Inclusive International Tax Systems Crucial in Strengthening Developing Countries’ Fiscal Policies, Green Transition, Speakers Tell Economic and Social Council
Fair and inclusive tax systems are essential in enhancing developing countries’ efforts to strengthen their financial and fiscal policies and accelerating the green transition, the Economic and Social Council heard today, as members held the 2023 Special Meeting on International Cooperation in Tax Matters.
“The world does not have a crisis of resources; it has a crisis of sharing and managing those resources effectively,” said Amina Mohammed, United Nations Deputy Secretary-General. Given that 40 per cent of developing economies are suffering from severe debt problems, it is crucial to strengthen international tax cooperation, she underlined, noting that tax-related illicit financial flows, tax avoidance and tax evasion are draining much needed resources and undermine long-term sustainable development. Calling for fair international tax systems, she emphasized that the use of tax policy as a lever to drive the transition from fossil fuels to renewable energy sources could drastically accelerate the green transition.
Echoing those sentiments, Mathew Gbonjubola, Co-Chairperson of the United Nations Committee of Experts on International Cooperation in Tax Matters to the Economic and Social Council, detailed that body’s work to help countries mobilize domestic resources for sustainable development by broadening their tax base, strengthening tax administration and helping curb tax avoidance and evasion. Taking into account the needs and capacities of developing countries, the Committee has expanded its work programme to address policy concerns related to wealth taxes and indirect taxes, including health taxation. He drew attention to numerous easy-to-administer approaches adopted by the Committee, including the United Nations Model Double Taxation Convention.
Zainab S. Ahmed, Minister for Finance, Budget and National Planning of Nigeria, giving her keynote speech via videoconference, expressed concern about the lack of inclusiveness in the development of taxation frameworks. Developing countries are being punished by unilateral declarations and “blacklisted by forums and bodies in which they have no voice”, she pointed out. Given their lower-capacity tax systems and their inequitable experience with the results of arbitration under international investment agreements, she urged that proposals for mandatory arbitration on tax dispute settlement be addressed. The United Nations has the convening power to lead an inclusive tax cooperation process, she said, adding that a binding multilateral convention is the most effective way to deliver international tax norms that meet the needs and capacities of developing countries.
The Council then held the first of two panels, “Promoting Inclusive And Effective International Tax Cooperation at the United Nations”, with panellists addressing challenges faced by developing countries and detailing strategies to achieve an inclusive and equitable international tax order.
One of four panellists, Yariv Brauner, Hugh Culverhouse Eminent Scholar and Chair in Taxation Law at the University of Florida, pointed out that the existing regime is not only archaic but also insufficiently adaptable to a world where domestic economies and tax policies are interdependent. Therefore, the focus must be on the division of taxing rights, not on policing each other in a tax competition framework. An effective dispute resolution mechanism would serve the interest of all — especially developing countries — he said, highlighting the importance of creating a framework agreement for tax coordination.
In that vein, respondent Tove Ryding, Policy and Advocacy Manager, Tax Justice, European Network on Debt and Development, said that for too long, global decision-making on tax has been left to non-inclusive forums and has been marked by deeply flawed and biased rules. This failure is costing Governments hundreds of billions of dollars in lost tax income every year due to illicit financial flows, including tax evasion and tax abuse by the world’s richest corporations and individuals, she said.
In the interactive dialogue that followed, speakers called for inclusivity, noting that developing countries must be represented on an equal footing, with the representative of Sierra Leone, speaking for the African Group, noting that States’ commitments to scaling up international tax cooperation in the Addis Ababa Action Agenda have yet to be fulfilled.
Others countered by highlighting the need to avoid duplication, with the representative of Liechtenstein emphasizing that existing international instruments and capacity-building processes must be taken into account. Duplication of efforts on this matter through numerous conventions and agreements will cause inefficiencies and fragmentation, she asserted.
In the second panel, “Taxation as a policy lever to advance energy transition”, panellists underscored that effective tax policies are key to harnessing opportunities to create fiscal space and to facilitate the transition.
Dirk Heine, Global Lead, Climate Aspects of Fiscal Policy, World Bank stressed that carbon taxation stands out as the most effective way to curb carbon emissions. Further, carbon taxes improve local air quality, which could help tackle the 3 million premature deaths per year from ambient air pollution in developing countries. Thus, carbon taxation is a powerful instrument to improve equity in developing countries, he said.
