By (Mrs) Amb Narinder Chauhan
In a historic move, the resolution A/C.2/78/L.18/Rev.1, tabled by the African Group under the title “Promotion of inclusive and effective international tax cooperation at the United Nations”, was voted on November 22, 2023, at the UNHQ in New York. The resolution was passed with 125 votes in favour of the tax Convention, with 48 votes against, and 9 abstentions. India, along with other BRICS nations-Brazil, Russia and China, voted in favour while the US, UK, Netherlands, Switzerland, Japan, France, and Germany were among those who opposed the resolution. This means the global tax reins will shift from the Organisation for Economic Cooperation and Development (OECD) to the UN where the developing countries will have a larger role in setting the rules for an equitable and effective global tax system. The UNGA voted overwhelmingly despite last-minute attempts to derail the plan from wealthy countries including the UK, US and the entire European Union (EU) bloc.
For decades, the OECD-a group of 38 mostly high-income countries that includes the UK and the US – has dominated international tax policy. But in recent years criticism over the outsized power wielded by wealthy countries in its closed door decision making has grown, including at the top levels of the UN. Earlier this year, UNSG said in a report that enhancing the UN’s role in shaping policy was “the most viable path for making international tax cooperation fully inclusive and more effective.” That language was echoed in the newly adopted resolution.
India has supported the African Group in this move which is expected to achieve a fair share of taxes to the source jurisdictions where the consumers are based like India, as the current tax rules are biased towards capital exporting countries. Initially there was hope that negotiations at the OECD would deliver a solution, but the outcome left African countries in particular sorely disappointed at a tax deal ‘for rich countries but also for the rich in rich countries’. The first pillar of the reform considered how to tax the biggest multinationals: a hundred or so companies with global revenues exceeding $20b a year in return for consuming countries signing away taxing rights. This straightaway limits its relevance in Africa, where few businesses operate on such a scale. The signing away of taxing rights is a particular sticking point for Nigeria and Kenya, which both have digital services taxes of their own and the deal meant these countries would give up more than they gained.
There is also disappointment about the second pillar of the reform, which sets a global minimum corporate tax of 15%, as against the 25-30% in African and other developing countries. The bottom line is that looking at the two pillars together or in isolation, there is not enough money in it for African and other developing countries to make it worth their while participating in a forum where their concerns are largely ignored. The African Tax Administration Forum (ATAF), a network of tax officials, for example, no doubt provided technical support to African countries in the negotiations thereby fostering pan African unity and tax expertise, but the process was not inclusive as only half the African countries were represented at the negotiations. The negotiations were at a frantic pace, with documents circulated in the evening for commitment by morning, even the cost of staying in Paris was prohibitive. This explains why African countries revived their long standing demand: to shift the tax conversation to the UN where they would be heard.
In May, 2023, African finance ministers called on the UN to start negotiations on a tax convention, similar to the convention that already underpins global talks on climate change. In September the UNSG announced its willingness to support it. The draft resolution was accordingly tabled by Nigeria in October, 2023 on behalf of the AU member states. The AU is increasingly empowering itself and assuming a leadership role in addressing the collective concerns of its 54 member states that include some of the poorest in the world.
A group of finance ministers from the EU warned that a UN tax convention would risk duplicating OECD led efforts. According to the UN, that position contradicted the European Parliament’s support for a UN tax convention in its report on “lessons from the Pandora Papers” in response to the 2021 tax haven investigation. Other investigations such as the ‘Paradise Papers’ and ‘Lux Leaks’, have highlighted the staggering scale of corporate tax dodging by some of the world’s biggest companies.
The Paradise Papers, for instance, exposed tax manoeuvres by more than 100 corporations, including Nike and Apple, the latter having shifted profits around the world to accumulate $252b offshore. The Tax Justice Network warned that countries could lose nearly $5 trillion in tax revenue over the next decade as multinationals and wealthy individuals continue to use tax havens to whittle down their tax bills. The report identified four countries among the jurisdictions enabling the loss of public money: the UK, the Netherlands, Luxembourg and Switzerland, all also members of the OECD.
The new UN resolution calls for the creation of an ad hoc intergovernmental committee open to all UN member states with an office of no more than 20 members, elected with gender and regional balance in mind, which will be tasked with establishing the terms of reference for “a UN framework convention on international tax cooperation”, by August 2024, whereafter all UN member states will be invited to join the intergovernmental negotiation process, regardless of their vote. The budget for the new intergovernmental tax process will come up for approval at the UN in December 2023.
Given India’s size, population, technical expertise and global economic standing as a country that voices developing countries’ concerns, it would be an ideal candidate for inclusion in the ad hoc intergovernmental committee, the terms of reference of which could include aggressive tax avoidance, evasion, illicit financial flows, recovery of stolen assets, digital economy taxation, and consideration of the perspectives of source countries etc.
Although we are not still there yet, but a beginning has been made. The adoption of a unified, UN led framework convention for international tax cooperation, is expected to open doors to significant economic advantages. For emerging economies, this would mean greater ability to mobilise domestic resources for development projects and social welfare programmes. For more developed countries, it promises a level playing field, reducing instances of tax evasion undermining economic fairness. The fact is many OECD countries had started losing faith in the capability of the body to address their concerns. Moreover, recent data from the IMF suggests that improving international tax cooperation could significantly reduce illicit financial flows that not only deprive critical funding but also fuels crime, destabilising societies. With this, the UN starts to take back power over global tax rules that affect all.
The author is a former Indian Ambassador.
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