Sustainable sides of taxation: An international law approach

Abstract

This article explores from an international law perspective how taxation can be used by states as an instrument to address the mutually reinforcing themes of sustainability and human rights, and to sustain a civilisation. In doing so, the article discusses how far the maximisation of financial resources through a domestic tax system is necessary for the attainment of the United Nations Sustainable Development Goals. It further discusses whether tax avoidance by multinational enterprises is an infringement of the human rights obligations undertaken by states under the International Covenant on Economic, Social and Cultural Rights.

Introduction

The intersection between taxation and sustainability is wider than purported when one pauses to ponder. Any state or civilisation with ordinary foresight would typically be concerned about being able to sustain itself over the long run and hence will intervene to accomplish this. When we reflect on the objectives of taxation, taxation can be such a key interventionist instrument used by a state to sustain a society by facilitating fairness, justice, and equality, in particular through the redistribution of income and wealth.

While there remain multiple accepted definitions of sustainability, ¹ this article adopts a broad and human-centric definition of sustainability which includes but is not limited to environmental sustainability. It identifies sustainability as the ability to maintain a specific state across the short, medium, and long terms, acceptable to meet the minimum broad-based necessities of every human in the present and future, enabling them to exist peacefully without being helplessly confronted by crises. Under such an anthropocentric definition of sustainability, human rights are a core component of sustainability, just as sustainability is a core component of human rights. ² Sustainability and human rights are mutually reinforcing matters that can deeply interlink with taxation. This can be illustrated by wealth, environmental, and gender-based taxation and tax policies, which by applying or removing financial disincentives on specific products and activities can help achieve a more just and desirable social outcome. Taxation law can furthermore provide tax justice, overlapping with criminal law and supporting human rights through concepts such as ne bis in idem. ³

The existing scholarship addressing the intertwine between taxation, sustainability, and human rights remains underdeveloped, ⁴ with the intertwine often being assumed without express elaboration, notably from a legal perspective. But there is a growing recognition of this intertwine, exemplified by the United Nations (UN) Development Programme's Tax for Sustainable Development Goals Initiative that was launched in 2022, which this article seeks to supplement. This article explores the intertwine through the lens of two well-known and widely accepted UN apparatuses on sustainability and human rights, the UN Sustainable Development Goals (SDGs) and the International Covenant on Economic, Social and Cultural Rights (ICESCR). ⁵ It showcases how taxation can influence the fulfilment of the SDGs and the sanctity of the ICESCR, which have simultaneously continued to be undermined by the likes of diseases and wars that exacerbate food, energy, humanitarian, and refugee crises, with the climate emergency in the backdrop, threatening humankind's ability to sustain itself.

The article argues that taxation, when used effectively by states, can be a crucial instrument to safeguard fundamental sustainability goals and human rights. By doing so, taxation will foster and preserve a sustainable civilisation, which is put forward as the main goal of taxation. However, an inanimate tax framework is unable to do so alone – the genuine efforts and inputs of the public sector as a whole ⁶ and the private sector are also necessary.

In exploring the article's thesis connecting the themes of taxation, sustainability and human rights from an international law perspective, this article contains two parts. Part I, oriented towards the public sector, explores how far the maximisation of financial resources through a domestic tax system is necessary for the attainment of the SDGs. Part II, oriented towards the private sector, discusses whether tax avoidance by multinational enterprises (MNEs) is an infringement of the human rights obligations undertaken by states under the ICESCR. While these two parts of the article approach the taxation issues of separate economic sectors from different angles, they are interrelated as governmental policies to maximise tax revenues can influence sustainability and tax avoidance, while tax avoidance can simultaneously impact a government's ability to maximise tax revenues and sustainability. The two parts will collectively showcase taxation's strengths and limits in relation to supporting sustainability and human rights.

Part I: The effectiveness of maximising tax revenues to achieve the UN SDGs

• A. The SDGs and maximisation of available resources

Sustainable development has been defined as development that meets the needs of present generations without compromising those of future generations. ⁷ The 17 UN SDGs are a blueprint to build a more sustainable future for the world, focusing on people (including poverty, peace, and prosperity) and the planet. ⁸ They were adopted by all UN member states in 2015 as part of the 2030 Agenda for Sustainable Development. The SDGs are non-legally binding soft law instruments, reflecting and complementing the binding force of hard international law, ⁹ which international tax law forms part of. They encourage states to cooperate to deliver these goals by 2030 ¹⁰ under specific targets (one of which acknowledges taxation as being able to help achieve sustainable development) ¹¹ and indicators. ¹²

Without resources, the objectives under the SDGs clearly cannot be or are unlikely to be achieved. ¹³ A question that follows is, to what extent is the maximisation of financial resources necessary to achieve the SDGs? Generally, the maximisation of available resources as a concept can be observed in the ICESCR in the context of obliging states to progressively realise economic, social, and cultural rights (which along with civil and political rights, form the two subsets of human rights in Western societies) ¹⁴ to the maximum of all resources at their disposition. ¹⁵ Article 2(1) of the ICESCR states:

Each State Party to the present Covenant undertakes to take steps, individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means, including particularly the adoption of legislative measures.

