David Stewart 0:02

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: the unOECD. With an increasingly digital and evolving global economy, governments and international bodies have been forced to look for a way to update the international tax system for the 21st century. Although much of this work has been driven recently by the OECD and its inclusive framework, other groups such as the United Nations Tax Committee have begun to emerge as prominent participants. Here to talk more about the U.N. Tax Committee is Tax Notes contributing editor Nana Ama Sarfo. Ama, welcome back to the podcast.

Nana Ama Sarfo 1:36

Thanks, Dave. It's great to be back.

David Stewart 1:38

Now I understand you recently spoke with someone about the role of the U.N. Tax Committee in the international tax world and how it can be a better advocate for developing countries. Can you tell us about your guest?

Nana Ama Sarfo 1:48

I spoke with Abdul Muheet Chowdhary and he is a senior program officer with the South Centre Tax Initiative. So the South Centre is a Geneva-based NGO of developing countries, and Abdul's work focuses on international tax cooperation and policy, so helping developing countries with international tax capacity building and then also helping them navigate multilateral discussions. So he is very well acquainted with the work of the U.N. Tax Committee, which addresses the international tax needs of developing countries.

David Stewart 2:18

Alright, can you tell us a bit about what you two talked about?

Nana Ama Sarfo 2:20

Well, this is a really interesting and pivotal time for the U.N. Tax Committee. It's about to elect new members and they will start around the same time that the OECD is expected to reach an agreement on BEPS 2.0. So Abdul in response wrote a really insightful article on how the U.N. Tax Committee can become more effective for developing countries. And in our conversation, he expanded on some of the concerns that he highlighted in the article. So he discussed the need for transparency and how members and the agenda are selected. And he offered some suggestions on how the committee can expand its resources and build a really robust secretariat and make the most of its members' expertise. He also explained what is that stake here for developing countries if things don't change. And of course I had to ask him what kind of relationship does he think the U.N. Tax Committee should have with the OECD moving forward.

David Stewart 3:14

All right, let's go to that interview.

Nana Ama Sarfo 3:18

Abdul, thank you so much for joining us on the podcast.

Abdul Muheet Chowdhary 3:21

Thank you for having me.

Nana Ama Sarfo 3:22

So this is a really important time for the international tax world, especially with international tax reform and COVID-19 recovery. And it's also an important time for the U.N. Tax Committee, particularly since the current session is winding down and countries are nominating new members. And so the new committee will be weighing in on these issues. So I'm hoping that you can describe for our listeners, those who aren't familiar with the U.N. Tax Committee, two things. First, the tax committee's mandate, and then secondly, the tax committee's makeup . So how many members are selected? How long are their terms? How is the membership of countries determined? And how is reappointment to the committee determined?

