Corporate Tax Reform Crucial to Rebuilding Trust in Post-Pandemic World, Speakers Tell Annual Meeting of Economic and Social Council
Participants Explore Challenges of Digitalized, Globalized Economy, Call for Global Tax Convention to Curb Dangerous Illicit Financial Flows
Reforming the current international corporate tax regime is critical to rebuilding trust and creating a new social contract between companies, Governments and citizens, the Economic and Social Council heard today, as members held their annual meeting on international cooperation in tax matters.
Opening the session, Amina Mohammed, United Nations Deputy Secretary-General and Chair of the United Nations Sustainable Development Group, highlighted “the paradox of plenty” that has resulted from regressive taxation, especially in the extractive sector of developing countries. Pointing to the peculiar challenges of international taxation in a digital and global economy, she said that value can increasingly be created remotely and is not subject to tax in the country where economic activity takes place.
She drew attention to several ongoing reform initiatives, including a multilateral convention spearheaded by the Organization for Economic Cooperation and Development (OECD) and the Group of 20 (G20) on an Inclusive Framework for Base Erosion and Profit Sharing, and the 2021 Model Taxation Convention, which was designed by the United Nations Tax Committee. Illicit financial flows must be redirected and invested in sustainable development for all, and not into the bank accounts of billionaires, she said.
Echoing those sentiments, Collen Vixen Kelapile (Botswana), President of the Economic and Social Council, stressed that the international community must question whether taxation has kept up with the digital advances that now permit companies to sell products across borders without maintaining a physical presence. Corporate taxes, as a significant source of revenue for many Governments, exemplify the social contract between corporate entities and the markets in which they are active. Tax reforms must pay special attention to the needs of developing countries, aiming to reduce corrosive global inequalities, he added.
Liselott Kana, Co-Chairperson of the United Nations Committee of Experts on International Cooperation in Tax Matters, detailed that body’s work to enable countries to mobilize domestic resources by broadening their tax base, strengthening tax administration and helping curb tax avoidance and evasion. Noting the need for a balance between revenue needs and the promotion of development-focused investment climates, she pointed to the updated United Nations Tax Treaty Model and other products developed by the Committee.
The Council then held two panel discussions featuring a variety of experts and stakeholders. The first, which was followed by an interactive dialogue, examined the future of corporate taxation in a digitalized and globalized world. Several speakers highlighted challenges posed by proposed tax reforms, including the OECD/G20 Inclusive Framework, drawing attention to implementation struggles faced by developing countries in particular.
Stephen Coakley-Wells, Commissioner of Financial Services Commission of Belize, cautioned that the new rules may result in increased costs and increased pressures, with very little return on investment. Mathew Gbonjubola, Co‑Chairperson of the United Nations Committee of Experts on International Cooperation in Tax Matters and Director of Nigeria’s Tax Policy and Advisory Department, said the cost of administering the Inclusive Framework may be way out of reach for many developing countries.
In the interactive dialogue that followed, China’s delegate stressed the importance of enabling market jurisdictions to implement their right to reasonably tax digital economic industries, while the representative of the United States pointed to the difference between tax avoidance and tax evasion. Drawing attention to the tax reform proposal submitted by the African Union and the African Tax Administration Forum, Varsha Singh, Adviser to that Forum, highlighted the adverse impact of the imbalance between source and residence jurisdictions.
During a second panel on the theme “Tackling tax aspects of illicit financial flows for sustainable development”, panellists examined the myriad ways in which such flows impede development and stressed the need to accelerate cooperation in curbing them.
Muhammad Ashfaq Ahmed, Member of the United Nations Committee of Experts on International Cooperation in Tax Matters and Chairman of the Federal Board of Revenue of Pakistan, said that powerful developed countries profess liberalism but pursue realism, “running with the rabbit and hunting with the hound”. Márcio Verdi, Executive Secretary of the Inter-American Centre for Tax Administration, highlighted the two types of illicit financial flows — the criminal form, including bribery, human trafficking and weapons, and that of tax avoidance by legal companies — and called for differentiated solutions.
Alex Cobham, Chief Executive of the Tax Justice Network, pointed out that illicit financial flows due to cross-border tax abuse and offshore secrecy cost the world about $483 billion in 2021, with poorer countries suffering the greatest losses. A United Nations tax convention could provide the basis for ending the anonymous wealth ownership that underpins illicit financial flows, he stressed. Echoing that point, the representative of Bangladesh said that safe havens incentivize the siphoning off of assets from developing countries.
