The 19th Session of the United Nations Committee of Experts on International Cooperation in Tax Matters was held October 15-18 in Geneva.
This session, like the prior one, mainly focused on the role that taxation is playing in raising domestic resources to finance sustainable development goals, as recently set forth in the Addis Ababa Action Agenda.
It is evident that the work of the UN Tax Committee essentially speaks to those pressing issues in taxation related to the sustainable development goals, the informal economy, and environmental taxation, as well as to other vital areas such as the taxation of the digitalized economy; dispute avoidance and resolution; the relationship between tax, trade, and investment treaties; challenges confronting developing nations; and, of course, transfer pricing.
Regarding the current state of international taxation, most countries will follow one of two sets of international transfer pricing guidelines.
If a country is a mature economy or a developed nation, it will adhere to the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which was last updated in 2017, just a couple of years after the unveiling of the outcomes of the OECD/G20 base erosion and profit shifting (BEPS) action plan.
However, if the country is a developing nation or within the least developed country category, it will follow the United Nations Practical Manual on Transfer Pricing for Developing Countries. Although the manual was refreshed in 2017, during this year’s 18th Session of the UN Committee of Experts on International Cooperation in Tax Matters, the subcommittee on transfer pricing proposed the upcoming update to this Manual.
Traditionally a remnant of 20th-century international trade economic theory, and partly as a result of the era’s globalization, developed nations were capital exporting countries, while those lesser developed were deemed to be capital importing countries. Today, these economic classifications have arguably been blurred to some extent, but this reality persists in many cases and often confronts any traveler to regions such as Africa, the Caribbean, and the Far East, making the sense of inequality even more evident today than years past.
While the fundamental goals and ultimate objectives stated in the BEPS action plan are commonly shared by both the UN and the OECD, the fiscal policy focus, motivation, incentives, and economic direction are not the same. Still, both objectives reflect that unpredictable global economic slowdown and the unstable market conditions that can abruptly arise have created a sense of urgency for developing nations, perhaps even more so than for wealthier countries.
Coincidentally, in July 2015, around the same time, the OECD was getting ready to initiate the BEPS action plan, the UN held its 3rd International Conference for Financing for Development in Addis Ababa, Ethiopia.
It was here that the Addis Ababa Action Agenda for financing sustainable development and developing sustainable finance was unveiled. This agenda includes a comprehensive set of policy actions by the Member States, with a package of over 100 concrete measures to finance sustainable development, transform the global economy and achieve the sustainable development goals, as well as a new global framework for financing sustainable development that aligns all financing flows and policies with economic, social and environmental priorities and ensures that financing is stable and sustainable. This also serves as a guide for actions by governments, international organizations, businesses, civil society, and philanthropists.
It is this agenda that has now become the raison d’etre, or the primary motivation, incentive, and focus, of the UN’s Department of Economic and Social Affairs and the UN’s Committee of Experts on International Cooperation in Tax Matters, as one of the Addis Ababa Action Agenda Initiatives is to “enhance international tax cooperation to assist in raising resources domestically.”
Accordingly, the 2019 Financing for Sustainable Development Report, led by the UN and including the International Monetary Fund, the World Bank Group and World Trade Organization, which jointly called for an overhaul of the global financial system, recognized that the private sector’s interest in sustainable finance is growing and playing a large role in embracing the agenda and its sustainable development goals.
It is recommended that tax professionals working in the area of international tax policy, specifically transfer pricing in developing countries, carefully review Chapter II. A [on] Domestic Public Resources, and 1. [its] Key Message and Recommendations. This will greatly amplify one’s understanding of the fundamental tenets of the current international tax architecture, along with its fast-moving trends in revenue and taxation.
The 2019 Report further indicates that:
Revenue is not an end in itself; it is a means for Governments to finance the expenditure necessary to achieve sustainable development and policy goals. The fiscal system plays several roles. It finances the provision of public goods, sets incentives for the behaviour of private actors, and promotes equity. It also supports macroeconomic stabilization and can be used to stimulate growth during economic slowdowns. While median tax-to-gross-domestic-product (GDP) ratios have increased, there is still a large gap between public resources and financing needs to achieve the Sustainable Development Goals (SDGs).
It is with this rationale and objective in mind that the work of the UN Tax Committee advances. Therefore, we anticipate the eventual release of updates to its Practical Manual on Transfer Pricing Manual for Developing Countries with further work on Article 9 (Associated Enterprises) and, most notably, the new Chapter B on Financial Transactions.
As of November, the OECD’s draft guidance on financial transactions has yet to be finalized; however, the UN Tax Committee appears to be on target for releasing its new Chapter B on financial transactions.
According to the UN draft, among other items, the new Chapter B includes the interaction with rules and measures against base erosion, common types of intra-group financial transactions and of group financing departments; the process of actual delineation and relevant characteristics of financial transactions, the process and system of credit rating and potential transfer pricing methods, including the use of simplification measures/safe harbours; different types of intragroup loans and relevant characteristics and determining the arm’s length nature of intra-group loans; different types of intragroup financial guarantees and relevant characteristics; determining the arm’s length nature of intra-group financial guarantees; and other available methods.
The chapter also discusses cash pooling practices and captive insurance without further detailing the delineation and arm’s length pricing of those specific transactions.
Different types of intra-group loans are mentioned, and the draft identifies four steps to determine the arm’s length of them: (i) analyse economically relevant characteristics; (ii) accurately delineate the entire transaction undertaken, as well as the (iii) selection and (iv) application of the most appropriate transfer pricing method.
Although several recent articles also highlight key differences between these sets of transfer pricing guidelines, most notably is Shiv Mahalingham’s Bloomberg Tax article where he emphasizes that a number of countries within the Middle East and North Africa have not signed the BEPS Inclusive framework. He also adds:
“The tone of the UN Manual is more supportive of transfer pricing advisory, design, and planning, whereas the OECD BEPS Project approaches regulations as a response to aggressive tax planning.”
Mahalingham effectively explains that the so-called Sixth Transfer Pricing Method currently incorporated into the UN Transfer Pricing Manual has had successful application as:
“is applied in practice in many Central and Southern America regimes and considers quoted prices of the commodities market that may be comparable uncontrolled prices (CUPs) for transactions with related parties (under similar circumstances).”
The 2019 Financing for Sustainable Development Report recognizes that the international tax environment has changed over the past decade, specifically in the last five years, acknowledging that norm-setting is more inclusive and additional information is now available on financial accounts and corporate activity, although profit shifting remains a challenge.
On the other hand, as we strive to comprehend the requirement of two sets of international transfer pricing guidelines, and with the emergence of the digital tax regime under Pillar One of the new Unified Approach, we should consider this critical statement from the Report’s Chapter II. A [on] Domestic Public Resources:
“The international tax architecture needs to continue to be more inclusive and the voices of all countries need to be part of discussions on setting new tax norms. It is in the global interest to seek a consensus, but it needs to reflect the realities and priorities of different countries. It is critical to pay attention to the potential impact on small and poor countries, who already lag behind in their ability to raise revenue. Putting the needs and capacities of these countries at the forefront of analysis and decision-making would help create a fairer international tax system and advance sustainable development.”