Current global tax rules let multinationals book profits away from where value is created, with real consequences for workers, public revenues and economic power; the UN tax negotiations are a once-in-a-generation chance to change that.

Transfer pricing, governed by the OECD/ G20 BEPS framework and related OECD standards, is the main mechanism MNEs use to separate where value is created from where profit is recorded. 

OECD standards treat each subsidiary of an MNE as a separate, autonomous firm, trading with its “sibling” companies at prices meant to mirror normal market conditions – the so-called arm’s length principle. In practice, national tax authorities rarely have the resources to scrutinize every intra-group transaction, and MNEs know it. Companies exploit this gap to charge excessive costs to operating subsidiaries. This reduces profit recorded where the economic activity actually happens and shifts it to lower-tax jurisdictions. 

The current system gives capital far stronger tools than labor to claim value. Intellectual property, financial risk, corporate ownership and strategic control can be parked in subsidiaries to justify recording profits there – even when a subsidiary employs almost no one. Workers create value through production, services, and sales, but have no say in where an MNE group books it.

Transfer pricing becomes a labor and public-policy issue when recorded profits are shifted to a different country from where the workers did the work. Lower recorded profit weakens wage bargaining, reduces profit-sharing and bolsters claims that more staff or better conditions are too expensive. It also drains public revenues for services, infrastructure and public employment.

The employment effects of profit shifting reach beyond individual workplaces. Research shows: MNEs that establish operations in tax havens reduce employment by 8.6% in their second year – clear evidence that international tax rules affect jobs, not just tax bills.

The following cases were discussed at a FES-hosted labor and tax roundtable with Member State negotiators in New York earlier this year. They show how transfer pricing shifts value away from workers, in practice.

Internal debt moves value through interest payments. A subsidiary borrows from another company in the same group – often in a financial hub or lower-tax jurisdiction – then the local entity pays interest on the loan, reducing taxable profit and moving cash elsewhere in the group.

This structure can make a profitable company look financially constrained. The local operation may generate strong revenues, even as cash leaves through interest payments, debt repayments or related financial charges. Workers then face arguments about debt burdens and limited cash – instead of seeing profits reinvested in jobs, maintenance, or better conditions.

Management fees, royalties and markups can move profit through charges for services, brands and intellectual property. A local subsidiary may pay another company in the same group for a trademark, technology, software, marketing support, head office service or other intra-group arrangement linked to brand value or supply chains. Some payments reflect real support, but the price can be hard to verify when a brand or internal service does not have a simple market price.

These charges make a productive local business look weaker than it is. A subsidiary may employ workers, serve customers and depend on public infrastructure – yet its recorded profit falls the moment it pays large fees or markups to another company in the group. This matters most where workers are covered by profit-sharing schemes: arrangements, negotiated or legally required, that distribute part of a company’s recorded profit to employees. Shrink the profit recorded in the employing entity, and you shrink what workers take home.

Guaranteed margin models reduce the profit rate assigned to a local subsidiary. An MNE labels a subsidiary a “routine” manufacturer, distributor or service provider, entitled to only a small, fixed return, while the rest of the group’s profit is recorded elsewhere, usually wherever the group says the key assets reside or the strategic decisions get made.

That margin can be reduced through biased comparisons. To justify the return left in the subsidiary, the company compares it against supposedly similar independent firms, a comparison that can be shaped by cherry-picking lower-profit peers, excluding stronger performers, narrowing the subsidiary’s described role, or claiming the real risks sit elsewhere in the group. A low margin can then appear normal, even when the local workforce is needed for production, sales and services.

The UN Framework Convention should help governments move beyond a system that lets value be recorded away from where it’s created. The examples are not isolated abuses or technical disputes. Management fees, royalties, guaranteed margins, toll manufacturing and internal debt all point to the same structural weakness: current rules give MNEs too much room to decide, on their own terms, where profits appear.

Article 5 is where this wider challenge becomes most visible. By addressing the fair allocation of taxing rights, it should set the direction for how MNE profits get divided between countries. A weak outcome affirms fair allocation in principle while leaving the current transfer pricing framework largely intact. A stronger outcome makes clear that taxable profits should be tied to real economic activity, including labor, sales and assets.

Unitary taxation and formulary apportionment offer a structural answer to this problem. They treat an MNE group as one integrated enterprise and allocate its global profits among countries, using objective factors. The exact formula would need negotiation, but the principle is clear: taxable profits should track real activity, not the internal arrangements, which companies have strong incentives to manipulate.

Union-backed research shows that structural reform is practical, not just theoretical. Our modelling of unitary taxation and formulary apportionment across more than 7,400 MNE groups and 161 jurisdictions shows that changing the allocation rule can shift tax bases away from profit-shifting hubs and towards jurisdictions with real economic activity – employment, payroll and sales.

A labor perspective should judge the Convention, and Article 5 in particular, by whether it creates a credible pathway towards this deeper reform. That means asking whether the negotiations:

• shift taxing rights in practice, rather than only restating fair allocation in general terms;
   
• recognize labor as one key indicator of real economic activity;
   
• strengthen transparency and public oversight, including through public country-by-country reporting.

These tests matter because the Convention can reinforce or change the current distribution of value. If Article 5 leaves profit allocation dependent on opaque internal prices, workers will remain exposed to the same practices that reduce local profits, weaken bargaining, and shrink public revenues. If it creates space for deeper reform, it can help reconnect taxable profits with the workers and societies that make those profits possible.

Fair allocation of taxing rights would account for labor’s role in creating value. Value created through work, markets, public infrastructure and productive activity should not be recorded elsewhere, in structures built primarily to reward capital. International tax rules are part of the global economic rulebook. If workers create value, that rulebook should say so.