OVERVIEW
On August 16, 2024, the Ad Hoc Committee entrusted with formulating the terms of reference for the impending UN Framework Convention on International Tax Cooperation (hereinafter referred to as the “framework convention”) ratified the definitive version of the text, as delineated in UN General Assembly Resolution A/78/230.[1] This milestone, shaped by dedicated advocacy of civil society organisations, has thoughtfully integrated human rights considerations into the terms of reference. It articulates that endeavours to fulfil the convention’s objectives must harmonise with the obligations of states under international human rights law, representing a pivotal shift for the pursuit of economic justice.
The Terms of Reference[2] (ToR) stipulate that the Framework Convention should contain key structural elements such as clear statement of objectives, guiding principles, and commitments to achieving them. Additionally, the ToR outlines the development of protocols to address specific tax issues, with details on the approaches and timeframe for the negotiation committee.
The 79th General Assembly, of September, 2024, will centre its efforts on several priorities: advancing human rights, fortifying the frameworks of international law and justice, catalysing economic growth through innovation and sustainable green practices, and tackling pressing global challenges related to sustainable development.
CHRONOLOGY OF EVENTS
On November 23, 2022, the 77th UN General Assembly’s Second Committee, led by a coalition of African nations, adopted a draft resolution advocating for universally inclusive international tax framework. This initiative culminated in the adoption of Resolution 77/244[3] by the UN General Assembly on December 30, 2022, setting the stage for intergovernmental discussions, aimed at fostering inclusivity and enhancing global tax cooperation. Nigeria while speaking on behalf of the African Union[4], expressed that the African group initiated the process with a clear purpose to ensure inclusivity in international tax discussions.[5]
In February 2023, the UN Secretary-General initiated a public consultation to gather feedback from stakeholders, which was followed by the release of a report in July 2023, titled “Promotion of Inclusive and Effective International Tax Cooperation.”[6] The report outlined three potential pathways to establish a more inclusive tax framework: strengthening the existing international tax cooperation framework, establishing a new international tax cooperation framework and adopting hybrid approach by combining elements of both the existing and new frameworks to leverage the strengths of each while addressing their respective weaknesses.
On November 22, 2023, the UN General Assembly’s Second Committee approved a resolution to support inclusive international tax cooperation by establishing an Ad Hoc Committee to develop a Framework Convention.[7] Resolution 78/230, was adopted by the UN General Assembly on December 22, 2023, with 111 jurisdictions voting in favour, 46 against, and 10 abstentions calling for the finalization of deliverables by August 2024 for submission to the 79th session of the General Assembly.
On June 7, 2024, the Ad Hoc Committee’s Bureau released a “zero draft” of the ToR[8] and solicited feedback from stakeholders, resulting in over 100 submissions. A revised ToR was released in mid-July and served as the basis for discussions during the Second Session of the Ad Hoc Committee, held from July 29 to August 16, 2024.[9]
The Second Session concluded with the finalization of the ToR, was approved by a vote of the Ad Hoc Committee on August 16, 2024.[10] The ToR outlined the major structural elements of the Framework Convention, including objectives, principles, commitments, provisions on capacity building, and a timeframe and approach for negotiating the Framework Convention.
The ToR also provided for the development of protocols under the Framework Convention. These protocols would be legally binding instruments that each party to the Convention could choose to join. The ToR referenced two initial protocols to be developed alongside the Framework Convention: (1) Protocol addressing the “taxation of income from cross-border services in an increasingly digitalized and globalized economy,” and (2) Protocol on a subject to be chosen from four priority areas: (a) taxation of 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 their effective taxation in UN member jurisdictions. The ToR also suggested the possibility of developing protocols on other topics, such as tax cooperation on environmental challenges, exchange of information for tax purposes, mutual administrative assistance on tax matters, and harmful tax practices.
In the final vote, 110 UN member jurisdictions supported the ToR, while 44 jurisdictions, including the EU and its Member States, abstained. The EU and the US provided explanations for their votes, expressing concerns about the lack of consensus-based decision-making and the need for alignment with other international forums.[11] However, questions have emerged regarding India’s position, which need clearer articulation.
INCORPORATING HUMAN RIGHTS CONCERNS IN TAX POLICY DEVELOPMENT FOR DEVELOPING NATIONS
Three policy documents delineate the concept of human rights: the Universal Declaration of Human Rights (UDHR), International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR).[12] As these treaties do not outline specific fiscal policies that governments are required to adopt; societies have generally regarded tax codes as being indifferent to human rights.
Though international treaties may lack specificity, there are inherent limitations on the discretion available to states on the formulation of fiscal policies. For instance, Article 2(1) of the ICESCR mandates that parties maximise their resources for the ‘full realization’ of the rights enshrined in the Covenant, including through the ‘adoption of legislative measures.’[13] A human rights perspective underscores the importance of taxation as an integral mechanism for adhering to the principle of utilizing Maximum Available Resources (MAR),[14] as stipulated in Article 2(1) of the ICESCR.[15] States that are parties to the ICESCR are obligated to demonstrate their commitment to satisfy core human rights obligations. This entails implementing intentional and targeted measures to protect the rights of vulnerable population and to facilitate the broadest possible enjoyment of rights, notwithstanding existing challenges.[16]
Governments depend on robust state finances to effectively fund social programs, redistribute wealth, and promote economic development. Taxation and fiscal policy play a vital role for safeguarding the human rights of its citizens. This is primarily because rights cannot be protected or enforced without adequate public funding and support and hence, all rights impose demands on the public treasury.[17] Where affluent corporations and individuals neglect their tax obligations, the financial burden is unfairly shifted to less wealthy citizens. The situation may lead to the discontinuation or insufficient funding of vital social programs. A misuse of the tax system fundamentally impairs the capacity of states to act in the best interest of their populace. Developing nations thus face challenges in establishing effective and efficient tax systems. When a state experiences a decline in revenues resulting from a diminished tax base, it becomes imperative to seek alternative sources of revenue.[18] This is essential to bolster the national treasury and ensure stability of the national budget.
