We recently published the latest update to the Tax Justice Network’s Corporate Tax Haven Index, which is a ranking of the countries most complicit in helping multinational corporations underpay tax.
The index ranks countries by evaluating how much wiggle room for corporate tax abuse their laws provide and by monitoring how much financial activity conducted by multinational corporations enters and exits the countries. Laws are evaluated against 18 indicators.
In this blog, we’ll do a deep dive on two of those indicators – the one on Royalties and the one on Services – and the key findings revealed by each.
Why limit royalty and service fee deductions?
The strategic use of intellectual property (IP) rights is one of the main tax avoidance tactics used by multinational corporations to lower their tax bills. Intellectual property refers to patents, copyrights and trademarks that protect the enterprises’ production processes and brand. Especially in the digitalised economy, intellectual property rights on digital applications are often a company’s most valuable assets.
However, intellectual property assets are both difficult to value and intangible. This makes it easy for a multinational corporation to shift the ownership of its intellectual property assets from one company within its corporate group to another. And often, this means we end up seeing multinational corporations shifting ownership of their intellectual property to their companies in corporate tax havens. These companies then charge royalties to the rest of the companies that make up the multinational corporation’s corporate group for the use of the intellectual property (like its brand name, production processes or digital applications). These companies are the ones located and generating revenue from selling goods and services outside of tax havens.
By paying the royalties payments to the parts of the corporate group based in tax havens, these companies outside of tax havens pay the profits they make out of the countries where they are operating and into tax havens. Royalties payments are usually fully deductible and, as such, high-taxed profits from the external sales are turned into low-taxed royalties income showing up with the IP holding company. By selecting a low-tax jurisdiction with adequate tax treaties in place, the high-tax jurisdiction will also not levy withholding tax on the royalty payments. The result is profit being shifted into corporate tax havens and going untaxed.
In a study published in October 2023, Lejour and van ‘t Riet estimate that at least 18% of cross-border royalty payments between companies is motivated by tax evasion. The authors also point out that in 2018, payments between Ireland and the Netherlands, and between the Netherlands and Bermuda amounted to US$25 billion, the largest bilateral royalty flows between countries ever recorded. This extraordinary statistic is caused by the fact that intra-group royalty payments are a crucial ingredient of the infamous double Irish-Dutch sandwich, a tax planning scheme that, according to the authors, has been used by the likes of Google and Uber to syphon profits from the multinationals’ activities in market jurisdictions in a ‘tax-friendly’ way to Bermuda where these profits were left undertaxed. News reports from November 2024 regarding Netflix (see here and here) indicate that even post-BEPS, intra-group service fee and royalty payments have still been used to shift profits and erode countries’ tax bases ‘à volonté’. Quite tellingly, the countries facilitating the sandwich rank high on the recently updated Corporate Tax Haven Index with Ireland in 9th place, the Netherlands in 7th and Bermuda in 3rd.
Deductions for intra-group payments for services cause similar issues of tax avoidance through base erosion. By the strategic use of intra-group services contracts, group companies in low-tax jurisdictions can be lined up to provide high-value managerial, consultancy or technical services group companies in high-tax jurisdictions. The digitalisation of the economy, and the ability to provide services remotely, makes this tax abuse technique even more easy to implement.
What do the indicators do?
The indicators on Royalties and on Services measure to what extent countries have adopted rules to limit the deduction of intra-group payments of royalties and services. In principle, expenses incurred by a company for the purpose of its business are fully deductible against its profits.
Various policy options exist to limit excessive deductions of intra-group payments of royalties and services fees.
One option is to design a cost deduction limitation that disallows deduction if the related income in the hands of the recipient is taxed at a rate less than a certain percentage or less than a certain percentage of the country’s tax rate.
A second option is to include a deduction limitation that limits the amount of intra-group royalty and service fee payments that can be deducted to a percentage of turn-over, taxable income or assets.
A third option is to partially disallow deduction in function of the tax that can be withheld on the outbound payment.
A final option is to introduce a deduction limitation in the form of a minimum tax on outbound base eroding services and royalty payments to prevent full erosion of the local tax base by means of service and royalty payment deductions to foreign group companies.
What do the indicators’ latest results reveal?
Analysis of country tax rule developments since 2021 shows that while certain countries have abandoned their previous policies to limit deduction, comparatively more countries have decided to start imposing deduction limitation in some way or another. On aggregate, this means deduction restrictions for intra-group services and royalties have become more common, which is a good development.
Brazil is one of the few countries that has backtracked on its fixed deduction limitation rules. As part of the country’s recent alignment with the OECD Transfer Pricing Guidelines, Brazil has abolished its longstanding royalty deduction limit of 5% of the gross revenue derived from sales that relied on the IP for which the royalties were paid. It is believed that pricing royalty transactions in line with the OECD’s arm’s length principle makes deduction limits redundant. This is an unfortunate development. It is not because isolated transactions are priced right that the overall arrangement in which they figure is artificial and amounts to tax avoidance. As confirmed by the European Court of Justice in a recent decision in October 2024: the arm’s length principle is not a safe harbour against tax avoidance. As a consequence of this, Brazil loses some of its previous good marks on the Index’s anti-abuse indicators.
On the upswing, our research shows that in recent years, many EU countries which have started to adopt deduction limitations for intra-group royalty and service fee payments. Unfortunately, these rules have limited scope and are framed as defensive measures ‘defensive measures’ which only restrict the deductibility of payments to group companies in countries that are on the ‘EU list of non-cooperative jurisdictions’ (currently practiced by Denmark and Germany) or on the country’s own list (currently practiced by Greece, Spain and Portugal). In some countries, the taxpayer has the ability to disproof the implied lack of economic substance that underlies a country’s inclusion on the blacklist (e.g. Belgium, Italy, Spain).
In our recent submission to the EU Commission’s public consultation on the revision of the EU’s Anti-Tax Avoidance Directive (ATAD) we point out that using a ‘tax haven blacklist’ to determine the scope of deduction limitations is both ineffective and inappropriate. Not only does the EU’s list target almost exclusively developing countries in the Global South, the listing criteria are conveniently shaped to ignore certain EU countries’ own roles in global corporate tax abuse. This is again made clear in our recent Index which ranks three EU countries among the top ten enablers of global corporate tax abuse.
Despite the flaws of using blacklists, the recent adoption of these rules clearly shows that EU countries find it a sensible policy to restrict deduction of intra-group royalty and service fee deduction in some form. In our ATAD submission, we accordingly suggest that harmonised non-deduction rules should be included in an updated ATAD. Such harmonised rules should apply to all intra-group service fee and royalty payments, regardless of the country of the recipient, and should be based on objective limitation criteria like related revenue or the levying of withholding tax.
Finally, in light of the fact that more countries are adopting deduction limitation rules but at the same time the rules they are adopting are often far from ideal, we have decided to slightly tighten our scoring methodology for these two indicators. Previously, countries were scored in a binary fashion: a country either has certain limitations (good score) or does not (bad score). Now, the quality of the limitations is also considered, not just their presence. A country receives the best score if it fully disallows the deduction of intra-group service fee and royalty payments. If a country has adopted deduction limitations that come with certain restrictions (like a scope limited to blacklisted countries or a substance carve-out) a medium score is granted. And if country doesn’t have any limitations, it gets the worst score.
Currently, no country fully prohibits the deduction of intra-group payments of royalties or services fees. We are also aware it’s unlikely that a country will ever adopt such a policy as long as the separate entity approach and the arm’s length principle underly the international allocation of the corporate tax base. Full abolishment of intra-group payment deductions would be concomitant to a general move to a system of unitary taxation with formulary apportionment.↪NOTEUnitary taxation requires a multinational corporation’s profits to be divided up across the countries where it does business, so that each can tax their fair share. The fair share is allocated base on a formula that relies on objective factors like assets, employees and sales made by the multinational corporation in the individual countries in which it is active. Unitary taxation makes tax havens redundant since multinational corporations don’t do real business in tax havens. Learn more. If the overall profits of a multinational are apportioned to group companies in function of their share of assets, labour and sales used to make such profits, there is no need to assess the tax consequences of intra-group service and royalty payments. This does not mean that a group company’s intra-group services will not be rewarded with taxable profits. It will, but only if these services reflect the genuine use of assets and labour, and not merely because the terms of an intra-group company agreement say they do. As such, only a corporate tax system based on unitary taxation with formulary apportionment, fully eliminates the risk of corporate tax abuse via services and royalties payments, and so, deserves a perfect score on the Services and Royalties indicators.
Services and Royalties under the UN Framework Convention
Finally, it is good to note that subject matter of these two indicators is also at the heart of upcoming negotiations on a United Nations Framework Convention on International Tax Cooperation. Countries have recently pre-agreed on the terms of reference terms of reference for these negotiations and these terms contain a commitment to a fair allocation of taxing rights on services and to address tax-related illicit financial flows. In the near future, a protocol under the Framework Convention may be negotiated to instate source taxation on outbound payments of royalties and service fees. A protocol on illicit financial flows may introduce measures to curb aggressive transfer pricing strategies that involve base erosion using intangibles and intra-group service agreements.
Besides ridding the world of corporate tax abuse, the adoption of these protocols would also improve countries score under the Services and Royalties indicator of the Corporate Tax Haven Index. Nothing to sneeze at, if we may say so.
As a former school teacher, what I was perhaps most excited about when I joined the Tax Justice Network was the opportunity to work with, and learn more about how tax injustice impacts students and teachers around the world. At the same time, it felt scary because this is surprisingly (or perhaps not) still a new topic for most teachers like myself. It’s also a topic that people – particularly those with power and influence over decisions on global tax rules – have an interest in making look complicated and inaccessible, so that they can continue to make decisions without much accountability from the people affected by those decisions.
When I sat down on a unextraordinary morning to start drafting a “tax justice and education” report, I had one big cup of coffee in my hands and two questions on my mind:
What is my purpose in writing this report? And how can it be helpful to other people?
Not very easy questions to answer as you can imagine.
My purpose in writing this report is to make people angry, as angry as I am. Angry to know that students and teachers worldwide have had their futures, opportunities and work conditions stolen from them. Angry to know that the reason we still have 250 million kids out of school, and the reason teachers are regularly being overworked and underpaid, is not because governments don’t have enough money to fix the problem. Quite the opposite. It’s because our governments have made a political choice to not fix the problem so that a small group of people – who already own way more than they should – can own even more.
And how could making people angry be helpful? Because this is not a fight that one person, group or organisation can win on its own. We need more people like you and I around the world to call upon their governments to do their part.
One of the key learnings I’ve taken away from this research is that this has to be an intersectoral and collaborative debate. People from across the tax justice and the education policy movements have to work together to bring this conversation to the big tables, just like how we worked together writing this piece with invaluable input from education partners.
So, before you go on and read the report, here’s a summary of what to expect:
The report starts off with a crash course for newcomers to tax justice and education financing to get up to speed and learn how the two movements are connected. It then models what our public education systems could look like if we had fair tax systems that take into account human rights and inequalities – just like they should.
Here’s what the report finds:
At this point you’re hopefully thinking, “Well then, what can I do about it?”.
We’ve got you covered. The report delves into a whole set of policy solutions on education and tax (like the ABCs of tax justice), at the national and international level. These are policy solutions we can all take to our governments and demand they take immediate action.
Feeling anger when discussing injustice is normal and necessary, but just as important is finding, and holding on to, the inspiration to change things for the better. The findings of our report are enraging – the rights of millions of children denied – but they also make clear what our communities have to gain, what exciting future we can usher in, by securing just tax policies.
We always welcome feedback to help improve our research and reports where possible. If you have any comments and feedback you’d like to share on this report, please email [email protected].
We recently published the latest update to the Tax Justice Network’s Corporate Tax Haven Index, which is a ranking of the countries most complicit in helping multinational corporations underpay tax.
The index ranks countries by evaluating how much wiggle room for corporate tax abuse their laws provide and by monitoring how much financial activity conducted by multinational corporations enters and exits the countries. Laws are evaluated against 18 indictors.
When a country does not require all multinational corporations to report their revenue, profits, taxes, staff and tangible assets for each country where they have affiliates, corporations can shift their profits to tax havens, conceal this information within their consolidated accounts at the group level, and underpay tax.
This indicator assesses if the country requires multinational corporations incorporated within its borders, listed on national stock exchanges, or involved in certain sectors to make public their worldwide financial reporting data on a country by country basis.
Why public country by country reporting?
Public country by country reporting is one of the key corporate transparency policies the Tax Justice Network has been long advocating for. Its an accounting practice designed to expose a multinational corporation whenever it shifts its profit into tax havens to pay less tax than it should.
Country by country reporting regimes come in different shapes and sizes. In the previous edition of the index (developed in 2020 and published in 2021), the emphasis laid on measuring the extent to which countries were embracing public reporting. For example, countries received good marks if they adopted a single sectoral regime and better marks if they adopted various regimes for various sectors. This approach was in line with policy situation of the day: while many countries had adopted the OECD’s standard of non-public country by country reporting developed under BEPS, few legislators had ventured into embracing public reporting rules. Public disclosure of country by country reports is however the only way of solving the flaws of the OECD’s confidential reporting standard. Not only does this standard often leave low-income countries out of the information ‘circle’ because they are unable to implement the burdensome exchange of information standards, it also denies countries access to information on multinational corporations that are remotely doing business within their borders but without a taxable presence. Furthermore, non-state stakeholders like citizens, consumers, investors, academia and civil society all have valid interests in transparency on multinationals’ various local activities and local tax bills.
How does the indicator score countries?
The zeitgeist regarding wide scope public country by country reporting has drastically changed since the Corporate Tax Haven Index was last updated. The adoption of the EU Public Country by Country reporting Directive at the end of 2021 shows that many countries hosting multinational headquarters are no longer opposed to economy-wide public country by country reporting. For this reason, the focus of the indicator has now shifted from measuring the quantity of regimes in place to measuring the quality of public reporting regimes in place. Under the updated methodology, three factors are key for determining the quality of a country’s public country by country regime: 1) whether the regime applies to all sectors (good score) or just a single sector (bad score); 2) whether a regime adopts a high information reporting standard by requiring information on assets, payroll, sales and profits/losses before tax (good score) or only limited information like just tax payments without other financial information (bad score) and 3) whether a regime requires full geographical disaggregation (good score) or allows the information on certain groups of countries to be reported in aggregated form (bad score). If countries have multiple regimes in place, their score is determined by the most optimal regime, which will be the regime that has the widest scope of application.
What do the indicator’s latest results reveal?
On the surface, countries’ scores on Public Country by Country Reporting Indicator don’t seem to have changed much. But there’s more going on underneath the hood.
The biggest change seen on this indicator took place in the EU. Twenty-four EU countries have now implemented the wide-scoped public country by country regime of EU Directive 2021/2101. Their scores, however, remain the same. In fact, they scored the same as the three EU countries that did not implement the new directive, namely Cyprus, Italy and Slovenia. How can this be?
While the regime of the new EU directive applies to all sectors, it does allow multinationals to aggregate country information from non-EU countries which are not listed as tax havens. This significantly restricts the directive’s reporting powers – and ultimately the directive’s impact – to the point of making the directive not particularly more effective than the older directive other EU countries are implementing. For this reason, implementing EU countries have not gained a score improvement on the indicator compared to the three EU countries that have not implemented the new directive.
Those three countries are scored for their implementation of the sectoral public reporting regime of the older EU Directive 2013/36 which applies only to banks and which was implemented by all EU countries some years ago. Under this older regime, only banks have to provide public country by country reporting but full geographical disaggregation of information is required, which leads to an identical score as the new regime.
So to put it simply, the new directive applies to all sectors (good!) but allows aggregated information (bad!). The old directive applies to just the bank sector (bad!) but does not allow aggregated information (good!). So implementation of either directive results in the same mixed-bag score.
If EU countries want to increase transparency (and see their indicator scores improve), they have to tick both boxes: public reporting in all sectors and without any aggregation of individual country information.
An additional note here: Analysis of EU countries’ transposition of the new directive shows that many EU countries are making use of the opt-outs allowed under the directive. These include the safeguard clause for commercially sensitive information, the lack of compulsory publication of the reports on a company’s website if published somewhere on a government website, and the absence of a penalty regime. These opt-outs are not treated as score-altering restrictions on the indicator (since the directive’s allowing of aggregated information is already a serious restriction), but they certainly do not increase the effectiveness of the new directive.
Last but not least, the indicator shows that a tiny but important bit of public reporting progress has been made in the United States. Like Canada, Switzerland and EU countries, the United States enacted a long time ago a public country by country reporting regime that applies to companies active in the extractive industries. This reporting regime, figuring in Section 1504 of the Dodd Frank Act of 2010, requires US multinational corporations active in the extractive industries to provide public country by country reporting on ‘payments to governments’. Alongside information on mining royalties, dividends, fees and a few other types of payment made to governments, information is also required on the amount of tax paid per country. However, US Big Oil companies have so far continued to successfully prevent the regime from being implemented by repeatedly challenging its implementation rules, both in court and in Congress, for nearly 14 years now.
But, a challenge-proof set of rules was issued in 2021 and the first reports are expected to be finally filed by the end of 2024, including by the Big Oil companies. The public filing of these reports will be a good day for corporate transparency, and arguably for the planet.
You can see countries’ scores on the Public Country by Country ReportingIndicatorhere. And explore all indicators on the Corporate Tax Haven Index here.
This report was produced in collaboration with Banking on Climate Chaos, whose support was essential to our analyses. We also greatly appreciate the valuable resources compiled by urgewald e.V. and Reclaim Finance.
Disclaimer: The Tax Justice Network considers the information communicated in this report to come from reliable sources and has taken every care to ensure its accuracy and that the data analysis is robust. Full details regarding data sources and methodological decisions can be found in the accompanying methodology note. However, given the opaque nature of the subject matter, the Tax Justice Network cannot warrant the absolute accuracy, completeness, or reliability of the information or analysis and disclaims any liability for the use of this information or analysis by third parties. If you believe there are inaccuracies in our data, please reach out to us at [email protected], and we will make every effort to investigate and correct any errors as necessary.
This analysis identifies structural deficiencies based on aggregated data. The individual examples given are used to illustrate the risks, and we do not assert that any of the companies named are actively violating laws or regulations.
The global financial system is still fundamentally at odds with climate goals, as it continues to entrench high-carbon development pathways. In this report, we demonstrate that financial secrecy plays a key role in perpetuating this issue: it enables banks and fossil fuel companies to obscure the true scale of their fossil fuel financing – a practice we term “greenlaundering.” Unless steps are taken to dispel this smog of financial secrecy, progress won by the climate justice movement to divest from fossil fuels will continue to be jeopardised.
This report examines the fossil fuel financing provided by the 60 largest global banks, exploring how funds are strategically channelled through “secrecy jurisdictions.” These type of tax havens, specialized in financial secrecy, allow firms to obscure their activities and ownership structures from the public. Fossil fuel company subsidiaries appear to be deliberately established in secrecy jurisdictions to take advantage of weak transparency regulations and favourable tax regimes.[1] The report also offers indicative evidence of how these structures benefit both fossil fuel companies and their financiers – at the expense of the climate and a liveable future for us all.
Our analysis of fossil fuel financing of the world’s largest 60 banks reveals:
68 per cent of the fossil fuel financing provided by the world’s 60 largest banks is being granted to subsidiaries in secrecy jurisdictions. With their weak transparency laws, such jurisdictions allow fossil firms to hide details about their ownership structures and financial activity or enable them to pay lower taxes than they should.
It is widespread practice among fossil fuel companies to establish financing subsidiaries in secrecy jurisdictions, from which they move funds to expand fossil fuel activities in other locations. These companies often have complex subsidiary structures spread across various secrecy jurisdictions, making it difficult or even impossible to trace the flow of finances.
Since the majority of fossil fuel financing flows through secrecy jurisdictions via complex subsidiary structures, it becomes difficult to quantify banks’ true fossil fuel exposure. This challenge is further compounded by the lack of transparency regarding the final use of each type of financing. As a result, ensuring the accuracy of banks’ sustainability reporting, as well as their adherence to exclusion policies and regulatory measures – particularly those focused on transparency in sustainable finance – becomes increasingly difficult. What we observe resembles a “hall of mirrors,” where deals are concealed by layers of complexity and obfuscation.
We illustrate the problems of such structures based on two prominent examples of fossil fuel companies: Aramco, the world’s largest oil company, and Glencore, the world’s largest coal producer and exporter. These companies’ responses, and those of others named including a range of banks, are included in full in the accompanying methodology note.
Our detailed investigation of Aramco’s and Glencore’s financing structures reveals:
The “hall of mirrors” makes it nearly impossible for activists, researchers, financial regulators, and the public to identify all subsidiaries that are relevant to the companies’ financing structures.
Even when a subsidiary can be linked to a fossil fuel company, its location in a secrecy jurisdiction makes it difficult or even impossible to obtain information about the firm’s owners or financial situation. This is a concerning pattern for anyone trying to assess the financial health of a fossil fuel multinational.
Even for subsidiaries where basic information can be obtained, it remains impossible to determine how the financing received is eventually transferred and used.
This lack of transparency makes it difficult to hold fossil fuel companies and banks accountable for their continued investments in polluting sectors. It also complicates regulators’ efforts to enforce rules related to both sustainable finance and financial stability. Meanwhile, the largest fossil fuel firms and global banks may benefit from this opacity at the expense of broader accountability.
Our analysis of potential secrecy benefits for the largest fossil firms shows:
Exploiting financial secrecy can enable fossil fuel companies to secure more favourable financing conditions. Specifically, we find that financing channelled through subsidiaries in secrecy jurisdictions is associated with lower interest payments for fossil fuel companies. This may be because such financing is not classified as “fossil fuel financing” by banks, allowing it to be offered under more advantageous terms and could be a method by which fossil fuel firms circumvent existing bank exclusion policies.
A strategic arrangement of various financing schemes can further reduce the cost of funding for fossil fuel companies. Under the current system, these firms can obtain favourable lending conditions for the “greener” parts of their business, such as renewable energy projects, by using “Green Bonds” that offer lower financing costs. Simultaneously, the same company could secure funding for its fossil fuel activities without penalties by structuring it through subsidiaries that are not classified as “fossil fuel financing” and labelling it as “general purpose funding.”
A well-known benefit of using low-tax jurisdictions – common not only in the fossil fuel sector but across industries – is aggressive tax planning. Channelling finances through secrecy jurisdictions allows fossil fuel companies to shift profits to locations with the lowest tax rates. For example, a loan received in a low-tax jurisdiction can be passed on to other group entities at higher interest rates, effectively moving money from higher-tax countries, where the interest cost can be deducted against profits subject to higher tax rates. This enables companies to reduce their tax burden and avoid paying the fair share of taxes owed, given the economic activity they have in each country.
The largest banks may be complicit in these arrangements, as it allows them to remain unaware – or deliberately avoid knowledge – of fossil fuel activities they would rather not recognize, a practice we refer to as “planned ignorance.”
Our analysis of potential benefits for global banks from secrecy deals shows:
Banks appear to understate their true exposure to the largest oil, gas, and coal companies compared to our findings. This allows them to greenwash their image and technically comply with self-imposed sustainability metrics, while still maintaining lucrative relationships with profitable clients they would otherwise be expected to cut ties with.
This understatement can be attributed to several factors linked to secrecy practices: banks may not report the fossil fuel exposures of the corporate group if they have granted financing to one (potentially non-fossil fuel related) subsidiary of this group only, they may exclude certain types of financing, and they might apply generous definitions and high thresholds when designating companies as fossil fuel firms.
An analysis of the exclusion policies of six of the largest global banks reveals that only one explicitly considers the activities of all subsidiaries within a corporate group in (at least parts of) its fossil fuel exclusion policies. This loophole allows banks to continue financing an excluded company through one of its subsidiaries or through subsidiaries under the same parent company.
Banks likely understand that funding can be shifted between subsidiaries. Therefore, they should take subsidiary structures of fossil fuel companies into account – especially those of large, diversified energy groups – when defining exclusion policies and reporting fossil fuel exposure.
“Planned ignorance” can prove useful when a bank only reports what it officially knows, for instance, in the context of the EU’s sustainable finance and corporate sustainability reporting requirements. This approach may also explain why banks avoid formulating clear and ambitious exclusion policies – such as including all forms of financing to any fossil fuel subsidiary, no matter their own exact role in the financing – and why the available data on banks’ fossil fuel financing does not align with their sustainability reports.
Greenlaundering harms us all. The opaque nature of fossil fuel financing through secrecy jurisdictions prevents policymakers and regulators from fully enforcing regulations. Investors seeking to invest sustainably are unable to access transparent data. It also weakens the ground for climate advocacy: the goalposts for the climate justice movement in bringing about the permanent divestment from fossil fuels are constrained by the very limited information that is publicly available.
Tax justice is key to fighting greenlaundering and dispelling the hall of mirrors that enables it. Jointly with increased reporting transparency and continued pressure on both banks and fossil fuel corporates, we can hold them to account.
Specifically, we propose the following recommendations:
Negotiate transparency rules at the UN: Financial secrecy is a global issue that requires multilateral cooperation, best achieved through transparent and inclusive processes. The recent agreement to establish a UN Tax Convention marks progress towards a global transparency framework. This shift can take the world beyond the historically opaque and discriminatory OECD negotiations, and offers a chance to connect tax and climate goals at the highest level of governance.
Unmask polluters through comprehensive beneficial ownership transparency: Identifying the individuals behind fossil fuel companies and their subsidiaries would expose financial secrecy and reduce their ability to hide polluting activities. Publicly accessible beneficial ownership transparency would make it harder for companies to shift funds through subsidiaries unnoticed, helping dismantle “planned ignorance” by banks.
Improve public country by country reporting for corporations: Requiring multinational corporations, including fossil fuel companies, to disclose their economic activities, profits, and taxes paid in each country would reveal potential abusive practices. Stronger reporting standards would uncover the use of secrecy jurisdictions to conceal fossil financing and thereby combat “greenlaundering”.
Pressure banks to phase out investments in dirty fossil fuels: While better data and reporting are essential, the overarching goal must remain clear – banks need to be pushed to commit to a just and equitable phase-out of fossil fuels. Civil society groups and advocacy tools, such as policy trackers, can help maintain pressure on financial institutions to adopt stricter fossil fuel policies.
Drastically improve reporting standards for banks: Current reporting standards fall short, especially in relation to banks’ scope 3 emissions, which include financed emissions from clients in the fossil fuel sector. Mandatory scope 3 reporting is essential for holding banks accountable for the detrimental impacts of their investments. This should be enforced and unified through existing frameworks such as the Corporate Social Responsibility Directive (CSRD) int the EU, with benchmarks across the global financial sector.
Prompt financial supervisors to request better data to assess climate risks: Misleading or incomplete data from banks limits the ability to accurately assess their true fossil fuel exposure and related climate risks. Supervisors, such as the European Central Bank, require improved reporting on fossil fuel finance, including detailed data on subsidiaries, to effectively manage transition risks and ensure alignment with the Paris Agreement.
This report is the latest in a series of papers by the Tax Justice Network aiming to strengthen the links between the tax justice and climate justice movements and equip campaigners with tax justice tools.
Introduction
To prevent and mitigate the most extreme climate crisis trajectory, we need nothing less than the root-and-branch reform of our economic systems. In recent years, the climate justice movement has secured some fiscal policy wins, like the creation of a Loss and Damage fund, meant to support those developing countries most vulnerable to the adverse effects of rising temperatures. However, the global financial system is still fundamentally at odds with climate goals, as it entrenches high-carbon development pathways, while failing to provide sufficient resources for climate adaptation.[2]
One reason for this misalignment is financial secrecy, which enables fossil fuel financing to flow amply but in opacity through secrecy jurisdictions. It thus drastically undermines efforts to enforce and improve environmental regulation in the fossil fuel industry, and the ceasing of funding fossil fuels altogether.
For decades, financial secrecy[3] has enabled the wealthiest interests to hide their assets from the rule of law. Whether it’s to abuse tax, launder dirty money or circumvent state sanctions, financial secrecy makes it possible to circumvent the laws and regulations governments put in place to protect peoples’ rights, livelihoods and safety.
As this report demonstrates, financial secrecy allows banks and fossil fuel companies to conceal their real fossil fuel exposure. We focus on the banking industry’s fossil fuel financing, revealing how long-standing offshore secrecy practices undermine the progress towards a greener financial system. We refer to this practice as “greenlaundering”. Alarmingly, financial secrecy enables an ecosystem of “planned ignorance”, allowing banks to claim progress away from fossil fuels towards sustainable investment practices.
The good news is that financial secrecy can be curtailed, including through reforms championed by the tax justice movement. We explore how the climate justice movement, including financial regulators focusing on green finance, can make use of these solutions to bring transparency and true accountability to fossil fuel financing.
In this chapter, we introduce key concepts used in our analysis that are helpful for understanding how secretive offshore finance works. We summarise the insights gained from analysing fossil fuel financing granted by the world’s 60 largest banks in the next chapter, with a particular focus on their link to secrecy jurisdictions. For methodological details, including on the underlying database and our analysis, please refer to the accompanying methodology note.
Please note that throughout this report we highlight structural features of the fossil fuel finance sector. We do not claim that any of the individual companies or banks named have set up or used any specific subsidiaries specifically for opacity purposes.
Secrecy jurisdictions are countries or territories that enable individuals or firms to hide their finances from the laws and regulations of other countries. They achieve this through a weak regulatory framework that allows for secrecy about critical details, such as the true owners (ie beneficial owners) of a company or the countries in which a company operates. Secrecy jurisdictions are often used to set up intricate company structures to obscure who is behind the company.
In this report, we determine the level of a country’s financial secrecy based on the Tax Justice Network’s Financial Secrecy Index[4], a detailed ranking of countries most complicit in helping individuals and entities hide their finances from the rule of law. In the index, each country is assigned a secrecy score ranging from 0, representing a fully transparent regulatory framework, to 100, representing the highest level of financial secrecy. In several figures, we colour-code financial secrecy levels like shown below.
We examine the involvement of the 60 largest banks in corporate lending and underwriting transactions for fossil fuel companies.
These fossil fuel companies are identified based on industry classifications available in financial databases, combined with research by urgewald for the Global Coal Exit List, the Global Oil and Gas Exit List.[5] Additional companies active in Liquefied Natural Gas were identified using the Global Energy Monitor and Enerdata.[6] The financing has been compiled in the Banking on Climate Chaos report by several climate organisations and covers financing between 2016 and 2023.[7]
It includes not only loans from banks but also revolving credit facilities – which are pre-approved amounts that companies can use if needed – as well as bonds, stocks underwritten by the banks, and other types of financing. All these instruments provide new capital, which allows fossil fuel companies to expand their activities, including fossil fuel-related activities.
Underwriting refers to the process where banks or financial institutions agree to purchase new stocks or bonds from a company (in this case, a fossil fuel company) and then sell them to investors. This service helps the company raise capital by ensuring that all the issued securities are sold in the market, thereby transferring the risk from the company to the bank. In return for this service and the associated risk, the bank earns an underwriting fee.
Underwriting bonds (and, to a lower extent, stocks) is a critical component of banks’ fossil fuel financing because it directly supports fossil fuel companies in raising capital. By underwriting bonds, banks enable these companies to secure the funds they need for their operations, including exploration, production, and development of fossil fuel resources. Even if the bank itself does not directly invest in fossil fuel projects, its role as an underwriter is essential in providing the necessary financial backing for companies’ operations.
