Civil society demands transformative reforms for taxation agreement

Civil society groups have proposed key amendments to the draft texts under negotiation in the UN tax talks in order to bring about a fair and effective international tax system.

Maria Syed

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A ROBUST joint submission spearheaded by the Global Alliance for Tax Justice and supported by over 130 civil society organisations (CSOs) and trade unions has delivered a critical assessment of the draft United Nations Framework Convention on International Tax Cooperation and two accompanying Protocols.

The Intergovernmental Negotiating Committee (INC) mandated by the UN General Assembly to develop the new international legal instrument on tax cooperation met for its fifth meeting on 3–13 August. Three draft agreements – of the Convention and its two Protocols – were tabled for text review and negotiations.

The CSO submission urged for fundamental normative changes to ensure the negotiated agreements genuinely align with the UN General Assembly mandate. A central concern of the submission is that the draft Protocol on the Prevention and Resolution of Tax Disputes appears ‘focused on enforcing the old system’ rather than promoting structural reforms essential for global tax justice. The signatories advocate for an urgent shift away from the problematic transfer-pricing system towards a unitary system based on formulary apportionment and a reduced reliance on bilateral tax treaties. This systemic critique forms the bedrock of the CSOs’ normative demands, emphasising that the Protocol must align with and actively promote the transformative objectives of the Convention and the other Protocol on the Taxation of Income from Cross-Border Services.

CSO response to the ‘zero draft’ of the UN Framework Convention on International Tax Cooperation (UN document A/AC.298/CRP.32)

The CSOs’ joint submission highlights the absence of vital components from the Convention draft and a lack of operationalisation for other elements which are deemed essential for establishing ‘an inclusive, fair, transparent, efficient, equitable and effective international tax system for sustainable development’. The CSO proposals call for a systematic shift, embedding principles of equity, sustainability and human rights at the core of the new global tax architecture, reflecting key priorities for developing countries and those seeking a rebalanced international economic order.

The following are key normative pillars of the CSO submission:

1. Enriching objectives and principles for systemic justice: The CSOs argue for a more robust normative foundation. The principles of ‘polluter pays’ and ‘common but differentiated responsibilities and respective capabilities’ should be incorporated into the foundational principles. This inclusion is critical for ensuring that environmental costs are borne by those responsible and that richer nations uphold their historical and current responsibilities, particularly benefiting climate-vulnerable developing countries. National sovereignty should be balanced with the international responsibility to respect the sovereignty of other states, crucial for preventing harmful tax practices that erode other nations' tax bases.

2. Defining illicit financial flows and harmful tax practices with precision: To enable effective global action, the UN Statistical Commission’s broad definition of ‘illicit financial flows’ should be adopted: ‘Financial flows that are illicit in origin, transfer or use, that reflect an exchange of value and that cross country borders.’ This expansive definition, explicitly rejecting exclusions for non-tax crimes, is vital for developing countries struggling with capital flight and resource depletion. Simultaneously, ‘harmful tax practices’ should be defined as those that ‘undermine the fairness or effectiveness of the tax system in another jurisdiction’, a definition which provides a clear, actionable benchmark for identifying and combating such practices.

3. Operationalising sustainable development, human rights and environmental justice: A central normative demand is to link fiscal systems directly to UN member states’ obligations for sustainable development and the ‘progressive realisation of human rights’, including economic, social and cultural rights. This includes combating all forms of discrimination and inequalities, including economic, gender, racial and intergenerational inequalities. The submission further calls for Parties to the Convention to deliver ‘progressive environmental taxation’ nationally and internationally, targeting actors with excessively large ecological footprints. Significantly, it proposes establishing an international mechanism for a ‘polluter pays tax’ on the global profits of environmentally damaging industries, with revenues earmarked for sustainable development globally. An explicit commitment to ‘gender-responsive taxation’¹ is also advocated, recognising and rectifying gender biases in tax policies.

