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SOUTHNEWS

 
No. 297,  8 November 2019

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Developing country tax officials and experts discussed how to strengthen the role of the UN Tax Committee in the face of new challenges


On the sidelines of the XIX Session of the United Nations Committee of Experts on International Cooperation in Tax Matters (UNTC), held on 15th October 2019, the South Centre, in partnership with the International Centre for Tax and Development (ICTD) and the BEPS (Base Erosion and Profit Shifting) Monitoring Group, organized an expert-level peer exchange. This exchange was open to participation by all the developing country Members of the UNTC, the Member States of the Group of 77 (G77) and China as well as experts and developing country officials working with, or nominated by, the South Centre or the ICTD.
 
The aim of the peer exchange discussion was to better inform participants about the meetings of the UNTC and its subcommittees while generating a comprehensive dialogue among the membership of the UNTC, G77+China and all other developing countries. Many issues appearing under the agenda of the UNTC were addressed, particularly the challenges on taxing the digital economy and the modifications of the United Nations Model Convention.


En marge de la XIXe session du Comité d'experts des Nations Unies sur la coopération internationale en matière fiscale, tenue le 15 octobre 2019, le Centre Sud, en partenariat avec le Centre international pour la fiscalité et le développement et le Groupe de suivi BEPS (Érosion de la base d’imposition et transfert des bénéfices), a organisé un échange entre experts. Cet échange était ouvert à tous les pays en développement membres du Comité, aux États membres du Groupe des 77 et à la Chine, ainsi qu’aux experts et représentants des pays en développement travaillant avec le Centre Sud ou le Centre international pour la fiscalité et le développement, ou nommés par eux.
 
L'objectif de cet échange entre pairs était de mieux informer les participants sur les réunions de la Commission et de ses sous-comités tout en suscitant un dialogue approfondi entre les membres de la Commission, le G77 et la Chine et tous les autres pays en développement. De nombreuses questions inscrites à l'ordre du jour du Centre international pour la fiscalité et le développement ont été abordées, en particulier les défis de la taxation de l'économie numérique et les modifications du Modèle de Convention des Nations Unies.


Paralelamente a la XIX Sesión del Comité de Expertos de las Naciones Unidas sobre Cooperación Internacional en Cuestiones de Tributación, celebrada el 15 de octubre de 2019, el Centro del Sur, en colaboración con el Centro Internacional de Impuestos y Desarrollo y el BEPS Monitoring Group, organizó un intercambio de pares a nivel de expertos. Este intercambio estuvo abierto a la participación de todos los países en desarrollo Miembros del UNTC, los Estados Miembros del Grupo de los 77 (G77) y China, así como a expertos y funcionarios de los países en desarrollo que trabajan con el Centro del Sur o el Centro Internacional de Impuestos y Desarrollo o que hubieran sido designados por ellos.

El objetivo del debate sobre el intercambio entre pares fue informar de mejor manera a los participantes sobre las reuniones del UNTC y sus subcomités mientras también se generaba un diálogo amplio entre los miembros del UNTC, G77+China y todos los demás países en desarrollo. Se abordaron muchas cuestiones que figuran en la agenda del UNTC, en particular los desafíos que plantea la imposición de la economía digital y las modificaciones de la Convención Modelo de las Naciones Unidas.


 

On 15th October 2019, on the sidelines of the XIX Session of the United Nations Committee of Experts on International Cooperation in Tax Matters (UNTC), the South Centre, in partnership with the International Centre for Tax and Development (ICTD) and the BEPS (Base Erosion and Profit Shifting) Monitoring Group, organized an expert-level peer exchange in Geneva.
 
The event was conceptualized as a one day expert-level peer exchange open for participation by developing country Members         of the UNTC, Member States of the Group of 77 (G77) and China and experts or developing country officials working with or nominated by the South Centre or the ICTD.
 
The aim of the discussion was to better inform participants about the meetings of the UNTC and its subcommittees and generate a thorough dialogue among United Nations (UN) Tax Committee members, G77+Chinas and developing country experts and tax officials on addressing the different matters discussed under the agenda of the UNTC, in particular the challenges on taxing the digital economy and the modifications of the UN Model Convention.
 
The participants recognized that current tax discussions at the international level have focused on the taxation of the digital economy. Different forums have brought possible ‘solutions’ to the challenges brought by the digital economy. Nonetheless, the Organisation for Economic Co-operation and Development (OECD) has come out with its latest update on Pillar 1, the so-called ‘Unified Approach’, which states that it is combining elements of the three proposals on taxing the digital economy which are by the US, UK and Group of Twenty-Four (G24) respectively.
 
