Why the new Labour government should reverse the UK’s opposition to the UN tax convention

The UK is among the biggest revenue losers to the cross-border tax abuse of multinational companies and wealthy individuals. The UK public consistently identifies the fight against such tax abuse as a key priority. And the new Labour government has been very clear on the need to crack down on tax abuse, and to reverse the erosion of public services and infrastructure that is their inheritance after 14 years of ‘austerity politics’, Brexit damage and grave economic mismanagement.

The new Labour government is fortunate that the means to tackle tax avoidance at an international level is within spitting distance. All they need to do is support it. Over the next month, the draft terms of reference will be finalised for the negotiation of a comprehensive UN convention which would provide the biggest overhaul of the international tax rules for a century. The Labour government will have to show its cards. Will they opt for continuity with the previous Conservative government’s policy and continue to frustrate efforts at the UN? Or will they mark out a new course for the UK on the world stage and support international efforts to curb tax abuse? There is a great deal to be won, and the UK could well be the biggest winner of all – if it seizes the opportunity.

The negotiations of the Ad Hoc Committee to Draft Terms of Reference for a UN Framework Convention on International Tax Cooperation have gone well thus far. Although some OECD member countries including the UK had opposed the underlying UNGA resolution, participation in the negotiations this year has been universal.

The aim of the UN framework convention on international tax cooperation (UNFCITC) is to create the first-ever, globally inclusive body for decisions over tax rules and standards. The OECD, a group of rich countries, has largely set the rules since 1960 – but it has presided over a dramatic rise of cross-border tax abuse through this period.

The OECD’s ‘two pillar’ proposals to address corporate tax abuse were scheduled for delivery in 2020, and were themselves necessitated by the evident failure of the 2013-2015 process to curb tax losses. By mid-2024, neither pillar has been finalised but both have lost much of their initial ambition.

Pillar 1 aimed to stop profit shifting, but will now only apply to a small fraction of the profits of fewer than one hundred multinational companies. The draft has also now been modified so that the United States can exert a unilateral veto to prevent enactment by any other country – a veto that seems inevitable given the US’ current politics.

Pillar 2, the global minimum tax, has been reduced from a putative 28% or 25%, to an eventual 15%. Further carveouts have been agreed that would allow for an effective rate of around 10% to remain compliant. But more obviously, adoption has been led by a group of aggressive corporate tax havens including Switzerland which are openly competing to provide (OECD-approved) subsidies to offset any additional revenue raised, while ensuring no other country receives the right to raise additional taxes instead. Benefits for non-havens are independently estimated to be far lower than OECD projections had claimed. Unsurprisingly perhaps, adoption by non-havens barely extends beyond the EU.

The gradual crumbling of the two pillars is just the latest, if the most significant element of the OECD’s failure. Coupled with growing anger at the anachronistic, even colonial nature of its dominance of rule-setting, calls for a globally inclusive decision-making body have become irresistible.

In addition to questions of fairness, the OECD’s lack of transparency is understood to be central to its inability to deliver effective outcomes. Behind closed doors, the embedded corporate lobby groups have great scope to influence proceedings, while member states are free to oppose or weaken measures which they have publicly championed.

The OECD has often lauded the ‘consensus’ nature of its proceedings, but in fact there is no formal mechanism for decision-making other than by votes of only its member states. In practice, many non-member countries and some members too have complained of the undue influence of the US, and the failure of the secretariat to provide a fair basis for inputs or to recognise objections. Our recent report, joint with many allies, sets out the array of concerns over the OECD’s litany of failure.

The transparent nature of United Nations negotiations, and more limited role for the secretariat, greatly reduce the scope for backstage manipulation of outcomes. As has been seen in the United Nations Framework Convention on Climate Change (UNFCCC), there are moments where public scrutiny can make even a powerful blocker such as the US adopt a more constructive position. Other governments too, have found that they are better able to stick to their publicly stated positions if succumbing to US pressure would be visible to the public and civil society at home.

There is of course no requirement for unanimity within UN negotiations. The negotiations are likely to follow United Nations General Assembly (UNGA) rules which are based on a preference for consensus, but the potential for majority voting when time requires it, and the possibility for super-majority votes (e.g. two thirds) for the most important decisions. With the broad support of G77 countries and many EU members for progressive tax measures and more effective cooperation, the new UK government has a clear space to seek constructive engagement on a positive agenda – with others unable to veto global steps forward to the benefit of all.

A carefully designed and positive approach to the final meeting of the Ad Hoc Committee, scheduled to run from late July to mid-August, could generate significant gains. In terms of domestic politics, this is an opportunity for the Labour UK government to set out a distinct position to the Conservatives and indicate that it will no longer seek to block progress.

In terms of international diplomacy, the UK has a chance to rebuild some of the trust in its integrity and solidarity that has been lost as a result of a series of ill-judged steps from its predecessor, and the inconsistent positions taken with respect to Russia’s invasion of Ukraine and Israel’s destruction of Gaza. Finding common cause with the Africa Group and G77, on measures that would generate common benefits, would be a positive step.

Meeting commitments to international tax cooperation that date back to 2015, at a time when official aid has stagnated and many countries face unsustainable debt burdens, would not only be a valuable signal of goodwill but would support concrete progress for public finances. The UK would be among the largest winners in revenue terms from putting an end to cross-border tax abuse, while G77 members would benefit most from re-establishing a fair distribution of global taxing rights.

—

Without implication, thanks to Rachael Henry, Head of Advocacy and Policy at Tax Justice UK, for useful comments and suggestions.

Image credit: Number 10, CC BY 2.0, via Wikimedia Commons