Carlos Muñoz Piña, Research and Data Integrity Director, World Resources Institute Mexico, emphasized that a country should not have to choose between carbon taxation, technology-based standards, strategic public-private investments, or industrial-policy subsidies, but should use them all in the best combination possible. Carbon pricing should be calculated as the sum of excise taxes net of subsidies, carbon taxes and other forms of carbon pricing, subtracting any fiscal crediting or stimuli present.
Delegations then shared their country specific perspectives, with Romania’s delegate highlighting the great impact of the war on Ukraine on his country. While countries need to find solutions to so-called “dirty fuels”, they also need to address the energy crisis. Introducing carbon taxation by a small country like Romania is tantamount to “economic suicide” without international backing and outside institutions such as the United Nations, he asserted.
Closing the meeting, Navid Hanif, Assistant Secretary-General, United Nations Department of Economic and Social Development, observed that the demand for more inclusive international tax cooperation reflects deep trust in multilateral solutions. Identifying crucial issues for developing countries is the first step to effectively dealing with them. Calling for an open dialogue among Member States and other stakeholders to identify challenges to making international tax cooperation more inclusive, he stated: “This is the defining moment for improving international tax cooperation and we should use this opportunity to build a system that is owned by everyone and works for everyone.”
LACHEZARA STOEVA (Bulgaria), President of the Economic and Social Council, said today’s panel discussions will focus on promoting inclusive and effective international tax cooperation, as well as taxation as a policy lever to advance energy transition. She said that it is critical to consider how tax policies can support developing country energy transition efforts. Today’s session will also seek to identify the most significant tax and domestic resource mobilization considerations for energy transition in sectors such as extractions. She also encouraged participants to contribute their national perspectives.
AMINA MOHAMMED, United Nations Deputy Secretary-General, noting the dramatic widening of the inequality gap, said that economic growth has slowed while Governments continue to fight inflation through interest rate increases and other monetary tightening measures, which puts additional stress on vulnerable countries. As well, 40 per cent of developing economies are suffering from severe debt problems, she said, underlining the importance of strengthening international tax cooperation. Tax-related illicit financial flows, tax avoidance and tax evasion are draining much needed resources and some tax regimes undermine long-term sustainable development, including by providing fossil fuel subsidies with unfair tax breaks. Promoting fair international tax systems that can set societies up for success is crucial.
“The world does not have a crisis of resources; it has a crisis of sharing and managing those resources effectively,” she observed. The use of tax policy as a lever to drive the transition from fossil fuels to renewable energy sources could drastically accelerate the green transition. Highlighting the Secretary-General’s call for a large-scale Sustainable Development Goals stimulus at the global level, led by the Group of 20 (G20), to ensure all countries can access the funding needed to invest in sustainable development, she spotlighted its three elements: greater debt relief, more concessional financing and contingency financing for all in need.
MATHEW GBONJUBOLA, Co-Chairperson of the United Nations Committee of Experts on International Cooperation in Tax Matters to the Economic and Social Council, emphasized that the Committee’s mandate gives special attention to the needs of developing countries in the context of international tax cooperation and in its work of shaping international norms and policies and producing 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. To this end, it has developed guidance for Governments and tax administrators, taking into account the needs and capacities of developing countries.
Maintaining a stable corporate tax base in an increasingly digitalized and globalized world, the Committee has adopted numerous easy-to-administer approaches, including the United Nations Model Double Taxation Convention, he continued. However, many of the Model’s provisions hinge on whether or not the recipient of income has a physical presence in the country in which income is generated, he said, pointing out the increasing ability of many service providers and employees to work remotely — a trend accelerated by the pandemic. Moreover, the Committee has expanded its work programme to address other policy concerns of developing countries, such as those related to wealth taxes and indirect taxes, including health taxation. It is also working on practical issues, such as digitalization of tax administrations and increasing tax transparency, that can directly affect developing countries’ domestic resource mobilization and effectiveness of international tax cooperation.
ZAINAB S. AHMED, Minister for Finance, Budget and National Planning of Nigeria, expressed concern about the lack of inclusiveness and equal footing in the development of taxation frameworks, both in terms of the weight attributed to inputs from the developing countries, and their capacity to make such inputs. Tax cooperation architecture should address mutual accountability measures through a fair process, she said, adding that developing countries are being punished by unilateral declarations and “blacklisting by forums and bodies in which they have no voice”. Further, developing countries’ tax systems have lower capacity. Thus “easily” administered taxes such as withholding taxes need to be easier to use and more effective. In addition, given digitalization of business and transactions, it is important to consider the revenue potential from taxing automated digital services.
