Can the OECD Remain an International Tax Standard-Setting Organization?

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David  Ernick,  Esq.

By David Ernick, Esq. PricewaterhouseCoopers LLP Washington, D.C.

As the Organization for Economic Cooperation and Development continues to address base erosion and profit shifting (BEPS) issues, it is important to examine the organization's larger goals and how the processes through which it undertakes its work might impact their achievement.

As everyone in the international tax world knows by now, on October 5, 2015, the OECD released final BEPS recommendations (over 1,600 pages of reports), which were endorsed by the G20 leaders at their summit in Antalya, Turkey, on November 15–16, 2015. Although the OECD's work in the tax arena has for the most part traditionally been confined to its 35 member countries, more than 60 countries were directly involved in the technical groups that formulated the final BEPS recommendations. Regional tax organizations such as the African Tax Administration Forum (ATAF), the Centre de rencontre des administrations fiscales (CREDAF), and the Centro Interamericano de Administraciones Tributarias (CIAT) joined international organizations such as the International Monetary Fund (IMF), the World Bank, and the United Nations in contributing to the BEPS work.


Despite the release of the final reports, the BEPS project did not end on October 5, 2015. On that same day, the OECD promised that it would also work toward implementing its recommendations in countries around the world and creating an “inclusive mechanism” for monitoring that work:

Recognising all the progress made, including in establishing a new OECD-G20 framework for more inclusive deliberations, it appears necessary to further deepen cooperation and focus on monitoring the implementation and effectiveness of the measures adopted in the context of the BEPS Project as well as the impact on both compliance by taxpayers and proper implementation by tax administrations.OECD and G20 countries agree to keep working on an equal footing to monitor the implementation of the BEPS measures. The monitoring will consist of an assessment of compliance in particular with the minimum standards in the form of reports on what countries have done to implement the BEPS recommendations. It will involve some form of peer review which will have to be defined and adapted to the different Actions, with a view to establishing a level playing field by ensuring all countries and jurisdictions implement their commitments so that no country or jurisdiction would gain unfair competitive advantages.


The reference to “more inclusive deliberations” signaled an expansion of the OECD's tax work beyond OECD member countries, and even beyond the non-OECD G20 countries which were invited to participate in the BEPS project. And the reference to “working on an equal footing” meant that the non-OECD member countries would be treated like member countries for purposes of complying with the OECD's traditional consensus model for its tax work — which is a unanimous consensus approach, meaning any single country which disagrees with a proposal can block it.

The contours of the work on implementation and monitoring of its BEPS recommendations were further defined in March 2016 when the OECD released its “Inclusive Framework for BEPS Implementation”:

Members of the framework will work on an equal footing to tackle tax avoidance, to improve the coherence of international tax rules, and to ensure a more transparent tax environment. In particular, the framework will• develop standards in respect of remaining BEPS issues;• review the implementation of agreed minimum standards through an effective monitoring system;• monitor BEPS issues, including tax challenges raised by the digital economy; and• facilitate the implementation processes of the members by providing further guidance and by supporting development of toolkits and guidance to support low-capacity developing countries.All countries and jurisdictions are invited to contact the OECD Secretariat to express their willingness to join the new framework on an equal footing.


Note in particular the focus on developing “standards” and the fact that all countries around the world are invited to participate in the Inclusive Framework.

A few months later, in April 2016, the OECD announced the creation of a new “Platform for Collaboration on Tax” (Platform) through which it would continue to expand its reach outside of its base of member countries. The Platform is designed to help developing countries implement the OECD's BEPS recommendations; it will do this in part through cooperation with other international organizations — including the United Nations, the World Bank, and the International Monetary Fund — that have traditionally focused more on developing country perspectives. The objective of the Platform is to translate the complexity of BEPS outcomes (in relation, for instance, to transfer pricing), into user-friendly guidance for countries with limited tax administration and enforcement resources. It will do this by:

  •  Producing concrete joint outputs and deliverables under an agreed work plan, implemented in collaboration by all or selected [international organizations], and leveraging each institution's own work program and comparative advantage. The outputs may cover a variety of domestic and international tax matters.
  •  Strengthening dynamic interactions between standard setting, capacity building and technical assistance (experience and knowledge from capacity building work feeding into standard setting and vice-versa, including timing of implementation).
  •  Sharing information on activities more systematically, including on country level activities.


