By Iain Byrne
The past 18 months have witnessed many unprecedented events but surely one of the most remarkable has been the recent deal reached on reforming the global tax system. The deal was formally ratified by the G20 on 30th of October based on that agreed by the OECD on 8th of October. It has the stated aims of ensuring that multinational corporates pay a fair share of tax wherever they operate and earn profits whilst seeking to bring more stability to international fiscal policy. This is against the background of general agreement that the current international tax system, which has not been significantly reformed in over 100 years, is no longer fit for purpose in a globalised and digitalised 21st century economy. After decades of failure to achieve any form of consensus amongst governments on one of the most intractable and damaging global issues – corporate tax evasion and aggressive tax avoidance on a massive scale – progress in less than a year seems remarkable. However, will the deal provide a level playing field for everybody and ensure that all states will be able to better meet their human rights obligations?
A global scandal
Agreement on such a deal is certainly urgent and vital. A study last year revealed that over $427 billion in tax is lost each year to international corporate tax abuse and private tax evasion, costing countries altogether the equivalent of nearly 34 million nurses’ annual salaries every year – or one nurse’s annual salary every second. This imperative is now even greater as states seek to both recover from the COVID-19 pandemic and address the climate crisis by investing in infrastructure, employment and public services and in so doing tackle growing inequality and widespread socio-economic reversals during a previous decade of austerity.
The loss of tax revenue is a global problem, but can be particularly significant for low- income states when it comes to how much corporates pay. According to the African Tax Administration Forum (ATAF), an international organisation which provides a platform for cooperation among African tax authorities, corporate income tax represents a higher share of tax revenues and GDP in developing countries than in rich countries. Tax levies on business are also higher – on average 16% of total tax revenue, compared to 9% in OECD countries. So the transformative potential of the deal for developing countries could be particularly significant for low incomes countries which lose a combined total of over $45 billion per year – equivalent to over 52% of their health budgets. This matters when tax is the most the most sustainable and predictable source of financing for the provision of public goods and services.
Tax as a human rights issue
Having insufficient resources, including from corporate tax revenue, impacts not just the delivery of goods and services but human rights enjoyment. As such tax policy is a human rights issue. As a former UN Special Rapporteur on Extreme Poverty has emphasised taxes may not be the only source of government revenue, but they are arguably the most important (emphasis added) combining as they do three critical functions which matter to human rights: (a) the generation of revenue for the realization of rights; (b) achieving equality and tackling discrimination; and (c) strengthening governance and accountability.
In examining how human rights interacts with fiscal policy its important to remember that monitoring bodies such as the UN Committee on Economic, Social and Cultural Rights have made clear that they do not prescribe a particular economic or fiscal model for states to meet their obligations. However, any fiscal policies that are adopted must abide by these obligations. So, for example, where a government’s fiscal policies allow aggressive tax avoidance to take place or the tax system has a disproportionate impact on certain groups it could be violating its obligation to allocate the maximum available resources for rights enjoyment and/or to address discrimination.
Specifically, with respect to human rights obligations of international cooperation and assistance (ICA), seven years before the global tax deal’s inception, the Special Rapporteur was calling for a contemporary interpretation of ICA which would replace prioritising tax sovereignty with a modern conception of international tax cooperation in a globalized and interdependent world economy. This can also be part of a state’s extra territorial obligations; whereby it has a duty to ensure that other states are able to comply with their own human rights commitments by, in this case, creating an international enabling environment for tax justice.
A deal to help all states to meet their human rights obligations?
On the face of it, the new global tax deal should enable better compliance by states with their human rights obligations whilst also making it harder for multinationals to evade their responsibilities. However, as with all such multilateral deals the devil is in the detail. From what we know so far is it truly a fair deal for everybody or does it risk actually entrenching global power and inequality? The deal is based on a two pillar plan developed over a decade by the OECD’s Inclusive Framework process, a package of 15 measures aimed at tackling tax avoidance and improving the coherence of international tax rules whilst ensuring a more transparent tax environment. In particular, the process is meant to address base erosion and profit shifting where MNEs exploit gaps and mismatches in tax rules to avoid paying their fair share of tax, and which disproportionately impacts developing countries.
Pillar One is designed to ensure a fairer distribution of MNEs’ profits – potentially amounting to more than USD 100 billion – by reallocating taxing rights to the markets where they carry out business activities and earn profits without having a physical presence in those markets. Pillar Two introduces a 15% global minimum corporate tax rate which has been estimated to generate around USD 150 billion in additional annual global tax revenues. The Inclusive Framework has also proposed an elective binding dispute resolution mechanism to address contested issues.
However, many have criticised both aspects of the deal and how it has been arrived at. Lower income countries have complained that some of their key concerns have not been taken on board as pressure has been put on them to sign up to a deal by wealthier states. The deal as it currently stands risks perpetuating an imbalance in the allocation of taxing rights between the source of a company’s profits, often in the global south, and where it is legally based – residence countries usually in the global north.
Furthermore, Pillar One will only reallocate a small part of the global profits of the largest and most profitable 100 or so multinationals. This is because 20% of the residual profit can be reallocated to countries where the multinational operates and earns profits, but only where that multinational has a minimum profit margin of 10%. Consequently, there is likely to be a low level of profit reallocation, in particular, to those jurisdictions with smaller markets. Some expert commentators have estimated that this will mean that less than $10 billion of additional global revenue will be generated per year.
Even if the 15% rate set out in Pillar Two, which has been widely criticised as being too low, is ultimately implemented it could raise an additional $275 billion of global revenue. However, it has been calculated that the G7 countries alone, with just 10% of the world’s population, would take more than 60%. Given that most countries in Latin America and Africa, which have average corporate tax rates of 26 per cent and 27 per cent, respectively, in 2020, a global minimum rate of around 15 per cent would do little to reduce incentives for profit-shifting.
Other problems with the deal include states being asked to remove unilateral measures such as digital services taxes, which have been benefitting developing economies, and the fact that extractives and financial services are currently excluded from the deal altogether. Unless some of these deficiencies are addressed in the longer term the deal could risk undermining many governments’ abilities, particularly low-income states, to meet their human rights obligations to maximise tax revenue. Despite the vested interests – both state and corporate – that will press for going no further it is to be hoped that, having made this critical breakthrough, additional reforms can be introduced based on states’ human rights obligations. That would truly be the deal of the century.
About the author:
Iain Byrne is an international human rights lawyer specialising in economic and social rights. Since 2011 he has worked at the International Secretariat of Amnesty International as a Law and Policy Advisor and Researcher in the Economic and Social Justice (ESJ) team. He has also managed a number of Amnesty teams – the ESJ and Refugee and Migrants Rights teams and the Gender, Sexuality and Identity Programme. In all three roles he has managed a range of major research outputs including for Global Campaigns. He is a Special Advisor on Strategic Litigation for the organisation and has been involved in litigation in both domestic fora and before international and regional bodies including the European Committee of Social Rights, the European Court of Human Rights, the UN Committee on Economic, Social and Cultural Rights, the UN Human Rights Committee and ECOWAS. He is a Fellow of the Human Rights Centre, University of Essex.
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