UN tax power play endangers OECD supremacy

According to sources, the UN has gained attention for its backing of a treaty to combat tax dodging that draws on prior multilateral initiatives among developing nations.

A UN tax convention, according to Alex Cobham, chief executive of the London-based think tank Tax Justice Network, might change how governments negotiate international tax issues pertaining to the digital economy.

"It could move rule-making on global tax from the OECD to the UN, finally lifting the grip that former colonial powers have continued to exert over global tax rules," he claims.

On September 26, during the General Assembly, UN Secretary-General António Guterres supported a convention on aggressive tax planning. His backing strengthens a political movement away from the OECD and may trigger protracted discussions on the two-pillar approach.

According to policy analysts, a convention to combat tax avoidance and evasion might aid developing nations in responding more effectively to the problems brought on by the digitalization and globalization of the economy.

The OECD's two-pillar approach to tax reform in developing nations in Africa and Asia is criticized as being unnecessarily complicated. According to modeling results, some states would prefer to include Article 12B in the UN Model Taxation Convention's 2021 edition in their tax treaties since it may generate more money than pillar one.

On September 30, the IMF released research that showed base-widening adjustments to corporate income taxes, including a worldwide floor under pillar two, would affect state revenue more significantly and long-term than rate increases alone.

The global anti-base erosion (GloBE) standards of Pillar Two have drawn criticism in poor nations since they only apply to organizations with consolidated sales of €750 million ($742 million), which does not include the majority of multinational enterprises operating worldwide.

Even if pillar two of the OECD's two-pillar strategy is now fully developed with international consensus and draft law, a UN treaty on tax planning may produce more equitable outcomes than pillar two. The UN is strained for time and lacks the leadership necessary to provide a more effective approach.

Given recent industry criticism in consultations on the OECD's two-pillar proposal, one tax director of a multinational corporation in Amsterdam finds it intriguing that Guterres chose to endorse a convention at this time.

"It could be possible to design a set of high-level rules to work alongside pillar two for more global alignment, but this just adds extra complexity to the end result," he says.

On September 30, the IMF added to the body of information about the effects of unilateral tax reforms on cross-border revenue. These unilateral actions raise the issue of international taxation in negotiations.

International policymakers place growing importance on maximizing tax revenues in developing countries since those countries rely more heavily than average on corporate income tax.

The tax director cautions, "If this is to become a new fair tax… we should make sure we do not double up the rules – it is already an administrative nightmare for companies."

"It is difficult to make global rules apply to different countries, since not all countries are the same when it comes to tax administration," he continues.

The UN's highest-ranking official supporting a new global tax treaty opens the door to greater discussions among states over tax certainty instruments as the digital economy quickly grows.

However, when it comes to the two-pillar solution initially, authorities are likely to adopt a long-term "wait and see" strategy.

The OECD two-pillar solution largely continues to be a political issue, according to Belema Obuoforibo, director of the International Bureau of Fiscal Documentation. Developing countries still have the right to not advance legislation in this regard.

In his address to the General Assembly, Guterres emphasized the urgent need for leadership to revamp the disjointed legislative framework for combating tax fraud.

He pointed to the significance of a tax convention in addressing this requirement, saying, "We need a global system of laws… consistent with the principles set out in the United Nations charter."

Finance ministers from the Economic Commission for Africa made remarks in Guterres' report regarding when talks on a treaty to deal with international tax fraud should begin.

According to Cobham, a UN treaty might assist poor nations in renegotiating a broader and more straightforward set of norms to regulate international tax issues.

"This is a significant moment after years of efforts in the global tax justice movement," claims Cobham.

While the OECD has long dominated tax negotiations, the UN is starting to gain ground as a result of the contribution of developing nations. Many of these nations support the Committee of Experts on International Tax Cooperation's activities, particularly with regard to Article 12B.

Since 2021, nations have had the legal ability to formally add Article 12B's regulations for the taxation of digital services under the UN Tax Convention in their double tax treaties. According to several tax experts who spoke with ITR, Article 12B has weakened the OECD's two-pillar approach and caused discord in the global tax community since nations that choose the UN's strategy may be left out of the OECD's framework.

The creation of worldwide tax policy by the UN has its own unique set of issues, according to Serge Bakoa, managing partner of the Paris-based legal firm HSTB.

"A tax convention could move rule-making away from the OECD, but how inclusive can rules be without correcting for the complexities that make the two-pillar framework economically sound?" says Bakoa.

In order to improve its ability for determining tax policy, the UN has been paying attention to tax justice initiatives. The high-level UN commission for financial accountability, transparency, and integrity (FACTI) calling for a tax convention in 2021 was a turning point.

Although the panel's work was completed a year ago, additional UN publications support FACTI's recommendations to provide countries the fiscal tools they need to handle today's tax difficulties.

"We could be at risk of starting from the beginning again if the OECD does not reach a critical mass of countries to implement its two-pillar proposals," Bakoa continues.

According to Bakoa, "this is actually a crucial moment to push for final legislation on pillar one and pillar two."

The UN Tax Committee will meet again on October 18 in Geneva, and the agenda is expected the following week. We may presume that the OECD will be paying close attention.

By fLEXI tEAM