The new Foreign Secretary Ed Miliband has made a clear commitment in his acceptance speech; “reforming our international institutions so they deliver for all countries, including the world’s poorest people.” He and the Prime Minister have a once in a generation opportunity in the coming year to achieve this - the United Nations Tax Convention (UNTC). When it comes to tax, this is arguably one of the most important events taking place in the world right now. 

The UNTC process was spearheaded by the United Nations’ ‘Africa Group’ - predominantly made up of low-middle income countries disproportionately harmed by global tax abuse. For a century international rules on taxation were made by the established powers - first the European empires at the League of Nations, and then the OECD composed of the United States and its allies. The rules were written to favour the interests of those richer countries, while the voices of the Global South were systematically shut out of the decision making processes. 

This has led to the effective looting of much of the world by global multinational firms, extracting wealth from Africa, South America and parts of Asia, and then banking those profits in low tax jurisdictions like British overseas territories that act as tax havens, as well as Luxembourg, Ireland, and Delaware. Large companies, enabled by lawyers and accountants, use complex corporate structuring via subsidiary companies - and use what’s called ‘transfer pricing’ to shift profits from the high tax countries to low tax ones. 

Increasingly, it is also the Global North that loses out too. The biggest losers of international tax abuse are also its biggest enablers - the UK and its Overseas Territories are the world’s leading enablers of global tax abuse, responsible for over a quarter of lost revenues worldwide - whilst the UK is also one of the biggest losers, with £33bn a year being lost.  

International tax rules at the UN may seem divorced from ordinary people’s concerns but their impacts are very real. Transfer pricing is what has kept Thames Water in massive debts and bill payers picking up the tab - despite its owners banking handsome profits abroad. Until 2017, Thames Water operated subsidiaries in the Cayman Islands - issuing bonds and raising loans. Thames Water would repay debts into the Caymans, officially making little money in the UK, whilst the “investor” subsidiary banked huge profits in the tax haven. All the while, billpayers have had to pay increasingly large amounts for water use each year.

The UNTC looks to tackle this systemic abuse of the international tax system by the most wealthy and powerful, by introducing a wide-ranging new rules, with every country given a real meaningful say in how they are shaped. This would be a significant and welcome break from the status quo of rich nations imposing their rules on everyone else. 

One such proposal is Unitary Taxation of multinationals. Unitary Taxation would see big companies - with their dozens or hundreds of subsidiaries - treated for what they really are; a single large corporation. Corporation taxing rights will then be allocated on the basis of where economic activity actually takes place, rather than where it is booked by the accountants. For instance, in Europe Google and Amazon's revenues come from users spread across Europe, and yet the profits are all booked in low-tax Ireland and Luxembourg respectively. These companies would be taxed on the basis of where the customers and clicks come from - which is what makes them their money. 

This month, the Tax Justice Network published a major study on what impact Unitary Taxation would have on global corporate tax revenues. Corporation Tax revenues would increase by £370bn worldwide almost exclusively from the massive multinationals. If implemented, the UK is estimated to  gain a hefty £12.8bn a year - enough to pay for the country’s annual council house building needs according to Shelter, or two thirds of the cost of an NHS-style Social Care system. 

Importantly, it would see the Global South’s Corporate Tax revenues surge, helping put low-middle income countries on a more sustainable footing. Rwanda would see its revenue from multinationals rise by over 1,000%, and Egypt by over 500%. The Global South would collect more corporation tax revenue in a single year than the entire amount owed by Global South countries to the International Monetary Fund in outstanding loans under these proposals. This could help end the debt crisis that has plagued so much of the world for decades. 

The UK has so far been reluctant to supportively engage in the UNTC process - at every stage voting to oppose it entirely, though more recently making some positive steps on issues such as polluter pays taxes. A UNTC offers  a real opportunity for the new Government to show effective leadership and meaningful international cooperation - building fair and inclusive international rules that would benefit everyone, from the Thames Water customer in Berkshire to people in Egypt and Rwanda.

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