THE Financial crisis in the West around 2008-09 first drew the attention of the public to the quaint practices in the rarefied field of international taxation. Thanks mostly to the public-spirited news organizations followed by non-governmental organizations, the world came to know the practice of transfer pricing and the unfair rules of revenue sharing that was built over a period of almost 100 years by the Western powers to help their MNCs dominate this arcane world. A lot of water has flown down different rivers in the intervening two decades and we now have a patchwork of the old rules stitched here and there by the OECD that still rules the international tax world much to the chagrin of the developing South that legitimately yearn for a fairer, less obtuse, and easily administrable international tax system. The challenge to the OECD paradoxically is now being led under the aegis of the United Nations that till recently was content to follow the OECD's lead and often tried to minimize the differences between the two Models.

The double taxation avoidance agreements, the main instruments for regulating the international tax regime were put in place by the League of Nations (LON) in 1920s and 30s. After the demise of the League that the USA never joined but controlled anyway through its powerful advisors and renowned economists, the mantle should have passed naturally to the United Nations. The common wisdom that we all received from various tomes on international taxation is that the OEEC took over the charge from the United Nations since it was too busy tackling other issues of rebuilding the world in the wake of the WW-II. A recent scholarship by Ms. Nikki Teo in a meticulously researched book- "The United Nations in Global Tax Coordination - Hidden History and Politics" however, reveals a completely different story.

One may recall that the Fiscal Committee of the LON had produced two somewhat conflicting Models - the 1943 Mexico Model that scholars agree was somewhat pro source country taxing right and the 1946 London Model - that is generally considered more residence country oriented and the Fiscal Commission of the UN was urged to review and further develop the two models in a forum of a balanced group of tax administrators and experts from both capital-importing and capital-exporting countries and from economically advanced and less-advanced countries'

The book recounts how the developing countries emerging from centuries of colonial rule tried to assert themselves in the UN Forum and the intrigues and political and intellectual jugglery that followed and how an unlikely alliance between the then Soviet Union, the UK and the USA led to the unceremonious disbanding of the Commission itself in the year 1955. That made the way for the rise to the OECD and its rule for more than 75 years now.

Those paying close attention to the developments of the OECD-led BEPS Project will find uncanny similarities in the politicking and power play, the propaganda and the prejudice, the thrusting of incomprehensible solutions to the developing countries in the name of some ephemeral gains in revenue and foreign investments in that period with what is happening now. The difference seems to be the greater awareness of the usual machinations and power play, particularly amongst the African and some Latin American countries. These countries have also been able to deftly maneuver the forum of the United Nations for sustainable development to push for international tax reforms.

The OECD, till recently the unquestionable leader in almost all matters relating to international taxation, has naturally been under scanner. But it needs to be acknowledged that it has unparallelled domain expertise and institutional memory in successfully completing important projects. The OECD has indeed put in place the rules of the game through its periodically revised Models and the Commentaries thereon. The same has worked reasonably well for well over half a century. But questions about the fairness of the rules have been raised from time to time, most notably by some Western scholars themselves and institutionally by countries like India. However, the financial crisis forced the OECD itself to embark on is ambitious BEPS project.

While credit must be given to the technical experts at the OECD CTPA in coming out with some solutions in respect of its action plan in 13 areas, it has stumbled in its efforts at solving the knottiest problem of fairly sharing tax revenues in the digitalized world - the Action point 1 of the Project and the very basis for starting the Project.

One important achievement of the OECD in this project is that because of its innumerable reports and other outputs put in by academics and the involvement of the Press and civil society organizations, the mystique of international taxation has been considerably reduced and the abuse of the gaps in the interaction between disparate domestic laws and tax treaties by resourceful MNCs stand exposed. Besides, the OECD has also demonstrated how more than 3000 bilateral tax treaties can be modified at one go by inventing and then implementing the Multilateral Instrument (MLI).

But in respect of Action Plan 1 and the OECD Secretariat's two- pillar solution, so far, consensus eludes. Besides, its proposed rules under the different pillars are so complex that these are beyond comprehension of the most. The allocation of taxing rights to the developing countries was also so niggardly that a backlash was inevitable and it happened under the aegis of the United Nations General Assembly that has the virtue of all sovereign countries having an equal voice, a feature that the OECD tried to adapt in forming its Inclusive Framework where each jurisdiction, not merely sovereign countries, could theoretically participate on an ‘equal footing'. Some of these jurisdictions are world famous tax havens and do the bidding of their investors who are mostly from rich countries. As a result, despite an apparent agreement on the two-pillar solution, there is not much enthusiasm in the developing world for the OECD's solution.