Abdul Muheet Chowdhary 4:07

So the mandate of the committee, which by the way, is a part of the U.N. Economic and Social Council (ECOSOC). It is basically to first and foremost take care of this document called the U.N. Model Tax Convention between developed and developing countries. And this is used as a basis for negotiating bilateral tax treaties and provides an alternative approach to the OECD's model tax convention. And the two are quite similar, but in some important ways, they're quite different. And it's quite important for developing countries. For example, the rights of source countries are more prominently emphasized in the U.N. Model Tax Convention as opposed to the OECD convention, which gives more primacy to the countries of residence. Then another document, which the tax committee — so by the way the tax committee has a very long name. It's U.N. Committee of Experts on International Cooperation in Tax Matters, but usually it's informally referred to as the U.N. Tax Committee. So another document which it looks at is the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries. And then this is what is mentioned in the mandate. So the tax committee actually has gone through various other [avatars], various forms, and earlier it was called an ad hoc group of experts. So the resolution which upgraded it from the ad hoc group into what it currently is, it specified this mandate. So these two documents are mentioned in the mandate, but over time the committee has produced other documents as well. So they have this transfer pricing manual and they have come out with this handbook on issues in the extractive sector. So they keep coming out with the documents which are of interest to developing countries, in particular in international tax matters. And this is actually part of their mandate that when looking at issues of interest in international tax cooperation, it has to give special emphasis to the issues of least developed countries and developing countries and economies in transition . That's one thing. Another set of issues which the tax committee looks at is capacity building and providing technical assistance, and in general looking at any other issues which come up. So in recent times they've branched out into environmental taxation after the Sustainable Development Goals (SDGs) were passed in 2015, tax and its relationship to the SDGs. So new and emerging issues as they come up. So this is the mandate of the tax committee broadly. Then the other question which you had was about the makeup of the committee. So the committee is made up of members who very importantly are acting in their expert capacity. So these are not country delegates. These are not representatives, but rather these are experts acting in their individual capacity. So there are 25 members. They serve a term for four years, and it's not very clear as to how exactly the mix of countries is determined. So if you see the previous ad hoc group, which was the predecessor to the current tax committee, it mentioned that there should be 10 developed countries and 15 developing countries and economies in transition. And if you look at the current committee, depending on your interpretation, you can broadly argue that there are 15 to 16 developing countries and 10 or nine developed countries, though it's not very clear again who is a developing country and who is a developed country. For example, a country like Singapore. It's a part of the Group of 77 officially, but then again, so in that sense it would count itself as a developing country. In the World Trade Organization they call themselves a developing country, but in reality many of the positions they take are in the interests of the developed countries. So there are some ambiguities like that actually. So this is the numerical mix, but which countries actually get to be decided that is not very clear. And that is something which in fact needs some transparency. You had asked something about reappointment, but before coming to that, I think it would also be interesting to see what is the procedure because what is happening now is that there's a nomination for new members. So countries would make the nominations and the appointment is made by the secretary general "officially" in consultation with the member states. But again, the process is not very clear and this is something which needs some transparency actually. So that because it's a very important process and to be able to understand how that works, it's very important that it's transparent. But my understanding so far is that broadly, the secretariat takes a call or gives its assessment based on the nomination which is has received. These then go to the undersecretary general of the Department of Economic and Social Affairs. And from there, it then goes to the security general. But again, this to my knowledge is not clearly documented and it would be welcome to have some transparency in this regard .

Nana Ama Sarfo 8:52

I see. So following up on your concerns about transparency, as you had mentioned, a new committee is about to be selected. I believe they will start work in July. And so briefly what are your concerns about the tax committee as it currently operates?

Abdul Muheet Chowdhary 9:10

So in the article, which was published by Tax Notes, I had outlined these concerns and I will very briefly summarize them once again and add a couple of points which I didn't mention in the article actually. So the first point is that when countries are nominating experts, especially for developing countries, it's very important that they nominate the best candidates possible because these are then going to set, in a way, international standards or shape international standards in tax . So there are no criteria or guidelines at present. For example, it's not necessary that the nominees should have domain knowledge of international tax. Almost all of the members of the tax committee are with the tax departments. But if there are some criteria or some guidelines that the candidate should have some domain knowledge of especially tax treaties or issues like transfer pricing or exchange of information, and they will have the support of the tax administration, then that would be very helpful. Because when these members are nominated, then this again ties up to the issue of the committee being an expert body. They are sort of working on their own, and this is especially the case for developing countries. But if some sort of criteria could be there that when you nominate somebody, then the tax administration should also support them in their work, then this would really make it much more helpful so that especially for members from developing countries so that they can do their best with the support of the tax administration. Then another issue is that the agenda is decided with limited input from the members because you have a new nomination, you have a new set of members , and then the secretariat puts forward the agenda and the sort of yes or no. But they don't really have a very substantive inputs into how exactly the agenda will be crafted. And this is another issue which has been raised in this, in the 21st session we just ended that the inputs of U.N. member states should be solicited when deciding the agenda. And this is very important, so the way the agenda is decided is another issue. Then the staffing of the secretariat is an issue because we see that there is a preponderance of staff from OECD countries. And some of them are even actually from the OECD, former OECD officials. This is a big problem because, I mean it's in practice ... it's very difficult to let go of that ideological baggage which you have. And especially given that the committee has a mandate to give special interest to developing countries and economies in transition, least developed countries. These then obviously will be issues which are of interest to source countries and somebody from the OECD who their whole life has spent fighting for the rights of residence countries or developed countries. It's not very practical to expect them to suddenly turn around and start being very concerned about the developing countries. Then another issue is that reappointment, which you had mentioned previously, is not very clear on what basis is somebody being reappointed. And this again is a process which needs some transparency. So these are some of the issues which I mentioned in the article, but another issue which I wanted to actually share is that some of the committee members, especially those who are from the developed countries, they are wearing two hats. So to have members of the U.N. Tax Committee who are wearing two hats, who are chairs or co-chairs of working parties in the OECD's inclusive framework and are also office bearers in the U.N. Tax Committee will create some tension. If these people are also coordinators of a subcommittee or co-chairs of a subcommittee in the U.N. system, and also co-chairs or chairs of a working party in the OECD inclusive framework, that creates a sort of tension. And in a way it's actually like a conflict of interest. So this is something which should be avoided. If a member is there, then they should have only one clear responsibility. Either you'll be a coordinator of a U.N. subcommittee or a co-chair of a U.N. tax committee or body, or you be within the OECD inclusive framework system. But having both ... where it results in a system where ideas of one are being transplanted into the other and usually it's a one-way flow of information. So this is also something which is a problem actually and which should be avoided in the U.N. Tax Committee.

