By Betty Guchu
The UN is actively addressing the challenges of international tax cooperation in the digital era, highlighting the necessity to revamp existing rules. A recent UN report offers three options: a legally binding multilateral convention, a constitutive framework convention defining principles, and a non-binding multinational agenda. The UN seeks to address discontent with current tax treaties and foster inclusive and effective international tax cooperation.
Editor’s note: At the time of publishing on 28 November 2023, the resolution on promoting inclusive and effective International Tax Cooperation in the United Nations proposed by Nigeria on behalf of the African Group was adopted by the 2nd Committee of the Assembly in New York on 22 November 2023.
The Third International Conference on Financing for Development that took place in Addis Ababa, Ethiopia, from 13 to 15 July 2015 culminated in adoption of the Addis Ababa Action Agenda, an ambitious program of actions supporting the implementation of the 2030 Agenda for Sustainable Development Goals. The Addis Ababa Action Agenda was in turn endorsed by the UN General Assembly on 27 July 2015.
Among the areas of action defined by the Addis Agenda as critical to realizing sustainability through the sustainable development goals (SDGs), is the need to strengthen mobilisation and effective use of domestic public resources.
In the area of tax revenue mobilisation, in particular, the Agenda pledged to intensify global tax collaboration and called for cooperation among countries in order to enhance transparency plus implementation of suitable policies, taking into account their unique capabilities or conditions. Such policies would include multinational corporations reporting to tax authorities in each country from which they operate, providing competent authorities with access to beneficial ownership information, and gradually moving toward automatic tax information exchange among revenue authorities, when necessary, with support provided to developing nations, particularly the least developed ones.
The Agenda emphasised that international tax cooperation initiatives should have a global perspective and scope, fully accounting for the diverse needs or capacities of all nations, with a focus on 14 least developed nations, landlocked developing nations, small island developing states, plus African nations.
Reaffirming its July 2015 endorsement of the Addis Agenda, on 30 December 2022, the UN General Assembly resolved to start intergovernmental talks at the UN Headquarters in New York on how to improve the effectiveness and inclusivity of international tax cooperation by examining other options, such as the potential creation of an international tax cooperation framework or instrument that is decided upon through a UN intergovernmental process while fully taking into account current international multilateral agreements.
To this end, the Assembly called on the Secretary-General to draft a report analysing all pertinent international legal instruments, other documents, and recommendations that deal with international tax cooperation, with a focus on how to support countries in exercising their taxing rights, mobilising resources to invest in the Sustainable Development Goals (SDGs), climate action, and promoting SDG-aligned fiscal policies. The report would take into account the work of the Committee of Experts on International Cooperation in Tax Matters, the Organization for Economic Co-operation and Development/Group of 20 (OECD/G20) Inclusive Framework on Base Erosion and Profit Shifting, and among other forms of international cooperation. In his report, the Secretary-General would also recommend the way forward, such as creation of an open-ended, intergovernmental committee headed by a member state to make recommendations for strengthening the inclusiveness and effectiveness of international tax cooperation.
An advance copy of the Secretary-General’s report outlining the highly anticipated UN tax convention plans was released on 8 August 2023. The report starts by observing that, over the past century, the primary goal of international tax cooperation has been to lessen the potential harm that individual tax policy decisions made by nations could otherwise do to beneficial cross-border investment and trade. The primary strategy has been to use bilateral tax treaties to change how domestic tax laws that would otherwise apply to cross-border income flows operate. These agreements aim to balance the contracting governments’ tax systems so as to avoid unintentionally leaving income and capital untaxed while also preventing double taxation.
However, while recourse to bilateral tax treaties is common worldwide, not all nations have signed these kinds of agreements, or they have only done so with their most significant trading and investment partners. In the absence of a treaty, nations are free to tax most of the money earned within their borders; nevertheless, this freedom may come with consequences, such as double taxation, which should be taken into account.
While recourse to bilateral tax treaties is common worldwide, not all nations have signed these kinds of agreements, or they have only done so with their most significant trading and investment partners.
