Policy Proposals Trade, Investiment, EPA/FTA Three Functions to be Strengthened by the OECD (specific examples)
-- On the 50th Anniversary of Japan's Accession to the OECD --
(1) Enforcing OECD rules and ensuring level playing field with countries that have not adhered to OECD rules
A) OECD Guidelines for Multinational Enterprises
With respect to the Guidelines for Multinational Enterprises, which were updated in 2011, the highest priority is to promote outreach efforts to emerging countries and other countries other than the 46 adhering countries, with a view to securing a level playing field.
At the same time, the OECD is working on developing guidance on the guidelines for several sectors as assistance measures to encourage the development of responsible corporate activities in line with the guidelines. There are concerns that those efforts would lead to new interpretations of the guidelines which were updated and annotated by putting together opinions from a diverse range of stakeholders, and additional calls for enterprises to assume a greater burden than was anticipated by the guidelines themselves. Such works on developing guidance should be strictly limited to where there is a clear demand from the sector concerned.
It is necessary to continuously monitor how things go to ensure that guidance development does not adversely affect the implementation and promotion of the guidelines.
B) OECD Conflict Minerals Guidance
The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, which was adopted in 2011, requires risk management for the entire supply chain, which applies to all enterprises that supply or use minerals that are procured from conflict-affected and high-risk areas.
In the United States, a law has been enacted that includes conflict mineral regulations that require the same risk management as the OECD guidance. There is also a move towards introducing similar regulations in the European Union and elsewhere. Given that it is highly likely that those regulations will be implemented on the basis of the OECD guidance, it is necessary to make companies in Japan even more aware of that guidance and outreach to countries with which Japan does a significant amount of business.
C) OECD Arrangement on Officially Supported Export Credits
The Arrangement on Officially Supported Export Credits, which was agreed to in 1978, provides for official support conditions for the purpose of exports, and it ensures level playing field between participants to the arrangement, which comprise eight countries and one region.
At the same time, it has become an issue to ensure level playing field with emerging countries that are not participants in the arrangement, while respecting the interests of recipient countries.
Under such a situation, discussions aimed at establishing international export finance rules are being promoted on the basis of OECD rules in the Working Party on Export Credits and Credit Guarantees, which comprises nine countries including emerging countries that are not members and the member countries and region of the arrangement. It is necessary to closely monitor the discussions in the working party.
D) OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions
The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which entered into force in 1999, has 40 signatory countries including the 34 OECD members. The third round of country reviews (peer reviews) are being conducted in the OECD Working Group on Bribery in International Business Transactions in order to monitor and promote the full implementation of that convention.
Increasing the number of signatories is one of the issues to be tackled in order to secure level playing field with businesses in non-signatory countries. In parallel with efforts made to this end by the OECD, works on standardizing management systems to prevent bribery have started in the International Organization for Standardization (ISO).
If those management systems are standardized, regardless of whether enterprises in non-signatory countries actually put in place systems to comply with the Convention, it is likely that ISO standards will be used as sufficient proof of compliance with the Convention and will stand in the way of OECD efforts to increase the number of signatories. Particular vigilance should be given to the ISO work which is expected to begin in earnest.
E) Base Erosion and Profit Shifting (BEPS)
The OECD launched the Base Erosion and Profit Shifting (BEPS) project in 2012 to provide for solving issues related to cross-border tax avoidance schemes in a strategic and cross-sectional manner. The OECD made its Action Plan public in 2013, and it is expected that it will recommend measures on each area of work set out by the Action Plan in one to two and a half years, aiming at harmonizing international tax systems.
With respect to the implementation of the Action Plan, the "OECD/G20 BEPS Project" has been established as a framework to allow the eight G20 members that are not OECD member countries to state opinions in the same way as the OECD member countries and to take part in decision making. BEPS, therefore, is attracting attention as an example of non-member countries' involvement from the stage of formulating rules.
It is true that, with advancing globalization and digitalization, the current international taxation system has become unable to keep up with certain aspects of economic activities. Given this situation, it is fundamentally significant that the OECD is working to revise the Model Tax Convention and the Transfer Pricing Guidelines and promoting each country to put domestic legal systems into place. We at the Japanese business community also hope that the effort to create a common framework will move forward, involving non-OECD member countries as well.
The Action Plan, however, contains an item that requires multinational enterprises to disclose necessary tax information to all relevant governments (Action 13). If those obligations are imposed in a uniform manner, we are afraid that not only excessive administrative burdens will be imposed on enterprises, including those that have nothing to do with excessive tax planning, but also double taxation will be induced if the tax authorities of each country use that information for the interests of their own country without mutually adjusting it. We are also concerned that business activities will be hampered if overly strict rules are introduced to prevent tax avoidance. Cautious discussion is required so that the competitiveness of Japanese businesses may not be declined.
F) Cyberspace Rules
With respect to rules on cyberspace, it is becoming increasingly important to create rules to ensure the peaceful use of the Internet which will continue to attract a rapidly increasing number of users, while maintaining the openness and transparency of the Internet as a source of innovation and essential infrastructure for economic and social activity.
There are, however, some countries that want to restrict the distribution of data and cross-border services from political and security considerations. There is currently a difference of viewpoints between advanced countries and some emerging countries on whether communications over the Internet should be subject to the International Telecommunication Regulations (ITR) of the International Telecommunication Union (ITU).
