On November 22, the UN General Assembly voted overwhelmingly to develop a global tax framework, despite last-minute attempts to derail the plan from wealthy countries represented under the Organization of Economic Cooperation and Development (OECD). The resolution paved the way forward for negotiations of a harmonised, inclusive and transparent global tax regime.
Global taxation policy and regime has so far been dominated by the rich and imperial powers represented under the OECD. India joined its counterparts from the developing countries on the proposal of the African Union, which is termed as the testament of collective resolve of developing countries of a fair, resilient and sustainable global economy. In this context, it is important to understand the challenges arising out of the existing global tax regime dominated for decades by the OECD, challenges therein and expectations from this UN resolution.
A paradigm shift
The resolution marks an evolutionary but watershed moment, transferring rulemaking authority from the OECD to the UN. OECD countries often favour their own tax regimes over UN mandates, driven by factors such as national sovereignty, prioritising control over globally standardised approaches.
Rich nations assert their capitalist economic model as a governance exemplar, arguing that their unique economic structures may not align with a universal tax framework. ‘Tax haven’ countries resist UN mandates, fearing a loss of competitiveness in attracting businesses and foreign investment. Historical attempts at global tax rules and regime within the UN framework have been hindered by wealthy nations and former imperial powers.
It is pertinent to note that the OECD’s 2021 reform proposal, targeting a standardised 15 per cent taxation, faced obstacles from private sector lobbying, corporate tax havens and even select OECD members. Despite over 130 countries signing, hurdles persist in representing the interests of lower-income nations. The UN tax convention could shift global rule-making from the OECD to the UN, breaking former colonial powers’ grip for legitimate, transparent and inclusive rule-setting. Momentum for a UN tax convention, seeking a more inclusive international tax architecture, has been steadily growing, as is vindicated by this UN resolution.
Resistance to a standardised global tax regime is recurring, as some OECD countries are wary of relinquishing their authority. With their wealth, these nations express practical concerns in implementing a standardised tax regime. Historical agreements within the OECD framework, coupled with political considerations, make it unpopular to resist the UN-mandated global tax regime. These countries believes that there is a perceived threat to the efficiency and effectiveness of their existing tax systems.
Multinational corporations (MNCs), predominantly from developed nations, strategically enhance profits through practices such as transfer pricing and base erosion and profit shifting (BEPS). By situating their business operations in low or zero-tax jurisdictions, MNCs optimise potential taxation gains. Consequently, developed nations, represented by the OECD, resist aligning tax policies with host countries to counteract these practices.
These major companies, wielding significant economic power, adeptly evade taxes in developing countries using tactics like transfer pricing manipulation, profit shifting to low-tax jurisdictions, creating intricate corporate structures, exploiting tax incentives and loopholes, leveraging offshore tax havens, and engaging in treaty shopping, among others. They may also manipulate intangible assets, strategically shift debt, employ thin capitalisation tactics, establish shell company networks, conduct cross-border financial transactions, and exploit weak law enforcement and oversight in developing countries.
As a result, developing nations globally face widespread tax abuse from MNCs and wealthy individuals, leading to an estimated annual loss of $483 billion in tax revenue, according to the Tax Justice Network. Simultaneously, rising global inflation and extreme inequality exacerbate the strain on government budgets.
Similarly, past probes by the International Consortium of Investigative Journalists (ICIJ), such as the Paradise Papers and Lux Leaks, exposed extensive corporate tax avoidance by major global firms. The Paradise Papers revealed tax strategies of over 100 companies.
A shadowy path forward
The UN resolution proposes creating an ad-hoc committee accessible to all UN member-states. This committee, limited to 20 members selected for gender and regional balance, must establish guidelines for a “United Nations Framework Convention on International Tax Cooperation” by August 2024. The resolution underscores the committee’s responsibility to address the needs of all countries, especially developing ones.
It advocates for a comprehensive strategy, intertwining economic, social and environmental policies, with a focus on combating illicit financial flows. The commencement of tax convention negotiations depends on the guideline agreement, potentially taking a year. Rich nations are likely to resist during these prolonged negotiations. Representatives from developing nations must stress broader socio-economic impacts, pointing out the effects of international tax evasions on poverty, human development, migration, conflicts, and the sustainable growth of developing countries. Achieving a swift, transparent, and effective global agreement on international taxation poses a challenging and uncertain path forward.
India supports the UN-led global tax regime, emphasising inclusivity and urgency. India’s stance is significant, geo-strategically and geo-economically, recognising the shortcomings of the current OECD-centric approach. It advocates for a framework considering the needs and capacities of all countries, especially developing ones. India underscores cooperation and swift action to combat international tax dodging, mitigating financial losses faced by all nations amid the growing operations of MNCs in developing countries in both international trade and investments.
The writer is a professor at IIFT New Delhi. Views expressed are personal