Why the U.N. Vote on Taxes Matters

The United Nation’s General Assembly voted on Nov. 22 to form a committee to begin discussions on a “framework convention” on taxes–a major step forward in the U.N.’s bid to challenge the Organization for Economic Cooperation and Development as the globe’s standard-setter on international taxation. Despite the OECD's Two-Pillar plan to reform the international tax system–which is currently being implemented by countries around the world–those voting for the U.N. resolution said this could result in much more dramatic action to address developing nation concerns that tax competition and tax avoidance are draining the resources they desperately need to climb up.

In the United States, this was one day before Thanksgiving. But among tax officials it was those abroad who were most grateful for this development, as their U.S. counterparts either quietly or not-so-quietly seethed.

After all, through this vote a majority of the countries in the world explicitly criticized the 15% global minimum tax that has been touted as a major accomplishment of the Biden administration, as well as the best hope for stability in the tax world.

Reactions around the globe took on a “parallel universes” quality. Or the lack of reaction in some quarters. Many non-governmental organizations that have long criticized the OECD for allegedly excluding the concerns of developing countries, and not being aggressive enough to stamp out harmful tax practices, hailed the UN’s vote as a milestone in the history of taxes. But many other tax experts and professionals seemed to view it as barely being worth mentioning.

Who is right? Everyone, probably.

A year ago, when the U.N. first began this process, I wrote that it could be “another round of jockeying between the two bodies, which has gone on for years without much consequence.” Looks like I was wrong there, as the U.N. hasn’t taken a step like this before, with seemingly most of the developing countries in the world coming together to voice their disapproval of the OECD process.

This doesn’t mean that the U.N. will ultimately challenge the OECD’s role. But usurping the OECD isn’t the only way to change the global dynamics in international taxation.

The Tax Justice Network, a leading tax advocacy group, called the vote a "historic victory."

"Tax havens and corporate lobbyists have had too much influence on global tax policy at the OECD for too long," TJN chief executive Alex Cobham said in a released statement. "Today, we start to take back power over global tax rules that affect all of us."

"Groundbreaking," "democratic revolution," and "the most significant development in international taxation in the modern era" were some of the other words of praise for the U.N. vote.

Not quite everyone was as enthusiastic, though. Richard Murphy, the co-founder of the Tax Justice Network, who had a rather nasty falling out with the organization, largely over the OECD project, was much more cynical about the UN's chances at achieving a plan more effective than the OECD's Pillars.

"The U.N. could not, I very strongly suspect, have delivered anything better. To pretend otherwise is absurd, and does no one any credit," he said in a Guardian story from before the vote.

The U.N. resolution was at least impactful enough to elicit a response from the OECD. The organization's secretary-general issued a statement that didn't mention the UN directly, but touted its commitment to multilateral solutions including input from the developing world.

I’ll admit, I have a lot of innate skepticism of this, that perhaps I need to step over to view it clearly. Maybe there’s some beat jealousy, after covering the OECD for so long and seeing something else challenge its place. Or, maybe it’s that I became an adult in the era of the war on terror and the Iraq War, which gave me a pretty jaundiced view of the U.N.’s ability to mitigate disputes and prevent conflict among global powers. It could just be that the U.N. advocates are the boy who cried wolf, and now there’s a wolf.

My other basic bias is to view this as being less about the process–despite what many OECD critics claim–and more about the underlying policies. For instance, one big criticism that many have made about the OECD’s Two-Pillar process is that it didn’t seriously consider ditching the arm’s-length standard and moving to a formulary system. Keep in mind, the OECD did discuss formulary, which they called fractional apportionment. (See it mentioned in this 2019 report as one of three options under consideration for Pillar One, the plan to address digital taxation.) But they decided against it early in the process.

Would the critics have been happy if they’d dismissed it later in the process? Or if it was voted down in some public forum? Maybe, but I wouldn’t be surprised if the U.N. faces similar criticisms if they ever reject the formulary concepts. As someone who’s been covering government bodies for a long time, I’ve seen time and again how procedural concerns tend to become secondary to the results.

A key issue here, though, isn’t just the policy but how they will be carried out. The U.N. resolution calls for a “framework convention on international tax cooperation.” This is seemingly the most aggressive option outlined by a July report from the U.N. Secretary-General, which says that such a convention would be a legally binding agreement to “establish an overall system of international tax governance.”

Here's more:

A framework convention would therefore 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. 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.

To quote Keanu Reeves, whoa.

This would be a major paradigm shift in international taxes, which has never worked through this kind of multilateral mechanism. Even as the rules have been negotiated at international fora like the League of Nations and the OECD, it’s normally been carried out through bilateral treaties or agreements. Even recent multilateral agreements like the “multilateral instrument” to enact some parts of the 2015 Base Erosion and Profit Shifting Action Plan, and the proposed multilateral convention on Pillar One, didn’t change this precedent because they primarily amended existing bilateral treaties.

