FAQs: International Taxation, Human Rights and the United Nations Tax Convention (UNTC)

When money and businesses move freely between countries, tax authorities face challenges in taxing their profits. Each country has its own tax rules, and because of a lack of effective coordination between them, illegal money movements, cheating on taxes, and finding ways to avoid them becoming common. Initially, international taxation efforts were in the form of bilateral agreements between countries to avoid double taxation (when taxes are paid twice on the same source of income). Still, they have gradually moved towards multilateral cooperation. 

Low and middle-income countries face challenges in balancing the need to raise revenue generation and attract foreign direct investment. Today's main complications are the taxation of multinational corporations and the digital economy. Multinational corporations exploit tax loopholes by shifting profits to lower-tax nations with high secrecy laws to minimize tax liability, especially in digital corporations with no physical presence in many market jurisdictions. This creates a "race to the bottom" as countries lower corporate tax rates to attract foreign investment, resulting in revenue loss for low and middle-income nations, disadvantaging national businesses, reducing productivity and growth, weakening public services, and ultimately leading to human rights violations.

An important distinction is often made between tax evasion, illegal, and tax avoidance, legal but morally wrong, using loopholes to avoid paying taxes. But this distinction is often blurred, that’s why we talk about tax abuse. The latest figures estimate that global tax abuse costs $480 billion each year. That is nearly $5 trillion lost in tax to multinational corporations ($311 billion) and rich people ($169 billion) using tax havens to avoid paying taxes. llicit financial flows (IFF) result from tax evasion, involving the illegal movement of capital across borders. These flows are associated with various corrupt practices, including bribery and smuggling. They contribute significantly to the loss of tax revenue globally.

The full realization of human rights for all faces significant financing shortfalls, exacerbated by crises like climate change, unsustainable debt, and poverty, which require urgent collective action. Global tax abuse depletes governments’ coffers, resulting in the underfunding of public services and under-resourcing of rights. Integrating human rights standards into taxation is vital because they are a fundamental part of the international legal framework and impose obligations on states. These standards provide a critical benchmark for evaluating tax systems and emphasize the need for international tax cooperation to close inequalities and ensure governments can fulfill their human rights obligations.

A fair tax system is the cornerstone for gathering resources necessary to uphold human rights and address inequality by generating revenue for rights and public services, redistributing wealth to reduce inequality, disincentivizing harmful practices, and enhancing democratic governance through representation.

Framing international tax cooperation through a human rights lens is key for adopting a holistic, sustainable development approach that addresses inequality, environmental issues, health, gender equality, and intergenerational aspects. Human rights mechanisms provide crucial guidance for dismantling past injustices and building transparent, inclusive mechanisms for the future.

The commitments that States undertake upon ratifying human rights treaties, which are key for international taxation and tax cooperation, include: 

• Mobilizing maximum available resources for economic and social rights: Human rights norms require that every State mobilizes its “maximum available resources” towards progressively realizing economic, social, and cultural rights. To increase domestic resources, a progressive and equitable tax system is essential.

• Extraterritorial obligations: States must not only realize rights within their borders, but also have duties prohibiting them from engaging in behavior that violates rights beyond their borders. Recognizing states' extraterritorial obligations is crucial because the international tax regime has far-reaching effects beyond national borders. Failure to acknowledge these obligations may allow states to evade accountability for actions that violate human rights elsewhere, thereby reinforcing the need for assessments of extraterritorial impacts on fiscal space.

• Cooperation: The United Nations Charter recognizes the obligation of States to proactively cooperate globally, without prejudice, towards collectively realizing rights-based development priorities universally. Cooperation among states is essential in international taxation as it promotes equitable, rights-based development globally. This cooperation is critical for realizing human rights and preventing actions that undermine states' capacities, particularly in developing countries, to fulfill their human rights obligations due to issues like tax evasion and avoidance.

• Equality and non-discrimination: Principles of equality and non-discrimination recognized by both the United Nations Charter and the Universal Declaration of Human Rights are crucial within the convention as they guide progressive tax reforms, wealth redistribution, and the promotion of gender equality. These principles ensure that tax policies are fair and contribute to financing public services without discrimination.

• Transparency: Transparency is fundamental as a human right and is crucial in international taxation to prevent injustices such as tax evasion and avoidance. Lack of transparency enables practices that lead to significant revenue losses, particularly in developing countries. Upholding transparency principles ensures accountability and prevents unjust enrichment.

• Inclusiveness and participation: Inclusiveness and participation ensure that all groups affected by fiscal decisions, especially historically disadvantaged groups, have a meaningful say in the tax process. Democratic tax-related procedures enable full, informed participation, ensuring that decisions are fair, equitable, and considerate of diverse stakeholder needs.

