The term “global tax governance” has been used by political scientists and scholars to address changes and challenges in international tax law making for international cooperation, focusing on the interactions between developed and developing countries, as well as international and regional organizations. In essence, global tax governance aims to restrict and shape how the modern nation-states can tax, with an institution overseeing the interplay between national tax systems.
Over last decades, there are two main reasons in why the Organisation for Economic Co-operation and Development (OECD) has the capacity, dictated by the political mandate from the G20, to lead the international tax regime. The first agenda concerns the international tax standard, in particular the standard on exchange of information and transparency. This responsibility was come from by a consequence of the 2008 financial crisis. Ensuring the exchange of information to break the interaction between bank secrecy and tax havens effectively commits to the fundamental reform of the global financial system.
The final agenda addresses both the tax fraud by large multinational enterprises (MNEs) and the rise of the digital economy. To prevent such tax scandals, the OECD, once more with the political backing of the G20, introduced Base Erosion and Profit Shifting (BEPS) to combat tax dodging and to guarantee that multinationals pay their fair share. The BEPS project contained 15 actions, with 4 minimum standards, 10 best practices, and 1 multilateral instrument, involving OECD countries, OECD accession countries, and G20 countries. Non-OECD countries and non-G20 countries were also engaged to participate as BEPS associate in applying the 4 minimum standards, forming what is known as the BEPS Inclusive framework. Historically, the BEPS Inclusive Framework, representing 143 tax jurisdictions and more than 90% global gross domestic products, has been a significant force in global tax reform for last decade.
Yet, during the process of the BEPS Inclusive Framework, scholars, civil society, and regional tax organizations found out a clear inappropriate stance leveraged by OECD’s countries. As Martin Hearson, Co-Research Director of the International Centre for Tax & Development (ICTD), concluded on his book of “Imposing Standard”, developing countries have a formal scope to participate on BEPS Inclusive Framework, but OECD countries have taken too much power over discussion, negotiation, and decision-making. The indication is that the preexisting institutions, created by a core group of countries, lock peripheral states into participating in regimes that do not reflect their interests. To put in simply, the OECD-led international tax regime, backed by the G20 mandate, has instead underscored to the gap in power dynamics between global north and south countries in international tax law making, marked by bias and discriminatory attitudes.
From an academic point of view, according to Ian Hurd, global governance scholars who take up the cooperation premise must be attentive to the potential biases and cost. By assuming that global governance arises from the pursuit of shared interests through cooperation, they naturally reflect international institutions as mechanism aimed at the common good. Therefore, as predicted by Irma Mosquera, a global tax governance scholar from Leiden University, the OECD-led international tax regime has shown a lack of legitimacy and inclusiveness since its inception. This means that the legitimacy and the inclusiveness encompass input legitimacy (participation and representation in decision-making), throughput legitimacy (processes being transparent, inclusive, accountable, and open), and output legitimacy (outcomes being beneficial for all stakeholders). In other words, transparency, accountability, responsiveness, and openness are all criteria that need to be incorporated by all stakeholders in international tax law making.
Against this backdrop, Nigeria, on behalf of the African Group, has tabled a draft resolution for a comprehensive UN Tax Convention. In November 2023, the United Nations General Assembly responded to Nigeria’s request and passed a historic resolution initiating the development of UN tax framework convention.
This year, in the current negotiation for UN tax framework convention, during the initial session held from April 26 to May 8, as Tax Justice Network reported, the African-Group has advocated for a new international tax architecture and complained the structural problem that OECD-led international tax regime failed to consider the realities of developing countries, especially lower-income countries.
Another voice from the global south, India urged advancements in addressing illicit financial flows by improving transparency around beneficial ownership. Indeed, the issue of tax-related illicit financial flows and the taxation of cross-border services are highly demanded concerns by global south participants. It is evident that these issues are closely related to ensuring a fair distribution of benefits for global south countries in a rapidly globalized and digitalized world.
That is to say, one of the biggest attentions in international tax landscape, beyond OECD’s incapability in capacity-building, is all about the tax cross-border services, which caused by the global digital economy. If the result for UN tax framework convention would bring an inclusive and effective international tax cooperation with greater procedural transparency, the benefits will reach beyond the African-group members and lower-income countries, particularly to the Asia’s robust economic growth.
Amidst the backdrop of heightened worldwide integration and technological progress, the Asia-Pacific region has emerged as one of the world’s leading digital economic powerhouses. The UN Economic and Social Commission for Asia and the Pacific (ESCAP) pointed out that the Asia-Pacific’s growth rate in digitally deliverable exports has outpaced the global average over last decade. Although the progress in digital infrastructure, resiliency, and connectivity remains uneven, the acceleration of Asia’s digital economy is inevitable. It becomes a low-hanging fruit situation for Asia’s economy if it can close the gap of digitalization barriers, with a new global tax policy treatment driven by UN tax framework convention, thereby crystallizing the rise of the Asian economic miracle.
In addition, in the context on the current implementation of OECD-led international tax regime on the BEPS Inclusive Framework, which called Global Tax Deal, especially in pillar 1 arrangements, China and India, two Asia’s giants, still have not yet ratified. Under this circumstance, U.S. Treasury Secretary Janet Yellen called that China and India hindering global corporate tax deal. Geopolitically, China and India just expressed opposition to pillar one due to concerns about fairness, equity, and the potential impact on their tax revenues.
But this situation also prompted by US interest itself, with still no signal to ratify this pillar 1 because opposition stance from GOP’s force in congress. Inevitably, the outcome of the 2024 U.S. election will also likely be crucial in determining whether the U.S. will continue to participate in Global Tax Deal.
So, whatever the result of the negotiation for UN tax framework convention on international tax cooperation, which will be finalized in August 2024 and voted on at the UNGA at the end of this year, the world must acknowledge the African group’s efforts to challenge the injustices and biases in the current global tax governance and then the Asia’s economic growth must ready to capitalize this momentum.
[Photo by UN]
The views and opinions expressed in this article are those of the author.
Andi Mohammad Ilham has served as tax consultant and a postgraduate student at the School of Government and International Relations, Griffith University.
