How The OECD Inclusive Framework Shaped A New World Tax Order

Tax Notes’ Robert Goulder, Nana Ama Sarfo, and Stephanie Soong Johnston discuss the OECD’s inclusive framework — how it came into existence and where it’s headed in the future.

This transcript has been edited for length and clarity.

Robert Goulder: Welcome to the latest edition of “In the Pages.” This month’s featured article is titled, “A New World Tax Order: The Inclusive Framework and Its Future.” Its coauthors are with us; Nana Ama Sarfo, a contributing editor with Tax Notes, and Stephanie Soong Johnston, chief correspondent with Tax Notes. Ladies, welcome.

Out of curiosity, when did you start working on this article?

Nana Ama Sarfo: We started in May. From May through November we did a lot of research, speaking to many different people to get a grasp on exactly what the framework is and what the stakeholders really thought of the process.

Robert Goulder: The article references a date: October 8, 2021. That’s when the OECD secured high-level political commitment for the pillar one and pillar two proposals. In historical terms, is the tax community overestimating or underestimating the importance of the inclusive framework?

Stephanie Soong Johnston: There’s often a tendency to get overly excited about things, but in this case it seems deserved. I’ve been covering this subject for about 10 years now. The inclusive framework is significant because it’s really the first time that so many countries got together and managed to agree on something so controversial as taxing rights. These are key concepts that non-governmental organizations have been calling for some of these concepts for years, decades even.

The fact that nearly 140 countries overcame their differences to reach an agreement, that’s a remarkable achievement. The only other time I can think of when countries got together in this kind of format is the Global Forum on Tax Transparency and Exchange Information for tax purposes.

Robert Goulder: Let’s talk about the formation of the inclusive framework. It got started in 2016, but the final [base erosion and profit-shifting] reports were released in late 2015, less than a year earlier. How do we get from those BEPS reports to the inclusive framework? Why didn’t somebody say, “Hey, BEPS was enough. We’ve already done this. Let’s call it a day and go home?”

Nana Ama Sarfo: You’re right; that didn’t happen. To provide a bit of background on the BEPS project, it was a joint initiative between the OECD and the G-20. The final reports you mentioned were just one part of the package, because after the reports were published the next phase was implementation. That phase has a long tail; it’s still ongoing today.

The OECD and G-20 decided that out of those 15 action items, four areas were to become minimum standards. The OECD felt that to adequately address BEPS, as many countries as possible needed to sign on to the project and implement the minimum standards.

The problem was that most of the world was not involved in the BEPS process. You had G-20 members who were not OECD countries and had to pay a fee and receive a special status to participate in the BEPS negotiations, as we highlighted in our article. Then also, some developing countries and observer organizations like the African Tax Administration Forum (ATAF) were allowed to observe the negotiations and provide some input.

Ultimately, what ruled was the opinion of the OECD and G-20 countries. In that light, the OECD couldn’t then say that it wants the entire world to impose these BEPS standards without giving them some sort of buy-in. The place where it could give other countries a say was on implementation, and that’s how the inclusive framework came to be.

Robert Goulder: The OECD is ending the year on a high point. But the project was a long, rough road. What was the low point?

Stephanie Soong Johnston: I was thinking about what Pascal Saint-Amans said during a recent conference . . . that the “safe harbor” proposal the Treasury Department put forth was a poison pill to the negotiations.

It brought everything to a halt. Why would a country agree to a solution for taxing digital companies when the multinationals that will be in-scope could just opt out? That was a low point because it threatened to derail the whole negotiation. That was a big obstacle.

Then the Biden administration came in. They’re credited with unlocking the blockage by proposing the comprehensive scoping idea. That got rid of the need to distinguish between automated digital services companies and consumer facing business companies.

The original idea for pillar one was to target just those companies, but the question is how you distinguish between companies that are in-scope and which aren’t. That would lead to a lot of lobbying, hair pulling, and tantrums. The comprehensive scoping idea that Treasury put forth was instrumental in unlocking progress.

Nana Ama Sarfo: This may be an unpopular opinion, but I actually thought the OECD’s July 1st statement on the preliminary agreement was a bit of a low point.

We saw there were some holdouts. Kenya and Nigeria declined to sign that agreement, then later we saw that they also declined to sign onto the final deal, period.

When Kenya and Nigeria decided to abstain, it definitely raised some questions as to whether other countries might splinter off. That’s when we saw that there was disagreement and coming from some big economies.

Robert Goulder: You refer to the inclusive framework as a grand experiment in multilateralism. Is it ironic that this occurred at a time when many unilateral impulses push in the opposite direction?