Nana Ama Sarfo 13:22

I see. What you've unpacked there I think really drives at the heart at some potentially substantial changes within the tax committee if they are addressed as you are advocating for. Now as you had also explained in your piece, I mean, the U.N. Tax Committee has issued so many valuable resources for developing countries. Right now it is working on its own digital tax proposal, a very well-known model treaty provision that addresses automated digital services. It's seen as a counterpart to the OECD BEPS 2.0 project, and the committee has done its digital tax work and all of its other work under its mandates with a lack of resources. So can you share the ways in which the tax committee is under-resourced and what resources you think it needs to progress with its work.

Abdul Muheet Chowdhary 14:15

Yeah, so I think we can begin by looking at the staff which are employed to my knowledge. The U.N. Tax Committee has I think about two full-time staff actually, and maybe adding a few more. I don't think it would be more than seven or eight people. And if we contrast that with the OECD's staff in the Centre for Tax Policy, they might have around 150 plus. So that gives you a very concrete idea of the differential between the two institutions and the kind of work that, by implication, both institutions are capable of. And another thing which we can look at is the budget. How much budget is given to the OECD's Centre for Tax Policy and how much funding the U.N. Tax Committee has. There was a trust fund which was set up for the U.N. Tax Committee some years ago. And to my knowledge only one country in the whole world has contributed to it. I think that's India. It's given about $200,000 so far. With that it's of course the committee is doing what it can, but it really gives you an idea. Now this has some practical implications. So the first thing is that the members as mentioned are experts acting in their individual capacity . So this individual capacity phrase can be interpreted in a very literal sense that they're literally doing the work by themselves. And given that they are also tax officials and quite senior at some of them — some of them are even the heads of the revenue service — they have a huge amounts of responsibilities already. So to expect that these members will be able to do this very complex work by themselves is not very easy. And for that, they need some help. But if the tax committee doesn't have that amount of staff or they have not much money to hire consultants, then the amount of help which they can give to the members is also limited, which affects the output. Then the second question comes that even if you have staff, then what kind of staff are those? And as mentioned, a lot of the staff either come from developed countries or OECD countries, which are one and the same, or they come directly from the OECD formally. Now again, as mentioned, if you've spent your whole life fighting for the rights of residence countries, then it's very difficult to do a U-turn and suddenly become concerned about developing countries. So if a member from a developing country is trying to work on an issue and take that issue forward, and the secretariat member they are working with is of completely the different mentality, then it's not very easy to go forward. It would be a tense and harmonious relationship. You would say one thing, but then you would get something which says the opposite of, or at least is not taking your perspective forward. So because of that, some of the developing country members find it difficult to rely extensively on the staff of the secretariat itself. And that was also one of the issues which was raised in my article that the staffing of the secretariat should have more people from developing countries and the developing world. It may be poor and so on, but there is a lot of talent. There are a lot of very eager and enthusiastic and intelligent people who can really be brought into the tax committee and who have a lot to offer actually. People who have been working in tax administrations who have experience in tax treaties, or exchange of information, transfer pricing from the perspective of the interests of source countries. These kinds of staff can and should be brought into the secretariat . And that would actually reduce the load on the developing country members and it would make it easier for them to take the help of the secretariat and produce more work actually. So to summarize once again, first the committee doesn't have all that much money with which — they have limited resources. And secondly, the ones that they do have it's highly OECD or developed country oriented , some of the staff. So that makes it difficult actually for the developing country members to take the agenda forward. Then there's another aspect, which again goes back to the issue of them, of the committee being an expert body and the members acting in their individual capacity. So if you look at the way some revenue administrations are structured, they have entire divisions dealing with the discussions in the inclusive framework [like] the foreign tax division, or the tax treaties division, or whatever it's called. You have entire teams who are following the negotiations in the inclusive framework and were working part 11, six, or whatever. But in the case of the tax committee, that that is not the case because the member is again an expert in their individual capacity. So the governments often feel that, "Oh, this person is acting on their own and they're experts in their individual capacities." So they don't always provide them with support, with an entire team. So this is actually a systemic problem because the committee is not an intergovernmental body. And as some of the listeners may know that the Group of 77 has been demanding for decades that the U.N. Tax Committee should be made into an intergovernmental tax body. And this was raised in a big way in the 2015 Addis Ababa discussion, but it was shot down by the OECD countries. And if this had gone through, then this problem would have been solved. The members who were nominated were would have been nominated in their official capacity and their tax administration could then have said that, "OK, this person is not doing official work." And they could have provided them with a team who would shoulder their responsibility. And this would have helped them, especially those numbers from developing countries to do a much better job actually.