The UN Committee on Economic, Social and Cultural Rights had stated that this provision is ‘a necessary flexibility device, reflecting the realities of the real world and the difficulties involved for any country in ensuring full realization of economic, social and cultural rights’. However, the committee had also stated that ‘the phrase must be read in the light of the overall objective of the Covenant which is to establish clear obligations for States parties in respect of the full realization of the rights in question’, so ‘it thus imposes an obligation to move as expeditiously and effectively as possible towards that goal’. ¹⁶

Extrapolating from the ICESCR, the maximisation of available resources can be described as a duty of a government to raise as much tax revenue and other resources within its disposition as it reasonably can, taking into account any resource constraints, ¹⁷ and allocate and expend them to help their citizens progressively realise the minimum expected levels of human rights, ¹⁸ particularly those embedded within each of the SDGs, ¹⁹ as widely as possible. This creates the conditions essential for sustainability, sustainable livelihoods, and sustainable development. ²⁰ There is a non-exhaustive range of available resources that can be maximised, ²¹ including human, technological, organisational, natural, and information resources. In the context of this article, there would conventionally be a greater emphasis placed on the financial resources ²² obtained from taxation revenue and possibly from international assistance and cooperation often in the forms of foreign aid and debt.

B. Taxation and sustainability

There are three dimensions to the maximisation of available resources: resource generation, allocation, and expenditure. ²³ Investing the proceeds from taxation into the SDGs can translate into improved living standards and correspondingly more opportunities for economic growth, which would subsequently increase funding that further enhances the attainment of human rights. Conversely, sub-optimal levels of taxation, tax exemptions, budgetary austerity or underspending, and other neoliberal policies could have disproportionately adverse impacts on disadvantaged and marginalised communities and individuals ²⁴ in financing their needs. They could worsen economic growth and inequality, impeding the realisation of economic, social, cultural, and other human rights, and fiscal justice to underachieve the SDGs. ²⁵

Certain states, both developing and developed, have also successfully relied on the argument that fiscal shortfalls have prevented them from affording the full implementation of rights, to justify their neglect or violation of human rights. ²⁶ This line of argument could be more easily challenged under an approach that asks whether there has been a maximisation of available resources, even when maximising available resources in practice could be problematic due to its definitional ambiguities and imprecision. ²⁷ Even during economic downturns, states are obliged to demonstrate every effort has been made to mobilise all resources at its disposal to satisfy the minimum essential standards of human rights. ²⁸

Taxation can help states achieve the SDGs under a framework that emphasises the maximisation of available resources, even when there are no express obligations on states to maximise their available resources to deliver the SDGs. Taxation has remained an instrument utilised in various civilisations across history to address domestic social issues via publicly provided goods and transfers. ²⁹ Members of a civilisation or community pay taxes to fund their governing entity's operations, now in the form of the modern state, in its bid to realise and sustain its unique conception of an ideal civilisation. There is no pre-defined method of formulating or securing each state's concept of an ideal civilisation, which could be influenced by sociocultural, economic, religious, or other doctrines. In return, the taxpayers can enjoy the benefits of being a resident of such a civilisation. ³⁰

Avi-Yonah identifies taxation's three goals of revenue, redistribution, and regulation. ³¹ These three goals are instrumental in helping each state attain its distinct conception of an ideal civilisation by underscoring the modern state's taxation function while underlining the state's overarching goal of sustaining its civilisation. ³² The first goal, revenue, determines how revenue should be raised by deciding who, what, and how to tax, which can be readily influenced by a maximisation of available resources approach. The second, redistribution, decides how much tax revenue should be spent on whom, ideally to promote a fairer redistribution of income and wealth, and can be enhanced when available resources are maximised. The third, regulation, controls private-sector economic activity by rewarding activities that are considered by the government to be desirable while deterring undesirable ones, dictating where available resources can be maximised and allocated. These goals, which are also considered under the Tax for Sustainable Development Goals Initiative, when pursued at scale under the state's legitimate power to deliver just and ‘right’ outcomes, have interconnected abilities to influence the achievement of the SDGs by mobilising resources to promote justice (including fiscal, climate, and environmental justice), fairness, and equality (including income, wealth, gender, and racial equality). ³³ Ultimately, these three goals’ overarching purpose of preserving and sustaining ³⁴ a society's way of life can be more easily met under a maximisation of available resources approach.