A beneficial owner is the real person who ultimately owns, controls or benefits from a company or legal vehicle. Companies must typically register the identities of their legal owners (which can be real people or other companies), but not necessarily their beneficial owners. In most cases, a company’s legal owner and beneficial owner are the same person but when they’re not, beneficial owners can hide behind legal owners, making it practically impossible to tell who is truly running and profiting from a company. This allows beneficial owners to abuse their tax responsibilities, break monopoly laws, get around international sanctions, launder money and funnel money into political processes – all while staying anonymous and out of the reach of the law.
Beneficial ownership is a crucial concept of oversight that allows looking through ownership chains that are often use to murky the entities and individuals that are steering and owning businesses. Secrecy jurisdictions often do not require the registration of beneficial owners, and they frequently do not mandate the registration of legal owners either.
Multinational corporations are typically composed of a group of different sub-firms, including one (ultimate) parent company that owns the entire group, several holding companies that control other companies and investments, and many subsidiaries. A subsidiary company is either partially or wholly owned by another company. Together, these firms are referred to as the multinational corporation’s corporate group, which can consist of hundreds of subsidiaries and entities.
The more subsidiaries and entities in a corporate group, the easier it is to foster opacity within the corporate group. Spreading a corporate group across several countries increases this opacity, as does setting up subsidiaries in secrecy jurisdictions. The average number of subsidiaries of banks in our sample is 32, while from the average number of subsidiaries of fossil fuel companies in our sample is 110.
Figure 1 illustrates why the corporate group is such an important unit of analysis in fossil financing. The upper part of the figure shows how a global bank typically grants financing to a fossil fuel multinational. A financing agreement is made between the bank subsidiary acting as the lender and the fossil fuel subsidiary acting as the borrower. Such financing can be provided via:
A loan, where the bank lends money to the firm, which then repays it with interest;
A bond, where the bank provides financing in exchange for a bond document that it will typically sell to financial actors (the bank is then referred to as the “underwriter” of that bond); or
A credit facility, where the bank promises to grant a loan of a certain amount whenever the fossil fuel multinational decides to use it (“draw on it”).
The lower part of Figure 1 provides an example of such financing. In this example, a bond was issued by the Netherlands-based Shell subsidiary, Shell International Finance B.V., and underwritten by the U.S.-based Deutsche Bank subsidiary, Deutsche Bank Securities Inc. However, the subsidiary receiving the financing – Shell International Finance B.V. in this case – is not the entity that will ultimately use the money, as explained in the next section.
Figure 1: Financing from global banks to global fossil fuel firms
Corporate groups, which consist of different subsidiaries under the same parent company, move their financing around within the multinational group using internal capital markets. Internal capital markets refer to how companies allocate their own financial resources internally to fund various projects, such as exploration, extraction, and production of fossil fuels, or to support related investments. This means that the financing granted to one subsidiary of the corporate group might eventually be used by another subsidiary.[8] In the example of Figure 1, the proceeds of the bond initially issued by Shell International Finance B.V., could be used by any other subsidiary of Shell, for example by the Philippines-based subsidiary Shell Pilipinas Corp.[9]
Internal capital markets are not only used by fossil fuel multinationals but also by the banks granting the financing. For Deutsche Bank Securities Inc. in the US, this means that other Deutsche Bank subsidiaries or the entire group could support the financing by providing preferential loans to subsidiaries within the same banking group.
A core problem of tracing fossil fuel financing is that it is nearly impossible to determine where each loan given to one fossil fuel subsidiary is eventually used. However, for financial subsidiaries like the example given of Shell, we can be certain that financing is passed over to other subsidiaries since the sole stated purpose of the financial subsidiary is to raise finance for the corporate group and pass it on to where it is needed most.
In the following section, we first examine how two prominent fossil companies – Aramco, the world’s largest oil company, and Glencore, the world’s largest coal producer and exporter – structure their financing and how this links to secrecy practices in different jurisdictions.
We then take a broader look and analyse general patterns of fossil fuel financing, investigating specifically whether bank subsidiaries in countries different from their parent company locations are systematically providing financing to fossil company subsidiaries in secrecy jurisdictions.
Aramco, officially the Saudi Arabian Oil Group, is the national oil company of Saudi Arabia and the largest oil company in the world by market capitalisation.
Figure 2: How Saudi Aramco finances its activities
Figure 2 illustrates all subsidiaries that have received financing for Aramco’s corporate group in our analysis between 2016 and 2023. We highlight fossil subsidiaries in black, financial subsidiaries in gold, and subsidiaries from another industry in green. The arrow width shows the amount of financing subsidiaries pass to each other. As we cannot observe where the finances are eventually used, we direct all of them to the parent company or the company that probably re-allocates funds in our illustration.
Figure 2 illustrates that Aramco’s financing network spans several firms from different industries, many of them based in well-known secrecy jurisdictions.
Figure 3: The use of secrecy jurisdictions to channel Aramco’s financing
Figure 3 provides details on these jurisdictions and explores the implications and consequences of this financing structure. The figure colours each subsidiary according to the secrecy score of its host country according to the Financial Secrecy Index: blue indicates a low Secrecy Score, yellow a moderate score, orange and red a high score, and dark red a very high Secrecy Score. The different subsidiaries can be potentially pose transparency problems.
Aramco’s subsidiaries SABIC Capital B.V., SABIC Capital I B.V. and SABIC Capital II B.V. are all based in the Netherlands. The country has a secrecy score of 65/100 on the Financial Secrecy Index, due to the country’s lack of relevant transparency rules and its provision of incentives for shifting profits into the country.[10] Information on B.V.’s (private limited liability companies), the corporate form of SABIC Capital, is not freely available but can only be accessed for a fee after registering with Netherland’s corporate registry. Even the record obtained from the corporate registry often lacks basic information, such as income statements or cash flow statements – essential information to assess the financial position of a company.
Moreover, being based in the Netherlands allows SABIC Capital B.V. to avoid paying withholding taxes on interest payments or having to publish information about either the company’s beneficial nor its legal ownership.[11] As a result, the public might be unaware of the subsidiary’s role within the broader corporate group. While banks and auditors should have the tools to uncover these connections, the complexity and lack of public pressure provide them with a convenient explanation for “planned ignorance.”
In the example of SABIC Capital B.V., the secrecy is further complicated by the different industries involved in Aramco. The direct parent of SABIC Capital B.V., SABIC, operates in chemical activities, not fossil fuels, making it less obvious that SABIC is an Aramco subsidiary. Linking the Dutch-based SABIC Capital to Aramco is even more challenging as it requires first identifying SABIC’s parent company and then tracing it back to Aramco. This is a highly complex task when the firm in question does not need to maintain fully public accounts or present basic and free information about its ultimate beneficial owner.
SABIC Capital B.V.’s annual report shows how such opacity conceals the fossil nature of funds: SABIC’s auditing company states in SABIC’s annual report that “given the nature of SABIC Capital B.V.’s activities, the impact of climate change is not considered a key audit matter.” While potentially true for SABIC Capital B.V. or even for its direct parent SABIC, this is definitely not true for the company’s global ultimate owner, the largest oil company of the world.
The Cayman-based subsidiary SA GLOBAL Sukuk Ltd introduces additional secrecy into Aramco’s corporate structure. Based in a secrecy jurisdiction with a high secrecy score of 73/100[12], no public information can be found on SA Global Sukuk Ltd. This means that the public cannot even access basic financials, let alone information on legal or beneficial owners. Consequently, it would be difficult for a lending bank to establish SA Global Sukuk’s connection to Saudi Aramco – or, at the very least, it would be easy to disregard this connection.
This way of setting up and organising a corporate group is not unique to Aramco but serves as an illustrative example of what is likely common practice among fossil fuel companies and multinational corporations in general.
We contacted Aramco to provide them with an opportunity to respond to our report’s analysis. Aramco did not provide any feedback. Full documentation of our correspondence with the company is included in the accompanying methodology note.
We find a similar usage level of secrecy jurisdictions when looking at Glencore, one of the world’s largest coal producers and exporters. Figure 4 shows the financing structure of Glencore entities that have received financing according to the Banking on Climate Chaos report, with fossil subsidiaries marked in black and financial subsidiaries marked in gold. Again, we see a mixture of fossil and financial companies, many of them based in secrecy jurisdictions.
Figure 4: How Glencore finances its activities
Figure 5 illustrates how these secrecy jurisdictions can assist Glencore to hide obvious links to its fossil activity or to abuse tax. Again, each subsidiary is coloured based on its location’s secrecy score, with blue indicating a low secrecy score, yellow indicating a medium secrecy score, orange and red indicating a high score and dark red jurisdictions a very high score.
Figure 5: The use of secrecy jurisdictions to channel Glencore’s financing
Glencore’s headquarters, Glencore International AG, is registered in Baar, Switzerland. While Switzerland has a high financial secrecy score of 70/100, the municipality of Baar is particularly prominent for its financial privacy and harmful tax policies. Baar, located in the canton of Zug, offers very low tax rates and various incentives, making it a popular destination for multinational corporations seeking to underpay tax. Intra-company interest payments to Glencore International AG from other subsidiaries are subject to Swiss tax regulations, which can enable profit-shifting strategies within the corporate group.[13]
The financing for Glencore is channelled through its parent company, Glencore plc, which is incorporated in Jersey, a well-known offshore financial centre and tax haven. Jersey’s corporate laws allow for high levels of confidentiality, making it difficult to access detailed information about registered companies. Annual reports and comprehensive financial statements are not typically required to be publicly disclosed. Jersey’s harmful corporate tax rules, including no capital gains tax and very low corporate tax rates, makes it a popular jurisdiction for profit shifting. Intra-company interest payments to Glencore Finance Europe Ltd from other subsidiaries could be deducted against taxable profits made by these other subsidiaries, making it possible to shift profit within the corporate group.[14]
Additionally, Glencore Funding LLC is incorporated in Delaware, a renowned US corporate tax haven and secrecy jurisdiction. Delaware’s minimal reporting requirements restrict public access to comprehensive information, as the annual reports filed typically do not include detailed financial statements. Furthermore, Delaware does not tax revenues from intangible assets earned outside the state, making it an effective location for profit shifting. Intra-company interest payments from other subsidiaries could remain untaxed, making it possible to easily shift profit within the corporate group.[15]
We contacted Glencore to provide them with an opportunity to respond to our report’s analysis, including further examination of Glencore’s subsidiaries presented in the next section below. The company replied, stating that they raise debt finance through highly regulated bank or capital markets, with subsidiaries that transparently publish accounts for stakeholders such as banks, investors, and tax authorities. They emphasised that their consolidated debt position is publicly available and that accounting rules prevent them from concealing liabilities based on nationality or jurisdiction. Additionally, they affirmed their commitment to complying with tax laws and regulations, while maintaining transparent relationships with tax authorities, referring to their 2023 Payments to Governments report for further details. Unfortunately, the company was unwilling to share their country by country report, which could have provided additional clarity on the roles and activities of their various subsidiaries.[16] Our full correspondence with Glencore representatives is included in the accompanying methodology note.
While these firm structures seem sophisticated, Figures 2 to 5 only show a small subset of the actual corporate groups that Aramco and Glencore encompass. This is because even the Banking on Climate Chaos report might not cover all financing granted to the corporate group.
Figure 6 further estimates the extent of missing information for Glencore. It includes the six Glencore subsidiaries we previously identified and discussed. It then adds all Glencore subsidiaries available in the pay-to-access Orbis ownership database[17], which focuses on subsidiary structures. Instead of the previously identified six subsidiaries, Glencore has a total of 588 Glencore subsidiaries.[18] As we do not have specific information about these subsidiaries beyond their names, we cannot determine their exact roles within the corporate group. However, even without further details, it is highly likely that at least some subsidiaries received loans or other financing from the 60 largest banks. Judging by their names, several subsidiaries appear to have active financing roles, such as Singpac Investment Holding PTE LTD, Silena Finance B.V., or Perfetto Investment B.V.. However, we have no way of determining the specific role each subsidiary plays in internal and external financing, or in fossil fuel expansion. This further illustrates how complex and opaque corporate structures, combined with insufficient transparency regulations, make it impossible to fully trace fossil financing activities and hold banks and companies accountable for their actions.
Figure 6: Glencore subsidiaries that are not observable in Banking on Climate Chaos
These limited insights do not allow us to draw definitive conclusions about Glencore’s actual activities. Simply observing the location of various subsidiaries provides no proof, nor even a strong indication, of how the company is using these jurisdictions. While the presence of subsidiaries in secrecy jurisdictions could facilitate profit shifting to minimise tax obligations, we lack sufficient information to determine whether Glencore engages in such practices. It is also possible that its economic activities in each jurisdiction are aligned with the profits reported there. One key transparency tool that could enable researchers, as well as the public, to evaluate this is public country by country reporting. A country by country report provides an overview of a multinational corporation’s activities in each country where it operates, including profits reported, the number of employees, assets located there, and taxes paid on those profits.
As a multinational mining company, Glencore is required to publish only a very limited version of this report, specifically detailing payments made to governments related to its extractive activities.[19] However, in this public report, neither Jersey nor Switzerland are mentioned, leaving the public clueless about the profits Glencore reports in these jurisdictions and the corresponding taxes it pays. In addition to this public report, Glencore is required to submit a more comprehensive country by country report to the Swiss tax authorities, which includes information on economic activities and taxes paid across jurisdictions.[20] Unfortunately, this report is not made public, and Glencore declined to share it with us for research purposes. [21]
This lack of transparency highlights how secretive corporate structures hinder the ability of the public to verify whether companies are fulfilling their obligations, both in terms of tax compliance and climate responsibilities. It also makes it difficult to hold fossil fuel companies and their financial backers accountable for potential misconduct, as any wrongdoing can easily be concealed from public scrutiny.
These structures are by no means unique to Glencore. As with our deep dive into Aramco, Glencore’s financing structures serve as illustrative examples of common practices by multinational corporations related to fossil fuel financing.
Again, our full correspondence with Glencore representatives is included in the accompanying methodology note.
To investigate this common practice and see whether fossil fuel financing is systematically received through secrecy jurisdictions, Figure 7 shows the 20 countries that receive the most fossil fuel financing according to the Banking on Climate Chaos 2024 report.
About US$2.97 trillion – more than a 40 per cent of all financing – goes to fossil subsidiaries located in the US. China and Canada rank second and third, with Chinese-based fossil subsidiaries receiving about US$888 billion and Canadian-based firms about US$718 billion. Figure 7 highlights high-secrecy jurisdictions in red. We define a high-secrecy jurisdiction as a country with a secrecy score higher than 60% of our sample countries, which translates to a score of 63.8/100 or higher.[22]
Figure 7 reveals that several high-secrecy jurisdictions are among the countries receiving the highest volume of fossil fuel financing. In total, secrecy jurisdictions receive more than 68% of all fossil fuel financing.
The high volume of financing going to these jurisdictions could be due to factors other than their secrecy: larger countries or economies likely receive more financing of any kind. Equally, if fossil fuel financing is issued where fossil activity takes place, fossil fuel producers would logically attract a higher loan volume. In the following section, we demonstrate that even when accounting for these factors, secrecy jurisdictions attract an abnormally high volume of fossil funds.
Figure 7: Where fossil fuel financing goes
To establish this relationship, we first calculate the abnormal volume of fossil fuel financing received. We define the abnormal volume of fossil financing received as the difference between the fossil fuel financing expected given a country’s population and GDP, and the fossil financing actually received by the country. Figure 8 shows this abnormal volume of fossil fuel financing compared to their secrecy score on the Financial Secrecy Index. Jurisdictions whose laws and regulations permit a high level of financial secrecy attract considerably higher volumes of fossil fuel financing than would be proportional to the size of their economy and their population.
To determine if there is a systematic link between secrecy and abnormal fossil financing, we regress abnormal fossil financing on the secrecy score. The relationship between countries’ abnormal fossil financing and their secrecy score, illustrated by the red line in Figure 8, is statistically significant, with a beta coefficient of 0.27 and a p-value of 0.012.[23] This indicates that, indeed, high-secrecy countries do receive systematically more fossil fuel financing as we should expect, based on economic factors.
Figure 8: Abnormal amounts of fossil fuel financing received and country’s secrecy
Interestingly, we do not see a similar relationship between abnormal fossil fuel financing and fossil-producing countries in Figure 9. The figure examines whether the abnormal volume of fossil fuel financing received can be explained by actual economic needs related to fossil energy production, specifically the amount of fossil activities occurring in the country of interest. The figure plots a country’s share of fossil production, averaged over oil, gas, and coal production from BP’s Statistical Review of World Energy 2022 (x-axis)[24], against its abnormal volume of fossil fuel financing received (y-axis).
Despite the presence of clear outliers, such as the United States, Russia, and China—where high fossil fuel financing inflows can be attributed to their significant fossil fuel activity—there is no systematic link between the two variables. This suggests that actual fossil activities do not account for the abnormal fossil fuel financing received by secrecy jurisdictions. [25] In other words, fossil-producing countries’ greater need for and use of fossil fuel financing does not result in abnormally high volumes of such financing.
Taken together, these findings suggest that countries with higher secrecy scores attract more fossil fuel financing compared to countries of similar size and economic activity with lower secrecy scores. Moreover, this relationship is not due to higher fossil fuel production. This indicates that the preference for secrecy jurisdictions is likely driven by the desire to exploit regulatory loopholes and maintain financial opacity, rather than by the actual need for fossil fuel activities.
Figure 9: Abnormal amounts of fossil fuel financing received and country’s fossil fuel production
The abnormally high amount of fossil fuel financing in secrecy jurisdictions that we observe is linked to the corporate structure of fossil fuel companies.
First, parent companies are often located in secrecy jurisdictions. As previously shown, Glencore’s parent company is registered in Jersey. However, for most firms registered in secrecy jurisdictions, this is not where they conduct their actual business activity. For instance, Glencore’s head office is not in Jersey, but in Switzerland. Similarly, many of the largest Chinese oil, coal and gas companies are officially based in the tax haven Hong Kong.
Second, fossil fuel companies strategically locate subsidiaries meant to raise finance in secrecy jurisdictions. Indeed, most fossil fuel companies have several subsidiaries specifically dedicated to raising funds and located in a secrecy jurisdiction. For instance, the sole purpose of Shell’s subsidiary, Shell Finance B.V., located in the Netherlands, is to raise funds and transmit them to the overall company. Similarly, most large Chinese oil, gas and coal firms – which are often officially registered in Hong Kong – tend to have financial subsidiaries in the British Virgin Islands or Bermuda. These subsidiaries are designed to raise private funds and channel them into new investments primarily based in China.
The calculated setting up of financing subsidiaries in secrecy jurisdictions is also evident in the aggregate data. To illustrate this, Figure 10 aggregates all financing received in a country different from the parent company’s country. By excluding financing issued in a location simply because the parent company is based there, we can estimate the amount of financing strategically channelled through secrecy jurisdictions. As in Figure 7, countries with a high secrecy score are coloured in red. As before, we define a high-secrecy jurisdiction as a jurisdiction with a score of higher than 60% of our sample countries, which translates to a score of 63.8/100 or higher.
Figure 10 shows that secrecy jurisdictions are widely used for channelling fossil fuel financing. The United States and the Netherlands stand out as key locations for raising funds that are likely directed elsewhere, potentially to finance fossil fuel expansion. Switzerland and Singapore are also popular destinations for financing that is ultimately used in other locations. Interestingly, different secrecy jurisdictions are popular for different activities and among different types of fossil fuel companies: Western firms tend to use the Netherlands, Switzerland, and Luxembourg to channel funding, while Russian firms have historically raised their financing via the UK and Cyprus. Chinese firms predominantly rely on Hong Kong, the Cayman Islands, and the British Virgin Islands, in addition to the funds Chinese subsidiaries receive directly. Much of the US-based activity occurs within the US, with US-based parents having their financing subsidiaries in domestic secrecy jurisdictions, most prominently in Delaware.[26]
Figure 10: Where fossil fuel financing is strategically channelled
We now shift our attention to the banks who grant financing. To track how fossil fuel financing from different banks flows through secrecy jurisdictions, we analyse instances where the issuance of funds occurs in locations different from the parent company’s country for each bank. Figure 11 highlights the jurisdictions where fossil fuel subsidiaries receiving financing from Citigroup are located (middle part of the chart), and where the financing ultimately ends up (i.e. where their parent companies are based, right side of the chart). Jurisdictions and associated flows are colour-coded based on their level of financial secrecy, ranging from blue for low secrecy, yellow for moderate secrecy, to red for high secrecy.
In the case of Citi’s fossil fuel financing, the bank itself is located in a high-secrecy jurisdiction, as indicated by the red colouring. Key conduit jurisdictions include the United States, the Netherlands, the Cayman Islands, the UK, and the British Virgin Islands. The primary destination jurisdictions for these flows are the UK, the Netherlands, Canada, and Bermuda. As seen with other banks in the analysis, both the funding and its eventual destination often involve high-secrecy jurisdictions, which are frequently chosen as locations for financing subsidiaries as well as headquarters for fossil fuel companies.
When we reached out for feedback, Citi expressed concerns about our methodology and requested a meeting to discuss the report. Citi did not respond to our invitations to a video call. Our full correspondence with Citigroup is available in the accompanying methodology note.
Figure 11: Destination and transit of the largest banks’ fossil fuel financing Please choose your bank of interest in the dropdown menu.
In the following chapter, we provide evidence of how the strategies described so far enable fossil fuel companies to obtain better financing conditions, and banks to circumvent public and regulatory scrutiny. The use of offshore financial secrecy makes it possible for both fossil companies and banks to hide fossil investments and financing. We refer to this phenomenon as “greenlaundering”.
While fossil fuel companies and their creditors share similar incentives with other large multinationals, they likely gain specific advantages in the context of fossil fuel loans. By concealing the true purpose of their loans, fossil fuel companies can avoid exclusion or restrictions from banks that claim to adhere to sustainability standards or face stricter regulatory requirements when funding climate-destructive businesses. Consequently, by masking their fossil fuel-related activities, these companies can secure more favourable financing conditions, including larger loan amounts, longer repayment periods and lower interest rates.
Planned ignorance about whom they are financing, combined with the low risk of such financing becoming public knowledge, allows banks to continue greenwashing their public image without cutting ties to profitable fossil customers or stepping away from otherwise lucrative deals.
In the following section, we first document how the fossil fuel exclusion policies of the largest global banks contain loopholes that allow indirect fossil fuel financing via subsidiaries, such as financing through secrecy jurisdictions. We provide examples demonstrating how these loopholes have enabled the largest expansionary fossil fuel companies to continue to receiving financing, despite appearing to be excluded by these policies. We also show how such unclear definitions bias banks’ sustainability reporting by contradicting banks’ self-reported fossil exposures to what we see in the Banking on Climate Chaos report. Finally, we document that fossil fuel financing granted in more secretive countries is indeed associated with better financing conditions, particularly with lower interest rates.
Responding to increasing public and regulatory pressure to divest from polluting industries, several banks have issued exclusion policies, claiming they will no longer fund fossil fuel activities, particularly expansionary ones. Such claims have been prominently advertised on banks’ websites and sustainability reports. In the following section, we assess whether the exclusion policies of six major banks encompass all types of fossil fuel financing, regardless of how the financing is strategically channelled. We selected these banks to represent the largest global banks and various regions where exclusion policies are relevant.
Table 1: How banks consider subsidiary structures in their exclusion policies
Table 1 in shows some of the most important fossil fuel exclusion policies of these banks and specifies how narrowly or widely the policies target financing recipients. This targeting can be categorised into three levels: the project level, the subsidiary level, or the corporate group level.[27]
Of the six banks, only HSBC explicitly clarifies that its exclusion policies are assessed at the corporate group level, at least for some of its policies. Barclays also uses a group-level assessment for some policies but limits its energy policies to groups that derive at least 20% of their revenue from upstream oil and gas activities or to groups classified as super majors or major integrated oil and gas companies, which makes financing to a significant portion of diversified companies with substantial fossil fuel operations possible under the role. Most of the other banks primarily exclude only project financing or limit their exclusions to the subsidiary level.[28] Even more problematically, some policies apply only when specific conditions are met for both the subsidiary or project and the corporate group. For example, the policy is effective only if the corporate group meets a certain fossil fuel revenue threshold and the subsidiary or project fits a particular profile, rendering the policy highly ineffective.
This is surprising, given that banks are aware of multinational corporations’ use of internal capital markets. Indeed, banks usually consider the entire corporate group when granting a loan, rather than simply relying on one single subsidiary. For instance, the parent subsidiary will be held accountable if the borrowing subsidiary does not repay the loan, and loans will be granted based on an assessment of the financial conditions of the group, rather than just the subsidiary. Consequently, banks should understand that not explicitly excluding such subsidiaries in their exclusion policies leaves open a window for fossil fuel financing.
When we requested clarifications on banks’ acknowledgement of subsidiary structures in exclusion policies, Barclays, BNP Paribas, and Deutsche Bank provided additional details regarding their policies, their scope of applicability, and highlighted measures implemented to ensure the robustness of these policies. We have incorporated their responses in Table 1. BNP Paribas highlighted that their oil and gas policy “applies strict commitment to corporate [financing]”.[29] All correspondence with the banks is included in the accompanying methodology note. Table 1: How bank exclusion policies consider fossil fuel companies’ subsidiary structures
Note: This table only include exclusion policies (no general reduction targets) and policies that are already implemented (not the ones planned for the future). Rather than providing an encompassing overview of all policies, it is meant to illustrate on which level most policies apply. The table is also not meant to assess or judge bank’s exclusion policies in detail, but only focuses on their level of application in the context of financing through internal capital markets. For a detailed assessment on the quality of banks’ exclusion policies, see the Coal Policy Tracker and the Oil and Gas Policy Tracker provided by Reclaim Finance.
Unambitious or vague exclusion policies—both in terms of subsidiary coverage and regarding the types of financing or definitions of fossil fuel firms—enable the continuation of funding that banks give the impression they have stopped. Meanwhile, fossil fuel companies continue to receive financing from the largest global banks, despite these banks’ public claims to transition financing away from the fossil fuel industry.
An example of this is shown in Figure 12. It contrasts BNP Paribas’ climate commitments in its 2022 climate report (left panel in green) with some examples of the bank’s fossil fuel financing in 2023 (right panel in red). According to its 2022 climate report[30], between 2016 and 2022, the bank committed to:
Stop oil project financing (2016)
Cease business with shale oil and gas and tar sand companies (2017)
Cease financing in the thermal coal sector value chain in the EU and in OECD countries by 2030, and in the rest of the world by 2040 (2020)
Reduce its financing to upstream oil and gas by 10% between 2020 and 2025 (2021)
Restrict its support to energy companies involved in the Arctic and Amazon regions (2022)
To verify BNP Paribas’ compliance with these commitments, we examined fossil-related financing that was granted by the bank in 2023, a point at which all these policies should have been in place. Figure 12 presents a selection of such financing in the right (red) panel.[31]
We begin with a bond underwritten for Japan-based Mitsubishi Corp in 2023, granted via the BNP Paribas U.S. subsidiary BNP Paribas Securities Corp as part of a larger consortium. Since 43% of Mitsubishi Corp’s 79 million barrels of oil equivalent (mmboe) oil and gas production is based on fracking, providing funding to this subsidiary seems at odds with BNP Paribas’ 2017 commitment to cease business with shale oil and gas. Despite this, the bond provides Mitsubishi Corp, which invested US$70 million to expand fossil activities in Australia, Brunei, Canada, China, Gabon, Indonesia, Malaysia, Myanmar, Russia, the United Kingdom, and Venezuela in the three years preceding the bond, with an additional US$500 million over the next five years. The bond proceeds are intended “for general corporate purposes,” according to the bond issuance documents, which does not bind the firm to a specific use.[32]
Figure 12: BNP Paribas’ exclusion policies as of 2022 and fossil fuel financing in 2023. Note: The commitments in green are directly taken from BNP Paribas’ 2022 climate report. The examples of BNP Paribas’ financing come from the Banking on Climate Chaos report and from cbonds for the bond of Mitsubishi Corp. Information about the fossil companies’ business is from the Global Oil and Gas Exit List 2023 and the Global Coal Exit List 2023, both provided by urgewald.
A second example involves the financing of oil and gas, where project financing has been banned since 2016, and BNP Paribas committed in 2021 to reduce its upstream oil and gas financing, according to its own climate report. However, one of the deals that raises questions about the seriousness with which BNP is adhering to these commitments is the bank’s involvement in corporate loans totaling US$2.5 billion to UAE-based Mubadala Treasury Holding, granted by BNP’s Bahrain-based subsidiary in collaboration with other banks. Mubadala Treasury Holding is a subsidiary of the UAE’s sovereign wealth fund, Mubadala Investment Company, which is also the 100% parent of the upstream oil and gas company Mubadala Energy.
Mubadala Energy has short-term plans to expand its resources by 25 mmboe in Egypt, Indonesia, Israel, Malaysia, Russia, and Venezuela – 83% of which are considered unconventional. Over the three years preceding the loan, Mubadala Energy invested US$66 million in the exploration of new fossil resources – all exploration that is incompatible with the International Energy Agency’s Net Zero Emissions by 2050 scenario. The loan, granted in 2023 and maturing in 2028, provides funding for an additional five years. While the loan is not officially designated for oil projects, there is no indication that such use of the proceeds is prohibited from being passed from Mubadala Investment Company to Mubadala Energy.[33]
The bank’s promise to restrict support for energy companies involved in the Arctic and Amazon regions also appears questionable, given the US$300 million credit line granted to the Norway-based company Aker Solutions in 2023, which remains open until 2028, again as part of a consortium. Aker Solutions is a subsidiary of Aker ASA, a company heavily involved in the oil business, which “has grown from practically zero to 55 percent” of Aker’s value over the last 15 years, as Aker ASA proudly states in its 2022 Annual Report. Aker’s oil subsidiary, Aker BP, had invested nearly US$1.5 billion in the exploration of new resources over the previous three years, with its Arctic production accounting for 13% of total production. This funding seems at odds with BNP Paribas’ commitment to cease support for such environmentally sensitive areas.
BNP Paribas—and other banks confronted with the question of how such financing aligns with their self-defined policies—will likely provide clear reasoning as to why each instance of funding does not officially violate their exclusion policies. Asked about the financing, BNP Paribas firstly referred to banking confidentiality rules. The bank then stated that “in the examples of transactions [given in Figure 13 of this report] are referring to, there appear to be confusion around whether these legal entities you specifically mentioned are actually active in the exploration and production of fossil fuels, and what their respective position is within the diversified groups.”[34] The latter point – the relevance of subsidiary’s position within a diversified group – is to the core of our critique: given that fossil fuel firms are expected to use internal capital markets and nothing seems to prohibit them from doing so in the analysed deals, their position within a group should not matter for exclusion policies.
Other frequent explanations of banks when asked about specific financing that seems to clash with their policies include not being the lead arranger of a deal, following different definitions of fossil fuel activities compared to our sources, using complex calculations of thresholds, or disregarding the subsidiary structures of corporate groups.[35] However, all these examples demonstrate how banks do not commit to the spirit of their own exclusion policies, even if they technically adhere to them. As a result, fossil fuel companies continue to secure financing, potentially without even having to pay a premium, with the support of banks’ planned ignorance and partly enabled by secrecy jurisdictions.