Nana Ama Sarfo 19:47

Wow. So you have offered a really broad array of solutions that the tax committee could rely on to boost its support. So in a world where the U.N. Tax Committee does have more resources and more support, what kinds of work would you like to see the committee tackle?

Abdul Muheet Chowdhary 20:07

The existing mandate of the committee, I think, is broad enough in itself for capacity building and providing model documents and shaping standards. And on this, I think it can just do more better as they say.

Nana Ama Sarfo 21:17

Now you described in your article, I thought very effectively, a series of solutions that the tax committee can implement to become more inclusive and effective. So taking a step back here and looking at the bigger picture, what is at stake if nothing changes within the tax committee? If things remain as they are?

Abdul Muheet Chowdhary 21:37

It's very important question. It's interesting to see that many of the reasons why the tax committee has come into the limelight in recent times is because they have offered a solution to a pressing problem by the initiative of the tax committee on article 12B, which is the proposed solution on automated digital services. And even some of the work, which is being undertaken on taxing software payments as royalties, they have tapped into what is arguably the key discussion in international tax. But this has happened really because of the individual drive of two or three tax committee members at the most. And when the next set of members is chosen, there's no guarantee that you would again have members who are extraordinarily committed to step up and provide this sort of initiative. Because speaking of the digital economy specifically, for the longest time the U.N. Tax Committee's approach was let's see what's happening in the inclusive framework. And let's see, and let's see, and let's see. It was the role of a passive observer actually. But due to the initiative of a few members, this changed and they actually started providing their own perspective. So if these kind of changes are not made through which the tax committee can become more effective, then there's a danger that it would once again relapse into its passive role and it just observes what the OECD is doing. And this would be a very dangerous thing because then the developing countries would have no way to voice their concerns [or to] voice an alternative. It would be reliant upon the OECD solution. I mean, article 12B, all said and done. Even if you look at the most basic question, such as the question of nexus. If you look at the proposal in pillar 1, there is, I think — I mean, in India there are these seven levels of hell in Hindu mythology, after which you finally reach the end you have this bottomless pit of thresholds after which you can finally say that, "OK, this company now is eligible for a nexus." Which would be very, very difficult for most developing tax administrators to administer. And which would severely exclude many, many of the tech giants and the highly digitalized companies. But article 12B, it just says that it has no threshold. The [article 12B] automatically be deemed to arise once the automated digital service has been provided. So this is really the difference when you have a solution which is prepared by developing countries themselves, and when developing countries have to rely on this enormously complicated apparatus within the OECD system. Of course, even in the U.N. Tax Committee there are developed countries as well and their points of view have also been raised on article 12B. But the larger point is that if the U.N. Tax Committee is not reformed and if these changes don't take place, then developing countries would lose a very valuable site to which they can raise their concerns, and this would deprive them of revenue. And we are living in a time when there is so much of economic collapse [and] recession, and it would be really unthinkable. I shudder to think of what would happen to the developing countries if this option is taken away, actually.