Stephanie Soong Johnston: This all goes back to a concept the OECD has pushed called the “tax paradox.” It’s where multilateralism is essential for countries to retain their own tax sovereignty. They must cooperate with other countries in order to protect their own interests. It’s paradoxical, but I think it’s true. That’s the driving force of the inclusive framework. I wonder, too, whether the pandemic has pushed multilateralism to a positive outcome. It shows how interconnected we all are.

Nana Ama Sarfo: I think the whole inclusive framework process really showed how people can arrive at the same conclusion through different avenues.

You had the United States deciding to engage in the latter stages because it wanted to limit unilateral digital services taxes. Meanwhile, the initial distinction the OECD wanted to make between digital companies and non-digital companies didn’t seem to work because many multinationals have both business models.

It would’ve been really confusing to figure out if the new tax rules applied. Here we saw Treasury simplify the process, so that it applies to the top 100 companies globally.

On the other hand, we had growing numbers of countries in the European Union and elsewhere adopt their own unilateral digital services taxes, and the U.S. decided it was going to impose sanctions on countries with DSTs. For those countries, it made sense to engage multilaterally so they could reach some sort of agreement with the U.S.

Robert Goulder: If you look at the composition of the inclusive framework, it more or less parallels what we have in other bodies, such as the World Bank, the IMF, or the United Nations. The world already had institutions available to take on this project, yet it chose not to use them. Why was that?

Nana Ama Sarfo: It’s important to look at the make-up and mandate of those other institutions. For example, there have been insistent calls for global tax policymaking to be relocated to the U.N. That’s because the U.N. is open to all countries, whereas the OECD has now, what, 38 member countries?

The U.N. does have its own tax body, the U.N. Tax Committee, but the committee doesn’t reflect the wider UN membership. There are only 25 experts, or so, who sit on the committee — they serve in their own capacity to specifically address the tax concerns of developing countries.

The IMF cares about tax because it’s involved in lending to countries, and it has an interest in monitoring economic and fiscal policies. The World Bank is devoted to assisting low-income and middle-income countries. Given the very specific work they do, it wouldn’t make sense to relocate international tax policymaking to those bodies.

The one place where, I guess, it would make sense would be the U.N. But that idea has not gotten off the ground. There are a lot of political conflicts at play there.

Stephanie Soong Johnston: Even if responsibility for standard-setting were transferred to the U.N., countries would still run into the same political problems as the inclusive framework. Changing the venue might not have dispelled any of those challenges.

Robert Goulder: Thinking about the BRIC (Brazil, Russia, India, and China) or developing economies, which will be affected by pillar 1 and pillar 2, was the framework inclusive enough, from their perspective?

Stephanie Soong Johnston: Many of those nations are part of the G-20. If you look at them — India, China, and even Argentina — they had a strong say in what direction the project went and what rules were set.

But the tension was still there. Carlos Prado was Argentina’s key delegate and he told us the OECD deal was not ideal. He has publicly stated that this is not the best deal ever, but it’s probably better than no deal at all.

Robert Goulder: What about the African nations? How well were they served by all of this?

Nana Ama Sarfo: Your feeling that the African countries felt like they got some concessions, but not as many as they would have liked — I think that is definitely correct.

We saw that South Africa was heavily involved; Senegal was heavily involved; Nigeria was heavily involved. Some of them did take ownership in the process. Some representatives from African countries were reflected on the inclusive framework steering group. That shows they had an opportunity to shape the outcome of the process.

On top of that, some people told us they felt as though African countries were represented twice. That’s because they were represented through their own home governments, then they were also represented through ATAF.

ATAF was cited by several people we spoke to as an inspirational model within these negotiations. ATAF serves multiple roles. It attends these international meetings to brief its members as to what’s happening.

But what’s more unique is that ATAF formulates one organization-wide policy approach. They enter these negotiations as a bloc, saying this is what we, the members of ATAF, would like. That’s important from a regional perspective. It also gives some of the smaller members a feeling that their input has heavier weight. 

Robert Goulder: What about Ghana? My understanding is that it had a peculiar status. What was going on?

Nana Ama Sarfo: Ghana is an interesting story. Most countries that belong to the Global Forum also belong to the inclusive framework, but Ghana only belongs to the Global Forum.

In the early 2000s the country was thinking about starting an international financial services center. When that became publicized, they were approached by the OECD to see if they were interested in ensuring that their international standards were in line with general transparency standards. So that’s how Ghana joined the Global Forum.