When banks fail to classify fossil fuel loans accurately, it should result in overly optimistic sustainability reporting. To check whether this is the case, Figure 13 compares what large banks report as their fossil exposure in their sustainability or annual reports to the exposure observed in the Banking on Climate Chaos report.[36]
Figure 13: Banks’ fossil exposure in the Banking on Climate Chaos report and banks’ sustainability reports, climate reports, and annual reports
Note: For details regarding the exact data sources and methodology used to calculate exposures, we refer to the report’s methodology note.
We find a significant mismatch between banks’ claimed fossil exposures and the figures from the Banking on Climate Chaos report. This discrepancy arises from banks’ generous definitions of what constitutes fossil-related activities, their partly exclusion of bond issuance from reporting, and their failure to account for the entire corporate group in fossil fuel financing.[37] The discrepancy is even more pronounced considering the highly conservative nature of Banking on Climate Chaos. As the report is based on syndicated lending and underwriting data, it should only cover a fraction of banks’ total exposure.[38]
When requesting feedback on Figure 13, Barclays, BNP Paribas, and Deutsche Bank pointed us to additional reporting on capital market financing (Barclays) and coal exposure (Deutsche Bank). Barclays suggested that differences in methodologies for estimating fossil fuel exposures may explain the discrepancies noted in Figure 13. All correspondence with the banks is included in the accompanying methodology note.
In addition to the lack of clarity about banks’ dealings with fossil fuel company subsidiaries, their own subsidiaries in secrecy jurisdictions could also be used to reduce reporting obligations. This issue can be particularly significant when reporting on sustainable finance to financial authorities. Officially, most sustainable finance regulations, such as the EU’s Sustainable Finance Disclosure Regulation, apply to the entire banking group. However, only parts of the banking group are under the direct supervision of the regulator enforcing these regulations.
This means, for instance, that while Deutsche Bank Germany must report to the German central bank hosting the credit registry any loan granted by itself or by its EU-based subsidiaries to a fossil fuel company, any loans granted by its US-based subsidiaries, such as Deutsche Bank Securities Inc., are not reported.
It is therefore possible that EU financial authorities may only be aware of parts of banks’ fossil exposure, even though environmental regulation officially applies to banks’ total exposure as corporate groups, including non-EU subsidiaries. This greenlaundering loophole makes it possible for banks to continue financing fossil fuel activities while publicly greening their image through various commitments and initiatives.
Potential misrepresentations of fossil fuel exposures have two critical implications. First, if financial institutions were to report inaccurate figures, they would be in violation of sustainable finance regulations, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) or the Corporate Sustainability Reporting Directive (CSRD), which mandate transparency on environmental impacts, including fossil fuel exposure. Second, inaccurate or overly optimistic reporting of fossil fuel exposures suggests that banks are not appropriately assessing their climate-related risks. This failure to accurately assess risks means financial institutions would not meet the expectations for climate risk management set by financial regulators, such as the European Central Bank, which supervises large EU-based institutions.[39]
Does all this potential for obfuscation come with clear financial benefits? To explore this, we investigate the relationship between financial secrecy and the interest paid on loans or the coupon paid on bonds, which is the interest the bondholder receives.
We found a highly significant relationship when investigating all financing for which we know interest rates. If we compare loans and bonds granted in a country with a secrecy score of 25 (like Slovenia) to loans and bonds granted in a country with a secrecy score of 70 (like Switzerland), the average interest rate is one percentage point lower in the more secretive country.
A second indication of financial benefits from the strategic structuring of their financing arises from the observation that the stated use of proceeds for most financing is often very vague, such as for “general corporate purposes,” “refinancing” or “working capital.” One potential strategy available to fossil fuel companies is to label and promote investments in future-oriented projects as “Green Bonds” to secure better conditions, while using secretive structures to finance other ongoing environmentally harmful projects under generic, unsuspecting labels like “general corporate purposes.” This strategy allows a fossil fuel company to keep public and regulatory attention focused on the visible Green Bonds while diverting attention away from substantial “general” funds.
For example, French-headquartered energy giant Engie has issued Green Bonds specifically dedicated to transforming the company into a future-oriented business. Since 2014, Engie’s Green Bond issuance has reached €20.89 billion by the end of 2023, making it “one of the leading corporate issuers in the Green Bonds market,” as the company proudly states on its website.[40]
However, during the shorter time frame between 2017 and 2023 that we can observe in the Banking on Climate Chaos report, Engie’s bond issuance excluding Green Bonds amounted to about US$60 billion (approximately €55 billion). This is consistent with the fact that the company’s fossil fuel share of revenues still exceeded 50% in 2022.[41] In total, the Engie group received more than US$500 billion in financing over these six years. None of this financing is officially dedicated to fossil fuel projects. Instead, it officially serves to finance “general corporate purposes,” “refinance” or “repay selling shareholders,” with no indication that banks would prohibit Engie from using these funds for their fossil fuel business.
Asked for their feedback, Engie stated that their green bonds, including hybrids, are issued under a green financing framework verified by Moody’s, which excludes any fossil fuel investments. They also noted that annual reporting is available in their Universal Registration Document and on their Group website. For our full correspondence with Engie, please refer to the accompanying methodology note.
As long as a fossil fuel company can issue Green Bonds and banks’ Green Bond standards do not consider a corporate group’s entire business, fossil fuel companies can easily structure their financing to bundle all their sustainable activities into popular and inexpensive Green Bonds, advertise these bonds aggressively, and subsume the rest under “general purpose financing.”
Greenwashing is a well-known term that refers to visible forms of advertising that deceptively uses green PR and marketing to persuade the public that a company or its products are environmentally friendly. Greenlaundering involves the use financial secrecy and secrecy jurisdictions to obfuscate banks’ and fossil fuel companies’ real, fossil fuel exposure from the public and regulators.
Greenlaundering enables banks and fossil companies to at least partially circumvent some of the pressure to divest from fossil fuels fought for by the climate justice movement. In the process, it undermines sustainable finance regulators taking aim at the entirety of global banks’ business, including the activities of all subsidiaries. That so much of fossil fuel financing flows through secrecy jurisdictions makes it hard to enforce and improve these regulations. For instance, the European Corporate Sustainability Reporting Directive (CSRD) or the European Sustainability Finance Disclosure Regulation set goals for banks entire lending book – not only for EU-based subsidiaries. But European regulators only have access to the credit register covering financing granted by EU-based subsidiaries of banks, and cannot observe the activity happening in other countries. This problem is particularly pronounced for subsidiaries that do not reveal sufficient public information, such as those based in secrecy jurisdictions.
Greenlaundering also misleads and harms civil society, researchers and activists. This is because the systematic obfuscation of financing information makes it hard to grasp, quantify, communicate and mobilise in favour of regulatory policies and the general call to divest, since the real scale of fossil fuel exposure remains hidden. This lack of transparency therefore weakens the ground for climate advocacy in the sense that the goalposts for the climate justice movement about the financing of fossil fuel are constrained by limited financing information that is publicly available. The practice thus helps stifle radical climate action and erodes the already severely fractured sense of trust citizens have in governments acting in the interest of the many, not the few. It is also deeply uncompetitive: the promise of green finance pursued by some competing financial institutions and businesses breaks down when green and brown financing cannot effectively be distinguished.
Financial secrecy is a global problem in need of multilateral cooperation. By design, financial secrecy makes it possible to evade the rule of law elsewhere – that is, to evade other countries’ laws and regulations, and even international law. Greenlaundering and its role in undermining transparency in fossil fuel financing shows once more that effective multilateral coordination is needed if the global financial system is to play a positive role in achieving climate goals. This coordination can only be effective if it is inclusive and transparent at the highest level of governance, allowing citizens to hold governments accountable. Any efforts to reduce financial secrecy must not occur behind closed doors with privileged access for select countries and stakeholders.
The recent agreement to establish a UN Tax Convention[42] marks a significant shift towards transparent and accountable multilateral coordination about tax and transparency measures. For the first time, the creation of a global transparency and accountability framework is being negotiated openly and democratically, moving away from the historically exclusive and opaque OECD-led negotiations on global tax policies. Supporting this process towards a comprehensive framework convention is crucial not only for advocates of democracy, accountability and tax justice, but also to ensure the benefits of tax reform extend to the climate justice movement. The framework would allow the bridging of a critical gap at the highest level of governance: that between international tax negotiations and international climate negotiations. This bridge is sorely needed to mobilise the power of tax to address the challenges of the climate crisis.
Unmask polluters through comprehensive beneficial ownership transparency
Beneficial ownership transparency means identifying the individuals who ultimately own, control or benefit from legal vehicles such as companies, trusts or foundations – including fossil fuel companies and banks. As such, it is also a powerful tax justice policy for bringing transparency to the secrecy of fossil fuel financing. If beneficial ownership transparency is established and publicly accessible, it becomes clear which firm is behind which entity, on top of revealing who owns the most polluting assets and investments[43]. Consequently, fossil fuel companies would no longer be able to channel financing through subsidiaries with the same opacity and ease. Comprehensible and accessible beneficial ownership transparency would also lay the foundation for dismantling planned ignorance as banks could no longer feign ignorance about using fossil fuel subsidiaries in the usual manner.
If implemented well, this type of transparency reform[44] could both expose unreported fossil investments and bring the rule of law to bear on the extreme wealth of fossil fuel company owners – two essential steps to curbing financial secrecy, and with it, extreme wealth and emissions inequalities.
Improve public country by country reporting for corporations
Public country by country reporting is another transparency measure and requires multinational groups to disclose their economic activities on a country by country basis. Specifically, it mandates that multinationals report the number of employees, assets, reported profits and taxes paid in each country they operate in. This measure helps identify where multinationals strategically report profits and manipulate tax payments. In the context of opaque fossil fuel financing, it offers additional benefits: it can reveal where fossil fuel companies have secured financing without having much other activity. For example, detailed country by country data would reveal financial and holding companies based in secrecy jurisdictions, whose main purpose is to reduce lending costs. This could expose countries with no employees but significant financial assets. Therefore, stronger country by country reporting standards could help uncover the use of secrecy jurisdictions for fossil fuel financing and reduce “greenlaundering.”
Importantly, there are certain public country by country reporting standards in force for the fossil fuel sector in some countries, including in the EU[45]. These standards are insufficient, as existing regimes are typically based on EITI information standards for the reporting by governments of payments received by the extractives industry[46] and lack critical financial information needed to reduce greenlaundering, including on profits/losses before tax and interests paid to third party lenders like banks.[47] They are also subject to lobbying by fossil fuel giants. For example, the United States’ planned regime for public reporting by the extractive industry was suspended under pressure from companies including Exxon and Chevron[48], and has only recently entered into force, with the first public reports of US-based oil companies due soon.
Pressure banks to phase out investments in dirty fossil fuels
While our analysis points to the importance of better data and proposes a range of fine-grained technical and specialised governance recommendations, it is important to not lose sight of the bigger goal: the pressure on financial institutions to commit to a swift, just and equitable fossil fuel phase out must be maintained. Unmasking the web of financial secrecy that enables banks and fossil fuel companies to conceal their real fossil fuel exposure must happen in service of this wider goal, not as a goal in itself.
Multiple civil society and advocacy groups work in alliances to maintain pressure on this fossil fuel exit. Financial institutions must continuously be driven to adopt best practice fossil fuel policies, and many existing campaigning and advocacy tools like the Coal Policy Tracker and Oil and Gas Policy Tracker[49] are readily available to highlight their lagging commitments. Under pressure, robust fossil fuel policies would aim to close the loopholes we previously identified, including on subsidiaries. Existing financial institution alliances such as the Glasgow Financial Alliance for Net Zero and the Net Zero Banking Alliance should be the target of some of this pressure to ensure they set strict guidance and standards for their members to unify progress.
Drastically improve reporting standards for banks
As previously discussed, most global banks set out climate change goals in their sustainability reports, including a commitment to Net Zero. Yet very few have specific policies set to meet those targets.[50] The success of any divestment campaign relies heavily on ambitious and unified reporting standards that disclose fully and transparently all facilitated emissions banks are responsible for. These standards are missing.
The biggest gap in current reporting standards are binding obligations for all banks to report scope 3 emissions. In contrast to scope 1 and scope 2 emissions, which aim to capture a company’s own direct and indirect emissions, arising for example from burning fuels and energy use in the creation of the goods and services it sells – and which most large corporate entities do report – scope 3 emissions are created by a business’ suppliers and clients up and down the value chain.[51] In case of a bank, the emissions produced by oil and gas clients must count towards the bank’s scope 3 emissions, as they were facilitated through the banks’ investment. According to one estimate[52], the average bank’s Scope 3 emissions account for more than 95% of their total emissions.
The financial sector, both public and private, has a pivotal position in redirecting and redistributing flows of finance to achieve the goals of the Paris Agreement. The sector will only live up to this responsibility if better regulation is put in place, and scope 3 reporting rules on banks are made mandatory and apply without any exceptions. There are currently some proposals and budding regulation efforts to introduce this change. In the EU, these reporting rules are governed by the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). The latter has however been criticised for being ineffective in its benchmarking of standards for the financial sector.[53]
Prompt financial supervisors to request better data to assess climate risks
As suggested by our research, if banks do report misleading or ambiguous data on their real fossil fuel exposure, these numbers severely restrict the honest assessment of banks’ climate-related risks.
Like all corporates, banks are confronted with climate and transition risks in multiple ways, including when investing in carbon-intensive industries as they may face financial losses as these industries decline. The value of assets tied to these sectors could drop, leading to stranded assets, while banks may be held legally accountable for contributing to climate change or failing to adequately mitigate its impacts.
The European Central Bank recently pointed out[54] that most of the loans granted by banks in the Eurozone were fundamentally misaligned with the Paris agreement, and that transition risks were heightened through this funding, stemming from exposure to companies in the energy sector that lag behind in phasing out high-carbon production processes and the delayed roll out of renewable energy production.
Better data would equip supervising bodies such as the European Central Bank to decide whether banks do in fact fail to honour their climate and transition risks. Supervisors should therefore request detailed reporting on fossil fuel financing including finance provided to all subsidiaries of a corporate group as soon as possible, and to link this data to climate-risk management tools. Multiple frameworks are in place to structure this process, and, while non-binding, the recent Basel committee consultation[55] on global banking supervision on this issue is a necessary but insufficient step in the right direction.
Commarmond, Sidonie, Nelson Diaz, Simon Dietz, Nikolaus Hastreiter, Carla Carla, Carmen Nuzzo, and others, Banks and the Net Zero Transition: Tracking Progress with the TPI Net Zero Banking Assessment Framework (Transition Pathways Iniatiative, Grantham Research Institute on Cliamte Change and the Environment, September 2023) <https://www.transitionpathwayinitiative.org/publications/uploads/2023-banks-and-the-net-zero-transition-tracking-progress-with-the-tpi-net-zero-banking-assessment-framework> [accessed 4 September 2024]
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Newell, Peter, ‘Towards a More Transformative Approach to Climate Finance’, Climate Policy, 1–12
Ozbas, Oguzhan, and David S. Scharfstein, ‘Evidence on the Dark Side of Internal Capital Markets’, The Review of Financial Studies, 23/2 (2010), 581–99
Rainforest Action Network, BankTrack, Indigenous Environmental Network, Oil Change, Reclaim Finance, Sierra Club, and others, Banking on Climate Chaos: Fossil Fuel Finance Report 2024, 2024 <https://www.bankingonclimatechaos.org/?bank=JPMorgan%20Chase#fulldata-panel>
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Stein, Jeremy C., ‘Internal Capital Markets and the Competition for Corporate Resources’, The Journal of Finance, 52/1 (1997), 111–33
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[1] Note that this finding emerges from the research as a structural feature of the sector. We do not claim that any of the individual companies named have set up any particular subsidiary for the specific purposes of achieving opacity or tax benefits. Rather, we observe that the effect overall of the subsidiaries and jurisdictions used, is to increase opacity and tax risk across the sector.
[2] Peter Newell, ‘Towards a More Transformative Approach to Climate Finance’, Climate Policy, 1–12.
[3] Financial secrecy allows individuals and firms to hide their finances from laws and regulations. It is characterized by a weak regulatory framework that permits secrecy regarding critical details, such as the true owners of a company or the countries in which a company operates. See: https://taxjustice.net/topics/financial-secrecy/; 01.09.2024
[7] Rainforest Action Network and others, Banking on Climate Chaos: Fossil Fuel Finance Report 2024, 2024 <https://www.bankingonclimatechaos.org/?bank=JPMorgan%20Chase#fulldata-panel>.
[8] Ran Duchin and Denis Sosyura, ‘Divisional Managers and Internal Capital Markets’, The Journal of Finance, 68/2 (2013), 387–429; Joel Houston, Christopher James and David Marcus, ‘Capital Market Frictions and the Role of Internal Capital Markets in Banking’, Journal of Financial Economics, 46/2 (1997), 135–64; Naveen Khanna and Sheri Tice, ‘The Bright Side of Internal Capital Markets’, The Journal of Finance, 56/4 (2001), 1489–1528; Oguzhan Ozbas and David S. Scharfstein, ‘Evidence on the Dark Side of Internal Capital Markets’, The Review of Financial Studies, 23/2 (2010), 581–99; Hyun-Han Shin and René M. Stulz, ‘Are Internal Capital Markets Efficient?’, The Quarterly Journal of Economics, 113/2 (1998), 531–52; Jeremy C. Stein, ‘Internal Capital Markets and the Competition for Corporate Resources’, The Journal of Finance, 52/1 (1997), 111–33.
[9] Unless the company binds itself to a specific use in the bond documents.
[15] Hal Weitzman, What’s the Matter with Delaware? How the First State Has Favored the Rich, Powerful, and Criminal – and How It Costs Us All (Princeton Oxford, 2022); Margie Fishman and Goss Scott, ‘Delaware Provides Tax Shelter for Multimillion-Dollar Masterpieces’, The News Journal, 27 September 2017 <https://www.delawareonline.com/story/insider/2017/09/27/delaware-provides-tax-shelter-multi-million-dollar-masterpieces/678385001/> [accessed 3 May 2022]; Leslie Wayne, ‘How Delaware Thrives as a Corporate Tax Haven’, New York Times, 2012 <https://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-tax-haven.html> [accessed 27 August 2018].
[16] Glencore prepares its country by country report annually for the Swiss tax authorities, in accordance with OECD requirements. As discussed in the following section, this report enhances transparency by helping the public better understand the roles of various subsidiaries, including their economic activities, reported profits, and taxes paid in each jurisdiction.
[18] Note that this might also not be the exact number given potential duplicates in the Orbis database.
[19] Glencore has to report this to fulfil the UK regulatory obligations under DTR 4.3A of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (UK Transparency Requirements), which were introduced to implement the payments to governments requirements provided for in the EU Transparency and Accounting Directives. More information is available at https://ec.europa.eu/commission/presscorner/detail/fr/MEMO_13_541, 03.09.2024.
[22] Note that, in general, the Secrecy Score is a continuous score, mirroring a range of different secrecy loopholes, rather than providing a binary assessment of ‘secretive’ and ‘non-secretive’ countries. However, we have highlighted in red those jurisdictions belonging to the 40% most secretive to illustrate that jurisdictions with a high level of secrecy are attracting a disproportionate amount of fossil fuel financing.
[23] For robustness, we also regress countries’ abnormal fossil financing on both financial secrecy and fossil production share simultaneously in an unreported analysis. The beta coefficient of financial secrecy remains of similar size (beta = 0.25) and statistical significance (p=0.015).
[25] Given the absence of a systematic relationship, we do not report a regression line in this figure.
[26] Note that strategic financing of a U.S.-based multinational via Delaware would not appear in Figure 10, as it only includes funding received in a country other than where the parent company is located.
[27] Table 1 only includes exclusion policies (no general emissions reduction targets) and policies that are already in place. Rather than providing an exhaustive overview of all sustainability policies, it is meant to illustrate on which level exclusion policies apply. The table is also not meant to assess bank’s exclusion policies in detail, but focuses on their level of application in the context of financing through internal capital markets. For a detailed assessment on the quality of banks’ exclusion policies, see the Coal Policy Tracker and the Oil and Gas Policy Tracker at https://coalpolicytool.org/ and https://oilgaspolicytracker.org/; 05.09.2024.
[28] Often, the policies do not explicitly state that the ‘company’ they refer to could be owned by another company. However, as subsidiaries are generally treated as separate legal entities, we interpret this exclusion as applying to the subsidiary level unless other clarifications are provided.
[29] While “corporate financing” would normally refer to the company/subsidiary level, it could, in principle, also mean the group level. However, the bank’s oil and gas sector policy available at https://group.bnpparibas/uploads/file/bnpparibas_csr_sector_policy_oil_gas.pdf does not clarify that an exclusion of “companies” would be based on activities of the entire corporate group. The policy does not explicitly state that the ‘company’ they refer to could be owned by another company. However, as subsidiaries are generally treated as separate legal entities, we interpret this exclusion as applying to the subsidiary level (or, for standalone firms, at the level of the standalone firms) as no other clarifications are provided.
[32] See cbonds for details regarding the bond and the Global Oil and Gas Exit List 2023 for details regarding Mitsubishi Corp.’s business.
[33] For details regarding Mubadala Energy’s business, see the Global Oil and Gas Exit List 2023.
[34] For the detailed email exchange between the Tax Justice Network and BNP Paribas, see the methodology note.
[35] For instance, BNP Paribas played a non-leading role in the deal with Mubadala and therefore would not receive league credit in an industry-standard league table. Additionally, since Mubadala is a sovereign wealth fund with diverse investments, many banks may not consider its fossil fuel activities significant enough to warrant exclusion. In the case of Aker, BNP Paribas’ Arctic exclusion policy does not cover Norwegian territories due to the “rigorous” environmental standards and regulations there, meaning the Aker funding does not technically violate their policy. While all these arguments may be legally valid, they indicate that BNP Paribas does not fully commit to the spirit of its own exclusion policies.
[36] For details on sources and calculations of the different commitments, we refer to the methodology note.
[37] A detailed discussion on potential reasons for the mismatch reported in Figure 13 can be found in the accompanying methodology note.
[38] We do not have detailed information about the share of banks’ syndicated lending and underwriting in relation to total exposures. However, aggregate data suggests that syndicated lending and underwriting account for a relatively small portion of total exposure. For example, in 2021, syndicated loan issuance was equivalent to an average of 5.7% of countries’ GDP, according to data from the World Bank. This is a small fraction compared to the total domestic credit provided by the financial sector, which averaged 60.5% of countries’ GDP. Both figures are from the World Bank’s Global Financial Development dataset, available at https://databank.worldbank.org/source/global-financial-development/Series/GFDD.DM.12; 08.09.2024.
[39] Reclaim Finance, Corporate Climate Transition Plans: What to Look For, 2024 <https://reclaimfinance.org/site/wp-content/uploads/2024/01/Report-Climate-Transition-Plan-Reclaim-Finance-January-2024.pdf>.
[46] EITI Standard is the global benchmark for transparency and accountability in the oil, gas, and mining sectors, for more details see https://eiti.org/eiti-standard; 05.09.2024.
[47] See the Glencore example earlier in this report.
[50] Sidonie Commarmond and others, Banks and the Net Zero Transition: Tracking Progress with the TPI Net Zero Banking Assessment Framework (Transition Pathways Iniatiative, Grantham Research Institute on Cliamte Change and the Environment, September 2023) <https://www.transitionpathwayinitiative.org/publications/uploads/2023-banks-and-the-net-zero-transition-tracking-progress-with-the-tpi-net-zero-banking-assessment-framework> [accessed 4 September 2024].
Le vote récent aux Nations Unies pour adopter des termes de référence ambitieux pour une nouvelle convention fiscale est une évolution ultime dans le contexte du rapport du panel de haut niveau dirigé à l’époque par l’ancien président sud-africain Thabo Mbeki, qui pour la première fois en 2015, avait mis un chiffre (50 milliards $ par an) sur l’impact dévastateur des flux financiers illicites (FFI) sur le continent africain.
Le rapport Mbeki, avait été l’un des tout premiers documents institutionnels, à indiquer que les flux illicites impliquaient souvent des sociétés multinationales et des individus fortunés, qui exploitent des failles dans les systèmes fiscaux internationaux pour éviter de payer leur juste part d’impôts. Les termes de référence adoptés le 16 août 2024 par le comité Adhoc désigné à cet effet par l’ONU comprennent des éléments clés qui s’alignent sur les recommandations du rapport Mbeki. Ces éléments abordent des questions telles que l’impôt des sociétés, la taxation des personnes fortunées, l’évasion et la fraude fiscales, la coopération fiscale internationale et l’allocation des droits d’imposition entre les pays.
Evasion et optimisation fiscale des armes de destruction massives pour l’Afrique
Le système fiscal international actuel continue de priver l’Afrique de ressources cruciales pour son développement. Les chiffres sont éloquents et alarmants. Selon un document publié en 2021 par la Commission des Nations Unies pour Commerce et le Développement, les pertes annuelles dues aux flux financiers illicites ont presque doublé depuis 2015, atteignant l’astronomique somme de 88,6 milliards de dollars. Ces pertes compromettent gravement la capacité des pays africains à financer des domaines essentiels tels que la santé (Objectif de Développement Durable 3), l’éducation (ODD 4) et les infrastructures (ODD 9). Cette situation est rendue possible par des pratiques d’optimisation fiscale agressive, qui de plus en plus peut être mesurée. Mais le défi le plus grand reste L’évasion fiscale, Elle repose sur des violations de la loi ou l’absence de transparence et constitue de fait la partie immergée mais la plus importante des pertes de ressources financières domestiques. Ensemble, ces pratiques aggravent les impacts de la crise climatique en Afrique, en réduisant significativement les financements nécessaires pour y faire face, selon une récente recherche effectuée par Tax Justice Network et Tax Justice Network Africa, et qui est intitulé : “Delivering climate justice using the principles of tax justice”
Une Architecture Financière Injuste et Déséquilibrée
Un rapport récent du Fonds Monétaire International (FMI) sur la République Démocratique du Congo illustre l’ampleur du problème et les difficultés qu’il y a à lui trouver des solutions dans le cadre du système actuel : l’Île Maurice, qui peine à sortir de son statut de paradis fiscal notoire, était en 2022 le principal investisseur dans le secteur minier congolais,représentant 63% des capitaux apportés, alors que le top dix des multinationales qui exploitent les mines de RDC on leurs sièges sociaux en Chine, au Canada, au Royaume Uni, ou encore en Australie.
Comment expliquer ce paradoxe ? La réponse réside dans la politique fiscale attractive de l’île :un taux d’imposition sur les sociétés de seulement 15%, bien loin de la moyenne de 25% en vigueur dans la plupart des pays africains, et diverses autres dispositions fiscales avantageuses pour des constructions juridiques. Le cas de Maurice n’est que la partie émergée de l’iceberg. D’autres juridictions comme la Suisse, les États-Unis, Jersey, la Chine, ou le Royaume-Uni qui sont très souvent classés en tête del’Indice des Paradis Fiscaux oud’Opacité Financière, dominent les investissements dans le secteur extractif africain. Ces derniers sont aussi presque tous membres de l’OCDE (Organisation pour la Coopération et le Développement Economique), un club de pays riches qui a établit des normes fiscales mondiales, mais qui toutefois favorisent ses membres, souvent au détriment des pays en développement, et perpétuant ainsi les injustices fiscales globales.
Les Solutions Proposées par l’OCDE et leurs Limites
L’institution a effet mis en place le projet BEPS (Base Erosion and Profit Shifting), un ensemble de 15 actions destinées à améliorer la cohérence des règles fiscales internationales et à garantir plus de transparence. En outre, l’OCDE continue de plaider pour une réforme de la fiscalité internationale qui s’articule autour de deux piliers : le premier vise à allouer une partie des droits à taxer aux pays de destination, tandis que le second cherche à établir un taux minimal mondial d’impôt sur les sociétés.
Un Modèle de Coopération Non Inclusif et Inadapté aux Pays en Développement : Le modèle de convention fiscale de l’OCDE, pratiquement imposé à de nombreux pays africains, et très souvent sous la pression des bailleurs de fonds, favorise largement les économies avancées, car les normes fiscales internationales promues par l’OCDE sont souvent taillées sur mesure pour les intérêts des grandes puissances économiques, au détriment des pays en développement. Cette asymétrie de pouvoir dans l’élaboration des règles fiscales mondiales constitue un obstacle majeur pour l’Afrique, dont les pays se retrouvent souvent dans la position inconfortable d’avoir à appliquer des règles qui ne correspondent pas à leurs réalités économiques et qui ne servent pas leurs intérêts.
L’Influence Néfaste des Paradis Fiscaux : Un autre problème clé réside dans le fait que les solutions promues par l’OCDE n’attaquent pas de front l’existence des paradis fiscaux, qui sont au cœur du système mondial d’évasion fiscale. De plus, l’OCDE n’a pas réussi à imposer des normes suffisamment strictes concernant la transparence sur les bénéficiaires effectifs des sociétés et des trusts. Elle a aussi eu peu d’efficacité sur le reporting financier pays par pays accessible au public, une exigence de transparence financière qui contraint les multinationales à publier des rapports détaillant leurs activités économiques, revenus, impôts payés, profits et autres indicateurs financiers clés pour chaque pays où elles opèrent. Ces informations sont pourtant essentielles pour lutter efficacement contre l’évasion fiscale et le blanchiment d’argent.
Saisir l’Opportunité pour Transformer le Système Fiscal Mondial
Les pays africains ont actuellement une chance unique de faire entendre leur voix sur un pied d’égalité avec les nations développées. 110 pays dont tous ceux du continent, exception faite du Libéria, ont voté en faveur des termes de référence qui ont été négociés par toutes les parties prenantes. Plusieurs pays notamment de l’OCDE qui étaient clairement des opposants au processus, se sont abstenus cette fois. Les objectifs du cadre de discussions qui a été adopté, sont ambitieux mais essentiels : accroître la transparence financière, mettre fin à la concurrence fiscale dommageable, et assurer une répartition plus équitable des recettes fiscales mondiales.
Transparence Financière Totale : Mise en place de registres publics des bénéficiaires effectifs et extension de l’échange automatique d’informations fiscales à tous les pays.
Attribution des droits d’impositions basée sur une formule unitaire : Pour mettre fin à la concurrence fiscale déloyale et garantir que les revenus fiscaux restent dans les pays où les activités économiques réelles ont lieu.
Fiscalité au Service des Droits Humains : Repenser le système fiscal mondial pour protéger les droits humains et promouvoir l’équité.
Renforcement des Capacités Fiscales en Afrique : Investir dans des infrastructures fiscales modernes et former les fonctionnaires pour mieux lutter contre l’évasion et l’évitement fiscaux.
« C’est un jour historique. En seulement quelques mois de négociations à l’ONU, nous avons obtenu plus d’ambitions pour la réforme du système fiscal mondial que ce que nous avons vu en plus de 60 ans à l’OCDE. Pour la première fois, nous avons des engagements en faveur d’une répartition équitable des droits d’imposition entre les pays et de garantir que les pays ne portent atteinte aux droits humains dans le monde entier par des politiques fiscales égoïstes et à court terme. » a déclaré Alex Cobham, directeur exécutif de Tax Justice Network, commentant cette adoption des termes de référence.
