A battle is raging in the quiet corridors of the United Nations. Last December, the UN General Assembly passed a resolution to start negotiations on a new, fairer global tax architecture. The proposed UN Framework Convention on International Tax Cooperation would reform the current flawed tax system, which is riddled with loopholes that permit corporations and wealthy individuals to avoid paying taxes.
The extent of tax avoidance today is mind-boggling. The current system allows companies and wealthy individuals to “shelter” their profits in tax havens. Each year, 35 percent of multinational foreign profits—that is, profits originating from outside a corporation’s home country—are attributed to places such as Switzerland, Singapore, Bermuda, and the Cayman Islands, out of reach of the tax agencies in the countries where the profits really originate. The resulting loss of revenue is estimated to be between $240 billion and $600 billion annually.
For this reason, even as corporate profits have soared in recent years, corporate tax revenues have not, which is particularly worrying given that so many governments are in dire need of money to address climate change, humanitarian crises, and a host of other urgent needs, such as education, public health, and infrastructure. Tax avoidance has impeded governments all over the world from providing basic services to their citizens, contributing to global inequality, which is at an all-time high. Fewer than 3,000 people hold nearly $15 trillion—equivalent to the annual GDP of Germany, India, Japan, and the United Kingdom combined.
There is a clear need for an international convention to right these wrongs. That is why last November, 125 countries led by the African Group, the UN’s largest regional organization, voted in favor of the resolution to overhaul the global tax system. The leaders of these countries understand that taxing large profitable corporations and billionaires is the most rational way to raise revenue—and that the UN Framework Convention would set in motion a process that would enable them to do just that. UN member states now have an opportunity to create a more equitable and efficient global tax regime, one that would allow governments to finance public goods and services essential to economic growth and the reduction of inequality.
But since the beginning of negotiations in February, a number of high-income countries including Japan, South Korea, the United Kingdom, and the United States have done everything they can to derail these efforts. They say that they wish to avoid duplicating a parallel effort to reform global tax rules spearheaded by the Organization for Economic Cooperation and Development, the Paris-based club of mostly rich countries. But that decadelong undertaking, which developed the so-called Two-Pillar Solution, has serious shortcomings. Rather than pour more resources into the OECD’s failed efforts, the United States should throw its weight behind the promising African-led negotiations underway at the UN.
THE RISE OF TAX AVOIDANCE
The current international tax system, created a century ago by the League of Nations, was designed to neither maximize growth nor minimize income disparities but to ensure that the richest companies did not have to pay excessive taxes or be taxed in two different jurisdictions on the same income. The League of Nations could not have foreseen that companies would one day use the system to avoid paying any taxes on some of their income entirely. Beginning three decades ago, globalization ushered in a golden age of tax avoidance. A sizable industry of professionals—accountants, lawyers, consultants—helped the practice evolve from an art to a science. A host of tax havens all over the world emerged to provide safe harbor for profits that would otherwise have been taxed elsewhere.
Since the 1960s, despite enormous growth in pretax corporate earnings, global corporate tax revenues have been in decline; globalization and the rise of the digital economy have accelerated this trend. The tech giants that excel in exploiting user data also excel in tax avoidance. Apple’s historic tax arrangements with the Irish government, particularly two tax deals made in 1991 and 2007, allowed it to attribute almost all of its EU profits to its European headquarters in Cork. The company then took advantage of loopholes in Irish and U.S. tax law to attribute its European profits to offices that existed only on paper and were thus not subject to taxation in any country. Thanks to that arrangement, by 2014, Apple had reduced its tax burden to just 0.005 percent, according to an investigation by the European Commission.
Such dubious tactics have become the norm for multinationals. Two years ago, for example, Shell’s 37 employees in the Bahamas generated $28 billion in sales and $1.55 billion in tax-free profits, according to the company’s 2022 tax contribution report.
As tax havens have proliferated, public outrage over the wealthiest corporations skirting their tax payments has grown. Leaders of the G-20 understood this back in 2013, when, in urgent need of money after the global financial crisis, they asked the OECD to come up with a solution to stop or at least reduce tax avoidance by multinationals. In 2016, the discussions were broadened under the aegis of the so-called Inclusive Framework, which brought more than 100 non-OECD countries into the tax negotiations. The OECD’s Inclusive Framework called for a “Two-Pillar Solution”, and in 2021, 138 countries and jurisdictions agreed, in principle, to implement it, even though the details had not been worked out.
In the OECD’s proposed solution, Pillar One allocates taxing rights among countries but only for the 100 largest and most profitable multinationals and only for a fraction of total profits—a design that has no economic rationale. This narrow scope means that Pillar One will generate between $9.8 billion and $22.6 billion a year—a pittance.
Pillar Two, meanwhile, is meant to end the race-to-the-bottom practice by which countries offer multinationals favorable treatment in exchange for investment. Pillar Two entails a global minimum effective tax rate of 15 percent, which is relatively low compared with the tax rates imposed in most countries. This was expected to generate an additional $190 billion in revenue each year. But there is no clear reason why multinationals should be allowed to pay less than medium or small domestic companies, which are subjected to taxation at much higher rates in many countries. And the proposed minimum tax contains major loopholes, or “carve-outs”, that allow a significant share of a multinational’s profits to be excluded from the base of the minimum tax, thus lowering the minimum tax effective tax rate below 15 percent. (By comparison, the Independent Commission for the Reform of International Corporate Taxation, which I co-chair with the economist Jayati Ghosh, advocates a 25 percent minimum tax without loopholes that would generate more than $500 billion.)
Although both pillars reduce the financial incentives for multinationals to shift profits to tax havens, they do not eliminate them. Even in the new system, tax havens, tax competition, and profit shifting will continue to thrive, as multinationals would still have enormous discretion in allocating profits to jurisdictions with low taxes.