Developing nations encounter challenges for collection of personal income taxes, largely due to their reliance on officially employed workforce in the formal economy. Employers are responsible for withholding income tax from employees’ wages and remitting them to the government. Consequently, the potential revenue from corporate taxes—a critical and lucrative source —is not fully maximized.[19] Developing nations thus often tend to rely heavily on consumption taxes, even though a large part of their economies are informal.[20] Moreover, the pressures of globalization have also compelled developing nations to participate in a ‘race to the bottom,’ to compete for attracting foreign direct investment (FDI).[21]
Aggressive taxpayer structures also impact a state’s ability to combat poverty and development issues. Corporate tax abuse represents a critical concern related to human rights. When taxpayers engage in practices such as transfer mispricing, non-taxation of natural resources, negotiation of tax holidays, and the use of offshore investment accounts, they undermine the nation’s financial resources. This depletion of funds impedes efforts to alleviate poverty and to support programs designed to protect and promote internationally recognised human rights.[22] Former United Nations Secretary-General, Kofi Annan, astutely compared tax abuse to “taking food off the table for the poor.”[23] This analogy underscores that the repercussions of such practices are predominantly suffered by the most vulnerable segments of society.
The principles section of the ToR stipulates that efforts to fulfil the objectives of the convention must be consistent with the obligations of states under international human rights law. This signifies a substantial advancement toward achieving economic justice, providing developing nations with the hope that their human rights interests and concerns may receive representation within tax conventions.
INDIA’S PERSPECTIVE
On June 18, 2024, India articulated its stance on the zero draft of the terms of reference (ToR) for the framework convention.[24] An analysis into the document provides further insight into India’s stance with India expressing broad agreement with the structure and organization of topics, as well as specific subjects.
India also provided detailed comments specifically on principles section, stating: “A United Nations framework convention on international tax cooperation should include a clear statement of its guiding principles.” On Paragraph 9, “transparency and accountability of taxpayers, while respecting the rights to privacy and other fundamental human rights.”, India found the phrase “other fundamental human rights” vague and potentially open to unintended interpretations that could undermine the principle.[25] India emphasized the importance of respecting taxpayers’ rights and highlighted its taxpayers’ charter, which outlines the government’s commitments to taxpayers and expectations from them. To avoid ambiguity, India proposed rewording the clause: “require transparency and accountability of all taxpayers, with adequate safeguards to protect taxpayers’ rights and confidentiality.”[26]
India has endorsed the text on resources supporting the work of the negotiating body maintaining that a well-staffed and adequately resourced Secretariat is crucial for the intergovernmental committee drafting the UNFCITC. India has also emphasised the importance of Member States and other stakeholders assisting developing nations, particularly the least developed nations. This underscores India’s recognition of the need for the participation of developing nations, especially the least developed ones.
Additionally, during the 22nd meeting of the Ad Hoc Committee to Draft Terms of Reference, India articulated its stance with clarity and conviction. On August 16, 2024, India hailed the adoption of the ToR as a truly historic achievement and cast its vote in favour.
India acknowledged that while the milestone is significant, it represents merely the first step in a long and arduous journey reaffirming its commitment to engage constructively in the drafting of the framework convention and its protocols. India expressed confidence that other member states would also engage proactively, with the shared goal of crafting a document that lays a robust foundation for inclusive and effective international tax cooperation in the 21st century.
India with other members is advocating for the inclusion of key terms of reference that address tax-related illicit financial flows, tax avoidance, tax evasion, and harmful practices. Other crucial aspects include fair allocation of taxing rights, ensuring equitable taxation of multinational enterprises—a move seen as beneficial.[27] Additionally, the framework aims to tackle tax evasion and avoidance by high-net-worth individuals, ensuring their effective taxation in relevant jurisdictions. It also emphasises effective mutual administrative assistance in tax matters, particularly concerning transparency and the exchange of information, as well as the prevention and resolution of tax disputes. Many developing nations, heavily reliant on tourism income, face negative externalities that contribute to the deterioration and depletion of local resources, ultimately impacting the welfare of their people and economies.
WAY FORWARD
India has been earnestly engaged in the OECD negotiations on two-pillar solution for international taxation. Nevertheless, as a market jurisdiction, it has also lent its support to the UN resolution, demonstrating a commitment to a balanced approach. Despite opposition from developed nations (in voting) against the UN resolution, it is imperative for the UN to develop comprehensive literature that effectively critiques the frameworks put forth by the OECD.
In a display of solidarity, India was among the 110 nations that endorsed the ‘Terms of Reference’ for a United Nations Framework on international tax cooperation. This framework promises to enhance the influence of developing nations, particularly in Africa and Asia, in shaping and influencing the global tax agenda.
No doubt, the path ahead is fraught with challenges; however, it is essential to cultivate the political will and momentum to implement significant reforms whilst asserting taxation rights for market jurisdiction. The undertaking will likely demand a concerted and sustained commitment, from developing nations like India, to ensure they generate sufficient resources to meet the vital needs of their citizens and fortify their economies.
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