerrie Sadiq. Professor of Taxation,  School of Accountancy, QUT Business School, Brisbane, Australia
  • Dr. Bassem Awad, Deputy Director for Intellectual Property & Innovation. Centre for International Governance Innovation, Ontario, Canada.
  • T. Conzelmann, Professor of Political Science, Faculty of Arts and Social Sciences, Maastricht University, The Netherlands

This website uses cookies. More information