International tax in the 21st century: the role of the OECD.

• Author: Ellingsworth, Patrick J.
• Position: Organisation for Economic Co-operation and Development

A vivid lesson of the 21st Century, and particularly of the last 2 months, for commerce and tax is that the world is truly interconnected. For many businesses, cross-border activity is now fundamental and is often seen as the key to their growth. The 2008 meltdown of the financial markets and the precipitous decline in international trade have shown how global all financial markets and commerce generally have become. As domestic governments individually, and in coordination in the G-8, G-20, and other intergovernmental formats, seek means to resuscitate markets and protect them from further collapse, tax policy and administration have been thrust to the forefront of the international political agenda. The Organisation for Economic Co-operation and Development (OECD) has long been the major voice on international tax standards, and it is currently working that G-20 agenda. This work for the G-20 (sometimes referred to as the 'tax haven project'), as well as the changing focus of ongoing tax projects, is part of an ongoing shift in activities and approach by the OECD in order to maintain its strong voice on international tax matters. Whether this work and the manner of its implementation are the best ways to achieve those goals, and whether they will be successful, are open questions.

This article describes the structure and activities of the OECD in the area of international tax and the pressures that it currently faces in carrying out its historical mission of promoting international commerce through, among other measures, reducing and eliminating undue tax burdens on trade. It covers not only the work on the financial crisis, but also describes and assesses the current ongoing OECD Tax projects, how they are organized and their potential effects on business.

Background on the OECD and its Quest for Relevancy in 21st Century

The OECD is an international membership organization of governments, based in Paris that provides an intergovernmental forum for consultation, information, and analysis on global economic and social trends. It grew out of the Marshall Plan for the redevelopment of Europe following World War II and expanded from there into a broader international mission of promoting trade, and carrying out other global economic and social priorities of its member states. The OECD was established in 1961. There are currently 30 member countries, and they provide the organisation's funding pursuant to a formula, based on size of economy. Its annual budget is greater than $300 miilion (US).

The OECD organizes its work and its staff of 2,500 around 20 major areas of interest, or directorates. (1) One of the directorates or departments, indeed one of the largest, works in the area of taxation, the Centre for Tax Policy and Administration (CTPA). The taxation undertakings by the CTPA are governed by a Committee on Fiscal Affairs, consisting of representatives of the member countries. The CTPA is headed by Jeffrey Owens. (2) The CTPA has a secretariat staff of public finance economists, tax lawyers, tax administrators, and other professionals.

The overall OECD is widely known for its statistical and analytical work on economic and social forces around the globe. Its twice-yearly publication, OECD Economic Outlook, for example, is widely regarded as the most comprehensive and objective survey of global economic trends and predictions. Specifically in the area of tax, the CTPA in addition to the work described below relating to technical tax projects, also has a statistical and policy unit that is a very good source of global tax data.

After carrying out its original purposes under the Marshall Plan to rebuild Europe through promotion of trade among other means, the overall OECD has expanded into related challenge areas--all involving international trade, commerce, regulation, and social trends. (3) It has been effective in doing so and has been a major voice and moving force in these areas. The area of international trade and commerce is now crowded with many organizations, such as the United Nations, the World Bank, the International Monetary Fund, and many more global and regional ones. In particular, the advance of the European Union (EU) with its European Commission and its program of legal directives, judicial enforcement of EU treaty provisions and vast expert bureaucracy, is a challenge to the OECD because it has power, within the Union, in many of the specific areas that overall OECD had historically been the leader and major voice.

The OECD is an expertise-based forum for countries, with neither the financial resources nor legislative authority of other international organizations. Thus, the OECD's influence, its creation of value, is through application of its knowledge and expertise and its ability to facilitate and build consensus and common application of policy among its member states. In the 21st Century, it has been challenging for the overall OECD to maintain its strong role and voice in the face of better financed and more powerful players. It is in constant need of demonstrating its value in order to be listened to and invited to policy-decision making forums. The OECD and its Secretary General, Angel Gurria, are working hard to maintain and demonstrate relevance in the context of the current financial crisis that affects all member states and other countries that may become member states.

One way that the overall OECD is addressing the current situation is through its program of potential enlargement so that it has more complete coverage of emerging economies in its membership. The 30 current OECD members produce a large (more than 60 percent of world's GDP) but diminishing portion of economic activity in the world. All members are global trading partners, but several emerging countries are not members, including Brazil, China, India, Indonesia, and Russia. Expansion of membership to meet contemporary objectives has regularly occurred for the OECD in the past. (4) Currently several non-OECD countries have observer status and can participate in the discussions of the OECD, and the OECD has properly made it a priority to enhance its coverage and participation by encouraging countries that are not members to agree to the conditions for membership and become members. That process is currently advancing with Slovenia, Estonia, Israel, Chile, and Russia, each of whom has been invited to apply for membership.

To become members, the countries must agree to certain conditions that are related to the mission, goals, and methodologies of the OECD. (5) In addition, currently there is "enhanced engagement" status designed to increase involvement in the OECD (this may lead to application for membership) by China, India, Indonesia, Brazil, and South Africa.

For tax, the inclusion of these major non-members in the OECD discussion of international tax standards would be good, but what is really needed is adherence to the OECD standards themselves, and that requires real commitment to the process of formulation and debate and building a consensus that all abide by. This may be difficult for some of them, but it is critical for the OECD's relevance and ability to build those commitments and techniques for consensus. In the long run, membership in the OECD by all major tax authorities is best for business; in the short run, there will be difficulties in building consensus on specific positions with so many countries involved, so the formulation and development of standards may get bogged down. Nevertheless, working to enlarge the OECD is the right goal, but it will also require working within the OECD to enhance its skill and capacity to build consensus among the countries.

OECD Tax (including the CTPA) is an apt illustration of the broad pressures on the OECD. The OECD generally, and its Tax directorate specifically, have in the last 50 years been a very effective voice for the economic model that international trade is good in itself, so that techniques to enable trade by removing undue burdens will benefit all participants in the world economy. The relative influence of the OECD in this area, however, is being diluted by other international and inter-governmental organizational voices. For OECD Tax, its two major contributions to international commerce--its Model Income Tax Treaty and the Transfer Pricing Guidelines (incorporating the arm's-length principle)--have helped advance the international trade economic model as well, but like all concepts and models in a changing international context, they need regular updating, renewed consensus, and commitment from all countries and common understanding and clear contemporary applications. Over time, deviations from the standards in actual tax authority practice have become more extensive. The need for a stronger voice for consistency and consensus is apparent.

This background helps explain the recent activities of the OECD and the CTPA, as they work to maintain and establish standards and roles in areas in which they have preeminent expertise and knowledge but not financial resources or authority. In recent months, the OECD has expended much time and personnel on building a stronger role for itself in the current financial crisis and the ensuing economic and political drama, through working the part of the agenda of the G-8 and G-20 that emphasizes transparency, exchange agreements, and other requirements for 'tax havens'. This work has enhanced the OECD position and the CTPA, and has definitely affected their work methods and priorities. Whether it leads to a long-term change in stature and role is uncertain. It is likely that the OECD quest for relevance will need to be constant. Without political authority, its influence is...