Opening Remarks
COLLEN VIXEN KELAPILE (Botswana), President of the Economic and Social Council, said the Special Meeting on International Cooperation in Tax Matters has been convened since 2017 and has established itself as an important component of the global tax landscape, with stakeholders discussing action-oriented domestic and international issues and supporting States in their domestic resource mobilization for sustainable development. This year’s overarching theme — “Strengthening international tax cooperation for COVID-19 recovery and beyond: Examining the future of corporate taxation and tackling tax-related illicit financial flows” — addresses the significant toll of the COVID-19 pandemic on the global economy, with many developing countries and those in special situations disproportionately bearing the brunt. He noted the meeting has two aims: scouting the future role of global tax reform in addressing challenges of an increasingly digitized and globalized economy; and addressing illicit financial flows.
Citing the centrality of mobilizing and effectively using domestic resources, he emphasized that taxes are critical to financing the Sustainable Development Goals. Carbon taxes can help ensure sustainable environmental practices and health taxes can help finance those systems, as effective fiscal policies reduce inequalities and promote sustainable consumption. He noted that corporate taxes are a significant source of revenue for many Governments, exemplifying the social contract between corporate entities and the markets in which they are active. As digitalization now allows companies to sell products across borders without maintaining a presence on the ground, the international community must question if taxation has kept up with those changes or if it is falling behind, he said, asking: “Are brick and mortar businesses being disadvantaged as compared to their digital sisters and brothers?”
Meanwhile, he said, tax reforms must pay special attention to the needs of developing countries, aiming to reduce corrosive global inequalities. He noted the United Nations Tax Committee has made strides towards devising an option for developing countries, recognizing the amount of profitable economic engagement which can occur with limited or no physical presence. However, illicit financial flows from resource-rich developing countries still drain resources intended for development and jobs. Against that backdrop, he stressed that tax evasion and corruption must be eliminated and transparency and information exchange mechanisms should be embraced. It is therefore important to eliminate shell companies, strengthen anti-money-laundering laws and curtail trade mis-invoicing, he added.
AMINA MOHAMMED, Deputy Secretary General of the United Nations and Chair of the United Nations Sustainable Development Group, pointed to the challenges faced by developing countries, especially in the extractive sector, due to illicit financial flows. Stressing the need to reduce inequalities, rebuild trust and ensure that finance is invested in sustainable development for all — rather than into the bank accounts of billionaires — she said reforming international corporate tax is also key to emerging from the COVID-19 pandemic. Creating a new social contract between companies, Governments and citizens is essential, she said, underscoring the need to integrate gender equality into tax design. Highlighting the challenges posed by a digital and global economy, she noted that value can increasingly be created remotely. Under current tax treaty rules, such value may not always be subject to tax in the country in which economic activity takes place.
Spotlighting a joint initiative by the Organisation for Economic Co‑operation and Development (OECD) and the Group of 20 (G20) on an Inclusive Framework for Base Erosion and Profit Sharing, she said that project is currently negotiating a multilateral convention that would allocate taxing rights to market jurisdictions. Also pointing to the 2021 Model Taxation Convention, designed by the United Nations Tax Committee as an alternative approach for the taxation of digital automated services, she said tax reform is especially critical in the extractive sector, where regressive taxation has contributed to “the paradox of plenty”. Governance of extractive resources must be improved to bolster environmental sustainability and accountability, she said, adding that the extractive sector needs to be aligned with the Sustainable Development Goals and the Paris Agreement on climate change. She also stressed the need for tax incentives that encourage sustainable practices and move away from fossil‑fuel subsidies.
LISELOTT KANA, Co-Chairperson of the United Nations Committee of Experts on International Cooperation in Tax Matters, said the COVID-19 pandemic and its social and economic impacts have increased fiscal vulnerabilities and risks across the world. Through its targeted and practical guidance, the Committee aims to help countries mobilize domestic resources for sustainable development by broadening their tax base, strengthening tax administration and helping curb tax avoidance and evasion — all of which are essential to achieving the Sustainable Development Goals. Over the years, the Committee has generated a wealth of tools and products to support these goals. In the latest period, which just ended in June 2021, those products included updating the United Nations Tax Treaty Model and providing guidance on transfer pricing. Its work also included three completely new products, namely on avoiding and resolving tax disputes, carbon taxation and the tax treatment of Government-to-Government aid projects.