Again, note the focus on standard-setting, as well as the OECD's goal to produce “joint outputs and deliverables” with other international organizations.


The focus on standard-setting is important, because that is an effective way to incentivize cross-border trade and investment and, ultimately, increase economic growth. Despite the relentless focus of the BEPS project on eradicating so-called “double non-taxation” and “stateless income,” the mandate of the Committee on Fiscal Affairs (CFA) is actually centered primarily on reducing tax barriers to trade and thereby maximizing economic growth:

The overarching objective of the Committee on Fiscal Affairs is to contribute to the shaping of globalisation for the benefit of all through the promotion and development of effective and sound tax policies, international tax standards and guidance that will allow governments to provide better services to their citizens while maximising economic growth and achieving environmental and social objectives. Its work is intended to enable OECD and Partner (i.e. non-Member) governments to improve the design and operation of their national tax systems, to promote co-operation and co-ordination among them in the area of taxation and to reduce tax barriers to international trade and investment.


That is consistent with the broader goals of the OECD as a whole, “to promote policies that will improve the economic and social well-being of people around the world.”

Economic growth is maximized when double taxation is minimized. Double taxation of the same income is minimized to the extent countries around the world can agree on uniform, consistent transfer pricing and other international tax rules — i.e., standards. The OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations have been an important attempt at standardization of transfer pricing rules.

But in thinking about how to achieve standardization of international tax rules in order to reduce double taxation, it is necessary to first have a common definition of that term. In a very simple sense, a standard is just an agreed upon way of doing something. A standard refers to a uniform set of measures, agreements, conditions, or specifications among parties. The International Organization for Standardization defines standardization as the “activity of establishing, with regard to actual or potential problems, provisions for common and repeated use, aimed at the achievement of the optimum degree of order in a given context.” Particular applications of standards include things such as physical standards (systems of weights and measures); standards for systems and services; and standards for health, safety, consumers, and the environment.

Standards have important economic effects. At a very basic level, trade in goods and services will be detrimentally impacted to the extent that traders encounter different standards in different markets. A uniform system of weights and measures is necessary, for instance, for the efficient and orderly trade in commodities. Standards are developed in diverse fields for the same reason — coordination and cooperation will result in efficiencies when activities can be conducted with one set of rules, one set of tools, one form of communication, etc. The benefits of standardization include compatibility (orderly, efficient integration and operation with other elements in a system, no modification or conversion required), interchangeability (involving two or more items with characteristics making them equivalent in performance and durability), and commonality (sharing parts, training requirements, or other characteristics). When parties set aside individual preferences to achieve group consensus, the mutual benefits from such agreement will generally outweigh the individual benefit any party could gain from following its own preferences.

Conversely, when parties fail to achieve standardization and follow their own preferences, the results can be disastrous. A particularly horrible example is provided by the Great Baltimore Fire of February 7–8, 1904, which blazed for more than 30 hours and destroyed 1,545 buildings over a space of 140 acres. A major reason the fire could not be contained was the lack of standardization in fire-fighting equipment. Although fire engines from neighboring cities (including Philadelphia and Washington, D.C., and as far away as New York City) responded to the emergency, many could only watch helplessly, because the couplings on their fire hoses could not fit Baltimore's hydrants.


