Do the BRICS present a challenge to the governance of international tax?

For campaigners, journalists and academics, the more interesting answer to the title question of this post would clearly be “yes”. It’s fascinating to think that we might be living through a paradigm shift in the politics of international tax, with the OECD struggling to maintain its relevance in the face of a more and more divergent position from its most powerful non-members. But is that just wishful thinking?

Certainly, the BRICS continue to make headlines within the international tax community. There’s been a lot of discussion about recent rather personal comments by Michael Danilack, head of the US Internal Revenue Service’s Large Business and International Division, about his Indian opposite number:

What we have, from my perspective, is a policy official who is, as far as I can tell, the competent authority who is advancing a policy agenda that I think most people would say — whether you’re talking about his views on risk or cost-plus or his views on intangible ownership or on location savings — is very controversial.

(short version here)

International Tax Review have an article as part of their BRICS special that talks through some of the issues with plenty of comment from practitioners. Here I’m going to look briefly at the BRICS tax summit communiqué. The institutionalisation of cooperation between the BRICS countries could certainly be seen as the de facto creation of an alternative pole to the OECD. But the question would be, cooperation to what end? I’m going to focus on just one bullet point out of the seven proposed areas of cooperation:

contribute to development of International Standards on International Taxation and Transfer Pricing taking into account the aspirations of developing countries in general and BRICS Countries in particular

Define ‘developing country’

First things first. While the BRICS countries and especially China like to use the rhetoric of ‘developing countries’ in their diplomatic langauge around international tax, their interests and those of low-income countries can’t be expected to coincide all, or even most, of the time. While they may be recipients of foreign investment from OECD members, these countries are in the same position as OECD members towards most developing countries.

Consider the Chinese [pdf] and Indian [pdf] modifications to transfer pricing rules. These are designed to increase the size of the tax base that is allocated to them to tax. While some might be a de facto shifting of the taxing rights from residence to source countries, many are based on the special characteristics of these two countries’ markets, so they may have the effect of sucking in the tax base from everywhere else to India/China, whether more or less economically developed.

The modifications create a risk of double taxation for any business operating in either China or India and another country. Unless this approach becomes embodied in global tax standards, it would be up to their treaty partners to decide whether to leave businesses with double taxation, or to make a downward adjustment in their own tax assessment.For a UK business investing in India, say, the double taxation is probably a price it is willing to pay for access to the unique and growing market. But what about an Indian company considering investment in any number of African countries? Those African countries might come under pressure to cede some of their tax base to match the adjustments made by India.

Which international standards?

The most interesting part of the bullet point I’m considering is what it doesn’t say. It says they will work together to contribute to “International Standards on International Taxation and Transfer Pricing”, but it doesn’t say which ones. The UN and OECD model treaties, for sure, but there is only one document that pretends to be an international standard for transfer pricing, and that’s the OECD guidelines. The UN equivalent is merely a “practical manual”.

Now, several BRICS countries cooperate with the OECD, and are able to enter official observations on its treaties and standards. In practice, if they cooperate with each other, I suspect that they have as much influence as OECD members themselves:  it would be unwise for the OECD to move its transfer pricing standards in a direction that left several BRICS members feeling disenfranchised, because that would create more questions about the role and status of the OECD standards.

So what will the BRICS decide to do? Will they use their influence to push the OECD in the direction that they want on things like location savings, or will they throw their weight behind something else, such as further iterations of the UN manual? Given that Brazil continues to reject the OECD approach outright, is there even a common BRICS agenda? Would a coordinated BRICS approach be more likely to push for plurality, rather than for a specific policy approach?