This is not to say that nothing has been done by the OECD that is not beneficial to the developing world. Some such countries most certainly have adopted and benefitted from the automatic exchange of information. India, for example, has apparently gained a lot from the system put in place. A notable achievement is also the adoption of the country-by-country reporting even though the NGOs demand the public disclosure of such information for better evaluation and effective use of such information by the countries that do not have adequate expertise and infrastructure. There are also programs for cooperation between the tax administrations which should be beneficial for all concerned.

However, questions about legitimacy and inclusivity about the OECD's decision-making process have been raised for some time now both by academics and civil society. At the institutional level, the African group has been leading the effort. According to the Global Alliance for tax justice, the G77, the United Nations' largest intergovernmental organization of developing countries and of which India is a member along with China that though does not consider itself a member but provides political and financial support, have been calling for a UN intergovernmental tax body for over two decades.

In the quest for the same, in October 2022, G77, and China tabled a UN General Assembly resolution on illicit financial flows once again calling for an intergovernmental tax body at the UN. In addition, the Africa Group tabled another UNGA resolution calling for negotiations on a UN Convention on International Tax Cooperation. However, in the absence of any support from the developed countries, the proposal on the need for a UN intergovernmental tax body was withdrawn.

The Africa Group then tabled a revised resolution in General Assembly on "Promotion of inclusive and effective international tax cooperation at the United Nations" (A/C.2/77/L.11/REV.1) and this was approved by consensus on 23 November, 2022. (source- https://globaltaxjustice.org/news/press-release-governments-approve-proposal-for-international-tax-cooperation-at-united-nations/)

The resolution, amongst others, requested the Secretary-General to prepare a report analysing all relevant international legal instruments, other documents and recommendations that address international tax cooperation, considering, inter alia, avoidance of double taxation model agreements and treaties, tax transparency and exchange of information agreements, mutual administrative assistance conventions, multilateral legal instruments, the work of the Committee of Experts on International Cooperation in Tax Matters, the work of the Organisation for Economic Co-operation and Development/Group of 20 Inclusive Framework on Base Erosion and Profit Shifting and other forms of international cooperation, as well as outlining potential next steps, such as the establishment of a Member State-led, open-ended ad hoc intergovernmental committee to recommend actions on the options for strengthening the inclusiveness and effectiveness of international tax cooperation.

The secretary General in his exhaustive report of 26th July, 2023, analyzed the work of both the OECD, its Global Forum, the Inclusive Framework as also the work done by the UN Committee of Experts. (A/78/235, 26 July 2023) titled-Promotion of inclusive and effective international tax cooperation at the United Nations- Report of the Secretary-General.

While acknowledging the high quality of work at both, the Secretary General did point out certain shortcomings that are mostly in relation of inclusivity and effective participation by the developing countries. Specifically relying on an input paper prepared by the IBFD on this occasion, he pointed out that though the OECD produces a wide range of guidance documents on tax policy and administration that is recognized as having a high technical quality, in general and across topic areas, the OECD guidance is adopted much more widely in the developed countries than by developing countries for reasons of the complexity of the provisions and administration, lack of capacity in developing countries and some missed opportunities in the context of the base erosion and profit shifting project to address comprehensively the key issues that are regarded as most pressing for developing countries- wasteful tax incentives, taxation of cross-border services, indirect transfer of assets, and certain transfer pricing issues, such as the lack of comparability data.

He observed that developing countries consider that the OECD guidance does not respond to their more immediate needs and priorities, and instead draws resources away from such issues, and/or that they are not capable of implementing it as a result of their tax administration capacities. Accordingly, the substantive aspect of inclusive and effective international tax cooperation is not adequately met.

He also referred to the work of the Global Forum and the Inclusive framework and the procedural issues that prevent developing countries from participating fully in the agenda-setting and decision-making processes. Countries that join the Global Forum must commit to implementing the Exchange of Information on Request standard as well as the Common Reporting Standard. Similarly, countries that wish to join the Inclusive Framework must commit to the minimum standards of the base erosion and profit shifting actions. In each case, they must also pay an annual fee. "The requirements that jurisdictions pay to participate in discussions and accept the existing standards before being allowed to participate run counter to the principle of universal participation, by right, without preconditions."

