José Ocampo | Finishing the job of global tax cooperation

This year’s Spring Meetings of the World Bank and the International Monetary Fund, and the follow-up United Nations Forum on Financing for Development, have put international tax cooperation high on the global agenda once again.

Brazil has declared that it will use its G20 presidency to advance the issue – whereas last year’s New Delhi G20 summit made no mention of it – and the second phase of UN negotiations towards a global tax convention is now under way.

The earlier OECD/G20 Inclusive Framework helped advance this issue in two ways: it stipulated that very large multinational corporations should pay taxes in all the places where they operate, referred to as Pillar One of the agreement; and it held there should be a minimum 15 per cent global corporate income tax rate, known as Pillar Two.

But implementation has been slow, and even if most parties to the agreement sign the multilateral treaty necessary for Pillar One, the United States is unlikely to secure the two-thirds Senate majority required for ratification. Given that many of the world’s largest tech firms are headquartered in the US, the deal would be written in water, and the global digital economy would remain undertaxed.

Moreover, the benefits of the Inclusive Framework are expected to accrue mainly to developed countries, which is why the African Union subsequently pushed for negotiations towards a global tax convention at the UN General Assembly. The UNGA resolution was adopted last November, albeit along a sharp North-South divide, with most developed countries voting against it –Norway and Iceland abstained – and almost all developing countries voting in favour.

Now that UN negotiations are proceeding, they should focus first on improving the Inclusive Framework. The best way to achieve Pillar One is to create a broadly applicable rule based on the principle of ‘significant economic presence’, whereby multinationals would be obliged to pay all taxes, including sales and income taxes, on the profits they make from their activities in all countries.

This rule should be supported by a mechanism to apportion multinationals’ global profits between countries, as several federal countries already do within their own borders. Equally important, the minimum tax rate should be higher – rising at least to 21 per cent, as the US proposed in the OECD negotiations, or preferably to 25 per cent, the average rate across richer countries. Finally, there should be as few exceptions as possible, preferably none, to the minimum rate.

This year’s spring meetings also featured debates over a proposal to levy a 2.0 per cent annual wealth tax on the world’s super-rich. Having been backed by Brazil, this proposal most likely will be on the G20 agenda, too. Considering that the super-rich generally pay very low taxes, the case for it is strong. A recent study by the EU Tax Observatory, led by Gabriel Zucman of the University of California, Berkeley, shows that a 2.0 per cent global wealth tax on the world’s billionaires – roughly 3,000 people – would raise US$250 billion annually.

If anything, the UN negotiations should aim for an even broader minimum tax on the richest people in all countries, with an additional wealth tax complementing income taxes. This is necessary because wealth is more concentrated than income, and it benefits from many exemptions and exceptions, such as the lower rate on capital gains in the US and other countries.

During my recent stint as Colombia’s minister of finance, lawmakers approved the government’s proposal to introduce a wealth tax on top of the country’s income tax, demonstrating that such measures are politically achievable at the national level. But it will take greater international cooperation – a coordinated minimum tax, taxes on people and firms that have moved their residence abroad, and more exchanges of information between tax authorities – to ensure that the richest people everywhere pay their fair share.

In fact, the agenda of the UN tax convention should be broader. The Independent Commission for the Reform of International Corporate Taxation, ICRICT, on which I serve, has also called for common principles and minimum standards for taxing income and wealth; international coordination on windfall or excess profits; measures to strengthen anti-avoidance instruments; new mechanisms for coordinated digital service taxes; and public country-by-country reporting of taxes paid by multinationals. One might also add a standard minimum tax on the exploitation of natural resources, as several developing countries are giving foreign companies tax incentives for that purpose, a truly irrational policy decision.

Another ICRICT proposal would provide greater transparency of wealth ownership by creating a global asset registry that lists final beneficial owners, based on the information that national tax authorities and other public-sector agencies hold. Such transparency is crucial for effectively implementing any of the other tax proposals for capital income and wealth.

Finally, the UN Committee of Experts on International Cooperation in Tax Matters should be transformed into a formal intergovernmental body, as this will be essential to strengthening and sustaining international cooperation. Though this proposal was previously defeated in 2004 and 2015, the expert committee was at least strengthened on those two occasions, and now momentum for an intergovernmental organ is building once again.

So far, global negotiations on tax matters have been confined to the OECD/G20 Inclusive Framework, which has more than 140 members, but lacks the UN’s universal membership. The UN should now work together with the OECD to strengthen international tax cooperation. While developed countries voted against the African Union resolution last November, they are participating in the new negotiations.

At a time when the world is becoming more multipolar and fragmented, reforms to the international tax architecture – through a UN global tax convention and the G20 resolutions – can breathe new life into multilateralism, as well as help countries mobilise the resources they need to provide social services, build infrastructure, and strengthen resilience against climate change.

José Antonio Ocampo, a former United Nations undersecretary general and a former minister of finance and public credit of Colombia, is a professor at Columbia University, a member of the UN Committee for Development Policy, a member of the Independent Commission for the Reform of International Corporate Taxation, and author of Resetting the International Monetary (Non)System. © Project Syndicate 2024 www.project-syndicate.org