Lower-Income Countries’ Ongoing Quest for International Tax Justice: A Case Study of the OECD’s Tax Allocation Proposal

The viability of our international tax system hinges on two things: (1) safeguarding the effective flow of international activities and (2) ensuring that countries can adequately collect tax on the income derived from those activities. Each of these fundamentals relies on a defensible/fair allocation of taxing rights between countries with competing tax jurisdiction (inter-nation equity).

The recent Organisation for Economic Co-operation and Development (OECD)-led multilateral effort to transform international tax rules to ensure that countries can adequately tax multinational enterprises (MNEs) operating in the global digital economy (OECD proposal) has reignited inter-nation equity conversations. Although important to all countries, inter-nation equity is a special consideration for lower-income countries because of: (1) pre-existing perceptions that the subsisting regime is skewed against them; (2) their greater reliance on corporate taxation, including of MNEs, and (3) their limited capacity to give up taxing rights.

This article examines the OECD proposal from an inter-nation equity perspective. We contend that the deal does not adequately address the inter-nation equity concerns of lower-income countries. We, however, conclude that the path to a stable and fair outcome lies in adjusting aspects of the deal rather than invoking alternatives – e.g., withholding taxes on gross revenue – that may further distort international business. While this article focuses on the consequences of the OECD proposal for lower-income countries, higher-income countries (like Canada) are parties to the arrangements. So, Canada has a stake in the conversations and could experience negative distortions to international activities if inter-nation equity concerns are not adequately addressed.