Delegates talked about how a STTR and other crucial provisions in the upcoming UN Model Double Taxation Convention will support sustainable development objectives.
Enhancing the international tax system for poor nations is a top priority, according to members of the UN Committee of Experts on International Cooperation in Tax Matters, who want to see the sustainable development goals achieved by 2030.
The experts gathered last week, from October 18 to October 21, for their meeting in Geneva.
According to UN Assistant Secretary-General Navid Hanif in New York, committee deliberations must take into account how a STTR and other significant changes like transfer pricing adjustments and environmental levies would effect countries in various phases of development with various tax systems.
"Tax policy solutions should be devised in a way that all countries can easily implement," he added.
He questioned, "So how will draft guidance produced by various subcommittees help developing countries meet their sustainable development goals?"
Regardless of cross-border difficulties, committee members advised residence countries obtain more taxing powers in treaties to defend their business groups.
Members concentrated on strengthening anti-BEPS provisions in the next UN model treaty law, such as a STTR that would let source countries collect group payments with low tax rates.
A director of transactions taxes at EY in London tells ITR that because governments may choose between the STTR offered by the OECD under pillar two and the UN's more comprehensive version, international organizations are similar to service providers.
"The service is achieving government policy objectives… governments should not follow blindly, but they can switch to a different provider when unhappy," he stated.
The UN approach is preferred by many developing countries who want to raise their tax income and achieve important SDGs. In other words, it is believed that these countries' demands are not being met by the OECD's tax structure.
The head of Nigeria's Federal Inland Revenue Service's international tax division, Mathew Olusanya Gbonjubola, stated in Geneva that deliberate efforts must be made to alter international tax principles that grant the greatest taxing authority to developed nations with the greatest concentrations of business headquarters.
"Amid a lot of focus on international cooperation and capacity building, there is important work missing on how the UN's approach [to STTR] will return the tax base to developing countries," he said.
"It is not possible for developing countries to generate sufficient revenues to meet sustainability goals with the present tax rules that are set up to cater to capital-exporting countries," he said.
The UN tax committee is concentrating on crafting a distinct STTR to favor developing countries as the UN's 17 SDGs aim to safeguard the environment and fight illicit financial flows, including tax evasion by multinational organizations.
These countries choose the UN's STTR and other digital tax solutions over the OECD's two-pillar approach because, according to modeling results, the former can generate more tax income.
On October 19, committee members discussed the technical specifics of their STTR. Some committee members suggested that modifications to tax treaties be swiftly accepted through a global instrument created by the UN.
The UN is creating legislation for around 3,000 treaties that adhere to the Model Double Taxation Convention in favor of a larger STTR than the OECD's version to safeguard the tax base in developing countries.
An STTR under the UN treaty model might be built on adjustments similar to those made to the BEPS project, according to Rasmi Ranjan Das, director at the Indian Ministry of Finance, who made the statement in Geneva.
According to him, "there is a lot of support for a broad rule for minimum taxation that is not limited to BEPS concerns, as it would be easier for developing countries to apply."
Das said that because developing countries were unable to engage in all negotiations about the global minimum tax, the scope and context of the UN's STTR varied from those of the OECD's pillar two framework.
Due to corporate turnover criteria of at least €750 million ($738 million), few businesses operating in underdeveloped nations will be covered by the OECD's STTR. However, the UN STTR's purview is currently being examined.
Before countries may implement the rule through treaties, according to some members, private equity exemptions must be included in the STTR, while others are concerned about the possibility of double non-taxation. To present legislation at its next open meeting in March 2023, the committee is now writing it.
"I think we are again creating a trap for developing countries by trying to add exemptions that have little to do with them and forcing reciprocal benefits, which we must avoid," added Das.
Members of the UN committee writing the STTR stated that it is critical for poor nations to have a fast-change mechanism for treaties, similar to the multilateral instrument at the OECD.
"More than 3,000 treaties have been signed… If we introduce an STTR into the model, it might take endless time to get it negotiated," Das said.
To enhance tax systems, the UN tax committee is entrusted with developing recommendations for states, tax authorities, and taxpayers. Some experts disagree, however, and argue that the committee should not rush the process of including STTR in international agreements.
Stephanie Smith, a senior director at the Canadian Department of Finance, expressed her worries about the STTR's reach in Geneva.
"My concern with a broad scope is unintended cross-border consequences because it is not easy to understand how the new rules would apply to everything in your own tax system."
Members of the committee are arguing whether resident countries may restore their taxation authority over the STTR if source countries fail to use the privileges granted to them via treaty revisions.
Multinational corporations value the UN's STTR and other technological changes. One administrative issue with a STTR is double non-taxation, which occurs when the headquartered country cedes its right to tax specific cross-border revenue while other countries do not.
According to a tax director for a global retail corporation in London, STTRs are meant to assist source countries in protecting their tax bases, particularly those with weak administrative systems.
"This is relevant for an R&D-intensive company using patent box-type regimes that provide for a lower effective tax rate," she notes.
When two countries fail to target the same cross-border revenue, the committee is creating a provision based on Article 26 of the Nordic agreement to give legal guidelines for managing taxation rights.
Changes to the UN STTR treaty will not have an impact on profit taxes in developing countries. Even if those countries do not completely include that revenue in the tax base or if it is just subject to a small amount of tax in another country, this will still be the case.
However, Pillar Two's STTR only permits countries to charge on specific related party payments when they are subject to a 9% rate or below. Treaty benefits for these intra-group payments are denied.
In Geneva, Yan Xiong, director of treaties at the Chinese State Taxation Administration, stated that she has consistently urged for a comprehensive STTR to concentrate on fixing the remaining BEPS concerns and prevent adverse effects on actual economic activity.
According to her, "In line with that position, I think the UN STTR should apply to all base eroding payments and mobile income between related parties without a cap."
STTR comparisons between the OECD and UN presage more significant shifts in international tax policy. The UN model treaty revisions are becoming more popular among developing countries than OECD-supported alternatives. The UN will now have more international tax authority as a result of this action.
Hanif claimed that the UN tax committee's requests for a STTR demonstrate that developing countries desire greater international negotiations to stop illegal cash flows.
"Whatever comes from those calls, it reflects the yearning for common solutions that are practical, principles-based, and reflect the needs of all countries, especially the least developed," he added.
"This is a difficult balancing act, in technical and diplomatic terms, so whatever the platform or process, an inclusive and sustainable approach is the best hope for success," he continued.
58% of the 93 tax professionals surveyed by the EY director on LinkedIn believe that STTR talks at the OECD should continue. Sources claim that the UN is in the process of overtaking the US as the political organization with the best technical expertise for advancing global tax changes.
A UN convention on aggressive tax planning, according to Alex Cobham, chief executive of the advocacy group Tax Justice Network in London, might change taxation of digital economies across countries.
"It could move rule-making on global tax from the OECD to the UN, finally lifting the grip that former colonial powers have continued to exert over global tax rules," he states.
The two-pillar approach to tax reform proposed by the OECD has drawn criticism for being unnecessarily complicated. According to tax experts, the UN aims to undermine the OECD's dominance over tax policy, which is why the secretary-general of the organization called for more international dialogue.
While the OECD has long dominated tax negotiations, the UN is quickly emerging as a powerful organization to advocate for developing countries in the post-BEPS era.
By fLEXI tEAM