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OECD Digital Economy Designers: Share Your Work!

Posted on Mar. 23, 2020
Allison Christians
Allison Christians

Allison Christians is the H. Heward Stikeman Chair in Tax Law at McGill University in Montreal, where she writes and teaches in the area of national and international tax law and policy. You can follow her on the Tax, Society & Culture blog at taxpol.blogspot.com or on Twitter (@profchristians).

In this article, the author argues that the OECD should share the underlying data from its impact assessment on taxing the digital economy with independent researchers and not just relevant governments. She also calls for the Platform for Collaboration on Tax to use its resources and dedication to capacity building to help with individual country impact assessments.

As part of its recently released “Tax Challenges Arising From the Digitalization of the Economy: Update on the Economic Analysis and Impact Assessment,” the OECD provided a PowerPoint presentation and a webcast outlining its findings, but it did not include any of the underlying data that led to the results. The data is either proprietary or confidential or both, which means that independent researchers will not be able to replicate or further investigate the OECD’s findings. That said, the OECD is reportedly sharing a tool with the members of its inclusive framework that will allow governments to undertake their own analyses of how the digital economy project is likely to affect them. The tool — like the data — will not be available to independent researchers.

These decisions raise red flags for anyone following the OECD’s digital economy work, especially those who are concerned that governments with fewer resources are more likely to face challenges in assessing the likely impact of the OECD’s plan on their countries. The concern is that countries with many resources will race ahead, showing up to future inclusive framework meetings armed with a far more robust understanding of the implications of various scenarios and better prepared to negotiate in their own self-interest without regard for the distributive impacts of their actions. Having committed to construct a tax system founded on inclusivity and putting all jurisdictions on an equal footing, the OECD has taken on an enormous responsibility to anticipate and resolve this kind of institutionalized power asymmetry. The controlled release of findings — but not the relevant data, assumptions, or tools — risks doing the opposite.

In particular, two questions arise regarding these developments. First, why is the OECD unable to provide independent researchers access to its data? Second, if independent researchers cannot be allowed access, why isn’t the Platform for Collaboration on Tax — a collaboration that includes the U.N., IMF, and World Bank in addition to the OECD — using its considerable resources to assume responsibility for providing a country-by-country analysis of the OECD data? This article discusses both issues.

Information Asymmetry

Information asymmetry is, in many respects, a feature of the OECD’s work on digital tax, including its institutional and procedural choices. The release of the abstract impact assessment furthers this persistent difficulty. A review of the contents suggests that while the OECD has come a long way, it still has far to go when it comes to transparency.

In presenting its findings, the OECD refers to its use of a mix of confidential, fee-based, and public information sources. The annex to the OECD’s release includes a table demonstrating the abstract contours of its data set, which the OECD refers to as a “stylised illustration” of the profit matrix it used to combine data sources.

The methodology surrounding the choice and combination of these sources is the first point of asymmetry. Each square of the stylized illustration contains a dot representing the profits that the OECD has found to be relevant to the pillar 1 and 2 analyses for a particular jurisdiction. The actual number in any given box is derived using an undisclosed combination of four possible data sources. That is, each of the boxes in the matrix of more than 200 jurisdictions apparently contains a number that is derived from one or more of the data sources. The chart included in the presentation is only a partial illustration with only four jurisdictions listed, and the actual numbers that the dots represent remain undisclosed. Each of the four data sources represents a distinct analysis of distinct phenomena. 

Further information asymmetry is inherent in the data sources themselves. The first data source that the OECD identifies is aggregate CbC data. This data is currently exchanged via a multilateral competent authority agreement on the condition that the information “remains confidential and is used for the purposes of assessing high-level transfer pricing risks.” The data may come to the OECD with a lot of firm-level detail or very little, depending on the jurisdiction submitting the report. It may or may not include firms that would be excluded from the scope of the digitalization project, and the extent to which the OECD can segregate the data to exclude those firms from the analysis is unknown. Even so, the CbC data is probably the most comprehensive of the various sources, and it is specifically related to the measurement of income for tax purposes. However, the information is generally not available to independent researchers except in aggregate terms unless they have been officially authorized to examine the records. The OECD should be designing an authorization process as part of its overall commitment to good tax governance — but so far it is keeping all of this data analysis in-house.

The OECD’s next data source is the Orbis database, which contains unconsolidated firm-level data. The OECD states that the coverage that Orbis provides is “sufficiently good for about 25 jurisdictions of affiliate[s] (mainly in Europe).” Orbis is a fee-based service that can be used for transfer pricing analysis as well as general financial analysis. Anyone with a subscription could theoretically replicate the OECD’s assessment of this data, but they would need to know which companies the OECD included in its data set for each country — a fact that is presumably also confidential.