Undeniably, there are other functions and goals of taxation beyond those identified by Avi-Yonah. They may relate to taxation's regenerative function (to restore the resources that had been exploited by the state), statehood and the existence of the state (to pursue the state's course of self-determination and nation-building, upholding its normative values domestically while playing the role of a responsible state and tax jurisdiction within the international community), and justice (including to promote economic equality, ³⁵ guarantee a range of public goods and services, provide equal concern and respect, ³⁶ and otherwise act in society's long-term interests). They may also be those relevant to economics (to finance essential government activities; influence behaviours and internalise externalities; ³⁷ promote economic growth, productivity, innovation, entrepreneurship, investment, and globalisation; and act as a countercyclical fiscal measure and an automatic stabiliser), politics (e.g. to be used for political appeasement as a market-based instrument instead of a more authoritative or coercive ban on an activity or product), and civics (to satisfy or express a social duty, responsibility, citizenship, membership, or an identity). ³⁸ This article takes the position that all of these goals of taxation can be subsumed under taxation's ultimate goal of preserving and sustaining society.

Financial resources provide for the social goods and services that can help states fulfil their human rights obligations as the main duty-bearer in statist societies. ³⁹ By collecting revenue to maintain public finances, a state can subsequently redirect wealth into areas that would sustain its community while supporting the international human rights regime. Sustainability-reinforcing taxes, tax systems, and fiscal policies can also be utilised by states to address and advocate for pressing social issues and meet the SDGs to prioritise long-term, inter-generational, and intra-generational equity.

Taxation can help achieve the SDGs by being applied to negative internalities and externalities to reduce their occurrences, redirecting wealth away from less sustainable human behaviours and activities, notably in consumption and production, towards more sustainable ones. Some examples are environmental, health and other consumption taxes, namely on greenhouse gas emissions, single-use plastics, and other forms of pollution; sugar; tobacco products; alcohol; luxury cars; and fuel. As such, taxation can be used to disrupt harmful individual behaviours and other social harms for the collective good of a community, to sustain. These social harms may comprise those that have yet been considered to be deviations of social norms, such that taxation could offer an alternative policy tool to respond to them quicker than the law. Simultaneously, the state can redistribute tax revenues, especially those obtained under progressive income or wealth taxes, to finance solutions to social issues and better fulfil the SDGs. These funds could typically facilitate well-resourced and well-functioning infrastructure and institutions that could improve communities’ well-being and access to clean water, sanitation, healthcare, and quality education; and tackle poverty and hunger, possibly via welfare payments.

On the other hand, taxation could be reduced or not imposed on goods and services that are perceived to be sustainable or possess other positive externalities to not deter their uptake. These could comprise the most credible, appropriate, and necessary carbon, biodiversity, and other environmental credits, as well as renewable energy and energy efficiency developments, public transport, and other green projects and transactions. Their uptake could be further encouraged through a state's provision of sustainability tax incentives for them such as concessionary tax rates, and tax deductions, credits, exemptions, and holidays. However, the effectiveness of using these sustainability-linked incentives from an economic-efficiency and environmental or sustainability viewpoint could be curtailed when accounted for under an international tax system that mandates a minimum level of payable corporate tax, exemplified by Pillar 2 of the Organisation for Economic Co-operation and Development's (OECD) Base Erosion Profit Shifting (BEPS) Inclusive Framework addressing tax avoidance.

By increasing the taxation of less sustainable activities while decreasing the taxation of more sustainable ones, taxation is a plausible market solution to realise the SDGs. Taxation could simultaneously provide a signal of an economy's direction towards sustainability, which could be useful to various economic actors. ⁴⁰ Sustainability-reinforcing taxes can act as a guardrail against neoliberal capitalism that could otherwise perpetuate systemic unfairness to undermine the SDGs and exacerbate social inequality, restraining those undesirable side effects by collecting and redistributing wealth towards resolving social issues.

C. The limitations of taxation in respect of sustainability

Nevertheless, financial resources and taxation alone cannot guarantee the achievement of the SDGs ⁴¹ nor the sustenance and preservation of a society. This is when the remedies provided by finance may not be able to address certain structural issues and SDGs. An economic system that is excessively skewed away from sustainability and instead towards capitalism or neoliberalism would require systematic reforms that may not be obtained merely with finance to reach more sustainable outcomes.

