UN Tax Convention: Summary of the Tax Justice Network’s stakeholder input after the Fourth Session of negotiations

This blog is a summary of the Tax Justice Network’s most recent stakeholder submissions regarding the ongoing negotiations of the United Nations Framework Convention on International Tax Cooperation.

After four sessions of (sometimes heated) warm-up, the negotiations of the Convention are now entering into ‘crunch time’. Over the summer and in anticipation of the Fifth Session of negotiations in August, all three workstreams are expected to deliver new draft text of parts of the Convention and its early protocols.  

For Workstream 1, the new text is expected to be a reworked version of the formulation of the Framework Convention’s ‘commitments’ based on the discussions in the Fourth Sessions and the subsequent inputs received. 

For Workstream 2 and 3, the expected text will be the first tangible output of the two ‘simultaneously negotiated protocols’ of the Convention. 

Below, we summarise the main elements of our recent stakeholder inputs.

More information and background on the Convention can be found at our UN Tax Convention Hub. 

Workstream 1: Framework Convention 

Based on the latest Workstream 1 Draft and the subsequent discussions during the Fourth Session, we have raised the following points in our stakeholder submission.

Generally speaking, we believe that the commitments should combine ambition, flexibility and cooperation with respect for sovereignty. Commitments should set the direction of travel for future work under the Convention while leaving technical detail to protocols and other conference of parties (COP) decisions. 

Regarding the formulation of the individual commitments, we note the following: 

• Article 4 (sustainable development): the commitment should reflect the principle of common differentiated responsibilities and needs the addition of rules to monitor progress in the field of tax and sustainable development. 

• Article 5 (fair allocation of taxing rights): the commitment should anchor the allocation of taxing rights in real economic activity, and not in ‘value creation’ which is a vague concept that has in the past often been interpreted to privilege allocation in function of capital and intangible asset ownership. Instead of emphasising the renegotiation of existing tax agreement (which are almost exclusively of bilateral nature), the commitment should focus on multilateral cooperative approaches to rebalance taxing rights. 

• Article 6 (taxation of high-net-worth-individuals): besides the sharing of information on the structures and techniques used by high-net-worth-individuals (HNWIs) to avoid and evade taxes, the commitment should emphasise the need for exchange of information on all relevant assets that make up wealth. This includes the adoption of common asset registration and valuation standards and the creation of a Global Asset Registry (GAR) that allows connecting national beneficial ownership information of entities and legal ownership of assets.  

• Article 7 (illicit financial flows, tax avoidance and tax evasion): the commitment should encompass the development of cooperative measures to ensure two-way complementarity between the information sharing for tax-related illicit financial flow action on the one hand, and for anti-money laundering, anti-corruption and related enforcement on the other hand. 

• Article 8 (harmful tax practices): the commitment should clearly reflect countries’ intentions to develop new standards to identify and remedy the extraterritorial harm caused by tax practices on other countries’ ability to raise revenue and determine its own policies.  

• Article 9 (mutual administrative assistance): the commitment should intention to afford each of the other countries the widest measure of mutual administrative assistance, without reservations or bilateral or regional fragmentation of this commitment but with differentiation in the practical implementation of the rules in function of country capacities.

• Article 10 (exchange of information): instead of copying the rules and restrictions currently included in other exchange of information instruments (like the foreseeable relevance standard or the reciprocity requirement), the commitment should express countries’ intention to develop new exchange of information rules that are based on the fundamental principle that any country should be able to obtain all the cross-border information needed to enforce its domestic tax laws. 

• Article 11 (data collection and analysis): the commitment should focus on countries’ intention to ensure the collection and sharing of all data that countries need for national tax policy development and evaluation. 

Our full submission on Workstream 1 can be accessed here. 

Workstream 2: Protocol on Cross-border Services 

Based on the latest Workstream 2 Concept Note and the subsequent discussions during the Fourth Session, we have raised the following points in our stakeholder submission: 

• The protocol should have a broad scope and cover all types of services – digital and non-digital. There should be no carving out of specific types of services or industries, like international transport.  

• The agreement struck under the protocol should apply to both taxes on income tax and taxes with similar economic effect, like digital services taxes in the case of certain digital services. The protocol should further a comprehensive solution to the topic of services taxation and this requires going beyond the strictly legalistic approach of ‘taxes covered’ (ie income tax only) under bilateral tax treaties.  

• The protocol should embrace various nexus rules, including payor location, market engagement and physical presence. The current standard for physical presence (PE rule) should be supplemented with new relevant indicators of sustained economic engagement. An overarching significant economic presence (SEP) rule can be developed to combine separate nexus rules. 

• With respect to method of taxation, the protocol should foresee a combination of gross taxation by withholding and alternatives for effective and simplified net taxation. Gross taxation at source comes with downsides but has an important role to play in deterring base erosion through intra-group services. Simplified net taxation can be achieved by relying on unitary approaches with formulary or fractional apportionment of the taxable profits from services. 

• The implementation of the protocol should not be left to the bilateral discretion of pairs of countries. The protocol’s rules should apply in all bilateral relations and not only to those relationships that (both) countries wish to cover (like under a BEPS multilateral instrument type instrument) or to bilateral treaties they wish to renegotiate. As such, the protocol should come with the explicit rule that it overrides any bilateral tax treaty rule to the contrary. 

Our full submission on Workstream 2 can be accessed here. 

Workstream 3: Protocol on Dispute Prevention and Resolution 

Based on the latest Workstream 3 Concept Note and the subsequent discussions during the Fourth Session, we have raised the following points in our stakeholder submission: 

• The Protocol should not include an optional mechanism modelled to OECD-style mandatory binding Mutual Agreement Procedures (MAP) arbitration. To be retained, arbitration should at a minimum be made both optional and non-mandatory so that access is granted only on ad-hoc basis if both countries agree. The arbitration process should be fundamentally reimagined as a “UN Tax Dispute Settlement Body” in which adjudicators are also guided by the UN Framework Convention principles. 

• An optional clause should be added to the Protocol to establishes the Mutual Agreement Procedure as the exclusive venue for tax-related investment disputes. The clause would override investors’ right to access investor-state dispute settlement (ISDS) in tax-related investment disputes under bilateral investment agreements if both countries subscribe to the protocol option. 

• To assist lower income countries without tax treaties, the Protocol should feature a universal consultative mechanism for non-treaty situations. The mechanism should not include allocation rules (like article 5/7 and 9 of the Models) to make up for the lack of a common legal ground. Instead, it should merely allow countries to ‘consult together’ on factual issues or the understanding of the application of foreign law. 

• Instead of setting up transfer pricing databases, the workstream should focus on the creation of a database with Mutual Agreement Procedure decision summaries. Not only would such a database boost transparency, eradicate power asymmetries in the Mutual Agreement Procedure process and achieve south-south knowledge sharing, it would also ensure Mutual Agreement Procedure, as a dispute resolution mechanism, can play a role in the prevention of future similar disputes.  

Our full submission on Workstream 3 can be accessed here.