International Regime Theory in OECD/G20 Inclusive Framework on BEPS

On 14th July 2022 in Bali, Indonesian Ministry of Finance was hosting the G20 Ministerial Tax Symposium intended to discuss regarding international tax challenges and the role of government especially from the members of G20 and their related ministry with the help of Organisation of Economic Co-operation and Development (OECD). On this event Indonesia emphasized the importance of developing nations participation in designing framework for international tax standard and implementing Base Erosion and Profit Shifting (BEPS) Actions. Thus, the benefit could be obtained effectively from the initiative made from OECD.

The referred initiative by OECD is initiative with 137 countries and jurisdictions, not only the members of the two institutions, were agreed in October 2021 under the OECD/G20 Inclusive Framework on BEPS. It is a tax planning framework consisting two pillars introduced by the OECD to target gaps and inconsistencies in tax legislation, which mean large multinationals underpay or avoid paying tax. Pillar One involves a new taxation methodology aimed at digitised companies and consumer-serving organisations that trade or communicate with customers through a digital format. Revenues generated from consumers in one country or from consumer data extracted from that country will be subject to tax regardless of whether the organisation has a physical presence in the jurisdiction.

On the other hand, The Pillar Two model rules in the initiative provide governments a precise template for taking forward the two-pillar solution to address the tax challenges arising from digitalisation and globalisation of the economy. The rules define the scope and set out the mechanism for the so-called Global Anti-Base Erosion (GloBE) rules under Pillar Two, which will introduce a global minimum corporate tax rate set at 15%. The minimum tax will apply to Multinational Entreprises (MNEs) with revenue above USD 805 million or IDR 12 trillion and is estimated to generate around USD 150 billion in additional global tax revenues annually. The GloBE rules provide for a coordinated system of taxation intended to ensure large MNE groups pay this minimum level of tax on income arising in each of the jurisdictions in which they operate. The rules create a “top-up tax” to be applied on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15% rate.

The OECD/G20 Inclusive Framework on BEPS Initiative might become a suitable example of International Regimes. By definition, Krasner defines regimes as “implicit or explicit principles, norms, rules, and decision-making procedures around which actor’s expectations converge in a given area of international relations.  Principles are beliefs of fact, causation, and rectitude. Norms are standards of behavior defined in terms of rights and obligations. Rules are specific prescriptions or proscriptions for action. Decision-making procedures are prevailing practices for making and implementing collective choice. In the initiative, the two pillars are the rules that guiding signees of initiative on regulating tax especially on MNEs in order to counter Tax Base Erosion and coordinate the effective minimum level of tax as communal expectations. Then, this initiative might be observed from two main perspective if states counted as rational actors, neorealist and neoliberalist.

Neorealists believe regimes are created and sustained by powerful actors (power determined in relation to the issue area at stake) and that regimes should “decline” when the founding hegemon declines and power shifts. That only the presence of an outstanding economic and political power which had the capacity (and the willingness) to lead and could make the group of states who participate in the world economy or a “privileged group” by supplying and supporting the infrastructure” (i.e. rulemaking and rule enforcement) for the regime.

In OECD Initiative incorporated with G20, it is clearly displayed that “privileged group” are the top 20 world economic powers collaborated with institution whose most of its member are more developed than most of the rest of the world including most of signee of the initiative itself. These privileged groups are facilitating the regime and set the agenda for the international tax standard regarding Base Erosion and Profit Shifting (BEPS) measures, Exchange of Information  and Two Pillar of International Tax Package. This perspective might look the regime as overpowered and manipulated regime, but without these privileged groups, there would be no power to “order” and “discipline” international system or might be called as anarchic state in context of taxation because most nations have their own national interest in taxes and could compete to the bottom for it, resulting for double taxation, regulation shopping, etc.

Meanwhile in Neoliberalist perspective, Regime theories in this tradition start by envisioning “instrumentally rational actors” that the states pursuing self-interest and reciprocal benefits. Essentially, “the basic challenge for states is to overcome market failures and international regimes are a device for overcoming market failure.” Market failure here describes a situation in which states may not reach their optimal outcome which is an agreement, because of some problems in the market structure (e.g., information, monitoring). If the states can act cooperatively they may achieve outcomes superior to the suboptimal outcomes of their individual uncoordinated behavior.

The other view might look OECD/G20 Initiative as an attempt of countries, mainly OECD/G20 members in order to overcome market failures. Market failures in this context are double taxation, tax evasion, regulation shopping etc. that detrimental to states finances and its people. Therefore, nations having an/some agreement(s) which is the initiative to coordinated their national interest in order they get benefit from the coordinated market or in this context are international tax system. With this view, every state expecting a reciprocal behavior and result from each other rather than order and discipline deployed by “privileged group” highlighted from neorealist.

In conclusion, international relations with international regime theory could be applied in many aspects of life either directly or indirectly including taxation matters. International regime in this context might be referred to Initiative of OECD/G20 Inclusive Framework on BEPS that filling the gap and guiding its signee regarding on regulating MNEs tax on their jurisdiction to counter tax avoidance. The regime itself might be viewed mainly into two perspectives which are neorealist and neoliberalist if states were counted as rational actors. Neorealist view that the initiative made by OECD and G20 as tool for ordering the anarchic state of international tax in this context regarding or unregulated state of Tax Base Erosion between countries. Meanwhile Neoliberalist view that the initiative as tool for coordinating the market or international economy to counter market failure which is failed to regulate tax avoidance by MNEs or unregulated state.

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