ON October 5th, the OECD came out with its final set of recommendations capping a two year long marathon effort at changing the current rules of international taxation aimed at preventing base erosion and profit shifting (BEPS) by multinationals.

The OECD BEPS project arose as a result of the public outcry in Western Europe against the all-pervasive tax avoidance by the multinationals. The companies that stood out in particular are of course mostly American, Google, Starbucks, Amazon, and Caterpillar etc. The present financial crisis that is with us for more than 8 years now had its origin in the sub-prime mortgage crisis in the USA and the collapse of Lehman Brothers. But, it is the European countries that suffered the most because of its ripple effects. Social security has traditionally been higher in the European countries. Citizens of these countries saw massive cuts in welfare schemes by their governments that were starved of revenue. Collections from corporate taxes declined and people became aware of various dodgy schemes adopted by multinationals to minimize their tax obligations in these markets. It thus became politically imperative for these governments to take concerted action against such tax dodging. It is these developments that are at the origin of the much talked about BEPS project of the OECD.

The BEPS project now is known as the G-20/OECD project. This is because of the fact that although the OECD initiated the project, it was strongly endorsed by the G-20 that later tasked the OECD to come up with an action plan and then submit its recommendations. In this context, it will be instructive to have an idea of the relationship between the OECD and the G-20.

Starting in the 70s and till the 90s, it was always a group of 6/7 countries [USA, UK, Germany, France, Italy, Japan and Canada] that used to meet informally and set the agenda for international economic reforms. However, the rise of the emerging economies, particularly of the BRICS meant that any coordinated action would lack legitimacy unless these countries that now represent a sizeable portion of international trade and commerce were on board. Therefore, in 1999, at the initiative of the USA and Canada, it was decided to form the G-20 at the level of the Finance Ministers and Central Bank Governors, initially to deal with the Asian Financial crisis. Following the global financial crisis of 2008, the G-20 was elevated to the level of the leaders to deal with the issue more effectively.

As was the case with G-7 and G-8 (and with the expulsion of Russia- G-7 again), G-20 does not have a permanent secretariat and depends on other international organizations for inputs. Since all G-7 members were also members of the OECD, it was natural for G-7 to use the immense expertise and knowledge of the OECD in various areas including in the area of taxation. The same practice has continued with the G-20. In the process, OECD's work acquires added legitimacy. However, even though the OECD has also expanded its membership and has an enhanced engagement program with most of the non-OECD G-20 members, questions have been raised about the role of the OECD, particularly in the area of taxation both by some of the non-OECD G-20 members as also by some non-G-20 OECD members.

Be that as it may, at the first summit level meeting of G-20 in 2008 that was dealing with the banking crisis, the leaders encouraged the OECD to continue its work in the area of bank secrecy and exchange of information. The OECD then came up with the Global Forum on Exchange of Information. Then in 2012, following the continued exposure in the UK and also in the USA about the various aggressive tax planning techniques adopted by the MNCs, in the 2012 summit at Los Cabos, the G-20 leaders expressed concern about the base erosion and extended support to the OECD's work in this area.

At this stage, it is worth recalling that coordinated efforts at synchronizing international taxation were made for the first time only after the First World War under the aegis of the League of Nations. As all students of history know, one of the prime movers for the formation of the League was the then American President Woodrow Wilson but the American internal politics ensured that the country could not join the organization. As am interesting aside, India, at that time although not self-governing, was given the original membership of the League in recognition of its contribution to the World war-I and apparently, that is one of the reasons why the US Congress did not ratify the Covenant of the League. It is a different matter that most of the representatives from India at the League were British civil servants and a few Maharajas.

The tax work at the League that started in 1921 was however certainly dominated by the Americans. The main concern, post WWI was devising ways to avoid double taxation and the League in 1927 produced draft bilateral conventions that although not complete in every respect, influenced the future bilateral tax treaties. The League had also established a permanent Fiscal Committee in 1929.

After the Second World War, it is the OECD that took over the work of the League of Nations and first produced a draft model in 1963 and a model in 1978. Countries willing to enter into tax treaties willy-nilly had to use the OECD Model.

In the meantime, the decolonization process world over led to the birth of the developing countries. These countries needed foreign investments and technologies. Conventional wisdom was that in order to attract foreign investment, it was necessary to enter into double tax avoidance agreements. These countries soon realized that by entering into tax treaties based on the OECD Model, they were losing disproportionate share of revenue. It was this realization that prompted the formation of the tax committee under the United Nations to develop a model suitable for being used by the developing countries. Despite some voices to the contrary, the committee decided to begin with the existing OECD Model and consequently, the experts from the OECD countries and also from the OECD secretariat heavily influenced the work of the tax committee. The developing countries did raise important issues mainly relating to the loss of revenue and as a result, the UN Model, although not very different from the OECD Model did give some additional rights to the developing countries. Ever since the coming into being of the UN Model there has been a tension about the legitimacy of the OECD as the sole arbiter of the world tax order.

