Governance And Fairness Questions Loom Large In U.N. Tax Talks

Forbes

11 hours ago

Right now, representatives from multiple governments are sitting at the U.N.'s New York headquarters negotiating three workstreams for the U.N.'s framework convention on international tax cooperation.
The convention's intergovernmental negotiating committee has a lot of work to do in the coming months, and it must consider many perspectives. Earlier this summer, the U.N. asked stakeholders in a series of draft issues notes to offer feedback on the scope and direction of the committee's workstreams, and it received nearly 150 submissions across the three workstreams — the first addresses the framework convention, the second addresses taxation of services, and the third addresses tax dispute prevention and resolution. On Workstream I, nearly 60 stakeholders responded. A review of that feedback reveals that at least two major issues loom large: Stakeholders are generally concerned about the convention's organization and governance, and they are divided over the concept of tax fairness and how it should apply to the convention.
Issues in Workstream I
The first workstream is crucial because it's how U.N. member states will draft the text of the U.N. Framework Convention on International Tax Cooperation and its accompanying commitments. According to a draft issues note, the intergovernmental negotiating committee is considering three different commitments for this workstream. The first would address the effective prevention and resolution of tax disputes.
The intergovernmental negotiating committee believes this is a promising topic because of the difficulties that some developing countries face in resolving cross-border disputes. They lack large treaty networks to rely on but receive considerable cross-border trade and investments. Unsurprisingly, the committee stated in a draft note that it sees usefulness in alternative dispute resolution and prevention mechanisms, but only if they 'are fair, independent, accessible, and effective in resolving disputes in a timely manner for both taxpayers and the tax authorities involved.' This, of course, raises the question: What is fair, independent, accessible, and effective?
The second commitment would address the fair allocation of taxing rights, which includes the equitable taxation of multinational enterprises. The committee landed on this topic based on various feedback from member states. There's a cohort of countries that believe the convention should ensure that jurisdictions have taxing rights over the business activities that take place within their borders, meaning that jurisdictions where users are located would have taxing rights. Other countries believe taxing rights should be based on economic substance and value creation, and some countries are unsure if third countries should receive these taxing rights. The committee wants member states to arrive at a common approach 'that recognizes that every jurisdiction where business activity takes place should share in taxing rights over the income generated.'
The third commitment is to sustainable development. On this issue, the workstream document says the member states will pursue international tax cooperation that also advances economic, social, and environmental development.
Stakeholder Responses
A lightning rod issue mentioned by several stakeholders is 'fairness.' Several perspectives on this have come to light. The African Union stated in its submission that countries should discuss the fair allocation of taxing rights on a protocol-by-protocol basis or, in the context of various initiatives and instruments, 'each taking up its meaning from the context of its peculiarity.' Meanwhile, the South Centre cautioned against determining, in detail, when and where economic activity takes place. 'This is an unnecessary detail which can become a very complex exercise, may not have universal applicability to all business activities, can become quickly outdated in the face of evolving business models and will end up wasting precious negotiating time,' the organization said. The Republic of Korea echoed a similar point, writing that 'while we appreciate the emphasis on creating 'future-proof' rules, we caution against attempting to prescribe detailed commitments for business models that may not yet exist. The rapid pace of technological innovation and evolving global structures makes accurate forecasting difficult.' The South Centre suggested that the committee remove language about determining where business activity takes place from the commitment and address the matter in specific protocols instead.
The International Chamber of Commerce (ICC) also advised member states to refrain from 'a broad, undefined debate on 'fairness'' because of its inherent subjectivity. And the Republic of Korea encouraged the committee to avoid negative framing, writing that while some cast the international tax framework as 'unfair,' that framework — which countries broadly rely on — is the product of many multilateral negotiations over the years.
'We are concerned that overly negative framing may undermine the cooperative spirit needed to reform the system,' the Republic of Korea said. 'A balanced tone — acknowledging both the strengths and limitations of the current system — would support broader engagement.'
For Indonesia, fairness looks like a strong reaffirmation of source taxation. It told the committee that the second commitment 'should include that taxing rights must be allocated based on where real economic contribution occurs. This includes not only supply-side operations but also demand-side factors such as consumption, and user base. This is critical to ensure that such countries do not lose taxing rights over income derived from digital markets and other activities where significant economic value is created.'
On the other hand, the Republic of Korea said that more conceptual clarity is needed for the concept of value creation. That's because there is no universal understanding of value creation or economic substance, and the Republic of Korea is concerned that jurisdictions could arrive at conflicting interpretations. 'We recommend that the text recognize this ambiguity and caution against prematurely operationalizing 'value creation' as a normative principle without further technical work and consensus-building,' its submission said.
Prioritizing Governance
Another highly mentioned topic is that of governance.
Paragraph 13 of the convention's terms of reference addresses governance-related issues:
'The framework convention should also include, inter alia, the following additional substantive and procedural elements: definitions; relationship with other agreements, instruments and domestic law; review and verification; exchange of information (for implementation of the framework convention); data collection and analysis; financial resources; conference of the parties; secretariat; subsidiary bodies; dispute settlement mechanisms; and procedures for amendments to the framework convention and adoption of protocols; and final provisions.'
Several stakeholders urged the committee to devote more time and resources in Workstream I to the convention's governance, because that will lay the groundwork for the convention's success. For example, how will the convention's Conference of the Parties be structured, and what tasks will they own? Also, how will the convention interface with existing international tax bodies and initiatives? How will the convention be amended? These are concerns voiced by several stakeholders, including Germany and the South Centre.
A submission from professors Peter Hongler and Irma Mosquera argued that Workstream I should be devoted to building a cooperation framework rather than focusing on commitments.