Several SDGs may not be simply purchased or secured by maximising taxation. They include decent work and economic growth (Goal 8); reduced inequality (Goal 10); sustainable communities (Goal 11); responsible consumption and production (Goal 12); climate action (Goal 13); peace, justice, and strong institutions (Goal 16); and strong international partnerships and cooperation (Goal 17) which could thereby strengthen domestic capacity for tax and other revenue collection. ⁴² It is sometimes in fact the removal of taxes, such as abolishing gender-discriminating taxes on feminine hygiene products which would improve gender equality, that could lead to better SDG outcomes. ⁴³ But even if such a tax on feminine hygiene products were to be abolished, it may not necessarily fully eradicate the wider issue of period poverty or poverty itself. This is particularly when poverty, inequity, and inequality are perceived as the deprivation of basic capabilities ⁴⁴ or opportunities rather than as merely not having adequate wealth or income, such that the requisite remedy need not necessarily be pecuniary.

Beyond resource generation, the other dimensions of the maximisation of available resources (resource allocation and expenditure) cannot be neglected, principally from a redistributive and regulatory perspective. Maximising tax revenues builds monetary resources to deliver the SDGs, but without proper governance, these resources will not be efficiently and effectively used from a human rights and SDG perspective, such that they may not always sustain and preserve a society. Tax revenues collected by a government could be spent on militarisation and wars, be siphoned off by corrupt officials, fund inefficient fossil fuel subsidies and tax exemptions, ⁴⁵ or be misused on activities that could otherwise jeopardise the attainment of the SDGs. These ill-spent resources could have been mobilised to enhance the livelihoods of citizens instead by funding environmental, administrative, financial, healthcare, educational, and other social improvements. ⁴⁶ Operational, legal, and administrative issues arising from the course of administering a tax system, ⁴⁷ especially one that is excessively complex, could further impair the achievement of its intended sustainability-related objectives. While maximising resources gathered through taxation is important for fiscal self-determination, equally important is how those resources are obtained and used.

It is also worth noting each state faces its unique set of underlying domestic issues. Some states by sheer good fortune, do not face comparable challenges in terms of type, severity, or scale as those that overshadow the fragility of others. These could be economic, cultural, social, political, healthcare, geographical, environmental, or climatic characteristics that would inherently disadvantage such a state in meeting the SDGs. The maximisation of tax revenues cannot solve all problems purely on its own. Doing so otherwise will risk the main or underlying issues that require non-financial solutions becoming overlooked and unresolved.

Furthermore, the several goals of taxation can conflict with each other to weaken taxation's ability to promote sustainability. For instance, while taxation's revenue-seeking goal benefits public finance by funding government expenditure that could support sustainability-related measures, taxation's redistributive goal could at the same time be impaired if taxation increases inequality to have a negative impact on the SDGs. In such a case, where the incidence of a tax lies is therefore an important consideration before its implementation, to avoid unjustly burdening an already marginalised social group.

A tax that is unwisely implemented contrary to the goals of taxation and the principles of justice, fairness, and redistribution, such as when it punishes the poor to enrich the rich, would diverge away from taxation's ultimate goal and will not benefit the preservation of its society. Vulnerable individuals and households with less resources would be at a greater disadvantage in responding to regressive taxes imposed directly on them, or indirectly on them by taxing their daily necessities such as fuel and emissions. An unfair tax on vulnerable people that reallocates resources away from them would aggravate their existing burdens and otherwise poor position to respond to unavoidable threats to their livelihoods such as conflicts, environmental degradation, and climate change. Conversely, the removal or reduction of such taxes on individuals and households would provide them with greater disposable incomes and autonomy to independently improve their own living standards under a neoclassical economic approach, in contrast to a Keynesian government-led approach.

At the same time, taxation may not necessarily be able to sustain a civilisation effectively when sustainability, which has been argued in this article to be taxation's ultimate goal, can consist of multi-faceted objectives that conflict with each other. Notably, the economic growth and developmental goals of the SDGs, particularly those that can improve several key measures of living standards and reduce poverty, can conflict and compete with environmental and equality goals to harm other measures of sustainability and living standards. From a viewpoint of the environment vis-à-vis anthropogenic development, this is unsurprising when humans often if not always have needed to pollute, harm, or otherwise extract from the environment in order to live and thrive. Humans more recently have done so in an accelerated manner to seek an even higher standard of living in a post-Industrial Revolution period by garnering the benefits of modern science and technology, as observed in modern healthcare, infrastructure, and other consumption and production patterns. There remains no definitive rule to resolve these economic, social, and environmental conflicts. A sociopolitical balancing act that transcends multiple disciplines is required to do so, to ensure taxation's overarching sustainability goal is met.

