UN inches towards flipping “Rule 1” of global tax system and ending tax abuse era

The 100-year-old cornerstone of the global tax system was put to debate last month in Nairobi as countries continued historic negotiations on a world-first UN tax convention.¹ Having already committed in 2024 to replacing the cornerstone with a fairer basis, last month’s discussions on how to best do so brought the world one step closer to ending the era of cross-border tax abuse.

Alex Cobham, chief executive at the Tax Justice Network said:

“Rule 1 of the global tax system is you tax multinational corporations where they declare their profits. This is the ‘pay-where-you-say’ approach and all other global tax rules are based on it. Modern multinational corporations exploit the ‘pay-where-you-say’ approach by moving profits into tax havens before declaring them, and as a result underpay $348 billion in tax every year. We must replace this with a ‘pay-where-you-play’ approach that taxes multinationals where they employ workers and sell goods and services. This would make tax havens obsolete overnight and improve the lives of people everywhere. The UN tax negotiations in Nairobi moved us closer than we’ve ever been to finally flipping that switch.”²

Countries had already signalled their willingness to move beyond the “pay-where-you-say” model when they committed in 2024 to establishing a fair allocation of taxing rights under the new convention. What remained unclear was which approach would command broad support. In Nairobi, most countries — particularly from the global south — backed the latest text of Article 4, which holds that a state should have the right to tax a multinational’s profits when the multinational has meaningful economic activity in that jurisdiction.³ Article 4 would, in effect, flip the basis of the international tax system to a “pay-where-you-play” approach.

Attempts to dilute the text by a handful of high-income countries and jurisdictions ranking highly on the Corporate Tax Haven Index, which was updated yesterday⁴, were firmly challenged by others.⁵

With momentum building behind Article 4, attention also turned to the transparency tools countries will need to make a “pay-where-you-play” system enforceable in practice.

Liz Nelson, director of advocacy and research at the Tax Justice Network, said:

“Meaningful transparency must be grounded in the ABCs of tax justice: automatic exchange of information, beneficial ownership registers and public country by country reporting. Fragmented reforms will not deliver real accountability. Article 4 only works if these transparency tools, backed by reciprocity and differentiated responsibilities, are built into the core of the convention – so that people all around the world can see for themselves that a fair allocation of taxing rights has been achieved.

Alongside the transformation of taxing rights, progress was made on several other pillars of the convention’s root-and-branch reform.

Discussions on illicit financial flows revealed sharp disagreements about scope and ambition.⁶ A number of countries warned against narrowing the concept or overlooking existing UN standards, after some OECD member countries had tried to suggest that there was uncertainty over whether multinationals’ tax abuse was included.

India underlined this point, stating:

“Illicit financial flows as a definition is the elephant in the room. The United Nations already has a formal statistical definition, which includes a specific category of tax-related illicit financial flows and recognises tax avoidance as an illicit financial flow. Under the Sustainable Development Goals framework, member states have accepted that illicit flows can arise from legal economic activity through aggressive tax avoidance — including manipulation of transfer pricing, strategic use of debt and intellectual property, treaty shopping and hybrid structures. A good starting point is the United Nations’ own conceptual framework for measuring them.”

The convention’s provisions on illicit financial flows must reflect this definition, which already covers both tax evasion and aggressive tax abuse.

Negotiations on the taxation of high-net-worth individuals highlighted that domestic policy alone cannot effectively address extreme wealth held offshore. Effective and reciprocal international information exchange is essential and cannot depend on conditional or discretionary access. The discussions also emphasised that effective taxation must be progressive if the convention is to help tackle historic inequalities and support social and economic development.

Throughout the session, delegates linked sustainable development, addressed in Article 9, to the need for predictable public revenue to finance gender equality, social protection, climate adaptation and debt relief. Many noted that fair taxing rights are fundamental to enabling countries to respond to escalating climate impacts without increasing debt burdens or cutting essential services.

Discussions on harmful tax practices, addressed in Article 8, highlighted longstanding concerns over preferential regimes and secrecy jurisdictions. Nigeria delivered one of the strongest interventions of the week, opening with a line from Bob Marley’s “Exodus” to underline why the United Nations process is necessary – despite the claims from a handful of members of the OECD that their rich countries’ club should keep its predominance:

“If a person does not know where he is going, at least he will know where he is coming from. If the existing forum or fora had been adequate, accommodating, inclusive and practical and acceptable by all, Chair, we would not be here today. Those existing tools and standards are either inadequate or unacceptable to all. We need to do what we have mandated to do, and the less effort and emphasis we place on existing protocol, forum and standard, the quicker we will do our job.”

The intervention underscored that Article 8 must address harmful practices through inclusive and updated standards rather than relying on mechanisms that many countries consider inadequate.

Discussions also centred on how the convention should address tax disputes, as set out in Article 10. Many countries raised concerns about including domestic tax disputes at this stage, warning that doing so could overlap with national courts and administrative systems. Others noted that optional guidance in future phases could support countries that request it, particularly through capacity building under administrative cooperation provisions. Any approach must respect national sovereignty and be grounded in country-led support.