Together with its network of crown dependencies and overseas territories, the United Kingdom is the world’s largest facilitator of crossborder tax abuse. Indeed the UK’s ‘spider’s web’, as it is often known, was developed as a global system of economic extraction during the retreat of its formal colonial empire.
The UN Tax Convention, if effectively designed and implemented, would go a considerable way in disrupting neocolonial corporate practices that maintain structural discrimination in the global economy. Last December, the UK not only voted against the Africa Group’s resolution to start the negotiations, however, but also introduced an amendment to rid the proposal of any mention of the word ‘convention’, which would dramatically weakening the potential of the initiative. That amendment was roundly rejected by the community of nations at the UN, however.
The UK is among a small group of powerful Global North countries which would prefer to keep standard-setting on international taxation at the Organisation for Economic Cooperation and Development – also known as the ‘rich countries club’ – where the voices of poorer nations have long been excluded.
As argued in the submission, the UK, both through its own facilitation of abusive tax practices and its protagonism at both the UN and OECD, is seeking to maintain an unjust international financial architecture that significantly undermines the capacity of poorer nations to provide essential public services like education, housing, healthcare and decent living standards.
The joint civil society submission came ahead of the UK’s appearance before the Committee on the Elimination of Racial Discrimination, when it was interrogated over its efforts to tackle racial injustice at both the national and international levels. It came at a time when the UN human rights system is paying more and more attention to the prejudicial impacts of crossborder tax abuse, and the structures of domination and injustice that are embedded in the global financial architecture.
In December last year, a group of eight UN special procedures – independent experts appointed by the Human Rights Council to investigate urgent and immediate human rights concerns – issued a communication to the OECD warning that its proposed ‘two pillar solution’ to corporate tax abuse could have a discriminatory impact on poorer countries on the grounds of gender, ethnicity and race, and could widen inequality both within and between states. In particular, they warned that the proposed ‘solution’ would erode countries’ fiscal capacity to resource economic, social and cultural rights and the right to development. Despite the gravity of the concerns raised in the communication, and the fact that the UN experts explicitly requested a response, the OECD simply opted to ignore the letter.
At the heart of the CERD submission is the understanding that the existing architecture of international tax governance was built on structures of historical racial oppression anchored in slavery, colonialism and apartheid. Historians have demonstrated that the proliferation of tax havens, and with it the plunder of desperately-needed revenue for public services, emerged directly from the decolonisation process. Indeed the OECD’s long-standing stewardship of international taxation, which makes crossborder tax abuse relatively straightforward for both multinational companies and high net worth individuals, dates back to the 1960s when the USA and Canada joined together with European nations to establish the OECD. One of the main motivations was to displace the UN’s efforts in the arena of global tax governance with a more exclusive process. At the time, newly-independent states across the Global South were pursuing progressive proposals and the Global North’s economic elite, which had funnelled vast amounts of money into dependent territories and former colonies to avoid paying taxes at home, feared they would have nowhere left to hide their wealth. In this regard, it can be argued that former colonial powers like the UK and France have a particular obligation to reform international taxation in a way that remedies the racially discriminatory economic harms of the past rather than perpetuating them.
As things stand, a staggering $309 billion in corporate profits is shifted into the UK’s ‘second empire’ every year, costing the world over $84 billion in lost tax revenue. This means the UK is responsible for 27 percent of the $311 billion the world loses to corporate tax abuse each year. It also accounts for more than half of the $169 billion lost to offshoring of private wealth, which translates into another $85 billion of revenue foregone. Importantly, it is not ordinary UK citizens, but only the country’s economic elite, who benefit from this injustice. The UK itself loses close to $45 billion in tax each year thanks to the system it is seeking to maintain.
The complaint delivered to the UN Committee on the Elimination of Racial Discrimination has been submitted jointly by:
The Center for Economic and Social Rights (CESR).
Tax Justice Network
Global Network of Movement Lawyers, Movement Law Lab.
ESCR-Net
Centro de Estudios Legales y Sociales (CELS)
Minority Rights Group International
Red de Justicia Fiscal de América Latina y el Caribe
The Government Revenue and Development Estimations (GRADE) initiative, St Andrew’s University
Steven Dean, Professor of Law at Brooklyn University
Our economies were designed to let people earn the wealth they need to lead secure and comfortable lives, but our tax rules make it easier for the superrich to collect wealth than for the rest of us to earn it. This has let the superrich collect extreme wealth to the point where our economies are becoming insecure, and it scarcely pays to earn a living.
Our infographic below explains how this has happened, how it impacts you and how our governments can straightforwardly implement wealth taxes to fix the problem.
The extreme wealth of the superrich is making our economies insecure and poorer than the sum of their parts.
Our economies were designed to let people earn the wealth they need to lead secure and comfortable lives, but our tax rules make it easier for the superrich to collect wealth than for the rest of us to earn it. This has let the superrich collect extreme wealth to the point where our economies are less productive, more households are having to go into debt and people are living shorter lives.
Wealth taxes are the best tool for putting an end to the two-tier tax treatment that puts people who collect wealth for a living (ie those who mainly live off of huge dividends and rent money they collect) above those who earn wealth for a living (ie those who mainly live off of income they earn from working). We need wealth taxes to make our economies secure and protect the earner way of life that has defined the modern era.
Countries can straightforwardly follow the example of Spain’s successful and modest wealth tax today to raise $2 trillion in tax from the world’s richest 0.5%.
Here’s our step-by-step guide on how to tax the superrich.
Steps
1. Set a high bar for wealth and only tax wealth that’s above the bar
Setting a high threshold – like the top 0.5% wealth – means any wealth a person owns below this threshold does not get taxed. This makes sure the wealth tax only applies to the superrich, and doesn’t negatively impacts the middle and lower classes. It also means the very wealthy individuals to whom the tax does apply would only pay tax on the upper crust of their wealth – that is, on the portion of their wealth above the 0.5% threshold. For example, in Switzerland, a 0.5% threshold stands at US$11 million. A wealth Swiss person would only be taxed on the wealth they own above US$11 million. Their first eleven millions would not be taxed. A high threshold makes the administration of wealth tax simple for governments and more politically feasible.
2. Apply the tax to all types of wealth to prevent the superrich from cheating on tax
Exempting certain types of wealth from the tax creates an opportunity for the superrich to abuse. They can shift their assets into exempted categories to pay less tax. This shifting isn’t only bad economics — since wealth goes to where tax dues are lowest rather than where they’re most productive — it also complicates implementation, making a lot more costly work for tax authorities. By applying the wealth tax to all asset classes above the high threshold, governments can prevent inefficient investments and curb the wiggle room for tax abuse. If you’re a government and you’re concerned about the potential impact of applying the tax to business assets, don’t worry, we’ll explain how to handle this in step 6 below.
3. Exercise robust transparency on owners of companies and assets, to tax the right amount
When governments apply income tax, they don’t rely alone on what people self-report. They use official records to verify how much a person earned and ought to be taxed. Otherwise, folks can underreport to underpay tax. Wealth taxes are no different. But the problem is the owners of companies and assets can cover the paper trails linking them to what they own. The best tool for exposing these paper trails are public registers on beneficial (ie true) owners. These registers provide detailed information on who truly owns and controls companies and assets, equipping governments with the official records they need to verify how much wealth a person has and how much tax they should pay.
4. Strengthen transparency standards at the UN so that the superrich rich can’t hide wealth in tax havens
The strength of countries’ tax laws ultimately depends on our global tax transparency standards. The superrich’s ability to use secrecy jurisdictions — a type of tax haven that specialises in hiding finances from other countries’ laws — to hide their wealth from tax administrations can keep wealth taxes from being fully effective. To make wealth taxes truly effective, countries must make sure the UN tax convention currently being negotiated delivers robust tax transparency standards.
5. Put in safety measures to make sure superrich individuals relocating to other countries still pay what they owe
Evidence shows that apply wealth tax to the superrich does not lead to the superrich fleeing the country in droves, despite media headlines claiming the contrary. Just 0.01% of the richest households relocated after wealth tax reforms targeting them were implemented in Norway, Sweden and Denmark. But just to be safe, governments can put in place measures to make sure a long-time resident superrich individual still pays the wealth tax they owe even if they move abroad. For example, governments can introduce a tax obligation on former residents for a specified period after they move abroad, or implement exit taxes on individuals who renounce their residency. It’s worth noting that if other countries also introduce wealth taxes, there’d be little point to relocate to somewhere else.
6. Provide business owners some flexibility so they don’t have to liquidate their business to pay their taxes
Concerns that business owners might need to sell parts of their companies to pay their wealth taxes can be addressed by providing alternative options for paying. For example, business owners who are unable to pay their tax dues in cash by the end of the year and cannot easily generate liquidity from their businesses — unlike publicly traded companies that can sell shares — could transfer some a fraction of their business’s shares, equivalent to the tax duty, to a government-managed “wealth tax trust”. This approach has been successfully used for taxing inherited artwork. The government would own that part of the business, with rights to receive their share of profits but without any control over how the business is run. And the business owner would have the option to buy back these shares within a specified period at the same price. If the owner decides not to buy them back, the trust would sell the shares to the market after a set period. This approach protects businesses from being squeezed by the wealth tax while making sure their owners pay the tax they owe.
7. Call out all myths used to scare the public off of wealth taxes
There are a lot of common misconceptions about wealth taxes: they drive the superrich away, they unfairly target the middle class, they harm the economy. None of these are true: the superrich stay where they are, wealth taxes only apply to the very richest, they boost economic productivity and investment. What rarely gets talked about is the two-tier tax treatment of wealth. Collected wealth – ie dividends, capital gains and rent gained from owning things – is typically taxed at far lower rates than earned wealth – ie salaries gained by working. At the same time, collected wealth typically grows faster than earned wealth. This has resulted in the wealth of the superrich – whose wealth is virtually all collected rather than earned – quadrupling since the 1980s. Wealth taxes put an end to this two-tier treatment, making our economies more secure and protecting the earner way of life our economies are based on. Governments should call out myths on wealth taxes with clear and factual information on how they would implement wealth tax reforms, who these would apply affect and the benefits to be gained.
The second and final round of negotiations of the Terms of Reference for a UN Tax Convention has started in New York City (see our recap blog on what happened in the first round). It is in the best interest of any person, no matter where they live in the world, that UN Member States negotiate in good faith in this process. At stake is that countries make the most of this once-in-a-century opportunity to come up with robust guiding parameters that pave the way for an international instrument that develops the duty to cooperate internationally on tax matters and puts an end to global tax abuse – which is on course to cost countries nearly US$5 trillion in the next 10 years if global tax rules aren’t fixed. Tax is our social superpower, and our governments are desperately in need of these essential resources to fulfil people’s rights and tackle the most pressing global problems, including the climate emergency.
Unsurprisingly, members of the rich countries club the OECD are continuing to throw obstacles at the UN tax talks. The OECD, whose members includes some of the most harmful tax havens, has served as the world’s de facto rule-maker on global tax for over sixty years and its opaque and non-inclusive processes have been widely criticised and blamed for our currently broken global tax rules, which lose just about half a trillion dollars to tax havens every year. That’s why a landslide majority of countries voted at the UN last year in favour of moving decision-making for the OECD to the UN. But OECD members are still trying to keep decision-making on global tax rules, even though top UN human rights experts have said the OECD’s plans for new global tax rules are incompatible with anti-racism and anti-sexism laws, will make even harder for lower and middle income countries from losing taxes to tax havens, and “could have a discriminatory impact on the grounds of gender, ethnicity and race.”
In anticipation of the negotiations, we’ve compiled a guide to the five main fallacies that rich OECD countries will likely use to try to derail progress in the talks. In order not to lose the privilege of setting the agenda on international taxation issues, these countries are making a short-sighted interpretation of their own national interests, and they are opposing an ambitious international instrument (see full our database on who wants what from the UN tax negotiations). We provide insights on how to respond to each of these fallacies with a view to avoid distractions from the aim of achieving the best possible outcome to secure a fully inclusive and truly effective international tax cooperation framework that benefits all countries.
Ultimately, a broken, opaque and non-inclusive global tax system is bad for everyone, despite OECD countries’ attempts to keep it so. OECD countries are responsible for facilitating over three-fourths of the tax losses countries suffer every year to global tax abuse. At the same time, they are also the world’s biggest losers to tax abuse. This is a lose-lose game that results in the world handing over nearly half a trillion dollars of public money to the wealthiest multinational corporations and superrich individuals. Moving global tax policy from the OECD to the UN, where transparency, democratic process and human rights obligations prevail, is our best shot for fixing our global tax system. All countries will benefit from UN leadership on global tax policy, including the OECD countries who are putting power before prosperity.
1. The fallacy of duplication
A first objection that will recur against an ambitious UN framework convention on tax is that this instrument should not duplicate work that has been done in other fora. This objection, however, ignores the fact that this is – literally – the very first time that a legally binding instrument governing international tax cooperation is being negotiated in a universal and inclusive forum.
While there are international and multilateral agreements on tax matters, the UN Secretary-General’s 2023 report requested by the General Assembly notes that “they do not satisfy the main elements for fully inclusive and more effective international tax cooperation”. This does not mean that the progress that may have been made through these instruments should be dismissed, but they would have to be brought into line with the objectives, principles and commitments defined by the framework.
The Secretary-General’s report argued that rather than duplicating existing processes, a UN intergovernmental process would leverage existing strengths and address gaps and weaknesses in current international tax cooperation efforts. Indeed, unlike technical guidance or assistance work that institutions such as the International Monetary Fund or the World Bank might develop, the UN undertakes collective norm-shaping through an intergovernmental process that can take into consideration the needs of countries at different levels of development. This is why the report considered that “enhancing the role of the United Nations in tax-norm shaping and rule-setting appears the most viable path for making international tax cooperation fully inclusive and more effective”.
The fallacy of duplication takes different forms in State Members’ submissions. For example, several countries argue that paragraph 20 of the negotiating draft text, which states that “throughout its work, the intergovernmental negotiating committee should take into consideration the work of other relevant forums, potential synergies and the existing tools, strengths, expertise and complementarities available in the multiple institutions involved in tax cooperation at the international, regional and local levels”, should be elevated to a principle. Moving this paragraph from the section on negotiating approaches up to become a principle would significantly undermine the flexibility of the negotiating committee necessary for negotiators to assess which elements of existing instruments should be included in the framework and which should not (according to their coherence with other elements of the framework) on a case-by-case analysis. In other words, it would limit the UN framework convention’s ability to fill the existing gap in the international cooperation on tax which this whole process aims to address, and which costs all countries dearly in tax losses every year.
The same group of countries arguing in favour of making paragraph 20 a principle often also argued that the commitments to be included in paragraph 10 of the terms of reference should exclude any issues that are being or have been addressed by other fora, and particularly by the OECD. In a similar vein, the UK, for example, proposes to include principles of subsidiarity or comparative advantage in the terms of reference so that the framework convention only includes issues that are not being addressed by other instruments. All of this would counterproductively restrict the scope of the framework convention, as it would prevent the UN from applying the universally adopted objectives and principles of the framework convention to key areas where current standards are not satisfactory ― for instance, corporate taxation standards covered by the OECD’s faltering two pillar agreement, which UN human rights experts say are incompatible with anti-racism and anti-sexism laws.
The point of the framework convention is to allow all countries to be included in setting international tax rules. It would be ridiculous to argue that the framework convention should not apply to areas where some countries only have already had a chance to participate in rule-setting.
2. The fallacy of fragmentation and uncertainty
A recurring and related objection is that including issues dealt with in other fora in the framework convention would create the risk of fragmentation of global tax rules and consequent legal ambiguity. According to this position, expressed by the UK in its submission, international tax cooperation could be weakened over the coming years because of fragmentation, which would increase the prospect of regulatory arbitrage and illicit financial flows. In addition, inconsistent rules could lead to double taxation, which would discourage foreign investment.
This reality-denying objection ignores the current proliferation of double taxation treaties and rules adopted in fora without universal acceptance is already resulting in exactly the type of fragmentation and ambiguity the UK is warning about – and that the UK’s financial centre notoriously exploits to undermine other countries’ tax revenues. And it ignores the fact that a UN framework convention is precisely the best instrument for putting an end to this fragmentation and ambiguity.
Contrary to what countries such as the Netherlands claim in their submissions, there is no functional, cohesive and predictable system of global tax governance today. On the contrary, the framework convention is how we can finally create cohesion. The risk of competing standards could be addressed if, as suggested by the Africa Group in the first round of submissions, provisions were made around a transitional regime. In the first round of negotiations, Brazil also raised the need to reconsider bilateral treaties through an expedited review procedure considering the adopted framework.
3. The fallacy of consensus-only outcomes in a world desperately in need of prompt solutions
One of the demands most insisted upon by the EU and other rich OECD countries is that at this stage of the terms of reference, discussion should mainly focus on procedural aspects, and in particular those that have to do with decision-making rules. These countries argue that in international taxation matters, by virtue of the principle of sovereignty, the rule of consensus should prevail. Consensus would be the way to ensure broad acceptance and commitment to the implementation of the framework convention.
A consensus rule in practice can mean that a single country has veto power over a reasonable agreement that all other countries are in favour of – which in international taxation matters may make agreements virtually impossible. Contrary to what is usually claimed, the OECD’s “Inclusive” Framework has not adopted many of its decisions by consensus. Not only does the “Inclusive” Framework fall far short of having universal membership, its decision have been made in direction opposition to strong, public objections by its members see the Litany of Failures report we co-published with partners for more information on this.
The UN General Assembly’s rules of procedure strive for consensus, but wisely recognise that to advance the solutions the world urgently demands, other decision-making mechanisms may be necessary when consensus is not possible. The field of international taxation should be no exception to this, and the rules of the subsidiary bodies of the General Assembly ― which do not outlaw the simple majority rule as a valid decision-making mechanism when needed ― are well established.
The group of countries supporting consensus as a decision-making mechanism has found some precedents in UN resolutions that have established decision-making rules different from the usual procedures of UN subsidiary bodies. However, in a context where multilateralism is being questioned for its inability to respond in a timely manner to pressing problems such as the climate emergency or the fulfilment of the Sustainable Development Goals it is worth asking if special rules should be introduced in this case. Establishing a veto power by introducing consensus as the sole decision-making mechanisms on international tax cooperation – which is a critical area for mobilising resources for these and other agendas – may reinforce the perception that multilateral solutions required very demanding requirements that impede them to move forward with any meaningful agreements. The current UN tax convention process is a golden opportunity to restore confidence that multilateralism can deliver timely solutions – and preserving the possibility of using alternative decision-making rules when consensus is not possible seems essential to put healthy pressure on Member States to seek agreements in good faith.
4. The fallacy of focusing on the less controversial topics
Another recurring objection to addressing the issues on which rich OECD countries have so far had the power to set the agenda is that the framework convention should focus on less controversial issues.
If multilateralism were to focus on less controversial issues, it would probably not respond to the world’s most pressing problems. What the world expects from this process is not to make easy progress at the margins (‘low-hanging fruit’ victories), but to deliver structural solutions to the major problems that result from failures in international tax cooperation (eg curbing tax-related illicit financial flows and harmful tax abuse) – regardless of, or indeed precisely because of how controversial and challenging these problems may be.
The point of a UN framework convention is to move beyond the OECD’s failed reign over global tax rules and in particular its dead-in-the-water 10-year long reform attempt at stopping the half a trillion losses in tax countries suffer to tax havens every year. Insisting that the UN framework convention should deal with minor issues on the sidelines while countries haemorrhage urgently needed public money is like asking the UN framework convention to build safety rails on the deck of the titanic.
5. The fallacy of undertaking thorough analysis to take any meaningful step
Finally, one of the objections to taking decisions on what commitments should be included or what protocols to prioritise at early stages in the terms of reference, is that a thorough analysis must be conducted first.
The General Assembly adopted a resolution to start intergovernmental negotiations towards a UN tax convention because most countries found that the status quo of international taxation is not working and there is ample evidence of this. When rich countries demand to start from scratch and carry out more diagnosis analysis before making even the most basic decisions on which topics the framework convention should cover, their commitment to promptly moving forward on solutions that work for all countries is not quite credible.
The failures of international tax are clear, and addressing the damage done to our societies is an urgent priority. Analysis is evidently needed – but as part of the process of reform, not as a precondition. It is time to stop making excuses and start solving the problems.
The second round of UN tax talks are running from 29 July to 16 August. Check out our rolling blog for updates on the negotiations. The negotiations sessions can be watch live on UN Web TV here.
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.
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Without implication, thanks to Rachael Henry, Head of Advocacy and Policy at Tax Justice UK, for useful comments and suggestions.
According to the Eurobarometer survey on fairness and inequality, 81% of the population in the Member States of the European Union believe that income differences are too great in their country, and 78% think their government should do more to address these income inequalities. Two-thirds believe that taxation has a role to play in remedying this situation.
The reason is clear: most of the tax systems in place in Europe deliberately favour the wealthiest, to the extent that this favouritism has become an unspoken norm. In virtually all European countries, taxation of the richest individuals has fallen steadily over time. Over the last thirty years, wealth tax has been abolished in all EU countries except Spain, where some form of federal tax on the richest remains. It is high time to reverse this trend, not only for democratic reasons, but also for economic efficiency.
At the same time as these inequalities are increasing, the European Union is facing another major challenge: climate change. As the European Climate Risk Assessment points out, Europe is the fastest-warming continent, with temperatures rising around twice as fast as the global average. Extreme weather events, such as floods, storms and forest fires, are becoming more frequent and disproportionately affect the most vulnerable populations, who paradoxically emit the least greenhouse gases. Experts also indicate that this situation is set to worsen over the coming decades.
A fundamental reorientation of the European Union towards a fair and democratic climate transition is therefore imperative and urgent. As climate justice cannot be achieved without social justice, we are calling for the introduction of a tax on the ultra-rich to restore global balance, while funding social policies, the ecological transition and development cooperation.
Learning from History: Taxing Wealth in Times of Crisis
In the past, wealth has been taxed in situations deemed exceptional. This was the case during the two world wars: in France in 1916 and 1945, and in the United States in 1941, when President Roosevelt introduced a tax on the highest incomes.
While past crises have led to a rethink of prevailing economic thinking, more recent crises have done little to shake up the current economic model. The great speeches made during the 2008 financial crisis or the coronavirus pandemic, for example, have had no effect on the neoliberal model, which seems unshakeable, even unsinkable. Yet the times in which we live today, with their growing social injustices, widening inequalities and various disruptions, require leaders to have the courage to change paradigms. The social and climate emergency must take precedence!
This paradigm shift must take place at least at European level. Individually, the Member States will not have the capacity, even if they move forward in a concerted manner, to counter the mechanisms of tax competition and dumping that discourage any effort towards greater justice. Europe was created precisely to provide global solutions to these pitfalls.
Unlocking Funds for Social and Ecological Progress
At the same time, implementing the ecological transition will require tremendous financial efforts. According to a study by the European Commission, Europe’s transition to a sustainable economy and meeting its climate targets by 2030 will require substantial investment, estimated at an additional €260 billion per year.
A wealth tax would raise this money, as several studies have revealed. The latest, published by Oxfam in April 2024, shows that EU governments are missing out on more than €286 billion in revenue a year because they are not taxing the richest Europeans proportionately. This huge amount, comparable to Finland’s GDP, is equivalent to around €33 million in uncollected tax revenue every hour.
A wealth tax would therefore be a very useful tool if we want to invest massively in the social and ecological transition and if we want to avoid average and poor households paying for this transition. This tax is not only necessary but also fair to share the burden of the green transition, especially as the richest people in the world contribute disproportionately to CO2 emissions. It is not just a matter of economic efficiency, but also of fiscal justice and democracy.
Take Action: One Million Signatures to Transform Europe
In 2023, a European Citizens’ Initiative (ECI) calling for a wealth tax was launched. This procedure is a concrete tool for action that is still little known in the European Union. If successful, it can be used to ask the European Commission to draw up a legislative proposal in response to the request. In this case, the aim is to introduce a European wealth tax to finance the fight against climate change and inequality. It would contribute to the EU’s own resources by generating revenue to co-finance the ecological and social transition policies pursued by the Union and its Member States.
For this initiative to succeed, we now need to collect one million signatures across the whole of Europe by 9 October, while reaching the minimum threshold in at least seven Member States. One million signatures may sound like a lot, but it’s not much if we mobilise the public, all those who are calling for greater social justice and resources for the ecological and social transition. That’s why we’re counting on a coalition of politicians, trade unions, NGOs and members of civil society who, together, can turn this initiative into a major popular and civic victory.
Let’s seize this opportunity to demand greater social and fiscal justice throughout the European Union!
We’re delighted to announce a successful bid for research funding from the Canadian government’s Social Science and Humanities Research Council (SSHRC). The Tax Justice Network will be supporting the three-year project, led by Dr Masarah Paquet-Clouston of Université de Montréal, with Prof. Nicholas Lord and Dr Tomáš Diviák of the University of Manchester. Here’s the summary of the research proposal – more soon as work gets underway!
Facilitating Crimes for Financial Gains: Understanding the Dynamics of the Online Market for Shell Companies
This research sheds light on the emergent online market for the sale of shell companies. These companies, though legal in creation, are central to the organisation of illicit finances associated with serious crimes such as organised crime, white-collar offences, money laundering, and tax evasion. This centrality is significant as an estimated US$1.6 trillion of illicit finances flow through the global financial system each year, much of which is organised via shell companies.
Today, these companies can be purchased online at various prices and with varying features by anyone interested in obtaining a company quickly in a preferred jurisdiction without having to go through the company formation process themselves. This burgeoning online market lowers barriers to entry to any customers interested in concealing, controlling and/or converting criminal and illicit finances domestically and transnationally. Given this, there is a pressing need to better understand the size, scope, and structure of this online market, and what are the dynamics, networks, and conditions that underpin market supply, demand, and competition.
The primary goal of the research is to map out and comprehend the size, structure, and dynamics of the online market for shell companies. This involves identifying key suppliers and jurisdictions as well as understanding the structures, and mechanisms enabling this market.
To do so, four objectives have been established:
Provide a comprehensive representation of the online market for shell companies.
Examine the pricing strategies employed by shell company suppliers in relation to specific jurisdictional characteristics.
Understand shell suppliers’ specialisation in jurisdictions’ offering.
Illustrate the interconnections between suppliers’ jurisdictions and the jurisdictions of the shell company they offer.
Data will be collected online to meet these objectives, using a blend of quantitative methods including multilevel modelling and network analysis. A fifth objective aims to automate the data collection and analysis process for research continuity. Such automation will allow for regular audits of the market over time, build longitudinal datasets, and inform on the impact on the work of regulators and civil society, once policy actions take place.
The research is a collaborative effort between a team of interdisciplinary researchers from Université de Montréal and the University of Manchester and a key partner, the Tax Justice Network. The Tax Justice Network is a global network dedicated to pioneering research on the operation of tax and financial systems, their impact on society, equality and the economy, and the world of offshore tax abuse and financial secrecy. The participation of the Tax Justice Network as a partner ensures that the research is grounded in real-world applications and reaches a wide audience, including policy makers and the public.
Through its expertise, the network plays an integral role in the research by not only offering key datasets on jurisdictions’ characteristics, but also by contributing to the research design, data collection, interpretation of the findings and the drafting of evidence-based policy recommendations.
The study will uncover the dynamics behind this crime-facilitating transnational market. By integrating practical insights from the Tax Justice Network, the findings are expected to inform and enhance policy development, particularly in the areas of financial regulation, crime prevention, and international law, to counter the negative impacts of this emergent digital market.
After the infamous ruling of November 2022 by the European Court of Justice that rolled back public access to beneficial ownership information, another case now pending in the European Court of Justice could deal an even worse blow to the fight against transparency and tax justice. Once again an individualistic concept of human rights, particularly the right to privacy, is being weaponised, this time to protect lawyers who enable illicit financial flows when they create secrecy vehicles such as companies and trusts.
Introduction
The EU is still trying to recover from the November 2022 strike against transparency that resulted in many EU countries, starting with Luxembourg, closing their public beneficial ownership registries. We welcome the approval in 2024 of the EU AML Package with provisions for legitimate interest access by civil society organisations, journalists, academia as well as foreign authorities is welcome, though it’s a poor substitute for public access.
Now, a new EU case concerning lawyer’s professional confidentiality could deal an even worse blow to the fight for transparency and tax justice. The new case arose from a request by Spain’s tax administration to Luxembourg for information about a law firm’s services to a Spanish company. The exchange of information request was based on Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation. The Spanish authorities were specifically interested in details of the acquisition by an investment group of a Spanish company and shares in another entity. The law firm refused to provide the information based on their legal professional privilege (LPP), which protects a lawyer’s communications with their client. Luxembourg’s tax administration imposed a fine on the law firm for failing to comply with the provision of information request. The law firm, with the support of the Luxembourg lawyers’ Bar Association, challenged the decision before the Luxembourg national court. The Luxembourg administrative court dismissed the action, so the law firm and the Bar lodged an appeal with the Higher Administrative Court. This Court decided to stay the proceedings and referred questions to the European Court of Justice regarding the right to privacy vis a vis legal advice provided by lawyers on matters of company law.
Before the European Court of Justice delivers its ruling, the Advocate General issues a non-binding legal opinion. On 30 May 2024, the Advocate General to the European Court of Justice Juliane Kokott published her legal opinion on the case. She agreed with the law firm. In essence, the Advocate General considered that lawyers should enjoy legal professional privilege (aka a right to secrecy) not just when they are defending a client in court, but also when they are hired by the wealthy to create companies and other investment structures.
This legal opinion will bolster the (ab)use of this special confidentiality of lawyers to protect criminals, high net worth individuals and multinational companies from scrutiny by authorities when creating secretive structures.
This blog post has three parts. First, it looks at this case within the context of a campaign to promote human rights from an individual perspective (eg privacy, data protection) against human rights from a wider-society perspective (eg health, education, housing, a clean environment, rule of law). Second, the blog post offers an analysis of the legal opinion itself in light of the secrecy risks that it creates. Thirdly, it finishes with a long-overdue proposal to establish a clear limit to lawyers’ legal professional privilege when it comes to legal advice unrelated to a current trial.
1. Individual rights versus the public interest
There appears to be a campaign to argue for the human rights of rich and powerful people and corporations against the public’s right to transparency and tax justice. This new legal case on lawyers’ confidentiality is another attempt in the ongoing campaign by law firms and data protection authorities in Europe and elsewhere to weaponise privacy, and its corollary data protection, against public-interest transparency advances. So far, the campaign has covered:
upon request exchanges of information between tax authorities (the new legal opinion)
automatic exchange of bank account information (eg in Belgium and the UK),
mandatory disclosure rules to disclose aggressive tax planning and schemes to circumvent automatic exchange of information or hide beneficial owners (eg in Argentina, Belgium and Ecuador).