Noting that illicit financial flows are a menace to developing economies, she pointed out that little effort has been deployed to develop instruments and frameworks to combat such flows and their resulting effects. States must implement the commitment made under the Addis Ababa Action Agenda, to redouble efforts to substantially reduce such flows by 2030. She also noted, among other things, that the proposals for mandatory arbitration on tax dispute settlement should be firmly addressed, because developing countries’ experience with the results of arbitration under international investment agreements has been much less than equitable. Stressing that the United Nations has the legitimacy, convening power, and the normative impact to lead an inclusive and holistic tax cooperation process, she said a binding multilateral convention is the most effective way to deliver international tax norms that meet the needs and capacities of developing countries.
The Special Meeting then held its first panel of the day, “Promoting inclusive and effective international tax cooperation at the United Nations”, moderated by Liselott Margareta Kana, Co-Chairperson, Committee of Experts on International Cooperation in Tax Matters. The featured panellists were: José Antonio Ocampo, Minister of Finance and Public Credit, Colombia; Gaël Perraud, Chair of the Organisation for Economic Co-operation and Development (OECD) Hosted Global Forum on Tax Transparency and Co-Chair OECD/Group of 20 Inclusive Framework on Base Erosion and Profit Shifting; Rasmi Das, Department of Revenue, Ministry of Finance, India, and Member of the United Nations Committee of Experts on International Cooperation in Tax Matters; and Yariv Brauner, Hugh Culverhouse Eminent Scholar, Chair in Taxation Law, University of Florida, United States. Tove Ryding, Policy and Advocacy Manager, Tax Justice, European Network on Debt and Development, was the respondent.
Mr. OCAMPO said that the battle against the global pandemic has left many Governments vulnerable, saddling them with massive debts they took on as tax revenues fell, health needs soared, and as they strived to soften the economic blow. Developing countries are now confronting spiralling energy and food prices, higher interest rates, and more volatile capital flows. The need for greater public resources to invest in recovery and restore trust in national and international governance is clearer than ever. But unilateral action is not enough to curb tax evasion and illicit flows which reduce fiscal space. This is why worldwide coordination and cooperation are more needed than ever.
Efforts put forth in the Base Erosion and Profit Shifting Project and the Inclusive Framework two-pillar solution demonstrates that nations can cooperate as they had with OECD and G20 on the initiatives. However, the international community has not yet achieved an inclusive, equitable and sustainable international tax order. Pillar one covers less than 100 companies, leaving out most of the digital actors doing business in developing countries. Meanwhile, pillar two falls short in addressing the need of developing countries to obtain new revenues while deploying reasonable strategies to attract foreign investment. According to estimates of the International Monetary Fund (IMF), which are optimistic, pillar one will have an impact equivalent to less than 1 per cent of the current corporate income tax collections in low income and emerging countries. “This is simply insufficient,” he stressed, also adding: “We need to start thinking on solutions that go beyond the current deal but with a completely different approach for the Global South.”
Mr. PERRAUD, noting that it is useful to look at what has already been accomplished, said the increased tax transparency on bank accounts and digital trading has led to the identification of €30 billion of additional income for developing countries. In 2022, they received information on 32 million accounts for €2.4 trillion in value, which, in turned allowed the Forum to help many countries to benefit from automatic exchanges. In addition, it is providing technical assistance to those countries and regional organizations, he said, acknowledging that such efforts should be increased to support least developed countries. The fight against optimization is another important area of mobilization for the international community, he said, highlighting progress made through the Base Erosion and Profit Shifting Process.
He went on to outline the Process’s two pillars, recalling that the first pillar’s objective is the signing of a multilateral convention in 2023, while the second pillar ensures a minimum level of taxation in its implementation phase. These are “historic agreements”, he said, stressing that many elements have been specifically designed to take into account developing countries with lower incomes. All countries will benefit from the introduction of a global minimum threshold through the implementation of the second pillar. The introduction of minimum taxation will make the rules fairer, without subjecting the most vulnerable to additional tax pressures, he said. Highlighting the inclusivity, as well as transparency of the Forum, he noted that its latest and 166th member is Angola.
