UN Digital Tax Talks Are Unlikely to Succeed Where OECD Failed

European countries that once worked to keep the United Nations’ tax negotiations from getting off the ground are now among the most active voices inside them.

Germany, France, Estonia, and Belgium have moved from abstention to engagement, reportedly citing eroding trust in US tax cooperation, frustration with stalled digital tax talks at the Organization for Economic Cooperation and Development, and fear of being absent if an agreement lands.

Europe’s engagement might look like momentum toward a serious agreement. But the goal every forum says it wants—a coordinated reallocation of net-income taxing rights over remote and digital services—is precisely what none has been able to deliver.

There is little reason to think the UN would fare better than its predecessors, and several reasons to think it would fare worse.

Pillar One is the cautionary tale. It stalled not merely because of generic US skepticism toward international agreements, but because of specific distributional politics. Reallocating taxing rights means shrinking one country’s base to enlarge another’s, and it’s nearly impossible to establish an enforceable consensus over the objections of countries that expect to lose revenue.

A UN process is more likely to offer a patina of multilateral legitimacy for gross-basis withholding taxes that countries can adopt on their own, rather than a coordinated reallocation paired with credits and double-tax relief. The result would be a patchwork of double taxation that inhibits cross-border trade and investment.

The draft convention text shows how. Its fair-allocation article declares that jurisdictions where value is created, markets are located, revenue is generated, or economic activities take place have a right to tax a portion of the income from such activities.

This folds together two different claims: source taxation, where production or business activity occurs, and destination taxation, where the customer sits. It asserts both as valid taxing rights but provides no mechanism for deciding which claim prevails or how overlap is relieved.

The OECD’s Pillar One, whatever its faults, at least tried to measure and allocate a defined base. Affirming multiple taxing rights without a principled effort to divide that base invites opportunistic double taxation.

The predictable equilibrium is “source for me, destination for thee.” Each government preserves source-based rules for its own exporters while reaching for destination-based claims on its imports, selecting whichever principle is convenient at the moment. Universalized, that pattern taxes tradable income twice and leaves domestic income taxed once.

US multinationals would face thickening layers of double taxation without reliable credits or apportionment. A purported act of global tax cooperation could end up hindering cross-border trade rather than facilitating it.

Multilateral tax forums have spent years describing undertaxation as a collective-action problem. But in today’s policy environment, the more immediate collective-action failure is unprincipled overtaxation of cross-border activity in digital services and in goods trade.

The US can’t credibly object to all of this from its current posture. European engagement with the UN appears partly driven by the perception that the US has become an unreliable negotiating partner, especially on broader trade issues. While US objections to the two-pillar approach have often been well reasoned, other US trade demands have been much less so.

Tariffs on goods undermine Washington’s credibility when it asks other countries to adopt more principled rules for cross-border services and international corporate income. The US also can’t ignore the base erosion and anti-abuse tax, which shares some of the same unilateral, rough-justice qualities it criticizes in digital tax talks elsewhere.

The US should reorient its tax and trade policy around a principled architecture for cross-border services, where many of its highest-value exports lie, and put self-reform on the table.

For developing countries, multilateralism still has a role. Countries that had limited practical influence in the OECD process have a fair complaint, and they may want to pursue regional harmonization—especially in relieving double taxation and policing double non-taxation. But multilateralism shouldn’t be used to mint new gross-basis taxing claims, as the UN convention currently seems poised to do.

Europe’s turn toward the UN isn’t a sign that governments are ready to resolve fundamental disputes over taxing rights. If anything, international cooperation on fair treatment of cross-border trade is crumbling. A willingness to entertain more gross-basis claims without creditability or apportionment only takes the world further away from that goal.

This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alan Cole is a senior economist at the Tax Foundation, with focus on business taxes, cross-border taxes, and macroeconomics.

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