Nana Ama Sarfo 24:34

So Abdul, your article points out that the tax committee members can be stretched very thin because they have to juggle their U.N. duties alongside their regular jobs. So what support do you think that member states and the U.N. can provide? I know you already touched a bit on the funding issue, but for example, are secondments a realistic option in this case?

Abdul Muheet Chowdhary 24:58

That's a very good solution . The idea of secondments — and this would be a great idea actually because first one of the implications of that would be that the committee members can be much more focused. And as a result, they could perhaps even have shorter terms instead of a four-year term. It could be a two-year term. They can really be full-time devoted to this. And hopefully the committee would also be able to come up with decisions quicker, which would also be much more helpful. So this is definitely a very practical option. And it's open to question whether that means that the members should come to the U.N. in New York and work there. But I think for a lot of them, another equally interesting option would be that they stay in their own countries and they keep working from there, and they are paid an allowance. But secondments is a very good idea actually. And apart from that, as mentioned, the tax administrations, when the member state is nominating the nominee, then the tax administration can also try to support them to the extent possible by recognizing that the work which they are doing is of course it's in their expert capacity. But to the extent possible that the tax administration can support them so that their workload is reduced. In developing countries that's a bit difficult because usually these departments — international tax divisions — are staffed thin. They have a few people doing a lot of different things, but to the extent possible they could provide them with support would be very welcome .

Nana Ama Sarfo 26:23

I see. And then what about funding for the trust fund that you had mentioned? Do you have any ideas on that?

Abdul Muheet Chowdhary 26:30

It's really unfortunate that only one country has contributed to this so far and more countries, which especially those which are being affected by illicit financial flows, it's in their interest that they come forward and contribute to the trust fund.

Nana Ama Sarfo 26:46

So your article made me think about access and transparency. And I'm wondering if you think if there's room for the tax committee to reform, how it interacts with the public. Is there a room for the committee to be more transparent with the public about the work that it's doing and soliciting feedback?

Abdul Muheet Chowdhary 27:06

Yeah, I think that's definitely — there is a lot of scope as mentioned. Many things, for example how the mix of countries is determined, who is a developing country. As mentioned, Singapore has — if you look at any of the issues which are of interest to developing countries like taxation of offshore and direct transfers or software payments as royalties — Singapore, which is ostensibly a developing country, has really not taken any positions in favor of the developing countries. So which countries are determined and whether they are counted as developed or developing countries, some transparency is needed on this. How the members are appointed specifically, what is the exact process, some transparency on that. How a member is reappointed, then even when it comes to, as you mentioned, the engagement with the public. If you want to see how voting decisions are taken, that's not very clear actually. To my knowledge, you have to go to the reports, the annual log. I don't know what frequency they come out with these reports based on what was discussed. I guess after each session the session reports where they say, "OK, this is how the discussion went, and this is how the voting took place." But it's not very clear for example, which member voted how. That information is not readily available. So how voting takes place, I think that that's something that should be more transparent. And the functioning of the subcommittee as well. I think we see that if you look at the composition of subcommittees , there are huge number of observers and there are enormous amounts of members from the business community. I think, for example, you look at the extractive subcommittee , you have all these oil and gas and mining companies over there. And they are heavily involved in the preparation of the documents which form the basis for subsequent decisions. So again, who gets to be on the subcommittee, how are these observers found out, there should be some transparency on that as well. Then when it comes to engaging with the public directly? Yes, definitely, there should be more time for public consultations. We see often that the turnaround time is not that much. You have, for example, you have an upcoming committee session. Now the agenda is not yet up. So soon we'll see that the agenda will be up and this would be quite close to the actual meeting itself. And then there'll be some time to comment on the documents, but it won't be that much time. And we need some more time actually to comment on documents. Because again for developing countries which don't have a huge tax administration, they would need some time to process and digest the issues which are going on. And this applies even to civil society from the developing world, from the global South. I mean, academics and civil society organizations do need some time actually. So some more time for giving public comments. And then there's the other options. So one is the inputs which would come from the outside, but then how will the committee process it? How will the secretariat process it? I mean, if you look at the inclusive framework for pillar one, they had some 3,000 [or] 4,000 pages of documents from the public, but they also had a staff of 450 people who could digest that information. But if the U.N. Tax Committee is understaffed, then how will they digest that information? So that's the other side of the issue. That because it's under-resourced, the capacity to absorb that public consultation should also be directed .