Mr. DAS, noting that his statement does not necessarily represent views of his Government, cited the General Assembly resolution on this subject as “the most significant step ever towards making the international tax system fairer, more equitable and sustainable in the long run”. The existing rules which govern the international tax system — set in the 1920s — have now been rendered ineffective. With regard to trade in tangible goods, a physical presence rule for allocation of taxing rights has some relevance; however, in respect of services which constitute a significant part of international trade today, it becomes ineffective. Further, the existing rules allocate taxing rights to the country of residence of the taxpayer by default and only give taxing rights to the source State in specified situations. Such a model is inappropriate between a capital exporting and a capital importing country or between a developed and developing country where there is significant imbalance in flow of payments between them.
At present, there is no inclusive international tax cooperation architecture that provides for universal and democratic participation for all countries on equal footing, he continued. After the financial crisis in 2008, there have been notable efforts to reform the international tax system, he recalled, detailing the weakness of these reforms, including the fact that most developing countries — particularly the least developed — had no say in the setting of the agenda. Against this backdrop, he stressed the need to build a new inclusive intergovernmental forum, where the Global South is not relegated to the margins of international standard setting. Equality in representation, participation and decision-making must inform any such international cooperation framework, he asserted.
Mr. BRAUNER said that the United Nations is the only possible forum for inclusive and effective international cooperation on tax matters. Coordination of tax policy and administration cannot be effective if it is not inclusive. The existing regime enjoys some legitimacy, he said, but added: “We should reform it with care.” However, it is not only archaic but also insufficiently adaptable to a world where domestic economies and tax policies are interdependent. Therefore, the focus must be on the division of taxing rights, not on policing each other in a tax competition framework. No one country knows better. Only a principled approach based on a genuine agreement could work to remedy the matter. A paradigm change is needed.
“We have to relegitimize source taxation in the name of fairness and hope for a legitimate regime,” he continued, adding that it offers a better chance of resolution of the homeless and Stateless income problem. He also stressed that the focus needs to be on better norms, rather than capacity-building. It is in the interest of all, especially developing countries, to have an effective dispute resolution mechanism. This should be coordinated with international economic law to make it a truly international measure that will be effective and sustainable with time. Creating a framework agreement for tax coordination is essential as it is not enough to focus solely on the United Nations model. Doing things quickly and not inclusively, however, is not an option as past initiatives have demonstrated.
Ms. RYDING welcomed General Assembly resolution 77/244, which marked a historic turning point, with Member States agreeing to begin true global and inclusive tax discussions and consider the option of developing a new United Nations framework or instrument. Commending the African Group for its tremendous leadership on this, she said that for too long, global decision-making on tax has been left to opaque and non-inclusive forums and has been marked by deeply flawed and biased rules. This failure is costing Governments hundreds of billions of dollars in lost tax income every year due to illicit financial flows, including tax evasion and tax abuse by the world’s richest corporations and individuals. The right instrument to solve this problem is a United Nations framework convention on tax, she said, adding that together with the Global Alliance for Tax Justice, her organization has developed a proposal for what such a convention could look like. Responding to the claim of OECD countries that they have to set global tax standards because of the urgency of this matter, she said: “Let’s be honest about why we have wasted so much time. It is because the OECD countries have blocked progress here at the United Nations.”
The call for inclusivity was front and centre throughout the discussion as the floor opened to delegates. Representatives of many developing countries emphasized the importance of being represented on an equal footing in the global discussions on tax cooperation, while other delegates countered by stressing the need to avoid duplication.
The representative of Cuba, speaking on behalf of the “Group of 77” developing countries and China, expressed concern that there is no single globally inclusive forum on this matter at the intergovernmental level, and called for effective platforms to discuss tax rules. It is counterproductive to highlight the importance of domestic resource mobilization while not tackling the inability of developing countries to mobilize such resources, he pointed out.
The representative of Sierra Leone, speaking for the African Group, said that in the Addis Ababa Action Agenda, Member States committed to scaling up international tax cooperation. These commitments have yet to be fulfilled, she said, adding that after years of attempted reform on international tax rules, there is no substitute for the globally inclusive and transparent forum provided by the United Nations. Establishing a globally inclusive intergovernmental tax body under the auspices of the United Nations has become necessary. She also expressed concern about illicit financial flows, noting that, besides draining foreign exchange reserves and reducing domestic resource mobilization, they also exacerbate insecurity and economic inequality and undermine the rule of law.