Moreover, implementing a tax on a specific activity could mean that taxes on other activities may simultaneously have to be forgone. A tax carries the opportunity cost or regressive effect of a government subsequently being less able or unable to tax other potential activities under a given finite tax and political base. This could prevent other social issues from being directly or indirectly addressed, to neglect the SDGs’ objectives in those untaxed or undertaxed areas which could carry negative externalities. Over-taxation on activities which generate positive externalities such as those that contribute to sustainability also similarly have an adverse impact on meeting the SDGs, as would an unduly high tax rate discourage entrepreneurship, innovation, and investment, to subsequently harm economic growth and development.

Additionally, it should be recalled that the SDGs are not necessarily domestic goals but are intrinsically global goals. ⁴⁸ They apply to all humans across the world when various states are at different stages of economic development. As such, states with more developed economies have a responsibility to help states with less developed economies realise the SDGs, ⁴⁹ championing the extraterritorial human rights obligations of states. ⁵⁰ It is important to note that the maximisation of available resources of a state for its purely internal use would invariably reduce the finite pool of resources available for other states. In today's world of partial assistance and aid in which states would naturally prioritise their own national interests over those of others coupled with the fact that uniform international tax laws still do not exist, more taxes raised and internally expended under a maximisation of available resources approach by a state, especially one with a developed economy, would leave less financial resources and opportunities for other states, particularly those with developing economies, to tax and fund their own sustainability and human rights projects autonomously. ⁵¹ Evidently, the maximisation of available resources alone may not be completely sufficient to secure the SDGs at either a national or global level, unless states cooperate to optimally attain the SDGs which necessitates an adequate portion of those resources being shared and diverted from more developed states and more affluent groups of people to less privileged ones.

Maximising financial resources through the domestic tax system (notably through fiscal and regulatory policies) ⁵² can to a large extent help states to secure the SDGs. This is importantly so with respect to developing countries, which generally perform more poorly in tax revenue collection, revenue sustainability, ⁵³ and meeting the SDGs. However, implementing the maximisation of financial resources may prove more difficult for developing economies because of their typically lower tax yields and smaller tax bases, when possessing less available resources in the first place. ⁵⁴ Such characteristics of developing economies can limit their governmental expenditure on the SDGs, accentuated when these developing economies are without any developmental assistance or debt and deficit financing.

A state's fiscal policy defines the availability, distribution, and usage of financial resources which the state can utilise to meet the SDGs. It reflects the state's social and political priorities, and how it wishes for different actors to contribute to them. ⁵⁵ The SDGs are more easily secured when the maximisation of financial resources is used in conjunction with sustainability-centred and human rights-centred governance and principles at the international and national levels. ⁵⁶ Part II illustrates how tax avoidance can impact the maximisation of financial resources to hinder progress towards meeting sustainability and human rights objectives. The unjust domestic and global distributions of financial resources detrimentally affect the attainment of these goals, which can be rectified with just and cooperative domestic and international tax and fiscal systems.

Part II: Does tax avoidance by MNEs infringe the ICESCR?

• A. The ICESCR and tax avoidance

As mentioned in Part I, economic, social, and cultural rights, along with civil and political rights, are two key subsets of human rights. ⁵⁷ The ICESCR is a widely ratified ⁵⁸ multilateral treaty adopted by the UN General Assembly in 1966 committing state parties to recognise express socio-economic human rights for individuals. ⁵⁹ It sets basic conditions on the equal rights of every individual to enjoy all economic, social, and cultural rights (Article 3); social security (Article 9); just and favourable conditions of work (Article 7); living standards including adequate food, clothing, and housing (Article 11); health (Article 12); education (Article 13); participate in cultural life, enjoy the benefits of scientific progress and its applications, and benefit from the protection of the moral and material interests resulting from any scientific, literary, or artistic production (Article 15(1)), helping individuals realise their right to live a dignified life. ⁶⁰

The ICESCR, together with the Universal Declaration of Human Rights and the International Covenant on Civil and Political Rights, form the International Bill of Human Rights. ⁶¹ This article focuses on the ICESCR instead of other human rights treaties or documents because the ICESCR as of the date of writing remains the primary convention on socio-economic human rights. Taxation is relevant to the ICESCR as taxation and tax policy can significantly support the promotion of human rights, particularly socio-economic human rights to uphold the ICESCR, which can in turn help to fulfil and reinforce the SDGs and taxation's ultimate goal to sustain a community. The article is directed towards socio-economic human rights instead of civil and political human rights since several forms of the latter, because of their more political nature, may not broadly enjoy the same degree of universality throughout different communities worldwide as the former. Moreover, civil and political human rights mainly as negative rights that protect individual freedoms may not be as easily upheld under a purely monetary approach with tax revenues, as compared to socio-economic human rights which are often positive rights to have a clearer nexus and correlation with public finances. That being said, facilitating the protection of civil and political human rights nonetheless would still regularly require a certain amount of public finances, but these rights have been excluded from the confines of this article and can be further explored in future research.

