Tax transformation: the road ahead for global cooperation

January 2024  |  FEATURE | CORPORATE TAX

Financier Worldwide Magazine

January 2024 Issue

The international tax landscape has changed dramatically in recent years as a result of extensive economic challenges, leading to the development of global standards and guidelines. Among the major developments is the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar One and Two initiatives.

And yet, while such rules have been under the purview of the OECD for some six decades, there is growing consensus that they be decided by the United Nations (UN) instead of the OECD.

To that end, in August 2023, Antonio Guterres, secretary-general of the UN, published an advance unedited version of ‘Promotion of inclusive and effective international tax cooperation at the United Nations’. The report, which has already gained the approval and adoption of certain African countries in late 2022, analyses options and next steps around UN international tax cooperation.

“There is a broad recognition that the current global tax system is not best practice,” says Rob Mander, international tax services consultant at RSM International. “Effective international tax cooperation remains a worthwhile pursuit to address tax avoidance, money laundering and illicit financial flows, while delivering much needed stability. However, from country to country, tax priorities will always be different and potentially conflicting.”

Not helping, according to Alex Cobham, chief executive of the Tax Justice Network, is the exclusionary and ineffective nature of the OECD. “The OECD is a member organisation that is legally bound to prioritise its members over all other countries of the world,” he explains. “It lacks any governance structure to support transparent negotiations or even a voting process, and has been left increasingly exposed over the last five years as it attempted to play a UN-type role.

“Non-member countries have publicly criticised the failure to allow their effective participation,” he continues. “Analysis of the OECD’s proposals shows they will provide small revenue benefits at best for some member countries, and little or nothing for non-members – except for the group of corporate tax havens which are expected to do extremely well from the OECD’s failure.”

The UN’s proposals

Although the OECD has introduced an international policy of a global minimum tax for a category of larger global enterprises, the UN is proposing three different options, as outlined below, to enhance international tax cooperation. These options would build on OECD legislation without duplicating existing processes.

The first option is a multilateral convention on tax. This would be a legally binding option covering a broad spectrum of regulatory tax issues (such as information exchange and modifications to taxing rights), with provisions similar to those in bilateral tax treaties. While there are expected to be some challenges in terms of viability, this option would aim to impose obligations “essential for appropriate domestic resource mobilization”. This option would also include dispute resolution procedures in case parties fail to adhere to their commitments.

The second option is a framework convention on international tax cooperation. This option would aspire to be legally binding but be much more flexible and broader in scope than option one. The aim of this option would be to establish an overall system of international tax governance and the core elements of future international tax cooperation. The system could be developed further via additional protocols, with more detailed commitments and with the ability for countries to opt in or out.

The third option is a framework for international tax cooperation. This option would be similar to option two in establishing core principles of international tax cooperation without being legally binding. Its function would be to set a multilateral agenda for coordinated actions at various levels (international, national, regional and bilateral) on improving tax norms and capacity. If certain problems were deemed to require legally binding commitments on a global level, the UN General Assembly could decide to put forward an agenda to implement a relevant legal instrument in line with one of the previously described options.

“The central option under discussion at the UN is the creation of a framework convention on tax,” adds Mr Cobham. “This would allow for the negotiation of binding protocols, to raise standards in areas such as beneficial ownership transparency and the multilateral, automatic exchange of financial account information; and it would also create a forum for the negotiation of international tax rules in future.

Landslide majority

On 22 November 2023, countries at the UN adopted by a landslide majority a resolution to begin the process of establishing a framework convention on tax and completely change how global tax rules are decided. The framework convention can eventually move decision-making on global tax rules from the OECD to the UN.

“This is a historic victory delivered by countries of the global South for the benefit of people around the globe everywhere,” concludes Mr Cobham. “Tax havens and corporate lobbyists have had too much influence on global tax policy at the OECD for too long. Following this vote, we can start to take back power over global tax rules that affect all of us.”

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Fraser Tennant