Menu
Tax Notes logo

Global Tax Plan Talks Don’t Breach Human Rights, OECD Says

Posted on June 1, 2022

The OECD’s tax chief has strongly rejected assertions from independent U.N. human rights experts that negotiations on an OECD-brokered two-pillar global tax reform plan constitute existing or potential human rights violations.

Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, defended the talks in an April 27 letter. He was responding to a March 30 joint letter from the experts, who were appointed by the U.N. Human Rights Council. According to Attiya Waris, a professor of fiscal law and policy at the University of Nairobi and one of the U.N. independent experts, the correspondence was published May 31.

The OECD supports U.N. mechanisms to implement international human rights standards, Saint-Amans wrote. “In that context, we have been very surprised by and we strongly disagree with the overview and concerns as presented in your communication,” he added, noting the U.N. experts’ concerns that the negotiations taking place in the inclusive framework on base erosion and profit shifting may constitute “a human rights violation that has already occurred, is ongoing, or which has a high risk of occurring.”

According to the U.N. experts’ letter, many low- and middle-income countries have said the two-pillar plan, to which 137 jurisdictions in the inclusive framework agreed in late 2021, doesn’t respond to their needs. Those countries have also said the plan, particularly pillar 2, will hamper their efforts to raise public revenues, the experts added.

Pillar 1 would allow the formulaic reallocation of a portion of residual profits that the largest multinational enterprises earn that are linked to consumers in market jurisdictions, even without a sufficient permanent establishment. These new reallocation rules, also known as amount A, would also allow market jurisdictions to tax some of those residual profits.

Pillar 1 also calls for amount B, a fixed return for baseline marketing and distribution activities in market jurisdictions, in line with the arm’s-length standard. Jurisdictions also agree to withdraw unilateral measures they have introduced to tax digital activity and promise to avoid introducing new ones.

Pillar 2 would apply to MNEs with annual group revenue exceeding €750 million and would rely primarily on the global anti-base-erosion rules — a top-up taxation framework that ensures that in-scope MNEs pay a 15 percent effective tax rate in the countries in which they operate.

Pillar 1 “will bring about only minimal benefits to developing countries,” the experts wrote, adding that although the OECD had estimated the rules would reallocate about $125 billion in profits to market countries, that translates to only about $10 billion for low- and middle-income countries.

The 15 percent minimum effective tax rate under pillar 2 is also much lower than what many civil society organizations, some developing countries, and regional organizations have called for. The rate may represent a corporation tax ceiling rather than a floor, the U.N. letter says.

“We are concerned that the two-pillar solution will reduce the ability of low- and middle-income countries to mobilize sufficient resources to invest in essential public services and to ensure the realization of human rights, including the rights to health, social security, and food, all of which are guaranteed under the International Covenant on Economic, Social and Cultural Rights,” the experts wrote.

Implementation of the two pillars “may constitute a retrogressive step in the implementation of the International Covenant on Economic, Social and Cultural Rights, if it results in reducing the tax revenues for developing countries,” they added.

Saint-Amans pushed back, saying that the two-pillar plan “will seriously limit tax competition and the race to the bottom, which has harmed revenues of both developed and developing countries.” It will also stabilize the global tax rules and de-escalate damaging trade tensions arising from a growing patchwork of unilateral measures to tax digital activity, according to the OECD correspondence.

The inclusive framework also involves the participation of low- and middle-income countries, as well as developed countries, on an equal footing, and regional organizations have played an active role in the talks, too, Saint-Amans wrote. “The discussions in the BEPS [inclusive framework] are now focusing on the implementation of the two-pillar solution and . . . each jurisdiction will decide whether or not to take the measures necessary for implementation,” he added.

The tax reform plan directly responds to concerns from low- and middle-income countries, such as the exclusion of extractives industries from amount A’s scope under pillar 1 and an elective binding dispute resolution mechanism under amount A for developing countries, Saint-Amans wrote. Pillar 2 also provides a carveout for substantial business activities and the treaty-based subject-to-tax rule, a minimum standard that will help developing countries guard against base-eroding payments, he added.

“It is not for the OECD to comment on whether it is the appropriate forum for this work: that is the sovereign choice of the 141 jurisdictions that are participating in the discussions,” Saint-Amans wrote. “We cannot agree with the assertion that the discussions taking place among BEPS [inclusive framework] members on the two-pillar solution could be considered to be an actual or potential violation of human rights or a retrogressive measure under the International Covenant on Economic, Social and Cultural Rights.”

Similar U.N. letters were sent to the Indonesian G-20 presidency, the IMF, the G-24, the Group of 77, and the Delegation of the European Union to the United Nations. However, the OECD is the only organization that has responded to the experts’ correspondence so far.

Copy RID