Globalisation has brought many benefits to economies and living standards across the world, but nurturing tax avoidance has troubled the state's ability to control and mobilise resources. ⁶² Tax avoidance can be defined as a taxpayer's use of lawful but contriving arrangements, including by transactions and structures, to reduce their tax liability in a manner contrary to the spirit or intention of the relevant policy or law. ⁶³ By contrast, tax evasion can be defined as a taxpayer's use of unlawful arrangements to conceal or not pay any amount of their tax liability. As a further comparison, tax mitigation is a taxpayer's use of lawful arrangements as encouraged and intended by the law to reduce their tax liability.

MNEs can use aggressive tax planning strategies to avoid tax, exploiting loopholes and mismatches in the international taxation regime which would erode tax bases. They can avoid tax by leveraging on tax expenditures and tax advantages; engaging in transfer mispricing; artificially but legally concealing sales and profits or shifting them to low-tax and tax-free jurisdictions where minimal economic activity takes place; and locating intangible assets in low-tax and tax-free jurisdictions. ⁶⁴

While tax avoidance is generally not unlawful nor a form of human rights abuse, particularly when it does not completely prevent a state from raising alternative forms of revenue to meet its human rights obligations, it remains unethical, immoral ⁶⁵ and contrary to the spirit of law and policy. Datt claims that morality has no role to play in determining a taxpayer's tax liability – the law either imposes a tax on certain income or it does not, so there is no obligation moral or otherwise to pay more taxes than as provided by the law. ⁶⁶ This may be uncontroversial at the domestic level. However, once human rights are visualised at the global level such that the morality of tax avoidance can no longer be defined by national borders and could present more detrimental implications to less developed economies, Datt's argument may not stand in the status quo's absence of a standard international law for tax, necessitating a moral basis. It also may be less viable in the face of taxation and other laws that are unjust.

B. The implications of MNEs avoiding tax

Where and how much tax an MNE pays can closely influence a government's ability to maximise resources to uphold its human rights obligations. Generally tax avoidance, along with other forms of detrimental and illicit financial flows ⁶⁷ including tax evasion and corruption, ⁶⁸ leads to a significant loss and under-mobilisation of state resources to reduce fiscal impact, as with harmful tax competition, regressive tax systems, and clientelist resource distribution. ⁶⁹ This undermines the commitment made by states to significantly reduce illicit financial flows by 2030 under SDG Target 16.4 of the 2030 Agenda for Sustainable Development. ⁷⁰ These resources could otherwise have been used to maximise the domestic resources available to finance the attainment of human rights and the SDGs. ⁷¹ By avoiding taxes, MNEs hinder fiscal justice by preventing affected states from optimally maximising the financial resources needed to fully satisfy these states’ duty of ensuring that their citizens can enjoy all fundamental human rights, and to meet sustainability objectives.

Alike other forms of tax abuse, states by allowing MNEs to avoid tax or not actively prohibiting them from avoiding tax could result in negative feedback effects occurring within one or several societies. These include increasing social inequality ⁷² and enabling MNEs which are more likely to be from developed economies to gain tax advantages over non-multinational domestic enterprises that do not similarly benefit from tax avoidance, ⁷³ which can worsen global inequality. Tax avoidance, as an economic deadweight loss that undermines a government's redistributive policies, also heightens the costs of tax administration and regulation, and the risks of regulatory capture; and weakens the rule of law, public trust, government legitimacy, fiscal democracy and other democratic processes, tax morale, corporate culture, compliance, and capacity-building efforts in regard to tax systems. ⁷⁴

By avoiding tax and hence not contributing their ‘fair share’ of the tax burden, ⁷⁵ MNEs could harm affected societies by forcing their governments to raise revenue from less inclusive sources. Such sources could comprise regressive taxes that would shift the tax burden to less wealthy households. A consequence of this would be to exacerbate economic and gender inequality while endangering the economic, social, and cultural rights of society's most vulnerable, ⁷⁶ including to adequate health, food, clothing, and housing, ⁷⁷ which would violate the principles of equality and non-discrimination. These affected societies would become less able to sustain themselves over time and more likely face expanded existential risks stemming from prolonged indebtedness and aid reliance, poverty, and stunted human and economic development. ⁷⁸

