To be able to provide essential services such as hospitals and schools required by their people, developing country governments need to have the power to collect the taxes they are due from big companies.
Currently, these companies use a whole range of different ways to avoid paying taxes in developing countries – many of them completely legal, even if the act of dodging taxes is entirely unethical.
Transfer mis-pricing and ‘treaty shopping’ amongst unfair tax treaties are two of these tax-dodging methods. These are common loopholes used by companies as we revealed in the case of two British-owned companies dodging taxes in Ghana and Zambia.
But two international forums are trying to tackle this problem. The Organisation for Economic Co-operation and Development (OECD) and the UN Tax Committee are producing guidelines on how to deal with these sorts of practices.
Both of have published model tax treaties that serve as starting points for negotiations between countries. They have also both published guidelines on how to deal with transfer pricing issues.
Different options on the table
Earlier this week I was in New York to attend events organised by the UN Tax Committee. At one of these, the committee formally released its new Practical Transfer Pricing Manual for Developing Countries.
This manual largely conforms to OECD transfer pricing guidelines – which committee members went out of their way to stress several times. But it is significant because it includes four case studies of the transfer pricing practices in Brazil, India, China and South Africa – each of which differs in certain ways, large and small, from the OECD model – showing that a variety of options are available.
While the manual stops short of endorsing any of these alternatives, the fact that it acknowledges that these are viable possibilities that are working in different parts of the developing world is important.
Historically, the OECD has been seen as the main place where this sort of work takes place. But this is massively unfair to developing countries, as they aren’t represented there.
The OECD is a club of 34 of the wealthiest countries in the world.
The UN Tax Committee, on the other hand, is part of the UN’s Economic and Social Council, which is open to all 193 UN member states.
It's an expert group consisting of members from 10 OECD countries and 15 non-OECD countries so it’s much more likely to take developing country needs into account. In fact, at the core of the committee’s mandate is that it will ‘give special attention to developing countries and economies in transition’ in dealing with international taxation matters.
Unfortunately, the committee’s status as an ‘expert group’ rather than a full intergovernmental body means that it is severely lacking in resources and authority. Members act as experts in their personal capacity, without the formal ability to represent their countries.
For the UN Tax Committee to truly provide a viable alternative to the OECD, it will need more resources and probably more formal standing.
With its membership due to change in October when a new group of experts selected by the UN Secretary General take their seats, the question is will the UN Tax Committee emerge as a stronger force in the fight against tax dodging?