Finally, A Level Playing Field For Tax?

A Century Of International Tax Misgovernance

There has never been a level playing field, or anything close, in the history of international tax. We can think of three main phases to that history.

First, the ‘pre-governance’ phase in the centuries during which European empires dominated the planet. The only significant international aspects of tax in this phase were the ways in which tax was used as a channel for extractive exploitation – whether that took the form of charter companies like the British East India Company raising taxes (so that India effectively paid for the wholesale exportation of its own goods to the UK), or colonial authorities taxing local populations to pay for the costs of their own occupation (and sending anything extra back to the metropole).

The second phase saw the establishment of ‘imperial governance’. The League of Nations, the club of imperial powers, set tax rules in the 1920s and 1930s that sought for the first time to systematically address the distribution of taxing rights between countries across which multinational enterprises operated. Needless to say, most countries of the world were not independently represented, and global fairness in the distribution of taxing rights was not a significant consideration for delegates. 

The post-1945 settlement saw the League of Nations replaced by the United Nations, with a growing number of newly independent countries among the membership. The latter’s interest in taxing and regulating multinationals led swiftly, however, to the re-exertion of power.

The third phase of ‘post-imperial governance’ saw the establishment of the OECD in 1960 with the express mandate to take international tax rule-setting away from the UN and place it back in the accustomed hands of western European and north American policymakers. Subsequent developments along similar lines included the 1973 creation of the International Accounting Standards Committee (later, Board), and the OECD-hosted Financial Action Task Force (FATF), established in 1989.

The OECD and FATF have together been responsible for administering international tax rules and financial transparency standards. This phase has seen the rapid growth of illicit financial flows, dominated by cross-border tax abuse, and the emergence of stark inequalities in taxing rights between countries at different levels of per capita income.

To add insult to injury, countries outside the OECD – and former colonies in particular – are consistently more likely to be subject to listing as ‘non-cooperative’, guilty of ‘harmful tax practices’ or otherwise ‘non-compliant’. The listing is carried out by member clubs – the OECD, FATF, and European Union – on the basis of opaque and manipulable criteria, which presumably explains the inability to list any of their own major members. That result appears impervious to any objective independent analyses, such as the United States being ranked as the greatest global threat in the Financial Secrecy Index, or European countries taking up four of the top ten spots on the Corporate Tax Haven Index (and their dependent territories another four spots).

The State Of Tax Justice

The global revenue losses due to cross-border tax abuse by multinationals and wealthy individuals hiding their assets offshore now stand at an estimated US$492 billion a year. Multinationals are responsible for the greatest part of global losses, around two thirds.

The 2024 edition of the annual State of Tax Justice report provides updated estimates of the national revenue losses suffered to each type of tax abuse, and the losses imposed globally by countries and jurisdictions that facilitate corporate tax abuse or offshore financial secrecy.

Broadly, the results for 2024 are depressingly consistent with previous years. The OECD’s member countries are responsible for by far the greatest share of tax losses imposed on the world, and those losses are not reducing over time.

Higher-income countries suffer the largest losses in absolute terms. Lower-income countries, however, suffer the most intense losses (equivalent to a share of their public health budgets), which is five times bigger than that for higher-income countries.

Corporate Tax Abuse

On the corporate side, longer-term research looking at US-headquartered multinationals showed an explosion in tax abuse  over three decades.[1] In the early 1990s, only around five per cent of the global profits of US multinationals was declared in jurisdictions other than the location of their real, underlying economic activity. By the late 1990s that had doubled, and by the early 2010s, some 25 per cent to 30 per cent of profits were declared elsewhere.

It was in this context, and the immediate aftermath of the ‘global’ financial crisis that began in 2008-09, that the OECD set out on the Base Erosion and Profit Shifting (BEPS) Action Plan (2013-2015). This was swiftly followed by a working group on the unresolved problems of digitalisation, which is simply another channel for profit shifting, but one that allows even more aggressive separation of real activity and declared profits by facilitating high-volume sales into markets where there may not even be a registered, taxable entity.

That gave rise to ‘BEPS 2.0’, which was scheduled to run through 2019 and 2020. Instead, the OECD has staggered on into 2025, still without achieving agreement on final proposals.

The most useful element of the original BEPS Action Plan was the introduction of a tax justice proposal for country-by-country reporting by multinationals to provide jurisdiction-level data on the distribution of activities, profits declared, and tax paid. Sadly, the OECD bowed to lobbying and failed to require the data to be made public. Instead, it publishes, with significant delay, aggregate data on the multinationals of each cooperating country.

