UN Tax Cooperation Efforts Should Focus on Simplicity, Investment

Efforts by the United Nations in February to boost international tax cooperation come on the heels of a separate effort in tax cooperation through the OECD, where 139 jurisdictions have agreed to an October 2021 document outlining an approach to international tax policy.

The successes and failures of the initiative, much of which hasn’t been able to overcome political hurdles, suggest UN efforts are best suited for incremental win-win improvements: harmonizing systems, reducing complexity, and facilitating cross-border investment.

One lesson from the Organization for Economic Cooperation and Development’s effort is that large multilateral deals often fail. Grand bargains to distribute revenue are especially difficult because they create distributional losers who will torpedo the deal.

The OECD attempted a two-pillar approach to apportioning revenue, but thus far only Pillar Two—the global minimum tax—has momentum. Pillar One, which would reallocate some corporate income tax rights to the jurisdictions of consumers rather than producers, is in limbo because of distributional bickering. If it’s to move forward, US support is crucial.

Pillar Two’s comparative success comes only under exceptional circumstances. It identified a known problem of profit shifting, and it offered a chance to mitigate that problem with a solution that was relatively simple to describe—even if it isn’t necessarily easy to implement.

Furthermore, Pillar Two promised that $220 billion in revenue would come at the expense of tax havens rather than fellow OECD countries, which assuaged some of the distributional worries. The lesson to draw from Pillar Two’s comparative success, then, is that agreements must have a compelling and simple case that participants will win on net.

A third lesson to draw from the OECD effort is that enforcement takes muscle. Pillar Two can enforce its global minimum in part through domestic and international policies of participating countries. But to incentivize its spread, it uses the undertaxed profits rule, which allows the global minimum to be enforced by any Pillar Two country where a company has a footprint.

The rule is only as strong as the country attempting to enforce it. If a country is small and business in that country isn’t particularly valuable, it may not be able to enforce the UTPR. A corporation may prefer to close shop in that country rather than face a surtax on global profits. The strength of the OECD agreement comes from the threat that large countries such as Germany and France will assess the UTPR.

Proponents of the UN committee are right to note that the UN is more inclusive than the OECD, a smaller group of wealthier countries. However, enforcement of any binding provisions would have to come from the might of wealthy OECD nations. UN agreements must either have wealthy OECD nations fully on board or be beneficial enough that countries will adopt them voluntarily.

A final reason to be skeptical of rules that aren’t beneficial for all is that international tax rules are often gamed. For example, many jurisdictions, from Vietnam to Bermuda, are looking to protect their tax incentives from triggering Pillar Two trouble. This can be done by turning nonrefundable tax credits into qualified credits, which count as an increase in income instead and are less likely to reduce measured tax rates below Pillar Two’s minimum.

Policies with some winners and some losers may face similar troubles in the UN as they did in the OECD. The losers may be able to gum up the policies procedurally, and even if they are eventually adopted, it’s difficult to enforce the deal on the losers. Any enforcement requires economic might, and people with an incentive to circumvent the policy may find an accounting trick to do so, much as Vietnam and Bermuda have done with Pillar Two.

Instead, the UN may find that win-win policies are the way to go. So where can these win-wins be found? Primarily in efforts to simplify, harmonize, or create more policy certainty.

Reducing the resources spent on global tax compliance is one example. If talented people work in the production of goods and services rather than tax, economies across the world are a bit stronger.

The fewer administrative costs to investing across borders, the better. The UN could pursue these ends through common definitions of tax concepts and terms, where possible, and agreements to avoid double taxation on cross-border investment flows.

Simplification and harmonization might be a bit dry relative to grander plans to redistribute money worldwide. But that dryness might be necessary to reach consensus and voluntary compliance among a diverse group of nearly 200 countries.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan Cole is a senior economist at the Tax Foundation, with focus on business taxes, cross-border taxes, and macroeconomics.

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