DEAD END
There are other fundamental problems with the OECD framework. For example, countries must sign up to a mandatory dispute settlement process, with disagreements settled by a dispute resolution panel of tax officials and ostensibly independent experts rather than by traditional courts. That requirement increases the power of large corporations at the expense of national sovereignty by allowing companies to bypass national judicial systems. Such dispute resolution processes have not worked well in the past, especially for developing countries.
Crucially, although developing countries were in the room during negotiations over the framework, they weren’t really at the table. The OECD rejected many proposals originating from developing countries, including the African Tax Administration Forum’s call for a minimum effective tax rate of at least 20 percent. As most African and Latin American countries have corporate tax rates well above the 15 percent minimum proposed in Pillar Two, ATAF has expressed concerns that the OECD initiative would put pressure on those countries to lower their rates.
Moreover, there was a lack of transparency throughout the OECD process. In some cases, officials from the International Monetary Fund intervened, asking countries to accept the OECD proposal and give up on pursuing alternatives even before they knew critical details of that proposal, such as how much tax revenue they could expect to receive or lose. An analysis conducted by the EU Tax Observatory has suggested that “the least developed countries gain no or very limited revenues”. And in return for this pittance, these countries are being asked to forgo a range of other taxes, such as those levied on digital services, which over the long run might bring in considerable revenue with low administrative costs—just the kind of taxes developing countries need. The OECD’s framework may be worse than the status quo: an initiative that began with the intent of raising more revenue from multinationals, especially for developing countries, might do just the opposite.
The plan’s most egregious flaw might be the fact that in order for Pillar One to take effect, the framework must be ratified by countries such as the United States that host the headquarters of most of the largest and most profitable multinationals. But despite the considerable political capital that the Biden administration has invested in negotiating the OECD’s framework, Congress almost certainly will not ratify it, since ratification requires a two-thirds majority in the Senate. Critics on the left worry that the framework will not ensure the developing world’s access to a fair allocation of tax revenue. And critics on the right oppose the deal, which they depict as allowing “globalists” to impose their agenda on the United States at the expense of American sovereignty.
A NEW START
The world’s first attempt at repairing the global tax system has been a fiasco. But the ongoing process at the UN may yet succeed in breathing new life into multilateralism.
The countries promoting the UN Framework Convention recognize both the strengths and the limitations of the OECD’s approach. The UN version seeks to build on the OECD’s work on taxing multinational enterprises but broadens the scope to include, for instance, the taxation of ultrawealthy individuals. Furthermore, it seeks to ensure that multinationals pay more and that taxing rights are more equitably allocated. Unlike the OECD model, the UN Framework Convention is also likely to address much-needed environmental taxes, especially those related to climate change and deforestation. In a world in which cooperation in the fight against climate change is crucial, U.S. opposition to the UN initiative is counterproductive.
Nobody likes conceding power, so it is understandable that rich countries would prefer that negotiations over global taxation take place at the OECD, a venue they control. But they should realize that it is in their interest to participate constructively at this new negotiating table. Otherwise, they will lose both the moral and the economic high ground. By allowing their positions to be driven so much by corporate interests, rich countries inadvertently reveal a weakness in their democracies.
A better global tax regime would be in the interests of all countries, including the United States. Unable to collect adequate tax revenues from multinationals, governments fail to deliver on the promises they make, which undermines social cohesion and trust. Public dissatisfaction, in turn, paves the way for populism—a rising tide that poses a fundamental threat to democracies around the world.
In opposing the UN’s Framework Convention, the United States has also exposed itself to charges of hypocrisy. Even as it calls for high taxes in the United States, especially on powerful corporations and the very rich, the Biden administration continues to support a framework with very low international taxation and extensive loopholes that enable tax avoidance. Under the OECD’s rules, it is still possible for multinational corporations to shift production and profits to low-tax jurisdictions, though to a lesser extent than before.
The fact that the OECD plan has failed should be reason enough to support the nascent effort at the UN. But Washington has another motive to get behind it: China has moved to support the UN Framework Convention, and Beijing’s engagement could further tilt the developing countries away from the United States. For the United States, geopolitical competition from China serves as an especially strong incentive to support an overhaul of global tax rules. Cash-starved developing countries are increasingly turning to China for finance. If Washington hopes to maintain its influence in shaping world affairs, it needs allies, and it needs to cooperate with those allies to promote and uphold a fairer economic order. To that end, the United States must lend its support to building a truly inclusive tax framework at the UN.
The one-country, one-vote rule at the UN means that the process will proceed and likely deliver a framework convention in the coming years, with or without U.S. support. Framework conventions go into effect even if not all countries agree to them. The United States has played a critical role in drafting numerous international treaties that it has ultimately not ratified, such as the UN Convention on the Law of the Sea and the UN Convention on Biological Diversity. The UN Framework Convention will set new standards and new norms. Over time, the United States will adhere to these norms precisely because it helped shape them.
Three decades after the end of the Cold War, the world order is undergoing immense structural changes. At the heart of this transformation is the challenge posed by China to the hegemony of the United States. Washington should see the negotiation of a framework convention on international tax cooperation as an opportunity to help shape fair global tax rules that have buy-in from most, if not all, countries. Neglecting to participate constructively in negotiations—or worse, attempting to derail them—risks pushing developing countries into the arms of the United States’ principal adversary. That is a risk not worth taking.
For all these reasons, it is hard to understand U.S. opposition to the UN Framework Convention—except if one sees the U.S. position as driven more by corporate interests than by national interests.
Joseph E. Stiglitz is University Professor of Economics at Columbia University and Chief Economist at the Roosevelt Institute. He is the author of The Road to Freedom: Economics and the Good Society.