Alex Cobham ■ UN resolution for an intergovernmental tax framework: What does it mean, and what’s next?

Nigerian delegate Hashimu Gisau Abubakar proposing UN resolution Nov22

Following the momentous passing of the resolution to begin intergovernmental discussions on a globally inclusive UN tax framework, our chief executive Alex Cobham spoke to the German Tax Justice Network, Netzwerk Steuergerechtigkeit, about why the resolution passed, what it means and what happens next. (The original German post is here).

1. Last Wednesday, the second committee of the UN General Assembly paved the way for a reform of global tax governance. The representatives of the UN member states adopted by consensus a draft resolution from African countries, which was tabled by Nigeria. What does this resolution contain and what does it mean for the future of global tax governance?

The unanimous adoption of this resolution by all UN member states is a pivotal moment in the development of the international tax architecture, and reflects the collective leadership of African countries. It’s a hundred years since the League of Nations – the group of imperial powers – gave itself the lead role on international tax matters. It’s nearly eighty years since the creation of the United Nations, which was supposed to be the successor to the League, but now including all the newly independent former colonies on an equal basis. And it’s sixty years since the western European and North American countries decided that they didn’t want the UN to set tax rules, and created the OECD in part to keep that job within their own club. There have been serious proposals for a global tax body since the 1990s at least, but every time the G77 countries or others have brought forward proposals, the original OECD members have quashed it.

And so this is a historic moment, because the resolution does two main things. First, it initiates intergovernmental discussions in New York on the architecture for international tax cooperation, including the proposal for a UN tax convention to be negotiated. That convention has the potential to set inclusive standards for tax transparency and cooperation – moving beyond the OECD arrangements that systemically exclude lower-income countries – and to create a genuinely inclusive intergovernmental tax body, to set the rules for the future. Second, the resolution mandates the UN Secretary-General, Antonio Guterres, to produce a report detailing the possibilities here. The Secretary-General has already pledged his office’s support to this process, and so by the next General Assembly we can expect an evaluation of the main options and modalities for negotiations to begin.

The resolution follows the ECA declaration of African finance ministers in May this year, calling for negotiations on a UN tax convention to begin. That in turn follows from the critical work of the AU/ECA High Level Panel on Illicit Financial Flows out of Africa, chaired by former South African president Thabo Mbeki. The panel’s recommendations for the fight against illicit flows, including commercial tax abuse as the largest component, were adopted as the collective decisions of heads of state at the African Union in 2015 and have underpinned African leadership in this space ever since. A major step forward was the adoption of the first global target to curb illicit financial flows, as part of the UN Sustainable Development Goals. This resolution reflects that continuing leadership, and sets the path for the overhaul of the international tax architecture which is necessary to win the fight against tax abuse. Countries in other regions around the world now have the opportunity to develop their own individual and collective positions, to engage fully in the intergovernmental discussions in New York, and to contribute to the creation of a global tax governance that is fit for the twenty-first century.

2. This was preceded by tough negotiations and attempts by some industrialised countries to stop the initiative. At the last minute, the USA introduced an amendment that would have watered down the resolution. Eventually, the amendment was rejected by 55 votes in favour, 79 against and 13 abstentions. How did the African countries manage to get their way this time?

There are two elements to the answer. Most immediately, it seems that the amendment failed because the US was itself not fully convinced. It has been suggested that the amendment reflected heavy corporate lobbying rather than a committed position of the Biden administration, which seems consistent with the decision not to spend significant US political capital in forcing support. In addition, the amendment itself was not very motivating. Rather than propose a positive alternative approach, it sought to make the intergovernmental discussions so vague as to risk becoming meaningless.

But the second reason the amendment failed, and the full resolution passed with complete consensus, is the deeper, and more important explanation. The OECD put enormous efforts into fighting the resolution. Although they have refused to share the information publicly or respond to media requests on this point, we know from multiple sources that the OECD took a range of steps. These include unusually blunt communications with country ambassadors in Paris, telling them to tell their national missions in New York to oppose the resolution, in language that calls into question whether the UN is even fit to play the role envisaged. The OECD also sent senior representatives to New York to lobby directly the permanent representatives of member states, in advance of the vote, and may even have worked with Singapore, a major corporate tax haven, to seek to divide the G77 group.

The extremity of the efforts, including unprecedented, undiplomatic language about a fellow international institution, surprised many observers and caused no little disquiet within the UN itself. But it shows that the OECD shared the assessment that this resolution marks a pivotal moment, shifting the momentum powerfully towards the prospect of globally inclusive, intergovernmental tax rule-setting.

