The future of international economic co-operation and development

Tom WickerFriday 20 January 2023

Since it was founded over 60 years ago, the OECD’s remit has developed significantly. Global Insight assesses how the organisation is tackling today’s biggest issues.

The Organisation for Economic Co-Operation and Development (OECD) has come a long way since it was founded in 1961 to encourage trade and economic development, growing from 20 to 38 member states. It carries out its work through committees comprised of government experts, and covers many areas of policy-making, reflecting ever-changing business, social and environmental issues.

Its initiatives have certainly been making an impact. For example, in October 2021, the G20 – comprising 19 countries and the EU – agreed to the OECD’s proposed global minimum corporate tax rate of 15 per cent. This landmark agreement is one aspect of the OECD’s ‘two pillar’ focus on oversight and transparency: a two-pronged effort to tackle what’s known as base erosion and profit shifting (BEPS). It builds on years of work and BEPS recommendations by the OECD’s 38 states, including multilateral reporting agreements.

Grace Perez-Navarro is Director of the OECD’s Centre for Tax Policy and Administration. The implementation of the two-pillar solution ‘will have significant implications [for] the global economy’, she says. Pillar Two is focused on the global minimum tax rate, while Pillar One seeks, in part, to tackle digital profits made in jurisdictions where companies may not be physically based. This agreement, the Inclusive Framework, will reallocate ‘more than $125bn of profits from around 100 of the world’s largest and most profitable multinationals to countries worldwide’. It will build on, says Perez-Navarro, the at least €112bn in additional revenues identified globally through voluntary disclosure programmes and offshore tax investigations ‘launched against the backdrop of the increased transparency and exchange of information’ since the OECD began to focus on tax transparency in 2009.

From Pillar to post

Disagreement on the policy details has however pushed the timeline for a full agreement on Pillar One to mid-2023 and implementation of Pillar Two until 2024 at the earliest. Pillar One’s targeting of digital businesses with market-based taxation – that is, where sales occur – has significant implications for the US business sector, given the country is home to one of the world’s largest concentrations of technology companies. Given this, Reto Heuberger, former Co-Chair of the IBA Taxes Committee and a Zurich-based partner at Homburger, says ‘Pillar One will never come, because the Americans will not accept it. It’s so targeted [towards] the US multinationals – Google, Amazon, you know the names.’

Nonetheless, prior to the proposed Pillar One, an inability to agree on a united approach to the international tax framework resulted in countries implementing bespoke digital services tax (DST) measures. This produced what Joe Duffy, Young Lawyers Programme Officer on the IBA Taxes Committee and a partner at the Dublin-based law firm Matheson, calls ‘something of a trade war’, with countries threatening each other with tariffs. Since then, this has ‘evolved into something more reflective of a ceasefire pending further talks’, he says.

I remain confident that [Pillar One] will be implemented, because the alternative scenario is not appealing for anyone, including US tech companies

Grace Perez-Navarro
Director, OECD’s Centre for Tax Policy and Administration

For her part, Perez-Navarro says that the OECD has ‘made great progress at a technical level’ since October 2021 in terms of Pillar One. ‘I remain confident that we will finalise the package and that it will be implemented, because the alternative scenario is not appealing for anyone, including US tech companies’, she says. This is because the absence of such an agreement, Perez-Navarro explains, is likely to ‘have led to a proliferation of uncoordinated and unilateral tax measures and an increase in damaging tax and trade disputes’. This would have ‘undermined tax certainty and investment and resulted in additional compliance and administration costs. The OECD has estimated that such disputes could reduce global GDP by over one per cent.’

Softly, softly

Ultimately, implementation of the OECD’s Inclusive Framework, as with its other policy proposals or initiatives, depends on the good faith of the member states. It can’t compel countries to adopt its measures or undertake investigations. ‘There will never be an international organisation that will be given enforcement power’, says Nicola Bonucci, a member of the IBA Anti-Corruption Committee Advisory Board and a partner in the Paris office of Paul Hastings’ Global Trade and Investigations and White Collar Defence practices.

