Does the World Need Tax Inspectors Without Borders?

Robert Goulder

You already know about Doctors Without Borders. Outside the Anglophone world, the nongovernmental organization is better known by its actual title, Médecins Sans Frontières (MSF). The Geneva-based humanitarian organization was founded in the early 1970s to provide critical medical services to underserved populations in the developing world, often in violent conflict zones. The group’s accomplishments are impressive; it was awarded the Nobel Peace Prize in 1999.¹

Serving as an MSF volunteer is not for the faint of heart. They’re the kind of people who rush toward the epicenter of an Ebola outbreak, rather than scurry away from it. Occasionally MSF volunteers get themselves blown to pieces while doing their work, as happened in Yemen when a hospital was bombed in 2016.

Tax professionals face a more sedate environment. It’s exceedingly rare for us to be summoned off to war zones or dropped into ground zero of a pandemic. Nevertheless, there’s a segment of the tax world that draws inspiration from MSF. In its own way, the group Tax Inspectors Without Borders (TIWB) is doing its part to make the world a better place, one tax audit at a time.

The organization is a joint initiative of the OECD and the United Nations Development Program (UNDP). Like the group that inspired its name, TIWB is focused on the developing world — but dedicated to revenue capacity rather than medicine. Although relatively new, TIWB is quickly growing in both scope and global prominence.²

From the perspective of an ailing patient, the arrival of foreign doctors and nurses is a decidedly welcome sight. But can the same be said when teams of foreign tax experts land on your shores in hopes of sharing their knowledge with local officials? It may come as no surprise that our profession contains pockets of skepticism.

The skeptic’s rationalization is as follows: The more skillful source-country auditors become, the more likely it is that multinationals will face larger tax bills and diminished after-tax profits. Such harsh views root against sound tax administration. Relevant to the point, the host jurisdictions are resource-constrained. They lack the structural capacity to adequately enforce our complex international tax regime.

This article poses an existential question to TIWB’s present and future ambitions. Does the world really need an ensemble of tax experts ready to be deployed overseas at short notice? As I see it, the answer is a resounding yes. The ultimate challenge for TIWB, however, isn’t just to help local tax officials perform better audits; it’s to change a cultural attitude that tolerates chronic tax evasion as a cost of attracting capital.

Taxation Aid

Most developing economies depend on some form of outside assistance. While such support is valued, fiscal dependency is less than ideal. The thought of a sovereign nation being perpetually relegated to donee status is undesirable for several reasons.

The future availability of international aid is uncertain because of competing demands for donors’ funds. An earthquake here, a famine there, and suddenly your country’s request for development aid is no longer a priority. Foreign aid often comes with strings attached. Recipients may find themselves encumbered with economic and geopolitical alliances they would otherwise choose to forgo. Replacing foreign aid with foreign loans doesn’t improve the situation, either, especially with the added debt burden countries face.

The far better scenario is for all countries, rich and poor alike, to have the ability to fund their flagship domestic projects by taxing the economic activity that’s occurring inside their borders.³ Thematically, this is considered a branch of the domestic resource mobilization (DRM) movement. DRM is strategically linked to the United Nations’ sustainable development goals for 2030.⁴ Thus, there is the need for tax administrators in developing economies to perform more stringent and more cost-effective audits — especially when multinationals are involved. That’s a tall order given the intricacy of international tax law and the sophistication of modern tax planning. TIWB exists to address this need.

Consider a simple statistic. In Senegal, it’s estimated that each additional dollar the government invests in cracking down on tax avoidance eventually generates an additional $1,000 in tax revenue. By comparison, the IRS estimates that each additional dollar it spends on enforcement will generate $4 of additional revenue. While both countries stand to benefit from increased funding of their respective revenue bodies, the disparity of these figures indicates vastly different revenue capacities. There’s a bottom line here: If you truly want to help a poor country, don’t send it handouts, send it tax auditors.

The concept for TIWB was proposed by the OECD’s Task Force on Tax and Development in 2012, and was the subject of a feasibility study in 2013. Armed with a mandate from both the OECD and the U.N., TIWB was launched in 2015 and commenced field operations in 2016. Former Kenyan tax official James Karanja serves as head of the TIWB Secretariat, which is based in the OECD headquarters in Paris. Conveniently, Karanja’s background lies in international practice areas such as transfer pricing audits, and he previously represented the interests of developing economies during the formative base erosion and profit-shifting project deliberations.

The international community has shown early support for TIWB. In 2017 Finland made a generous contribution through the UNDP. Another round of financial support is expected from Helsinki in 2019. TIWB is also financed by contributions from OECD member states as part of the pooled funds reserved for the BEPS developing countries project. In addition to Finland, other key donors include the EU, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.