She said that, while work undertaken traditionally by the Committee — such as update of the tax model and transfer‑pricing issues — will continue, members have already identified new areas of work that will support domestic resource mobilization regarding wealth and solidarity taxes, health taxes and work on value-added taxes, all as part of continuing efforts to find new ways to support the achievement of the Sustainable Development Goals. The Committee’s work on the relationship of tax, trade and investment agreements is intended to make sure that interaction is well understood and that the objectives behind such agreements are met, with the aim of promoting a balance between revenue needs and the development-focused investment climate that many countries seek.
Outlining some of the Committee’s additional efforts, she said it is working to improve the exchange of information for tax purposes, which is closely related to the tax aspects of illicit financial flows. Another focus is on the challenges to taxation posed by the ever more digitalized economy. More than a decade ago, the Committee identified the treatment of services as an issue of priority for developing countries, leading it to introduce model provisions expanding the treaty taxing rights where a source country could tax business profits of a non‑resident enterprise. More recently, that work was expanded to deal with the taxation of automated digital services. “The ability to conduct business remotely in a country without being subject to tax is, of course, one of the great issues that we face in the tax world, and we are already exploring fair balances of the interests of the revenue, but also taxpayers and the investment climate,” she said.
Panel 1
The Council then held the first of two panel discussions. Chaired by Council President Collen Vixen Kelapile of Bostwana, the session focused on the topic “The future of corporate taxation in a digitalized and globalized world”. It was moderated by Belema Obuoforibo, Chair of Centre for Studies in African Taxation, and featured presentations by Mathew Gbonjubola, Co-Chairperson of the United Nations Committee of Experts on International Cooperation in Tax Matters and Director of Tax Policy and Advisory Department at the Federal Inland Revenue Service, Nigeria; Yan Xiong, member of the same Committee, as well as Deputy Director-General of International Taxation Department, China; Stephen Coakley‑Wells, Commissioner of Financial Services Commission, Belize; Marilou Uy, Director of the Secretariat of the Intergovernmental “Group of 24” on International Monetary Affairs and Development; Grace Perez-Navarro, Deputy Director of the Centre for Tax Policy and Administration, OECD.
Ms. OBUOFORIBO stressed the importance of increasing fiscal space for developing countries. Highlighting the two-pillar solution laid out in the OECD Inclusive Framework on Base Erosion and Profit Shifting and the alternative approach put forward by the United Nations Tax Committee, she said there are clear efforts to include developing countries in global tax policymaking. However, closer attention is necessary to ensure that the solution is truly global. The new global tax system must accommodate the business models that predominate in developing countries, she said, adding that it is therefore critical to ensure an effective and enduring voice for those countries in international tax reform.
Mr. GBONJUBOLA noted that tax administrations in many developing countries are still based on manual operations and processes, as well as human capital issues. Highlighting challenges posed by the two-pillar solutions currently under discussion, he said the proposed rules have not taken into consideration the practical challenges that developing countries face. Their cost of administration may be way out of the reach of developing countries, he said, adding that a major part of the expected additional revenue from the proposed rules will not be coming to developing countries. Also highlighting the break-neck speed at which that work is progressing, he said documents numbering many pages are often provided just hours before discussions on tax matters take place. As a result, many developing countries which lack skilled officials are not able to effectively study these materials and respond.
Ms. XIONG stressed the importance of engaging with not only large countries such as China, India and Argentina, but also smaller developing States. Noting that the United Nations Tax Committee is mandated to develop tax rules from the perspective of developing countries, she highlighted the complexity of the rules proposed by the OECD/G20 initiative. Developing countries face difficulty in participating in the design and implementation of such complex rules, she said, also noting the time and capacity constraints in digesting related materials. When it comes to the digital economy, the line is blurred between developing and developed countries, she said, adding that the question is really one of whether a location is a market jurisdiction or an exporting jurisdiction.