Some of the elements discussed on this matter in different forums focus on considering if this proposal has indeed given enhanced taxing rights to source jurisdictions through redefining nexus and profit allocation rules and whether it has addressed the fundamental problems of the arm’s length method.  Likewise, it is essential to ponder if developing countries’ concerns and interests are effectively reflected in the proposal, or if it will be ineffective, and if so what can be an appropriate response that safeguards their interests in a balanced way.
 
The peer exchange looked at the role of the UNTC in such discussions as a means to address developing countries’ concerns and strengthen expertise to consider other possible solutions and alternatives to the allocation of taxing rights in the digital economy. Some proposals for example have considered re-examining relevant provisions in its own model treaty, notably article 5.3.b for a services permanent establishment, or article 7 on attribution of profits.
 
At the same time, the UN Model Convention is undergoing some significant modifications that would codify rules on some of the most important sources of revenue for the South. There are the proposed changes to Article 13 (Capital gains) which would impact the taxation of offshore indirect transfers of assets other than immovable property situated in the source country. This strikes at the heart of the perennial charade of mergers and acquisitions taking place through tax havens and countries which try to counter this avoidance being taken to investor-state dispute arbitral tribunals.
 
During the peer exchange exercise, experts discussed some of the challenges faced by developing countries in the taxation of the digital economy. Notably, that digital tax is a low hanging fruit because the economy is becoming service oriented, and therefore countries require the design of methodologies that allow them to identify tax liability and allocate profits to those who should bear it while promoting a fair allocation of taxing rights to the country in which profits are made.
 
Some of the participants in the peer exchange mentioned that developing countries could benefit from adopting Article 5.3(b) of the UN Model Tax Convention which states that the provision of services, including consultancy services, qualifies for a Permanent Establishment (PE) and hence it develops a nexus. For them, the interpretation of a group of countries favors the idea that no physical presence is required to allocate taxing rights to the ‘host state’; and therefore, this could be an alternative to the position of the OECD. Nonetheless, other participants considered that the interpretation of provision 5.3(b) brings a lot of debate, particularly on whether it was meant to require physical presence or not, and therefore other alternatives could be developed.
 
Similarly, it was mentioned that the role of the Committee, particularly how it will deal with OECD outcomes and how to propose new alternatives, requires major attention. As a reaction to this concern, it was remarked that the Committee is preparing a chapter on alternative approaches to digital taxation, and that efforts should be kept on that basis for now and that expert views are necessary on this matter.
 
Discussions on the reform process to the UN Model Convention (UNMC) also brought the attention of participants of the peer exchange. The experts examined some of the changes proposed to the definition of beneficial ownership. The Subcommittee on updating the UN Model Convention proposed that the latest OECD Model commentaries on the concept of beneficial ownership be incorporated into the UN Model. The changes also sought to give beneficial ownership a “contextual” meaning that cannot be interpreted with reference to domestic law. The participants discussed the pros and cons of this approach. Another topic involved treaty and domestic law options on taxation of collective investment vehicles (CIVs).
 
Finally, participants in the peer exchange regarded the discussions as useful, particularly the members of the UNTC. They requested the South Centre, ICTD and civil society members to continue providing inputs which would assist their work. Of particular interest were alternative proposals on taxing the digital economy. The South Centre assured the Committee Members of its continued support and enhanced engagement in subsequent tax discussions.
 
The South Centre has developed the Tax Initiative as a methodology intended to develop a peer exchange network, where experts and government officials could exchange their knowledge and expertise to strengthen a ‘community of practice’. Such endeavor is accompanied by capacity building activities and means to amplify the voice of developing countries in the forums responsible for making the rules of international tax. The efforts of the South Centre will focus on providing a ‘megaphone’ to the voice of the South in as many of these forums as possible.


Authors: Abdul Muheet Chowdhary is Senior Programme Officer and Daniel Uribe is Programme Officer of the Sustainable Development and Climate Change (SDCC) Programme of the South Centre. 


For more information on the South Centre Tax Initiative, go to: 
https://taxinitiative.southcentre.int/ 
SOUTHNEWS is an e-newsletter service of the South Centre providing information and news on topical issues from a South perspective.

To view other articles in SouthNews, please click here.

For more information, please contact Anna Bernardo of the South Centre: Email bernardo@southcentre.int, or telephone +41 22 791 80 50.
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