• Progressive realization and non-retrogression: The obligation to ensure the progressive realization of economic and social rights by taking appropriate steps expeditiously and effectively, through ‘deliberate, concrete and targeted’ measures, ‘to the maximum extent’ requires not taking retrogressive measures leading to the deterioration of the enjoyment of rights. Retrogressive measures, backward steps measures that would decrease the enjoyment of rights, such as reducing the budget allocated to public services, are only the result of exceptional circumstances, should be temporary, a last resort, and must give special consideration to the impact on the most vulnerable, according to the principle of ‘non-retrogression’.

Originally, multinational efforts were led by the League of Nations, the first worldwide intergovernmental organization founded in 1920, whose principal mission was to maintain world peace. The legitimate successor to host international tax cooperations should have been the United Nations (established in 1945, right after World War II), but this was hindered by the emergence of the Organization for Economic Co-operation and Development (OECD) in 1961. The OECD, often termed a ‘club of rich countries’, has been a key player in setting policies and proposing solutions to tax multinational enterprises. However, criticism arises due to its limited membership, predominantly from the Global North, as well as the decision-making process where richer countries have more weight. The UN Secretary-General also recognized the limited effectiveness of the OECD’s rules and its lack of inclusivity in his report on the issue. While multinational companies use tactics and loopholes to avoid paying taxes in countries where they conduct business, the people lose. Not only do people lose in terms of bearing additional tax burden, but they also miss out on the public services like healthcare, education, and social security that could have been provided by the lost taxes.

The United Nations Framework Convention on International Tax Cooperation is a recently proposed normative instrument being discussed by UN Member States to enhance global cooperation and fairness in taxation. It comes after decades-long demands from civil society worldwide to overhaul international taxation, a system that in its current form perpetuates and worsens inequalities within and between countries, denying states the resources needed to realize people’s rights.

In November 2022, groups working for fiscal justice saw unprecedented progress when, on behalf of the Africa group, Nigeria tabled a resolution at the UN to cooperate in tax matters. Despite intents by the US and the UK to water it down, the resolution was passed by a landslide of 125 votes in favor versus 48 against.

This voting was historic: until now, most of the global tax rules and decisions are dictated by a few countries in the G20 and the OECD. If approved by a sufficient number of member states, this worldwide agreement could transfer the authority over international tax regulations to the UN. This shift would provide all countries, particularly those in the Global South, with an equal footing in international rule-setting discussions and therefore fair allocation of taxation rights.

As per the resolution, the General Assembly approved the establishment of an Ad Hoc Committee to Draft Terms of Reference for a United Nations Framework Convention on International Tax Cooperation. The Committee began preliminary negotiations on terms of reference for the Framework Convention on International Tax Cooperation this February and stakeholders (including member states and civil society organizations) have actively contributed their inputs. CESR’s submission emphasized the importance of adopting international human rights law as part of the guiding principles of the convention, which was endorsed by 30 organizations from around the world. The Ad-hoc Committee has its first substantive sessions in April and May 2024. Despite initial resistance from powerful stakeholders, establishing a diverse and representative bureau and agreement on decision-making procedures signal a participatory approach to reform.

• November 2022: Second Committee of the General Assembly approved draft resolution. 

• December 2022: GA resolution 77/244 adopted by the General Assembly. 

• February 2023: The Secretary-General invites written inputs to his report. 

• May-August 2023: Informal briefings and consultations on the Secretary General’s report. 

• August 2023: Publication of Secretary General’s report advocating for enhancing the UN’s role in tax norm shaping and rule-setting. 

• September 2023: Opening of 78th Session of General Assembly. 

• October 2023: Opening of Second Committee Discussion began on agenda item.

• November 2023: Adoption of a Second Committee resolution calling for a two-step process to negotiate a UN Framework Convention. 

• December 2023: General Assembly adopted resolution 78/230 establishing an Ad Hoc Intergovernmental Committee to develop draft terms of reference for a Framework Convention.

• February 2024: Formation of Ad Hoc Committee taking into account gender and geographical balances at the Organizational Session. Call for inputs by the Ad Hoc Committee.

• February-August 2024: Substantive Sessions to develop a draft terms of reference led by the Ad Hoc Committee encouraging participation of all member states. 

• May 2024: First Session of the Ad Hoc Committee to develop draft terms of reference held at the United Nations Headquarters in New York. 

• July - August 2024: The Second Session of the Ad Hoc Committee is held from 29 July to 16 August at the United Nations Headquarters in New York.

• August 2024: The Ad Hoc Committee approves the Terms of Reference with 110 votes in favor, incorporating human rights principles into the framework.
  
  
• November 2024: The United Nations General Assembly approved the Terms of Reference (ToR) for the UN Tax Convention.
  
  
• 2025 - onwards: Representatives from Member States will meet three times a year to negotiate the text that will serve as a reference for international tax cooperation, with a target completion date of September 2027.

   

The current international tax regime coordinated by the OECD was established long before many colonies were independent and is biased towards the OECD members. They want the OECD to continue as the principal forum for international tax policy, representing the interests of industrialized nations. These benefiting members argue that international tax cooperation at the UN would be duplicating the efforts of the OECD. They are also voicing concerns regarding new rules increasing tax uncertainty at the international level, which may impact trade. However, there can be no duplication where there never existed a truly universal and participatory body overseeing international tax.