The third source is the OECD Activities of Multinational Enterprises database, which includes data on inward and outward activity of multinationals with affiliates in OECD countries. The database is compiled from annual surveys and is accessible to the public, but it likely draws from book rather than tax income.

The OECD’s final source is its own “extrapolation based on macro sources, including [foreign direct investment] data,” but this source appears to be used only in “cells not covered in other data sources.” Since the source is internal OECD analysis and no further information is given about its composition or frequency of use, it is not subject to analysis or replication by an outside researcher.

Skeptics may be forgiven for noting the apples-to-oranges quality of these sources and the obscure nature of their possible combinations. Perhaps it is a safe assumption that the first category provides the most useful data, with the usefulness of the other sources declining in turn and being drawn upon to fill in gaps as necessary. Or perhaps it is safe to assume that the OECD developed an appropriate approach for combining the available sources. A strong commitment to confidentiality is clearly the OECD’s rationale for obscurity. Yet it does not seem unreasonable to ask the OECD to explain its methodological choices, its means of extrapolating data from macro sources, and its approach to reconciling book and tax data in its public documentation. It is not entirely clear why the OECD cannot provide independent researchers with access to its data and methodology, at least on the basis of application and commitment to confidentiality. This kind of access is possible under national statutes that grant researcher access to confidential taxpayer information for purposes of policy analysis. For example, the U.S. Bureau of Economic Analysis provides just such access. And, of course, U.S. lawmakers can ask for confidential taxpayer information for purposes of undertaking tax policy assessment. This demonstrates that it is possible to develop institutional processes to permit independent access to information without breaking confidentiality requirements.

Obscurity around the OECD’s own working assumptions seems difficult to defend when countries with significant capacity differentials are expected to undertake their own analyses using the OECD’s approach. Some countries may simply be unable to perform the required analysis even using OECD tools.

This capacity differential leads to the second question, which considers the role that other international institutions involved in tax policy should play in this process.

Activate the Platform

With great fanfare, in 2016 the OECD, IMF, World Bank, and U.N. announced the creation of a cooperative venture: the Platform for Collaboration on Tax. A concept note dated April 19, 2016, explains that the idea was “to fully exploit the potential synergies from bringing more closely together the experiences and expertise that the [international organizations], with their different priorities and roles, have built up.” The platform was envisioned as a vehicle for enhanced cooperation, enabling the organizations “to develop a common approach, deliver joint outputs, and respond to requests for a global dialogue on tax matters.” Each platform member was expected to work cooperatively to develop coherent policy “based on their comparative advantages and capabilities.”

As the tax policy leader, the plan was for the OECD to lead the work on building and implementing global tax policy norms, including via the inclusive framework. The other organizations were to contribute by using their expertise to, inter alia, support non-OECD members in their participation in the inclusive framework. In particular, the platform stressed the importance of reliable and comparable revenue data, which requires the participating organizations to share information, coordinate their efforts, and exploit their different comparative advantages to develop data on revenue collection and ensure that available data is used effectively.

All of this cooperative language suggests that the OECD should not be working alone to assess the economic impact of the secretariat’s unified approach. But, so far, all of the economists working on this all-important effort appear to be housed within the OECD — the considerable resources of the partner organizations appear to be wholly unused for this project.

This is surprising because the IMF, the World Bank, and regional economic commissions within the U.N., including the U.N. Economic Commission for Latin America and the Caribbean, have historically done work on economic policy in many of the jurisdictions that are part of the inclusive framework. Sharing tasks among these institutions according to their respective strengths is not only more efficient but also allows for more transparency, accountability, and control. The involvement of the U.N., IMF, and World Bank would also make it possible to link tax policy to development policy, which is important because the issue is economic impact and how much each country stands to gain or lose. Given the strong commitment to mobilizing domestic resources and the well-understood capacity gap among countries, it is hard to understand why the expertise of all the platform members is not being marshalled to undertake CbC analysis.

There are probably adequate explanations for all of the governance decisions that the OECD is making as part of the digitalization program, including decisions about the exchange and use of data, analysis, and assessment tools. However, the fact that these decisions remain obscure to the public is intrinsically a problem for an organization that has taken on the responsibility of delivering an international consensus that effectively includes all participants operating on an equal footing. The OECD should expect scrutiny not only of its technical design choices but also of its processes for analyzing these choices, especially given the confidentiality constraints of the underlying data. The announcement of the Platform for Collaboration on Tax contained a strong commitment on this point — stating unequivocally that the platform would operate transparently, with its work plan and outputs available to the general public as well as to government stakeholders. The universal need for detailed assessments of the likely impact of the digitalization project on all countries offers an opportunity for the platform and its members to demonstrate their commitment to these principles.

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