South Centre and Indonesia hold inaugural forum for South-South cooperation on tax policy issues

Taxation issues have become more and more a priority issue in the global agenda.  However there is little space for developing countries’ tax officials to discuss and cooperate on tax issues, as a result of which their views are marginalized in the international discussions and decisions.  The South Centre and the Indonesian government organized an inaugural forum on developing country tax policies and cooperation at the end of 2016 with the aim of starting a process of South-South cooperation on tax policy issues.  Below is a report of what happened at this inaugural forum.

By Manuel F. Montes

Altogether 67 delegates, coming from 33 countries, participated in the Inaugural Annual Forum on Developing Country Tax Policies and Cooperation for Agenda 2030 in Surabaya, Indonesia on 30 November to 2 December 2016.  It was organized by the South Centre and the Government of Indonesia.

For the participants, what was at stake was no less than the feasibility of achieving the transformational goals of Agenda 2030. Agenda 2030 calls for the realization of sustainable development everywhere, leaving no one behind.  The ambitious agenda will require that developing countries be leading actors in mobilizing the financial resources.

Officials and experts engaged in the sharing of experiences and ideas on what would be needed to ensure that national authorities would be able to mobilize the financial resources needed for Agenda 2030.  One element present in all the discussions was the issue of how international agenda and processes of tax cooperation could be restructured to sufficiently incorporate the interests of developing countries.

In opening the Forum, Ambassador Abdurrahman Mohammad Fachir, Vice-Minister of Foreign Affairs of Indonesia, called on developing countries to expand their efforts to strengthen their tax laws and administration and to take up the leadership in setting the agenda and tax norms in the international sphere.

Madame Tri Rismaharini, Mayor of Surabaya, welcomed the participants and explained the programs of the city in building infrastructure and expanding critical social services and programs, giving the international tax officials a perspective on the importance of the outcome of their work.

Ambassador Triyono Wibowo, Permanent Representative of the Republic of Indonesia whose Mission in Geneva had worked very hard and closely with the South Centre in organizing the Forum thanked the delegations for participating and encouraged everyone to work hard to have a substantial outcome from the Forum for the benefit of all developing countries and future meetings.

In his message to the Forum, Martin Khor, Executive Director of the South Centre, remarked that the international tax regime is a legacy of colonial trading blocs and outdated.  Developing countries need to be actively involved in the fundamental reforms required, otherwise the resulting system will reinforce the dominant position of developed countries and their multinational companies and sustain obstacles to development.

Dr. Manuel F. Montes, South Centre’s Senior Advisor on Finance and Development, explained that the annual forum is aimed at creating a network with a strong international identity and leading-edge technical capacity among developing country tax officials.  This network will assist tax authorities with  standards of tax cooperation suitable for developing countries.  When in full operation, such a Forum will be held every year, will support working group meetings and efforts toward negotiated outcomes among its members and be supported by a network of tax experts.  Dr. Montes proposed the following three main objectives of the Forum and its associated activities:

(1) To assist country authorities in undertaking better research, upgrading local capacity and in designing effective tax policies for their own countries drawing on lessons and experiences from the developing country context;

(2) to strengthen and better coordinate developing country engagement with and negotiations in international tax cooperation activities such as in the OECD-G20 processes, the UN tax cooperation work, and regional cooperation activities where there are operating fora in Latin America and Africa, but not in Asia; and facilitate mutual action at the regional and global levels; and

(3) To establish international tax cooperation mechanisms among developing country authorities, for arriving at agreed norms and mutual action at the regional and global levels.

Global Tax Norms and the Process of Agenda Setting Internationally and in the South

In the session on “Global Tax Norms and the Process of Agenda Setting Internationally and in the South”, Ms. Kim Jacinto Henares, former Commissioner of the Bureau of Internal Revenue of the Philippines, delineated the challenges and obstacles facing developing country tax authorities in influencing the global agenda on international tax cooperation.  Not being member countries of the OECD, developing countries have experienced many difficulties getting their suggestions and innovations recognized under the G20 Base Erosion and Profit Shifting project – even when these are more appropriate to their circumstances.  The session highlighted the need for developing country officials to begin to develop standards and rules more suitable to their needs and for cooperative work among developing countries in support of their alternatives.

Managing Tax Competition and Investment Incentives: From National to Collaborative Approaches

Providing tax incentives to attract investment is a sovereign right and can be an important part of an effective industrial development toolkit.  However, authorities have to try to ensure that their fiscal costs are justified by the benefits received.

Mr. Astera Primanto Bhakti, Assistant to the Minister of Finance for State Revenue Policy, Indonesia,  presented Indonesia’s highly selective tax incentive system for foreign investors, taking into account that tax benefits are only one and sometimes not the most important consideration for the investment decision.  He also discussed Indonesia’s efforts in regard to minimizing harmful tax practices where the decision to relocate an investment is mainly a function of the tax advantages.   Mr. Thulani Shongwe, Specialist, Multilateral Cooperation, African Tax Administration Forum (ATAF) presented the features of the ATAF Agreement on Mutual Assistance in Tax Matters (AMATM).