With six years of data now available, the State of Tax Justice 2024 has revealed a clear pattern: the volume of profit shifting has continued to grow throughout the OECD’s reform processes, and so too the global revenue losses (now reaching some US$348 billion a year).

Undeclared Offshore Wealth

On the side of undeclared offshore wealth, in 2015 the OECD finally abandoned its resistance to the tax justice movement’s longstanding calls for a multilateral instrument for automatic exchange of financial account information. If fully delivered, the ‘Common Reporting Standard’ (CRS) should have sharply cut the scale of undeclared offshore wealth. This truly would have heralded the ‘end of bank secrecy’, as the OECD claimed it to be.

Instead, the CRS has been undermined in three distinct ways. First, by design, many countries of the world have been excluded from the outset. A needless requirement for reciprocity means that, for example, Malawi is unable to access data on its residents’ Swiss bank accounts – as if there were some equivalently problematic issues with Swiss residents holding Malawian bank accounts.

Even where countries outside the OECD have invested in order to be accepted into the CRS, they often find they cannot access the data they had hoped for. The OECD’s second design flaw is to have allowed countries to sign on without any actual commitment to provide data to all other signatories. Inevitably, OECD members and the largest economies can demand full access, while non-members and smaller economies are often denied.

All three flaws reflect the OECD’s deepest organisational failing – its inability to operate a level playing field. But the third flaw shows that most directly.

It was the United States’ introduction of the Foreign Account Tax Compliance Act (FATCA), rather than the EU Savings Directive a decade earlier, that allowed the OECD finally to introduce a multilateral instrument for automatic exchange. For six months or so, the US agreed to participate in the CRS. But when the Obama administration did a screeching U-turn and reneged on that commitment, the OECD was simply unable to call out its own biggest member.

Result? The US became the only significant financial centre not to participate in multilateral information exchange, and the biggest tax haven in the world leapt to number one on the Financial Secrecy Index. All the while, the OECD contorted itself to find new ways not to declare the US non-compliant.

A balanced assessment of the CRS requires recognition that automatic information exchange is the most powerful tool we have against the tax abuse and corruption associated with undeclared offshore wealth, and that even the OECD’s approach has delivered significant gains for some countries. The figure below shows the preferred ‘realistic’ estimate of undeclared offshore wealth diverging downwards from the total of all offshore wealth as a result. But at the same time, the flaws of the CRS – including the narrowness of assets it considers in scope – mean that the undeclared value has remained flat at best. Tax losses have at least stopped rising – but the world remains far indeed from ‘end of bank secrecy’.

A New View Of Countries’ Alignment On The UN Convention

Faced with the increasingly evident failures of the OECD – both ineffective and exclusionary – the countries of the world have committed for the first time ever to set international rules and standards in a globally inclusive forum. Negotiations are now underway for a UN framework convention on international tax cooperation, which is scheduled to be delivered in mid-2027.

It has not been plain sailing to reach this point. An earlier resolution saw more than 40 countries oppose the process, including almost every OECD member. But by the time discussions had concluded in August 2024 on the terms of reference for the full negotiations, the European Union and a number of others had shifted their position, leaving just eight countries opposed: Australia, Canada, Israel, Japan, New Zealand, South Korea, the UK and the US. At the critical UN General Assembly vote in November 2024, a ninth country joined – Milei’s Argentina, justifying its vote on a wholehearted opposition to the globally agreed Agenda 2030 and its Sustainable Development Goals.

Together, these countries account for around nine per cent of the world’s population, but they are responsible for an estimated 43 per cent of the tax losses uncovered in the State of Tax Justice 2024. The US and the UK, including its dependent territories, are the most damaging actors – and also appear to have been most strongly opposed to the UN process, railing against any ‘duplication’ of the OECD status quo.

However, as G77 speakers repeatedly pointed out during the talks, no duplication is sought. On the contrary, the UN convention will deliver something hitherto unique: a globally inclusive, transparent and broadly democratic decision-making process for international rules and standards on tax and associated transparency measures.

So finally, we might see a level playing field for tax. While some opposition from the blockers is to be expected (especially the new US administration), the UN negotiations do not offer powerful countries a veto – unlike the closed-door alternative at the OECD. The opportunity is now clear for the EU and other progressive OECD member countries to join with the G77 and deliver on the full potential of the UN convention.

[1] Alex Cobham & Petr Janský, 2019, ‘Measuring misalignment: The location of US multinationals’ economic activity versus the location of their profits’, Development Policy Review 37(1), 91-110.

Alex Cobham
Chief Executive