Under those circumstances, some countries expect the OECD to serve as a forum for building consensus between countries that share fundamental notions on Internet policy. It is hoped that discussions will proceed with the maintenance of an Internet environment with a free, stable, and integrated technical platform as the top priority in order to use the Internet in further developing a global economy and society and resolving problems.
(2) Supporting Policy Formulation and Implementation on the basis of Objective Data
A) Trade Liberalization
With a greater international division of labor where production bases are located in multiple countries in global value chains (GVC: a chain of activities involving multiple countries including activities before the production stage such as product planning, research and development, and design and activities after the production stage such as logistics, sales, and customer service in addition to the production stage) and increased intermediate goods trade, it is difficult to grasp the actual status of GVCs such as the distribution of value added in each country from conventional trade statistics that show the total amount of goods and services traded between countries.
Under those circumstances, in 2013, the OECD released jointly with the WTO the first results of its initiative on the Trade in Value Added (TiVA). By comparing conventional trade statistics with TiVA data, it is possible to know the actual situation of GVCs by analogy. TiVA data also suggest, for example, that import barriers on intermediate goods might have a detrimental effect on exports and that services play an important role in exports.
It is expected that if economies, industries and periods TiVA covers are expanded and, for example, analysis of the relationship between trade and employment is deepened, it will be possible to promote further adoption and implementation of trade liberalization measures.
B) Investment Liberalization and Protection
With respect to the formulation of comprehensive rules on international investment, although negotiations on the Multilateral Agreement on Investment (MAI) in the OECD failed in the latter half of the 1990s, the OECD has continued to conduct cross-sectional work on international investment.
Recently, in response to criticism that investment treaties unduly restrict the policy discretion of developing countries, the OECD has been emphasizing the importance of investment treaties and investor-state dispute settlement mechanisms (ISDS).
Under those circumstances, it would be beneficial if the OECD reassesses the positive effect of investment treaties on the economies of host countries and promotes investment treaties by using its result. That will contribute to the creation of global rules on international investment in the future.
C) Protection of Undisclosed Information (Trade Secrets)
With increasingly intense global competition, there is a growing risk of infringement of trade secrets. Many countries have strengthened measures against that risk (specifically, such as the establishment of procedures to recover from damage through demand for injunctions and claim for damages, the introduction of criminal punishments, and the introduction of provisions for severe punishment on overseas criminals).
However, as the risk of infringement of trade secrets continues to grow, it is necessary to not only reinforce information management systems in companies, but also to further strengthen protection measures by governments from the perspective of protecting the country's competitiveness.
The OECD is examining legal systems for the protection of trade secrets in each country and assessing the degree of protection. In phase 2 of the project, it plans to assess and analyze the effect the level of protection has on innovation. If those results are widely shared, it is expected that effective protection systems will be put in place in each country and norms of respecting intellectual property will take root in emerging countries as well.
D) Harmonization of Regulations and Institutions
Among advanced countries in particular, with the elimination or lowering of tariffs, domestic regulations and institutions have relatively significant effect on trade.
Against that background, the harmonization of regulations and institution has become an important issue in negotiations on Trans-Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP), and a Japan-EU Economic Partnership Agreement.
The OECD on its own has conducted analyses among other things on procedural transparency and approaches to non-tariff measures in order to (i) develop indicators to understand the extent to which regulations restrict trade in services and (ii) explore ways to achieve various policy goals of domestic measures (for example, safety and environmental regulations) in a manner that adversely affects trade as little as possible.
It would be useful in promoting the harmonization of regulations and institutions to estimate and make public the costs incurred from differences in the regulations and institutions of each country, while utilizing what the OECD has worked up to this point.
It would be also possible for the APEC to cooperate with the OECD in harmonizing notification procedures for new chemical substances on a global basis, which has been promoted mainly by APEC.
(3) Sharing the Best Practices of Countries and Regions
A) Rules in Regional Trade Agreements
With the deadlock in the WTO Doha Round and regional trade agreements (RTAs) proliferating, trade and investment rules are likely to be entangled in so called spaghetti bowl effect.
It is important for companies with global value chains that the same rules apply as broadly as possible. To that end, the harmonization of trade and investment rules incorporated in each agreement is necessary and ultimately a unified set of rules should be established at the WTO and applied globally.
It would be therefore useful that the OECD could examine and analyze each RTA, and share rules considered to be best practice for expanding trade and investment with a view to the creation of global rules at the WTO in the future.
B) Cross-Border Data Transfer Rules
For data services to be provided freely and smoothly across borders over the Internet, it is necessary to make efforts to form a free, fair and transparent market and to internationally harmonize rules to strike a balance between the utilization of data and the protection of privacy and to ensure information security.
With regard to cross-border data transfer, there are the proposed EU Data Protection Regulation, which aims to govern through strict laws and regulations, and the APEC Cross Border Privacy Rules System, which were formulated with Japan's participation. In addition, existing policies and regulations are also being revised in each country and region.
Under those circumstances, international harmonization should be promoted on the basis of the measures incorporated in the OECD Guidelines Governing the Protection of Privacy and Transborder Flows of Personal Data (adopted in 1980 and updated in 2013) to ensure that an excessive burden is not placed on businesses and the provision of data services is not hindered. Specifically, for example with respect to the implementation of measures incorporated in the guidelines, it would be useful that the OECD could request reports from each country and region and share the best practices.