Nana Ama Sarfo 30:28

Those are all really, really interesting points. But mentioning the OECD and the discrepancy between the secretariat leads me to my final question for you. So right now as we all know the whole world is waiting for the OECD to release its BEPS 2.0 solution. And that process has raised many questions about standard setting. I mean, who should set the rules and why? So as far as collaboration or coexistence with the OECD is concerned, what kind of relationship do you think that the U.N. Tax Committee and the OECD should have with each other?

Abdul Muheet Chowdhary 31:08

Yeah, this is a very interesting question. And there's the U.N. High Level Panel on International Financial Accountability, Transparency and Integrity (FACTI) panel, for example, recently came out with its recommendation that the Global Forum [on Transparency and Exchange of Information for Tax Purposes] could perhaps be incorporated into the U.N. system, similar to how the International Organization on Migration was incorporated into the U.N. system. And I think that's a very interesting idea because the global forum is working on an issue which is of a lot of interest to countries — exchange of information transparency. And this component of the OECD system, I think, could definitely be this recommendation of the FACTI panel can be taken forward. For many of the other aspects of the OECD's work, if you look at the inclusive framework and the steering group, we come back to the issue of transparency. It's not very clear how the steering group works and how decisions are taken. Given this reality, it's unclear what would be the effects of closely merging the two bodies [and] what that would mean. Because it should not be the case that the constraints which are upon the OECD should also be imposed upon the U.N. As it stands with all of its limitations, the U.N. Tax Committee, it still does give developing countries a forum for an alternative perspective, an alternative voice. And if somehow by a closer integration, collaboration, that voice gets stifled, then that will not be a good thing. So it [requires] some careful thought as to what should be the terms of engagement actually, but I think the fact the FACTI panel's recommendation on the global forum is definitely a concrete suggestion for taking things forward. That being said, the FACTI panel also has recommended — whose report would be strongly recommended to everyone listening to this — it has also recommended that the U.N. Tax Committee should be converted or upgraded into an intergovernmental body and an inclusive intergovernmental body. That is actually a much better avenue of thought. That instead of scratching our heads, wondering how the OECD can become truly inclusive, when ultimately the OECD was set up to administer the Marshall plan after the destruction of Europe in the second World War with all that history legacy. I mean, we have the U.N., which is set up by the whole world. It's a genuinely universal body. Why not make that the forum for setting the tax rules and where everybody can come — developed and developing countries? And then there's no need for, "OK, how is the steering group constituted? And how are decisions taken ?" And all those complexities can be set aside for the OECD to keep thinking. And the U.N. Tax Committee can be made into an intergovernmental body.

33:49

In fact, in 2010 Yemen, on behalf of the Group of 77, had introduced a draft resolution in ECOSOC, which would be basically a decision by ECOSOC to upgrade the U.N. Tax Committee into an intergovernmental body. And I think a resolution is E2010/L.10 if I remember correctly. And it had a very interesting idea about what this intergovernmental body would look like. So I think it was 47 member states, and they would have four-year terms. And there was a regional breakdown [ which] I think there were 13 from Africa and 13 from Asia. And there was a certain number from Western Europe and from Eastern Europe. It was very interesting actually, the structure and function of the proposed intergovernmental body was described in this resolution by Yemen, which was introduced in ECOSOC in 2010.

