The South Centre participated in the 26th Session of the UN Tax Committee in New York.
The UNTC is a subsidiary body of the UN Economic and Social Council (ECOSOC) made-up of 25 tax expert members, nominated by their respective Governments but acting in their individual capacities. Each member of the UNTC, once appointed by the UN’s Secretary-General, serves a four-year term. The UNTC’s mandate is to provide practical guidance to governments, tax administrators and taxpayers, with the aim of strengthening tax systems and aiding domestic resource mobilisation to finance sustainable development. The UNTC carries out its substantive work through Subcommittees (SCs) on several focus areas. These SCs are mostly led by some members of the UNTC who work with subject-matter experts from academia, the private sector, intergovernmental organisations and governments. The South Centre is a participant in the UNTC’s Subcommittee on Wealth and Solidarity Taxes.
The 26th Session featured critical discussions on a variety of issues, including transfer pricing (TP), taxation of the extractive industry, digitalised and globalised economy taxation issues, UN Model Double Tax Convention (UN MTC), environmental, health, indirect, wealth and solidarity taxes, tax administration, transparency, the relationship between tax, trade, and investment agreements, dispute resolution, the UN Manual for the Negotiation of Bilateral Tax Treaties, and taxation of crypto-assets. Concurrently, the UNTC constantly reflects on the connection between tax and sustainable development goals (SDGs) and how its work impacts the SDGs.
Various SCs presented papers on some of their workstreams for first consideration and comment by the UNTC. Observers, whether attending in person or virtually, were also given an opportunity to provide feedback on the items being discussed.
The SC on TP presented three papers, comprising TP during the COVID-19 Economic Downturn, TP Compliance Assurance – End-to-End Toolkit and TP of Carbon Offsets and Credits. These papers were well received, with wide discussions and suggestions that the SC could take into consideration as it further develops the papers.
The South Centre, in its comments, stated that the paper on TP during the COVID-19 Economic Downturn should include guidance on economic downturns in general, making it more future-facing. Additionally, where possible, the paper should incorporate country-specific experiences on issues such as how advance pricing agreements were administered in light of the COVID-19 economic downturn.
Reiterating the importance of voluntary compliance as important to bridging the gap between taxpayers and the often stretched revenue authority resources in developing countries, as highlighted in the paper on TP Compliance Assurance, the South Centre suggested incorporating a discussion of Cooperative Compliance (CC) programs. These offer an opportunity to reframe the relationship between revenue authorities and taxpayers on the basis of collaboration, transparency, and trust. CC programs have largely been implemented in developed countries, and a substantive discussion in the paper of the developing countries’ perspective would be useful.
The paper on TP of Carbon Offsets and Credits noted that developing countries often offer optimal conditions for carbon abatement activities. The South Centre, in its comments, made reference to the SC’s 23rd Session Paper. In this paper, exploring a move from a function, asset, and risk analysis to a function, risk and market analysis -which would enable the consideration of location-specific advantages (LSAs)- was proposed as a potential workstream. LSAs are widely argued as being relevant to developing countries. The South Centre proposed revisiting the topic of LSAs in the context of the TP of Carbon Offsets paper and generally in the TP context and pointed out that China’s and India’s country practices, as included in the UN Practical Manual on TP for Developing Countries (UN TP Manual), demonstrate that the topic of LSAs warrants further attention.
Taxation of Computer Software
The SC on the UN MTC presented draft proposals on the wording of Article 12 on royalties which aims to expand the definition of the term ‘royalties’ by including “consideration for the use of, or the right to use, any software”. This was a major step forward for developing countries which have made this demand for almost 20 years. The reference to “any software” in place of “computer software” was also progress, thereby implying that “software” under Article 12 will have a broader scope.
The South Centre, in its comments, proposed that the words “for the purposes of using it” at the end of subparagraph (c) of paragraph 19 of the Commentary may be deleted so as to expand the scope of the provision to software distributors. In addition, the South Centre recommended that the revised paragraph 3 of Article 12 proposed in paragraph 4 of the paper may be incorporated into the UN MTC at the earliest so as to subsequently speedily implement it through the UN Multilateral Instrument under contemplation.