In parallel to this campaign to use courts to strike down transparency advances, there is academic work to bolster individual’s rights over public interest. For instance, Advocate General Kokott co-authored a paper published in 2021 on Taxpayers’ Rights, where she and fellow authors detailed their approach to the human rights of taxpayers. While they accepted that there is a ‘collective right’ to tax justice, and even that it is ‘fundamental’, their view was that ‘the protection of fundamental collective interests must not go so far as to infringe individual fundamental rights’. From this perspective, ‘the international fight against tax avoidance, evasion, and fraud’ is a matter for tax authorities, governments and the Organisation for Economic Cooperation and Development (OECD).
This idea of human rights from an individual perspective against human rights from a wider societal perspective has four major flaws.
First, it assumes that the collective rights of the public are currently adequately protected by governments and authorities. However, tax and law enforcement authorities tend to be understaffed, lack appropriate budgets and technological resources, and in some worse cases even suffer from political pressure or corruption. To make matters worse, incentives to protect the enforcing of laws and rights in favour of society as a whole are much weaker than the incentives for powerful individuals to benefit themselves. In other words, it’s much easier for a rich tax evader to hire lawyers to protect their rights in court than it is to mobilise the many individuals whose human rights to health, education and a decent life depend on fair and effective taxation, the fight against money laundering and corruption, etc. This is the classic challenge of any collective action to overcome unjust structures.
Secondly, it results in a view of human rights that protects wealth and advantage over the basic needs of all individual human beings because it considers civil and political rights as more important than social, economic and cultural rights. This perspective sees all people, including ‘legal persons’ as equal, with equal rights. The consequence is that human rights legislation potentially protects companies, money and property to the same extent, or more than, basic human needs for health, housing, etc. However, it is essential to recognise that social and economic rights of all individuals are just as important as civil and political rights. Critical to this seeming conflict between individual rights versus collective rights is the recognition of States as key duty bearers for human rights of all citizens, especially when considering the needs of vulnerable people. The Principles for Human Rights in Fiscal Policy sets out how “states must be free from undue influence from corporations or those working to further their fiscal interests to the detriment of human rights realization”.
Thirdly, it is based on perceptions that tax enforcement, transparency or equality before the law only remotely and indirectly affect human rights, including not just health, education and housing but also the right to life or freedom. As we explain in our paper “Why beneficial ownership registries aren’t working”, it appears that people are more willing to allow for intrusive measures (eg airport checks on passengers’ luggage and personal items) when the danger to the right of life is more direct and obvious (eg stopping a terrorist attack). However, corruption, money laundering or tax abuse are not perceived as a threat to life and other basic human rights, and courts tend to be used to assert legal protections for the wealthy and powerful to use secrecy over transparency measures such as public access to beneficial ownership information or now, establishing limits against legal professional privilege. Nevertheless, the cases of fires and explosions in Argentina’s concert hall, the Bangladesh factory or Lebanon’s port show that corruption also results in the loss of life, facilitated by secretive legal vehicles, a view firmly established among global institutions such as the World Bank for over a decade.
Fourthly, no right is absolute and particular rights should not be exploited to undermine other rights. Just as the interest to board an airplane without passing a security check should not be understood as an interest to be protected by the right to free movement, neither should the refusal to provide information to authorities (or to publicly disclose beneficial ownership information) be understood as something that should be protected by the right to privacy.
The individual interest in secrecy by the rich and by powerful corporations must also be balanced against the individual and collective rights of others. Ensuring secrecy in favour of law firms and companies also affects both “individual” civil and political rights (e.g. the right to access information), and the “individual or collective” dimensions of economic and social rights. For instance, rights such as the right to health or education have an individual component as well because they protect individual claims before the law – having individual access to healthcare or to primary education).
Even if the Court found that the law firm has a legitimate defence in claiming protection under the law to refuse to divulge information, no right should be considered absolute, and the tools of balancing or harmonising conflicting rights should be used appropriately. That means in our view that the requirement to publish certain types of information, such as beneficial ownership information or a simple request for information by an authority in this case, is not a disproportionate restriction of the right to privacy because it protects other rights that would be at risk if secrecy were maintained in these cases.
In conclusion, academic work and lawsuits are pushing for a view of human rights that protects the rights to privacy and private property of companies and other legal structures. The problem with this perspective is that a blanket wall that protects secrecy around the ‘right to set up a corporate investment structure’ may end up aiding activities that are clearly against the public good, such as corruption, money laundering, tax evasion and avoidance. Legal professional privilege would make it impossible to distinguish between what is lawful and unlawful, as everything a lawyer advised on would become confidential.
2. An analysis of the legal opinion
The Advocate General’s Opinion gives an extraordinarily wide interpretation of the right to privacy under the Charter of Fundamental Rights of the EU which would have potentially enormous consequences for tax enforcement and cooperation in the EU. Three main points can be singled out:
2.1 Protection of privacy and family life should not extend to enabling illicit financial flows.
Article 7 of the Charter of Fundamental Rights of the European Union states that ‘Everyone has the right to respect for his or her private and family life, home and communications’. The Advocate General argues that ‘legal persons too can rely on the right to respect for private life’. This legal opinion proposes to go well beyond a previous decision of the Court which accepted that the individual’s right to protection of their personal data extended to when their name appears in that of a company. The legal opinion states:
It is true that the Court has held that ‘legal persons can claim the protection of Articles 7 and 8 of the Charter … only in so far as the official title of the legal person identifies one or more natural persons’. However, that distinction concerns only the processing of personal data under Article 8 of the Charter. Conversely, legal persons too can rely on the right to respect for private life that is protected by Article 7 of the Charter. This must be particularly true of the protection of communications, likewise protected by Article 7 of the Charter, in particular LPP…. The object of protection, after all, is the relationship of trust between lawyers and their clients. Such a relationship also exists between the lawyers brought together within a company, on the one hand, and their clients or their clients’ agents, on the other. The legal form within which the lawyer or the client acts is immaterial in this regard.
Yes, you read that right. According to the Advocate General’s legal opinion, the right to ‘respect for private and family life, home and communications’ applies not just to real people, but also to companies and law firms, and hence to communications between them!
Contrary to the expansion of the right to privacy to protect the secrecy of law firms and companies, one could consider the report by the Special Rapporteur on the promotion and protection of the right to freedom of opinion and expression in the aftermath of the European Court of Justice’s November 2022 ruling on beneficial ownership registries. The Special Rapporteur considered the balance between conflicting interests in terms of the right to privacy:
“The relationship between data protection, the right to privacy and the right to information is complex and requires a careful balancing of interests. That in turn requires that laws and policies clearly define, on the one hand, the personal information that is protected legitimately under the right to privacy and, on the other, the public interest justifying disclosure. Under such a test, even if the information is determined to be personal and its release would infringe privacy, it may be disclosed if the public interest in release is more important than the privacy interest.” (A/HRC/53/25: Sustainable development and freedom of expression: why voice matters – Report of the Special Rapporteur on the promotion and protection of the right to freedom of opinion and expression)
Additionally, the idea of companies and law firms having equal rights to individuals and the general public is in direct conflict with their responsibilities as outlined in the Guiding Principles on Business and Human Rights. Business enterprises have a responsibility to respect human rights, including not only infringing on others’ rights but also addressing adverse human rights impacts with which they are involved. Allowing businesses to enjoy secrecy around matters that could cause the widespread infringement of human rights for large groups of people through tax abuse, money laundering or corruption would be antithetical to the very idea of human rights principles.
2.2 Lawyers are not necessarily always interested in the rule of law
The Advocate General argues that legal professional privilege is a fundamental right for a just society:
After all, lawyers are not only representatives of their clients’ interests but also independent collaborators in the interests of justice. Consequently, LPP [legal professional privilege] protects not only the individual interests of lawyers and their clients but also the public interest in justice being administered in such a way as to fulfil the requirements of the rule of law. Thus, the special protection afforded by LPP [legal professional privilege] is also an expression of the principle of the rule of law on which the European Union is founded…
The legal opinion argues that legal professional privilege extends to any legal advice, not only from a lawyer (para. 61), and protects not only the individuals but the general public (para. 58). This means that any powers given to public authorities to ensure due compliance with the law, including tax law, must be ‘balanced’ against the right of those devising abusive schemes to keep their advice confidential. In the words of Advocate General Kokott: ‘In the light of the importance of LPP [Legal Professional Privilege], after all, fact-finding enquiries cannot be conducted at any price’ (para. 59).
If authorities are unable to obtain information due to legal professional privilege, how can they verify compliance with the law, and hence that the rule of law actually is being upheld? It appears as if the Advocate General assumes that all professionals giving legal advice always act in the interests of justice; not only are they never corrupt, but they never try to find loopholes and weaknesses in the legal rules in the interests of their clients, which they seek to conceal from regulatory authorities. Allowing them to keep their schemes secret would blindfold authorities, which are already so under-resourced that they have an almost impossible task in trying to stop tax evasion and avoidance.
It is not clear how the Advocate General can assert this in light of the evidence of the involvement of professionals such as lawyers and accountants in creating offshore companies facilitating illicit financial flows, especially as revealed by major leaks by whistleblowers, notably the Panama Papers and the Paradise Papers.
Contrary to the view that lawyers always stay within the law and promote the rule of law, the Financial Action Task Force (FATF), which sets global anti-money laundering standards, has been warning about the role of legal professionals in money laundering for more than a decade:
…the use of legal professionals to provide a veneer of respectability to the client’s activity, and access to the legal professional’s client account, is attractive to criminals. There is also a perception among criminals that legal professional privilege/professional secrecy will delay, obstruct or prevent investigation or prosecution by authorities if they utilise the services of a legal professional. (FATF 2013 report on “Vulnerabilities of Legal Professionals”, page 23)
According to the Financial Action Task Force, the situation had not changed much six years later:
Criminals may also seek out legal professionals (over other non-legal professions) to perform the services listed in R.22 with the specific criminal intent of concealing their activities and identity from authorities through professional privilege/secrecy protections. (FATF 2019 “Guidance for a risk-based approach for legal professionals”, page 23).
The Financial Action Task Force also explains that the mere possibility of invoking legal professional confidentiality directly affects investigations and can let lawyers off the hook:
… differing interpretations by legal professionals and law enforcement has at times provided a disincentive for law enforcement to take action against legal professionals suspected of being complicit in or wilfully blind to ML/TF [money laundering/terrorism financing] activity…
Claims of legal professional privilege or professional secrecy could impede and delay the criminal investigation… In many instances this means that the claim of legal professional privilege or professional secrecy will need to be resolved by a court, which can delay the investigation process for a substantial period of time. As time is a critical factor in pursuing the proceeds of crime, this may influence the decision of investigators of whether to investigate the possible involvement of the legal professional or to seek evidence of their client’s activities from alternative sources. (FATF 2013 report on “Vulnerabilities of Legal Professionals”, pages 6, 31-32)
Using human rights to undermine legitimate inquiries by public authorities authorised by democratically approved laws is a travesty of the rule of law.
2.3 Protection of human rights should not be used as a green light to create secretive companies and investment structures
The most dangerous part of the legal opinion is the broad confidentiality protection for lawyers’ involvement in the formation of companies and investment structures, which is one of the main ways to create complex secrecy structures which may engage in illicit financial flows.
The Advocate General writes:
Since it is therefore impossible to draw distinctions between the various fields of law – as Luxembourg has done in this case – when determining the scope of the protection afforded by LPP, that protection extends to legal advice in the field of company and tax law, too. In particular, advice on the establishment of a corporate investment structure such as that at issue here also falls within the scope of the protection afforded by LPP.
This extension poses grave dangers, considering that the Financial Action Task Force has identified several cases of legal professionals assisting or directly engaging in money laundering through the creation of companies.
Inherently these activities pose ML/TF [money laundering/terrorism financing] risk and when clients seek to misuse the legal professional’s services in these areas, even law-abiding legal professionals may be vulnerable. The methods are: … creation of trusts and companies; management of trusts and companies; …; and setting up and managing charities. (page 4).
Annex 5 to the same Financial Action Task Force 2013 report lists 126 examples of real cases where legal professionals were involved in money laundering or financing of terrorism. Out of these, 45 cases included the method of a legal professional obscuring ownership through the creation of companies, trusts, use of bearer shares or acting as trustees. For instance, “Case 59” involved “legal professional creates complicated foreign structures and transfers funds through client account while claiming privilege would prevent discovery.”
To prevent the facilitation of corrupt activities, legal privilege or professional secrecy should protect only activities that are specific to the legal profession, such as ascertaining the legal position of a client, providing legal advice, or representing a client in legal proceedings. These protections should not extend to activities performed by a legal professional that are purely financial or administrative in nature, such as handling client funds, acting as a nominee director or shareholder on behalf of a client, or acting as a formation agent of legal persons.
3. Establishing limits on professional confidentiality
Although the weaponisation of privacy has hit mostly in the European Court of Justice, international standards (including those set by the Financial Action Task Force or the Global Forum) also share some blame for allowing professional confidentiality to become a barrier to transparency and protection of fundamental human rights principles.
Already, the Financial Action Task Force’s Recommendation 23 allows lawyers not to file suspicious transaction reports, based on professional confidentiality. The actual text of Recommendation 23 states that lawyers, notaries, accountants and other legal professionals are required to report suspicious transactions when, on behalf of or for a client, they engage in, among others, the organisation of contributions for the creation, operation or management of companies or the creation, operation or management of legal persons or arrangements, and buying and selling of business entities. However, the Interpretative Note then states that legal professional privilege can protect lawyers against filing information:
Lawyers, notaries, other independent legal professionals, and accountants acting as independent legal professionals, are not required to report suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege.
It is for each country to determine the matters that would fall under legal professional privilege or professional secrecy. This would normally cover information lawyers, notaries or other independent legal professionals receive from or obtain through one of their clients: (a) in the course of ascertaining the legal position of their client, or (b) in performing their task of defending or representing that client in, or concerning judicial, administrative, arbitration or mediation proceedings. (emphasis added).
Likewise, the Global Forum on Exchange of Information for Tax Purposes’ Standard under Section C.4.1 allows countries not to exchange information when it would violate attorney client privilege:
Requested jurisdictions should not be obliged to provide information which would disclose any trade, business, industrial, commercial or professional secret or information which is the subject of attorney client privilege or information the disclosure of which would be contrary to public policy.
Where to draw the line between lawyers’ confidentiality and requiring them to provide information to authorities?
Legal professional privilege can be thought of as a spectrum following the letter “V”. The three extremes are easy. The two top vertices are clearly beyond legal professional privilege: one would include a lawyer who isn’t acting as one, but rather as a salesperson or manager. The other would refer to a case where the lawyer is acting illegally and committing a crime (eg engaging in money laundering). On the other hand, the bottom vertex involves a lawyer defending a client in court in the context of a trial, a situation that in most (if not all) countries would ensure the protection of legal professional privilege. The question is where to draw the line for legal advice.
Source: elaborated by author
In relation to the first top vertex, the Advocate General states that there would be no legal professional privilege when a lawyer acts in a commercial way as part of a management consultancy firm:
…that protection covers only information shared in the context of an activity involving the provision of legal advice as part of a specific instruction. In addition, however, lawyers may engage in commercial practice too, as part of a management consultancy firm, for example. To the extent that they do, lawyers do not practise as independent collaborators in the interests of justice. By extension, therefore, information obtained in that context does not require the same protection as information obtained as part of the provision of legal advice.
The protection provided by lawyer-client confidentiality does not apply when a lawyer is knowingly assisting, aiding or abetting the unlawful conduct of his or her clients. In such circumstances, the lawyer would be committing a criminal offence in most jurisdictions (page17).
Drawing the line for “legal advice” should depend on the risk of illicit financial flows
The main question is what happens when a client seeks legal advice from a lawyer before any legal proceedings apply. In this case, the conduct, either legal or illegal, is merely being planned or considered. We propose that the line should be drawn depending on the risks of illicit financial flows.
If the legal advice is about how to interpret the law or how to comply with the law exclusively for commercial purposes, this legal opinion would likely be covered by legal professional privilege, but this shouldn’t create any risk of illicit financial flows. For instance, we are talking about a “doing business report” where a lawyer explains to a foreign investor what types of companies there are in the country, or what would be the most suitable type of company or investment, exclusively based on the commercial (non-tax) purpose of the client.
If the legal advice sought from the lawyer is to identify all the loopholes in the law to escape the law, eg how to set up a bank account to circumvent automatic exchange of bank account information, how to set up a discretionary trust to prevent asset recovery or to exploit secrecy or asset protection against authorities or third parties in any other way, then this should not be subject to confidentiality protection because of the high risk of illicit financial flows.
This finally brings us to the issue of tax advice. If a client asks a lawyer for tax advice to stay within the literal meaning of the law and within the spirit of the law, this could also enjoy the protection of professional confidentiality because it wouldn’t be creating illicit financial flows risks. For instance, we refer to a case where a tax lawyer explains that tax incentives may be legally obtained by investing X percent in green energy, or by financing through debt rather than equity because the law allows for special interest deductions. In other words, the lawyer would merely be explaining what the law is trying to say. Tax authorities should have no problem with that.
However, a lawyer who offers tax advice to stay within the literal meaning of the law, but against the spirit of the law or against a likely interpretation of the law by the tax administration, should be considered unlawful and should therefore not enjoy legal confidentiality because of the tax abuse risks.
The next figure illustrates where the line could be drawn depending on the low/no risk of illicit financial flows (in blue) versus the high risk of illicit financial flows (in red):
Source: elaborated by author
The legal opinion makes it impossible to draw the line in practice, making everything a lawyer touches privileged information
The approach adopted by Advocate General Kokott creates a Catch-22. It makes it difficult to apply the distinction between being covered or not by legal professional privilege, even in a situation where a lawyer is acting illegally.
The whole point of giving authorities fighting illicit financial flows, including a tax administration, the right to obtain information is to enable it to determine if any unlawful activity is taking place. To allow a refusal unless the lawyer knows that unlawful conduct is involved assumes that only the client may be acting in a potentially unlawful way. If a lawyer has indeed knowingly advised an unlawful act, they would be unlikely to divulge the information to the authority. Lawyers who engage in money laundering have promoted their special confidentiality rights as a way to avoid authorities. Likewise, lawyers engaging in “tax mining” who devise tax dodging schemes generally claim that they think the schemes may be lawful, but they do not guarantee this. Unless authorities can obtain information about the scheme, they have no way to even look at, and challenge the lawyer’s advice.
This would give free rein for enablers of all kinds to devise and propose schemes for corrupt purposes such as money laundering, tax evasion and avoidance, leaving authorities powerless to challenge them.
A committee to decide on each case
While most people would agree that there should be no confidentiality protection when a lawyer acts in their personal capacity or when they are evidently offering to breach the law, there is a need for international standards and for countries to establish rules when the case isn’t as obvious. This would include cases where a client seeks legal advice on:
how to circumvent laws (eg how to avoid the automatic exchange system, how to hide the beneficial owner or evade taxes), or
how to stay within the text of the law, but going against the spirit of the law, or going against a likely interpretation or view by the tax authorities.
At the same time, it should not be up to a lawyer to qualify their legal advice, because they would always claim to be protected by confidentiality. It would thus make sense, that whenever authorities request information from a lawyer and they refuse to provide it, invoking legal professional privilege, then the documents should be sent to a special (and speedy) committee. This committee should include members of the bar of association, competent authorities and judges to determine which of the documents, if any, can be shared with authorities. The committee could also determine if any information should be redacted, provided the committee can prove that no unlawful or abusive conduct is being enabled by the lawyer.
Conclusion
The European Court of Justice is set to again deliver a ruling that could have a huge impact on transparency, exchange of information and the fight against illicit financial flows, especially if it considers that any case of company formation by lawyers would be subject to legal professional privilege.
In our view the Court should firmly reject this attempt by the Advocate General to undermine the powers of authorities, including tax administrations, to obtain information about business arrangements. Competent authorities are themselves already under strong obligations to protect the confidentiality of taxpayers’ information and personal data. This applies also to information they share and obtain through legal procedures now established for mutual assistance, such as the EU Directive. We fail to see how the rule of law is in any way affected by giving them the powers necessary to obtain information they need to enforce the law.
The Court should also draw a firm line to reject the specious arguments that would extend the human right to privacy and family life and communications to protect companies and business arrangements. This would be a distortion of the concept and purpose of human rights protection.
Today is Public Services Day, and I’m remembering as a child listening to my family complain about how supposedly bad public services in Brazil were. These services were costly too, they would say, costing you “double” the price of access: you’d pay taxes for the public provision of services that you wouldn’t use and then pay again for the private provision that you did use. Perhaps this sounds familiar to you.
Public services form the backbone of a healthy, functioning society. They include essential services such as healthcare, education, transportation and social security. These services are vital for ensuring that all members of society, regardless of their economic status, have access to basic needs and opportunities for personal and professional growth. High-quality public services contribute to social stability, reduce inequality and promote well-being.
Despite their importance, many public services are underfunded. Governments around the world have increasingly resorted to austerity measures, which involve cutting public spending to reduce budget deficits. These cuts often hit the most vulnerable populations hardest, leading to overcrowded hospitals, under-resourced schools and inadequate social support systems.
In these scenarios, privatisation is often presented as a solution to the funding gaps in public services. However, privatisation poses significant risks. One of the risks associated with eliminating public, free access is the potential for a vicious downward spiral, where reliance on out-of-pocket services increasingly extorts more expenditure. As fees are hiked, individuals may find themselves trapped in debt due to false diagnoses, especially in worst-case scenarios within the healthcare sector.
It is crucial to have a reliable and adequate funding mechanism to ensure the long-term sustainability and quality of public services. This involves creating a tax system where those with the most contribute the most. Progressive taxation ensures that wealthy individuals and multinational corporations contribute a fair share of their income to the public good. Such a system can generate the necessary revenue to support and improve public services, benefiting all members of society.
Tax justice is our social-superpower and a critical component in addressing the funding challenges public services face. By ensuring that the wealthy and corporations pay appropriate taxes, governments can secure the resources needed to fund essential services without resorting to austerity or harmful privatisation measures.
Tax justice can:
Expand revenue, ensuring that the tax system generates sufficient revenue to fund public services adequately.
Promote redistribution by using progressive taxation to reduce inequality by redistributing wealth from the rich to the rest of society.
Reprice products to discourage harmful activities (like pollution) and encourage beneficial ones (like renewable energy investments) by adjusting taxes.
Support representation by ensuring that all citizens, especially those in marginalised communities, have a voice in how tax revenues are spent, promoting transparency and accountability.
Promote reparation by using tax policy to address historical injustices and colonial legacies.
Our future is public, and ensuring tax justice is pivotal for the sustainable provision of high-quality public services. By adopting a fair and progressive tax system, we can generate the necessary funds to support healthcare, education, infrastructure and social security. It fosters a sense of community, ensures that everyone pays their fair share, and helps to build a society where no one is left behind. By embracing tax justice, we can lay the foundation for a more equitable future where public services are the cornerstone of a just and inclusive world.
Governments around the world pander to corporations in particularly polluting industries, effectively subsidising their carbon emissions and environmental degradation through extreme tax incentives.
Today, the Tax Justice Network launches a new report laying out in detail how corporate tax incentives undermine climate justice. We provide qualitative evidence of the prevalence of tax incentives in two particularly polluting sectors – shipping and extractives. In the absence of an effective global corporate minimum tax rate, and resulting from entrenched, decades old unjust power dynamics in global tax governance, we show how these incentives forgo critical public revenue needed to fill the climate finance gap. This revenue is important particularly for the most climate vulnerable communities in the global south – countries that at baseline already relatively suffer the most from global tax abuse.
Tax justice is climate justice
As we have laid out in our position paper, climate and tax justice are intimately linked: both movements aim to redress deeply discriminatory practices and inequalities upheld by a minority – of countries, and of people – at the expense of everyone else. The polluter pays principle is at the core of this link: those who emit more should pay for the negative impacts they create. But as we show, when many of the laws and loopholes that exist in corporate taxation are utilised by, or even exclusively applicable to polluting sectors, those who emit more can and do pay much less – a direct contradiction of the principle. Nevertheless, both the tax and climate justice movements mostly operate alongside each other, rather than together. But climate justice advocates would be hugely empowered by greater knowledge of the ins and outs of corporate tax policy and how it so deeply affects crucial climate outcomes. Tax incentives are just one, low hanging example.
Mass scale incentives for polluting sectors
Tax incentives are changes to the tax rules that reduce what individuals or companies are liable to pay, thus providing an economic benefit. They are sometimes made available only to specific groups of people or sectors. Based on our Corporate Tax Haven Index, we show that many countries offer tax incentives specifically to two of the world’s most polluting sectors: shipping and extractives. Shipping currently represents about 3% of global greenhouse gas emissions, on par with aviation. Worryingly it is projected to grow to up to 10% of global emissions by 2050. The vast, diverse and ever growing extractives industry – with China at the forefront – is estimated to produce up to 15% of global greenhouse gas emissions.
Our analysis finds that incentives are widespread in the shipping and extractives sectors. They include tax rates of effectively zero per cent for shipping operators, and pervasive tonnage tax regimes, some of which extend to extractives activities like deep sea drilling. Corporate tax havens love polluting multinationals, and are heavily implicated in undermining the polluter pays principle by helping these companies increase their profitability through profit shifting.
Many countries also offer incentives for companies operating in the extractives industries, including fossil fuel companies. This includes countries that aren’t themselves resource rich. Illegal fishing, logging and mining are plunged into further secrecy through different levels of exemptions of corporate income, sometimes shrouded behind Special Economic Zones, thus further reducing the accountability of these sectors.
Challenges and solutions
Harmful tax incentives for polluting industries speak to two particular challenges of tax-for-climate we previously identified.
Firstly, governments are depriving themselves of badly needed public revenue in the billions of dollars. As we argue in the report, the Global Anti Base Erosion (GloBE) Rules under the OECD’s Pillar Two recommendations, with the new minimum effective global corporate tax rate of 15% is anything but a solution for this problem and leaves loopholes and incentives in place. Luckily, there are more ambitious proposals for an alternative global minimum tax rate such as the one by the South Centre. For example, countries can pursue an alternative, effective global tax rate by acting in regional groupings and unilaterally, including revisiting tonnage tax regimes.
Second, the prevalence and nature of harmful tax incentives are emblematic of deep structural inequalities in global tax governance. This system is heavily shaped by OECD leadership. Marked by exclusionary and opaque leadership, which negates countries’ sovereignty over their taxing rights – especially in the global south – the OECD has been unable to structurally reform its own global tax rules, and to significantly curb tax abuse. Only a democratic revolution in tax rule-making can shake up the existing system under which governments effectively collude with polluting corporations and continuously subsidise them through mass-scale tax incentives. Fortunately, this revolution is currently underway at the UN where countries are negotiating a game-changing UN framework convention on tax.
The astronomical cost of tax incentives – both financial and moral – is nothing new.
Locked in a race to the bottom, and under the false economy of staying “competitive” for investments, governments have been knowingly giving up revenue at mass scale through. They pander to corporate powers that are major culprits in the climate crisis – caught greenwashing and lying over and over again, and litigating aggressively when they believe their profits are endangered through environmental legislation, in barely disguised contempt of the polluter pays principle. Financial grooming, threatening, gaslighting – it all sounds very much like the worlds’ worst toxic relationship.
When governments systematically fail to use effective, progressive tax policy to help fill their budgets, it is no wonder that austerity policies are widespread. It is also no wonder that the worst polluters – both historic and current – don’t seem to like the idea of paying for their harmful climate impacts very much at all.
The just concluded, bitter and ultimately fruitless negotiations at the Bonn Climate Change conference over climate finance commitments show how unwilling high income countries are to provide climate compensations for the global south, especially in the form of Loss and Damage funding. As one analysis put it, “developed countries have sought to focus the talks on the many ‘layers’ of finance that they see making up the final goal. They emphasize that this needs to be agreed before a number can be picked.” Rich countries stall a financial commitment in the form of unconditional climate payouts. Their “layers” instead include private finance, loans, domestic resource mobilisation and carbon markets. Perhaps holding up a mirror to their own failures, they refuse to realise what mobilising corporate tax income could do for climate finance – and public services in their own backyard.
The role of the ongoing UN tax convention process
Luckily, global tax governance is at a major inflection point. Over the past sixty years, and without a democratically agreed mandate, the OECD has positioned itself as the de facto standard setting body on international tax matters. But last year, and after a long struggle by Global South countries and civil society organisations, a once-in-a-century opportunity has emerged for international tax governance to be defined in a truly inclusive universal forum. A landslide majority of countries – home to 80 per cent of the global population – voted last year in favour of starting negotiations on a United Nations Framework Convention on International Tax Cooperation (UNFCITC). For the first time, all countries can work together on an equal footing to set the parameters for the negotiation of a legitimate binding instrument governing international tax cooperation. As our report shows, this is essential to address the fallout from the climate crisis, and to work towards achieving the Sustainable Development Goals.
The UN framework convention on tax can be an opportunity to establish standards that prevent tax incentives from being used as harmful tax competition tools, which erode the tax base and subsidise the burning of the planet. These standards should also be aligned with other agendas adopted within the UN, including the Framework Convention on Climate Change and the Paris Agreement. Any standards on tax incentives should firmly establish that no profits-based tax incentives should be granted to the most polluting sectors, including shipping and extractives – and especially the fossil fuel industry. The framework should ensure that tax advantages are only available upon proof of mitigation or eradication of environmental externalities. In short, the framework convention is a chance to enshrine the polluter pays principle as well as common but differentiated responsibilities and thus the put the spotlight on those most responsible for both historic and current emissions, and global tax abuse.
Conclusion
Recent years have seen unprecedented demand for action from countries around the world to address both climate crisis and global tax abuse. Economically and morally unjustified incentives and exemptions to existing tax rules granted to multinational corporations are key in this fight.
For a hope of success, and along with harmful fossil fuel subsidies and large-scale decarbonisation efforts, the tax justice and the climate justice movements need to call for ending morally bankrupt tax incentives that fuel the climate crisis.
For over sixty years, the Organisation for Economic and Cooperation has held dominion over the stewardship of international tax negotiations. In that time, progress achieved in putting a stop to crossborder tax abuse, which now costs governments around the world some US $480 billion a year, has been meagre at best.
With negotiations on a new framework tax convention now moving forward at the United Nations, the OECD’s leadership of standard setting on international taxation is for the first time in doubt. The move to initiate talks at the UN follows an historic resolution brought forward by the Africa Group, which was in turn motivated by frustration over the exclusionary dynamics of the OECD process. It can be argued that the OECD, as an institution mandated only to represent the interests of 38 advanced economies that make up its membership, was never an appropriate forum to tackle a problem which is, but it very nature, global. As demonstrated in the State of Tax Justice report, OECD member states are responsible for facilitating the vast majority of revenue losses to international tax abuse and, as such, have a vested interest in impeding the kind of radical reform that is so badly needed.
A new briefing produced by Tax Justice Network in collaboration with a coalition of allies systematically unpacks the various arenas in which the OECD has proven itself unfit to lead negotiations on international tax cooperation.
At the top of the list is the manifest inadequacy of its proposed ‘two-pillar solution’ to the problem. The first pillar aims to reallocate the profits of multinational companies to the jurisdictions where consumers are located, thereby countering the practice of profit shifting which lies at the heart of corporate tax abuse, while the second pillar sets a minimum corporate tax rate of 15 percent so as to prevent the ‘race to the bottom’ engendered by dysfunctional tax competition. Pillar One is limited to a tiny fraction of the profits of the largest multinationals, however, while the rate of 15 percent set by Pillar Two is likely to act as a ceiling rather than a floor, thereby exacerbating rather than redressing the very problem it purports to solve. Independent analyses have demonstrated that the ‘two-pillar solution’ would have little impact in real terms, while what benefits might flow from the deal would accrue almost entirely to the Global North.
