Article, Global

New York instead of Paris!

18.06.2023, Finance and tax policy

In 2016, the OECD promised to reform the international tax system such that it would also serve the interests of the Global South. Seven years on, the OECD has clearly fallen short of its own ambitions. It may now be time for the UN to step in.

Dominik Gross
Dominik Gross

Expert on finance and tax policy

New York instead of Paris!

A main street in front of the United Nations building in New York on 24 March 2022.
© Ed JONES / AFP / Keystone

"Let’s keep the money in Switzerland". This is what could be seen on the posters of those supporting Switzerland's introduction of the OECD minimum tax. With this simple slogan, and the kind assistance of the centre-right parties, the business associations economiesuisse and SwissHoldings were able to win the vote on 18 June. As of 1 January 2024, the Federal Council can enact the minimum tax. Should it in fact generate substantial amounts of additional revenue in Switzerland, those funds will go towards promoting Switzerland as a business location. This would be tantamount to channelling the additional revenue back to the very corporations in Switzerland that extract more than USD 100 billion annually in taxable funds from other countries, thereby assuring Switzerland's low-tax cantons like Zug and Basel City of generous profit tax revenue. The mere possibility of implementing the minimum tax in such a way is evidence of the failure of efforts by the Paris-based Organisation for Economic Cooperation and Development (OECD) over the past decade to shape a more just worldwide tax system. That is hardly surprising. For although more than 140 countries took part in negotiating the minimum tax, including some emerging and developing countries, once again it was the interests of the rich countries in the Global North that prevailed in this framework.

Level playing field only at the UN

The history of the "inclusive framework" created in 2016 by the OECD is also a factor at play. What was promised at the time was a level playing field for all countries. But the condition for admission to this OECD framework is adopting the rules against "Base Erosion and Profit Sharing" (BEPS), which were worked out in the preceding years exclusively by the OECD's 39 Member States (mainly rich countries of the Global North). More than 100 developing countries were excluded from this process. As a result, these rules are tailored to suit the countries of the North, and the price of "inclusive framework" membership for developing countries is therefore high. The countries of the Global South, where the bulk of production is located in today's global economy, will see very little of the roughly 250 million in additional revenue being anticipated by the OECD as a result of introducing the minimum tax.

An alternative is now needed, and it is currently taking shape in New York. At the end of last year, the UN General Assembly adopted a resolution put forward by the African group of countries and the G77 (comprising all developing countries), designed to launch the groundwork for a draft UN convention on tax cooperation. Like the UN Climate Convention, which has influenced the pace and direction of global climate policy since 1992, it would create a truly inclusive multilateral framework for international tax policy. This would pave the way for elaborating and negotiating global tax policy principles for the world, and which would redress the fundamental imbalance between North and South in today's global tax system. A UN tax convention would lay the groundwork for multilateral rules on a tax system that is grounded transnationally, and hence no longer based on bilateral treaties. Under the present system, a few multilateral treaties do in fact supplement rules that are enshrined in bilateral double taxation agreements (DTAs), which ultimately determine just how countries divide up the taxable revenue generated from cross-border financial flows in the world economy. This often takes place at the expense of developing countries which, given their economic weakness, often lose out in bilateral negotiations of DTAs with countries in the North.

Time for global taxation

A UN framework convention on tax policy would also be a condition for effectively working towards the global taxation of multinational corporations. The present tax system treats individual subsidiaries of multinationals in different countries like separate companies. Accordingly, corporations should be taxed in each country based on the profits they generate there. For decades now, profit-shifting has indeed been a major problem for countries with relatively high tax rates. Many countries are losing billions in tax revenue each year because multinational corporations do not declare their profits for tax purposes in the places where they actually create value, but instead where profit tax rates are the lowest. A global unitary taxation with formulary apportionment would render profit-shifting obsolete, as individual subsidiaries of multinational corporations would no longer be taxed by country, and corporations would therefore no longer have an incentive to book their profits in places with the lowest tax rates. Instead, all profits from all countries where a corporation is active would be added up and the profit tax base allocated to each country according to a formula that considers the number of workers per country, sales, and physical assets (such as factories). Countries would in turn tax these profits in keeping with their domestic tax regulations.

The Office of UN Secretary-General António Guterres is currently drafting a report on the creation of a tax convention, and this will be tabled in September in New York following consultations with UN Member States and stakeholders. The Global Alliance for Tax Justice (GATJ) and the European Network on Debt and Development (Eurodad), of which Alliance Sud is a member, are very actively involved in this process.

Switzerland opposes it

Switzerland did vote in favour of the resolution in the General Assembly. However, in replying to an interpellation from National Councillor Fabian Molina, the Federal Council stressed that while it supports "a review of the institutional framework for international cooperation in tax matters" at the United Nations, it is opposed to the creation of a UN tax convention. The Federal Council is obviously convinced that it knows better than the developing countries themselves what is good for them. Thus, writing very much in the old colonial and paternalistic style, it states: "On the other hand, the Federal Council deems the usefulness of a United Nations tax convention to the position of developing countries to be questionable."

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