The Inclusive Framework and the BEPS package are the responses from the OECD and the G20 to the taxation challenges posed by a global economic system that allows multinational corporations to avoid and evade taxes in certain countries. While these efforts are valuable, the policies they promote fail to put human rights and the planet before corporations’ profits. Furthermore, they could even widen inequality both within and between states and have not been discussed on an equal footing by all countries.  

Following the financial crisis of 2008 and several scandals of international tax wrongdoings, the OECD introduced a flagship strategy to fight against tax evasion and avoidance: The BEPS. The acronym comes from domestic base erosion and profit shifting, which happens when multinational corporations take advantage of variations and discrepancies in tax regulations across different countries. The BEPS (both in its 1.0 and 2.0 versions) are action plans to combat these tax avoidance practices. The Inclusive Framework is an international tax governance network of over 135+ countries, created in June 2016, in response to the G20’s call for broad and consistent implementation of the BEPS package.

As previously mentioned, the OECD faces criticisms for lacking universal membership and political accountability to all states. During its establishment, the Inclusive Framework required new members to agree to commitments without their input. Additionally, the treatment of non-sovereign entities like the British Virgin Islands alongside sovereign states creates power imbalances. Recently, several UN Experts called out the OECD tax reforms to risk violating human rights law for being retrogressive to the implementation of social rights and incompatible with the Convention on the Elimination of All Forms of Racial Discrimination.

BEPS 2.0 (or “Two Pillar Solution”), is an updated version of the original action plan to better address the challenges of the digitalization of the economy. Pillar I aims to resolve the problem of taxation of the digital economy (taxing companies such as Google, Uber, Microsoft, etc.) that operate their businesses in countries where they don’t have a physical presence. It reallocates a share of their global profits to those countries in which markets they obtain profits but do not have a physical presence. Pillar II deals with the ‘race to the bottom’ of countries offering lower taxes to attract foreign companies. It attempts to deter profit shifting to lower or no-tax jurisdictions by introducing a global minimum tax rate of 15%.

The originally promising Inclusive Framework has been a historic missed opportunity. The minimum corporation tax was reduced last minute from 25% to an unreasonably low 15%, leading to a new race to the bottom to attract foreign investment. It also adds the option of carve-outs for further tax exemptions. The urgent need to tax the digital economy, to ensure that companies such as Uber, Microsoft, and Google, pay taxes where the activities are carried out and profits are made, has not been much more fruitful. The current agreement largely favors high-income countries, such as the US, where most of these corporations are headquartered. It establishes an arbitrary threshold of $750m in profits (which with the current schemes would mean that Amazon is exempt). Yet, even when the US has been behind most of these measures and is pushing every country to sign the agreement, the US is not doing it!

Countries ratifying the Inclusive Framework agreement would lead to giving up their taxing rights to collect revenue from these corporations. The EU Tax Observatory estimates that the potential revenue gains would be just “0.17% of current tax revenues for developing countries and 0.15% for developing and least developed countries”. That is why countries should consider alternatives, such as digital services taxes or withholding taxes estimated to generate similar or more revenues.

The United Nations is the right space to ensure procedural and substantive fairness, so that governments may better cooperate in generating financing for development, combatting illicit financial flows, recovering and returning stolen assets and promoting financial integrity for sustainable development. Low- and middle-income countries have historically been the most affected by the corrosive effect of the tax abuse, which is depriving their governments from raising sufficient resources to provide good quality public services, fulfil their human rights obligations and finance climate resilience and adaptation.  

An inclusive body providing an equal footing platform for voicing concerns and the issue of illicit financial flows are particularly important to the Global South as they bear the brunt of inadequate resource collection. Fair allocation of taxation rights to the low- and middle-income nations allows them to make better public provisions available to the citizens and make public investments furthering sustainable and inclusive growth.  The redistribution of revenues to the market jurisdictions where the activity takes place would be a much-needed reversal from the extractive practices using tax evasion, tax avoidance, and illicit financial flows that drain the Global South of their resources, causing a direct affront to efforts to secure human rights and sustainable development.    

Inclusive and participatory rule-making on global tax issues can potentially increase the taxable revenue of the countries reflecting their actual levels of economic activity, unaffected by biased rules. The United Nations provides an inclusive and participatory platform where all states have an equal seat at the table, unlike OECD, which represents the interests of its 38 industrialized members, particularly the richest ones. The additional resources can be used by lower-income countries to improve social and economic rights, provide better public services, and enhance their ability to address crises like sovereign debt and climate change. 

The United Nations' universality enables harmonizing tax norms with the international human rights law framework. Lower and middle-income countries have historically suffered most from tax abuse and lack of inclusive global governance, mainly in terms of loss of revenue and, therefore, the potential of mobilizing resources for the state’s responsibilities. The United Nations can ensure substantive fairness towards them.