On the legitimacy of the Inclusive Framework from a Global South perspective

Report on the BEPS Inclusive Framework of the OECD

Publication

Maarten Hietland

Adinda Wisse

Myrthe Bekkers

Johanna Krebs

Thijmen Reinalda

10 November 2021

^{This research has been conducted for SOMO by students at the International Research by Student Programme at the Rijksuniversiteit Groningen (Netherlands). SOMO researchers have supervised the research process and assessed the final report before publication.}

Last week the G20 approved the plan to universally apply a global minimum corporate income tax rate of 15 per cent to large multinational corporations. This plan aims to curb international tax planning and put a stop to the competition between governments to lower corporate income taxes. The OECD package hopes to generate more revenue from corporate taxation, both for high- and lower-income countries. Nevertheless, the new agreement has received a lot of criticism from developing countries, saying that their interests have not been sufficiently taken into account.

The OECD has tried to make the process leading up to the announcement of this plan, more inclusive by inviting non-member states to participate via the so-called Inclusive Framework (IF). Historically speaking, international taxation schemes and treaty models have been the prerogative of developed and higher-income G20 countries.

Despite these effort, a wide variety of experts have questioned the legitimacy of the OECD as the main institution for reforming the international tax system, and suggested that the OECD itself must change in order to be able to seriously address the needs of lower-income countries.

A Western affair

The 38-member states of the OECD are predominantly and English-speaking countries, with some member states in and Nonetheless, since the start of the OECD work on international tax reform called ‘Base Erosion and Profit Shifting’ (BEPS), the work has had an inherently global scope.

Following the launch of the first BEPS report (in 2015) the G20 has sought to increase its legitimacy by creating the so-called ‘Inclusive Framework’, which the OECD hoped would encourage implementation of the 2015 BEPS package, especially the minimum standards.

The Inclusive Framework aims to include all 193 member states of the United Nations. To date, 69 did not participate in IF negotiations. Five countries that did take part, Nigeria, Kenya, Sri Lanka, Pakistan, and Mauritania (who became a member recently, after the deal was negotiated), did not sign up for the package. So in total, 119 countries are part of the recent agreement, and 74 are not.

As negotiations take place for a more fundamental overhaul of the international tax architecture, (referred to as the BEPS2 process), the inclusive framework member countries are now officially participating with OECD member states ‘on an equal footing to tackle tax avoidance, to improve the coherence of international tax rules, and to ensure a more transparent tax However, as one official stated: “The Inclusive Framework is largely dominated by the OECD countries and lip services are paid to other parties who have signed [the IF -red.]. But ultimately it is by rich countries and for rich countries, and it does not reflect at all the views of those non-OECD countries in the Inclusive Framework. […] They [developing countries] don’t have access to all the relevant .”

Fixed menus

“[…] People would argue that if you’ve set a menu before and people do not have a choice in changing what the menu is, then it becomes difficult to say that they were part of the design of the project. […] It is because the OECD sort of agreed on what will be discussed, and developing countries, particularly countries like Nigeria, really had no say in those conversations, they basically were forced to find or have an opinion on this. And that’s why out of 54 countries, there were only 25 African countries involved in the BEPS process. This could show that to them, there is no substantial interest in what goes on at the OECD level”, says Alexander Ezenagu(opens in new window) , Assistant Professor of Taxation and Commercial Law at HBKU Qatar.

A large number of experts interviewed for this report, believe that the IF is ineffective, because developing countries are unable to meaningfully influence what is discussed. They attribute this not to the lack of resources, expertise, or personnel, but to decisions having already been made before developing countries have even entered the room. In other words, the agenda has been set by others.

This research concludes that there are serious flaws in the structure of the OECD that prevent both equal participation and partiality, and that, because of this, developing countries are not always able to make meaningful contributions to protect their interests.

Members only?

“I think you cannot ask for it from the OECD. The OECD is meant to represent the interests of its members, and for that reason alone, it cannot change its agenda, because that is the agenda they serve”, says Dr Gitte Heij(opens in new window) from the University of Melbourne.

While the OECD Secretariat should become more inclusive to represent the interests of developing countries within the organisation, a serious lack of transparency also hinders a more inclusive decision-making process.

This research has attempted to provide a glimpse into the issues related to international taxation at the OECD level. The focus of the reserach has been on larger developing economies, such as Nigeria and Kenya, but further research should concentrate on smaller developing nations.