Nana Ama Sarfo 34:35

Well , Abdul, you raised some really interesting points and especially bringing up the FACTI panel. Very much appreciated because that report definitely should be read by international tax practitioners to get an idea of the breadth of the panel's recommendations, but also the sheer creativity involved in that. And so I also thank you as well for raising these ideas and raising awareness about how the U.N. Tax Committee can become more effective. So for those listeners who haven't read Abdul's piece, I very highly recommend that you do. The name is "Making the U.N. Tax Committee More Effective for Developing Countries." And you can find that in Tax Notes International. So Abdul, we really enjoyed having you today. Thank you so much for coming on the podcast.

Abdul Muheet Chowdhary 35:21

Thank you so much for the invitation. It was my pleasure.

Coming Attractions with Janelle Julien

David Stewart 35:26

And now coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Janelle Julien. Janelle, what do you have for us?

35:36

Thanks, Dave. In Tax Notes State, experts consider the impact of pro bono services in the latest installment of The Search for Tax Justice series. Martin Eisenstein and David Swetnam-Burland consider Chicago’s interpretation of how its personal property lease transaction tax applies to digital and cloud service providers. .

Janelle Julien 35:55

In Tax Notes International, Karl Schmalz begins a two-part series on the shortcomings in the Platform for Collaboration on Tax’s Toolkit on Offshore Indirect Transfers. Two practitioners with Chiomenti in Milan, analyze recent Italian guidance on taxing income from the transfer of data. . On the Opinions page, Joseph Thorndike argues that President Biden and Democrats are determined to avoid repeating the perceived errors around the 2009 stimulus plan during the current crisis. Nana Ama Sarfo gives an overview of what could come down the pipeline now that the U.N. FACTI panel has released its final report on

In the Pages Sneak Peek

Janelle Julien 36:33

the global financial system . And now for a closer look at what’s new and noteworthy in our magazines, here is Tax Notes Federal Editor in Chief Ariel Greenblum. .

Ariel Greenblum 36:40

Thanks, Janelle. I'm joined by Thomas Neubig, who is a senior associate for the Council on Economic Policies and a member of the Tax Analysts board of directors. Welcome to the podcast, Tom.

Thomas Neubig 36:54

Thank you , Ariel .

Ariel Greenblum 36:55

Today, we're going to discuss Tom's recent piece in Tax Notes titled, “Disparate Racial Impact: Tax Expenditure Reform Needed.” In this article, Tom, you delve into how income and wealth disparities combined with the policy design of tax expenditures disadvantage Black households. Can you tell us about your findings?

Thomas Neubig 37:18

Absolutely. In the past three years and particularly the last 12 months, many more policy analysts have written about how the current federal and local tax systems disfavor Black households. The federal tax code has no explicit rules differentiating between race and ethnic groups, but many federal tax provisions can have less favorable effects for Black compared with white households. Federal laws, prohibit explicit discrimination or disparate treatment of racial and ethnic groups in the housing and employment area, federal laws also address differential outcomes, or what is called disparate impact. And this article looks at the disparate racial impact of some important federal tax provisions. For the past few years, I've been working with a Swiss think tank, the Council on Economic Policies to improve countries' transparency and analysis of tax expenditures. Tax expenditures are government incentive and benefit programs run through the tax code rather than through direct government spending. With increased focus on the income and wealth inequality in the U.S. plus expanded goals for racial equity, I thought it would be possible to quantify the disparate impact of some of the largest tax expenditures. To date, there have been qualitative discussions of such impacts, but not quantitative analysis. So the article uses the information on the income and wealth distributions of Black and white households from census data, plus information from the Treasury and the Congressional Budget Office, on the income distributions of some of the largest tax expenditures. Black households' median and average incomes and also median and average wealth are significantly less than those of white households. Sixty percent in the case of income and 13 percent in the case of wealth. So Black households get smaller shares of the total benefit of tax expenditures that are related to income or wealth due to these income and wealth disparities. But the disparate racial impact is made worse by what is called the upside down nature of many tax expenditures. To illustrate the upside down regressive feature of spending through the tax code, $1,000 of deductions, exemptions, or exclusions are worth $370 for the highest income taxpayers, but worth zero or only $120 for lower income taxpayers. Further, some tax credits are not refundable, so they aren't even available to lower income taxpayers . So due to these financial inequities and upside down nature of many tax expenditures, Black households receive much less than their proportionate share of the benefits. Black households account for 13 percent of all American households, but they receive only 7 percent of the benefit of the mortgage interest deduction and only 5 percent from the preferential tax rates on capital gains and dividends. Now tax expenditures don't have to disfavor Black households. I estimate that Black households receive 18 percent of the refundable earned income tax credit, and 15 percent of the partially refundable child tax credit. This occurs because those credits are refundable for the most part, and they're also targeted at lower income families. So the article tries to highlight that a greater focus on equity is needed when considering government tax policy. Besides just income distributions, policymakers would benefit from knowing the racial and ethnicity distributions of government tax incentives, just as they see them in analyses of government spending programs.

