As one of the world’s most unequal regions, Latin America is desperately in need of additional revenues if it is to solve its knotty economic, social, and environmental problems. But tax collection in Latin American and Caribbean (LAC) countries is low, averaging 21.7% of GDP in 2021, compared to 34.1% for OECD members. What accounts for this gap, and what should be done to close it?
Regionally, the overall lack of progressive taxation certainly plays a role. But the international tax architecture is also to blame. All too often, multinational corporations and the wealthiest in our societies can exploit the rules to avoid paying. The unfairness baked into the current system not only reflects and reproduces inequalities, but also fuels demagogic discourse and undermines faith in the rule of law.
Many of the rules that form the basis of the international tax system were drawn up a century ago by wealthy countries. No surprise, then, that these countries – and their richest citizens – benefit the most from the current framework. That is why the African Group at the United Nations tabled a resolution in October calling for a new round of negotiations on international tax co-operation.
This process could create more equitable rules that reflect the interests of developing economies. Ensuring fairness is important, to be sure, but so is giving governments a realistic chance of generating sufficient revenue to fund sustainable development, climate action, and infrastructure investment, as well as to tackle social inequality and sovereign-debt crises.
LAC countries should welcome the UN’s involvement in shaping global tax policy. For starters, the drawn-out negotiations under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have been disappointing for many in the Global South, who blame the initiative’s lack of inclusivity and flawed decision-making process. Few believe that the resulting agreement to reform international corporate taxation, even if implemented, will deliver meaningful and sustainable revenues for the developing world.
UN-led negotiations would allow LAC countries to advocate their shared interests. Despite facing common challenges when it comes to cross-border taxation, especially regarding digital businesses, we have not come together to devise common solutions, whether at home or in global discussions. That must change.
As part of this new approach, policymakers must build on and go beyond the reallocation of taxing rights provided for in the OECD agreement. The current design, lacking a comprehensive and effective strategy for taxing mega-corporations operating in digital markets, must be reformed to ensure a more equitable redistribution of these rights.
More crucially still, even if enough BEPS members sign the multilateral treaty, securing the two-thirds Senate majority required for ratification in the United States is highly unlikely. Given that many of the world’s largest tech firms are headquartered in the US, the deal would end up being written in water, and the global digital economy would remain under-taxed.
In the short term, developing countries should implement unilateral measures, rather than wait for others to decide on their behalf. This could mean introducing digital-services levies or taxation based on the principle of significant economic presence. While not a comprehensive reform, such measures (which Colombia recently enacted during my tenure as finance minister) ensure that multinationals start paying their fair share of tax in the countries where they earn their profits.
At the same time, the UN process would allow for a broader reconsideration of how to close the loopholes in the international tax system. For example, the scope of reform could be widened to include co-ordination on taxing individual wealth.
A recent study by the EU Tax Observatory shows that a 2% global wealth tax on the world’s billionaires (roughly 3,000 people) would raise a total of $250bn annually, and around $7.3bn in Latin America alone. While the BEPS framework has normalised the idea of a global minimum tax rate for corporations, intergovernmental negotiations at the UN could do the same for ultra-wealthy individuals.
The UN is uniquely positioned to address these issues, given its universal membership and its founding principle of sovereign equality. Recent history has demonstrated that inclusiveness is a prerequisite for successful implementation of a progressive and efficient tax system. When a negotiation agenda is built collectively, the outcomes are seen as more legitimate by all parties involved, often leading to greater compliance. Moreover, at the UN, developing countries are organised into negotiating blocs, through which they gain more leverage to promote their interests. — Project Syndicate
Opinion
A new approach to international tax co-operation
Inclusiveness is a prerequisite for successful implementation of a progressive and efficient tax system