Prior to his current role, Bonucci was the OECD’s Director for Legal Affairs. Joining as a legal adviser in 1993, he worked for the organisation for 26 years, moving up the ranks to lead and develop its efforts in the anti-corruption area. ‘The OECD can – and does – put pressure on countries to investigate and prosecute alleged wrongdoing’, he says. ‘But, at the end of the day, there is the basic principle that you cannot really question a prosecutor’s discretion.’

However, if the OECD can’t compel member states to investigate, or adopt its policies, this raises an important question: if, instead, consensus is key, are some OECD member states more ‘equal’ than others? Do bigger, wealthier countries, such as the US, call the shots? This is a concern for Heuberger, who believes ‘the big guy tells the small guy what to do’.

Does this limit what the OECD can achieve? Not according to Perez-Navarro. ‘Its “soft law” enforcement mechanism of peer pressure has proven effective’, she says. ‘For example, all 165 countries and jurisdictions of the Global Forum have committed to the international tax transparency standards and have agreed to be peer reviewed on those standards. The annual follow-up to those reviews shows that the vast majority of jurisdictions are actively working to address the recommendations contained in the peer reviews.’

While Bonucci acknowledges the sway of global leaders such as the US, he says his initial scepticism that the OECD’s monitoring mechanism of member states, when it was first introduced, would become ‘a mutual back-scratching exercise’ was ‘completely wrong’. Now, he believes ‘it is really the great differentiator between the OECD and other institutions. The OECD has managed not only to have countries adopt legislation, but also to change or enact new legislation’. He refers to the UK Bribery Act as a perfect example, arguing that its passage into law was very much the result of OECD pressure.

Grace Perez-Navarro, © Xavier Granet/Task Force on Financial Integrity & Economic Development.

If anything, Bonucci adds, ‘there’s an overreliance on the OECD’s Secretariat to do the dirty job’ by member states, who, he says, could do more to exert pressure on each other when it comes to enforcement. ‘Japan, for example, is one of the OECD’s largest economies, but basically has had no bribery cases since the Anti-Bribery Convention came into force almost 25 years ago. It’s difficult to understand why’, he says. He’d like the other G7 countries – Canada, France, Germany, Italy, the UK and the US – to tell Japan that it needs to do more, ‘or they will make public their unhappiness with its enforcement’.

The quest for better policies

Underpinning the OECD’s tax initiatives – particularly when it comes to ensuring that emerging or poorer jurisdictions receive their fair share of tax profits – is the OECD’s motto of ‘Better Policies for Better Lives’, says Perez-Navarro. She points to the fact that, in the tax area, the OECD regularly works with countries and jurisdictions beyond its 38 members. The Global Forum on Transparency and Exchange of Information for Tax Purposes, for example, brings together 165 jurisdictions to implement international standards of transparency. ‘Importantly, developing countries have identified nearly €30bn’ as a result of tax transparency since 2009, she says. As an illustration, the fourfold increase in exchange-of-information relationships between African tax administrations led to three of the continent’s countries alone identifying nearly €40m in 2021.

However, when it comes to specific initiatives, such as the Inclusive Framework, some experts, such as Kristin Konschnik – a former Treasurer of the IBA Taxes Committee and a founding partner at McLemore Konschnik in London – have expressed scepticism about how much it’ll benefit emerging countries or jurisdictions outside the G20. Konschnik questions if Pillar One is ‘kind of just reallocating income among already well-off European jurisdictions, rather than helping developing countries. You have to question whether, in fact, that was one of the aims – to give them more tax certainty and a level playing field.’

[Is Pillar One] just reallocating income among already well-off European jurisdictions, rather than helping developing countries?

Kristin Konschnik
Former Treasurer, IBA Taxes Committee

For her part, Perez-Navarro flags the fact that the OECD/G20 Inclusive Framework on BEPS includes 70 developing countries, with 90 members of the Global Forum being developing countries. These ‘participate in the Steering Groups of each of these bodies’, she says, and highlights that Marlene Nembhard-Parker of Jamaica was elected co-chair of the OECD/G20 Inclusive Framework on BEPS in early 2022.

Responding to criticism that the Inclusive Framework doesn’t go far enough to support emerging countries, she says that they ‘actively participated in the negotiations’. The ultimate agreement ‘acknowledges their call for more predictable international rules’, she adds, and protects their right to ‘tax certain base-eroding payments (that is, interest and royalties) when they are not taxed up to the minimum rate’.