For the OECD’s efforts to fail so completely – with the amendment rejected and the resolution adopted by unanimous consensus – is highly significant. We believe this reflects two main dynamics. On the one hand is the depth of anger that has developed through the broken promises of the OECD ‘Inclusive Framework’. Countries outside the OECD were told that they could become full participants in the rule-setting process if they accepted in full the results of the first BEPS process (2013-2015), over which they had no say, and paid fees to the OECD. The Inclusive Framework agreed its workplan for the new process in early 2019, setting out three proposals including a comprehensive reform developed by the G-24 group of countries, to be evaluated by the OECD secretariat. That evaluation never took place, because the United States and France began to negotiate bilaterally. The secretariat took the results of that negotiation – between their host country and their largest member – and came back to the Inclusive Framework just six months later with a ‘unified proposal’ which dropped any element of the G-24 proposal. The loss of trust was profound, and subsequent events confirmed repeatedly the lack of weight given to views of Inclusive Framework members outside even of the G7 group of countries. These tensions spilled repeatedly into public, for example with open requests for an end to the ‘coercion’ of non-OECD members. Overall, the experience has clarified for many that there is no possibility of inclusive rule-setting within the rich countries’ club at the OECD – and so the commitment to make progress at the UN.

The other dynamic underpinning the OECD’s failure to block the resolution is that it has lost much support among its own members. The ‘two pillar solution’, intended to be delivered by 2020, remains a work in progress, and the schedule continues to slide. The ambition of both pillars is far short of the original aims. Pillar One was supposed to go ‘beyond the arm’s length principle’, introducing a unitary taxation approach to ensure the profits of multinationals can be taxed where they arise. As it stands, the OECD proposal would achieve this for just a small fraction of the profits of perhaps 80 large multinationals. The rest of their profits, and all profits of all other multinationals, would remain subject to arm’s length approaches – despite these being widely recognised as no longer fit for purpose. Pillar Two was supposed to introduced a global minimum effective tax rate for multinationals, of a floated 21% or even 25%. This has been weakened to just 15%, and then even further by the introduction of carveouts that make it likely a rate below 10% could be achieved in full compliance. Worse, the current proposals would privilege headquarters countries of multinationals, leaving their countries of operation elsewhere exposed to much the same risks of profit shifting.

For these reasons, neither the US or EU seems likely to legislate for Pillar One – making any possible benefit for other countries diminishingly small, while they would still be required to give up significant freedom to pursue unilateral measures to protect their revenues. Legislation for Pillar Two seems almost certain not to pass in the US, and remains in question for the EU. It seems certain that there will be a rapid return to highly imperfect measures such as Digital Services Taxes, which had been a key driver for the G20 mandating the OECD to start negotiations again in 2019. In this context, it seems likely that even the core members of the OECD found it difficult to generate much enthusiasm for the organisation to continue with an effective monopoly over tax rule-setting.

If the OECD were proving itself either inclusive or effective, the historic pattern of blocking UN progress would very likely have continued. That the OECD is seen to be both ineffective and exclusionary at this stage ultimately explains the unanimous consensus to begin intergovernmental discussions. A number of OECD members used their statements after the resolution to express residual concern, and it will be important to continue to engage with these in the discussions to come. Civil society in countries like Germany, and across the EU and beyond, should be asking their governments about their positions, and the process by which they may develop negotiating positions to take into those discussions.

3. Critics of the UN process claim that the OECD has been extremely successful in agreeing a global minimum tax for over 130 jurisdictions. Furthermore, they argue, that negotiations with so many countries necessarily mean that you need to agree on a compromise and do not achieve 100% of what you desire. How would you answer this?

We should be clear that at present, nothing has been agreed at the OECD. The purely political statements of 2021 have not been followed by binding commitments of any form. The OECD has yet to bring forward the text of a multilateral agreement, or any evaluation of country-level revenue impacts, so there is a long way before informed national discussions could lead to signatures. The major supporters of the current proposals, in the US and EU, appear themselves to be unable or unwilling to legislate on the lines of the OECD proposal – which makes it harder to imagine that they will continue to twist the arms of others. So after four years of what was intended to be a two year process – and in reality, after ten years of the first BEPS process beginning in 2013 – we have nothing more than unfinished proposals with questionable support, even from the most empowered participants.

To be clear, while Pillar One has little to offer, it would be valuable for the core OECD members to introduce a meaningful minimum effective tax rate. Pillar Two is too flawed to be that, but it would still be better than nothing, for these countries. But that does not imply that any other country should follow. The space is now open to design much more effective and less complex minimum taxes, and this should be a feature of countries’ national and regional talks as they prepare for intergovernmental discussions at the UN.