Although the OECD described the Final BEPS Reports as consensus documents, they actually reflect widely varying degrees of consensus. The OECD grouped its recommendations into four levels of consensus:

  •  New minimum standards to tackle issues where no action by some countries would have created negative spillovers on other countries (including adverse impacts of competitiveness), e.g., treaty shopping, country-by-country reporting, harmful tax practices and dispute resolution.
  •  Revision of existing standards, where not all BEPS participants have endorsed the underlying standards, e.g., on tax treaties or transfer pricing.
  •  Common approaches where countries have agreed on a general tax policy direction, e.g., hybrid mismatch arrangements and interest deductibility, which will facilitate the convergence of national practices and guidance drawing on best practices.
  •  Best practice guidance aimed at supporting countries that seek to take action in other areas, e.g., mandatory disclosure initiatives or CFC legislation.


However, even some of the issues for which the OECD claims to have achieved the highest level of consensus around standardization of rules actually represent the avoidance of setting a single common standard. For example, to prevent treaty shopping the Final Action 6 Report recommends that countries include in their treaties either (1) a limitation on benefits clause (LOB) accompanied by a principal purpose test (PPT), (2) an LOB accompanied by a narrower anti-abuse rule, or (3) a stand-alone PPT. But achieving “consensus” around that sort of menu of options approach is not really consensus or standardization — it is the opposite of those things, and it does little to achieve standardization of international tax rules. Other important areas where the OECD failed to achieve meaningful consensus in its final recommendations include the digital economy, CFC rules, limiting base erosion via interest deductions, and transfer pricing.


The new Inclusive Framework and the Platform for Collaboration raise fundamental questions about how the OECD will operate in the coming years as a standard-setting body for international tax rules. The OECD historically has consisted of a small group of relatively like-minded member countries, focused on helping member countries agree on uniform, consistent international tax rules, in order to minimize the double taxation that could inhibit cross-border trade and investment.

The non-OECD members of the G20 participated in the BEPS project, however, and now the Inclusive Framework is open to a broad group of countries (representatives of 82 countries in recent meetings, and OECD representatives have stated that there will soon be over 100 countries participating) with divergent views on international tax issues. The BEPS project showed the difficulty in achieving consensus with non-OECD member countries, and where such consensus could not be achieved, the OECD sometimes resorted to a “menu of options” approach, which simply catalogued divergent country views.

The need for consensus was stressed at the beginning of the BEPS project as justification for the OECD to undertake the work. Achieving consensus at the OECD would avoid the danger of countries enacting unilateral measures “which could lead to global tax chaos marked by the massive re-emergence of double taxation.” A quick review of some of the outputs from the Final BEPS Reports, however, illustrates the degree to which the OECD struggled to achieve consensus.

With the Inclusive Framework including a group of countries much broader than even that which participated in the BEPS project, it remains to be seen whether the OECD's future tax work will reflect consensus around uniform, consistent international tax rules or whether it will end up simply cataloguing divergent country views. The Inclusive Framework appears to reflect the OECD's desire to expand its sphere of influence far beyond its 35 member countries. There is an intuitive belief that if countries are allowed to participate in the development of new international tax standards at the OECD they will be more likely to actually implement those standards in their domestic tax rules.

But however well-intentioned the objectives may be behind the OECD's broad expansion of the countries participating in its tax work, it must be balanced against the impacts that expansion has on its substantive output. Having 100 countries in a room negotiating the wording of new tax rules seems like a recipe for never being able to reach consensus, if consensus is defined as agreement around a uniform rule. Drafting new rules with a group that large may simply lead to more of the “menu of options” approach which the OECD resorted to in the Final BEPS Reports and the drafting of ambiguous rules which allow countries to implement divergent positions in their domestic rules. If the OECD becomes the place where countries come to discuss issues and simply memorialize their different preferred approaches, it is not clear how that improves the economic and social well-being of people around the world. The desire (reflected in the creation of the Inclusive Framework) to expand participation in the OECD's tax work must be balanced against the detrimental effects that it has on the ability to achieve consensus and standardization.

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