Concurrently with that, Ghana was also participating in the OECD’s capacity building programs. Through that, and the U.N. Tax Committee, Ghana had a pretty strong picture of what it would need to do to bring its general international tax standards in line with the global standards. So when the OECD inclusive framework came into the picture, Ghana realized that it didn’t have the capacity to follow the requirements of both programs.

That’s what led Ghana to decide that it would just focus on the Global Forum and not on the inclusive framework so much. It’s an interesting story in that the capacity training provided by the OECD essentially empowered Ghana to say, “Thanks, but we’re going to sit this one out.” I think that was a fair decision for them to make.

Robert Goulder: Have any nations dropped out of the inclusive framework?

Stephanie Soong Johnston: Yes. Bangladesh and Eritrea were initially part of the inclusive framework. They left for reasons unknown. We have not been able to contact them.

Robert Goulder: You write that that inclusive framework encountered some growing pains operationally, apart from all the political challenges. Can you tell us about these growing pains?

Stephanie Soong Johnston: Language was a big issue. The OECD operates on both English and French, but most countries speak other languages. There were some problems with translating documents and conducting interviews in native languages. There was a lag between the meetings and the outcomes.

The pandemic was also a challenge. Normally, when things happen in-person, much of the progress really happens during coffee breaks or in hallways outside of the formal plenary meetings. I think the pandemic had a big effect there. And even before the pandemic, it costs a lot of money for the delegates to attend meetings in Paris. Resource constraints were an issue for some of the delegates we talked to.

Nana Ama Sarfo: To add to what Stephanie said, getting political buy-in from leaders was also a challenge for inclusive framework delegates. You have these tax experts, they’re in Paris or they’re meeting virtually, and they understand what the challenges are. But then they need to go back to their home governments and explain the case for why their countries need to sign up to pillars one and two.

In some cases, the developing countries were able to make that case. In other cases, their political leaders weren’t as involved so they weren’t able to make that case. That was another area people flagged as important.

In terms of these challenges, including the ones that Stephanie mentioned, the inclusive framework hasn’t overcome all of them yet — but they’re looking at ways to address them. We see that in the developing countries’ report the inclusive framework released in October.

The thing to say is, just stay tuned.

Robert Goulder: The article mentions an exchange with a U.K. tax official, Mike Williams, who was very close to this project. He asked whether it’s enough that we develop new tax rules and apply them only to OECD members. He answers his own question, saying that maybe such a thing would have flown years ago, but not in 2021.

What does that say about the future? Are we ever going see another project where the OECD performs as a solo act?

Nana Ama Sarfo: I absolutely agree. The OECD, from here on out, could not operate within its own little bubble. The quote Mike gave us was profound. It illuminates the path for the OECD moving forward.

We see that with the planned implementation for pillars one and two, in the fact it’s focused so heavily on developing countries. That shows how important the OECD thinks that that block of countries is.

In terms of whatever other projects the OECD has on the table, I think it has set precedent. If it’s going to engage in anything on a large scale, it now realizes that it cannot just rely on OECD membership.

Stephanie Soong Johnston: Right. And developing countries also now have a taste for multilateral cooperation on corporate tax matters. It would be really hard, once we’ve given them this opportunity, to take it back. I think that’s never going happen. The fact that the inclusive framework’s mandate has been renewed to at least 2024, and perhaps it will be extended further.

We spoke recently with an OECD official who said they’re still working with the four holdouts. They’re still involved; they’re still engaged. They’re also talking to other countries that didn’t join the inclusive framework at the outset, to see if they’re interested in joining during the second phase.

The genie is out of the bottle, you can’t stuff it back in.

Robert Goulder: What does the inclusive framework do for an encore? Once the OECD has built out this new process, it seems rather wasteful to shut it down. There must be some kind of a desire to build on the momentum. What are your thoughts?

Nana Ama Sarfo: There’s absolutely an impulse to keep it moving. The inclusive framework is going to have its hands full just in terms of implementing and monitoring. That takes a lot of time, effort, and care to make sure those new rules are working as they should. Based on that alone, I don’t think the inclusive framework is going away anytime soon.

Stephanie Soong Johnston: I might add one thing, to build on what Ama said. The OECD produced a report for the G-20 about developing countries and the benefits they’re getting from the inclusive framework.

In that report, it suggested there could be other topics that the framework could tackle in the future — one of them was carbon pricing, which is a controversial topic itself.

There has been talk from the OECD Secretary-General Mathias Cormann to adapt the inclusive framework structure to tackle carbon pricing. Saint-Amans mentioned recently that this inclusive framework for carbon pricing will be separate from the one we’re talking about now.

We’ll see what happens with that in the future.

Robert Goulder: That’s all for this episode. Thank you for joining us and thank you for watching.