International Shipping and Air Transport
The SC on the UN MTC also presented a proposed draft of a revision to Article 8 (Alternative B) on international shipping and air transport which aims to provide strengthened source taxing rights in contrast to the status quo of a largely residence-based taxing right. One of the main discussions was whether air transport should be firmly brought within the purview of Article 8 (Alternative B). There were mixed views on this, with one of the main arguments against, being the complexity of the air transport industry and the multiplicity of international agreements that cover the area, such as air transport agreements and their taxation elements. A contrasting view given was that if the shipping industry is covered, there is no reason to exclude air transport. Other interventions suggested to remove alternative A from Article 8 of the UN MTC altogether, and even Article 8 itself from the MTC. The argument was that alternative A which provides exclusive residence taxation effectively resulted in non-taxation of shipping and aircraft companies. The critique of Article 8 as a whole was that by severely limiting source-taxation, it damaged the taxing rights of developing countries who would be better off without such an Article in the UN MTC.
The South Centre, in its comments, supported the developing countries’ position that a workable provision for source-state taxation of income from international traffic under Article 8 of the UN MTC is urgently needed as it would support developing countries in easing their negotiation of bilateral treaties. The South Centre also reiterated the importance of source taxation of the air and international shipping industries. The latter, in particular, has contributed to the increase in the cost of living/inflation crisis through capitalising on supply chain disruptions. Both industries have also benefitted from public-funded bailouts. Furthermore, tax avoidance by the shipping industry has arguably led to overcapacity in the sector, consequently contributing to environmental damage through greenhouse gas emissions and overfishing.
In objecting to the position that sourcing revenue from the air transport and shipping industry is difficult in practice, the South Centre pointed as an example to the detailed revenue sourcing rules under Amount A of Pillar One, which the Organisation for Economic Co-operation and Development (OECD) has developed and that can be seen in Schedule E of the July 2022 Progress Report on Amount A. These provide approaches to sourcing revenue for these industries.
The South Centre also lent its support to the proposal to delete Alternative A in Article 8 altogether, as many shipping companies are registered in tax havens and thus escape taxation entirely.
Finally, in relation to containers, the South Centre stated that since their use is widespread in shipping and air transport and to a large extent their use is inextricably linked to these sectors, any rental income therefrom may be included under Article 8 rather than Article 12 (royalties).
The SC on environmental taxation presented papers on the interaction of carbon taxes and other national measures and carbon border adjustment mechanisms (CBAM) and their impact and relevance for developing countries. The CBAM proposals for discussion elicited some strong views that the SC’s work was possibly legitimising the uptake of such measures, which were viewed with concern by developing countries as they went against the Principle of Common But Differentiated Responsibilities (CBDR) under the Paris Agreement. However, drawing on the UNTC’s mandate, a reminder was made by the SC that part of the UNTC’s work is to ensure that countries, more so developing countries, are well equipped and adequately prepared to tackle emerging issues such as these.
United Nations Model Tax Convention (UN MTC)
The SC on the UN MTC presented a paper for final approval, which proposed to include within the UN MTC a subject-to-tax-rule (STTR) that is broad and goes beyond just addressing base erosion and profit-shifting (BEPS) concerns. The STTR is a treaty-based rule that is aimed at providing the source state with a taxing right over income derived by a resident of other contracting state where the income in question is subject to a low level of tax. The meaning of a low level of tax would be determined through bilateral negotiations. The STTR acts as a secondary taxing right and is intended to deny treaty benefits to income that is subject to low or no taxation in the residence state. The UN STTR is broader in scope when compared to the STTR under the OECD’s Pillar Two in that it is envisioned to apply to any payment in the DTC, to any party and has no cap on the tax rate. This UN STTR was approved and will now form part of the UN MTC.
United Nations Manual for Negotiation of Bilateral Tax Treaties (The Manual)
The update of the Manual takes place periodically. The present update aimed to reflect the substantial changes made to the UN MTC in its 2017 and 2021 updates. The SC on this topic presented a final draft of the Manual for approval. It also presented proposed guidelines on conducting tax treaty negotiation by video conference. These were approved and would be incorporated into the updated version of the Manual.
The Digitalised and Globalised Economy
As part of its continued innovation and ground-breaking work, the UNTC, through its SC on taxation issues related to the digitalised and globalised economy, is working on a multilateral solution akin to the BEPS Multilateral Instrument to implement Article 12B on automated digital services and other articles relevant for developing countries that would allow a faster implementation of the source based rules in the UN MTC. This multilateral solution, called a ‘fast track instrument’ (FTI), would enable the update of multiple tax treaties simultaneously concluded prior to the latest release of the UN MTC. At this stage, the UNTC is focused on suggesting the approach and text for the FTI and thereafter, at an appropriate time, advice would be sought from the UN Secretariat on how the proposed text can be easily transformed into treaty text in light of public international law.