The Secretary general observed that the obligation that countries that are not members of OECD must commit to applying rules that were developed before they became members of the norm-shaping body, namely the Exchange of Information on Request requirement, Common Reporting Standard and base erosion and profit shifting minimum standards, is inconsistent with the procedural criteria that all countries should be involved in agenda-setting.

In this column, I have often pointed out the hollowness of the equal footing slogan of the OECD. It is heartening to note that the Secretary General also alludes to the same: - "In practice, however, it may be difficult for countries with small international tax staff to influence decision - making processes in these forums. In the case of the Inclusive Framework, a country is considered to agree to a proposal unless it raises an objection. It is not required to affirmatively "opt-in" to be part of the consensus. Therefore, a country that cannot keep up with the pace of work and never expresses a view on a proposal is considered to agree to it."

The Secretary General also referred to the work of the UN Committee of Experts: "The United Nations is attuned to the need to provide guidance that offers different options that are appropriate for countries at varied levels of development. Such guidance is widely used by developing countries. However, it is produced by the Committee of Experts, which is a small expert group, the members of which serve in their personal capacities. Even with the broad engagement of Member States and other observers in the Committee's work, the status of its guidance is not the same as that of guidance produced and agreed through an intergovernmental process."

The Secretary General therefore concluded that enhancing the role of the United Nations in tax-norm shaping and rule-setting, with full consideration of existing multilateral and international arrangements, appears the most viable path for making international tax cooperation fully inclusive and more effective. Rather than duplicating existing processes, a United Nations intergovernmental process would leverage existing strengths and address gaps and weaknesses in current international tax cooperation efforts. It would draw and build on the long-standing and multilayered cooperation between the United Nations and OECD in the area of international tax, as in many other areas.

He also pointed out that the United Nations has vast experience of reaching and implementing multilateral agreements that address the needs of all parties, on both politically sensitive and technically complex issues. Some of those multilateral agreements were initiated by other institutions but only became global standards after being reopened for negotiation through a United Nations process that led to them being concluded and agreed.

In the end, he gave three options-

- a legally binding convention, sometimes also referred to as a "standard multilateral convention", that would potentially cover a wide range of tax issues.

- a second option, namely a framework convention, would also be a legally binding multilateral instrument, but one that is "constitutive" in nature, in that it would establish an overall system of international tax governance. A framework convention would therefore outline the core tenets of future international tax cooperation, including the objectives, key principles governing the cooperation and the governance structure of the cooperation framework. Framework conventions may also include institutional provisions for creating a plenary forum for discussion between States that is endowed with the authority to adopt further normative instruments to which States could then become a party. Protocols to the framework convention could provide additional, "regulatory" aspects, with more detailed commitments on particular topics, giving countries the ability to opt-in and opt-out on the basis of their priorities and capacities. If there is sufficient agreement on certain action items, some of these protocols could be negotiated at the same time as the framework convention. This might include, for example, a protocol on measures to address the problem of illicit financial flows.

- a third option would be developing a non-binding multilateral agenda for coordinated actions, at the international, national, regional and bilateral levels, on improving tax norms and capacity. Some problems, such as eliminating illicit financial flows, require global action because a handful of jurisdictions can undermine the efforts of the majority. A single approach is not necessary for some other matters, such as the appropriate withholding tax rates that should apply to cross border payments in a bilateral situation. Improvements to tax administration naturally take place at the national level, but they can be, and frequently are, supported by multilateral and regional processes. Member States, operating through the framework, would analyse tax problems to determine the level or levels at which coordinated actions would be most effective.

Then, on the 28th December 2023, the United Nations General Assembly, adopted Resolution Number 78/230 at the behest of Nigeria on behalf of the African Nations deciding "to establish a Member State-led, open-ended ad hoc intergovernmental committee for the purpose of drafting terms of reference for a United Nations framework convention on international tax cooperation."

For this article, it will be interesting to note some of the reasons for adopting the aforesaid resolution as is evident from the document itself:

- the timeliness and importance of strengthening international tax cooperation to make it fully inclusive and more effective, both in procedural and substantive terms, so that Governments may better cooperate in generating financing for development, including through combating illicit financial flows, recovering and returning stolen assets, promoting financial integrity for sustainable development and improving public institutions.