Mr. COAKLEY-WELLS said the reform measures being discussed today represent the introduction of novel taxation regimes in developing countries. That can introduce increased costs and increased pressures, with very little return on investment, he cautioned. Stressing the importance of addressing significant capacity gaps, he also pointed to the impact of the proposed two pillars on the revenue‑enhancement measures of developing countries. “All these countries that are being asked to introduce these measures, really, what is the benefit to them?”, he asked, adding that many Governments may feel compelled to toe the line against their own development developmental interest so as to not be seen as bad actors or non-cooperative players.
Ms. UY said the Group of 24 has advocated for inclusive international tax cooperation to make the global tax system equitable and simpler. The OECD/G20 Inclusive Framework expands the tax nexus to recognize economic presence and starts to adopt a formulary approach to profit allocation that considers sales in market countries. Developing countries need to take proactive steps to capture the opportunities and flexibilities under the new rules, she stressed, adding that, to improve the voice of such States in the implementation of the two-pillar consensus approach, it is important to shed light on the revenue impact of the reforms and the cost of administration, which are priority concerns of developing countries.
Ms. PEREZ-NAVARRO said there is no intention to address all international tax issues affecting developing countries within the two-pillar solution. Rather, it addresses digitalization issues. Noting that existing international rules can result in multinationals paying little or no corporate tax — despite their huge profits in market jurisdictions around the world — she said Pillar One attempts to streamline and simplify some of the most common transfer pricing cases which end up in disputes. Meanwhile, pillar two aims to create a global minimum tax to ensure multinationals pay a rate of at least 15 per cent, putting a floor on tax competition. Noting the political imperative to work as quickly as possible, she stressed the need for assistance for developing States.
Responding to the Chair’s questions about ensuring a voice for developing countries in international tax reform, Mr. GBONJUBOLA called for more engagement and information, while Ms. UY said countries need to know the revenue fallout of the reforms. Mr. COAKLEY-WELLS said events such as the one being convened today are useful in that regard.
Ms. PEREZ-NAVARRO echoed the need for engagement at the governmental level, while Ms. XIONG highlighted the shortcomings of withholding taxes based on “place of payer”.
The Council then heard from three respondents to the panel: Lee Sheppard, tax commentator; Allison Christians, Faculty at McGill University; and Varsha Singh, Adviser to the African Tax Administration Forum.
Ms. SHEPPARD said developing countries must understand their own economy first. “You may not be dealing with these multinationals in your country,” she said, adding that, while some States may now have big foreign players coming in, those may not be subject to the two pillars, or they may not be doing a sufficient volume of business to trigger Pillar One. Also pointing to the impact of tax treaties signed between developing countries and the parent countries of multinational companies, she added that Pillar One does not create a new taxing right.
Ms. CHRISTIANS said the international community needs to focus on ensuring that any increased tax revenues generated from today's reforms go to developing countries first. Noting that unsustainable business practices generate profit by externalizing environmental and social damage, she said countries could and should tax away unsustainable profits by incorporating externalized costs in the design of the income tax. She therefore called for a global forum on tax governance with a mandate to study and redesign the processes of global tax leadership and decision-making, stressing that the concept of inclusive governance cannot be treated as just an “empty tag”.
Ms. SINGH said that, while the Inclusive Framework’s two-pillar solution has given Africa some of what it wanted, it also represents a lost opportunity. Highlighting the proposal submitted by the African Union and the African Tax Administration Forum, she pointed to the imbalance in the allocation of taxing rights between source and residence jurisdictions. Most African countries are source jurisdictions, and are therefore adversely impacted by the current allocation rules, she said, adding that the new rules have yet to redress that challenge.
As the floor was opened for questions and comments, China’s delegate said it is crucial to enable market jurisdictions to implement their right to reasonably tax digital economic industries. The representative of the United States voiced support for the Addis Ababa Action Agenda and noted that, while tax evasion is illegal, tax avoidance is not. A representative of the World Bank stressed the need for inclusivity, simplicity and ease of implementation of tax reforms, also voicing concern about the timeline of implementation.
Responding, Ms. PEREZ-NAVARRO noted that there are commonalities across the divide between developing and developed countries, while Mr. COAKELY-WELLS said it is crucial to ensure that all viewpoints are articulated. Ms. UY emphasized that tax reform should deliver on development imperatives. Meanwhile, Ms. XIONG stressed that the new international tax system must strive for fairness, and Mr. GBONJUBOLA said the “pendulum is swinging in the right direction”.
The representatives of Indonesia, Oman and Thailand also participated, as did representatives of the European Network on Debt and Development, Society for International Development and another civil society organization.
