IBFD director criticizes OECD model in IFA 2022

At an IFA panel, Belema Obuoforibo, the director of the nonprofit IBFD, criticized the OECD's two-pillar solution's policy architecture.

During a panel discussion at the IFA Congress in Berlin today, September 5, the director of the International Bureau of Fiscal Documentation criticized the OECD's worldwide two-pillar scheme, asserting that the starting point of the policy should be the interests of developing nations.

Despite the "promising" claims made by the Inclusive Framework (IF), according to Obuoforibo, pillars one and two may be in jeopardy due to certain missing facts in the status report provided by the OECD in July.

"The underlying policy concern is that in designing the global framework, the starting point is the interest of developing countries. Perhaps there is still some middle ground that policymakers should look into when looking at developing countries," she said.

Developing countries are worried about the first pillar's scope, predicted tax collection volume, withholding taxes, and loss handling.

These nations want a broader scope that includes more jurisdictions and generates more money. According to Obuoforibo, they also favor using Article 12B of the UN Model Convention rather than Amount A of the OECD Model.

Any firm, regardless of size, would be subject to an automated digital services tax under Article 12B of the UN model (DSTs).

Many African nations believe the UN model offers tax administrations and taxpayers a simpler and easier policy, but officials claim this might result in an increase in unilateral DSTs.

Additionally, Obuoforibo drew attention to a few crucial points in the July progress report on pillar one's amount A.

Countries are discussing whether withholding taxes should be taken into account in the policy rule, although Amount A is intended to address the possibility of duplicate counting, in which Amount A is imposed even when a tax has already been administered.

"That’s a big issue. Developing countries reject the idea of including withholding tax. Amount A is also a new taxing right that overlays a taxation system," according to Obuoforibo.

"When a lot of countries signed up to the IF, there was no indication at the time that withholding tax would be taken into account. For it to show up now, it’s causing issues – it calls for further enquiry," she continued.

According to Obuoforibo, the debate over whether or not withholding taxes should be included in Amount A will be "a very serious battleground."

Concerning pillar two, developing countries believe that the agreed-upon minimum rate of 15% is insufficient to provide the full benefits of implementation.

According to Obuoforibo, "many developing countries have rates of between 20% and 25% already."

However, because they are simpler to manage, withholding taxes are also being called for to be increased and leveled in emerging nations.

Obuoforibo asserts that the expansion of withholding tax should not take the place of transfer pricing (TP).

The optimal setup may have a strong TP system that is in line with the arm's-length principle and withholding taxes.

By fLEXI tEAM