This U.N. seems to be following the model of trade agreements, which set up global agencies like the World Trade Organization with the power (in theory) to enforce multilateral agreements like the General Agreement on Tariffs and Trade. But taxes has always worked on a bilateral basis–countries acting out of their own self-interest, meeting one-on-one to hammer out agreements based on mutually agreed principles.

While OECD standards are technically optional, they often don’t feel that way because countries feel immense pressure to follow them, or miss out on the global economy. While OECD critics can claim this is why its policies are biased towards neoliberal principles, consider that backlashes to perceived tax avoidance have driven it to enact anti-abuse rules that countries have been quick to follow. Maybe OECD officials and representatives thought this was the right thing to do, but they were also clearly motivated by the desire to preserve their standards’ legitimacy so they could continue to serve their function.

Would a U.N. convention be able to achieve this level of widespread compliance? The only way would be for all countries to sign onto this binding convention, which is quite a task. What reason would compel skeptical countries, including the United States, to join? And how could the U.N. do this while remaining true to its stated values of inclusion and consideration of all countries’ views?

Let’s just say, if I had to bet on this happening, I’m not sure odds go low enough.

But that’s not the only way that this development could have an impact. The U.N. has undeniably earned a seat at the table now. Already, this dissatisfaction among developing countries has affected the game. The OECD in recent months has been bending over backwards to demonstrate its commitment to helping the Global South, and has argued that the Pillar One and Pillar Two agreements could bring developing countries much more benefits than they think.

A few years ago, then-OECD director of taxes Pascal Saint-Amans floated the idea of a “Pillar Three” devoted to the tax concerns of poorer countries. I wouldn’t be surprised if this concept makes a comeback.

One issue that has been holding developing countries back in these debates is that while they may have common interests, they haven’t yet come together to speak with a common voice or articulate common goals. This is a big step in that direction. Where it goes is anyone's guess.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

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LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• As expected, the Canadian government included its controversial digital services tax in its Fall Economic Statement, which it is moving to pass as legislation before the end of the year. Despite pushback from the United States and the tech industry, both in Canada and elsewhere, the new law contains few changes from what had been previously announced–a flat 3% levy on revenue for targeted online activities. As those who’ve been following this saga know, Canada is an outlier here, the only major OECD member to depart from a global agreement to hold off on DSTs until 2025. The announcement provoked another round of bipartisan condemnation from U.S. lawmakers and officials, but there’s still little in terms of a solid plan to retaliate, from either Congress, the U.S. Trade Representative, or the White House. Some still seem to be holding out hope for some sort of negotiation–after all, these are Canadians, some of the nicest people on Earth. 🙂
• Despite these challenges to its position in taxes, the OECD continues to forge ahead with plans to take on a greater role in other areas, including carbon pricing and climate change mitigation. On Monday it released a report on carbon taxes in 2023, finding that road tax rates fell in the past year, largely due to inflation. This demonstrates how fragile the consensus towards fighting climate change through higher prices on carbon-emitting activities can be, in the face of economic and political headwinds. But the report also showed that emission trading systems actually grew during this period. There are more than one way to skin a cat–part of the OECD’s planned role in climate change is to come up with a system that can coordinate all of these tax and non-tax methods of reducing carbon emissions, so any sign of increased enforcement is encouraging towards that goal.
• The OECD also released a study finding that nearly 40% of global profit is taxed at below 5%, a discouraging figure given how many policies have been implemented in recent years aiming to mitigate tax avoidance and other factors pushing down tax revenue. This report immediately became grist in the OECD/UN tax battle–the OECD said it’s why a global minimum tax is needed, while its critics said it’s yet more evidence that the OECD regime isn’t working. The nuance in the study is that much of this profit is held in high-tax jurisdictions, which raises some trickier questions about what the goal of a minimum tax should be. The OECD’s Pillar Two includes “jurisdictional blending”–it’s enforced based on a jurisdiction’s overall effective tax rate, not the tax rate of particular entities or streams of income.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Every week, a new character from the Golden Age of Superheroes who's fallen out of use.

Midnight, first appearing in Smash Comics #18. A replacement for The Spirit during wartime, he's a radio announcer who fights crime at night, inspired by a character he occasionally voices on-air. (The idea of radio characters existing in real life during the Golden Age of Radio is a common trope, especially with iconic characters like The Shadow.) A boxer and, apparently, a brilliant inventor of crime-fighting gadgets, he's aided in his quest by a talking monkey. (?)

Contact the author at amparkerdc@gmail.com.