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By Diego Alexander Foss, Senior Advocacy Advisor at Save the Children Norway, and Bonnie Berry, Senior Advocacy Advisor at Save the Children International New York Global Advocacy Office
More than 75 years since the establishment of the United Nations and the Bretton Woods Institutions, there has never been a universal or broadly inclusive forum or body for global coordination on international taxation matters. Rather, the process of setting international tax norms and standards has been largely led by the OECD and the G20, where power and influence are primarily held by wealthy nations and where lower-income countries have been traditionally excluded from decision-making processes.
The rise of globalization and digitalization of financial systems has further complicated the situation. As a result, lower-income countries are systematically disadvantaged by an eroded tax base as current financial structures and systems enable widespread tax avoidance and evasion, primarily by multinational corporations through profit shifting and other practices to avoid paying taxes in jurisdictions where they have operations or where profits are earned. This has hampered the ability of all countries to invest in sustainable development and children’s rights, but particularly affects lower-income countries who are already the furthest behind. It has also contributed to widespread inequality and inequity, both within and between countries.
While some efforts have been made to reform the global tax system, these have primarily taken place outside a transparent, inclusive multilateral process. For years now, civil society organizations and lower-income countries have been calling for the democratization of global tax governance under the auspices of the UN and there are now promising signs that this shift may occur.
On 23 November, the UN General Assembly’s Economic and Financial Committee (known as Second Committee) adopted a resolution on the Promotion of inclusive and effective international tax cooperation at the United Nations, effectively opening the door for negotiations towards an international tax cooperation agreement through inclusive, intergovernmental negotiations at the UN.
The current financial situation
This development is particularly timely considering that three years into the COVID-19 pandemic, low- and lower-middle income countries are struggling to recover from the economic consequences of the global health crisis. The situation is exacerbated by the climate crisis and the increasing number of conflicts around the globe, particularly now with the conflict in Ukraine and its impact on the cost of food, energy, and other commodities.
The fiscal space for low and lower-middle income countries to finance sustainable development and invest in children in line with the 2030 Agenda for Sustainable Development, its Sustainable Development Goals (SDGs), and international child rights obligations is seriously constrained. The current financing gap for achieving this vision – already high prior to the pandemic – is estimated to be $4.2 trillion per year for lower-income countries, making the likelihood of delivering on the promise of the SDGs out of reach for much of the global south.
Global debt levels further complicate the picture. According to estimates by the IMF and World Bank, 60% of low-income countries are in debt distress or are facing high risk of debt distress. This is driving some countries to make the difficult decision between paying down their debts and spending on critical public services to uphold children’s rights and the SDGs. For example, recent analysis from Save the Children found that one-third of low- and lower middle-income countries spent more on servicing their external debt than they did on education in 2020, which is particularly concerning given that approximately half of the world’s 2.4 billion children are estimated to live in multidimensional poverty.
Unsustainable levels of debt are also preventing low-income countries from building the necessary resilience to stand up to future crises, be they health, climate or other. The result is an unnecessary cycle of debt and aid reliance that has financial implications for both developed and developing countries.
It’s hard to fathom how countries will finance the achievement of the SDGs in this context of increasing debt instability as well as troubling trends in development cooperation. For decades, donor countries have failed to deliver the commitment to fulfill and exceed the official development assistance (ODA) target of 0.7% GNI, and the last few years have seen several large donor countries reduce their ODA support and/or redirect ODA to cover the costs of refugee reception at home. This emphasizes how unsustainable it can be for low-income countries to rely on the solidarity of rich countries to help finance development.
Unfulfilled commitments and failed reforms are hampering sustainable development
In 2015, through the adoption of the Addis Ababa Action Agenda, countries committed to scaling up international tax cooperation through universal approaches that would take into account the different needs and capacities of all countries and to strengthen the voice and participation of developing countries in international tax cooperation efforts. They also committed to substantially reducing illicit financial flows by 2030 through increased international cooperation and agreed to make sure that all companies, including multinationals, pay taxes to the Governments of countries where economic activity occurs and value is created.
Yet, despite the global nature of the world economy, there is currently no truly global and inclusive body for all countries to participate in decision-making on international tax cooperation. While some effort has been made to reform mechanisms and rules around tax governance, these have failed to live up to the promises made in 2015. Instead, there are more than 2500 bilateral tax agreements and the closest thing to a global framework is led by the OECD, an organization primarily comprised of high-income nations.
The OECD/G20 two pillar solution has been called out by some actors for failing to provide real solutions that would address root causes and rules that facilitate tax dodging. While some progress has been made, such as an agreement on a global minimum tax rate, progress has been insufficient and lower-income countries have not had an equal footing in negotiations compared to their higher income counterparts.
Furthermore, efforts to address debt issues through the G20 Common Framework have failed to deliver. Due to weaknesses in the framework, few countries have applied for debt restructuring, and none have completed the process. Importantly, the framework has so far failed to bring private creditors to the table. These failures in the international debt system make progress in reforming the international tax system to expand fiscal space for investment in sustainable development all the more urgent.
Why would talks at the UN on international tax cooperation matter?
We know that progressive taxes and domestic resource mobilization (DRM) are the most reliable long-term sources of financing for sustainable development and investment in children. For many countries, reforms to broaden the tax base, make tax systems more progressive and improve public financial management are needed.
But that won’t be enough on its own.
The economic consequences of the pandemic, conflict and the climate emergency have hurt countries’ abilities to raise domestic resources and tax revenues have fallen. Annually, more than $483 billion US dollars are lost in public revenue globally due to cross-border tax abuse, including $312 billion as a result of corporate profit shifting3. This figure doesn’t include indirect losses, which the IMF estimates could be at least three times higher.
This tax abuse hits lower-income countries the hardest, as it represents a larger share of their overall tax revenues, with serious implications to their ability to invest in critical public services for children like health, education and social protection. Addressing these abuses through international cooperation to address cross-border tax abuse, evasion, and illicit financial flows, as agreed to in the Addis Abba Action Agenda, has the potential to unlock significant levels of domestic resources.
The commitment to scale up tax cooperation must be honored if we are to achieve the 2030 Agenda.
For decades, low-income countries and civil society organizations have called for moving international decision-making regarding international tax cooperation to the UN where all governments are on an equal footing. This would promote fairness towards lower-income countries by replacing existing tax norms and standards that are biased towards more wealthy corporations and countries with a more coherent and fairer international tax system. The adoption of the resolution on international tax cooperation by the UN in late November now makes this possible, and CSOs have put forward a draft proposal setting out what a UN Tax Convention could look like.
However, the road ahead won’t be without challenges. While the resolution was passed with consensus, a number of high-income countries voiced their disapproval at moving intergovernmental discussions on tax matters to the UN. An exception was Norway, who has taken what can be considered a middle stance – supporting the improvement of the OECD-led framework while at the same time acknowledging the role the UN can play. Going forward, high-income countries must recognize the limitations of the OECD-led system and support the discussion of global issues in inclusive global fora where all countries have a genuinely equal seat at the table.
Finding inclusive and sustainable solutions to fix the broken international financing system has significant potential to help accelerate progress towards the SDGs and is an investment for the future. If coupled with transparency and accountability, ensuring that countries keep more of their due tax revenues provides a stronger foundation for them to invest in children, address inequalities, increase financing to address the climate crisis, as well as prepare for and recover from future crisis. This is in the interest of all countries and all populations – and, crucially, of children.