However, the representative of the European Union, speaking in its capacity as observer, said there is no need to set up additional frameworks through an intergovernmental process which might lead to competing standards at additional costs. He expressed support for the work of the OECD/Base Erosion and Profit Shifting framework and the ongoing negotiation process, notably on the two-pillar solution which has come to its final stage. The United Nations should support this process to avoid duplication of efforts and risk of inconsistent outcomes, he said, adding that while an inclusive international tax cooperation is vital, it is of the utmost importance to maximize coordination and synergy with the work of the other international bodies.
The representative of the United States said that the Secretary-General’s report on international tax cooperation must analyse all of the existing efforts and take into account ongoing efforts to identify the areas in which the United Nations can add the most value and not undermine the other work. Highlighting the work of the inclusive framework, including on pillars one and two, he said it has delivered significant results, including on issues that have been championed by developing countries. “We need to ensure that we do not undermine that progress by starting a parallel and competitive process,” he said.
The representative of Liechtenstein noted the large number of jurisdictions that have joined the Base Erosion and Profit Shifting project, including many developing countries. Further, the Global Forum has a remarkable track record in capacity-building, she said, adding that the Secretariat must take into account existing international instruments and capacity-building processes when preparing a report on this. Duplication of efforts on this matter through numerous conventions and agreements will cause inefficiencies and fragmentation, she added.
A representative from the Global Alliance for Tax Justice, noting that OECD countries keep repeating the word “duplication”, pointed out that it is not duplication, but adaptation. Nobody is denying the right of OECD countries to represent themselves, he said, adding that the question is about their control of the process. “You cannot democratize oligarchy,” he pointed out, adding that the facilitation of international negotiations should come back to the United Nations. “Only the pillars constructed within the UN system” will build a strong house, he said, adding that it is not an accident that African countries are pushing for inclusivity.
The representative of Singapore said that, in the last few years, developed and developing countries have invested an enormous amount of time and resources to develop the two-pillar solution. The private sector has also been widely consulted in the process. Developing a new pathway at this point could risk undoing years of hard work and may exact further demands on countries’ already limited resources.
A representative from the International Monetary Fund said that the two-pillar agreement has the potential of moving the international tax system in a direction that makes it more robust to tax competition and profit shifting. However, it could have been designed in a way that was more favourable to the specific needs of developing countries. Further, implementing the agreement comes at considerable cost and complexity which is also a specific challenge for developing countries, he pointed out.
The representative of the Russian Federation called this a historic discussion, expressing support for the African Group and other countries in their efforts to enable equal participation of all Member States in international tax cooperation. He also highlighted the need for establishing a knowledge base and a data transmission system in order to ensure exchange of best practices.
The Council also heard from several speakers from the United Nations Committee of Experts on International Cooperation in Tax Matters who spoke in their personal capacity. One of them said “it is anomalous” that the United Nations does not provide a forum for multilateral engagement on tax. However, it would be reckless to jeopardize current progress, he added. The Global Forum has transformed tax cooperation, he said, noting that the OECD has invited all countries to participate in its work. Yet, he added: “I also look forward to a process wherein Governments can engage together, not by invitation but by right.”
Also speaking today were the representatives of Bolivia, Philippines, Italy, Thailand, Spain, Canada, France, United Kingdom, Argentina, Germany, Colombia, Dominican Republic, Cambodia, Pakistan, Romania, Paraguay and Nigeria. A representative of the United Nations Development Programme spoke as well.
Speakers of civil society and international organizations, including the Digital Cooperation Organization, South Centre and the International Chamber of Commerce also spoke today.
Mr. DAS, responding to the comments and questions from delegates, spotlighted the discussion on duplication and said that if the final structure of the first pillar, as agreed upon within the Base Erosion and Profit Shifting framework, does not result in meaningful revenue for developing countries, it is not sustainable, “and we are looking at restarting negotiations” thereby resulting in duplication. Regarding the role of the United Nations Tax Committee, he said it should continue in its present form as a Committee of Experts and provide technical advice to the proposed United Nations process.
Mr. PERRAUD said that a sustainable solution is one that exists already and can be agreed upon in a reasonable time frame. “As long as we keep arguing, problems remain unresolved,” he said.
Mr. OCAMPO said that “the UN came before the OECD in this area”. Noting that Secretary-General Kofi Annan created the intergovernmental Committee, he said if OECD is worried about inclusivity, it should incorporate itself into the United Nations process.
Mr. BRAUNER said that this is an opportunity to do what is right. There is no real threat to the existing regime, he pointed out, adding that its desirable elements will be retained and further boosted with legitimacy. It is essential to take power back from the “illegitimate fora that are leading” currently, he stressed.