Keynote Address
IBRAHIM ASSANE MAYAKI, Chief Executive Officer of the African Union Development Agency — New Partnership for Africa's Development (NEPAD), said the United Nations High-Level Panel on International Financial Accountability, Transparency, and Integrity — known as FACTIPanel — has for years discussed many recommendations to prepare Governments, policymakers, civil society and the private sector to take up new procedures. However, “we know that recommendations are not enough”, he said. As significant collective efforts are needed, today’s meeting must drive the common agenda to agree on new solutions for tackling tax aspects of illicit financial flows for sustainable development. Hunger, poverty, lack of health care, wealth concentration and other problems have rapidly worsened the financial system, which was already plagued with deficiencies of integrity and transparency before the onset of the COVID-19 pandemic.
“COVID-19 was not only a crisis of public health, but also a crisis of public finance,” he affirmed, due to lack of inclusiveness in the global tax architecture, digitalization of the economy, weaknesses in asset recovery and capacity deficiencies in developing countries. Tax avoidance happens through abusive trade and transfer pricing, as well as different standards and laws used by some countries. Stressing that all stakeholders must be involved to strengthen the framework for international tax cooperation, he said developing countries must show leadership through such platforms as the “Group of 77” developing countries and China, and the United Nations Conference on Trade and Development (UNCTAD). The goal should be to realistically address safe havens, exchange information on the part of tax authorities and reform tax incentives.
Outlining several recommendations, he spotlighted the need for a Global Pact for Financial Integrity for Sustainable Development based on countries’ priorities, given the magnitude of resources that could be unlocked with financial integrity. Similarly, he called for greater international information‑sharing to advance efforts against cross-border corruption and tax abuse – namely, through a global exchange that can strengthen enforcement, international rules and standards and the promotion of financial integrity. A Global Pact will also provide capacity-building to foster dynamic responses to new risks and challenges while ensuring that no country is left behind. He further called for the creation of an intergovernmental United Nations tax body to support the equitable allocation of taxing rights, and to serve as a fair platform for international dispute‑settlement while reshaping the global tax architecture.
Panel 2
In the afternoon, the Council held its second panel discussion. Chaired by Mr. Kelapile, it focused on the theme of “Tackling tax aspects of illicit financial flows for sustainable development”. It was moderated by Muhammad Ashfaq Ahmed, Member of the United Nations Committee of Experts on International Cooperation in Tax Matters and Chairman of the Federal Board of Revenue of Pakistan, and featured the following panelists: Bjørg Sandkjær, State Secretary for International Sustainable Development of Norway; Tarja Valsi, Deputy Director of the Anti-Shadow Economy Division, Customer Relations Unit of the Finnish Tax Administration; Márcio Verdi, Executive Secretary of the Inter-American Centre for Tax Administration; and Irene Ovonji-Odida, Member of the FACTI Panel and Office of the Special Adviser on Africa Knowledge Network, and Independent Commissioner at the Independent Commission for the Reform of International Corporate Taxation.
Mr. AHMED pinpointed the major challenge of “the demon of illicit financial flows”, which deprive countries of their legitimate revenue, exert undue pressure on their exchange rates and compel them to borrow nationally and internationally. This prevents investment in growth and infrastructure, he said. While an elusive concept, illicit financial flows exist in multiple forms, from human trafficking to tax evasion. The international response to the scourge has been spotty, he said, with cooperation suffering from significant infirmities. Country-by-country reports make little impact on the ground. While powerful developed countries profess liberalism and pursue realism, their reluctance to identify gaps “leads one to conclude that they are running with the rabbit and hunting with the hound”, he said.
Ms. SANDKJÆR noted the “dark backdrop” of the illegal invasion by the Russian Federation of Ukraine, resulting in soaring energy and food prices. That context makes today a good time to discuss the importance of multilateral cooperation. Even before the pandemic, she said, most low-income countries faced significant underfunding of their efforts to implement the Sustainable Development Goals, and now the situation is even more severe. In the long run, domestic resource mobilization is the only viable solution to finance national priorities and the Goals. Curbing illicit financial flows should be a top priority when reforming both the international and national tax systems, she affirmed, as they are a cancer in the system that destroys trust and tax morale — and eventually State-building. An integrated approach must involve bold policy measures at the global level, as well as assisting national tax administrations to improve implementation. Pointing out that there is still no agreed definition of illicit financial flows, she stressed that much remains to be done, adding that solutions should be based on multi-level financial integrity; inclusive negotiations to ensure legitimacy; progress towards a common standard of transparency to tackle secrecy; and all taxpayers paying their fair share.
