Find the original article by Latindadd and RJFALC here.
Questions and Answers from the Negotiations of the Terms of Reference of the United Nations Framework Convention on International Tax Cooperation
by:
Nathalie Beghin, President of Latindadd
Adrian Falco, Tax Justice Coordinator of Latindadd and Secretary of RJFLAC*
Luis Moreno, Director of International Taxation of Latindadd and Chair of GATJ
*The regional network of GATJ in LAC.
Introduction
From July 29 and August 16, 2024, the final round of negotiations for the Terms of Reference of the United Nations Framework Convention on International Tax Cooperation (UN Tax Convention) took place at the United Nations Headquarters in New York. La Red de Justicia Fiscal de América Latina y el Caribe (RJFALC) and Red Latinoamericana por Justicia Económica y Social (Latindadd) were active participants in the negotiations, as members of the delegation of the Global Alliance for Tax Justice (GATJ).
What is the United Nations Framework Convention on International Tax Cooperation?
The present international tax system is outdated and obsolete. Technological advances and profit shifting makes it impossible for many governments around the world to collect taxes from companies operating in their territories. As a result, more than ten years ago people began to think about how to update the rules of the game.
The creation of a global “tax body” was proposed by civil society; an international space where tax rules could be discussed at the global level. This tax body would address issues including tax abuse. Currently, multinational corporations use tax havens to avoid paying taxes which results in an enormous amount of illicit financial flows. Year after year, these flows are draining our countries. And, this tax body has a novel characteristic, that it should be equitable, so that all the countries that make up it have equal voice and vote.
The fight for global tax justice resulted in a victory on November 23rd, 2023 when States, in response to a text tabled by the African Group, approved the beginning of negotiations for a UN Tax Convention.
This past August 16th, 2024, in another key step forward, the Terms of Reference (TOR) for the UN Tax Convention were approved within the framework of a specific Ad Hoc Committee. These TORs are the reference for negotiating the Convention. They define the principles, objectives, commitments, deadlines and resource needs.
Next, the UN General Assembly must approve the terms of reference which will go for a vote at the coming session this fall.
Then, a new Committee made up of UN member countries will be established for the negotiations of the Convention and its protocols, which are like the rules of engagement that are in the Convention. The entire process is expected to go until 2027.
Why do we need international tax cooperation?
Every year, countries lose huge amounts of public resources due to tax evasion and avoidance by multinational corporations and wealthy individuals. For example, according to the Economic Commission for Latin America and the Caribbean (ECLAC), governments in the region fail to collect nearly 6.3% of GDP annually as a result of tax abuses. This figure is equivalent to the region’s annual health budget.
Unfortunately, the drain on resources does not stop there. Countries grant tax incentives for which there is no evidence of their effectiveness. ECLAC estimates that tax privileges in the region correspond to about 4% of the countries’ GDP. This percentage is the same as the region invests in public education.
Thus, it is clear that 10% of the regional GDP disappears due to these two categories alone. With these resources, it would be possible to guarantee the realization of human rights by addressing the enormous challenges of today such as hunger, poverty and climate change.
To stem this loss of budgetary resources, countries need to cooperate with each other, because tax abuse knows no borders. Governments therefore need to act collectively to:
—end tax havens;
—combat illicit financial flows;
—prevent the granting of ineffective tax incentives that lead to a race to the bottom between countries; (tax competition)
—make multinationals pay taxes in the countries where they generate their profits;
—have automatic exchange of tax information between countries; and
—establish rules that allow for fairer and more inclusive tax processes, among other issues.
Why is the UN Tax Convention important?
So far, discussions on international taxation have taken place at the OECD with the support of the G20. However, the agreements reached there do little or nothing to respond to the demands and needs of countries in the Global South. This is why there was a movement led by the African Union, supported by the G77, to move negotiations from the OECD to the United Nations. This move was successful and at the end of 2023, the UN passed a resolution that launched the process of creating the UN Tax Convention, which is currently being negotiated at the UN.
There are many reasons for agreeing to a UN Tax Convention, but four stand out:
1) Mobilize additional, new, accessible and debt-free public tax resources that can be used to realize human rights and combat the impacts of climate change.
According to estimates by specialists [1] , taxing individuals with large fortunes would raise between US$ 250 billion and US$ 2.1 trillion. This amount is several times more than what the countries of the North have committed to mobilize to support the countries of the South in the fight against climate change, of US$ 100 billion per year. It is even many times higher than what UNEP has calculated is needed to implement national adaptation priorities, of US$ 387 billion per year [2] .
Regarding tax incentives, according to IISD [3] , fossil fuel subsidies amount to nearly US$ 1 trillion worldwide and a large part of this is made up of tax incentives. The gradual elimination of these subsidies, in addition to contributing to reducing greenhouse gas emissions, would allow financing the energy transition.
