The Organisation for Economic Cooperation and Development (OECD) and Group of 20 (G20) agreed in 2021 on an Inclusive Framework on Base Erosion and Profit Shifting, aimed at limiting tax avoidance, ensuring the coherence of international tax rules and establishing greater global tax transparency.
But the agreement was far too limited in scope, requiring only very large multinationals to allocate a small share of their global profits to the countries where their customers are located. The convention that would implement even this limited requirement has yet to be ratified.
The framework also agreed a low minimum tax rate for multinationals of 15 per cent, well below these countries’ current average corporate tax rate of 25 per cent and lower than the 21 per cent minimum rate proposed by the US. Yet another flaw in the framework is that signatories would be required to avoid unilateral measures such as taxes on digital services. Overall, benefits to developing economies were minimal.
Fernando Haddad, Brazil’s finance minister, speaks during the G20 finance ministers and central bank governors’ meeting in Rio de Janeiro, Brazil, on July 26. Photo: Bloomberg
Today, however, two initiatives are under way that represent important improvements on the framework. First, last week in Rio de Janeiro, G20 finance ministers agreed to work together to ensure that ultra-high-net-worth individuals are taxed more effectively.
Brazil made such an agreement a top priority of its G20 presidency. While the details have yet to be decided, one possible approach would be to impose a 2 per cent global wealth tax on the world’s billionaires in US dollar terms. That is roughly 3,000 people.
The second promising initiative is a United Nations framework convention on international tax cooperation, negotiations for which are now under way in New York. The resolution to negotiate such a convention was overwhelmingly approved by the UN General Assembly last November.
According to the “zero draft” released in June, the convention should include commitments on a “fair allocation of taxing rights, including equitable taxation of multinational enterprises” and “effective taxation of high-net-worth individuals”. It should also ensure tax measures contribute to addressing environmental challenges, guarantee “transparency and exchange of information for tax purposes” and enable “effective prevention and resolution of tax disputes”.
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Former US president Donald Trump’s company found guilty in tax dodging scheme
Former US president Donald Trump’s company found guilty in tax dodging scheme
How should the final document reflect these commitments? For starters, the convention should reallocate taxation rights fairly among all countries where firms do business. If a company engages in substantial business activity in a country, it should have to pay taxes there.
The convention should also include a 25 per cent global effective minimum tax on multinationals’ profits, as well as a tax on capital gains. It should introduce minimum standards for the taxation of the richest people globally and each country’s wealthiest residents, including anti-avoidance instruments such as a global minimum income tax.
The convention should include coordinated mechanisms for digital services taxes and clear criteria for taxing activities associated with the exploitation of natural resources. In addition, it should require public, country-by-country reporting of multinationals’ economic activities and enshrine common principles for ensuring the transparency of wealth ownership.
Angelo Pisani, former lawyer of late Diego Maradona, symbolically places the papers of the ruling of Italy’s highest court that established that Maradona was not a tax evader in the shrine with the former Napoli player’s memorabilia in front of the mural that portrays him in the Quartieri Spagnoli of Naples, Italy, on July 5. In January, the Supreme Court of Cassation in Rome cleared the late football legend of tax evasion charges. Photo: EPA-EFE
Finally, the UN convention should establish a system of governance for international tax cooperation. To this end, either the UN Committee of Experts on International Cooperation in Tax Matters could be transformed into an intergovernmental organ or a new UN organisation could be created.
Such reforms would go a long way towards correcting the economic distortions generated by a handful of CEOs and ultra-wealthy individuals. But while there is reason to hope that they will be implemented, the political barriers to progress must not be underestimated.
Most developed economies voted against the UN resolution to establish the tax convention. One hopes that, both in the current negotiations and during next year’s UN Conference on Financing for Development, these countries will come to their senses and recognise that effective international tax cooperation is in their best interest.
José Antonio Ocampo, a former UN undersecretary general and former minister of finance of Colombia, is a professor at Columbia University, a member of the UN Committee for Development Policy, and a member of the Independent Commission for the Reform of International Corporate Taxation. Copyright:Project Syndicate
