The conclusion of the Organisational Session of the Intergovernmental Negotiating Committee (INC) on the United Nations Framework Convention on International Tax Cooperation marks a significant step toward establishing a more inclusive and effective system for global tax governance.

In this context, Mr. Radhakishan Rawal (Senior Advisor, Dhruva Advisors LLP) elaborates on the major issues to be discussed by the INC. While signing-off, the author remarks, “The success of this UN initiative will depend on how many countries finally sign the Framework Convention and related Protocols. Certain countries (especially EU) have already expressed their dissatisfaction for moving away from consensus approach and USA has already exited the negotiations at an early stage.”

“One More Step Towards UN Framework Convention”

An important milestone has been achieved towards “promotion of inclusive and effective international tax cooperation at the United Nations” with the conclusion of the Organisational Session of the Intergovernmental Negotiating Committee (INC) on the United Nations Framework Convention on International Tax Cooperation (NY – Feb 3-6).

As per the Terms of Reference (ToR) prepared by the Ad hoc Committee last year, one of the early protocols should address “taxation of income derived from the provision of cross-border services in an increasingly digitalized and globalized economy”. The ToR also listed four additional topics for early protocols (a) Taxation of the digitalized economy (b) Measures against tax-related illicit financial flows (c) Prevention and resolution of tax disputes (d) Addressing tax evasion and avoidance by high-net worth individuals and ensuring their effective taxation in relevant Member States.

It was thought that the topic of “taxation of digitalized economy” could largely be covered by the first topic for the simultaneous early protocol agreed in the ToR. INC selected “Prevention and resolution of tax disputes” as a second topic for the simultaneous early protocol.

Another major issue to be decided by the INC was method of decision making, certain countries wanted “consensus” and certain wanted “majority” based decision making. INC finally agreed for simple majority decision making for the issues related to Framework Convention. For substantive matters related to the Protocols a higher threshold [appears to be 3/5th majority (the final report is yet to be made public)] is agreed. However, before resorting to this voting based approach, the INC needs to make all attempts to achieve consensus. The INC is expected to work over a period of next three years and develop the Framework Convention and two early Protocols simultaneously.

While this is an important milestone, there is a long way before the desired outcome of the UN initiative is achieved. The success of this UN initiative will depend on how many countries finally sign the Framework Convention and related Protocols. Certain countries (especially EU) have already expressed their dissatisfaction for moving away from consensus approach and USA has already exited the negotiations at an early stage.