The report goes on to observe that the need to update the treaty-based rules that currently allocate rights to tax income or capital among jurisdictions to account for new business practices in an increasingly digital and globalised economy has become more apparent in recent years. With G20 backing, the OECD has been the main platform for finding responses to these issues. In particular, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has devised a “two-pillar solution” that mainly aims to modify the rules applicable to large multinational corporations.
The report goes on to observe that the need to update the treaty-based rules that currently allocate rights to tax income and capital among jurisdictions to account for new business practices in an increasingly digital and globalized economy has become more apparent in recent years.
However, the modifications resulting from that process would not completely resolve the broader dissatisfaction stemming from the long-held belief by numerous nations and stakeholders that the current tax treaty regulations do not sufficiently reserve taxing rights to nations that host multinational corporations and serve as markets for their goods.
It is against this background, and having consulted with member states and other stakeholders, that the report presents an analysis of the existing arrangements, identifies additional options and proposes potential courses of action.
UN norm-shaping in international tax cooperation
The Ad Hoc Group of Experts in International Tax Cooperation was established to address long-standing concerns that the current paradigms of international tax cooperation were not meeting in relation to the interests of all nations. Specifically, the OECD Model Tax Convention’s primarily resident country taxation rules were deemed inadequate for developing nations looking to enter into tax treaties. These regulations would tend to give taxing rights predominantly to the developed country in treaties between developed and developing nations, while offering benefits that are nearly equal in the case of agreements between nations with balanced capital flows.
Consequently, the task of creating and maintaining an updated model tax convention that strikes a balance between the goals of better protecting developing countries’ taxing rights and fostering an environment that is conducive to investment fell to the Ad Hoc Group of Experts in International Tax Cooperation, now the UN Tax Committee (UNTC), its successor.
Under its mandate, the UNTC develops international tax standards, issues guidelines, and suggestions on tax administration or policy, with a focus on developing nations’ needs. As a result, source nation taxation powers have steadily increased in relation to the UN Model Double Taxation Convention, surpassing the provisions of bilateral treaties that would be based on the OECD Model.
Developed under the mandate of the UN Model Double Taxation Convention, the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries is a practical guide to all aspects of tax treaty negotiations, including the goal and operation of UN Model rules. Regular updating of this manual supports the adoption of the UN Model provisions in bilateral tax treaties. Both the UN Model and the Negotiation Manual (supported by capacity building) help countries to develop and articulate their own treaty policies in negotiations by describing a wide range of viewpoints and offering a variety of options from which they can choose, according to their realities or priorities.
In general, it has been found that the UN’s efforts to promote international tax cooperation are inclusive and successful. The International Centre for Tax and Development (ICTD) reports that clauses that are present in the UN Model but absent from the OECD Model are becoming more prevalent in bilateral tax treaties.
In general, it has been found that the UN’s efforts to promote international tax cooperation are inclusive and successful.
However, the UNTC does not, in terms of procedure, satisfy the requirement of universal participation by right and without preconditions. Members of the UNTC are experts who serve in their individual capacity within the group.
The 25 members, representing various tax regimes, are therefore chosen to reflect a fair geographical distribution and are rotated every four years. This, together with the Committee’s methods of operation and multi-stakeholder participation, guarantees that a variety of viewpoints are represented in the UN guidance products. However, while the nomination process is open to all countries, they do not have the right to participate directly in the UNTC’s norm-shaping process. This lack of universal participation in the UNTC means that other procedural criteria, such as agenda-setting, are not met.
OECD tax policy and administration
The 38 member countries of the Organisation for Economic Cooperation and Development (OECD) are all upper-middle income or high-income countries of Europe and the Americas. The organisation produces a wide range of guidelines on tax policy and administration which, however, are adopted by developed countries much more than by developing ones due to, among other reasons, their complexity and lack of capacity for implementation in developing countries. Moreover, and as earlier mentioned, specifically with regards to the “two-pillar” solution being developed through the OECD/G20 to tackle the challenges of taxing the digitalised and globalised economy thereby limiting harmful tax competition, developing countries feel that key concerns have not been addressed and that “the expected benefit from the proposed reforms will be minimal, especially when compared to the cost of implementation”.