Consequently, there have been persistent attempts by international business to harmonize the two models. The 2011 UN Model update made serious attempts in this regard, particularly in the area of the definition of permanent establishment and allocation of profits thereto. This was strongly resisted by the developing countries. The 2011 exercise also brought out the differences in the perception of Brazil, India, China and South Africa and the OECD in the area of transfer pricing when the practices of Brazil, China and India were separately stated in the UN practical manual on transfer pricing.

It is in this context that the current OECD BEPS work has to be seen. BEPS was an opportunity for the OECD to regain its preeminence. But to be truly the international tax arbiter, it had to shed the tag of being the club of the rich. That's the reason why certain developing countries had to be taken on board. The G-20 developing countries were apparently on board on "an equal footing". Towards the end of the project, 14 additional developing countries were subsequently invited to attend the BEPS meetings: Albania, Azerbaijan, Bangladesh, Croatia, Georgia, Jamaica, Kenya, Morocco, Nigeria, Peru, Philippines, Senegal, Tunisia, and Vietnam.

Civil Society groups, particularly the Tax Justice Network and some commentators have pointed out that the developing country participation in the project has been minimal. "More than 100 countries were never invited to the decision making meetings. They were invited to send comments to public hearings, participate in regional consultations, etc. But they were never invited to any decision making. Now, when all the BEPS decisions have been made, the OECD is considering setting up a Global Forum to ensure that all countries in the world are invited to follow the rules that OECD have adopted on "an equal footing". In this context, TJN uses the following comparison: "If I lived in a country where a small group of rich people made the rules and decisions, and afterwards announced that all people in the country were welcome to participate on an equal footing in following the rules (and risk getting sanctioned if we didn't), I wouldn't say I was living in a democracy."  [http://www.taxjustice.net/2015/09/23/developing-countries-and-beps-an-equal-footing/]

In fact, civil society groups pressed very hard for a greater role for the United Nations and convert the group of experts into an intergovernmental body thereby ensuring a greater role for it in the area of international taxation. At the 3 rd international conference on financing for development at Addis Ababa that took place in July 2015, there was a proposal from the developing countries to this effect but the USA, the EU countries and Japan shot it down. [Source: http://qz.com/455059/rich-countries-rejected-an-international-plan-to-let-the-un-help-fight-tax-evasion/]

At the plenary, the Indian Minister of State for Finance, Mr. Jayant Sinha stated: "In today's interconnected world, tax policy is a global public good, with ramifications far beyond national borders. We cannot expect countries to generate more tax revenues while stopping short of reforming international cooperation on tax matters.

Greater information exchange is good, but not a substitute for genuine and equitable multilateralism in deciding global norms and standards on taxation.

If this is truly a universal agenda, then all of us must have an equal seat at the table to legislate on global issues. The lack of an ambitious decision on upgrading the UN Committee of Experts on international cooperation on tax matters into an intergovernmental body, in our view, is a historic missed opportunity."

(https://pminewyork.org/adminpart/uploadpdf/69163FFD%203%20stmnt%20Addis%20July%2015,%202015.pdf)

OECD is at pains to point out that G-20 and developing countries participated in the project on an equal footing. From an Indian perspective, it is true that Indian delegates participated enthusiastically in various groups and perhaps shaped the outcome of the final documents to an extent, particularly in the area of digital economy, artificial avoidance of PE, transfer pricing and compulsory arbitration. However, it is interesting to note that there was some politics here also as is evident from the Finance Ministry's Annual Report for 2014-15.

It transpires that during the G20 meeting, India and some other non-OECD G20 countries raised an issue that the base erosion and profit shifting being a global concern the recommendations should be developed through global consensus and not by the OECD countries alone. It was then agreed that all the eight non-OECD G20 countries viz., Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia and South Africa would participate in the project on an equal footing. Accordingly, the OECD modified its rules and made a formal offer for being an "Associate" and India accepted the same through the acceptance letter dated 31st July 2013.

OECD's Committee on Fiscal Affairs has a Bureau consisting of 12 members to oversee the progress of the Project. With the participation of the G-20, the Bureau was expanded to "Bureau Plus" for the BEPS Project and 3 out of 8 non-OECD G20 countries were to be inducted in the Bureau Plus through a process of election. Initially, China, Brazil and South Africa were elected.