The amount of lost revenue is usually amplified when MNEs avoid tax, given their typically larger scale and earnings when compared to other taxpayers. ⁷⁹ MNEs are characteristically sophisticated enough to manufacture more complex and less discoverable tax arrangements, eroding the tax revenues collected by not one but several governments to create a multi-jurisdictional issue. Simultaneously tax avoidance by these MNEs, which are less likely to derive from the least developed and most vulnerable economies, would lead to a significantly disproportionate loss of tax revenue ⁸⁰ for these economies while imposing higher costs of tax collection on them ⁸¹ under an unfair global tax system which allocates taxing rights to their disadvantage. ⁸² Hence, governments should take active measures to ensure MNEs are prevented from engaging in base erosion and profit-shifting practices to perpetuate tax avoidance. ⁸³ These may involve abolishing tax havens and anonymous forms of corporate ownership and preventing international transfer mispricing. ⁸⁴

Developing economies are usually more reliant than developed economies on corporate income tax as a revenue source, ⁸⁵ which MNEs should fairly contribute towards, and collect relatively low tax revenues in the first place. ⁸⁶ They further lack the normative and administrative frameworks necessary to prevent MNEs from avoiding taxation, ⁸⁷ to be disproportionately affected ⁸⁸ by tax avoidance which would aggravate their already limited investments in human rights. ⁸⁹ This is compounded by the recent phenomena of a lower proportion of profits being taxed globally, ⁹⁰ and MNEs becoming more influential within societies, reinforced by increasing privatisations and private–public partnerships. Meanwhile, MNEs already shape taxation frameworks by lobbying for reduced corporate taxation, broadened tax allowances and tax exemptions, and increased legal loopholes to further enable tax avoidance. ⁹¹ Subsequently, transparency, participation, and democracy in fiscal policy continue to be eroded, diverting resources away from financing the realisation of human rights. ⁹²

Low-tax regimes or tax havens with a ‘race to the bottom’ tax competition strategy ⁹³ and the abuse of tax treaties ⁹⁴ create opportunities for MNEs to avoid tax. These tax avoidance opportunities detrimentally affect states, in particular developing ones, by depriving them of the tax revenue ⁹⁵ needed to afford basic healthcare and education, and to eradicate poverty. Such strategies would bring greater financial benefits to MNEs and their shareholders who are usually from developed economies, than to developing economies and their citizens. ⁹⁶ They could subvert aspects of international law requiring states to refrain from direct or indirect conduct that frustrates the enjoyment of economic, social and cultural rights by people in other states. ⁹⁷

A state's low tax strategy could be counteracted by increased foreign domestic investment, which had led to the economic successes of Singapore, Hong Kong and Ireland resulting in improved domestic living standards in those jurisdictions. However, this is unguaranteed ⁹⁸ as there are several other factors involved in a jurisdiction's ability to attract foreign investment, such as the capacity of its labour force, language, culture, social stability, geography, regulations, operating costs and non-tax financial incentives including grants and certain subsidies. Implementing a low tax or no tax strategy could jeopardise tax revenues vital for governmental spending on basic human rights, especially in developing economies.

C. State obligations

Tax avoidance by MNEs can subvert the binding human rights obligations of member states under the ICESCR, and the SDGs. By carrying out abusive tax practices that erode states’ tax bases and therefore their capacity to protect human rights, MNEs could undermine the human rights obligations undertaken by states, namely those under the ICESCR, which may consequentially cause states to breach their ICESCR and other human rights obligations. States have a duty to protect human rights within their jurisdictions against abuses by third parties, which include MNEs and would typically do so under their state laws and policies. States by not doing enough to prevent MNES from avoiding tax, more specifically when it causes a severe deterioration in public finances and expenditure for the protection of human rights, could infringe their ICESCR Articles 2(1) and (2) human rights obligations to progressively realise all rights recognised under the ICESCR to the maximum of their available resources for all individuals within their jurisdiction without discrimination. ⁹⁹

Notedly under Article 2(1) of the ICESCR, states must do their utmost to attain economic, social, and cultural rights to the maximum of their available resources, ¹⁰⁰ and increasing revenue when necessary, equitably and non-regressively. ¹⁰¹ State parties are obliged to ensure the satisfaction of the minimum essential levels of all economic, social, and cultural rights, and demonstrate that they have made every effort to utilise all resources within their disposition to satisfy them. Such efforts to maximise available resources would derive from a state's ability to generate resources and prevent resource diversion. ¹⁰² Hence, a state's enactment of austerity or contractionary economic measures without first seeking alternative revenue-raising methods could infringe the ICESCR, if it were to deprive people from accessing minimum essential levels of socio-economic human rights. ¹⁰³