The OECD has been ‘clever to develop mechanisms that allow non-members to participate in activities in certain sectors without having to become full OECD members’, says Bonucci. This is important because becoming an OECD member is a huge commitment, he explains, which ‘takes a lot of energy and a lot of money. This way, a medium-sized African country, let’s say, can join specific sectors of the OECD that are of particular interest to it.’ Perez-Navarro also highlights that when the Inclusive Framework deal was finally agreed in October 2021, the African Tax Administration Forum published a statement acknowledging the role developing countries had played in the negotiations.

Significantly, the OECD’s broader tax policy serves as a ‘policy lever’ in other areas, says Perez-Navarro. The Committee of Fiscal Affairs, the OECD’s main tax body, ‘covers a broad range of issues including environment and climate change, housing, employment, health, gender and inclusive growth’. While the Inclusive Framework remains the tax committee’s focus, it continues to work in these other areas. In early 2022, it released the first-ever cross-country report on how tax policy can help gender equality. ‘Governments can improve the gender outcomes of taxation by removing over biases and reconsidering tax settings’, Perez-Navarro says. In July, the OECD also published a report on housing, following a sharp rise in house prices, identifying reform options that could enhance ‘the efficiency, equity and revenue potential of housing taxes’.

Interdisciplinary evolution

The OECD’s remit has ‘exploded between the mid-1990s and today’, says Bonucci. By way of example, he highlights that when he started working there, there was no human rights chapter for multinational enterprises. The OECD’s holistic approach to the issues facing the world is one of its major advantages, according to Bonucci. He compares it with other institutions established following the Second World War. ‘Take the United Nations system’, he says. ‘It was very much based on the idea that there would be one organisation that would deal purely with political issues, then a number of specialised bodies that would deal with technical issues, like the World Health Organization or the World Trade Organization.’

But that approach no longer works, says Bonucci. ‘Technical issues can be very political. Is climate change an environmental, economic or social issue? Is it a business or human rights concern?’, he asks. ‘The answer is that it’s all of those. That’s the advantage of the OECD – it’s interdisciplinary.’

There may not currently be an OECD committee specifically focused on the climate crisis, but the organisation is structured to enable, for example, its economic policy, employment and social affairs experts to collaborate on the issue. ‘That’s why the OECD is much better equipped to deal with the biggest challenges of today’s world than the United Nations, which is still very much in silos’, he says.

The often-interrelated challenges facing society and the business world have evolved at a rapid pace in recent decades. Issues that were not previously dealbreakers for a company’s commercial or reputational value are now major concerns. One of the biggest of these is environmental, social and corporate governance (ESG), which embraces everything from human rights to sustainability. This is an area in which the OECD’s Guidelines for Multinational Enterprises are playing an increasingly prominent role – particularly via its National Contact Points (NCPs). These are government-supported offices, required of all OECD members and adhering governments, whose duty is twofold: to raise awareness of the Guidelines among businesses and to provide a grievance mechanism for complaints against companies.

Anna Kirkpatrick is the External Communications Officer for the IBA Business Human Rights Committee and a senior associate at Clifford Chance in London. She acts for corporations on disputes relating to human rights and environmental harms and advises on other forms of dispute resolution, including complaints to NCPs. Since the OECD implemented its due diligence framework in 2011 across its guidelines, she has seen ‘a huge uptick in the number of specific instances being filed before NCPs by NGOs and interested parties and deploying the human rights chapter in particular’. One advantage is that ‘it’s quite a cheap mechanism’, she says. The public nature of these filings also means that, while the NCP can’t enforce rulings, there’s a reputational incentive for companies to address issues.

Since 2019, Kirkpatrick has seen a rise in complaints to NCPs relating to the climate crisis. ‘That becomes quite interesting because there isn’t a real focus in the OECD guidelines on climate change’, she says. ‘So, instead, we’ve seen the deployment of, say, the consumer protection and environment chapters, as well as some disclosure-related commentary, to raise climate-related complaints concerning “greenwashing”.’ This creativity has led to productive outcomes, she says, with some companies agreeing to work with complainants to raise awareness about, for example, cutting emissions within their industry.

