The United Nations (UN) achieved a key milestone in its efforts to create a new international tax framework. Last week, 110 member states approved the terms of reference (ToR) that will guide a special committee, known as the Ad Hoc Committee, in designing and negotiating a new tax Convention. Initially driven by African nations, this initiative aims to promote more inclusive global tax cooperation under the UN’s umbrella. 

Divergent interests, particularly between developed and developing countries, have heavily influenced the discussions. While the ToR received significant backing from many member states, some major economies voted against it. Here is what you need to know.  

Highlights of the Final Terms of Reference

The adopted ToR advances key issues related to tax certainty and dispute resolution. Tax certainty, in its traditional sense, means that taxpayers have a clear and predictable understanding of their tax obligations from the beginning to the end of an investment. What we see in the ToR is what might be stated as the other side of the same coin: the right of governments to revenue certainty. The ToR does this by “ensur[ing] certainty for both taxpayers and governments.” This is a critical addition to the balance between taxpayer and government rights and obligations. It seeks to untie the hands of governments when faced with taxpayers practicing tax base erosion and profit shifting, as well as other decisions that can significantly impact the expected revenue base of the government.

The ToR understands that there are two critical sets of expectations, those of the taxpayer and the government, and that governments are entitled to tools to enforce the rules underpinning their rights, just as companies are.

The text also retains a focus on preventing and resolving tax disputes—a priority highlighted in our written inputs to the Committee. Given the rising number of international tax disputes, often favouring investors, the consensus on the need for a better dispute resolution system is a positive step forward.  

Although several positive proposals by developing countries made it into the final text, some key issues had to be watered down to secure broader agreement. The removal of the reference to the need to cooperate on climate-related tax measures illustrates this compromise. Some negotiators against the reference argued that such issues were already being handled in other forums such as the UNFCC and for that reason should not be duplicated in the Convention. However, the Convention explicitly requires consideration of work from other forums, which should allow for climate-related issues to remain on the agenda regardless. In an attempt to find common ground, the ToR also includes broad language that commits the Convention to explore international tax cooperation approaches aimed at achieving sustainable development, including environmental matters. Furthermore, it opens the possibility for the prioritization of work on environmental challenges through the early protocols, which should give the negotiating committee a sufficient mandate to address climate-related tax measures.  

What Should the Convention Do? 

At the core of last week’s discussions was a more fundamental debate on what the Convention should achieve. How should it interact with other ongoing international tax efforts? Should the ToR provide prescriptive guidelines for the negotiating committee, or should they allow more flexibility?  

For some countries, the Convention should contribute to the existing international tax cooperation system. For many others, especially the African group frustrated with the current international tax agenda, this is a chance to revisit stalled international tax projects, like the taxation of cross-border digital services, and to raise new priorities, such as the combatting of illicit financial flows. To them, the Convention should not be subsidiary to any other ongoing or past international tax reform process that might limit its scope. Whereas previous drafts had described the Convention as “contributing” to the ongoing “system of governance,” the final text states that the Convention will “establish [...] an international tax system,” an outcome more aligned with the position of the African group and their original motivation for this work.   

The disagreement over the Convention’s purpose has led to further discord about the specific undertakings of the negotiating committee. Developed countries predominately wanted the ToR to provide broad, high-level, and non-prescriptive language to ostensibly allow the committee to have minimal restrictions in designing the Convention. Developing countries, on the other hand, preferred to give the negotiating committee as much guidance as possible, likely fearing that if the ToR contained broad, unspecific language, it could weaken the operational force of the Convention and sideline their priority areas. 

The Real Drivers Behind the Tax Negotiations 

Beyond technical tax and procedural matters, diplomacy and political alliances both played critical roles in shaping the outcome of the negotiations. Diplomacy helped navigate some of the inherent tensions of negotiations. Countries such as Colombia were represented by diplomats skilled in UN negotiations, who were not tax experts but helped find a middle ground using less contentious words and sentence constructions. These negotiators often served as mediators, easing tensions and facilitating agreement, highlighting the value of involving and equipping a diverse range of stakeholders when developing an international tax system. 

A key factor in the success of developing countries, particularly the African group, in pushing forward many of their proposals was their ability to negotiate as a unified bloc. At the final vote, only one African country abstained, while the rest supported the text. Under the leadership of the African Union and the African Tax Administration Forum, through Nigeria and Ghana, the African group presented a cohesive stance that other developing countries often backed. This was achieved through political agreement among African governments. Although more active participation by all member states would have been preferable, the ability of developing countries to organize and present unified positions worked to their advantage as they were the majority. In contrast, other regional and economic groups often faced internal disagreements, which slowed negotiations.  

Going forward, the strong organization of the African bloc and other developing countries may prompt further debates over how decisions are made within the negotiating committee. The unity of these groups could challenge the preference for majority voting, as larger economies might worry that their interests could be overshadowed by the numerical strength of developing nations. In their explanations for voting against the ToR, many developed countries indicated that insufficient consensus had been reached on several key issues, including the subject matter and timelines of the early protocols. However, given the strong divergence of opinions expressed during the negotiations, consensus on some issues may prove elusive. 

What’s Next? 

Despite a lack of consensus, both developed and developing nations have shown a strong commitment to the process, recognizing its potential impact, even amid increasing pressure on multilateralism.

The adoption of the guidelines highlights the significant influence of developing countries in the UN tax negotiations. Their collective economic power and role as major contributors to the real economy and resource supply chains will play a crucial role in the development of the Convention. As the guidelines move to the General Assembly for a final vote in September, the outcome will however depend on all member states overcoming entrenched positions and finding common ground.