A UN tax convention is finally in the making. Now what?
Farida T. Bena explores steps towards a UN Framework Convention on International Tax Cooperation.
A few months ago, I interviewed Abdul Muheet Chowdhary (below) from the South Centre to discuss the ongoing negotiations on a landmark United Nations tax agreement that is in the making. If approved by enough Member States, this global agreement – also called the UN Framework Convention on International Tax Cooperation, or UN Tax Convention in short – will have the potential to shift the decision-making power on international tax rules from the OECD, a rich country club, to the UN. This move will give all countries, especially those in the Global South, a fairer share of tax revenues from multinational corporations operating within their borders. I spoke with Abdul again in December, days after the UN General Assembly had finally agreed to proceed with the drafting of the convention, to ask him what we should expect in the next few months.
Hi Abdul, congratulations on the news that we will soon have a UN Tax Convention. It sounds promising for the dozens of Southern countries that have been asking for a global tax body for decades. What is your view on this achievement?
The UN General Assembly Resolution proposed by the group of African Member States, and later adopted, is historic. As we have said in our statement, it is the most significant development in international tax cooperation in the modern era. For the first time ever, all Southern countries will have a say in how tax rules are decided – and they will participate in the decision-making process on an equal footing with Northern countries. More equitable tax rules will generate more resources for both Northern and Southern countries to achieve progress, such as on the Sustainable Development Goals.
What is also striking is that this time around, there was much stronger support for a UN-led tax negotiation than just a year ago. The final votes followed a South/North divide with 125 countries, mostly from the Global South, voting in favour, and 48 countries voting against. Even Chile and Colombia, which are members of the OECD, chose to support the UN initiative, although most other OECD countries opposed it. In a way, the UN resolution was a vote of confidence in the UN and of no confidence in the OECD.
What happens now and how long will it take to draft the Tax Convention?
The main job between now and August 2024 will be to provide a basic structure for the Convention. To do so, the UN is setting up an intergovernmental committee that will be responsible for drafting the Terms of Reference of the agreement and then for presenting it to the UN General Assembly in September for further consideration.
This means that until August, we have a key opportunity to influence the drafting of the overall structure of the Convention and future negotiations. The Terms of Reference will set out the broad contours of what the Convention will contain. This will form the basis for the detailed negotiations going forward. So, this is a very important stage of the process. The Terms of Reference will be negotiated by an Ad Hoc Intergovernmental Committee, in which all UN Members can participate. This will be headed by a Bureau, which will have 20 member States – four countries from each region of the world. It’s important that developing countries put forward the best candidate countries from each region.
The overall process may take quite some time. On average, a Convention takes years to negotiate. On a divisive topic such as this one, where developed countries are determined to maintain the OECD-led status quo and will likely try to frustrate the UN process, it will be even more challenging. We should be ready for a long and difficult road ahead and not expect quick results.
Further, we need to pay the utmost attention to the process that will be put in place to agree international tax rules under the UN Tax Convention. It is completely possible that countries may face the same governance problems we have seen at the OECD, such as having to follow arbitrary timelines to comment on documents. There must be clear rules of procedure to encourage a genuine level playing field for developing countries so the Convention can achieve its key objective of promoting inclusive and effective tax cooperation. If not, it will be very damaging to the UN’s reputation and at that point there will be no other place to go to negotiate tax rules. So, let’s not take for granted that things will be different this time simply because the negotiations are happening at the UN.
We must target August 2024 to finalise the terms of reference of the UN Tax Convention and the earliest possible text of the Convention itself, as realistically feasible. In 2025, there will likely be the fourth UN Financing for Development Conference. Civil society has long been arguing that there is a strong link between a fairer global tax system and more equitable development for all. This negotiation is therefore happening at an opportune moment. As the South Centre, we hold regular briefings for our Member States and other developing countries from the G77 (a group of 134 Southern countries, including China) to explain what is going to happen in the coming months. The next big milestone will be a special meeting on international cooperation in tax matters in March 2024.