The respective SC’s paper included a revised version of a paper by Philip Baker on the FTI, incorporating feedback from the discussions during the UNTC’S 25th Session. The revised paper was lauded as being innovative and timely. However, various concerns were raised by the developed country UNTC Members on the viability of the proposed FTI, with the main concern being that it is unlikely to gain traction as the UN MTC is not as widely utilised in the bilateral negotiation of tax treaties as the OECD MTC. Another issue raised by them was the seeming complexity of the FTI’s proposed structure. Despite this, the necessity for the work on the FTI was strongly supported by developing countries, agreed upon and will thus continue.
The South Centre, in its comments, welcomed the roll-out of the FTI and suggested that the immediate focus should be the formation of a drafting committee to commence the formulation of the fast track instrument in a coordinated manner. The South Centre also supported the developing countries’ view that political support should not be a precondition for the work on the FTI to proceed, and thus called for the rejection of the suggestion to gauge the support of countries as a precondition for taking the work forward.
The South Centre also supported the inclusion of a revised Article 8 for source-based taxation of income from international shipping and aircraft while opposing the inclusion of the UN model arbitration provisions provided under article 25 (Alternative B) of the 2021 UN MTC into the FTI.
Wealth and Solidarity Taxes
At the commencement of this current membership of the UNTC, the wealth and solidarity SC, on which the South Centre is a member as an international organisation, was constituted with the mandate to prepare a paper giving an overview about the questions that arise when countries consider implementing wealth and/or solidarity taxes.
The SC presented an update on its progress highlighting that it is currently refining the draft of the paper which it aims to present for its consideration during the 27th session. In addition to the paper, the SC is also working on an annex to the paper which will contain legislative elements of a net wealth tax to provide guidance to countries should they elect to implement a wealth tax.
There was discussion on the appropriateness of providing legislative elements and the general consensus was that these would not be prescriptive but rather would be a guide, enabling often resource-strained and low capacity revenue authorities in developing countries seeking to adopt a wealth tax to easily be able to do so. The developing country Members demanded that the guidelines should be eventually translated into a model wealth tax legislation which could be used by interested countries.
As the 26th Session drew to a close, there was consensus by the UNTC to take work forward on the taxation of crypto assets acknowledging their continued proliferation and the need for developing countries to focus on them from a tax perspective.
As in the past, through the South Centre Tax Initiative, the South Centre continues to support the work of the UNTC in various ways, including organising briefings and coordination meetings for the UNTC developing country members.
2023 ECOSOC Special Meeting on International Cooperation in Tax Matters
On the 31st of March 2023, an ECOSOC special meeting on cooperation in tax matters was held. This followed the adoption, on 30 December 2022, of resolution A/RES/77/244 on the promotion of inclusive and effective tax cooperation at the UN and a call for inputs to the Secretary-General’s report on the same.
The first panel discussed promoting inclusive and effective international tax cooperation at the UN. The South Centre in its comments emphasised that based on the inputs submitted by various stakeholders from developing countries, three demands are common. These are that:
there must be an intergovernmental tax body at the UN;
there is a need for a binding multilateral UN Tax Convention which will both undergird such an intergovernmental body and provide the framework of international tax cooperation; and
the Two Pillar Solution in its present form is inadequate and requires review.
The South Centre lent its full support to these developing country demands while reiterating its submission by proposing that the forthcoming UN tax cooperation instrument address the following issues of governance in the international tax system:
the problem of accountability requires urgent resolution. The OECD Inclusive Framework and the Global Forum are not treaty-based organisations and not formally accountable to anyone, including the G20. The proposed UN tax cooperation instrument can bring in an overarching rules-based process through which all existing international tax forums can be held accountable by countries;
the existing method of decision-making by consensus must be eliminated wherever it exists, and replaced by the principle of majority voting; and
setting of a global tax agenda through a genuinely inclusive process taking onboard the views of all countries, both developed and developing, and the subsequent allocation of the agenda in a manner that avoids duplication of efforts.