“Although everyone likes to joke about how things take forever at the U.N., actually the U.N. tax committee has delivered a whole set of things quite quickly,’’ says economist Alex Cobham of the Tax Justice Network.
What do you get when you put complex international tax reforms into a multilateral negotiation format involving the United Nations’ 193 member states? Common sense would say progress at the pace of a snail, or maybe a tectonic plate.
But by multilateral standards, the U.N. is breaking speed records on international tax. Delegations met in Nairobi, Kenya, in November ahead of a target to get a draft text on international tax cooperation in front of the General Assembly by 2027.
“Although everyone likes to joke about how things take forever at the U.N., actually the U.N. tax committee has delivered a whole set of things quite quickly,” Alex Cobham, economist and chief executive of the Tax Justice Network, an international tax advocacy organization, told Envoy.
“We’ll [soon] start to see what this is going to look like in terms of how ambitious it will be,” he said.
The spur in the U.N.’s side on taxes has been the degeneration of a rival process at the Organisation for Economic Cooperation and Development (OECD), a group of wealthy countries that was formed in the 1960s to take the reins of international finance from the U.N. as the winds of decolonization were blowing across the globe.
As that process has languished, even OECD member countries are getting behind the U.N. initiative, growing increasingly worried about losing substantial national revenues to the lack of a big-picture accord.
Nearly half a trillion dollars of global government revenues are lost every year to the use of tax havens by large businesses and wealthy people, according to research by Cobham’s organization. In 2023, the OECD estimated that its global minimum tax would pull in $220 billion, roughly 9 percent of global corporate income tax revenues, — but that was before the U.S. effectively pulled out. “In the context of the shortcomings of the OECD agreement, the U.N. tax convention emerged,” Vicente Silva, senior policy advisor at the EU Tax Observatory, told Envoy. “The main challenge is how we can make both processes interact, because neither institution will disappear in the near future, and both have important and complementary roles to play.”
Beneath the often deliberately obscure and acronym-laden legal language, international tax law boils down to two simple questions: Who pays the taxes, and how much do they pay? Those questions are the so-called “two pillars” of the stalled-out OECD arrangement on international business taxes.
Agreement on the first pillar – which would have taxed companies’ profits according to the location of their customers, as opposed to their headquarters – missed a 2024 deadline and is considered by most in the tax world to be dead in the water. The second pillar – which established a minimum 15 percent tax rate on company profits – has moved ahead, but without the participation of the United States, the largest economy in the world in nominal terms.
In place of the second pillar, the U.S. announced an arrangement with the Group of Seven (G7) large economies in June that would crucially exempt it from the OECD’s profit tax requirements. To make sure the OECD’s tax rule would not apply to American companies, U.S. lawmakers included what was intimidatingly termed a “revenge tax” on foreign capital in a large domestic bill passed over the summer. The provision was sufficient to scare the OECD off U.S. turf, and was dropped from the final version of the legislation.
Congressional tax officials in Washington have said they’re ready to pull the trigger on the “revenge tax” if they feel pressure from OECD’s profit rule.
While the U.S. has labeled the G7 deal a “side-by-side” agreement, arguing that it allows the OECD’s minimum tax deal to stay in place, American tax lawyers say otherwise. David Rosenbloom, director of the international tax program at the New York University School of Law, told Envoy that while the OECD’s second pillar and the G7 deal may exist alongside each other, they are not the same.
Getting into the weeds of it, the G7 deal allows the U.S.’ global intangible low-taxed income (GILTI) provision, which has been renamed the net controlled foreign corporation tested income (NCTI) rule, to redistribute taxable profits among subsidiary companies in a way that the OECD’s rules prohibit.
“The GILTI regime is not the same as the Pillar 2 taxes, largely because of the blending,” Rosenbloom said.
“They’re based on different systems. One is based on an accounting system, and the other is based on tax rules. Inevitably, they’re not going to be the same.”
“The Europeans think that the benefit is going to go to the United States,” he added.
Rosenbloom is picking up on some real frustrations. Beneath the immaculate manners of U.N. diplomats in New York, tensions are indeed simmering within different economic blocs.
Workstreams for the Nairobi session were led by Mr. Daniel Nuer of Ghana, who directs overall proposal and protocol design; by Ms. Liselott Kana of Chile on taxing cross-border products, which is especially relevant for big tech companies; and by Ms. Marlene Nembhard Parker of Jamaica and Mr. Michael Braun of Germany, who are structuring the agreement’s dispute mechanism. The tax committee is helmed by Mr. Ramy M. Youssef of Egypt.
A draft template for the framework convention was released in October, and while many of the articles are forthcoming, several are already in place and boasting some bold language.
Front and center is the article on the fair allocation of taxing rights, which homes in on the issue of where value is created and which country gets to tax it – the subject of the OECD’s now defunct Pillar 1.
“The States Parties agree that every jurisdiction where a taxpayer conducts business activities, including jurisdictions where value is created, markets are located, and revenues are generated, have a right to tax the income generated from such business activities,” the draft article reads.
Following that is an article on taxing rich people, with some equally strong wording: “In order to prevent high net worth individuals from avoiding or evading taxes, the States Parties agree to adopt measures to detect and thwart such activities.”
There are also articles on information exchange between countries, illicit financial flows, sustainable development, dispute resolution, and on “harmful tax practices.”
That provision includes restrictive language on “tax incentives” that are fundamental to the structure of many Western economies. Those incentives “should be substance-based, linked to investment or performance, and not merely profit-based,” the article says.
As the U.N.’s tax process ramps up, the future of the OECD’s corporate minimum tax is uncertain. While it’s generating revenues at the international level, even affecting some American multinationals, the ambivalent stance of the U.S. suggests it could become either stronger or weaker.
Not everyone in the U.S. sees it as a threat. Research from the University of Chicago argued that the U.S. should still move forward with the accord, calling it a “paper tiger,” while acknowledging that it will “undoubtedly be somewhat disruptive” and has “extreme political salience abroad.”
“Instead of reducing overall tax or economic competition, it will slightly change the form that competition takes, while increasing tax revenues by far less [than] its supporters expect,” Chicago law professor Julie Roin argued earlier this year.
“Adoption of Pillar Two will not stand in the way of the President’s and Congress’ pursuit of their nationalist economic and political agenda.”
Beyond the multilateral venues, the taxation of large businesses and wealthy people is gaining steam as an issue in multiple countries on the level of national and regional politics. In New York City, Zohran Mamdani bucked the Democratic Party establishment to win the city’s mayoral race in November, running on a platform of taxing the wealthy.
In France, the so-called Zucman tax on the ultra-rich has made waves and garnered substantial popular support, though French lawmakers rejected it at the end of October, backing instead a plan to tax assets held in holding companies. Die Linke in Germany laid out a new plan to tax the super-rich ahead of parliamentary elections earlier this year.
The sociopolitical backdrop to these tax initiatives is skyrocketing global wealth inequality, which has been accelerating in recent decades. The U.N. found that in 2018 – prior to the pandemic, which further exacerbated financial inequality – the 26 richest people in the world owned as much wealth as half of the human population.
In November, the Group of 20 (G20) wealthy economies’ committee on global inequality found that the two main drivers of increasingly concentrated wealth were market incomes and bad public policies, related to the trend of less progressive taxation in recent years.
“Taxation has become less progressive, with effective tax rates on corporations and the richest individuals in most countries falling dramatically, and an increasing reliance on regressive taxation, like value-added tax,” the G20’s inequality experts concluded.
They also noted that globalization and internationally integrated production pipelines have allowed for “far greater levels of tax avoidance and evasion.”
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