UN International Tax Cooperation: Counting The Compliance Costs

International taxation becomes increasingly more complicated with the passage of every new law, regulation and international standard. The Tax Foundation surveyed companies about the cost of complying with these new regimes.^[1] The companies surveyed estimated that 43 per cent of their federal income tax compliance costs were due to rules relating to foreign-source income (ie, income from places other than where they are headquartered). These compliance costs have increased by 29 per cent between 2017 and 2023, and they do not account for the implementation of Pillar Two nor any of the proposals currently being considered at the UN.

When evaluating a policy, the increase (or decrease) in tax is not the only relevant cost. Compliance costs must be considered as part of the overall impact of such policies. In fact, with some proposals, compliances costs may outweigh the tax impact by many multiples. Additionally, the opportunity cost cannot be viewed in a void. Companies take these costs into account when making decisions as to whether to invest, expand, or sell into a market.

The UN Process

The UN formally began its quest to coordinate international taxation in 2022 when the UN General Assembly (UNGA) adopted resolution 77/244 to initiate intergovernmental talks to pursue a universal framework for taxation.^[2] Following the Secretary-General’s publication of Tax Report 2023, which laid out several options for international tax cooperation at the UN, the UNGA adopted resolution 78/230 to establish an Ad Hoc Committee to lay out the path forward for a Framework.^[3] After an initial draft in June 2024, the Ad Hoc Committee finalised and approved a draft Terms of Reference (TOR) at its August 2024 meeting. The TOR effectively lays out the guidelines and expectations for an agreement and protocols on tax cooperation with an emphasis on the needs and desires of developing countries.

Recent International Tax Initiatives

The international tax landscape has changed substantially in recent years as a result of both domestic and international processes, and multinational companies and tax administrations have had to change their compliance systems in kind.

The Organisation for Economic Cooperation and Development’s (OECD) base erosion and profit shifting (BEPS) initiative sought to curb tax abuses and promote coordination among developed countries. Eventually that effort morphed into the Inclusive Framework and Two Pillar Solution. For the better part of the past decade, the OECD has grappled with the best way to create, implement and administer a global minimum tax, producing a cornucopia of rules and Administrative Guidance for countries around the world to implement. As part of its work on the international taxation system, the OECD is also finalising Pillar One, a process that will reallocate taxing rights so market jurisdictions may receive a portion.

In 2017, the US created a new international tax regime through the Tax Cuts and Jobs Act (TCJA) to layer on the existing Subpart F regime (anti-deferral rules). The shift to a more territorial regime brought new rules, compliance costs, and administrative burdens for multinational companies. The Global Intangible Low-Taxed Income (GILTI) regime, Base Erosion and Anti-abuse Tax (BEAT) and incentive of Foreign Derived Intangible Income (FDII) are now common parlance among US tax professionals.  Since the TCJA included several ‘cliffs,’ a law must be passed for it to extend in its current form, and companies must be prepared to deal with any changes or failures to extend any of the provisions.

As the TCJA readies for a hopeful extension and the OECD enters the administrative phase of their qualified domestic minimum tax, the UN is starting on page one.

Regulatory Changes Cost Money

While the recent international tax initiatives noted above are all in the implementation stage, the UN process is just beginning. The push for a taxation discussion at the UN is driven by Developing Countries seeking increased tax revenue, increased transparency and simplification of the rules, among other priorities. However, the compliance burden of these efforts will be high for both companies and the countries seeking to raise revenue – especially those agencies tasked with reviewing tax returns and conducting audits in each jurisdiction. Adding more rules, particularly rules that are not aligned with the current international paradigm, makes achieving these goals even more elusive.

The compliance costs for companies have already skyrocketed in recent years. Additional tax burdens, both local and international, create the need for each company to design and implement new systems, hire additional staff and make modifications to their internal data collection and processing systems.

These costs are not just financial; they also cost the company’s time. In a recent Deloitte survey^[4] of over 500 tax leaders and CFOs of Multinational Enterprises (MNEs) potentially subject to the Pillar Two rules, 93 per cent of those surveyed indicated that Pillar Two is either very likely or moderately likely to affect their organisation’s strategy. This is coupled with the 70 per cent of respondents who expected to spend $500,000 or more annually on compliance costs related to Pillar Two, and 25 per cent expected to spend more than $1 million.

MNEs will also require additional coordination with their international subsidiaries, including requests for new data and metrics. While MNEs are reaching stability with the TCJA changes, and working to compile the enormous data requirements of Pillar Two’s Qualifying Domestic Minimum Top-Up Taxes, adding another international standard without proper alignment creates confusion, lack of clarity, and economic cost without a real benefit.

