International financial system reforms and tax cooperation are crucial to effectively mobilizing much-needed funds for sustainable development.

UN Trade and Development (UNCTAD) is renewing calls for stronger international tax cooperation with a more inclusive and transparent approach to addressing the needs of the global South.

Raising capital has long been challenging for developing countries, only 22 of which have investment grade ratings, according to the Trade and Development Report 2024.

A string of global crises, high borrowing costs, volatile external private financing and limited access to affordable public financing all risk aggravating the current multi-trillion-dollar investment gap for the Sustainable Development Goals.

To change course, reforms to the international financial architecture are necessary to expand the fiscal space of developing countries – through timely and flexible liquidity, debt relief and restructuring, and an expanded scope of development lending.

At the same time, countries need to effectively mobilize domestic revenue – another key source of financing – by tackling the challenges posed by tax avoidance, corporate arbitrage and illicit financial flows.

Such endeavour demands coordinated mechanisms on a wider scale, as regulatory fragmentation has made it easier for corporations and individuals to shift profits and assets to other jurisdictions.

In this regard, the creation of a global tax platform will be vital for enhancing international financial integrity and governance.

“It’s a central lever for developing State capacity and maintaining macroeconomic stability, enabling governments to make required investments independent of external sources,” the report urges.

The global tax system needs fixing

Concerning cross-border taxation, currently, many developing countries lack the resources to tackle base erosion and profit-shifting (BEPS) activities by multinational enterprises.

Between 2015 and 2019, around 40% of multinational profits were shifted to tax havens, cutting global corporate tax revenues by 10%.

Global profit shifting has severely hampered domestic resource mobilization, particularly in low-income countries.

The countries most affected by BEPS, particularly in Africa and Latin America, lose a larger share of total tax revenue compared to wealthier nations.

Domestic revenues have also taken a hit from corporate arbitrage and illicit financial flows. The latter, in some cases, could constitute as much as half of officially recorded trade.

Push for change

The ongoing initiative to create the United Nations Framework Convention on International Tax Cooperation seeks to ensure all countries have an equal voice in setting the agenda, shaping and deciding on rules.

This could help developing countries better steer efforts to close gaps in the global financial system and strengthen mechanisms for domestic revenue mobilization.

While the current tax system relies heavily on bilateral agreements and limited multilateral cooperation, the convention could establish a comprehensive platform for global tax governance, the success of which will depend on factors including:

• Effective policy cooperation among developing countries and North-South dialogue.
• Prioritizing inclusiveness and transparency, areas where the United Nations has an advantage over other organizations, particularly in addressing the needs of the global South.
• Leveraging international tax reform to shape the future of tax cooperation and reforms of the global financial architecture.
• Addressing arbitrage, inequalities and risks of differential tax regimes that could affect trade and investment flows and drain domestic revenues.