Ms. VALSI said the common will against dishonesty and tax crimes is a key factor to success. Citing a recent attitude survey, she pointed out that as many as 96 per cent of Finnish residents agree that paying taxes is important in order to maintain a welfare State. She went on to note the importance of a whole-of-Government approach, including strong partnerships within different agencies, between different jurisdictions and with civil society at large. Citing the long tradition of cooperation between Nordic countries regarding tax crimes, she also called for global solutions and efforts to improve international tax standards, legislation and policy in order to promote fairer tax standards around the world.
Mr. VERDI, describing himself as a former tax auditor working in criminal investigations on tax evasion, said the challenge is looking for two types of illicit financial flows, which must both be dealt with differently. Those include the criminal form of evasion — including bribery and the trafficking of humans and weapons — and tax avoidance by legal companies. Tax officials are not prepared to tackle criminal illicit financial flows and would require training, as well as strong international cooperation from entities, such as financial intelligence units, federal police, customs and prosecutors. Noting that efforts to tackle tax evasion related to legal activities have improved in recent years, he said more must be done to improve the use of technology. Detecting and identifying illicit financial flows requires a modern tax code for empowerment, as well as the mechanisms to control them. He stressed that the main challenge for developing countries is the need for specialized personnel in the extractive sector, which is very broad and complex, as well as budgetary constraints.
Ms. OVONJI-ODIDA said corporate tax avoidance is particularly problematic in the mining sector in Africa, given that sector’s outsized impact in many countries in the region. She cited recent International Monetary Fund (IMF) reports on tax avoidance in that sector, which show that the current transfer pricing rules — developed by countries in the global North and happily exploited by multinationals — result in $600 million in revenue losses every year in the mining industry in sub-Saharan African countries, alone. Emphasizing “country by country reporting” as a key risk assessment tool to review large multinational enterprises, she pointed out that many African and developing countries do not have the necessary legislation in place to receive these reports, and most low‑income countries do not receive the relevant information. She noted a United Nations tax convention on transparency and financial integrity could be conducive to that end. Addressing the proposed G20/OECD 15 per cent minimum tax, she said countries must review their incentive regimes to ensure they no longer offer an effective tax rate below that minimum.
Responding to a question by the moderators about capacity‑building for developing countries’ tax administrations, Ms. SANDKJÆR said the right global framework is required, but will not be very useful without implementation at the national level. Norway works with its extractive industries — companies that do not leave the country when taxed — and shares that information with other States, she said.
Ms. VALSI said there has been progress in fighting illicit financial flows, and OECD guidelines help in tackling professional enablers. There remains room for improvement in capacity‑building and the development of tools, given gaps between tax administrations, as well as in addressing some sensitive cultural points. It is crucial to have sufficient sanction where required, she stressed.
Mr. VERDI underscored the need to focus on human resources, as “we need to work hard to create careers” in the tax arena.
Ms. OVONJI-ODIDA emphasized the importance of recognizing that different countries have different contexts — not just in cultural terms, but in economic capacities. For example, States that host corporate headquarters may have access to greater information to tax them adequately. Meanwhile, developing countries face issues around debt and investment. Pointing out that the European Union only provides information to other European Union States, she said the real push needs to be on equal access to the forum where tax rules are set, which only the United Nations currently provides.
Next, the Council heard from two respondents to the panel: Rola Dashti, Executive Secretary for the United Nations Economic and Social Commission for Western Asia (ESCWA); and Alex Cobham, Chief Executive of the Tax Justice Network.
Ms. DASHTI said the proposed two-pillar solution may not necessarily attend to all interests, both in pandemic recovery and financing the 2030 Agenda for Sustainable Development. The inability to tax the digital sector continues to drive inequality in developing countries, feeding the cycle of debt and underdevelopment. She called on the international community to reflect on the reason for excluding many multinationals from proposed tax reforms. A revamped international tax system that is inclusive is a step in the right direction, she said, noting that it must restore balance and respond to the realities of growing cross-border trade and an increasingly digitized economy. She also called for a new global pact to root out illicit financial flows.