The insufficiency of its proposed solution to international tax abuse stems from the failure to meaningfully incorporate the voices of Global South nations into the negotiating process. While the ‘Inclusive Framework’ mechanism was established in 2016, ostensibly to facilitate the participation of non-OECD members in the ‘Base Erosion and Profit Shifting’ initiative, proposals brought forward by the G24 in representation of developing nations were ignored in favour of an agreement negotiated bilaterally by the United States and France. It was against this backdrop that the Africa Group opted to table Resolution 78/230 for the commencement of talks on a more inclusive process at the UN.
Failures of inclusivity and effectiveness are not the only areas when the OECD has come up short, however. The existing regime of international taxation, which makes crossborder tax abuse relatively straightforward, was put in place as the major European empires were in decline and was designed to protect the economic interests of former colonial powers. As a result it has deeply racialised impacts, systematically constraining the fiscal space of majority non-white nations of the Global South and, in turn, their ability to fund fundamental public services. Moreover, despite the fact that the OECD counts most of the world’s most nefarious tax havens among its members, the only country it has targeted for sanctions on the basis of tax haven policies is the tiny African state of Liberia.
Unfortunately, this failure of accountability coheres with a pattern of conduct by the organisation in recent years, which has also seen repeated controversies over shortcomings in adhering to professional standards. Perhaps most notably, as the Africa Group’s initiative to pursue more inclusive negotiations at the UN gained traction, the OECD took the unprecedented step of writing to various of its member states’ ambassadors questioning the fitness of the UN to lead such talks and calling on them to block the proposals.
Several of the OECD’s leading figures have meanwhile been mired in controversies over questions of autonomy and independence. In 2022 the former head of the OECD’s Centre for Tax Policy and Administration, Pascal Saint-Amans, departed the organisation and immediately took up a position with lobbying firm Brunswick Group. During her time with KPMG, current head of tax policy Manal Corwin meanwhile co-authored a tax planning proposal for Microsoft that would lead to a major tax abuse scandal, while Secretary General Mathias Cormann has likewise faced controversy over allegations he profited from secretive dealings with Luke Sayers, who was head of Price Waterhouse Coopers Australia during the TaxLeaks scandal.
In a world of multiple enmeshed crises, from climate change and runaway inequality to the cost of living and recovery from the Coronavirus pandemic, the continued syphoning of revenue away from government coffers represents an urgent human rights concern. Modelling by the Government Revenue and Development Estimations initiative at the Universities of St Andrews and Leicester demonstrates that, were it not for the revenue lost to crossborder tax abuse each year:
15 million people would have their right to basic water.
32 million their right to basic sanitation.
2 million additional children would attend school.
101 additional children would survive every day: 36,900 each year.
11 additional mothers would not die during childbirth: 3,999 each year.
It is for the reasons set out in this briefing that the move to shift negotiations on international tax cooperation away from the OECD and to the more inclusive forum of the UN is so critically important. The most ubiquitous counterargument deployed by those nations that would seek to maintain the status quo is that the UN process would risk duplicating efforts at the OECD. While the latter organisation undoubtedly has valuable technical expertise and experience to offer, the United Nations is the only forum that can provide the legitimacy, inclusivity, transparency, and accountability that is a precondition to the just and comprehensive reforms that are so badly needed, however. The UN can and must provide a radically different process and outcome to that which has unfolded at the Organisation for Economic Cooperation and Development.
Litany of failure: the OECD’s stewardship of international taxation was produced by Tax Justice Network in collaboration with the Center for Economic and Social Rights, Centro de Estudios Legales y Sociales (CELS), the Economic Policy Working Group at ESCR-Net, the Global Network of Movement Lawyers at Movement Law Lab, the Government Revenue and Development Estimations project (University of St Andrews/University of Leicester), Minority Rights Group, Tax Justice Network-Africa, and Steven Dean, Professor of Law, Boston University School of Law.
Africa has contributed the least to global warming, yet millions of African people are facing the most severe impacts of the climate crisis. To combat these challenges – stopping floodwaters, feeding starving people, and increasing the resilience of the public sector – African governments need more finance.
Yet Africa loses around $89 billion each year due to illicit financial flows, according to estimates. The enabling nations of tax abuse are the richest countries in the world. Ironically, they are also largely responsible for the climate crisis.
Climate finance and tax abuse
Over a decade ago, rich nations pledged an annual US$100 billion for climate finance – a promise that has been unfulfilled. And even if they honoured their promise, this amount falls far short of addressing the world’s escalating needs. By 2030, the economic cost of loss and damage in poorer countries could be as high as US$1.8 trillion.
Fixing the international tax system could help plug this gap. The Tax Justice Network’s State of Tax Justice 2023 estimates that the world loses US$480 billion per year to corporate tax abuse and wealth tax evasion. This is nearly five times more than the unmet climate finance commitment. This stark discrepancy is why Africa is leading the charge for a UN framework convention on tax. A majority of the world is advocating for international rules that should have been in place years ago, had it not been for the influence of the richest nations within the OECD.
Fostering continental conversations on tax and climate
In the same year, the Special Rapporteur on the promotion and protection of human rights in the context of climate change urged the UN General Assembly to “Explore legal options to close down tax havens as a means of freeing up taxation revenue for loss and damage”.
We are now sharing insights from two roundtables and studies conducted in Mozambique and Tanzania. Drawing from these collaborative efforts, we adopted a framework of tax justice principles to direct future advocacy for climate action. This is known as the ‘5Rs of tax justice’, which include:
raising revenue,
redistributing wealth to create a more equal society,
repricing through higher costs to discourage activities that infringe on the rights of others,
improving representation to strengthen the social contract between citizens and their elected officials, and
supporting reparations to address harms from historical injustices and colonial legacies.
The briefing, accompanied by a pocket guide, includes a series of probing questions for each of the principles to enhance collaboration between tax and climate justice movements. You can download the briefing and the pocket guide from Tax Justice Network Africa.
The CEDAW committee was formed in 1982, comprising 23 global experts in women’s issues. Its main role is to oversee progress for women in countries that are parties to the Convention on the Elimination of All Forms of Discrimination against Women. CEDAW monitors national measures to fulfil this commitment by reviewing reports state parties submit every four years. During the different sessions, the Committee engages in dialogue with government representatives and civil society organisations to provide feedback and seek additional information. It also issues recommendations on women’s rights-related issues, to which states parties should pay far more attention.
As part of its review process, the committee has previously requested Brazil to address “any disproportionately negative impact of austerity measures and tax policies on women” but the Brazilian government has failed to do so both in the State Party Report and its annex. Answering this silence, Tax Justice Network, INESC, Latindadd and Red de Justicia Fiscal para America Latina y el Caribe have worked together to shine a spotlight on the tax injustices directly affecting women’s rights in Brazil, particularly black women in low income backgrounds. Our joint submission elucidates why the Brazilian government needs to urgently address the issues of inequality and discrimination.
The group submitted a Shadow Report, with inputs from several feminist organisations in Brazil. We present a number of salient issues which provide indicators of gender inequality and human rights failures, for example, how women are likelier to work in the public sector and rely on crucial public services, but when public spending is cut, jobs disappear, salaries get capped, and essential services like childcare and healthcare vanish. This leaves women jobless or underemployed and burdened with even more unpaid care work. And on top of that, traditional gender roles at home and domestic violence make things worse. With little economic power or social support, these policies often keep women from accessing even their most basic rights.
Among the recommendations of the shadow report is the need to acknowledge the unequal impact of austerity measures on women, especially black women. We call for tax policies in Brazil to take into account gender and race issues, regulations that include subsidies for health and personal care products, and the implementation of tax refunds for the poorest. Our report also suggests implementing measures to reduce the prevalence of tax incentives for multinational companies that generate socio-environmental damage, in order to repay the affected populations, mainly black and indigenous women.
In this week’s session, representatives from both Tax Justice Network and INESC will attend in-person to present the report and deliver its key recommendations to the CEDAW committee and government officials. We will use this opportunity to also discuss with, and learn from, feminist civil society organisations about how tax justice plays a crucial role in women’s lives. We expect the Committee to use the information we presented to question the Brazilian government about their actions on austerity and tax, and demand the country implement tax justice measures and guarantee women’s rights.
Unprecedented, historic negotiations took place from 26 April to 8 May at the United Nations headquarters in New York. For the first time, the 193 Member States began discussing the parameters that will guide the negotiation of a United Nations Convention on International Tax Cooperation (UNFCITC). Civil society and other stakeholders were also able to publicly contribute their views to the negotiations under UN rules of procedure, bringing the winds of genuine democracy to international tax negotiations that have up until now taken place behind closed doors in spaces such as the OECD (see the Civil Society Financing for Development Mechanism’s comprehensive compilation of resources on these negotiations).
This blog summarises what happened in the first session of negotiations (from April 26 to May 8) and raises some considerations for the key decisions that the Ad Hoc Committee will have to make in the remaining period of its mandate. A second session of negotiations will be held from 29 July to 16 August on the final draft of the parameters, before they go to a vote at the UN General Assembly near year-end.
Why are framework conventions so important? Because they are binding instruments that provide the basis for the creation of a system of governance and an international legal regime in a specific field. Their nature can be better understood if they are thought of as a global constitution that serves as the basis for creating more detailed binding rules —called protocols— that make up an international legal framework. As such, the discussion on the terms of reference of a UN framework convention on international tax cooperation is a golden opportunity to lay the foundations for an international tax framework that overcomes the structurally embedded, racialised inequalities in decision making power that the world has inherited from the imperial and colonial dynamics with which the current rules were decided (see top-level UN experts formal communication to the OECD on this matter).
Resolution 78/230 adopted in 2023 by the General Assembly mandated an Ad Hoc Committee to finalise the terms of reference (ToR) that will govern the negotiations of a UN framework convention on tax by August 2024. This is as important a task as the negotiation of the United Nations Framework Convention on Climate Change (UNFCCC) was, whose provisions have laid the foundation for international climate cooperation with significant implications for present and future generations. As happened with the framework convention on climate change, the defining of the parameters of the UN framework convention on tax will have significant implications for the scope, speed and timeliness of international cooperation on global tax for the decades to come, ultimately shaping how the costs and benefits of international tax policy play out for future generations (see our previous blog on why the world needs UN leadership on global tax policy).
So how did the negotiations go?
A show of tactics lacking good faith
It’s important to emphasise that it took a historic, overwhelming, global south led victory at the UN last year for these negotiations to take place at all. That victory came in the form of legally binding decision taken by the UN General Assembly to begin these negotiations, starting first this year with negotiations on the terms of reference and culminating next year with a framework convention. The scope and focus of the negotiations were also agreed as part of this binding decision. A landslide majority of countries – home to 80 per cent of the global population – voted in favour of the decision, outnumbering those against by more than 2 to 1.
With a legal mandate now established to negotiate and pursue the adoption of a framework convention on tax, and clear decisions on what these negotiations should entail, pushback from countries who voted against the decision was expected to reasonably focus on watering down the terms of reference and securing the weakest version possible of a framework convention. Shamefully, pushback from some countries during the negotiations went beyond what could be considered in good faith. Several tactics were employed by some countries to negotiate not the terms of reference but to attempt to reopen, undermine and disregard the binding legal decision agreed last year.
In his 2023 report, the UN Secretary General presented to the UN General Assembly, as he was requested to do by the assembly, three options for making international tax cooperation fully inclusive and more effective. He noted that if the option of a framework convention (as opposed to a standard convention or a non-binding framework) was adopted by member states, it “would outline the core tenets of future international tax cooperation, including the objectives, key principles governing the cooperation and the governance structure of the cooperation framework”. The report also clarified that framework conventions “may also include institutional provisions for creating a plenary forum for discussion between States that is endowed with the authority to adopt further normative instruments to which States could then become a party”.
With the adoption of Resolution 78/230, the General Assembly opted to initiate an intergovernmental process that should culminate with the adoption of a Framework Convention, and as such it gave a precise mandate to the Ad Hoc Committee to elaborate the terms of reference for such an instrument. This mandate is binding for the 125 Member States that voted in favour of Resolution 78/230, as well as for the 48 that voted against and the 9 that abstained (see the positions that countries adopted on the Tax Justice Policy Tracker and the voting records here).
While states may have diverse negotiating positions and legitimate concerns about the process, the first round of negotiations that just took place shows that some states are still betting on carrying over into this stage discussions on issues that have already been decided, and as such should not be taking place if states are negotiating in good faith.
Among these obstructionist tactics that hinder the fulfilment of the Ad Hoc Committee’s mandate, and against which member states and other actors in the process must be vigilant, were:
Disregarding or generating confusion about the clear mandate to move towards a Framework Convention. This ranges from positions that still speak of a preference for a non-binding framework to those that disregard the constitutive character of a Framework Convention by restricting its ability to pursue its own objectives. The recurring argument by the minority that voted against Resolution 78/230 that the Convention should not duplicate or be inconsistent with existing instruments, for example, ignores that a Framework Convention, aims to “establish an overall system of tax governance” (see Secretary General’s report, par. 55) and as such can redefine the substantive and procedural pillars of existing and future instruments.
Limiting the scope of the task ahead and of the Convention to be negotiated to the point of disregarding the mandate of the Ad Hoc Committee. Advocating for a minimalist Convention with objectives such as “gather countries to exchange effective practices on mobilising domestic resources” (see several EU submissions) instead of outlining the core tenets of international tax cooperation, is also another way of ignoring the constitutive character of a Framework Convention and thus pushing for the definition of parameters for the stage that are contrary to the mandate of the Ad Hoc Committee.
Denying the motivation or other provisions of the resolution that has given rise to the work of the Ad Hoc Committee. As recognised in the UN Secretary-General’s report “existing international and multilateral arrangements […] do not satisfy the main elements for fully inclusive and more effective international tax cooperation”. Resolution 78/230 stated that an intergovernmental process at the United Nations for tax norm shaping and rule-setting would “leverage existing strengths and address gaps and weaknesses in current international tax cooperation efforts and arrangements”. While the Resolution mentions that this should be done “with full consideration of existing multilateral and institutional arrangements”, it also recognises that “inclusive and effective participation in international tax cooperation implies that procedures should take into account the different needs priorities and capacity of all countries to meaningfully contribute to the norm-setting processes, without undue restrictions”.
A corollary of this is that if Resolution 78/230 is motivated by the importance and timeliness of strengthening international tax cooperation to make it fully inclusive and more effective, both in procedural and substantive terms, then being faithful to that mandate implies overcoming the problem of the lack of both full inclusiveness and effectiveness of existing instruments identified by the Secretary-General’s report. In this vein, refusing to reform and reconsider existing rules on the grounds of avoiding duplication and complementarity, when they fail to meet the values put forward by the General Assembly, is to deny the motivation behind the mandate given to the Ad Hoc Committee.
Insist on changing well-established decision-making rules. All procedural provisions must be based on compatibility with the rules that are specific to the spaces where discussions take place. It is important to distinguish three distinct stages: 1) the Ad Hoc Committee’s decision-making rules for drafting the terms of reference (ongoing), 2) the Ad Hoc Committee’s decision-making rules for negotiating the Convention, and 3) the decision-making rules of the Framework Convention itself. In the first two cases, since the task will be performed by subsidiary bodies of the General Assembly, the established practice is that while consensus is sought, simple majority rule is not ruled out. A minority of states have argued that established practice should not apply when it comes to the Ad Hoc Committee’s decision making due to the alleged exceptionality of the nature of tax matters. Instead, they argued that decisions can only made on a consensus basis. The arguments for alleged exceptionality have not been convincing and either way would not be sufficient reason to modify the established practice in these bodies. The established practice is intended to ensure timely decision-making and to prevent a minority of states from obstructing progress by wielding veto power.
Restrict the participation of other stakeholders and limit their meaningful contributions to the process. At the first meeting of this negotiating session there was an incident that involved a lengthy discussion over Turkey’s objection to the accreditation of three civil society organisations. Fortunately, member states did not accept this objection and all organisations were accredited. A few days later, and less restrictive in nature, France requested that civil society organisations be heard only after all member states had spoken, if time allows. Although these are two very different actions, the two episodes reinforce the importance of all member states being on the same page in terms of valuing the opportunity that the UN rules of procedure offer to deliberate in a more informed manner with the input that civil society and other actors can bring to the process. The limited and precious time the Committee has for fulfilling its mandate should focus on using the input of all actors to jointly achieve the best outcome rather than on time-consuming discussions to restrict the existing participation mechanisms.
These tactics, coupled with silence as a strategy by the countries who voted against the resolution last year — which made the meetings particularly short during the last week of negotiations — led countries such as Nigeria to argue in its closing remarks on 8 May that good faith in negotiation must not only be preached but put into practice by all countries.
Country blocs around the main procedural and substantive discussions
Acknowledging the nature of the Ad Hoc Committee’s mandate by all countries should facilitate the task ahead: finalising the terms of reference in the indicated timeframe. What is the balance after the first session and what can we expect from the discussions to come?
Different views on the type of framework convention, its objectives and principles
The first days of deliberations focused on more general issues on what kind of parameters the terms of reference should set. That discussion showed stark differences in the type of framework convention that states are advocating for and varied views on what its general provisions should be. These different views of the type of convention desired, and on what the objectives of the framework convention should be, were also evident in the widely varying proposals countries submitted in writing ahead of the session.
During the session, the positions on the type of parameters that the terms of reference should set were divided into two main blocs. A first group of countries – mainly those that voted against the resolution adopted last year – argued that the terms of reference should give very general guidelines and focus on the procedural aspects for drafting the framework convention – without prematurely addressing anything that could prejudge its content. A second group comprised of global south countries showed stronger support for an initial outline for the terms of reference and for an annex with the possible structural elements of the framework convention, both prepared by the Ad Hoc Committee’s Secretariat based on the inputs States submitted to the process (see images below). They later suggested the terms of reference should have a broad-based approach according to which all issues should be up for discussion, and that the terms of reference should include some substantive scoping along the lines of the draft outline of the elements of the framework convention proposed by the Secretariat.
Despite differences over the emphasis that the terms of reference should have, states adopted a working agenda that over several days addressed an exploration of substantive points that could be included as high-level commitments of the framework convention.
The issues that countries want the framework convention to address
The exploration of the issues identified an expanded but not exhaustive list of issues that the terms of reference should contain as a guide for the negotiation of the framework convention. States expressed different positions on the inclusion of these issues. Richer OECD countries, including several vocal EU countries, noted that the framework convention should focus on less controversial issues and not duplicate efforts with other fora (implicitly and at times explicitly, the OECD). Global South countries (including some OECD members) generally argued for the need to include all relevant issues, even if they had been addressed by other fora. It is the Tax Justice Network’s view that in order to incorporate the perspectives of all countries, an inclusive framework convention on tax should not exclude any of the issues discussed, and particularly those that lower-income states consider to be priorities.
Before reviewing states’ positions on specific issues, two more cross-cutting observations should be made. The first is about the language used. While states use similar terms such as “domestic resource mobilisation”, “capacity building” or talk about their commitments to “fully inclusive and more effective tax cooperation”, the scope of these terms can be very different. For example, for Global South countries it is key that domestic resource mobilisation is understood to include combating illicit financial flows, while for richer countries it is often associated with a capacity building agenda to enforce existing standards and improve the collection of specific taxes in lower income countries.
To resolve these differences, we believe it is necessary to build on the most comprehensive definitions adopted in the most universally accepted fora. This can help overcome discussions in which states should avoid becoming embroiled. For example, in the discussion on the issues that should be addressed as part of the simultaneous development of early protocols, the United States raised that the term “tax-related illicit financial flows” was ambiguous, and noted its concern that certain tax avoidance practices might not be considered illegal in certain countries and as such should not fall under that definition. This objection was raised despite the fact that UN’s formal statistical definition already includes cross border tax abuse by both multinational companies, through profit shifting, and wealthy individuals hiding assets and income streams offshore whether illegal or not. Considering such established definitions, therefore, there should be no doubt as to the extent to which some terms should be interpreted. Furthermore, the whole purpose of covering “tax-related illicit financial flows” is to develop rules that are less prone to aggressive tax avoidance to the detriment of global south countries. As such, whether these practices are legal in the United States or in other high-income countries, is irrelevant.
A second observation has to do with the information used for resolving controversies in the negotiations. If one starts from different premises or a different diagnosis of the problems of the current tax architecture, states may entrench themselves in rhetorical positions that do not address what other countries are calling for. For example, African Group countries have insisted that there are structural problems with the standards decided in other fora such as the OECD because these standards fail to consider the realities of African countries and because they were decided in a forum without meaningful and equal participation — facts on which ample evidence can be provided. In contrast, richer countries, and in particular OECD countries, repeatedly cite the risks of duplicating what already exists, including these problematic standards, thereby ignoring objections to the legitimacy and effectiveness of existing instruments without providing any evidence base to address the concerns of other countries. The search for a common understanding implies approaching the process in a way that genuinely addresses the concerns of other parties.
With these two observations shared, we now provide summaries of the positions that were expressed on specific issues.
Domestic resource mobilisation and capacity building
A first discussion was on the scope of the concept of domestic resource mobilisation (DRM). In written submissions the term was mostly used by countries from the global north, as the following table shows.
During the sessions, there were two main positions on this issue (see statements on the matter here). A first group of countries argued that domestic resource mobilisation should be the priority issue to be addressed by the framework convention, with an emphasis on capacity building in lower income countries. A second group of countries pointed out that domestic resource mobilisation must be understood beyond capacity building measures and include issues of fair allocation of taxing rights and progressivity of tax systems. Hence, according to the second group, domestic resource mobilisation and capacity building should be addressed separately (recognising the importance of capacity building under an approach that addresses the needs of Global South countries). The chart below summarises how positions were aligned during the session.
The Chair concluded this agenda item by acknowledging that domestic resource mobilisation would need to be understood as having at least two components: one related to capacity building and the other including fair allocation of taxing rights and broader issues.
Effective taxation of high-net-worth individuals, including wealth taxation
Several states raised demands in their written submissions in relation to the inclusion of taxation of high-net-worth individuals, as shown in the table below.
During the session, there was a broad agreement on the importance of this issue for combating inequality and achieving other aims, but positions on how to include it in the framework convention varied. On the one hand, Brazil stressed that it considered this to be a crucial issue, for which it had made a proposal in the context of the country’s G-20 presidency. Brazil pointed out that the United Nations would be the most inclusive forum to discuss this issue. Spain and France indicated their support for Brazil’s proposal to the G-20 and suggested that the modalities for inclusion in the framework convention could be defined at a later stage. Colombia, Morocco, Belgium and Austria were more in favour of referring to the taxation of very high-net-worth individuals as a high-level commitment under the framework convention.
A second bloc of countries noted that the taxation of wealth was an issue of domestic tax policy to be decided by each country individually. But these countries were still open to considering options for including it as a high-level commitment, although some more open than others. These countries insisted on the need for a flexible approach that recognises the diverse circumstances of each country. Interventions from Japan, Canada, China, Germany and Sweden fell within this view. The United States, the United Kingdom and Korea more strongly emphasised that this was a domestic taxation issue and were more sceptical about its inclusion in the framework convention. However, they did not raise insurmountable objections in principle, and Korea and the United Kingdom indicated that they were open to considering it. Mauritius and the Bahamas raised some technical doubts about design of wealth taxes and how to include it in the framework convention.
A third bloc argued that the issue was indeed very important but suggested including it either under the high-level commitment on domestic resource mobilisation (Nigeria, Jamaica, Singapore, Chile), the high-level commitment on combating illicit financial flows (India, Kenya) or under a new high-level commitment on combating inequalities (Japan).
Given that there was broad consensus on the importance of the issue, the Chair noted it should be included in the negotiation, although the specific modalities would have to be defined at a later stage.
Making sure tax measures contribute to addressing environmental challenges
On this issue, there was broad agreement on its importance and urgency and no objections to its inclusion were heard from any member state (except a call for caution from Korea).
There were different emphases on the measures that could be considered. Argentina, India, Mauritius, Bahamas and Kenya highlighted the principle of shared but differentiated responsibilities. The latter two argued that careful consideration should be given to the way this issue is addressed with a view to avoid restricting lower income countries’ policy space to exploit their natural resources.
Singapore, South Africa and Kenya focused more on the issue of carbon taxes, while Japan, France and Sri Lanka spoke of a wider range of instruments. Colombia raised the issue in connection with the need to mobilise more resources and fill the climate finance gap.
Spain, Norway, Austria, Italy and France spoke about the importance of the issue, and France mentioned the joint initiative they launched with Kenya on the Taskforce on International Taxation and Climate as a benchmark that could help the UN to give greater political relevance to this issue.
Equitable taxation of multinational corporations
One of the most controversial moments of the first round of negotiations occurred on the morning of 1 May. The agenda item to be addressed was the inclusion of the issue of equitable taxation of multinational corporations as a high-level commitment. The positions of the countries were divided into two blocs. A minority bloc expressed concern that the inclusion of this issue would erode the progress made in other fora, and particularly regarding the two-pillar agenda of the OECD’s Inclusive Framework. They insisted on the alleged risks of “duplication” and argued that any discussion of these issues would have to be consistent with ongoing work in the OECD framework.
A second bloc, representing a majority of countries, advocated for comprehensive inclusion of the issue as part of the high-level commitments. Within this group, some pointed out that a forum such as the OECD’s Inclusive Framework could be considered neither transparent, nor equitable, nor inclusive, and as such it was a distortion to say that all countries had already reached agreement in this area in reference to the two-pillar agenda. The expression “140 is not 193”, referring to the number of jurisdictions that are part of the Inclusive Framework as opposed to the number of UN Member States, was heard on several occasions. They also pointed out that the Inclusive Framework was hardly a forum in which its member states could participate on an equal footing. It was also raised that the risk of fragmentation would arise from not including this issue as part of the framework convention on tax. Other states argued that including this issue would not lead to the erosion of work already done in this area but rather consolidate that work.
In his closing remarks on this agenda item, the Chair acknowledged that there are different views on the matter. He acknowledged that a group of countries were concerned with duplication but as this concern connected more with how the work would be done rather than about whether it should be added or not, he concluded the corporate taxation issues will be included to be discussed as high-level commitment in the terms of reference.
Additional topics that can be included as high-level commitments
As part of the agenda, member states suggested additional issues to include as high-level commitments in the terms of reference. These included:
Indirect taxation to contribute to domestic resource mobilisation
Institutional capacity of revenue administration
Assistance in revenue collection
Country by country reporting (the Tax Justice Network intervened on this matter)
Taxation of extractive industries
High-level commitment on fairness
Dispute prevention and resolution mechanisms (a presentation by the Secretariat was made on this)
Certainty, equality and predictability as high-level commitments.
Eradicate economic imbalances between nations
The Tax Justice Network proposed the inclusion of measures related to the ABC of tax transparency, including the proposal to create a Global Assets Register and a Centre for Monitoring Taxing Rights.
“Protocols to the framework convention could provide additional, “regulatory” aspects, with more detailed commitments on particular topics, giving countries the ability to opt-in and opt-out on the basis of their priorities and capacities. If there is sufficient agreement on certain action items, some of these protocols could be negotiated at the same time as the framework convention. This might include, for example, a protocol on measures to address the problem of illicit financial flows”.
In addition, Resolution 78/230 required the intergovernmental committee, in elaborating the draft terms of reference for a framework convention “to consider simultaneously developing early protocols, while elaborating the framework convention, on specific priority issues, such as measures against tax – related illicit financial flows and the taxation of income derived from the provision of cross-border services in an increasingly digitalized and globalized economy”.
With this framework for discussion, negotiations on the 2nd and 3rd of May focused on addressing the issue of the simultaneous development of early protocols to the negotiation of the framework convention. Countries came to the session with various proposals on the issue of protocols in their written submissions. During the session on 2 May, two main blocs emerged. A first bloc proposed a sequential approach: first the framework convention, then protocols. A second bloc proposed to develop simultaneous protocols on urgent issues to respond to the needs of member states, even if they were controversial. An intermediate proposal came from the United Kingdom delegation to combine simultaneous and sequential work. The Chair summarised the proposal with the chart below.
This was followed by a discussion on the ambition of the proposed timeline, in which the African Union, India, Chile, China and others raised their support for the proposed approach, while other countries such as Sweden, Germany and Austria raised that there were still too many unknowns to make an informed decision. Argentina, Switzerland and the United Arab Emirates raised doubts as to whether simultaneity was feasible in terms of the resources that needed to be allocated. The conversation on the proposed timeline was followed by a presentation by the Secretariat on dispute prevention and resolution that some countries welcomed for providing clarity in terms of how the Framework-Protocol approach might operate.
On 3 May, the session started with a discussion of possible issues that early simultaneous protocols could address. Global south countries led with strong interventions aligned on the need to have simultaneous early protocols, with some range of issues discussed, but mainly mentioning the topics of tax-related illicit financial flows, information exchange, and taxation of cross-border services. There was some noteworthy pickup of civil society demands. For instance, India called for progress in tackling illicit financial flows by means of beneficial ownership and legal ownership registration, and Brazil suggested considering public country by country reporting.
This was countered by many OECD countries with a strong pushback against simultaneous early protocols, justified by resource constraints for parallel negotiations and the resulting need to prioritise, and by the desire to better understand how the framework convention would work and how everything would fit together,etc. In this context, controversies emerged over the understanding of some terms, including the definition of illicit financial flows.
The US took the floor and poured a bucket of cold water on the negotiations, speaking directly against three of the most frequently mentioned issues for consideration for early simultaneous protocols: tax-related illicit financial flows, information exchange and the taxation of cross-border services. The US specified that the term illicit financial flows should be interpreted to apply to criminal proceeds not only from tax crimes, but also from corruption and organised crime, and remove from scope tax avoidance which may not be illegal but “lawful” (here is why we beg to differ).
On exchange of information, the US expressed concerns that the existing international standard may be duplicated, in conflict with or eroded by any action by the UN framework convention on international tax cooperation in this area. Specifically, the US defended the standard of “foreseeable relevance” of requested information, which is the threshold for a country to exchange tax information under bilateral tax treaties and the Convention on Administrative Assistance in Tax Matters. It’s worth keeping in mind here, however, that neither the overwhelming majority of UN members nor the overwhelming majority of Global Forum members had any say in designing this standard. The standard has proven to be very cumbersome to adhere to in lower income countries, drastically reducing the effectiveness of the whole exchange of information regime in the global south.
Since the US does not participate many of the international standards it tries to defend (e.g. the US has not signed the Amended Convention on Administrative Assistance on Tax Matters; it also does not participate in the automatic exchange of financial account information under the Common Reporting Standard for Automatic Information Exchange; and often the country fails to live up to promised reciprocity under its own system of obtaining foreign account information, known as ‘FATCA’.), the US’ statement is a remarkable feat in hypocrisy.