4. Ensuring equitable taxation of multinational enterprises (MNEs): Central to the CSOs’ vision is a fundamental normative shift from existing profit and expense allocation rules through transfer pricing. The submission proposes a commitment to ‘equitable taxation of multinational enterprises’, moving towards ‘unitary taxation with formulary apportionment’, supplemented by an ‘ambitious minimum effective corporate tax rate’. This model, where multinational profits are taxed based on real economic activity in each jurisdiction, is a crucial departure from the ‘arm’s length principle’ in transfer pricing that has facilitated profit shifting and tax avoidance, disproportionately harming developing countries. The proposal also suggests considering sector-specific formulas, particularly for extractive industries, to ensure fair taxation where value is truly created.

5. Achieving effective taxation of high-net-worth individuals (HNWIs): Addressing global wealth inequality, the CSOs propose a global minimum tax on net worth for the wealthiest HNWIs with progressively higher rates, with revenues channelled towards sustainable development. This recognises that the wealth of the super-rich often transcends national borders, necessitating an ‘international component’ to taxation rights. This is vital for curbing tax avoidance by the ultra-wealthy and mobilising resources for public goods and development.

6. Establishing robust compliance and sanction mechanisms: To give teeth to the Convention, the submission calls for strengthening compliance. Parties are called upon to consider establishing specific procedures and institutional mechanisms to ensure compliance with the provisions of the Convention. Crucially, the CSOs propose a mandate for ‘joint action against non-cooperative jurisdictions’, including non-Parties to the Convention, whose tax systems undermine the fairness, transparency or effectiveness of Parties’ systems. This includes developing ‘sanction mechanisms’, a vital step towards ending harmful tax competition and enforcing global tax justice.

CSO response to the draft Protocol on the Taxation of Income from Cross-Border Services (A/AC.298/CRP.33)

The overarching concern voiced by the CSOs regarding the current draft Protocol on cross-border services is that it ‘strongly resembles a typical bilateral tax agreement aimed at avoiding double taxation’. This approach, they contend, fundamentally mismatches the Convention’s objectives, risking the perpetuation of systemic problems in international taxation rather than fostering transformative reforms. Thus, instead of promoting a truly inclusive, equitable and effective international tax system, the Protocol in its current form inadvertently reinforces existing inequalities.

A key criticism revolves around the hierarchical allocation of taxing rights. The draft’s approach, which divides taxing rights into a dichotomy of residence versus source states, fails to adequately consider competing source taxing rights of third states. This can lead to ‘triangular’ cases and inadvertently cancel legitimate claims for source country taxing rights. The CSOs emphasise that the Protocol must move beyond this bilateral mindset and develop a truly multilateral system that acknowledges, protects, coordinates and enforces source country taxing rights in multiple countries simultaneously.

To achieve this, the submission puts forward several crucial normative points:

1. Implementing the Convention and ‘anti-lock-in’ clauses: The Protocol must not be a standalone instrument but must explicitly promote the implementation of the Convention. This includes Parties’ obligation under the Convention to align their existing international tax agreements with the Convention’s provisions and principles. Crucially, the Protocol should incorporate ‘anti-lock-in’ clauses to prevent countries from being bound by outdated norms and rules developed outside the Convention’s inclusive framework. This aims to clear the path for fundamental reforms, such as a corporate tax system based on unitary taxation with formulary apportionment.

2. Introducing the concept of ‘significant economic presence’ (SEP): The CSOs advocate strongly for the inclusion of SEP as a new nexus to align taxing rights with current economic realities, particularly in the digital economy. This would enable net-based taxation for non-resident foreign corporations without physical presence or permanent establishment. A comprehensive definition of SEP, subject to periodic review by the Parties, should integrate digital factors (e.g., local domain names), user-based factors (e.g., active users, volume of data) and revenue thresholds. Furthermore, ‘taxpayer pick and choose’ elements regarding taxation methods should be removed to ensure automatic application where SEP exists.

