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Developing tax rules for a globalised world

Alex Cobham 31st July 2024

The European Union can be the biggest winner from the United Nations tax convention.

The member states of the European Union are among the biggest losers of revenue from cross-border tax abuse by multinational companies and wealthy individuals. EU citizens consistently identify the fight against such abuse as a priority for their governments and the EU has repeatedly advanced leading proposals. Yet these have consistently foundered on opposition from the United States via the Organisation for Economic Co-operation and Development or from individual EU members seeking to benefit from undermining the tax base of their neighbours.

Over the coming fortnight, the draft terms of reference will be finalised for the negotiation of a comprehensive United Nations convention which would provide the biggest overhaul of international tax rules for a century. EU governments will now have to show their cards: either they will commit to the global process, knowing it is the best chance to curb the hundreds of billions lost to tax abuse each year, or they will seek to sabotage progress. There is a great deal to be won, and the EU is likely to be the biggest winner of all—if it seizes the opportunity.

US blocking progress

The negotiations of the Ad Hoc Committee to Draft Terms of Reference for a UN Framework Convention on International Tax Cooperation have gone well thus far. While some OECD countries, including the United Kingdom and the EU, opposed the initiating resolution passed by the UN General Assembly last December, participation in the negotiations this year has been universal. And while the UK and EU have still sought to limit their scope, only the US has sought to block progress. Moreover, on a number of issues—such as wealth taxes—support has straddled the divide between the OECD and the G77 countries representing the developing world.

The aim of the framework convention is to create the first globally inclusive body for decisions over tax rules and standards. The US opposition seems to be based on a desire to maintain the dominance of the OECD—a group of rich countries which has set tax rules with a largely global range since 1960.

The US has unparalleled power to set the rules at the OECD, and indeed to break them with impunity. For example, it is the only significant financial centre which refuses outright to participate in automatic multilateral exchange of information on offshore accounts, through the OECD’s Common Reporting Standard or otherwise. Yet the standard only became possible when the US administration unilaterally introduced the Foreign Account Tax Compliance Act, requiring automatic information from all others, while the EU had supported a multilateral mechanism since its introduction of internal information exchange a decade earlier.

Effective veto

On corporation tax, the US is responsible for the central design of pillar one of the OECD’s long-awaited ‘two pillar’ proposals, allocating multinationals’ taxation to individual states. If its internal political problems mean it will be unable to ratify this mechanism, it has however ensured that it enjoys an effective veto on any other country enacting the approach. The US will also be unable to introduce pillar two, the global minimum tax—despite being its loudest cheerleader—and various political representatives have threatened countermeasures against countries that seek to make the rules binding on US multinationals.

Even though EU members have supported throughout the OECD process to tackle ‘base erosion and profit shifting’, they will be unable to enact pillar one unless the US allows. The introduction of pillar two is so far limited to the EU and a dozen or so countries—mainly tax havens seeking to stymie any effect by giving offsetting subsidies to companies in scope. Only limited benefits are possible at best, due to heavy watering down of the proposal with the support of EU members such as Ireland and Hungary.

Two dynamics undermine the EU’s attempts to fight tax abuse. First, despite the union comprising a clear majority of OECD members, the US dominates and administrations of all political persuasions have been opposed to meaningful steps forward. Indeed, the US has fully earned its place atop the Financial Secrecy Index, posing the greatest risk globally of facilitating illicit financial flows, including cross-border tax abuse. It is also the leading opponent of multinational companies’ country-by-country reporting, a key transparency measure which has been shown to curb tax abuse where introduced.

Secondly, the EU’s own governance and, in particular, the requirement for unanimity on tax questions allows any member state to prevent progress. Whether that comes from the most aggressive corporate-tax havens (the Netherlands, Ireland) or those most committed to a ‘race to the bottom’ on tax rates (Hungary, Estonia), support from US actors tends to be a common feature—from multinationals and their professional enablers, including the big four accounting firms, to right-wing political actors that find common cause with more extreme EU member states.

Outright attack

Even seasoned country delegates to the UN were however taken aback when the US launched an outright attack on the process towards a framework convention on tax. Its representative claimed that OECD success in areas such as corporate-tax rule-setting and the automatic exchange of information on financial accounts—areas of greatest Washington obstruction—meant the OECD’s monopoly on international tax rule-setting should be sustained.

Within a UN process, the US cannot exercise a veto if other countries wish to move ahead. And agreed measures—for example on international corporate taxation—can be designed such that they are effective against actors, including multinationals, from non-participating states. US threats of countermeasures, meanwhile, lose much of their terror when applied to the collective signatories of a globally inclusive and openly negotiated instrument.

In addition, the transparent nature of negotiations and limited role for the UN secretariat greatly reduce the scope here for backstage manipulation of outcomes. As has been seen with the UN Framework Convention on Climate Change, there are moments where public scrutiny can make even the US adopt a more constructive position. Other governments, too, have found they are better able to stick to publicly stated positions when US pressure is visible to their publics and civil society.

No unanimity requirement

The UN approach also has potential when it comes to the EU’s unanimity dilemma. There is no requirement for unanimity within UN negotiations. These are likely to follow General Assembly rules, which are based on a preference for consensus but with potential for majority voting when time requires it and the possibility of super-majority votes for the most important decisions.

Within the ad hoc committee, now in session until mid-August, different EU members have already indicated quite different positions, on wealth taxation for example. With the broad support of G77 countries for progressive tax measures and more effective co-operation, sympathetic EU members can seek constructive engagement on a positive agenda while any objectors are free to state their case but unable to veto global steps for the benefit of all.

Domestically, this is an opportunity for EU countries to show leadership on issues consistently near the top of voters’ concerns. Internationally, the union has a chance to rebuild some of the trust in its integrity and solidarity lost as a result of the inconsistent positions taken with respect to Russia’s full-scale invasion of Ukraine and Israel’s destruction of Gaza.

Common cause could be found with the Africa Group and the G77, with the prospect of common benefits. EU members would be among the largest winners in revenue terms from putting an end to cross-border tax abuse, while G77 members would benefit most from re-establishing a fair distribution of global taxing rights.

Meeting international commitments to tax co-operation that date back to 2015, while official aid has stagnated and many developing countries face unsustainable debt burdens, would be a valuable signal of goodwill which would support progress on their public finances. Overall, the UN convention provides the best chance to overturn the unaccountable domination of the US over tax rules, to ease the tyranny of the EU’s unanimity requirement and to create an international-taxation system that is, finally, fit for purpose.

Alex Cobham
Alex Cobham

Alex Cobham is an economist and chief executive of the Tax Justice Network.

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