Looking ahead, Kirkpatrick says that many of her multinational clients are increasingly keen to know how EU regulations relating to sustainable reporting directives and ESG will connect with the expectations set by the OECD. ‘We’re seeing a drive from the EU to reference back to the OECD’s guidelines for multinational enterprises’, she says, ‘but there’s industry concern because what that precisely entails, particularly in relation to climate, is unclear’.

Whatever the outcome, Kirkpatrick believes this will ‘lend greater significance’ to NCP decisions – despite not being legally binding – in this evolving area. Meanwhile, she notes that a recent stocktake by the OECD identified the need for ‘further clarity’ on disclosure and reporting of business’ climate performance. She sees revision to the guidelines as being on the cards, particularly in respect of the climate crisis, ‘because of the urgency of the issue’.

A coalition for good

As the climate crisis, ESG, human rights and other socioeconomic issues have become more important for investors, non-governmental organisations, government watchdogs and the media, there has been increasing scrutiny of the jurisdictions applying for – and being granted – OECD membership. Some countries wait for years to join, as they seek to benefit from the boost in financial confidence that membership of a body that includes some of the world’s wealthiest and most powerful nations brings. Accession roadmaps have recently been decided for Brazil, Bulgaria, Croatia, Peru and Romania. Each of these countries, says Perez-Navarro, has ‘demonstrated their readiness to become members’. In practice, she says this entails committing to the OECD’s ‘shared values, vision and priorities’. Accession discussions are also underway with Argentina.

Perez-Navarro hopes that the demonstration of compliance with the OECD’s guidelines required of the candidate countries by the accession process will itself contribute to their ‘positive social and economic transformation’. While the ‘roadmap’ includes adherence to the organisation’s guidelines on tax transparency, double taxation, combatting tax crimes and addressing BEPS (including the two-pillar solution), it depends on meeting standards, policies and practices that ‘go well beyond anti-corruption and tax’, says Perez-Navarro. This means engaging with the OECD’s founding principles, such as ‘the preservation of individual liberty, the values of democracy, the rule of law and the protection of human rights’.

In this respect, it’ll be interesting to see if the recent invasion of Brazil’s Congress, presidential palace and Supreme Court by supporters of Jair Bolsonaro, who lost his bid for re-election as the country’s president in October 2022, will have any impact on the decision-making process for Brazil’s accession. The OECD did not reply to Global Insight’s request for comment on these specific events.

The challenge the OECD faces is that it’s a global organisation, but not a universal one

Nicola Bonucci
Member, IBA Anti-Corruption Committee Advisory Board

There are various issues ahead for the OECD, from accession talks, to implementing the Inclusive Framework, to tackling the impact of the evolving digital sector and existential concerns, such as the climate crisis. Moving forward on these will depend upon co-operation between OECD members and those it has developed relationships with. And there are additional considerations globally now. Bonucci, a huge supporter of the OECD’s work, points out, however, that the world has changed significantly in the past 30 years. Countries such as China and India, neither of which are part of the OECD, have become emerging powers in areas such as the climate crisis or the fight against corruption. ‘You can have a binding agreement between OECD members in these areas, but what does it mean if [countries such as these] aren’t on board?’ Against an increasingly complex and fragmented geopolitical backdrop, Bonucci says, ‘the challenge the OECD faces is that it’s a global organisation, but not a universal one’.

In the meantime, the OECD is forging ahead with its aim to be what Perez-Navarro characterises as a ‘coalition of like-minded countries striving to be a force for good in the world’. One of the more significant initiatives to emerge from the OECD’s data-sharing and membership committee-based approach in the past year is its Inclusive Forum on Carbon Mitigation Approaches, launched in June 2022. Supported by the economic, environment and tax directorates, ‘it is our hope that better data and information sharing about the comparative effectiveness of carbon mitigation approaches and the sharing of best practices will inform better decisions around the world’, says Perez-Navarro. The OECD’s supporters, and its critics, will undoubtedly be watching closely.  

Read the Global Insight in-depth interview with Grace Perez-Navarro, Director of the OECD’s Centre for Tax Policy and Administration which you can access here.

Tom Wicker is a freelance journalist and can be contacted at