The potential of a UN Tax Convention and a “Race to the Top Alliance”

[Update: On September 27th, 2022, UN Secretary-General António Guterres announced his readiness to support a United Nations convention on tax that would overhaul century-old global tax rules. Find the press release by the "Tax Justice Network" here] 

Authors: Bodo Ellmers (Global Policy Forum) and Tove Maria Ryding (Eurodad)

Tax revenue is an absolutely essential source of financing for development, but international tax dodging and harmful tax competition undermine tax collection and cost governments billions of dollars in lost tax income every year. This is true for governments of developed and developing countries, and for countries in the global North and the global South. Effective international tax cooperation remains a gaping hole in global economic governance, and calls are getting louder to fill that gap with a comprehensive United Nations Tax Convention. A concrete proposal for such a Convention has just been discussed at the margins of the UN´s Financing for Development Forum, while political support has been expressed in the Forum´s plenary sessions.

Tax Cooperation: Where are we coming from?

Domestic resource mobilization has been a key pillar of the UN´s Financing for Development (FfD) agenda since its beginnings 20 years ago. Back in 2002, the High-Level Panel on Financing for Development had sent the FfD process off to an ambitious start. The policy recommendations of the expert panel, chaired by former Mexican president Ernesto Zedillo, demanded nothing less than the creation of an International Tax Organization (ITO). The mandate should include, among others: developing measures against tax competition, promoting exchange of tax information and “Perhaps most ambitious of all, an international tax organization might in due course seek to develop and secure international agreement on a formula for the unitary taxation of multinationals”.    

The creation of an ITO could not be agreed either at the FfD Summit in Monterrey or at the following Summit in Doha (2008). In 2015, the issue of setting up an intergovernmental tax body under the auspices of the UN became one of the most contentious issues in the negotiation leading to the Third FfD Summit in Addis Ababa. In the end, the proposal was blocked by a group of Organization for Economic Co-operation and Development (OECD) countries.

Political negotiations on global tax matters have instead taken place at the OECD. The organization, with its 38 Member States, mainly rich and developed countries, has set up a so-called Inclusive Framework, which allows developing countries to become members if they comply with specific conditions. However, there are strong concerns about the inclusivity of the framework, specifically whether developing countries will really be able to participate on an equal footing in the framework, since over a third of the world’s countries do not even participate in the OECD-led process. None the less, the Inclusive Framework has been the forum where a new package of global tax rules was negotiated over the past couple of years, even though the outcome of the negotiations has been strongly criticized for ignoring the interests and concerns of developing countries. For example, the UN World Economic Situation and Prospects report from January 2022 noted that “the main beneficiaries will likely be a small number of developed countries with existing multinational headquarters, undermining the principle of fairness assumed to underlie the accord” and that “Developing countries in fact stand to lose out due to its allocation principles and absence of dispute resolution mechanisms.”   

The call for a UN Tax Convention

Meanwhile, the Group of 77 (G77) – representing over 130 developing countries – has continued to call for an intergovernmental UN tax body. Since 2019, the Africa Group at the UN has also called specifically for a UN Tax Convention. At the recent FfD Forum, Malawi´s Vice-President, Saulos Klaus Chilima, stated on behalf of the group: “The African Group strongly believe on the urgent need to establish a universal, UN intergovernmental tax body and negotiate a UN Tax Convention to comprehensively address tax havens, tax abuse by multinational corporations and other illicit financial flows through a truly universal, intergovernmental process at the UN, with broad rights holders’ participation.”

Support also comes from academia, civil society and high-level actors. In 2020, the Presidents of the UN General Assembly and of ECOSOC jointly convened the High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI Panel). The panel included high-level profiles, seasoned international relations professionals and renowned tax experts, including, for example, Professor José Antonio Ocampo and former German Development Minister Heidemarie Wieczorek-Zeul. When the panel released its final report after a year of deliberations, the UN Tax Convention featured prominently on the list of recommendations.

The idea of developing a comprehensive UN Tax Convention is gaining momentum, and this might only be the beginning. The OECD-led Inclusive Framework process has not only been a disappointment to those who hoped that developing countries would be able to participate on an equal footing, it has also fallen far short of delivering a balanced and comprehensive outcome toward a globally coherent tax system aiming to get countries to play by the same rules. The chaos of unilateral action and the maze of incompatible domestic tax systems are not only creating openings for large-scale international tax dodging and illicit financial flows, they are also causing strong frustrations for international businesses and investors, and at the same time putting high tax countries in both south and north under pressure to lower their rates in a self-defeating race to the bottom. In a time where all governments are desperately trying to increase their tax income, a growing number of OECD countries might discover it is in their self-interest to join forces with developing countries in pursuit of truly global UN-led solutions.

Moving forward: A first concrete proposal for a UN Tax Convention

At the 2022 FfD Forum, Eurodad and the Global Alliance for Tax Justice (GATJ) launched their Proposal for a United Nations Convention on Tax.  The Proposal is a discussion paper that operationalizes the idea of a UN Tax Convention, building on best practices from existing UN conventions such as those on climate, biodiversity, tobacco, and many other issues.

The proposal provides solutions to many contemporary problems related to tax: The UN Tax Convention would provide a legitimate body for international norm-setting where all countries have a seat at the table. It would set up the key mechanisms to promote transparency and fight illicit financial flows. It would also create much simpler and a more efficient tax system because the decisions under the convention could gradually replace the thousands of bilateral tax treaties that exist today. It also suggests that unitary taxation of transnational corporations should replace the failed transfer pricing system.

Last but not least, it would promote tax justice through fair allocation of taxing rights among different countries, and link international tax policy directly to other international commitments, including those relating to the sustainable development goals (SDGs), human rights and environment. The proposal also makes clear that the UN Tax Convention should be a framework convention, which defines the central objectives, commitments, and mechanisms, but the allows for countries to take a stepwise approach towards a more comprehensive system being developed over time.

A race to the top alliance

An important feature of UN negotiations is the tendency for different types of progressive alliances to emerge – often spanning across regions and traditional divides, bringing together ambitious developed and developing countries. In the world of tax such an alliance has long been missing. Instead of working together in a “race to the top alliance”, the large and diverse group of countries that are losing billions of dollars to international tax dodging and illicit financial flows has failed to get organized.

As the idea of a UN Tax Convention is on the international policy agenda, so is the question of whether new progressive alliances can take form. Both of these issues were discussed at an informal meeting of at the New York office of Friedrich-Ebert-Stiftung, on the margins of the 2022 FfD Forum. The event, co-organized with Global Policy Forum, Eurodad, GATJ and the Civil Society Financing for Development Group, convened civil society actors and diplomats for a first debate on the prospects of a UN Tax Convention.

The debate made it clear that tax governance leaves much room for improvement and that getting tax systems right is a key lever for realizing the Agenda 2030 for Sustainable Development. Many expressed strong interest in the proposal for a UN Tax Convention; others questioned how a new UN Tax Convention would relate to existing forums and create value to them. The proponents of a UN Tax Convention stressed that a fairer and more effective system should benefit all countries by giving them the chance to mobilize more public revenue in a fairer way.

The discussion about a UN Tax Convention is moving from a question of “Should we have one?” to “How would we do it?”. This issue will feature centrally in the debates on how to improve the means of implementation for the remaining years of the Agenda 2030, as well as in the process leading to the Fourth UN Conference on Financing for Development. This conference, which is likely to take place in 2024, is a new chance to create the breakthrough in tax governance that many had already wished to see at the Monterrey Summit over 20 years earlier.