Tax dodging and harmful tax competition remain major challenges to mobilising sufficient resources for development and public services. A landmark agreement reached in New York on 16 August 2024 could finally provide the international community with an effective tool to tackle these problems. After three weeks of intense negotiations, an ad hoc committee of the UN General Assembly agreed on the Terms of Reference (ToR) for the new UN Framework Convention on International Tax Cooperation. The adopted ToR outline both the path and the scope of the new convention.

The “Ad Hoc Committee to Draft Terms of Reference for a United Nations Framework Convention on International Tax Cooperation” of the UN General Assembly (UNGA) was established in pursuance of the mandate given by UNGA Resolution 78/230. The resolution had “recogniz(ed) the important role of taxation to close the sustainable development financing gap” and “emphasiz(ed) that a United Nations intergovernmental process for tax -norm shaping and rule-setting … would leverage existing strengths and address gaps and weaknesses in current international tax cooperation efforts and arrangements.” According to the FACTI Panel, a group of experts appointed by the UN, cross-border tax ‘optimization’ strategies by transnational corporations (TNCs) alone deprive public budgets of tax revenues to the tune of US$ 600 billion a year. 

A milestone in tax governance 

The new UN Tax Convention is intended to do nothing less than fill the gaping hole in the international financial architecture that is the absence of effective institutions for international tax cooperation. According to the Terms of Reference,  the Convention should “establish a system of governance for international tax cooperation capable of responding to existing and future tax and tax-related challenges on an ongoing basis.” It is expected that the new convention will be governed by a permanent global tax body, most likely in the form of a Conference of the Parties (COP) to the convention.   

A key element of the ToR is the chapter on “Protocols” which starts to define the scope of the new Convention. In total, there are 9 protocols, or thematic clusters, mentioned in the Terms of Reference:

1.  taxation of the digitalized economy;

2. measures against tax-related illicit financial flows;

3. prevention and resolution of tax disputes;

4. addressing tax evasion and avoidance by high-net worth individuals and ensuring their effective taxation in relevant Member States;

5. tax cooperation on environmental challenges;

6. exchange of information for tax purposes;

7. mutual administrative assistance on tax matters; and

8. harmful tax practices. 

Number 9, the “taxation of income derived from the provision of cross-border services in an increasingly digitalized and globalized economy” is to be tackled as a matter of priority, as an early protocol to be developed in parallel with the framework convention itself. In early 2025, governments will also select one of the first four protocol issues as another early protocol, to be finalized within the same timeline. The remainder will be negotiated by the new global tax governance body – the COP - that the convention will establish, in line with its mandate to address existing and future challenges. 

The revenue potential of addressing these issues is enormous. A briefing paper published by Global Policy Forum Europe and partners ahead of the UNGA committee meeting highlighted that a reform of the corporate tax system could generate US$ 500 billion annually, a wealth tax on high net worth individuals could generate an additional US$ 200 billion annually. A system of fair and effective environmental taxes would not only generate additional revenue, but would also have significant steering effects for sustainable development.

Political challenges remain

The political challenge remains that eight countries voted against the ToR, including the US, UK, Japan and South Korea, some of the countries that host a significant share of TNC headquarters. A fairer allocation of taxing rights, including to countries where TNCs make their profits or produce their goods and services, is expected to be a key outcome of the new UN convention. 43 countries abstained, including the 27 Member States of the European Union, but also a number of G77 members such as Argentina, Liberia, Singapore, Trinidad and Tobago, and the United Arab Emirates. However, it is a positive sign that all UN Member States have participated constructively in the work of the Ad Hoc Committee, and that the EU has switched from its no vote on Resolution 78/230 to an abstention on the Terms of Reference. 

In addition to the chair, the process will have 18 co-chairs, an unusually high number. It seems that a large number of countries want to keep a tight grip on the process.  Whether this is a sign of ownership or mistrust remains to be seen. The process outlined by the ToR foresees three negotiating sessions in each of the next three years, meaning that the new UN tax convention should be ready for adoption and ratification by member states by the end of 2027.