Furthermore, rules of procedure prevent developing countries from fully participating in the OECD’s agenda-setting and decision-making process. In particular, the notion of universal participation, by right and without prerequisites, is violated by the requirement that jurisdictions pay to take part in talks. They also have to agree with the current norms before being permitted to participate. In addition, the requirement for non-OECD nations to adhere to regulations created prior to their membership in the norm-shaping body is incompatible with the procedural requirement that all nations participate in the agenda-setting process.
Options for inclusive and effective international tax cooperation
The UN report concludes that the substantive regulations created by OECD initiatives are often either too complex for developing nations to implement or do not sufficiently meet their requirements and objectives. The report argues that the UN is attuned to the need to make recommendations that offer a variety of solutions suitable for nations with varying degrees of development and that, therefore, the best way to make international tax cooperation completely inclusive and more efficient would be to increase the UN’s role in tax-norm formulation or rule establishment, fully taking into consideration current multilateral and international arrangements.
The UN report concludes that the substantive regulations created by OECD initiatives are often either too complex for developing nations to implement or do not sufficiently meet their requirements and objectives.
To attain this objective, the UN report offers three options. The first would be a legally binding agreement that would address a variety of tax-related topics. This type of agreement is commonly referred to as a “standard multilateral convention”. It would be characterized as “regulatory” in that it would lay out particular guidelines that would impose obligations, such as restrictions on the use of taxing rights.
The convention would set out mandatory, preferably enforceable, obligations deemed essential for appropriate domestic resource mobilization plus the establishment of a monitoring mechanism to ensure adherence to the information reporting and exchange rules, as well as mechanisms for resolving disputes when parties fail to honour their commitments.
This option’s feasibility would depend on political agreement over the necessity of addressing the tax issues that the convention will cover globally and in a legally binding way, as well as the capacity to reach an understanding regarding the best course of action.
A framework convention, which is the second possibility, would likewise be a legally binding multilateral instrument. However, it would be “constitutive” in the sense that it would create a comprehensive framework for international tax regulation. The fundamental principles of future international tax cooperation would thus be outlined in a framework convention, along with the goals of the collaboration, important guiding concepts, and the framework’s governance system.
The fundamental principles of future international tax cooperation would thus be outlined in a framework convention, along with the goals of the collaboration, important guiding concepts, and the framework’s governance system.
Due to their flexibility, framework conventions enable parties to agree to start talks even when there isn’t a strong political consensus on particular solutions, allowing them to handle a problem piecemeal. Nevertheless, there is the risk that establishing a framework convention may put on the back burner any the legal or technical effort required to bring about meaningful change.
The creation of a non-binding multinational agenda for coordinated measures would be a third choice. In practical terms, this framework would be similar to the second option in that it would set forth the guiding principles or procedures for international tax cooperation; however, these guidelines or procedures would not be covered by binding legal agreements.
Under such an arrangement, Member States would analyse tax issues to ascertain the level or levels at which coordinated efforts would be most successful. In cases where there is political agreement that a specific issue necessitates not only global legal obligations but also coordinated actions, the General Assembly could choose to authorise the negotiation of an instrument along the lines of the first two options above.
The three options proposed by the Secretary-General’s report are, therefore, not mutually exclusive, as a framework that makes recommendations regarding domestic tax rules could co-exist with a standard multilateral convention or framework convention focussing on international tax rules, for instance.
In response to the UN Secretary-General’s report, the European Union has already made its position known. The bloc is in support of the third option, observing that “it would be useful to develop further actions aiming at capacity building and revenue mobilisation, taxing the informal economy, and countering illicit financial flows, especially in the least developed countries, which are critical for delivering on the Addis Ababa Action Agenda and the Sustainable Development Goals over time”. For its part, the OECD has expressed “disappointment” in the report and “surprise” that the UN “had chosen to ignore favourable assessments of the current state of OECD collaboration submitted to U.N. member states for the [Secretary General’s] analysis, resulting in ‘a number of inaccuracies and misleading statements’”.
Meanwhile, on behalf of the Africa Group, Nigeria has tabled a UN resolution on establishing a legally binding UN tax convention – the strongest of the three options presented by the UN report – for voting and adoption at the UN General Assembly when negotiations begin in earnest in early 2024.
This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).