With the US not walking the talk on tax information exchange, and oblivious to the democratic deficit in bringing about a standard for information exchange that is largely ineffective especially for lower income countries (as Tax Justice Network has explained in this briefing), designing better rules on global exchange of information can hardly be seen as an erosion of current standards. The ineffectiveness of the current standards was highlighted by Senegal by mentioning and acknowledging that information exchange is already happening, yet then emphasising how it would need to be improved for it to work for Senegal and similarly situated countries. Requests for information exchange would for example often not be answered, so at the UN, there should be a binding obligation to respond to requests with the requested data or with a valid reason why the data was not obtainable.
The discussion continued between a bloc of Global South countries arguing for the urgency of early action and prioritising the most pressing issues for resource mobilisation, and a group of higher income countries continuing to argue for the desirability of the sequential approach and the need for further analysis. Korea and Norway suggested that a Commission of International Organisations working on the Platform for collaboration be invited to provide further analysis on specific issues. Nigeria, on behalf of the African Union, made a compelling case to explain that existing rules are not catering to the needs of all countries and, therefore, urgent action is required in key areas that early protocols should address for mobilising resources to tackle poverty and other pressing challenges.
The final meeting of the first week closed with a recap by the Chair on the issues raised by delegations as priority issues for the development of early simultaneous protocols:
Cross-border services
Illicit financial flows
Digital economy
Dispute resolution
Taxation of high-net-worth individuals
Environmental and climate challenges
Exchange of information
Tax incentives
In line with the joint submission of the Global Alliance for Tax Justice and the CSO Financing for Development Mechanism that the Tax Justice Network endorsed, we believe that any elements to be developed by protocols should be covered by strong provisions in the negotiation of the framework convention itself. In our own written submission, and in line with what has been raised by several countries in the global south, the Tax Justice Network believes that an early protocol on illicit financial flows should be part of the list of protocols to be prioritised, incorporating the ABC of tax transparency – i.e. automatic exchange of information, beneficial ownership transparency and (public) country by country reporting – and the creation of a Centre for Monitoring Taxing Rights. Whether negotiated simultaneously with the framework convention or under other arrangements, these elements, as well as others that countries may wish to develop further through protocols, should be included as part of the core content of the framework convention. Capacity issues need to be carefully considered by countries in a simultaneous negotiation of early protocols from a strategic standpoint, but far from being a zero-sum game many of the bottlenecks in the more general discussions could be resolved by parallel technical negotiations on more specific issues that early protocols can address.
Roadmap for second session, preparatory work and timeline
The second week of negotiations proceeded at a slower pace, with several countries refusing to make additional interventions on substantive or procedural issues in the absence of a zero draft that captured the earlier discussions. In this context, the final days focused on reaching agreement on the way forward, as summarised in the timeline below (prepared by our partners at the Center for Economic and Social Rights).
This ambitious roadmap implies several challenges for the different actors involved in the process. For UN member states, it will involve preparations for the decisive negotiations between July and August, which given the events of the first session are expected to be very tough and complex. For countries in the global south, the stakes are measured in terms of the resources that states lose every day to respond to the climate and other interrelated crises, and to build schools, hospitals, sustainable infrastructure and to mobilise the resources with which the realisation of people’s rights can be financed. For high-income countries that until now have been in the driver seat of global tax governance, it is a simple matter of accepting that international tax norms need global support, a fair distribution of benefits and a special reckoning of the needs, priorities and capacities of global south countries. But also, a matter of recognising that universally accepted rules that correct the flaws in the current tax architecture are beneficial for all countries. Such highly needed rules might contribute to put an end to the astronomic losses that richer countries suffer from tax abuses to the detriment of their own population (which are greater in absolute terms than those of lower income countries).
Achieving a shared understanding to focus everyone’s energies on agreeing terms of reference that enable the negotiation of an ambitious convention is critical for the process. However, discussions are tough, and the negotiation issues are sensitive. Continued leadership, unity and perseverance by Global South countries – the kind that brought us to these negotiations in the first place – will be required to see this process out in a successful way.
Evidently, it will be a major challenge for countries to achieve a successful negotiation in the short time ahead. For other stakeholders involved, ranging from the Secretariat facilitating the discussions to civil society observing the process, it will therefore be key to assist countries in drawing the right conclusions to make consensus achievable. As such, the Tax Justice Network will continue to provide tools and analysis to support the negotiations, and to collaborate with partners within the tax justice movement and beyond so that the world seizes this historic opportunity for change.
Beneficial ownership transparency is a crucial tool to fight illicit financial flows. It involves identifying the real individuals who ultimately own, control or benefit from legal vehicles such as companies and trusts. Although this sounds rather simple, getting it right is a whole different story. Standards by international organisations (watered down by powerful countries) tend to be quite weak and unambitious. Even then, countries fail to meet these low standards as they lack understanding, resources or interest (or all of the above).
Against this gloomy context, a technical note published by the IMF in January 2024 on “Resolving Opaque Bank Ownership and Related-Party Exposures” is a much welcomed breath of fresh air. It is also an encouraging sign of what the IMF’s new AML strategy is capable of. The technical note deals with an issue very dear to the Tax Justice Network on who “controls the controllers”. Financial institutions are frequently bestowed with obligations to prevent money laundering, determine the tax residence of account holders, withhold account holders’ taxes or report their banking information for automatic exchange purposes. However, this system which relies on the private sector to self-supervise and to assist competent authorities often results in awful consequences (as can be expected of any system with the wrong incentives). For instance, there have been several cases of banks turning out to be complicit, or even initiators, of the wrongdoing they are meant to guard against. The Swiss leaks is one prominent example.
The IMF technical note is not just interesting for its subject matter. It also made us here at the Tax Justice Network realise that we need to update our paper on uses and purposes of beneficial ownership data to include another very important reason to provide public access to beneficial ownership information: bank stability and bank failure. Lack of beneficial ownership transparency can have an impact on the (illegal) transactions carried out by the bank’s owners, which in turn can have serious financial stability and macroeconomics effects for a country. As the technical note describes:
“If not managed properly, related-party transactions can quickly become a source of bank weakness and a threat to financial stability…Most of these [bank] failures (16 out of 22) were largely attributed to extensive abuses by beneficial owners of bank resources in a manner affecting viability….In Indonesia, excessive related-party exposures were one of the key contributors to the country’s banking crisis in the late 1990s… the channeling of funds to finance beneficial owners was a common practice” (pp. 22 and 34).
Some could argue that if public access to beneficial ownership information is needed to prevent bank failures, then it should only apply to the banking sector rather than generally. However, the same counter-argument (that we’ve repeated many times) applies: if you don’t cover absolutely all companies, then secrecy (for corruption, fraud or bank failure) will move up the chain, to the contractor or supplier. Indeed, the same happens with banks where secrecy is not present in the bank itself, but in the secretive entities engaging in (undisclosed) related-party transactions:
“[…] the experience of some jurisdictions with material related-party problems shows that although the banks’ immediate related parties, such as managers or controlling shareholders, were mostly known to the authorities, numerous borrowing entities that were de facto connected to these related parties were not reported as such.” (P. 26)
Apart from offering us a new purpose and case for public access to beneficial ownership, the technical note offers several recommendations that are completely aligned with the Tax Justice Network’s position on beneficial ownership transparency. The following table presents a summary of our papers and proposals compared to extracts from the technical note pointing to the same ideas.
The Tax Justice Network’s proposals compared to the IMF paper’s proposals
The Tax Justice Network
IMF technical note on banking ownership (extracts)
As proposed for instance by our roadmap to effective beneficial ownership transparency (REBOT), all countries should establish public access to beneficial ownership information. We have published a report addressing the privacy, data protection and human rights perspective in favour of public access to beneficial ownership information.
“It is good practice to require public disclosure of a bank’s beneficial owners.” (p. 9)
“Common characteristics of opaque ownership structures include (1) excessive layers of ownership (for example, chains of holding companies)… (2) owners’ residency in foreign jurisdictions… (3) complex usage of available legal persons and arrangements (for example, special purpose vehicles, trusts).” (p. 9)
“A common problem relates to narrow or unclear definitions of … “significant ownership,” or other relevant terms; for example, exclusively based on quantitative indicators such as ownership thresholds. Definitions may fail to capture voting rights being exercised without legal ownership (for example, under a collateral arrangement) or preferential voting rights (for example, veto rights).” (p.11)
Some of our policies in our roadmap focus on addressing complex ownership structures and incentivising compliance go way beyond international standards. These include proposals to reduce the number of allowed ownership layers, lowering (or eliminating) thresholds, prohibiting discretionary trusts, disallowing foreign entities based in secrecy jurisdictions from owning local assets or entities, and applying the “constitutive effect” so that registration is a pre-condition for having or exercising rights.
Additional legal amendments, beyond international standards, may need to be considered… examples of enhancements include (1) restricting the complexity of bank ownership, for example, by limiting the number of ownership layers; (2) lowering the threshold for direct and indirect “significant ownership,” to enable the supervisor to deal with opaque ownership structures and concerted actions that were designed to keep the relative share of individual shareholders just below preexisting regulatory thresholds… that full disclosure of beneficial ownership.… is a precondition for exercising their shareholder rights;… (6) explicitly empowering the supervisor to declare a specific ownership structure as “nontransparent” and, thus, in breach of licensing requirements; (7) explicitly stipulating in law that bank owners or shareholders from jurisdictions that are uncooperative for the purposes of prudential supervision, or are considered to have strategic AML/CFT deficiencies, do not meet suitability requirements” (p. 11 and 13)
Our roadmap together with our papers on trust registration around the world and abuses of offshore trusts describe the risks of trusts (especially discretionary trusts) and propose ways to disallow them or counter their harmful effects.Our roadmap and paper on why beneficial ownership registries aren’t working also recommend identifying those with a power of attorney as beneficial owners with control.One of our first papers on beneficial ownership, published back in 2016, proposed identifying the 10 or 20 biggest shareholders in cases where no individual passes the threshold to become a beneficial owner (instead of following the Financial Action Task Force’s requirement to identify a senior manager).
Box 3 on Ukraine’s indicators on non-transparent ownership:“* Trust: Presence of a discretionary trust in the ownership structures* Power of attorney: Issuance of power of attorney…* … For shareholder structures with more than 20 natural persons, the largest 20 individual shareholders were defined as ‘key participants.’” (p. 12)
Our paper Rethinking limited liability: beneficial ownership transparency to reform the liability system proposed ways to ensure beneficial owners or ultimate shareholders are held liable. This liability should also apply to any earnings that shareholders, beneficial owners or directors obtained from the company, even if they are no longer related to the entity by the time the liability arises (within some reasonable timeframe). In other words, if John as a shareholder got dividends worth $10 million from company A, then sold his shares to Mary and after a few months company A cannot repay its debt, then at least part of $10 million previously paid out to John should be used to repay current creditors, even if John is no longer a shareholder or beneficial owner. In essence, if there’s a cap in losses, there should be a cap in gains.
“The civil liability of beneficial owners and other related parties for a bank’s failure may be based on a combination of general and specific rules. The bank can pursue its claims from related parties on different legal grounds, for example, contract, tort, or unjust enrichment.” (p. 35)
Our roadmap as well as our paper on beneficial ownership verification proposes sophisticated checks to detect registered owners who are actually nominees serving as owners. These checks include checking whether the registered owner could have afforded acquiring their shares to begin with, based on their declared income or wealth.Likewise, our paper on complex ownership structures recommended reversing the cost equation. As things stand now, complexity is free for those who create it and costly for authorities and investigators who seek to identify the beneficial owner hiding behind the complicity – a task that often proves impossible. Our recommendation was to reverse this situation, and make it costly and burdensome (or even forbidden) to create complex ownership structures. This would be similar to how Dutch banks started charging higher fees to customers with complex ownership structures because of the extra costs the banks incurred when performing due diligence.
“verify that beneficial owners have no record of criminal activities or involvement in illicit activities or suspicious practices. It should also assess their financial soundness, that is, the sources of funds for the acquisition of bank shares… The financial soundness assessment is a key tool to identify potential “strawmen” (that is, nominal shareholders that lack financial strength and act in the interest of an undisclosed beneficial owner). In jurisdictions with legacy opaque shareholder structures of systemic proportions, this assessment may call for identified beneficial owners to submit audited financial statements, tax returns, bank account statements, independent personal asset valuations, and other documents.” (p. 16)
Our paper on beneficial ownership verification delves into the risks and challenges of verifying beneficial ownership information and proposes various methods for verifying that information and detecting red flags. One challenging example is detecting cases where trusts disguise distributions to beneficiaries (eg paying their tuition fees or credit card expenses) as if they were expenses belonging to the trust. The IMF paper proposes additional, very good ideas on how to detect undisclosed relationships between entities and how to identify nominees and shell companies.
“*Exclusivity: For example, no other financial institution unrelated to the bank is lending to the party, and the amount and type of loans do not justify it from an economic point of view.
*Economic dependency: For example, most of the party’s revenues come from the bank or its related parties …
*Common infrastructure: For example, common or very close business addresses (physical or virtual) with the bank and its related parties; common operational structural elements; common managers or staff; and common suppliers, service providers, or customers.
*Underwriting standards: For example, material disproportion between proceeds, tenor, and terms and conditions; legal form of transaction differs from their economic essence; and the terms and repayment conditions differ from the current market conditions.
(…)
*Indebtedness and creditworthiness: For example, at the onset, the loan is unlikely to be repaid as stipulated in the contract, given creditworthiness and available repayment sources; and credit rating below the minimum considered acceptable by the bank.
*Interest rates, fees, and prices: For example, interest rate and fees to be paid to the bank are substantially lower than for clients with similar economic and financial characteristics, and prices paid by the bank for assets or received services differ from market prices. (p. 27)*Loan transactions in the weeks prior to material capital injections (for example, those exceeding a certain percentage of total capital during the past five years) should also be reviewed to ensure that the injections have not been effectively funded by the bank itself.
*The sample should also include some transactions that do not directly involve credit exposures, for example, purchase and sale of financial instru¬ments and nonfinancial assets, acquisition of assets in lieu of loan repayment, and service contracts, such as for asset management, advice, and other major professional services (for example, information tech-nology development, database management, auditing, and loan workouts).” (p. 30)
Conclusion
This technical note is an excellent example of the role that the IMF can and should take to bring about real progress on beneficial ownership transparency. For instance, the IMF could start requesting major financial centres to publish beneficial ownership information of their banking sector. This would allow beneficial ownership transparency to move beyond the weak international standard set by the Financial Action Task Force. We hope to see more of this ambitious approach when the IMF engages with countries on capacity building and financing, and when the IMF give feedback on current international standards. In this regard, a protocol on beneficial ownership transparency to the UN Framework Convention on International Tax Cooperation (the UN Tax Convention) would also ensure more transparency for all countries.
Countries at the UN are currently negotiating the parameters of a UN framework convention on tax, which could deliver the biggest shake-up in history to the global tax system. The final parameters – aka the “terms of reference” – will be published in draft form in August, and voted on by the full General Assembly, likely in November.
We’ll be sharing rolling updates on this blog here over the coming months in the run-up to the UN vote on the terms of reference.
Countries voted by a landslide majority last year to begin negotiations on establishing a UN tax convention. The convention has been heralded as countries’ best chance to avoid losing nearly $5 trillion to tax havens over the next decade.
What makes a UN tax convention so game-changing isn’t just the changes it would make to existing global tax rules, but the way it would dramatically change how global tax rules are decided. For over 60 years, global tax rules have been decided behind closed doors at the OECD, a small club of rich countries whose members include some of the world’s most harmful tax havens. A UN tax convention would require global tax rules to be decided democratically and transparently at the UN, where all countries can be heard on global tax rules that affect us all.
26 April – 8 May: The committee will hold its First Session, where all countries will have an opportunity to inform the provisional work of the committee on the terms of reference.
29 July – 16 August: The committee will hold its Second Session, where all countries will have an opportunity to input and negotiate on the final draft of terms of reference before the terms go to a vote near year-end.
November/December TBD: The UN General Assembly will vote on whether to accept the terms of reference prepared by the committee for a UN framework convention on tax. If passed, countries will negotiate the content and meat of the framework convention in 2025, with a view to put the convention to a vote near year-end in 2025.
Positions raised at First Session of the Ad Hoc Committee, 26 April – 8 May 2024 Positions submitted in writing ahead of the First Session of the Ad Hoc Committee.
Transcripts of the First Session of the Ad Hoc Committee, 26 April – 8 May 2024
Please note that these transcripts are automatically generated by transcribing software and may contain errors.
The Tax Justice Network ran similar live rolling blogs in 2023 and 2022 on the previous stages of the UN process leading towards a UN framework convention on tax. The 2023 blog is available here. The 2022 blog is available here.
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🔴 – Live updates
Wed 27 Nov 2024
17:45pm GMT: Alex Cobham covers the live vote via Bluesky
Here’s the resolution on ‘Promotion of inclusive and effective international tax cooperation at the United Nations’, put forward by Nigeria on behalf of the Group of African States: undocs.org/A/C.2/79/L.8
Bizarre first contribution from Argentina, whose delegate explains the country has embarked on ‘a new model’ and therefore has marked a set of paragraphs in the text from which it disassociates itself, including the 2030 Agenda, SDGs, climate change(!), and introduces its own definition of gender…
Russia next, also supports the resolution and also disassociates itself from some paragraphs- in Russia’s case, those referencing the Pact for the Future
The Nigerian delegate now introduces the motion, summarising the path through agreement on the draft terms of reference by which the countries of the world have arrived at this point
“The Africa Group believes that achieving an equitable and inclusive framework (for tax) will benefit all… We must seize this moment to strengthen cooperation… Only together can we pave the way for a fairer and more sustainable future.”
Hungary, speaking for the EU, is raising a ‘technical clarification’. It’s not a good sign that Hungary is speaking – they and France are understood to be the main opposition to the resolution, within the EU.
The Nigerian delegate explains that the change was a technical one to address a redundancy in the text (a repetition of language on geographical scope)…
Hungary says that they are not fully satisfied, and that this change undermines consensus. (This seems petty…)
Nigeria’s delegate explains that OP2’s language reflects the consensus from the ad hoc committee, and that reopening this would undermine and delay the process. On OP5, the Africa Group believes that the organisational session of the negotiations in 2025 must determine decision-making rules.
UK delegation speaking to its abstention on OP5, and the importance of consensus – but note “the openness to progress”, opportunity to agree at the organisational session, and stresses its commitment to work with all partners. Interesting shift – might UK reverse its opposition on main vote?
US – a leader of the opposition – now speaks, to call a vote on the whole resolution. “We would have preferred to join consensus” but refuse because the text does not require full consensus. Ignoring the earlier discussion…
The Nigerian delegate emphasises that voting *against* the resolution would be a vote against multilateralism, and against the interests of developing countries in particular.
15:00pm GMT: Second Committee, 26th plenary meeting – General Assembly
Today, the UN General Assembly votes on the UN Tax Convention Terms of Reference.
13:00 pm : Sergio Chaparro-Hernandez update ahead of the todays vote at the UN on Adoption of the #UNTaxConvention Terms of Reference.
📢Today, the United Nations will take the final step to begin negotiations on the most important international tax treaty in history: the #UNTaxConvention 📃 What to expect from the vote today? What is the value of this process in the current international context? 🧵👇#VoteYespic.twitter.com/9xi9UPtOm3
— Tax Justice Network @TaxJusticeNet.bsky.social (@TaxJusticeNet) November 27, 2024
This year the Ad Hoc Committee worked on the drafts terms of reference that set the parameters for the negotiation of the #UNTaxConvention in the next three years. The vote at the Ad Hoc Committee showed opposition softened as only 8 countries (#TheHarmfulEight) voted against. pic.twitter.com/a0lCE6m7WT
— Tax Justice Network @TaxJusticeNet.bsky.social (@TaxJusticeNet) November 27, 2024
What to expect ahead of the vote? The South bloc (G77 countries) with a few exceptions will likely remain solid in its support to the process. The question is if rich countries will understand this is the best chance to reform international tax rules in the current context. pic.twitter.com/nVZpKwE6RO
— Tax Justice Network @TaxJusticeNet.bsky.social (@TaxJusticeNet) November 27, 2024
👁️Don’t miss our live blog tracking developments on the road to this critical UN vote towards a #UNTaxConvention. 📺Follow the vote in our live blog today at 10am (EST) 👇https://t.co/Q0TTNfGkKG🔴live-un-tax-negotiations/ @SergioChaparro8
— Tax Justice Network @TaxJusticeNet.bsky.social (@TaxJusticeNet) November 27, 2024
Fri 16 Aug 2024
9:45pm GMT+1:Countries ‘bash open’ door to historic tax reform at UN
Countries have just voted by a landslide majority to adopt an ambitious scoping document for a UN tax convention, after months of negotiation. The document1, referred to as the Terms of Reference, sets out ambitious parameters and a clear roadmap for the next stage of negotiations, to being next year, on a framework convention and early protocols. The parameters secured set a strong enough basis for countries to deliver the biggest shakeup in history to the broken tax system.
7:33pm GMT+1:The ICRICT commission’s statement calls on UN member states to vote YES on terms of reference
The Commissioners state:
“The vote today on the ToRs provides an historic opportunity to advance international tax cooperation in an inclusive and sustainable manner and we encourage Member States to vote YES to the draft as it stands.”
12:15pm GMT+1: Countries to vote today on ambitious scope for UN tax convention after months of negotiations
Economists, civil society organisations and campaigners from around the world are calling on countries to back the ambitious scoping document for a UN tax convention that emerged yesterday after months of negotiations at the UN. The document1, referred to as the Terms of Reference, sets out the principles and protocols that will inform the framework convention, and has retained enough of its original ambition to deliver the biggest shakeup in history to the broken global tax system, the Tax Justice Network says.
10:00am GMT+1: Tax Justice Minute: Sergio Chaparro-Hernandez wraps up the second week of the final negotiations.
Wed 7 Aug 2024
The second week of negotiations on terms of reference for the UN Tax Convention is in full swing. Having stormed through discussions on the objectives and preamble of the draft ToR, vying national interests are now on full display as countries debate the principles that will underpin the Convention.
Of critical importance to tax justice advocates is the incorporation of strong human rights language into the terms of reference. On Monday and Tuesday, an arduous debate ensued on the exact function and location of such language in the ToR. Broadly speaking, countries’ opinions were divided across three positions. Colombia and a number of other Latin American countries fought compellingly for human rights obligations to be included in the principles section the preamble. Embedding human rights standards in the operational part of the document as a principle means they can serve as one of the concrete guidelines of the work under the Convention besides other principles like ‘transparency’ or ‘the fair allocation of taxation rights’. Inserting human rights as a principle aims to ensure the Convention meaningfully advances the wellbeing of ordinary people in all countries. It would also require a specific focus on the needs of marginalised sectors, such as women, minority ethnic groups, persons with disabilities and other discriminated-against groups.
As things currently stand, the principles section of the ToR states that efforts to achieve the objectives of the Convention should “be fully aligned with international human rights law and States’ existing commitments under human rights conventions to respect, protect and fulfil all human rights for all people in all countries”.
Perhaps surprisingly, the position of including human rights as a principle was strongly and repeatedly opposed by the African countries and by India. As explained by the African Group, not including human rights as a principle does not equate to the continent dismissing human rights obligations. On the contrary, efforts to mobilise domestic resources to increase living standards and human rights adherence are the key priority for Africa. But in their view, this will be achieved by fair and equitable tax rules between countries. India agreed, but not without calling a cat a cat: if a general reference to human rights is adopted as a general principle, it could be used to block things like effective exchange of information.
The African and Indian position needs to be understood in relation to the third position, that taken by many of the countries in the Global North. Having voted against the process towards a UN convention on tax last year, these countries were quick to support the inclusion of a general human rights principle which – in their view – mostly serves to anchor the protection of taxpayer rights. After all, it is these individual human rights – the right to privacy, the right to property – which tend to be most enforceable (or most frequently enforced, at least).
As illustrated in recent jurisprudence by the European Court of Justice (see here and here), individual human rights like the right to privacy do not always align with progressive tax agendas. On the contrary, wealthy global North taxpayers aiming to stretch the scope of these rights in local courts may altogether hinder progress. Hence, the African and Indian skepticism and the grim realisation for all others involved that even a seemingly obvious reference to universal human rights – core values on which the UN forum is built – can be weaponised against a progressive agenda or, at least, is perceived by a large part of the Global South as entailing such risk.
As the debate over human rights rolled into Tuesday, perhaps the most eloquent contribution came from Mauritius, which spoke in favour of keeping strong human rights language in the principles and called on the gathered delegates to remember that, ultimately, the fulfilment of human rights is the whole reason the framework convention process was initiated. The very purpose of cooperating internationally on issues of taxation, he argued, was to raise revenue for human rights such as education and healthcare.
A series of Latin American states – including Brazil, Colombia, Chile, Costa Rica, Honduras, and Mexico – echoed this position over the course of the day.
A much-needed intervention from the Office of the High Commissioner for Human Rights aimed to clarify the role core human rights principles can and must play in delivering an effective and transformative Convention. The OHCHR representative reminded the gathered delegates that the Human Rights Council has underlined the centrality of just taxation for the realisation of all human rights, and reaffirmed that this same objective is one of the central purposes of the UN Charter. Placing human rights at the core of implementation of the Convention would, she argued, serve to reduce inequalities both within and between countries. Importantly, as some of the day’s argumentation had heard calls for ‘taxpayers’ rights’ – which often means privacy and with it financial secrecy – should not be given precedence over established human rights; instead the whole body of human rights must be considered holistically. The UN human rights system has developed effective standards to balance the trade-offs that can arise between different categories of human rights, and stands ready to support in this regard.
CESR’s Charlotte Inge explains why human rights must be in both the preamble and principles of the Terms of Reference for a Framework Convention on International Tax Cooperation
The Center for Economic and Social Rights also intervened, delivering an important clarification that while human rights are protected by an established canon of international law, ‘taxpayers’ rights’ do not have any such status and therefore their inclusion in the principles section would be problematic. In order to deliver the guiding framework that is needed, the principles underpinning the new convention should be anchored in international law that can provide clear interpretive guidance for implementation.
Closely linked to the push for strong human rights language, there was also concern that civil society voices were being sidelined as state interventions ran overtime, and that the critical issue of gender equality seemed to have slipped from country delegates’ minds. With this in mind, Monday’s only intervention from civil society centered on a call for the Beijing Declaration and Platform for Action – considered the key global policy document on gender equality and women’s empowerment – to be included in the list of international agreements framing the convention.
As to the worries expressed by the African countries and by India, these have remained largely unaddressed in the debates until now. One way to achieve progress here is to insert an explicit connection between ‘fair allocation of taxing rights’ and ‘the adherence to human rights’ as inseparable principles. From a tax justice perspective, alignment with human rights principles is key to ensure fair taxation within countries, and to underpin the ability to hold states accountable for extraterritorial damage. But if there is no corresponding principle of fairness between countries (fair allocation of taxing rights), there is a clear risk that the human rights alignment is (mainly) weaponised against fundamental reform of taxing rights that is central to overcoming the deliberately created global inequalities in their distribution. In other words: taxpayer rights in the Global North are important, but not to the extent that they can stifle and extinguish other principles and country commitments under the Convention.
Countries may therefore be well advised to merge the two principles so to keep the best of both worlds – general adherence to human rights and fair allocation of taxing rights – and rely on it as a single principle of utmost importance for all work under the new Convention.
Mon 5 Aug 2024
15:00pm GMT+1: Tax Justice Minute: Sergio Chaparro-Hernandez rounds up the first week of the final negotiations.
11:55am GMT+1: Sergio Chaparro-Hernandez explores our guide to the five main fallacies that rich OECD countries will likely use to try to derail progress in the UN tax talks
15:55pm GMT+1: Speakersaddress the Ad Hoc Committee to Draft Terms of Reference for a UN Framework Convention on International Tax Cooperation.
Sergio Chaparro makes key points on the need for the ABC of tax transparency: fully inclusive Automatic exchange of financial account information; for public registers of Beneficial ownership info; and for fully public Country by country reporting by multinationals. pic.twitter.com/HzwwABTxyC
— Alex Cobham @alexcobham.bsky.social (@alexcobham) August 2, 2024
21:00pm GMT+1: Insights from day 2: Liz Nelson recap
Day 2 of the final round of negotiations of the Terms of Reference for a UN tax convention in New York brought an early attack on hard fought language on human rights. Submissions from tax justice and human rights advocates had set out in their submissions to the Bureau (here and here) the importance of strengthening the draft terms of reference with clear language on human rights principles (See paragraph 9). The Office of the High Commissioner for Human Rights supplemented with their own submission.
The nature of the attack on the human rights text in paragraph 9 came, perhaps, from unexpected quarters, but has sounded the alarm and underlined that there are limitations to the depth of understanding of key principles that are necessary, and should, shape the UN Framework Convention on International Tax Cooperation. If indeed member states are committed wholeheartedly to address social and economic inequalities in and between countries by a root and branch reform of the international tax rules this cannot meaningfully happen without adherence to their duty bearer obligations.
Many of civil society working on human rights have worked quickly to provide the Secretariat to the Ad Hoc Committee with a reminder of the clear rationale and the legal framework for the inclusion of human rights in the Terms of Reference, as opposed to the quite different concept of taxpayer rights. The notes here prepared by civil society in New York (CESR, Dejusticia, GI -ESCR, Tax Justice Network and others) navigate through the arguments for human rights language:
12:30pm GMT+1: Social Europe article: Developing tax rules for a globalised world by Alex Cobham
Yesterday, a number of EU countries intervened in the UN tax convention negotiations, to argue that the convention should not ‘duplicate’ work of the OECD. But the UN convention is a massive opportunity for the EU and its people – and their negotiators should seize the chance.
16:00pm GMT+1: U.S. Treasury Secretary Janet Yellen opposes shifting global tax deal negotiations away from the Organisation for Economic Cooperation and Development to the United Nations.
Sergio Chaparro-Hernandez, Tax Justice Network: “The US has long been opposed, so while it is disappointing that Secretary Yellen would make such a public statement, it comes as no surprise. But with this confirmation that there will be no constructive engagement in the negotiations from the US, regardless of their presidential election results later this year, the focus is now on the stance of other OECD member countries, including the EU and UK. These are the countries which lose the greatest amounts to crossborder tax abuse due to the failures of the international tax rules. And these are also countries whose citizens consistently demand that their politicians make progress in this key area. We therefore hope to see the UK and EU signalling their willingness to support the Africa Group’s leadership on the UN convention, and pushing hard for an ambitious and progressive terms of reference for the full negotiations to follow.”
12:30pm GMT+1: New blog summarising the First Session negotiations
Our colleagues @SergioChaparro8 and @markusmeinzer have written a blog providing a jam-packed recap of what happened at the first round of UN tax negotiations. The blog breaks down negotiation tactics that were on display at the Ad Hoc Committee’s First Session, views and positions expressed by countries, emerging blocs and what lies ahead on the path towards a UN tax convention.
11:59am GMT+1: Database of country positions from First Session
We are also making publicly available a database we have compiled on what countries said they want from a UN tax convention during the First Session of the Ad Hoc Committee that recently ran from 26 April to 8 May.
11:10am GMT+1: Transcripts of First Session meeting
We are sharing here our automated transcripts of the Ad Hoc Committee’s First Session, which ran from 26 April to 8 May. Please note that the transcripts are automatically generated by transcribing software and so may contain errors. The automated transcripts include timestamps to help cross-check quotes in the transcripts against the recordings of the meetings on UN web TV, which we advise doing.
