Creating effective institutions for international tax cooperation - New recommendations from the UN Secretary-General


Dollar bill
Dollar bill

By Bodo Ellmers

Countries around the world continue to lose almost US$ 500 billion every year to tax dodging and global tax abuse. At the request of United Nations Member States, the UN Secretary-General has now presented his report on “Promotion of inclusive and effective international tax cooperation at the United Nations”. The report recommends a major upgrade of the international tax architecture. In the best case, the gaping governance hole created by the absence of fully inclusive institutions with universal membership for tax norm-setting might soon be filled by a UN Framework Convention on International Tax Cooperation. Tax justice activists around the world have welcomed the report and are calling on UN Member States to take immediate action to make sure the recommendations are implemented.

Tax – a fragile pillar of development finance

Domestic resource mobilization can theoretically provide the most productive source of financing for development. Unfortunately, however, tax dodging is preventing this funding source from reaching its full potential. The dire situation means that governments all over the world, but primarily in the global South, have reduced capacity to invest in the public services and critical infrastructure needed to promote sustainable development. Both the new wave of austerity policies and the looming debt crises are a direct consequence of the inability to generate fiscal revenues.

Back in 2021, the report of the UN’s High-Level Panel on Financial Accountability, Transparency and Integrity (FACTI) already estimated the losses due to illicit financial flows at US$ 500 billion per year. Recent research by the Tax Justice Network (TJN) confirms these numbers. According to TJN, the world is losing US$ 472 billion annually to global tax abuse. Of this, US$ 301 billion is due to multinational corporations’ malpractice in shifting profits to tax havens, while the remaining US$ 171 billion is due to rich people stashing their assets in offshore financial centres.

To address these issues, the FACTI expert panel had already recommended that “the international community should initiate a process for a UN Tax Convention”. In October 2022, Nigeria – with solid support from other UN Member States and especially from the Africa Group at the UN – sponsored a UN General Assembly Draft Resolution on a “United Nations Convention on international tax cooperation”. The negotiations on the Resolution made it clear, however, that some Member States preferred a more cautious approach. The final UN General Assembly Resolution 77/244 therefore took a step backwards: it omitted to refer explicitly to a Resolution, and requested that the Secretary-General should prepare a report that analyses the current state of tax cooperation and outlines the next steps.

Participation by right, not by privilege

The Secretary-General’s report strongly emphasises the need to promote “inclusiveness and effectiveness of international tax cooperation in substantive and procedural terms”, as highlighted in the summary. It refers to the international agreement made at the Third International Conference on Financing for Development Conference in Addis Ababa in 2015 that “efforts in international tax cooperation should be universal in approach and scope”.

This pledge had remained unfulfilled in the eight years that have passed since the Addis Ababa Summit. This has had dire consequences for the whole sustainable development Agenda, which the Action Agenda agreed at Addis Ababa was supposed to finance. In the meantime, piecemeal reforms have been taken forward under the leadership of the Organisation for Economic Co-operation and Development (OECD). But, as the Secretary-General’s report finds, these have failed the test on both inclusiveness and effectiveness.

When it comes to inclusiveness, the OECD only has 38 Member States, most of which come from the high-income end of the scale. This means that the vast majority of the 193 UN Member States don’t have a seat at the negotiation table and whole categories of countries, such as the Least Developed Countries (46 countries), have no voice at all. The OECD has set up an “Inclusive Framework” to enable participation by non-Member States in OECD-led processes; in the meantime, 126 UN Member States have joined. However, countries could only join on the precondition that they implemented previous OECD agreements, many of which have been detrimental to their own needs and interests. And critical observers have found that the Inclusive Framework operates in a way that disadvantages non-OECD members.

The procedural shortcomings are also reflected in the outcome. A recent agreement on corporate taxation – the so-called “Two-Pillar Agreement” – has been designed in such a way that it is not expected to generate substantial additional revenues for countries in the global South. Actually, while tilted in a way to advantage the home countries of big corporations in the global North, the Two-Pillar Agreement is not expected to generate much revenue in the North either. So it is not effective when it comes to addressing the US$ 500 billion-loss-per-year problem.

Having reviewed the current state of affairs, the Secretary-General’s report concludes: “In the spirit of the Addis Agenda, inclusive and effective international tax cooperation requires that all countries are able to effectively participate in developing the rules that affect them, by right and without pre-conditions.”

Towards an effective global tax architecture

In his report, the Secretary-General presents three options for the Member States to take forward:

  • A multilateral convention on tax
  • A framework convention on international tax cooperation
  • A framework for international tax cooperation.

The last option is the least ambitious one. It would be of a voluntary nature. The first two options are the more ambitious governance innovations, and are legally binding for the countries that ratify the convention. A multilateral convention would be a rather static legal framework to improve and regulate international tax cooperation. The scope would need to be defined by Member States, and depends on the common denominator that the United Nations is able to find.

framework convention in turn, the Secretary-General writes, would establish an “international system of tax governance”. The most famous existing example is the UNFCCC – the UN Framework Convention on Climate Change. Similar to the UNFCCC, a framework convention could also create a “plenary forum for discussion among States that is endowed with the authority to adopt further normative instruments that States could then become a party to”. This is equivalent to the Conferences of the Parties (COPs), the UN Climate Summits that continuously develop international climate change policies.

A key advantage of a framework convention is that it creates a dynamic framework. Diverse protocols can be added over time, which allows for the gradual expansion in the scope of international tax cooperation, and also takes on new challenges in global tax policies where they emerge. For those reasons, the idea of a framework convention enjoys most support from independent tax justice activists, as reactions by TJN and Eurodad to the report confirm.

The caveat is, however, that the possibility to add further agreements down the road might tempt Member States to procrastinate over taking the necessary steps now. The hesitation by some Member States to adopt draft conclusions on the UN Tax Convention when it was on the UN General Assembly´s agenda last year has already caused an unnecessary delay of a full year. The price tag for this hesitation was another US$ 500 billion in tax revenue lost to public treasuries all over the world, and an equivalent windfall profit for corporate and individual tax dodgers. This is an amount that’s equivalent to the size of the UN’s Sustainable Development Goal (SDG) stimulus package, which is widely considered as the international community’s final chance to save the 2023 Agenda for Sustainable Development.

A new Resolution on a UN Tax Convention is expected to be tabled by UN Member States before the end of the year.