Tax policy experts Elisângela Rita and Kudzai Mataba were recently at the United Nations (UN) for the start of negotiations on the UN Tax Convention. In this article, they break down the key decisions and discuss how the convention can best address the challenges faced by developing countries.
Negotiations for the UN Framework Convention on International Tax Cooperation have officially begun. The aim of the convention is to create an international tax cooperation system to close gaps in existing tax frameworks that prevent many countries from collecting crucial tax revenues. Here’s a closer look at what happened at the negotiations and how the UN Tax Convention could tackle the challenges faced by developing countries.
Recent Developments in UN Tax Negotiations
During the negotiations, one of the main points of discussion was the decision-making process. The African Group, led by countries like Nigeria, Ghana, and Kenya, pushed for majority voting instead of consensus voting, arguing that the current consensus-based system allowed too much obstruction, particularly from developed nations. In contrast, developed countries, especially the European Union, advocated for consensus decision-making to ensure national sovereignty and achieve universally accepted agreements.
The result was a hybrid approach: a two-thirds majority for substantive issues and a simple majority for non-substantive matters when consensus fails. This compromise marks an important step forward, although consensus on decision-making processes remains a challenge, with some countries like the United States withdrawing from the process.
Tax Dispute Resolution Chosen as Key Focus
Another significant decision was on the focus of the second early protocol of the UN Tax Convention. While there was initial discussion around the taxation of the digital economy, the consensus leaned toward prioritizing tax dispute resolution. This issue has garnered widespread support as a critical element to leveling the playing field between developed and developing nations. Many developing countries face difficulties in resolving tax disputes due to limited resources, which often leads to delays and lost tax revenues. The UN Tax Convention provides an opportunity to establish a fairer and more efficient dispute resolution system to address these challenges.
Addressing Challenges Faced by Developing Countries
The UN Tax Convention holds significant potential to address long-standing challenges faced by developing countries. Some of the areas in which the convention could bring about transformative changes include:
- Taxing the Digital Economy: As digital operations often escape taxation in source countries, some nations have implemented Digital Service Taxes (DSTs) to capture this lost revenue. However, opposition from major tech-exporting countries, particularly the United States, has stalled progress. The UN Tax Convention could help simplify and strengthen the framework for taxing the digital economy, ensuring that developing countries don’t miss out on critical tax revenues.
- Tackling Illicit Financial Flows (IFFs): Illicit financial flows, including corruption and tax evasion, drain billions from developing countries annually. The Convention could help by establishing global definitions of IFFs, creating regulatory standards, and introducing measures to prevent illicit financial transfers.
- Addressing Wealth Inequality: High-net-worth individuals (HNWIs) often shift wealth to low-tax jurisdictions, depriving their home countries of significant tax revenues. The UN Tax Convention could introduce a global minimum wealth tax, helping developing nations capture more revenue while addressing global wealth inequality.
- Environmental Taxation and Climate Financing: With the growing urgency of climate change, developing countries need new revenue sources to finance climate action. The Convention could help align global tax systems with environmental goals, allowing developing countries to increase their tax base while supporting global climate efforts.
The UN Tax Convention could be a game-changer for developing countries, creating a more equitable tax system and addressing critical issues like digital taxation, illicit financial flows, and wealth inequality.
What’s Next for Global Tax Cooperation?
Looking ahead, negotiations will continue with sessions planned for at least three times a year, aiming to finalize the convention and its protocols by 2027. The success of these negotiations will depend on building trust and finding common ground between countries, especially from the Global South and Global North. Striking a balance between ambition and practicality will be key to shaping a UN Tax Convention that promotes fairer global tax cooperation and benefits developing nations.