ALBERT R. CHIMBINDI (Zimbabwe), Vice-President of the Economic and Social Council, said any measures to address the climate situation needs to consider the issue of energy access, an essential enabler for sustainable development. Fossil fuels continue to be a major driver of economic growth, especially in developing countries. Renewables, on the other hand, account only for about 17.7 per cent of global energy consumption. Emphasizing the importance of effective support to meet the ambitious targets towards net zero greenhouse gas emissions, he observed that developing countries bear the pressure of balancing and integrating revenue generation with climate considerations. Taxes can also drive innovation and investment towards low-carbon technologies and products while discouraging the use of fossil fuels and other high-emission options. Moreover, through well-designed tax policies, Governments can create incentives that encourage sustainable practices and technologies. Tax policies must be coordinated at the international level to prevent adverse effects, such as tax evasion or carbon leakage, but they must also promote a level playing field for businesses operating in different jurisdictions. The work of the Committee is essential in reviewing and reflecting on adequate tax policies that can assist countries’ efforts in transitioning from fossil fuel energy to renewable and environmentally friendly sources, he said.
The Special Meeting then held its second panel of the day, on “Taxation as a policy lever to advance energy transition”, moderated by Susanne Åkerfeldt, Senior Adviser at the Swedish Ministry of Finance. The featured panellists were: Dirk Heine, Global Lead, Climate Aspects of Fiscal Policy, World Bank; Vanessa Corkal, Senior Policy Adviser, Canada Energy Transitions, International Institute for Sustainable Development; Carlos Muñoz Piña, Research and Data Integrity Director, World Resources Institute Mexico; Christopher Axelson, Chief Director, Economic Tax Analysis Unit, National Treasury, South Africa; and Ligia Noronha, United Nations Assistant Secretary-General and Head of the New York Office of the United Nations Environment Programme.
Mr. HEINE said that, following the COVID crisis, countries will need to rebuild fiscal space, which is exceptionally hard in the aftermath of recessions. After the 2008 global financial crisis, efforts to rebuild fiscal space — by raising taxes or cutting expenditures — contributed to double-dip recessions and persistent losses of human capital, increased income inequality and fractured social cohesion. Many countries also delayed climate mitigation efforts, disrupting the path to sustainable growth. “Such policy errors should not be repeated,” he asserted, stressing that fiscal measures must be chosen carefully, balancing short-term stabilization objectives with long-term economic sustainability. Raising environmental taxes can help countries rebuild fiscal space by broadening tax bases at a time when traditional revenue sources have dwindled.
Voicing concern over uneven taxation which encourages tax evasion and informality — contributing to slower productivity growth — he said that in many countries, shifting the structure of tax revenues away from income taxes towards consumption and excise taxes can raise growth. In applying this strategy, carbon taxation stands out and is the most effective way to curb carbon emissions. Highlighting development benefits of carbon taxes, he noted that by reducing hazardous air pollutants, carbon taxes improve local air quality, which could help tackle the 3 million premature deaths per year from ambient air pollution in developing countries. Moreover, carbon taxation is a powerful instrument to improve equity, especially in developing countries, he said, adding that climate-smart fiscal policy measures would help set countries on a sustainable growth path.
Ms. CORKAL recalled how during the COVID-19 crisis many Governments supported “shovel-ready” fossil projects that were already in the pipeline as a quick fix against falling gross domestic product (GDP) growth. Now, many oil and gas companies are seeing windfall profits, during an affordability crisis linked to the global energy price crisis. In many cases, countries may be subsidizing and taxing fossil fuels at the same time, for example by having low fuel prices and a carbon price. This is counterproductive and inefficient, she said. If the international community wants to create global taxation norms that are aligned with sustainability, eliminating tax-based fossil fuel subsidies is a fundamental prerequisite. The decline in fossil fuel revenues will, however, require Governments to cut spending or increase other revenue streams.
“We must improve the accountability of global commitments,” she emphasized. Governments need to step up, and there are clear ways to do so. Domestically, Governments should increase transparency and annually report all support for fossil fuels including tax-based subsidies, while adopting a specific timeline for reform. It is not enough to phase out tax subsidies. “We also need to shift savings from reformed subsidies into improved social protection and increased clean energy support,” she said. The past few years have shown an urgent need for better non-subsidy mechanisms to support people during energy and affordability crises. It is also critical that countries broaden commitments on fossil fuel subsidies to all public financial flows. All public support for fossil fuels, including investment by State-owned enterprises and lending by public financial institutions, needs to be withdrawn in a managed and socially responsible way.