The Potential Costs Of A UN Tax Initiative

While it is not yet clear where the UN framework convention will lead, to date, the UN discussions amble between administrative concerns, tax evasion, lack of transparency, and other political considerations. The recently finalised TOR approved by the Second Committee – the UN Committee under which sits the Ad Hoc Committee on Taxation – proposes a new international tax framework that includes two early protocols and a series of meetings over the next three years (three meetings per year). The TOR is intended to provide the next committee with guidelines to create this new system.

Based on the work from the UN Committee of Tax Experts, a separate UN Committee dedicated to taxation, the current proposals deviate from the norms of international taxation. At times, these proposals create helpful alternatives, such as a toolkit for developing countries or a new provision for Tax Treaty negotiations (the US uses its own separate model Tax Treaty). However, Tax Treaties are bilateral instruments whereas the forthcoming framework and protocols are meant to be multilateral instruments. Layering an entirely new system on the already complicated system of international tax is problematic, because it greatly increases the likelihood of double or multiple taxation, increases the risk of disputes, and upends the norms of international taxation. Complying with a new layer of taxation means that MNEs may have to account for items multiple ways, including calculating income and the source of that income under different standards for submission to countries adopting the UN regime. The result will be double or triple taxation of income with no relief. Disputes will certainly arise as to the correct method and which country has the right to tax certain income. These disputes represent another increase in both cost and resource constraints for MNEs and tax administrators.

Tax audits, litigation and other disputes can last years, if not decades, and the associated costs will be astronomical. The more intertwined the international tax system is, the more intertwined are the disputes. Multiple country audits may become the norm. Disputes are played out in multiple fora – some led by countries as they negotiate with other countries on who has the right to tax, and others in courts or administrative proceedings.

By adding on a UN standard, the goal of simplifying and streamlining the international taxation system may never be achieved. Instead, both countries and MNCs will face unbridled complexity, resource constraints and financial costs. The UN should use a principled approach to fix the challenges that exist within the current international tax system, such as capacity building and resource mobilisation, and ensure that any new rules aid in the stated goals instead of detracting from them. Reducing costs and providing clear administrable rules are in the best interest of all parties involved.

^[1] McBride, William. (2024, September 4). Results of a Survey Measuring Business Tax Compliance

Costs. Tax Foundation. https://taxfoundation.org/research/all/federal/us-business-tax-compliance-costs-survey/?utm_medium=email&_hsenc=p2ANqtz-84QfBgB_akiozZsz1Dvr12cSs1VUeot9cORygJryBJm304VGmOFOTJvfoqj4lgoEhYmqtLxJdo0fQ2D4JaZAclHbx6jg&_hsmi=323131859&utm_content=323131859&utm_source=hs_email#_ftn15

^[2] United Nations General Assembly. 2022. Resolution adopted by the General Assembly on 30 December

2022 – Promotion of inclusive and effective international tax cooperation at the United Nations. Seventy-seventh session. A/RES/77/244. Available at https://documents.un.org/doc/undoc/gen/n23/004/48/pdf/n2300448.pdf.

^[3] United Nations General Assembly. 2023. Resolution adopted by the General Assembly on 22 December 2023 –

Promotion of inclusive and effective international tax cooperation at the United Nations. Seventy-eighth session. A/RES/78/230. Available at https://documents.un.org/doc/undoc/gen/n23/431/97/pdf/n2343197.pdf

^[4] Deloitte. (2024). Committed to compliance – Preparing for Pillar Two.

https://www.deloitte.com/content/dam/assets-shared/docs/services/tax/2024/dttl-pillar-two-research-report.pdf 

^[5] The Second Committee approved the TOR on November 27, 204 and the General Assembly plans to hold   a vote in December 2024.

Anne Gordon
Anne Gordon is Vice President for International Tax Policy at the National Foreign Trade Council, the leading business association dedicated solely to advancing the interests of U.S. companies in international commerce. Anne previously served in the U.S. Senate as Tax Counsel to two Senators Rob Portman and Todd Young of the Senate Finance Committee. During her time in the Senate, Ms. Gordon was one of the lead staff involved in drafting the tax provisions of the Infrastructure Investment and Jobs Act. She has also worked in the International Tax Services practice of PwC’s National Tax Services office, where she gained experience on a wide array of U.S. international tax issues including cross-border mergers and acquisitions and issues arising in the context of anti-deferral regimes, including Sub-part F. She also advised clients on debt issuance and modification, foreign currency issues, treaty benefits, GILTI, section 163(j), FDII and BEAT.