By Peter Hongler and Simon Habich
- Overview
The second session of negotiations of the Terms of Reference of a UN Framework Convention on international Tax Cooperation started on 29th July. The latest published Draft Terms of Reference contains a chapter on “specific priority areas to be addressed in early protocols”. The idea is for these protocols to be developed simultaneously with the negotiation of the framework convention. Substantive issues should be regulated therein.
The chosen approach of regulating substantive issues in protocols is generally worth supporting. This strategy ensures that the Framework Convention remains a pure framework agreement, unburdened by contentious elements. It will also lead to a higher probability of acceptance because agreement to the Framework Convention can be separated from agreement to the protocols (see sec. 4). However, some questions arise in this context. We argue that understanding the protocols as plurilateral agreements would significantly contribute to the successful completion of the UN Framework Convention.
2. What are “protocols” under international law?
In the context of tax law protocols are usually documents that are attached to a treaty providing certain interpretations for parts of a treaty or containing auxiliary provisions to a treaty. In the context of the UN the term protocol is more ambiguous. The UN provides for five distinct use cases in its definition.[1] It is important to emphasize here that protocols in the UN context are generally understood as binding attachments of a treaty, in general signed by all parties. Exceptionally the UN uses so called “optional protocols” which are not signed by all parties of a treaty.
However, it seems to be the idea behind the early protocols to the UN Framework Convention that all parties sign them. This way, the substantive objectives laid out in the Framework Convention could be implemented through obligations specified in the protocols. The underlying goal might be to move substantive specifications to protocols to “ensure a more simplified and accelerated treaty-making process”[2] but this only reflects our interpretation and not a public position of the Ad Hoc Committee.
As we will argue in the following, we see the instrument of optional protocols[3] or plurilateral agreements – as we will call them – as more appropriate. The case for optional protocols or plurilateral agreements is more systemic. It is not about simplifying the negotiation process but about structuring the new tax cooperation framework in a more effective manner.[4]
3. Content of the Protocols
The latest Draft Terms of Reference mention the following topics which should be addressed in protocols: (i) taxation of the digitalized and globalized economy; (ii) taxation of income derived from cross-border services; (iii) tax-related illicit financial flows; (iv) prevention and resolution of tax disputes; and (iv) taxation of high-net worth individuals. Furthermore, additional topics may be addressed in future protocols such as: (i) tax measures on environmental and climate challenges; (ii) exchange of information for tax purposes; (iii) mutual administrative assistance on tax matters; and (iv) harmful tax practices.
Many of the topics have been at the forefront of the international tax policy debate over the past decades. Especially the taxation of the digitalized and globalized economy but also the taxation of cross-border services has received considerable attention by international tax policy makers. We are happy to remain optimistic, but we believe it is unlikely that the Ad Hoc Committee will find a solution on these issues within the next year. Therefore, there is a risk that filling the protocols with substantive and disputed topics would endanger consensus on the Framework Convention, especially if the protocols are an integral part of the Framework Convention to be signed by all member countries.
Nevertheless, we support the idea of debating some of the mentioned topics during the framework convention negotiations.
4. Suggestions: Protocols should be thought of as plurilateral treaties
We strongly believe that the UN Framework Convention should be signed by as many countries as possible, so that a forum can be created in which all future international tax matters can be addressed. However, there is a limited time frame to bring the project to a successful end and to reach an agreement on the lowest common denominator by as many states as possible. If we understand the protocols as plurilateral agreements – i.e. agreements signed by a subset (but not all!) of member countries to the framework convention, chances are significantly higher that an agreement on the Framework Convention will be reached and future tax cooperation can be built on a more sustainable institutional ground.[5] As an obvious consequence, the Framework Convention itself should mainly address non-substantive governance issues.
Of course, opponents could argue that the Framework Convention would become toothless if substantive provisions are moved to plurilateral agreements and, therefore, these substantive provisions would not be signed by all signatory countries. At first glance this might prove true, but we should consider that most substantive topics do not require a global solution. Additionally, the debates on Pillars 1 and 2 have shown that global solutions are basically impossible to find, at least in the current environment. Therefore, tax cooperation on substantive matters needs to happen among coalitions of the willing. For instance, if countries want to address the topic of taxation of high-net worth individuals they should do it within a plurilateral agreement under the umbrella of the new Framework Convention. Forcing broader participation through a global consensus will most likely only wash down the effectiveness of solutions due to the conflicting interest of countries in tax matters. There are a few exceptions which indeed require a more or less global solution such as fighting climate change through tax policy and fighting cross-border tax evasion. Here it might be better to aim at a global solution, preferably also under the Framework Convention.
Institutionally, it will be important to link these new plurilateral agreements to the Framework Convention and this is why they should better be called plurilateral agreements instead of mere optional protocols as they are developed and signed under the umbrella of the Framework Convention.[6] This enables countries to benefit from several advantages. Starting with the negotiations process, i.e. the Framework Convention should contain rules on how negotiations are initiated, who can submit proposals, who monitors the fulfillment of treaty obligations. But the Framework Convention might also contain more progressive provisions such as an inter-state dispute resolution mechanism or a special and differential treatment mechanism. This would allow (i) a transparent development of new tax treaties, (ii) a dynamic environment able to react to societal changes (no global consensus is required – international tax cooperation could move faster) (iii) the optional use of an intact judicial control system; and (iv) the possibility of considering the interest of developing and least-developed countries.[7] We firmly believe that with this approach the main weaknesses of the current international tax cooperation could be overcome.
5. Conclusion
The UN Framework Convention on International Tax Cooperation provides a unique opportunity to reform the international tax regime. We are convinced that the Framework Convention can be a success if as many countries as possible participate. In order to not discourage countries from participating the agreement on substantive issues in the Framework Convention should be kept to the minimum, the lowest common denominator, or preferably only be dealt with in plurilateral agreements, i.e. agreements among a subset of member countries.
[1] See https://treaties.un.org/Pages/Overview.aspx?path=overview/definition/page1_en.xml#protocols.
[2] See case “c“ https://treaties.un.org/Pages/Overview.aspx?path=overview/definition/page1_en.xml#protocols.
[3] Case “b” https://treaties.un.org/Pages/Overview.aspx?path=overview/definition/page1_en.xml#protocols.
[4] This approach was also mentioned as one of three options in the Report of the Secretary-General “Promotion of inclusive and effective international tax cooperation at the United Nations” (A/78/235) para. 56.
[5] For plurilateral agreements generally see Hoekman and Mavroidis, “WTO ‘à la Carte’ or ‘Menu du Jour’? Assessing the Case for More Plurilateral Agreements,” 26 Eur. J. Int’l L. 320, 325 (2015).
[6] For further details see Hongler & Habich, The New U.N. Framework Convention: Plurilateralism Could Be a Key to Success” taxnotes int. Vol. 114, No. 4 https://www.alexandria.unisg.ch/entities/publication/fb2dc135-59d3-430f-a782-b4bb6aabc8d9/details.
[7] On this issue see Magwape, “The era of Reform? Agenda-Setting, Decision Making and S&DT in International Tax and Trade” https://www.ictd.ac/blog/era-reform-agenda-setting-decision-making-sdt-international-tax-trade/.