Mr. PIÑA, noting that his comments represent his views and not necessarily the World Resources Institute Mexico, said that his country’s carbon pricing experience, from negative to positive, allows it to understand the policy inertias that have let fossil fuel subsidies become such a large burden on public finances. Having a situation of low fossil fuel prices, be it because of international market conditions or due to regulation or taxation, makes any investments in energy saving less profitable, and helps prop up the cost-benefit balance for any carbon intensive choices. Mexico’s experience shows that when international prices are high, net taxation needs not to be that high, but when prices are low, it is most important to have a clear taxation policy to keep fossil fuel prices up, maintaining a long-term signal that an energy transition is desired. Taxes help consumers and firms make better choices, he added.
Carbon emission reductions for a country like Mexico, and for those of middle and lower incomes, are lower per capita, and per unit of GDP, because of high levels of poverty and growing industrialization, he continued. Mexico’s findings support the view that carbon pricing through fiscal policy, in Mexico and elsewhere, should not be restricted to highlighting explicit carbon pricing in the form of emissions trading systems or carbon taxes. Instead, it should be understood, and calculated as, the sum of excise taxes net of subsidies, carbon taxes and other forms of carbon pricing, subtracting any fiscal crediting or stimuli present. “A country should not have to choose between carbon taxation, technology-based standards, strategic public-private investments, or industrial-policy subsidies, but should use them all in the best combination possible,” he added.
Mr. AXELSON, speaking via videoconference, said that, as a middle-income country, South Africa’s tax system’s primary objective is to raise revenue to fund much needed expenditures, whether they be salaries for teachers and nurses or social grants. Even though a tax system should try to be neutral, he pointed out that there are clearly instances where the market is failing and there is a good rationale for the tax system to intervene. A clear case in point is carbon emissions, he said. South Africa has a high level of carbon emissions on a per capita basis, and one of the mechanisms the Government is using to meet its international commitments to lower carbon emissions is a carbon tax, which became effective on 1 June 2019. In a country with low economic growth and exceptionally high unemployment, any tax policies that are perceived as restrictions to economic growth are strongly opposed, he observed, adding that the carbon tax rate is quite low by international standards.
Citing the carbon tax as the main instrument to reduce carbon emissions and encourage a shift to greener technologies, he emphasized that it generates additional tax revenue. However, his Government is also offering some tax incentives to push the shift towards renewables for both companies and households. South Africa is heavily dependent on coal mining for its electricity generation, he said, adding that those plants have been underperforming, which has led to rolling blackouts. Moreover, his Government has introduced incentives to help companies move towards generating their own green power, and to enable households to claim a portion of the cost of solar panels as a tax rebate, he said.
Ms. NORONHA said that an effective tax policy can indeed help developing countries with the energy transition, including with respect to energy access and improved equity. Effective tax policies are key to harnessing these opportunities both to create fiscal space and also to facilitate the transition. But to be politically acceptable, proposals must be gradual, attentive to the public and just. An unprecedented increase in clean energy spending is required to put countries on a pathway towards net-zero emissions. While many developing countries are dependent on extractives, there are significant tax and domestic resource mobilization opportunities and considerations for energy transition through the extractives sector. These assets present opportunities for countries to increase and invest the rents from the development of extractives into the energy transition and broader sustainable development needs of local populations, ensuring a conversion of natural capital into human and other forms of capital to ensure long-term sustainability.
Developing countries can also diversify their economies and reduce dependence on revenues from extractive industries over time, she continued. This includes bolstering direct taxation of income and property to enhance fiscal resilience in the sector. Correct fossil fuel price signals are key to energy transitions. Environmental taxes, thus, create a triple win for fiscal policy: revenue generated, efficiency improvements to the tax system, and reduction in the need for raising conventional taxes to finance public expenditures for addressing the same social costs. However, taxes alone cannot always bring about the intended environmental outcome but need to involve other policy tools or smart mixes, including consumer information and voluntary agreements, she said, adding that social compensation mechanisms should aim to drive the green transition, by funding the acquisition of low-carbon, energy- or resource-efficient technologies.