2) Promote greater equity by having corporations and very wealthy individuals, who currently pay no or very little taxes, would finally begin to contribute.
3) Promote a more inclusive and fair global debate. Having the Tax Convention at the United Nations is also important because in this space all countries have a voice and there are rules for the participation of civil society. The UN is imperfect, but it is certainly more inclusive than the OECD, where countries in the Global South do not have the right to vote and civil society participation is prohibited, where sessions are not public and documents are only available in English.
4) Influencing national tax agendas. Indeed, this global debate on tax cooperation has repercussions on the agenda of countries. For example, the issue of taxation of large estates, which Brazil defends at the G20, allows us to act at a local level in defence of a more progressive tax system, and it also allows us to fight for tax justice, since a large part of our inequalities, including those of gender and race, are produced by our extremely regressive tax systems.
What were the main results of the negotiation of the ToR of the Convention?
Three weeks of intense debates, negotiations behind open and closed doors. Voices from “interested parties” such as civil society, academia, the private sector and at times the delay of the process due to small, major disagreements about what “could” or “should” be worked on in relation to the scope of the text under negotiation.
In these international forums, the letter of the agreement counts heavily. What is written is what matters, because if it is not written, it does not exist. Thus, we highlight the main results of this second and final round of negotiations (the first took place at the beginning of 2024).
Positive aspects
The articulation and unity of the African Union has always been valued. The 55 States that comprise it have a common colonial past and strong solidarity. It was they who pushed, built and embodied the words that we repeat with ease today: “Tax Convention at the United Nations.” Their work served as inspiration for civil society around the world, including Latindadd, the Tax Justice Network of Latin America and the Caribbean and the Global Alliance for Tax Justice, who fully supported their proposals to pave the way for this reality that brings back to us the serious work of coordinated countries.
The countries of Latin America and the Caribbean also seem to have been infected by this reality. Although there was no explicit orientation to vote as a block, the facts shows us that at least they voted in a coordinated manner for the approval of the ToR. Except for Argentina (which abstained), the Dominican Republic (absent) and Venezuela due to a membership issue, the rest of the region sent two clear messages with its positive vote. The first, the OECD does not represent the countries of the Global South. It is clear the need to a change where the tax rules are developed. The second, there is a need for concrete reforms that help developing countries to build their own destiny with genuine public resources and outside the trap of indebtedness, tax evasion, and the flight of foreign currency to tax havens. The countries of the region that are part of the OECD (Colombia, Mexico, Chile and Costa Rica) were key to constructing these messages.
Also worth mentioning is the inclusion of concepts such as “justice, equity and effectiveness” and the incorporation of a human rights perspective. Addressing the issue related to the unfair allocation of tax rights that disproportionately affects developing countries was also present, although it is a central issue that the OECD does not even mention. The inclusion of sustainable development is a key concept included and the Sustainable Development Goals. Mention was made of a reform of the international corporate tax system, the need to tax cross-border services in a digitalized and globalized economy and finally to tax high net worth individuals, who typically avoid taxes.
The ToR explicitly mentions the equal participation of all countries in the debates and decision-making. This is an essential demand of the countries of the Global South due to their exclusion from the spaces for debate within the OECD. Finally, the inclusion of the participation of civil society, academia and unions stands out.
Negative aspects
The Terms of Reference do not explicitly mention key concepts such as the “progressivity” of tax systems, nor do they refer to gender equality or improving public services. These issues have always been a permanent demand. A negative point was also the elimination of the undermining of tax systems by strategies linked to the “ race to the bottom”. Nor is there any mention of the importance of having registers of final beneficiaries or a global register of assets, nor is there any record of the effective taxation of extractive industries. There is no mention of the need to review or evaluate tax incentives.
On the other hand, the member countries of the OECD and the United States were relentless in their diplomatic, underhanded defense of those global corporations and wealthy people who permanently strive to maintain their power. The current system comes at the expense of the stagnation of hundreds of countries, especially in the Global South, which are relentlessly seeking to break the chains of debt and tax regressivity to achieve tax justice that will allow growth with development for all.
What are the next steps? [4]
The Ad Hoc Committee’s terms of reference will be submitted to the General Assembly, which will vote on the text during the UNGA’s 79th session, which begins this September 2024.
If adopted, the Assembly would entrust the drafting of the UN Tax Convention and the two early protocols to a negotiating committee led by Member States, which would meet over the next three years. The negotiating committee would then submit a final text to the General Assembly for consideration in the first quarter of the 82nd session, in accordance with the terms of reference.
All 193 UN member states could vote on a finalized UN global tax treaty by 2027. The UN Tax Convention would have to be adopted by the General Assembly, after which it would be open to signature and ratification by all member states.