- increasing the legitimacy, stability, resilience and fairness of international tax rules is in the common interest of all relevant stakeholders in tax systems and requires scaling up international tax cooperation by establishing the legal basis for fully inclusive and more effective international tax cooperation in terms of substance and process, giving due consideration to the value of coherent and consistent international tax rules while also respecting the tax sovereignty of each Member State,

- respect for tax sovereignty implies international tax cooperation that allows all countries to effectively participate in developing the rules, by right and without preconditions, and adapt and implement them in accordance with their needs and preferences,

- inclusive and effective participation in international tax cooperation implies that procedures should take into account the different needs, priorities and capacities of all countries to meaningfully contribute to the norm setting processes, without undue restrictions, and support them in doing so, including giving them an opportunity to participate in agenda-setting, debates and decision making, either directly or through country groupings, according to their preference,

- agenda-setting is an important procedural aspect because the way in which tax challenges requiring collective action are identified and framed often predetermines the scope and nature of the responses to these challenges, as well as the order of priority for dealing with them,

- a fully inclusive and effective international tax cooperation requires well-established and transparent decision-making structures, and clear and transparent rules, in order to ensure that all participants are on an equal footing procedurally and have the same ability to engage meaningfully in decision-making, as well as clear and cohesive multilateral rules to aid countries and businesses and to prevent opportunities for tax avoidance,

- an inclusive and effective international tax cooperation system requires robust processes for preventing and resolving tax disputes in an effective manner, and keeping in mind that developing countries have limited resources to handle costly international dispute settlement processes

- international tax rules must respond to the needs, priorities and capacities of all countries and appropriately address the ways in which modern markets operate and business is done, as part of a major overhaul of the international financial architecture,

Noting that the implementation of the Addis Ababa Action Agenda and the 2030 Agenda for Sustainable Development may be further supported by additional domestic resource mobilization.

The Resolution, of course, noted the contribution of the OECD work on BEPS - the ongoing work on the two-pillar solution, noting that it facilitates collaboration for tackling tax avoidance and improving the coherence of international tax rules. Besides, the resolution also noted the implementation of the Standard for Automatic Exchange of Financial Account Information in Tax Matters under a common reporting standard developed by the Organisation for Economic Co-operation and Development, as well as the role of the Global Forum on Transparency and Exchange of Information for Tax Purposes.

Predictably, the reaction of the core OECD member states to the development has been hostile. Nevertheless, the resolution passed and as directed, an ad-hoc working group consisting of 20 members was constituted, consisting of a chair, vice-chairs, and a rapporteur, elected on the basis of balanced geographical representation and considering gender balance, with each of the five regional groups equally represented.

On the 7th of June, 2024, the Chair of the Ad-hoc committee, Mr Rami M Youssef of Egypt put up a zero draft of the TOR for discussion and debate.

In subsequent discussions, some modification to the language was made perhaps to assuage the feelings of the developed countries and finally on the 16th of August 2024, the TOR was adopted in the General Assembly. The important elements of the same are as follows:

Objectives-

a. Establish fully inclusive and effective international tax cooperation in terms of substance and process;

b. Establish a system of governance for international tax cooperation capable of responding to existing and future tax and tax-related challenges on an ongoing basis;

c. Establish an inclusive, fair, transparent, efficient, equitable, and effective international tax system for sustainable development, with a view to enhancing the legitimacy, certainty, resilience, and fairness of international tax rules, while addressing challenges to strengthening domestic resource mobilization

Principles-

a.be universal in approach and scope and should fully consider the different needs, priorities, and capacities of all countries, including developing countries, in particular countries in special situations;

b. recognize that every Member State has the sovereign right to decide its tax policies and practices, while also respecting the sovereignty of other Member States in such matters;

c. in the pursuit of international tax cooperation be aligned with States' obligations under international human rights law

d. take a holistic, sustainable development perspective that covers in a balanced and integrated manner economic, social and environmental policy aspects;

e. be sufficiently flexible, resilient and agile to ensure equitable and effective results as societies, technology and business models and the international tax cooperation landscapes evolve;

f. contribute to achieving sustainable development by ensuring fairness in allocation of taxing rights under the international tax system;

g. provide for rules that are as simple and easy to administer as the subject matter allows;

h. ensure certainty for taxpayers and governments; and

i. require transparency and accountability of all taxpayers.