Ariel Greenblum 41:02

So what kind of steps can policymakers and lawmakers take to address the problem?

Thomas Neubig 41:08

Well , the article suggests eight different steps to consider in reforming tax expenditures while reducing racial and income disparities. I'll list a few. First, there has to be a recognition that facially neutral tax policies can still have disparate racial impacts. The new focus on racial inequities in the U.S. is an important additional reason for an immediate of federal tax expenditures. Second, measurement and analysis matters, so it is critical to have better data on race and ethnicity in tax policy. The easiest way would be to have race and ethnicity collected on federal tax returns, which it currently is not. That would be similar to how race and ethnicity is collected in most other government programs so that information is available for other government programs, but not in the tax area. There are certainly pros and cons to collecting the information on tax returns. But I would argue when significant government benefits and incentives are involved, the racial and ethnicity impacts are needed for policymakers to consider. Of course, if that data was collected on 2021 tax returns, the data would not be available to analyze for several years. So the Treasury and the Joint Committee on Taxation, as well as outside tax policy analysts, should use statistical imputations of race and ethnicity in their modeling analyses. Treasury and the JCT already makes such imputations , such as for non-filing households. They also impute data not on tax returns, such as employer health insurance premiums, and income and pension accounts. Imputations are never perfect, but they provide important tax policy insights. Third, disparate racial impacts could be reduced by converting deductions and exemptions into refundable tax credits. So all households eligible for an activity receive the same proportionate benefit. That would help lower- and middle- income households. Eligibility limits on income or assets could also better target the benefits of tax expenditures. I personally don't think retirement savings in excess of $5 million or $10 million require tax incentives. And those tax incentives currently add to the racial income and wealth inequalities in the U.S. And finally, revenue raised by reforming tax expenditures should be used to redesign tax expenditures, and also to finance improved government expenditures addressing education, health, and housing disparities. It is not simply taxes, but whole of government efforts that need to address racial inequalities.

Ariel Greenblum 43:48

We're lucky to have you as a part of a webinar panel that Tax Analysts is hosting on April 14 on this very topic. Can you give us a preview of this Taxing Issues webinar?

Thomas Neubig 44:01

Sure. Even before the 2020 election, there was a need for a thorough review and reform of federal tax expenditures. It hasn't really occurred since the 1986 Tax Reform Act. One of President Biden's first executive orders requires agencies to evaluate whether and to what extent, "programs and policies perpetuate systematic barriers to opportunities and benefits for people of color." The Biden campaign and the America recovery plan have also included proposals and actual legislation for greater use of refundable tax credits, which is important in terms of addressing racial inequities. And then with the significant financing needs of the president's infrastructure proposal and the current large budget deficits, reforming tax expenditures should be an important part of the coming tax policy debate. Increased transparency and thorough analysis of tax expenditures are an important precursor to meaningful tax reform. The upcoming Taxing Issues webinar will be a worthwhile debate among several of us on how to use tax expenditure analysis more constructively. I look forward to participating in the webinar and hope listeners of this podcast will join the webinar on April 14.

Ariel Greenblum 45:16

Thank you, Tom. And thanks for joining us on the podcast today. You can find Tom's article online at taxnotes.com and be sure to sign up for the next Taxing Issues webinar on reforming tax expenditures held on April 14. You can register today at events.taxanalysts.org. Again, that's events.taxanalysts.org. Back to you. Dave,

David Stewart 45:43

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.