What about OECD’s tax work at this point? Do you think it will continue?
Despite their defeat at the UN General Assembly, the OECD issued a statement claiming that they would continue working on their own international tax agreement and a so-called “Two-Pillar Solution”. It was jarring to read that statement, there was no recognition that times have changed and even the most advanced economies can no longer ignore the overwhelming global support for a UN-led tax framework.
Yet, it is important to clarify that OECD negotiations do not legally overlap with the UN’s. UN negotiations are about reforming the global tax architecture while the OECD’s Amount A Multilateral Convention [more details on Amount A in my previous blog interview with Abdul here] is a specific solution for taxing large multinational enterprises. The two can coexist. In fact, the UN General Assembly Resolution recognises OECD’s good work and wants to build on it. This is not a campaign against the OECD, but a global effort for a fairer international tax sytsem. The African Union has been clear that OECD’s Inclusive Framework [part of OECD’s tax initiative] has produced some good results and there is no intention now to reinvent the wheel.
In late 2023, the OECD made their Amount A Convention public but negotiations on the text of this agreement are still ongoing. Brazil, India and Colombia have concerns about some aspects relating to withholding taxes and other technical issues. But that is only part of the problem.
What else do you think is causing this delay in OECD negotiations?
We are at a critical point. Because Amount A focuses on taxing the digital economy and the most important tech companies are based in the United States, everybody is waiting to know if the US will sign the Convention. In fact, the US does not want to sign it and is happy with endless negotiations which do not result in any concrete action. This negotiation process started over ten years ago. Since then, a few frustrated countries have made unilateral moves as a last resort to collect tax revenues. In 2016, India was the first country to impose a Digital Services Tax, which has brought in lots of revenue, almost half a billion dollars in 2022. Since then, other governments – including Northern countries like Italy and the UK – have started doing the same. This move has forced the US to come to the negotiating table and find a multilateral solution to tax the digital economy. The deadline for signing Amount A has now been pushed to June 2024.
What will happen if the US does not sign?
That’s the big question now. Many analysts doubt that the US will ever sign or ratify such a convention. If they do not sign, Amount A will fall apart.
However, even if the US does sign and ratify Amount A, the momentum for the UN Tax Convention has reached such strength that it will only continue to grow. There will still be a need to reform the agenda-setting aspect of the international tax system, which is at the heart of the UN Tax Convention. That will now proceed regardless of the fate of Amount A.
That being said, the Amount A negotiation must now be brought to a conclusion as soon as possible so countries that support OECD’s Inclusive Framework can decide whether they want to sign it or not, and if not, to move on to other options. As long as the negotiation continues, it will be used to pressurise countries not to take any action. This must end. As of January 2024, all Inclusive Framework countries are still free to initiate unilateral measures such as imposing a Digital Services Tax. Countries can and must use this policy space to the fullest.
This opens a great opportunity for the UN to find a better solution for the taxation of the digital economy. There is talk now of a Multilateral Approach to Digital Services Taxes. This would be a much more realistic way forward, including for tech companies because it would be a lot easier to follow a harmonised approach to comply with this kind of tax around the world. This could be considered as one of the protocols to be negotiated within the UN Tax Convention.
2024 will, like 2023, be a very important year for international tax negotiations. The active involvement of civil society has greatly contributed to getting us this far. Undoubtedly, it will continue to help with the much-needed reform of the international tax system. And a better tax system can provide the world with the revenues needed to achieve the Sustainable Development Goals.
Farida T. Bena is an aid and development effectiveness expert, humanitarian and campaigner with 20 years' experience with non-governmental organisations (Oxfam, International Rescue Committee, CSO Partnership for Development Effectiveness) and international organisations (UNICEF, OECD, European Commission). Farida's interests include citizen participation, social accountability and innovation in the global South. After having worked in about twenty countries in Sub-Saharan Africa and South Asia, Farida is now based in Geneva, Switzerland.
Cover photo credit: Global Alliance for Tax Justice.