The Taxation of Technical Services in Developing Countries

In a session moderated by Muhsin Syihab, Director for Economic Development and Environmental Affairs, Ministry of Foreign Affairs of Indonesia, Mr. Ignatius Mvula, Assistant Director at the Zambia Revenue Authority, presented (via Skype) the motivation behind and the main features of the United Nations’ Committee of Experts on International Cooperation in Tax Matters’  proposed new approach to the taxation of technical services.  Developing countries are highly disadvantaged by the conventional treatment that services transacted between related foreign entities do not create a taxable base unless these have the features of a “permanent establishment.”  The proposed UN approach seeks to amend the tax treatment consistent with the principle that foreign corporations are subject to tax where the economic activity takes place.  Because trade in services is an increasingly major component of the international economy, overcoming this development obstacle is urgent.

Mutual Administrative Assistance and Evolving Tax Architecture

Jahanzeb Akhtar, Commissioner of Income Tax, Ministry of Finance of India,  presented on the deficiencies, power and technical imbalances, and practical constraints in the area of mutual administrative assistance, exchange of information, and country by country reporting. The role of developing countries in these international efforts have evolved from exclusion to “half-hearted” consultation, to current efforts toward a multilateral system of country-by-country reporting.  These proposals are undermined by issues of the legitimacy of a developed country-led project and non-reciprocity in practice.  There are also material constraints in the cost developing countries have to absorb in developing a data generation method to participate.

Mr. Abdul Gafur, Head of Section for Exchange of Tax Information, Directorate General of Taxes, Ministry of Finance of Indonesia, discussed the operations of the tax intelligence unit and the interest in the Asian region to set up more practical approaches and mechanisms for sharing tax information.

In the breakout group on the topics, the difficulties experienced by specific developing countries in obtaining timely information from developed countries, the prohibitive cost of setting up computer systems to comply with the OECD information standards, an abiding interest among developing countries to set up standards and mechanisms to exchange information emerged.

Transfer Pricing: How Can Developing Countries Cooperate on the Issue?

Argentine economist Veronica Grondona, Advisor on Tax Justice, Panama Papers Inquiry Committee, European Parliament, reviewed Argentina’s record of utilizing an alternative method of examining transfer pricing actions among related companies, including the experiences in applying the standard OECD methods.  Argentina’s so-called “sixth method” involves using prices observed in commodity markets to set transfer pricing benchmarks as opposed to the OECD method of transaction-by-transaction use of “comparables” as a benchmark.

Dr. Vinay Kumar Singh, Director of the FT&TR-I, Central Board of Direct Taxation, Dept. of Revenue, Ministry of Finance of India, presented on the principles and their implications in the practice of India’s transfer pricing approach.  He emphasized that a reliance on an OECD approach involves judgment and discretion on the part of both authorities and taxpayers since methodology does not generate a single price as a benchmark.  The application of a functions, assets, and risks (FAR) analysis is inadequate because it ignores demand side factors behind price determination. Dr. Singh proposed that developing countries consider further work toward an internationally accepted method of profit attribution and an effort toward a broad consensus among them.

Mr. Achmad Amin, Deputy Director for Prevention and Settlement of International Taxation Disputes, Directorate General of Taxes, Ministry of Finance of Indonesia, discussed the challenges Indonesian authorities faced using standard transfer pricing approaches.  Particularly in the case of intangibles, the identification of the “comparable uncontrolled price” can be difficult.  Mr. Amin explained Indonesia’s rule-of-thumb approach in monitoring intellectual property charges.  He highlighted the potential and challenges of collaboration among developing countries in transfer pricing methodology with the onset of country-by-country reporting.

Tax Treaties, Allocating Taxing Rights, and E-commerce: A Challenge to South-South Cooperation

Mr. Gunawan Pribadi, Head of International Tax Policy, Centre for Revenue Policy, Fiscal Policy Agency, Ministry of Finance, Indonesia, moderated this session ,which started by examining the role of tax treaties.  Mr. Alvin Mosioma, Director, Tax Justice Network – Africa highlighted how many developing countries are “giving away” their taxing rights under tax treaties, particularly those that follow OECD principles.  This kind of problem would arise even when the treaty is between two developing countries; Mr. Mosioma gave an example of a court case initiated by his organization which questions whether such treaties should be allowed to come into force if they undermine the public interest.

Mr. Asrifal Hardi Rangkuti, Head of Planning and Evaluating of Intelligence Operation, Directorate General of Taxes, Ministry of Finance of Indonesia  presented on the challenges of e-commerce.  Developing countries need to invest in upgrading their capabilities, undertake domestic legal reforms, and be active in international discussions to avoid being disadvantaged by the growth of e-commerce.  Mr. Rangkuti outlined Indonesia’s step-by-step approach to defining the area and the policy changes required.  Overall, the challenge of effective taxation consists of three topics: (1) identification of e-commerce players, (2) determination of taxing rights, and (3) design of taxing mechanisms.