While the United States is not a major financial contributor, TIWB has used retired U.S. tax officials. It can be reasonably argued that IRS employees should not directly assist in the funding of foreign governments — a loose extension of the common law “revenue rule” that many readers will know from the Pasquantino litigation.⁵ Karanja notes that TIWB has collaborated with Treasury’s Office of Technical Assistance who identify and contact retired experts.

Transfer Pricing and Beyond

At its core, TIWB is an exercise in cross-border knowledge-sharing premised on the credo “learning by doing.” Host countries apply for assistance from the TIWB Secretariat, which maintains a network of partner administrations and a UNDP managed roster of experts. It tailors each deployment to meet the specific needs of the host country. Karanja refers to this as a “demand-driven process.” For instance, if a host country seeks support for issues involving the oil and gas sector, the secretariat will make a point of referring auditors or industry experts with extensive expertise in that field.

TIWB places great emphasis on south-south programs (when an expert from one developing country is sent to assist another). As Karanja sees it, south-south cooperation helps ensure that developing-country perspectives remain at the forefront in the audit assistance experience. Thus far, India, Kenya, Mexico, Nigeria, and South Africa have been among the pioneers in supporting south-south programs.

Assisting with that effort is a Community of Practice learning function that TIWB recently launched, inspired by the Canadian government’s knowledge sharing platform. TIWB experts are already sharing best practices using this peer-to-peer platform, independent of centralized coordination through the TIWB Secretariat.

The bulk of TIWB’s workload involves corporate tax, particularly international transactions. Predictably, transfer pricing enforcement is a recurring theme. That’s a function of several factors including the prevalence of related-party transactions, globally integrated supply chains, the sheer complexity of the international transfer pricing rules, and the large dollar amounts involved. TIWB’s mandate does not preclude it from looking into other categories of taxes, such as those on labor, property, or consumption, but the initiative’s focus is driven by developing countries’ priorities on areas where potentially large amounts of revenue can be obtained from relatively modest interventions. “TIWB experts tackle the cases presenting highest risk to revenue to maximize the impact, though some jurisdictions do opt to commence with smaller cases and progress to the more complex and larger cases as they build more confidence,” Karanja said.

A possible future TIWB work area is the investigation of tax crimes. TIWB is set to commence new tax crime pilot programs with five host countries: Armenia, Colombia, Kenya, Pakistan, and Uganda. The results of the program should be known within the next 12 to 18 months. Future pilot programs could address how best to exchange information under the OECD’s common reporting standard and joint audits.

Overall, TIWB can boast several success stories. In February it released a statement of outcomes noting that 13 programs were fully completed, covering activities in Africa, Asia, Eastern Europe, Latin America, and the Caribbean. The statement estimates that TIWB programs have resulted in $445 million in additional tax revenue.⁶ TIWB has 39 additional programs in progress, with 24 more scheduled to begin in the coming year. The statement targets a combined 100 deployments by 2020. Among the reasons for the rapid growth is the minimal bureaucracy involved and the lack of burdensome contracting or procurement arrangements.

Concerning the revenue figure mentioned in the statement of outcomes, the TIWB reports data on a regional basis to maintain anonymity for the affected governments. Similarly, TIWB’s annual reports present collective data in such a way as to avoid singling out taxpayers, sectors, or jurisdictions. As a matter of policy, TIWB has no interest in naming-and-shaming affected taxpayers.

Along the same lines, TIWB sees no difficulties with the growing international trend toward enhanced taxpayer rights, such as reasonable confidentiality expectations. It’s foreseeable that foreign tax experts might be exposed to return information during a deployment. Those familiar with the protections of IRC section 6103 will perceive the cause for concern. Many jurisdictions have parallel provisions prohibiting third-party disclosure without the taxpayer’s consent. TIWB is already equipped to deal with such confidentiality issues. Karanja noted that one of the current programs has been structurally anonymized so that the taxpayer’s identity is concealed from the participating expert.

The Horizon

How far will TIWB’s influence reach? It’s impossible to say, but one can surmise the greatest obstacle to forward momentum could come from the host countries themselves. This could occur if they perceive TIWB involvement as bringing a chilling effect on foreign direct investment. This reflects a classic internal tension between the government’s economic development function and its taxing function. The latter can scare away what the former seeks to attract. The issue is by no means unique to developing economies, although the stakes on both sides are arguably higher. Such is the burden of an investment climate where capital is highly mobile.

This is among the reasons why TIWB looks beyond revenue when gauging a program’s success. According to Karanja, it tracks a range of performance indicators that reflect the priorities selected by the host administration. These indicators include improved business climate and positive changes in taxpayer behavior.

Feedback from TIWB programs points to improved taxpayer relations arising from a more professional handling of audits. This fosters a more stable investment climate. Karanja hopes to associate TIWB with the emerging narrative about corporations’ social responsibility to pay tax. If that idea can take root in developing countries, there’s a much better chance it can become meaningful in places like the United States and Europe.