In the ensuing discussion, delegations shared their country specific perspectives, touched on dilemmas faced by their Governments and proposed methods to increase efficiency towards a greener future. The new reality caused by the COVID-19 pandemic, as well as the war in Ukraine, were also noted, as those crises highlighted an even greater need for international coordination and collaboration on the matter to help support the most vulnerable.
The representative of Germany said that reducing environmentally harmful fossil fuel subsidies could contribute substantially to mitigating climate change and could help liberate resources. Taxation can also be used as a lever to create incentives for climate change mitigation and investments. Policy changes must be tailored to specific country contexts and be designed to prevent unintended consequences. The potential of tax measures to foster private sector investment in green activity by setting incentives should be considered. Taxation measures to advance the energy transition must be assessed by their impact on the population, including a negative impact on the poor. Carbon-intensive sectors, such as transportation, contribute significantly towards the carbon budget. Measures targeting such activities can have a substantial effect.
The representative of Romania said that his country faced the discussed issues during the COVID-19 pandemic and after it as well. The energy crisis generated by the war on Ukraine has greatly impacted Romania. The so-called “end-of-history calm” is not the reality on the ground. On one hand, countries need to find solutions to so-called “dirty fuels” but on the other hand they need to address the energy crisis and not close energy flows that could feed energy demand especially at a time of crisis. There is no way for a small country like Romania to find solutions outside institutions such as the United Nations. Introducing carbon taxation by a small country like Romania is tantamount to “economic suicide” without international backing on the decision.
The representative of India said that there are two ways to tax fossil fuels. One is transaction-based and the other one is taxing the super profits of large corporations. He asked if there was a greater need to focus on direct taxation on the profits of fossil fuel enterprises.
Responding to the question from the representative of India, Ms. CORKAL said there is a need for both approaches: taxing consumers and taxing corporations. The tax on excess profits, however, needs to be designed to ensure that the taxes are not then passed down by corporations onto customers. In regard to staying tied to fossil fuels in times of crises, she said that the faster the world moves to renewable forms of energy, the faster it will move away from turbulent energy calamities.
Mr. HEINE said many central banks are warning of a coming large financial crisis hitting carbon-dependent assets. Tax policy, and more specifically extractive taxes, can help a country reduce the risk of stranded assets.
Mr. PINA said it is important to consider that tax revenues can be used in many different ways, including to support industrial change and a transformation towards a decarbonized future.
Ms. NORONHA, underlining the need for urgency, warned: “We have really run out of time.” She also emphasized the importance of highlighting the multiple benefits of new taxes that are introduced. Any argument that is made for a tax needs to speak to all the different aspects of development but also environmental and social dimensions.
NAVID HANIF, Assistant Secretary-General, United Nations Department of Economic and Social Development, stressed the need to make international tax cooperation more inclusive and effective. The demand for more inclusive international tax cooperation reflects deep trust in multilateral solutions. Identifying crucial issues for developing countries is the first step to effectively dealing with them, he said, calling for an open dialogue among Member States and other stakeholders to identify challenges to making international tax cooperation more inclusive. Multilateral solutions should be designed through cooperation among all those who can make meaningful contributions under the United Nations umbrella, he underscored, adding that participants have shared insights and addressed possibilities of new governance structures, with some highlighting issues essential to developing countries.
“This is the defining moment for improving international tax cooperation and we should use this opportunity to build a system that is owned by everyone and works for everyone,” he stated, stressing: “It is time to give it a home at the United Nations. It is time to pursue this with a sense of urgency so that the Sustainable Development Goals can be financed and achieved by 2030.” Citing effective tax policies as powerful tools to foster the transition towards low-carbon energy supply while creating fiscal space, he said that such polices can also facilitate access to affordable energy, fulfilling countries’ climate and development goals. Policies outlined during the panel discussions can help countries reduce their emissions and adapt to the impacts of climate change, he added.
Ms. STOEVA, expressing her appreciation to all speakers, also noted the active engagement by officials from tax administrations, ministries of finance and permanent missions in New York, plus a wide range of other stakeholders. Today’s discussions have provided options and ideas on how to address the challenges and opportunities in promoting inclusive and effective international tax cooperation at the United Nations, she said.
Furthermore, the meeting has highlighted interesting and instructive experiences, as well as actionable ideas, on the role of tax policy in supporting energy transition, including energy access, she added. Noting that these will support the development and implementation of policy in areas such as carbon pricing mechanisms and the role of environmental taxation in developing countries’ energy transition and revenue collection, she called on the international community to work together to put the Sustainable Development Goals back on track.