It is not surprising that India, at that time the most vocal among developing countries to challenge the suzerainty of the OECD got left out. Recall that in 2013 the Joint Secretary (FT&TR-1) had written a letter to the UN ECOSOC that said: "[I]t is inconceivable as to how a standard developed by [the] Government [sic] of only 34 countries can be accepted by Government [sic] of other countries as [the] 'standard' of sharing of revenue on international transactions between source and resident country [sic] particularly when it only take [sic] care of the interest of developed countries and has seriously restricted the taxing powers of source country [sic]."

Things have obviously changed since. The Finance Ministry annual report mentions that with the active intervention of the MEA, India ensured that Indonesia supported India, resulting in a tie and that the OECD was thereafter persuaded to include 4 non-OECD G20 countries in the Bureau Plus on account of their large economies - India, Brazil, China and South Africa.

Apart from the politics involving developing countries and the civil society and business interest groups, the BEPS project also saw the more important politics involving the USA and its transatlantic partners. As Lee Shepherd has pointed out,BEPS is not about developing countries. It is an effort by the European governments to force American multinationals to pay some tax in these jurisdictions. It is also interesting to note the public spat between the Americans and the British over the BEPS project. At an international conference, on 10th June, 2015, the U.S. Treasury Deputy Assistant Secretary for International Tax Affairs Robert Stack apparently said: "the U.S. is extremely disappointed in the output, and our collective failure in the BEPS project to do more, and to do better work than we have done." BEPS seemed to be motivated by politics and a drive for revenue, and not necessarily by a desire for a better international tax system. He is stated to have remarked: "Do the international tax rules even matter anymore? Do we really need a standard setter to say, 'Tax administrators can use the pornography test to catch tax avoidance. We know it when we see it. And we will get you if we want to.'?" (U.S and U.K delegates differ on their evaluation of BEPS project- Kevin A. Bell)

The Americans are particularly miffed by the unilateral actions taken by the UK and Australia relating to the diverted Profits Tax (UK - 'Diversion' to tax digital economy; India: More loyal than the King). However Mike Williams, Director of Business and International Tax with HMRC said U.K. tax policy "is determined by the U.K. government and Parliament, consistent with our international obligations." [http://www.bna.com/us-uk-oecd-n17179927592/]

Amidst all these public spats, it seems that at least about one action point-the country-by-country reporting- there is strong support, at least officially on the part of both the Americans and the British. The country by country reporting is of course a victory for the civil society groups, particularly of the Tax Justice Network that first mooted the idea almost a decade ago. Although the civil society is still not completely satisfied with the end result in that it has been decided that the CBCR will not be made public and thus the general public including scholars and researchers will not have access to the information as to where exactly the MNCs park their profits, still it has been hailed as a big step in helping the tax administrators to know the facts in brief and then exchange the information on a reciprocal basis.

While some of the BEPS action plan proposals will definitely help both the developing countries and the developed countries in protecting their tax base, intense politics also played out in respect of action point 14 relating to compulsory arbitration. Although nothing to do with the BEPS as such, it was included in the action points at the insistence of the big business that said that due to the change in the international tax architecture, there will inevitably be more conflicts with the revenue administrations and there must be some way for resolving such conflicts in a time bound manner. Thus the idea of compulsory arbitration was mooted. It may be noted that the OECD in its 2010 Model had already incorporated the compulsory arbitration clause in the MAP article 25. This has been roundly rejected by all the developing countries. But, the OECD persisted with its recommendation. There was also an attempt to incorporate the clause in the 2011 UN Model update as well. But this did not succeed due to the strong resistance from the developing countries. The UN Model therefore contains two alternatives- Alternative A without the compulsory arbitration clause and alternative B for those countries that choose to adopt the same with a compulsory arbitration clause that nevertheless differed in some respects from the OECD model.

Action point 14 of the OECD action plan again proposed compulsory arbitration. This has again been rejected by the developing countries. Instead, what has been agreed is a minimum standard with respect to the resolution of treaty related disputes and the establishment of a peer review mechanism that will report compliance to the G-20 through the OECD CFA. The OECD report mentions that 20 countries have also committed to provide for compulsory binding arbitration in their tax treaties. These countries are: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States. Interestingly, the list does not contain even a single developing country and even some members of the OECD like Chile, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Iceland, Israel,Korea, Mexico,Portugal, Slovak Republic, Slovenia, Spain and Turkey are also not on board.

These are then some of the politics involved in the BEPS project. But that does not detract from the merit of the reports, which are highly sophisticated and technical documents. The specialists and experts at the OECD Centre for Tax Policy and Administration need to be complimented not only for the excellent reports but also for sticking to the time schedule that at one point seemed unachievable. Whether the end product is suitable for the developing countries or indeed is implementable there is of course a different matter altogether.