3. Comprehensive scope and revised definitions: The Protocol’s scope must be expanded to include international shipping and air transport, which represent significant service sectors for many developing countries. These sectors require specific profit allocation/attribution rules, ideally based on unitary taxation and formulary apportionment. Several definitions in the current draft are also deemed problematic: the conflation of natural and legal ‘persons’ should be clarified, and the concept of ‘applicable tax instrument’ deleted as it risks upholding existing treaties that contradict the Protocol’s objectives. The definition of ‘resident’ should be moved to the Convention.

4. Limiting MNE rights and enhancing information exchange: The submission firmly states that UN treaties are agreements between states and should not award rights directly to multinational enterprises. Provisions should focus on state obligations regarding such enterprises rather than creating corresponding corporate rights. Furthermore, the Protocol must provide a robust mechanism for automatic information exchange, covering crucial data like residence, assets, payroll, user data and revenue. Restrictive wording (such as limiting exchanges to what is ‘foreseeably relevant’) and inappropriate secrecy restrictions imposed by domestic laws must be removed to facilitate comprehensive information sharing.

5. Reconsidering non-discrimination: The broad non-discrimination principle suggested in the draft is seen as inappropriate. The CSOs argue that it could have damaging impacts by preventing countries from legitimately using taxation as an instrument to pursue development objectives, support domestic producers or protect strategic sectors.

CSO response to the draft Protocol on the Prevention and Resolution of Tax Disputes (A/AC.298/CRP.34)

The CSO submission on this Protocol argues that its current form risks entrenching an outdated international tax system rather than fostering the ‘inclusive, fair, transparent, efficient, equitable and effective’ system envisioned by the Convention. The CSOs’ key normative recommendations underscore a profound commitment to fairness, equity and the sovereign rights of states, particularly developing countries.

Significantly, the CSOs vehemently oppose the awarding of rights to MNEs under the Protocol. They assert that UN treaties are agreements between states, not corporations, and that the Protocol should not include ‘taxpayer-initiated mechanisms’ that could grant MNEs undue influence or standing. This stance reinforces the principle of state sovereignty and aims to prevent corporate capture of international tax governance.

Furthermore, the submission strongly advocates for the full integration of principle 9(a) of the terms of reference adopted by the UN General Assembly for the Convention. This principle mandates consideration of the ‘different needs, priorities, and capacities of all countries, including developing countries’. The current draft Protocol is criticised for largely overlooking this principle, potentially imposing significant administrative burdens on developing countries. The CSOs call for differentiated responsibilities to be systematically embedded throughout the Protocol, recognising the distinct realities and resource constraints faced by these nations.

Concerns also extend to specific mechanisms like advance pricing agreements (APAs) and arbitration. The CSOs highlight the substantial risks associated with APAs for MNEs, including issues of secrecy, potential for special treatment, and inconsistency. They propose giving tax administrations the right to reject APA applications without providing specific reasons, deleting MNEs’ right to request advance rulings, and establishing a mandate for the Meeting of the Parties to the Protocol to address these problems. In addition, the submission rejects outright the inclusion of arbitration as an option for dispute resolution, citing its highly concerning practice of vesting major tax decisions in a small group of experts.

The collective voice of the CSOs unequivocally calls for a paradigm shift in the draft Protocol. They envision a Protocol that acts as a truly transformative, multilateral and equitable instrument which is aligned with the spirit and objectives of the Convention. They seek a dispute resolution mechanism that prioritises systemic reform, upholds state sovereignty, ensures differentiated responsibilities for developing countries, and prevents the perpetuation of an unjust and outdated international tax system.

Maria Syed is a development economist from Pakistan specialising in international macroeconomics, feminist economics and global governance. Based in Berlin, she works as an economics consultant, researcher and policy advocate with the Third World Network, with the main focus on the international financial architecture.

Notes

1.  Gender-responsive taxation aligns fiscal policy with human rights, aiming to alleviate disproportionate tax burdens on women, especially those in low-income groups. It involves progressive reforms like taxing wealth and corporate profits, while reducing regressive consumption taxes that impact women more severely. The goal is to fund essential public services and redistribute unpaid care work, thereby advancing gender equality and women's rights.

*Third World Resurgence No. 368, 2026/3, pp 16-18