9:00am GMT+1: Markus Meinzer summarises yesterdays sessions
The negotiations for Terms of Reference of a #UnTaxConvention have focused today on two crucial procedural questions:
1. should early simultaneous protocols be negotiated?
2. what timeline for any protocols and the Framework Convention?
The morning session was characterised broadly by two different views, with many strong interventions from G77 consistently pointing out the need and feasibility of early simultaneous protocol negotiations, and many, but not all, OECD members rather arguing against this.
These two differing views may have surprised some observers, as it was OECD members rather than others who repeatedly cited bottlenecks in administrative capacity for simultaneous negotiations: the practical question of working in parallel on more things demands more resources.
The position by G77 & some few OECD members calling for negotiations of early simultaneous protocols may indicate their commitment & determination to bring in their technical tax negotiators January 2025. So how may they deal with capacity constraints for 2 parallel processes?
The obvious answer (the OECD may not like too much) is that tax policy negotiation resources could be freed up by…pausing…(for lack of a better word…) the stalling work over at the #InclusiveFramework. Perhaps until the USA might show us ratification of Pillar 1 and 2? And as we are at it, of the Common Reporting Standard?
The longer than usual break after the morning session indicates that this penny might be beginning to drop here & there… After the break, a compromise proposal, initiated by the UK, for overlapping negotiation timelines, but not full simultaneity, was elaborated on by the Chair.
Then the Chair projected this chart (as shown above) as an indicative illustration of the potential compromise timelines. It indicates the completion of the full framework convention within 18 months, and then the completion of early “semi-simultaneous” protocols, 6 months thereafter.
Well, if that is the case, expecting the ToR will be voted in the UN General Assembly this fall, we are in a scenario where the negotiations could start in January 2025 indeed.
The beauty of democratic negotiations at the United Nations at work.
PS: Those interested in the case why corporate taxation and public country by country reporting by multinational companies should be a high level commitment as an area to be within jurisdiction of the Framework Convention, watch my intervention yesterday at the Ad Hoc Committee: https://youtu.be/XNlEUY4Pr7M
Wed 1 May 2024
12:20pm GMT+1: Markus Meinzer, delivering a statement on behalf of the Tax Justice Network on public Country by country reporting
The Tax Justice Network aligns with the remarks made by the Global Alliance for Tax Justice. Esteemed delegates, in this intervention, we would like to advocate for including Country by Country Reporting and corporate taxation issues more broadly in the Terms of Reference of the Framework Convention; and for inclusion of the establishment of a Global Asset Registry (GAR), as well as of a Centre for the Monitoring of Taxing Rights (CMTR) to monitor progress.
I found encouraging that today, many country delegates have expressed their desire to do more to ensure that large multinational enterprises pay their fair share of tax.
In this regard, the importance of the relationship between corporate taxation, that has been discussed this morning, and the ABC of tax transparency that has been discussed yesterday, cannot be emphasized enough. Why is that?
One objective of tax reform processes initiated 2013 by the G20 has been to align the declaration of profits of multinational enterprises with their economic activity.
Country by country reporting – the C of the ABC – has been proposed as one tool to not only hold accountable multinational enterprises, but also to measure the progress towards this ambition of states, and it has been widely implemented in form of BEPS Action 13.
While CbCR has been originally devised as a public financial reporting standard whose predecessors are dating back to the 1970s and the United Nations, CbCR has been however severely truncated during the OECD BEPS negotiations.
The first truncation of this tool happened as tax secrecy was declared to cover this data.
In order to access the data, a complex system of automatic information exchange was established that leaves most lower income countries out of the exchange mechanism.
Esteemed delegates, the result of this system is a further exacerbation, not a reduction, of information asymmetries between higher income and lower income countries – information asymmetries that everyone in this room knows do translate into inequalities of power and ultimately taxing rights.
The second truncation in OECD’s BEPS Action 13 is that of limiting the use of the data and ruling out the use of the data for transfer pricing or tax base adjustments to enable formulary apportionment of income.
That is an enforceable provision in the OECD rules directly in opposition to a clause included and widely accepted to this day in the UN model tax convention under Art. 7.4.
These two OECD treatments of country by country reporting have truncated the tool and solidified a deeply unjust and unfair asymmetry in taxing rights.
In addition to this truncation, the OECD has failed to live up to its commitment to complete a review of the CBCR standard in 2020, after a consultation showed broad support for public access, incl. by investors.
I am telling this episode not to entertain or bore you – but for 2 reasons. First, because I hope it reminds us of why we need a high-level commitment to work on corporate tax matters in the Terms of Reference.
Second, I mention this because I believe we also need a high-level commitment of public CbCR in the ToR.
Healing the OECD truncations could help releasing upfront significant revenues in developing countries – and in developed countries alike.
Public CbCR should be created under a robust standard, and we believe that the Global Reporting Initiative’s GRI 207 standard should be among those tabled for review by the Ad Hoc Committee here, as it is currently the most robust and reliable existing standard – or to be tabled and reviewed but the subsequent committee.
In addition to this, a Global Asset Registry that establishes the infrastructure for enabling the taxation of high income individuals by laying down systems and IT parameters, protocols that enable the registration and interfacting, exchanges about bank accounts, about financial securities, about real estate, vessels, yachts, about airplanes, about other high value assets, would be prerequisite to enable the progressive taxation of individuals both by the personal income tax, and by means of a wealth tax. In this regard we would request the GAR to be included for consideration as another high-level commitment in the Terms of Reference.
Full Tax Justice Network statement on Country by country reporting here:
6:20pm GMT+1: Live updatefromSergio Chaparro-Hernandez
A second group 2 (majority – over 60 countries) supported the inclusion of corporate taxation as a sustantive issue to include in the ToRs. A few countries made some nuances in regards to the need to build on the progress made in the context of the OECD's Inclusive Framework. pic.twitter.com/dKq5v7LL7s
A somewhat surprising procedural hickup happened just now, when France objected to the proposition by the chair to allow contributions by civil society to be made during the session rather than only at the end of the session, when no other member state raises their hand. pic.twitter.com/zeAkZa9clb
2:00pm GMT+1: Insights from Day 3: Sergio Chaparro-Hernandez’s Recap
On day 3, the Ad Hoc Committee had extensive discussions on the substantive issues that the Framework Convention should include in the form of high level commitments. The morning session addressed the issue of domestic resource mobilisation (DRM). A first group of countries, including Sweden, Korea, Austria, Norway, the United States, Italy, the Netherlands and Belgium either had an understanding of DRM that equated it primarily with capacity building or, recognising that the concept implies broader dimensions, suggested that the Convention should focus on capacity building. A second group, including India, Nigeria, Bahamas, Kenya, Senegal, Colombia, Algeria, Tanzania, Russia and Belize advocated separating the issue of DRM from capacity building, and emphasising that DRM should include the issue of fair allocation of taxing rights and its connection to the SDGs. Tax Justice Network Africa reinforced this point by noting that capacity building is not a panacea and DRM must address historical imbalances in the distribution of taxing rights.
A second segment of the morning addressed the issue of taxation of high net worth individuals. Brazil and Spain indicated that they support the inclusion of this issue, and that they have been advancing a proposal on this in the context of the G-20, recognising the importance of the discussion of the UN Framework Convention as an appropriate scenario to address it. Some interventions, both from countries from the Global North and the Global South, argued that this is a domestic taxation issue. While some advocated for not addressing it in the Convention, others argued that it should be addressed more broadly under a wider objective, be it DRM or combating inequalities. Other states, such as India and Colombia, argued that the issue raises a dimension of international cooperation that should be the way it is addressed as part of the Convention. Colombia proposed a global registry of beneficial owners of different types of assets, along the lines of a Global Asset Registry. Interventions by Alliance Sud and Oxfam reinforced the need to include the issue of taxation of high net worth individuals in the Convention.
In the afternoon session, although with different emphases on the issues, there was broad agreement on the importance of addressing taxation measures to address climate and environmental challenges as part of the Framework Convention. A second segment consisted of a dialogue with international institutions. And the afternoon session continued with discussion of other topics that could be included as part of the high level commitments in the ToRs, including the problem of blacklists raised by the Bahamas and the ABC of tax transparency that the Tax Justice Network had the opportunity to talk about.
Negotiations for a UN Tax Convention in New York have changed in tone and dynamic on Tuesday. While on Monday it seemed as if OECD countries had teamed up to stall the negotiations by insisting on non-duplication and complementarity, the style and inputs appear more constructive.
Sergio Chaparro-Hernandez, International Policy and Advocacy Lead for the Tax Justice Network, addressed the negotiations concerning the Terms of Reference (ToR) for a UN Tax Convention. His emphasis was on the necessity for enhancements to the fundamental aspects of tax transparency, known as the ABC of tax transparency, to operate in a more comprehensive, inclusive, and efficient manner. This, he argued, is crucial for combating illicit financial flows and facilitating domestic resource mobilisation.
Tues 30 April 2024
5:45pm GMT+1: Ad Hoc Committee to Draft Terms of Reference for a United Nations Framework Convention on International Tax Cooperation – Delivered by Markus Meinzer, Tax Justice Network
12:15pm GMT+1: Maria Ron Balsera, Interim Executive Director of the Center for Economic and Social Rights explains why the framework convention negotiations offer a unique chance to rectify unfair international tax rules, leveraging taxation’s corrective powers to establish a just framework grounded in human rights principles resilient to future challenges.
9:15am GMT+1: Catch up on yesterdays discussions
On Monday the Committee discussed two main issues. The morning session was scheduled to discuss the possible skeleton or outline of the terms of reference that had been shared by the Secretariat as a starting point for discussion. A first group of countries – mainly those that voted against the resolution adopted last year – pointed out that the terms of reference should give very general guidelines and focus on the procedural aspects of drafting the Convention – without prematurely addressing anything that could prejudge its content. A second group showed stronger support for the Secretariat’s previous work, with some clarifications. They suggested the ToRs should have a broad based approach where all issues should be up for discussion, and that the ToRs should include some substantive scoping such as the draft outline of the elements of the Convention proposed by the Secretariat. The discussion then focused on whether a point on decision making rules should be included and whether it should be moved from Annex 1 to the skeleton of the ToRs (as suggested by members of the first group) or whether it should be left where it is, bearing in mind that the decision making rules of subsidiary bodies such as the Ad Hoc Committee should be the same as those applying to the General Assembly. The session ended with the intervention of civil society, led by the FfD Civil Society Mechanism, and ATAF insisting that the Ad Hoc Committee is not entitled to change the rules that should govern the discussion of the subsidiary bodies of the General Assembly.
The afternoon session discussed the introductory elements of ToRs (Preamble, Objectives and Principles). Countries made specific suggestions on these aspects, but the main discussion was around the principle of complementarity. Differences on the problems of the current tax architecture and whether or not it is unfair, as well as how existing instruments should be dealt with, emerged in the afternoon conversation. Civil society insisted that instruments that had not been negotiated in an inclusive manner could not be incorporated into a Convention that is meant to be inclusive, an idea that was supported by countries such as Pakistan. Issues of equity, human rights and special and differential treatment were also discussed.
3:15pm GMT+1: A UN convention with the ABCs of Tax
The ABCs of tax justice ensures the UN’s tax convention paves the way for fair, progressive taxation worldwide. Stand with the tax justice movement to advocate for a #UNtaxConvention that promotes democratic, transparent, and inclusive reform of #GlobalTaxRules, bridging inequalities across borders.
Fri 27 April 2024
4:00pm GMT+1: First Session now underway
The First Session of the Ad Hoc Committee is now underway! The session will run from today until Tuesday 8 May. The session will give all countries an opportunity to inform the provisional work of the Ad Hoc Committee on the terms of reference
3:00pm GMT+1: New EU position on the UN Tax Conventionannounced
A new EU position on the UN Tax Convention (a from 24 April) has been released and can be found online here.
The document is quite broad, but it’s a slight improvement from the EU Common Approach released last September in 2023. According to the new position:
“…the proposed UN Framework Convention on International Tax Cooperation should aim to promote global dialogue and create policy synergies. In recognition of the call for more inclusive and effective international tax cooperation, international dialogue at the United Nations in relation to a future Convention should aim to gather countries to exchange effective practices on mobilising domestic resources through both tax policy formulation and the strengthening of enforcement mechanisms. This effort underscores the pivotal role of the United Nations in supporting UN member states to mobilise domestic resources and finance development strategies, aligning closely with the aspirations outlined in General Assembly resolution 78/230.”
For more information on individual countries’ demands for the UN process and what they want from the UN negotiations, see our public spreadsheet here.
Thurs 26 April 2024
09:30pm GMT+1: Get up to speed ahead of this week’s First Session with our blog
Our International Policy and Advocacy Lead Sergio Chaparro-Hernandez has written a catch-up blog about what has happened so far this year leading up to the negotiations kicking off this week and about what we can expect over the coming days.
4:15pm GMT+1: UN publishes a draft outline of the terms of reference and the framework convention
Things are getting real! In preparation for this week’s session, the Ad Hoc Committee has published a draft outline of the terms of reference, which is being negotiated this year, an the framework convention itself, which will be negotiated after the terms of reference are agreed.
Fri 19 April 2024
2:20pm GMT+1: South Centre calls out unhelpful behaviour from OECD countries
Powerful statement from Dr Carlos Correa, head of the intergovernmental South Centre, to the intergovernmental G-24, highlighting the unhelpful behaviour of OECD members and the continuing failure of the OECD process to deliver either consensus or progress. Noting that even an unlikely success in the OECD process would deliver little or nothing for developing countries, the South Centre’s clear call is for all efforts to be concentrated on the negotiation of a UN framework convention on tax.
“On taxation issues, we note that the deadline of 31 March 2024 for finalizing the OECD digital tax solution of Amount A of Pillar One has been once again missed, with developed countries making increasingly extreme and irrational demands as preconditions to sign the Amount A Multilateral Convention. We strongly reiterate our recommendation that developing countries no longer wait and keep losing revenues, and immediately commence with unilateral digital tax measures such as Digital Services Taxes (DSTs) or Significant Economic Presence, and consider Amount A only after it has been ratified by major developed countries, particularly the USA. The South Centre in partnership with the African Tax Administration Forum and the West African Tax Administration Forum will soon come out with country level revenue estimates on Amount A vs DSTs for the 85 combined Member States of the African Union and the South Centre, and this can provide valuable data for informed decision making and on the opportunity cost of continuing to not take any action.
“Regarding the OECD Global Minimum Tax (GMT) of Pillar Two, the OECD’s own revenue estimates show that only 1.6% of the profits taxable under the GMT are located in lower middle-income countries, and only 0.1% are in low-income countries, making the OECD GMT irrelevant for the vast majority of developing countries. Further, even in countries where these minimal profits are located, the multinational enterprises can continue to shift profits and pay zero in taxes owing to the design of the rules. We reiterate that reforming wasteful tax incentives and an alternative minimum tax with a tax base such as turnover can be far easier to administer and bring in revenues, unlike the complex OECD Global Minimum Tax whose cost of administration is most likely to exceed any revenue collected.
“We welcome the historic resolution 78/230 of the UN General Assembly to prepare the Terms of Reference (ToR) for a UN Framework Convention on International Tax Cooperation. We call on all developing countries to actively participate in the Ad Hoc Committee which will draft the ToR, and allocate sufficient resources for the travel to and participation of delegates in New York. The South Centre has submitted inputs to the Ad Hoc Committee.”
1:00pm GMT+1: The Center for Economic and Social Right’s analysis of submission to the UN Ad Hoc Committee
The Center for Economic and Social Right has published an insightful analysis of countries’ written submissions to the Ad Hoc Committee detailing their views and stances on the terms of references.
“The call [for submissions] received 103 inputs in total, including 49 responses from United Nations Member States. These numbers indicate strong engagement with the international tax debate now that the UNTC is a certainty. A similar call for inputs from the Secretary General last year received 92 submissions in total, which consisted of only 28 responses from Member States (read our analysis here). Hence, the engagement of Member States has considerably increased. Other inputs include 1 from a member of the UN Committee of Experts on International Cooperation in Tax Matters, 4 from United Nations Organizations, 6 from other international organizations, 10 from businesses and others, and the remaining 33 from civil society and academia.”
In the next six months, United Nations member states will have to decide on the terms of reference for a UN framework convention on international tax cooperation (UNFCITC). This means that they will have to set the roadmap for negotiating the most important international tax instrument ever drafted. This is a once-in-a-century opportunity to redefine the pillars of the international tax system and to make it fully inclusive, just and effective.
The mandate for this task was given by the UN General Assembly to an Ad Hoc Intergovernmental Committee through the adoption of Resolution 78/230 in December 2023 (see the positions that countries adopted on the Tax Justice Policy Tracker and the voting records here). The Ad Hoc Committee must prepare and submit the terms of reference to the General Assembly by August 2024 at the latest.
The timetable for this process is already set and underway. The organisational session, which elected the chair and the bureau that will guide the discussions of the Ad Hoc Committee, as well as other rules for its operation, took place from 20 to 22 February 2024 at the United Nations in New York.
Next up on the schedule is the first substantive session, which will run from 27 April to 8 May. The session will give all countries an opportunity to inform the provisional work of the Ad Hoc Committee on the terms of reference.
What happened at Februrary’s session and what can we expect from the April’s? We delve into this below.
Dispute at the organisational session over decision rules and scope
A very positive development for the international tax discussions is that the organisational session was broadcasted live in its entirety, and anyone with internet access from anywhere in the world could follow it. The high standard of transparency of the discussions that have started at the UN contrasts with the closed sessions that have been held at the OECD on international taxation issues over the past decade.
It is because of this unprecedented level of transparency in international tax negotiations that the Tax Justice Network can make available to the public the transcripts of the sessions, and an account of the positions adopted by states. We can also contrast how these positions relate to the performance of countries on the Financial Secrecy Index, our ranking of countries most complicit in helping individual hide their finance from the rule of law, and the Corporate Tax Havens Index our ranking of countries most complicit in helping multinational corporations underpay tax. The analysis below is based on these tools. We invite other stakeholders to use them extensively to produce their own analysis.
The first key moment of the session was the election of the Bureau to guide the Ad Hoc Committee’s discussions. Egypt’s Deputy Minister of Finance Mohamed Youssef was elected as chairperson. Four representatives of the five regional groups were also elected for a total of 20 members. Although the Bureau is not a decision-making body, its role will be key in organising the work of the sessions and proposing options to bring divergent positions closer together to enable the Committee to move forward and fulfil its mandate.
A second noteworthy development is that several of the 48 countries that had voted against Resolution 78/230 last year are now actively participating in the process. The European Union, for example, which voted as a bloc against the resolution last year, accepted the path set out by the resolution by stating in its initial statement at the organisational session that, “the UN framework convention on tax cooperation can and should serve to further promote tax transparency and fair taxation” (see analysis by the Tax Justice Network’s CEO Alex Cobham on why the European Union should start looking to the UN as the way to achieve the universal tax standards they have sought for themselves).
Following the presentation by the Secretariat to clarify what the mandate to draft the terms of reference of a framework convention means, delegations raised questions on the decision-making procedures and the scope of this task, but none of them at this stage questioned the mandate of the Ad Hoc Committee.
The main controversy in the session was around the decision-making rule under which the Ad Hoc Committee should operate. It is customary for subsidiary bodies of the UN General Assembly, such as the Ad Hoc Committee, to operate under the same rules of procedure as the UN General Assembly. Although these rules imply a strong preference for consensus, and the procedures are geared towards the search for consensual decisions, they also recognise the possibility of taking decisions by simple majority when consensus is not possible, which facilitates the fulfilment of the mandate assigned to the Committee in question.
Broadly speaking, the same bloc that voted against last year’s Resolution 78/230 (and some of those that abstained), initially called for the rules of procedure to be amended so that it could be established that decisions must be taken by consensus – and not, in any scenario, by simple majority. It is worth noting that this bloc of countries is a sample of countries in the top half of the Tax Justice Network’s Financial Secrecy Index ranking (from the United States in the dishonourable 1st place position to Turkey in 59th place).
It is also worth noting that Latin American countries that initially spoke in favour of a consensus rule for the Ad Hoc Committee, such as Chile and Mexico, softened their position during the course of the session. Had this amendment been realised it would have meant, in practice, giving veto power to any of the countries that opposed the resolution. This would then make it more difficult to fulfil the mandate given to the Ad Hoc Committee to draft the terms of reference of a UN framework convention on tax within six months.
The solution adopted by the Ad Hoc Committee was to introduce a paragraph proposed by Colombia which established that “every reasonable effort should be made, within the available time frame for negotiations, to seek consensus on substantive matters”. Prior to this paragraph it was clarified that the Ad Hoc Committee would operate under the same rules as the General Assembly – which in effect implies the possibility of taking decisions by simple majority vote. Although some countries such as Canada, Australia, the UK and others wanted to register their concern on this possibility in the final report of the session, this was not feasible under the rules of procedure.
With the basis for an agreement in place, the Ad Hoc Committee then approved two key documents that will form part of the final report of the organisational session:
Annex I: Outline and modalities for the work of the Ad Hoc Committee to Draft Terms of Reference for a UN framework convention on international tax cooperation (preliminary unedited version)
Annex II: Modalities for multi-stakeholder engagement in the work of the Ad Hoc Committee to Draft Terms of Reference for a UN framework convention on international tax cooperation (preliminary unedited version)
The discussion at the organisational session to set the agenda of the first Ad Hoc Committee’s substantive session to be held in April and May was also an opportunity for some delegations to raise the problems they believed could be addressed by a UN framework convention on tax. The chair opened the discussion by pointing out, by way of example, the following problems:
Full consideration of the existing multinational and international arrangements would leverage existing stance and address gaps and weaknesses in current international tax cooperation efforts and arrangements.
Clear and coherent rules that are responsive to changing business models, technological innovation, and globalisation while helping to ensure that taxpayers are neither excessively burdened by these pre-tax rules nor allowed to aggressively avoid payment of tax.
Maintaining a fair and equitable balance of taxing rights between residents and source countries.
Developing a precise dispute resolution mechanism that considers the capacity of developing countries.
Adopting rules that should be adequate and sufficient to discourage illicit financial flows.
Addressing the challenges related to the digitalisation of the economy.
Addressing the issues of harmful tax competition between countries.
One positive aspect of the subsequent discussion is that some of the most vocal opponents of the idea of a binding tax instrument at the UN spoke up on the content that such an instrument could include. For example, the UK, which had proposed an amendment to last year’s resolution to delete the word “Convention”, argued this time that the framework convention should consider how member states can support each other to increase domestic resource mobilisation through shared best practices and capacity building, as well as issues of climate change and new technologies.
Although several Member States that voted against last year’s resolution mentioned the risk of duplication with other existing instruments, it is important to note that the creation of a new international legal regime, which is the purpose of a framework convention (see section 2), implies the harmonisation of existing instruments with the principles, objectives and obligations of the framework convention. It is only such an instrument that would be able to address, at its root, the risk of duplication and fragmentation under universally shared principles.
Other states called for a framework convention with a more ambitious scope. For example, Russia suggested that the Convention should make progress on at least five aspects: 1) a multilateral model for the conclusion of international tax instruments reflecting the latest developments of the UN Committee of Experts on Taxation; 2) the creation of a UN Platform to Exchange Knowledge on tax administration given digitalisation; 3) the definition of a global basis to determine the status of tax residence; 4) tax and climate change policy issues; and 5) general criteria for preferential tax regimes.
Colombia went further and added that the framework convention should address inequalities between both individuals and legal persons; inequalities in taxation rights (between countries of residence and source countries); resource mobilisation for climate action and consider the creation of an independent UN tax body in addition to the Conference of the Parties. Caribbean countries, and particularly the Bahamas, raised concerns with blacklisting, as well as the need for predictable rules under a common standard suitable for all countries and transparent global tax governance that promotes equality and considers the perspectives of the Global South.
Also worthy of note was an important discussion that took place in the organisational session about the adoption of early protocols, which are complementary instruments that could lead to tangible outcomes from the process while the negotiation of the framework convention happens. Resolution 78/230 states that the Ad Hoc Committee may “consider the possibility of simultaneously developing early protocols while the framework convention is being developed on specific priority issues, such as measures against illicit financial flows related to taxation and taxation of income derived from the cross-border supply of services in an increasingly digitised and globalised economy”. While some countries, such as Canada, considered that the Ad Hoc Committee should focus only on the terms of reference, the African Group and countries such as Colombia advocate the possibility of advancing early protocols on issues of combating illicit financial flows and on issues of progressive taxation.
The way forward: procedural and substantive issues to draft the terms of reference for a UNFCITC
The organisational session defined the agenda to be discussed at the first substantive session to be held between 26 April and 8 May in New York. In accordance with the participatory mechanisms adopted in Annex II, the Secretariat opened a call for contributions from different actors (including civil society organisations) to inform the deliberation on the procedural and substantive provisions of the terms of reference, as well as on the issue of early protocols. All the inputs submitted are available . At the Tax Justice Network, we align ourselves with the joint submission made by the Global Alliance for Tax Justice and the Civil Society Financing for Development Mechanism as well as with the one made by the Centre for Economic and Social Rights. We contributed also with a complementary submission. With a view to track the demands that States made at the written submissions, we are releasing a compilation on Who Wants what from a UN Tax Framework Convention.
A first discussion that will be critical in the forthcoming sessions is the type of Framework Convention that different actors will push for (the debate on a possible Framework Convention on the Right to Development can be a good proxy of the dilemmas at stake). A Framework Convention consists of the gradual establishment of a legal regime. These instruments usually contain substantive provisions expressed in the form of objectives, principles or general obligations, and institutional provisions, which are aimed to create authoritative spaces (such as the Conference of Parties) to agree on new normative instruments, as well as to define the rules of operation and the mechanisms for the participation of other actors in these spaces. This means a Framework Convention is a flexible approach to the definition of a legal regime, as it defines a common framework for the development of more specific agreements that states may decide to ratify or not.
One of the key debates will be around the balance between the procedural and substantive provisions of the framework convention. Will it be an instrument like the UN Framework Convention on Climate Change (UNFCCC) that focuses on procedural aspects and substantively outlines very general content at the level of principles or objectives? Or will it be an instrument that, in addition to defining procedural aspects, contains more specific substantive guidelines on the type of problems and measures that should be adopted on international tax cooperation, in the way that the WHO Framework Convention on Tobacco Control (WHO FCTC) does? An instrument such as the UNFCCC might facilitate ratification of the instrument by most of the states that could otherwise block the process, but it would weaken the scope of the obligations and create the risk that concrete action would have to wait until the negotiation of protocols on certain issues. An instrument such as the WHO FTCC might establish more demanding obligations but increase the risks that the blockers do not ratify the instrument.
The proposals that have so far circulated in this regard, such as the Economic Commission for Africa’s technical report and associated briefing document; the Eurodad/Global Alliance for Tax Justice draft text for a UN tax convention; the South Center brief, the FACTI Panel report, and the report of the High Level Panel on Illicit Financial Flows out of Africa, imply different balances between substantive and procedural provisions. The Secretariat has published a document for informal discussion containing both a Proposed Outline of Draft Terms of Reference and an annex with an index of possible structural elements of the Convention itself. Complementary analyses have been published by Professor Sol Picciotto and other voices (for real time updates follow our rolling blog).
One way to seek the right balance is to explore for what combination of objectives, principles and specific provisions, using learning from the experience of other similar instruments, would increase the likelihood that all key issues could be addressed under a fair framework with sufficiently robust obligations within reasonable timeframes. This may require that the objective of the framework convention is broad enough to gradually build a framework for cooperation with the mandate to address any international taxation issue that Member States consider relevant. A second step would be to establish a set of comprehensive principles on the just distribution of obligations and benefits to be borne by the parties as part of the global cooperation framework on tax matters created by the instrument, in the way that the UNFCCC establishes, for instance, the principle of common but differentiated responsibilities between states. Finally, a series of more specific provisions could establish mandates for action and clear obligations on certain issues, but the operational details could be addressed in the negotiation of protocols. Tax Justice Network’s input to the first substantive session set out briefly the basis for a protocol on illicit financial flows, but on the basis that such a protocol should form a central element of the convention from the outset we identify the potential for its inclusion in the core text of the convention, rather than as an early protocol. Same can be done with other key issues agreed by State Members.
If the content of the framework convention defined this substantive framework of objectives, principles and obligations, the procedural provisions should be concerned to create an institutional structure that is strong enough to technically support the Conference of Parties and other bodies in the development of the Convention’s mandates. In addition to endorsing the proposals on the matter from the tax justice movement, the Tax Justice Network’s input proposed the establishment of a UN Centre for the Monitoring of Fiscal Rights – mandated with the task of administering key global public goods such as a global asset register, a public register for tax and fiscal policies, and a public register for corporate transparency – as well as the establishment of an independent secretariat.
The eventually agreed terms of reference will form the basis of a resolution at the next General Assembly, a resolution that will begin the formal negotiations of the convention.
As a conversation starter and an illustration of the potential of the UN framework convention on international tax cooperation, the Tax Justice Network offers a draft operative paragraph for this resolution.
Draft OP3
3. Requests the ad hoc committee, in developing the draft convention, to adopt a holistic, sustainable development perspective that considers interactions with other important economic, social and environmental policy areas, to take into account the needs, priorities and capacities of all countries, in particular developing countries, and to consider, inter alia, the following indicative elements:
general principles, including those of sovereignty and non-discrimination; of effective provision of tax information; of fair allocation of taxing rights; of mutual assistance and cooperation; and of transparency and disclosure;
definitions, use of terms and scope, including with reference to the formal UN statistical definition of illicit financial flows;
capacity-building and technical assistance, including support to developing countries and collaboration with international organisations;
review and monitoring of the convention’s implementation;
establishment of a Conference of the Parties, and main modalities including its mandate, procedures and schedule;
multilateral, automatic exchange of information about financial accounts and related asset classes, without the requirement for immediate reciprocity from developing countries;
good governance practices and transparency in financial transactions to prevent illicit financial flows and enhance the integrity of the international financial system;
international cooperation, coordination and transparency in the recovery of assets derived from illicit financial flows;
transparency of the beneficial owners of companies, trusts, partnerships and other legal vehicles, through public registers;
transparency of the economic activity of multinational groups through the requirement for annual publication of country by country reporting data at the company level, in line with the Global Reporting Initiative standard Tax:207 and/or other robust standards;
appropriate public disclosures including tax policies and practices, by national tax authorities to strengthen public accountability and effective cross-border cooperation;
common principles for effective and independent enforcement by tax authorities;
unitary taxation based on formulary apportionment, in order to ensure corporate tax is levied in the jurisdictions where the underlying real economic activity takes place;
dispute resolution procedures, including through mutual agreement;
common principles for the taxation of wealth;
the establishment of a UN Centre for Monitoring Taxing Rights, with responsibilities including:
a global asset register, combining public data components and components held privately for tax authorities and other enforcement bodies, to underpin the fight against illicit financial flows including tax abuse;
a UN public registry for tax and fiscal policies;
a UN public registry for corporate transparency; and
publication of regular analyses of progress, including in support of Sustainable Development Goals 16.4 (illicit financial flows) and 17.1 (taxation); and
the establishment of a secretariat for the convention, with responsibilities including support to the Conference of the Parties, and the UN Centre for Monitoring Taxing Rights.
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