Commitments

a. fair allocation of taxing rights, including equitable taxation of multinational enterprises;

b. addressing tax evasion and avoidance by high-net worth individuals and ensuring their effective taxation in relevant Member States;

c. international tax cooperation approaches that will contribute to the achievement of sustainable development in its three dimensions, economic, social and environmental, in a balanced and integrated manner;

d. effective mutual administrative assistance in tax matters, including with respect to transparency and exchange of information for tax purposes;

e. addressing tax-related illicit financial flows, tax avoidance, tax evasion and harmful tax practices; and

f. effective prevention and resolution of tax disputes

Protocols

Two early protocols should be developed simultaneously with the framework convention. One of the early protocols should address taxation of income derived from the provision of cross-border services in an increasingly digitalized and globalized economy.

The subject of the second early protocol should be decided at the organizational session of the intergovernmental negotiating committee and should be drawn from the following specific priority areas:

a. taxation of the digitalized economy;

b. measures against tax-related illicit financial flows;

c. prevention and resolution of tax disputes; and

d. addressing tax evasion and avoidance by high-net worth individuals and ensuring their effective taxation in relevant Member States.

Protocols addressing the following topics, inter alia, could be considered:

a. tax cooperation on environmental challenges;

b. exchange of information for tax purposes;

c. mutual administrative assistance on tax matters; and

d. harmful tax practices.

While all these developments are good from the perspective of developing countries, the decision was not unanimous and 8 capital exporting countries led by the USA voted against-(Australia, Canada, Israel, Japan, New Zealand, Republic of Korea, United Kingdom and the United States.) A total of 110 Member States voted in favour of the terms of reference for a new treaty. 44 members including the EU members abstained.

In this connection, it will also be useful to note the explanation of its vote as issued by the USA-

"Thank you, Mr. Chair. I would like to start by thanking you for your stewardship of this negotiating session and by thanking all participating Member States for their efforts over the past three weeks.

While those efforts are appreciated, the United States regrets that it cannot join consensus on this report or the Terms of Reference, and we wish to explain the reasons for our decision to call the vote that will follow shortly.

Throughout this process, we have provided many suggestions related to the importance of consensus and broad support to ensuring the success of this, or any project on international tax cooperation.

The implementation of fundamental international tax reforms requires maximum participation and cooperation on very complex topics, including complicated tax computations, resources devoted to enforcement, and streamlined modifications to existing international agreements.

If the ultimate goal of this effort is to make meaningful and durable changes to international tax cooperation, the only way to do so is by achieving broad-based support. Inclusive and effective international tax cooperation inherently requires global buy-in. We do not think that idea is controversial. Unfortunately, that key principle was not reflected here today.

We have and will continue to engage constructively to work through issues that are important to us and other jurisdictions. Like many countries here, we have dedicated significant resources of our State Department and Treasury Department in order to find common ground on priority concerns.

As we have raised in many oral and written inputs, we had also hoped to see more flexibility in the Terms of Reference afforded to the proposed intergovernmental negotiating committee. We think that the proposed committee will be better positioned to scope and analyze the commitments and protocols, especially given the very ambitious and ambiguous scope of the topics raised here. We had also hoped to see a stronger reflection to the principle of complementarity, considering the extensive work and expertise of other forums.

Unfortunately, despite best efforts to find a path forward, we do not see those priority items reflected here.

We continue to be interested in engaging with all negotiating partners here on constructive paths forward. However, without a clear commitment to finding consensus-based solutions and maximizing the number of implementing jurisdictions, we see a clear risk that this project may lead to further fragmentation of the international tax system.

For that reason, we are compelled to call a vote here, and will vote against the adoption of this report and its Terms of Reference."

According to a UN handout, the TOR will now be presented before the UN General Assembly in its 79th Session in September, 2024. If adopted, the Assembly would have the convention and two protocols drafted by a Member State-led negotiating committee, which would meet annually for the next three years. The negotiating committee would then submit a final text to the General Assembly for its consideration in the first quarter of the 82nd session, according to the terms of reference. That would mean that all 193 UN Member States could vote on a finalised UN global tax treaty in 2027. The UN treaty would need to be adopted by the General Assembly, after which it would be opened for signature and ratification to all Member States.

Will this actually happen? Let's keep our fingers crossed.