Tax Havens and Illicit Financial Flows: From National Efforts to International Cooperation 

Mr. Tri Purnajaya, Director of Trade, Industry, Investment, and Intellectual Property Rights, Ministry of Foreign Affairs of Indonesia, moderated a lively session on tax havens and how developing countries can cooperate to become active players in shaping the standards and the rules, instead of leaving it to developed countries.

Mr. Alexandre Akio Lage Martins, Tax Auditor, International Taxation Division Government Unit, Federal Tax Unit, Ministry of Finance, Brazil, presented the long-standing Brazilian system in classifying particular tax jurisdictions as tax havens and treating transactions between Brazil and these jurisdictions differently, including imposing a higher withholding tax.  The Brazilian system is a transparent system based on evolving (since 1996) legislation and administrative procedures which draw on Brazilian experience and on international analyses (including the work on harmful tax practices effort in the OECD in the late 1990s).  For example, it has an effective definition of “substantial economic activity” of a corporation in its residence jurisdiction when it has the appropriate operational capacity (qualified employees, physical facilities) to fulfill its objectives.  The categorization is thus not based on politics or participation in a forum, such as that involved in determining non-cooperative jurisdictions under the OECD.  Developing country participants also expressed the possibility that the current EU intention to create a tax havens list could result in non-EU members being categorized as such while EU members are exempt from evaluation.

Ms. María Carola Iñiguez Zambrano, Undersecretary of International and Subregional Organizations of the Ministry of Foreign Affairs and Human Mobility of Ecuador, responsible for the presentation of the Ecuadorian proposal on tax justice in the multilateral system, spoke about Ecuador’s agenda in tax cooperation and efforts in the UN General Assembly.  Ecuador will seek the UN’s expanded involvement in combatting illicit financial flows and in decision-making on tax cooperation at the intergovernmental level. Ecuador’s view is that raising the participation of developing countries and ensuring their access to setting the international agenda in tax cooperation is a matter of good governance and justice in line with achievement of Agenda 2030 and leaving no one behind.

Dra. Lorena Freire Guerrero, Undersecretary for Tax Compliance, Internal Revenue Service, Ministry of Finance, Ecuador, discussed her government’s efforts in combatting illicit flows in and out of the country.  Ecuador has a well-articulated tax haven regulatory framework, including listing of jurisdictions considered to be tax havens.

Expanding South-South Tax Cooperation in the Coming 12 Months

Mr. Toufiq Islam Shatil, Counsellor, Permanent Mission of Bangladesh in Geneva, outlined the challenges in international tax cooperation in discharging commitments from the financing for development outcome and in the work programme of the UNCTAD as articulated in the outcome of UNCTAD XIV in Nairobi.

As Ecuador assumes the presidency of the G77 and China in 2017, Ms. María Carola Iñiguez Zambrano, Undersecretary of International and Subregional Organizations of the Ministry of Foreign Affairs and Human Mobility of Ecuador called on developing countries to work together and invest time and resources to take the lead in international tax cooperation and to ensure that the more representative body of the UN becomes the venue for this effort.

Closing Session and Major Conclusions

Mr. Arko Hananto Budiadi, Director for Socio-Cultural Affairs and International Organizations of Developing Countries, Ministry of Foreign Affairs, Indonesia and Dr. Manuel Montes of the South Centre moderated the closing session. Among the key aspects of the inaugural forum that were highlighted in the final session were the following:

1. The Forum covered many issues of interest to developing countries but there were other issues, such as the tax treatment of extractive industries and in services, which were not covered in detail. Consideration should be given to collaborative work before the next Forum and the next Forum can be devoted to these issues not adequately covered.
2. For the topics that were actually included in the Forum, there is a need to expand collaboration and cooperation among developing country tax authorities to undertake research and publication (particularly on actual country cases and experience) and in sharing of analyses and practices, possibly through exchange of visits or small meetings at the regional level. The South Centre can facilitate these activities.
3. Experts and officials that were involved and served as presenters in the inaugural Forum could be encouraged and supported to visit other developing countries to share their knowledge and experience. The South Centre can facilitate these activities.
4. There is solid support to continue the Forum as a venue for the intergovernmental discussions of tax policy and cooperation among developing country officials. It should draw on expertise of interest to these officials including from academics and civil society analysts, as was the case in the inaugural Forum.
5. While there was a broad regional representation in the Forum, there is a need to continue to expand and diversify the number of developing country participants and experts.
6. In the future, to save costs, middle income countries could fund their delegations and the funds for the Forum can be for LDC participants.
7. A big debt of gratitude is owed to the Government of Indonesia, including the mission in Geneva, for the extensive support and the investment of staff time in organizing the Forum. A big debt is also owed to the City of Surabaya for generously hosting the welcome dinner and the memorable cultural show.
8. There was a strong spirit of South-South solidarity during the Forum and, as it ended, participants looked forward to expanded cooperation and collaboration.

Manuel F. Montes is Senior Advisor on Finance and Development of the South Centre.