Delegations expressed broad support for strengthening dispute prevention through tools such as advance pricing agreements, joint audits and simultaneous examinations. These tools must remain optional, complement existing treaty arrangements and be supported by long term capacity building. Civil society organisations cautioned that advance pricing agreements lack transparency and argued that prevention must address root causes through strong information access, including public country by country reporting, beneficial ownership transparency and the creation of global registry systems.

For dispute resolution, the Mutual Agreement Procedure was widely recognised as the most practical and adaptable tool. Delegates supported clearer timelines, improved information sharing, sustained capacity support and the inclusion of a model provision for treaties that currently lack language on the Mutual Agreement Procedure. Arbitration remained the sharpest divide. Nigeria, India and Zambia opposed both mandatory and optional arbitration due to concerns about sovereignty, cost and bias, while some high-income countries favoured keeping arbitration optional. Any dispute mechanism established under Article 10 must be inclusive, affordable and transparent.

Across the negotiations, countries emphasised that capacity building must be a core obligation of the convention, not an optional add-on. Long-term, demand-led support is required to strengthen tax administrations, build beneficial ownership systems, improve audit and treaty negotiation skills and support digital transformation. Addressing information asymmetry, including access to beneficial ownership information and global registries, will be essential for ensuring the convention can meet its mandate.

The Nairobi negotiations marked a turning point, with countries beginning to collectively confront the structural imbalances at the heart of the global tax system. Embedding a fair allocation of taxing rights in Article 4, supported by robust provisions in Articles 8, 9, 10 and the articles addressing illicit financial flows, is essential for creating global tax rules that work for all countries and allow them to raise the revenue needed to meet people’s rights and climate commitments. The next negotiation round will be crucial as countries work toward a consolidated text and lay the groundwork for the first Conference of Parties.

-ENDS-

Notes to editor

1. For updates, summaries and analysis of the UN tax convention negotiations, see our dedicated webpage here. You can see more detailed information on specific elements being negotiated in this section of the webpage.
2. Arguably, the most consequential feature of the current global tax system was established in the 1920’s by the League of Nations. This is the “arm’s-length-principle” which has served as the basis on which multinational corporations are taxed for a century. The principle treats the individual parts of a multinational corporation – its subsidiaries, headquarter, holding companies, etc – as separate businesses and taxes them separately. Each country taxes the parts located within its borders. This is the key principle that multinational corporations exploit when they shift profits out of one part of the corporation in one country and to another part in a corporate tax haven in order to underpay tax. We refer to this approach to tax as “pay-where-you-say” because it taxes multinational corporations based on where they declare their profits on paper – which can often be in a corporate tax haven where the only presence the corporation has is a mailbox it rents. The alternative to this approach is unitary taxation with formulary apportionment. This approach treats all the parts of multinational corporation as one entity, and requires the corporation to be taxed on the profit it makes as whole. Each country in which the multinational corporation operates – where it employs workers, makes goods and services and sells them – taxes a slice of the profits. The size of this slice is proportional to the slice of the multinational corporation’s operation that takes place within the country’s borders. So if a quarter of a multinational corporation’s workforce and sales are in Kenya, then a quarter of all the profit it declares, wherever it declares it, must be taxed by Kenya. Kenya taxes this profit in accordance with its corporate tax rate. We refer to this approach as “pay-where-you-play”. By requiring a multinational corporation’s profits to be proportionally taxed across the countries where it genuinely does real business, where each country can tax its allotted share of profit as it sees fit, unitary tax makes corporate tax havens redundant. A corporate tax haven may still choose to have a corporate tax rate of 0%, but if a multinational corporation doesn’t do real business in the tax haven and only rents a mailbox there, the share of the multinational’s profit that the tax haven can tax will be very small to non-existent. The OECD’s failed two-pillar proposals sought to narrowly implement unitary tax on a very few multinational corporations, but with deeply biased rules for how proportionality would be allotted that benefitted the richest countries and European tax havens. The UN has committed to a “fair allocation of taxing rights” in the Terms of Reference of the UN Framework Convention on International Tax Cooperation, which is broadly understood to be best achieved by replacing the arms-length principle (pay where you say) with unitary tax (pay where you play).
3. Article 4 of the draft framework convention states: “The States Parties agree that every jurisdiction where a taxpayer conducts business activities, including jurisdictions where value is created, markets are located and revenues are generated, have a right to tax the income generated from such business activities.”
4. The latest batch update to the Corporate Tax Haven Ranking, published Tues 2 December, focused on countries’ loopholes and exemptions. One finding among these that particularly stands out is that countries are giving multinational corporations an average 63% tax discount on profits generated from intellectual property. The size of the discount is proportionally the same as allowing workers to not pay income tax for seven months of the year. Countries offering the tax discount are giving away at least US$29 billion of their own tax revenue each year. At the same time, they globally cost other countries US$84 billion in tax losses a year, as multinationals respond to the tax discount with abusive profit shifting out of countries where they have their real operations. More information available here.
5. For a recap of the discussion on Article 4, see the “Fair allocation of taxing rights” commitment dropdown box in the “Build-a-convention” tracker section of our webpage dedicated to the UN tax negotiations.
6. See this blog for more information about these discussions on the illicit financial flows and their implications.