It’s true, evidently, that negotiations with many countries are difficult, and require compromise. But that does not mean that any failure is a good failure. The world has already created an organisation designed specifically to provide the forum for complex intergovernmental negotiations, involving all countries of the world and where they may have multiple, competing interests. This is the United Nations. It’s perhaps unfair to ask an organisation like the OECD, established explicitly to promote the economic interests of its members, to understand and take on this much broader and more complex role. The UN has learnt over time that key elements include broad transparency, so that governments can be held accountable by their own citizens and to one another. This can contribute to a dynamic where even reluctant governments eventually take more ambitious positions – as seen recently at the UNFCCC negotiations on the climate crisis, for example.

A former head of tax at the OECD once told me, on a public platform, that transparency would kill any hope of progress in tax discussions. But the world has seen that allowing private influence – both of major member states and of corporate interests – makes inclusive progress impossible. The absence of voting in the Inclusive Framework exacerbates this dynamic, and has fomented a culture of obtaining individual consent through bilateral threats and pressure. The UN is not free of the same underlying power dynamics between countries of course, and these tactics are not entirely absent. But the public nature of discussions, and the full transparency of positions presented and decisions taken, provide a counterbalancing accountability among states and to citizens. The absence of that accountability in OECD discussions is ultimately responsible for proposals that fail to align with the stated ambition of countries, and lack support even among the most committed members.

We would be foolish to believe that simply moving the setting to the UN will guarantee success. But we would be much more foolish, after ten years of accumulated evidence, to persist with the flawed process of the OECD.

4. Does a stronger role for the UN in international tax coordination mean that the OECD’s time is coming to an end? Or are there possibilities to integrate the existing OECD process into a future UN process?

For now, we can be certain that the OECD will continue to fight for its pre-eminent role – even at the expense of broader progress. There will be an added desperation in the efforts to deliver a two-pillar solution that can actually be adopted by at least some of its own members, which seems unlikely to support more ambitious outcomes. It seems unthinkable that the G20 countries would give the organisation any further mandate on tax, but with the dominance of OECD members in the group, it can’t be ruled out.

Looking to the UN process, however, there are options for the OECD. Many of its members would support it having a role. There’s no question that the OECD has a depth of technical expertise on tax that is unrivalled, simply because its funding is many multiples of all other organisations in this space, including the UN tax committee. The question would be how that expertise could be tapped, without also bringing the major disadvantages – from the patterns of member country and corporate influence, to the tradition of opacity in decision-making.

One possibility would be for the OECD to become a technical resource for those members that wished it, supporting their position in intergovernmental discussions at the UN. That would stop short of a formal role in the UN system, where the OECD’s behaviour has created significant bad feeling. Not all OECD members would necessarily wish to participate, of course, since many are already members of their own groupings which provide technical and political support – from the G77 to the EU.

A more ambitious aim for the OECD tax unit could be to seek permission to convert itself wholesale into a UN secretariat for tax discussions, and in doing so overcome the exclusionary nature of the current arrangements. There would be a high barrier of mistrust to overcome, however, for such a move to be feasible. The management of the Inclusive Framework, and the OECD’s aggressive lobbying against the UN resolution, would not be easily forgotten. Nonetheless, a UN framework convention that could throw an umbrella over range of UN and OECD instruments and activities, with the aim of ensuring a coherent architecture for international tax cooperation, is one of the options that has been discussed.

An important question relates to the OECD’s questionable stewardship of global public goods such as the standards and data on automatic exchange of financial account information and on the country by country reporting of multinationals, on which we have written to the G20 to raise concerns. These seem too important to be managed in the exclusionary and ineffective way that they currently are, and this supports the proposal to create a Centre for Monitoring Taxing Rights, or similar, under UN auspices to deliver on this and the important statistical requirements of the Sustainable Development Goals target on illicit financial flows. Again, the OECD could make a case to begin carrying out this work in a new UN framework; again, there would be a question of trust to address first.

5. What three concrete measures could the German government take to support a stronger role of the UN in international tax matters?

The German government has been a leading participant in the OECD process, but has also played an active role in supporting countries’ efforts to fight illicit financial flows (the Tax Justice Network receives some funding in this regard, details of which are publicly available in our annual accounts). Within the coalition government, the SPD has committed to support a UN instrument on tax – although as far as we understand, this has not yet translated into full support for the current process.

The first concrete measure would be for the government to address the issue publicly, explain its support for the consensus adoption of the resolution, and commit to engage constructively in the intergovernmental discussions in New York.

Second, the German government could provide a model for other EU members. A public consultation process to inform the German position would be most welcome, along with the convening of cross-EU discussions to support a broader, constructive engagement.

And third, the German government could offer to provide financial support to the process. Budgetary resolutions at the UN are always hard fought, and the related allocation of funds here will be no less contested – so a clear German commitment would ease the way significantly, and ensure that the process is not held up for lack of resources.

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