Mr. COBHAM highlighted the three imperial ages of illicit financial flows, which in recent decades has been characterized by a “tax haven empire” where the use of offshore secrecy to evade taxation and regulation lies at the heart of the global economy. All these phases have seen the greatest costs imposed on the countries made poor by colonial extraction. He went on to note that illicit financial flows due to cross-border tax abuse by multinational companies and by individuals hiding their wealth offshore cost the world $483 billion in 2021, and countries with low per‑capita incomes suffer the greatest losses. Citing research studies which show that the top 10 per cent of households by income, and the top 1 per cent in particular, are responsible for the great majority of tax abuse, he noted that it is people in lower-income households, in every country, who experience weaker and less inclusive public services because progressive taxation is undermined. Citing efforts by the “Group of 77” countries to establish an intergovernmental tax body under United Nations auspices — which has been blocked by some OECD members — he called for a United Nations tax convention, which could provide the basis for an inclusive setting of international standards to end the anonymous wealth ownership that underpins illicit financial flows.
When the floor opened for questions and comments, Nigeria’s representative said it is worrisome that, despite the predicament of financial indebtedness of developing countries, they have continued to lose public funds due to the international community’s indifference to illicit financial flows.
The representative of Bangladesh said that, due to the COVID-19 pandemic, 60 per cent of least developed countries are now at high risk for debt. Recoveries are not uniform, meaning lenders have little incentive to provide financing. Meanwhile, safe havens incentivized the siphoning off of assets from developing States and must be eliminated.
A representative of the United Nations Development Programme (UNDP) said adequate legal structures are crucial to tackling tax evasion and illicit financial flows. Digitalization of tax administrations is also crucial, as well as coordination between agencies at the country level, with a progressive and fair tax system that fosters good governance.
A civil society representative, recalling that the United Nations committed itself in 2015 to fighting illicit financial flows, asked: “What has happened? Nothing, in concrete terms.” He called for a framework aligned with other conventions in the United Nations, followed by multilateral discussions where all countries are equal, and for a United Nations tax convention and intergovernmental tax body.
A representative of the International Monetary Fund (IMF) said his organization has been helping developing countries with illicit financial flows, but there cannot be better tax compliance while corrupt tax administrations continue to exist.
Ms. OVONJI-ODIDA said that, under the auspices of the Economic and Social Council, technical and political accountability is possible among all Member States of the United Nations. The impact of illicit financial flows is felt by all countries, she stressed.
Mr. VERDI agreed with other speakers that corruption is a main constraint to fairer tax mobilization. He added that, in the digital economy, it is crucial for developing countries to collect a consumption tax, which does not even require an international standard.
Closing Remarks
LIU ZHENMIN, Under-Secretary-General for Economic and Social Affairs, thanking all stakeholders who shared their insights and expertise, said the new reality shaped by the COVID-19 pandemic includes fresh logistical challenges and economic pressures. This has increased the urgency for greater global cooperation, he said, emphasizing the crucial role that tax reforms can play in the global recovery. Summarizing the many threads from the meeting, he said it is clear that, given today’s digitalized and globalized world, the current model of taxation is antiquated. Developing countries are calling for reforms to the tax system and measures to tackle illicit financial flows, especially in light of the harsh economic environment caused by the COVID-19 pandemic. Reforms can help mobilize domestic resources and strengthen tax systems that have been exploited. Acknowledging the work of the United Nations, Governments, as well as regional tax organizations and commissions, he called on the international community to actively support such efforts.
Mr. KELAPILE emphasized that corporate taxes remain an important source of revenue for developing countries, noting that it is critical for those States to devise mechanisms to improve levying and collection systems. The continued challenge posed by taxing the digitalized economy must be addressed to ensure that countries can effectively raise revenues, as discussions during today’s Panel 1 clearly underscored. Addressing illicit financial flows requires tackling the imbalance in the international financial and trade systems and confronting weak institutions that have prevented countries from exercising the necessary ownership over economic and financial flows. He noted that Panel 2 raised practical issues that must be considered when combating illicit financial flows, including the critical tool of exchange of information. This includes addressing challenges arising from asymmetry of information — between countries and between Governments and taxpayers — that allows such practices as tax evasion to thrive. Addressing such problems will help strengthen global financial integrity, he added.