They raised an interesting question: Does the framework convention need commitments at all? The U.N. Framework Convention on Climate Change (UNFCCC) has successfully incorporated commitments, but the professors are doubtful that the same construct is useful for tax cooperation. 'Commitments must be concrete; otherwise, they are merely empty words,' their submission says. 'In the UNFCCC context, precise commitments were feasible. For example, states can be concretely obliged to maintain an inventory of anthropogenic [greenhouse gas] emissions or to reduce [greenhouse gas] emissions by a certain percentage. In the tax field, however, this seems impossible or at least not meaningful.'
They go on to provide some examples: On the issue of tax dispute prevention and resolution, they argue that a tangible solution, like obligating countries to incorporate arbitration clauses into their tax treaties, would face opposition.
They also voice doubt about the commitment toward a fair allocation of taxing rights, given the long time in which governments have debated this issue:
'[It] is ultimately impossible, as there is no objectively 'fair' allocation. Also fairness has different meanings, which also constitutes an obstacle to achieve these commitments. . . . In our view, allocation rules can only approximate fairness from different perspectives and even more important, fairness is mainly achieved through fair terms of cooperation. Therefore, the focus should be on fair terms of cooperation.'
On the other hand, the African Union has no such qualms about the convention's commitments and believes there's room to add more.
Another governance-related issue is whether the convention should make decisions by majority or consensus. U.N. countries agreed in February to approve decisions on a simple majority basis, meaning that a two-thirds majority is required to approve protocols to the convention. In its feedback, KPMG pointed out that even though simple majority voting is the official stance, the intergovernmental negotiating committee also agreed that it would 'exhaust every effort in good faith to reach consensus on all matters of substance while taking into account the available time frame for negotiations.' KPMG says that the consensus standard should be the primary approach.
'While there will be some areas where international divergence may be preferable, global cooperation is likely to be achieved only where there is consensus,' the firm said. 'Use of the 'majoritarian back-up' is likely to lead to bifurcation of acquiescing and dissenting countries which in most cases will be sub-optimal.'
KPMG believes the committee should create working advisory groups to attain consensus and should incorporate business interests into those groups. 'Ultimately it is businesses that will be impacted by most measures and thus it is critical that potential impacts and possible unintended consequences be fully explored,' the firm said. The ICC issued similar advice, urging the committee to establish a technical business advisory council. Ideally, it would host 20 business representatives, split equally among the U.N.'s five different regional groupings. In the interest of transparency, the outcomes of these advisory council consultations would be publicly released on the U.N.'s website, the ICC said.
This feedback from KPMG and the ICC highlights a glaring issue: They were the only two business representatives to respond to Workstream I. This raises questions about why there has been a lack of business engagement and what can be done to bring more business taxpayers — who will be affected by the outcomes of the convention — into the discussion.
What Is Cooperation?
At the end of the day, international cooperation is perhaps the most important issue here. Determining the contours of that cooperation — including who can be in the deliberation rooms and when — is still being sorted out. Some stakeholders believe they should have more access to the discussions.
From the outset, the U.N. secretariat has been clear that member states will lead the decision-making process. That said, the U.N. Economic and Social Council is free to grant consultative status to nongovernmental organizations through article 71 of the U.N. Charter. In this sense, ECOSOC is unique — it is the only main U.N. group that maintains a formal process for NGO participation, according to the council. And it grants that status to many organizations: Over 6,300 NGOs are in consultative status with ECOSOC. However, that does not mean they all participate in the U.N.'s work on the same basis. Generally, consultative status means that an NGO can do things like provide analyses to the U.N. and help monitor the implementation of U.N. projects.
There are three kinds of consultative status: general, special, and roster. General status is typically given to large, international NGOs whose work touches on most of ECOSOC's priorities. They are allowed to send representatives to the U.N., attend and speak at ECOSOC meetings, and circulate statements. Special status is given to smaller NGOs with a special competence in topics handled by ECOSOC. They have the same sorts of privileges as general status organizations. Roster status is conferred on NGOs that have a narrower or more technical focus and periodically contribute to the work of ECOSOC or its subsidiary bodies. They are allowed to attend meetings held by ECOSOC and its subsidiaries, but they are not allowed to speak in meetings. They may circulate statements if invited to do so by the secretary-general.
The convention's terms of reference address this issue in paragraph 21, which states that 'civil society and other relevant stakeholders are encouraged to contribute to the work of the intergovernmental negotiating committee in accordance with established practices.' More specifically, civil society organizations are allowed to participate as observers, according to a committee document. At the end of July, the committee, in a draft decision, approved 34 civil society and non-governmental organizations to participate in its work.
It appears there's some debate over what civil society contributions should look like in the context of the tax convention. In comments, the Independent Commission for the Reform of International Corporate Taxation told the committee that while they are committed to the process, they and other observers have not been allowed to participate in previous meetings.
'We find it deeply concerning that observers have not been invited to participate in the online meetings of the Workstreams. The fact that we have been unable to even observe the numerous meetings that Member States have already had, leaves us with a very limited understanding of the specific discussions, and significantly reduces our ability to feed into and respond to the debate,' the group said. 'We would like to stress the importance of allowing for full and effective participation of civil society and trade unions in all meetings of the committee, including the online sessions of the Workstreams.'
The EU delegation to the U.N., which is also an observer organization, has voiced similar concerns because it has not been allowed to attend informal, intersessional discussion sessions for the workstreams but believes it should have received access.
Sustainable Development
Stakeholders have generally spent comparatively little time on the third commitment on sustainable development, which makes sense because the other two commitments raise important foundational issues that require resolution. But stakeholders who did address it, like the African Union and Germany, urged the committee to align the commitment with the outcomes from the U.N.'s recent Fourth International Conference on Financing for Development. Some, like Brazil, said this would be a good location to fit the convention's capacity-building work.