Similarly, the failure of states to adequately address tax avoidance or even their encouragement of unchecked tax avoidance and tax mitigation within their jurisdictions by MNEs would destabilise tax revenue. This would reduce the domestic resources available to states to safeguard human rights. In severe cases, it would subsequently lead to the erosion of these rights and cause states to infringe the ICESCR, specifically under Article 2(1) and on eliminating discrimination, ¹⁰⁴ and other human rights obligations ¹⁰⁵ and sustainability objectives. The onus is on member states to defend their failure to meet these obligations and objectives due to a lack of available resources, ¹⁰⁶ which could derive from the prevalence of tax avoidance. As noted by the former Special Rapporteur on extreme poverty Magdalena Sepúlveda Carmona, taxation is a critical tool to realise human rights and equality, such that ‘a State that does not take strong measures to tackle tax abuse cannot be said to be devoting the maximum available resources to the realisation of economic, social and cultural rights.’ ¹⁰⁷

Meanwhile, states remain unaccountable for facilitating tax avoidance. The failure of a state to adequately address tax avoidance (especially when it remains lawful and may not be considered as a form of human rights abuse or infringement) in itself may not be a breach of its duty to protect human rights. This is unless the failure to protect a human right can be clearly attributed to tax avoidance and the state's failure to effectively redress this issue specifically. Such attribution would be challenging under ordinary circumstances given the innate difficulties of proving so, more so in respect of tax avoidance's exploitative element, while marred by its lawful nature. These evidentiary obstacles would be compounded by the fact that maximising financial resources alone including through the eradication of tax avoidance may not be able to fully attain the SDGs, as outlined in Part I, or protect human rights.

D. Corporate responsibilities

Since MNEs are not signatories to the ICESCR unlike states, MNEs cannot technically violate the ICESCR which is not legally binding on them. There is currently hardly any express legal obligation on MNEs to not avoid tax under the ICESCR or other international legal instruments, due to the international community's continued failure to act decisively against tax avoidance by MNEs. ¹⁰⁸ For human rights to advance fiscal justice by preventing MNEs from avoiding tax, international norms pertaining to them must be translated into binding, well-defined, measurable, and readily enforceable standards. ¹⁰⁹ Otherwise, MNEs will naturally continue to have a financial incentive to avoid tax under their profit-driven motive within capitalist constructs, ¹¹⁰ exploiting their freedom to choose where and how to operate in order to reduce their payable corporate taxes under the guise of globalisation. ¹¹¹ This is even more so given the resurgence of neoliberalism depressing government intervention in support of the idea that private investment is essential for economic growth and should not be stifled, as exemplified by tax minimisation ¹¹² and other forms of fiscal austerity.

Nevertheless MNEs, as with other businesses, have human rights and social responsibilities. ¹¹³ This is since their existential ability to profit is dependent on a functional society which can afford their goods and services, on top of meeting any basic human rights expectations that society would have of them. At the same time, MNEs benefit from the public commons that a government controls or maintains by being in or otherwise utilising the benefits of its jurisdiction. Put simply, government resources are funded by the taxes paid by taxpayers. So, taxpayers including MNEs have responsibilities to pay their due taxes to enable governments to maintain domestic revenues and fulfil their human rights and sustainability obligations, such that the aggressive tax arrangements of MNEs could undermine the ICESCR.

Under the UN Guiding Principles on Business and Human Rights and international human rights law, while the duty to protect human rights is currently imposed on states and not business enterprises, each corporation has a responsibility to respect human rights. ¹¹⁴ Principle 11 of the UN Guiding Principles on Business and Human Rights articulates business enterprises should respect human rights. Principle 13 further elaborates that the responsibility to respect human rights requires business enterprises to avoid causing or contributing to adverse human rights impacts through their own activities; address such impacts when they occur; and seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products, or services by their business relationships, even if they themselves had not contributed to those impacts. Tax avoidance by MNEs, which has implications for funds that could be spent on safeguarding human rights, increases the likelihood of contravening these principles, demanding states to take action to prevent and address tax abuses by MNEs. ¹¹⁵ This is even when the UN Guiding Principles on Business and Human Rights do not contain any express provisions on tax avoidance or evasion, and when states currently are generally not needed under international human rights law to regulate the exterritorial activities of MNEs. ¹¹⁶ Nonetheless, the commentary on Principle 4 remarks that the closer the nexus of a business enterprise is to a state or the more it relies on taxpayer support, the stronger the state's policy impetus for ensuring that enterprise respects human rights becomes. ¹¹⁷

While it may be arguable that MNEs could potentially use their untaxed funds to improve work conditions and other human rights within their control, ¹¹⁸ they may not necessarily do so or to the extent, degree, objectivity, or expertise required. Additionally, while tax avoidance by MNEs could cause them to be in breach of the UN Guiding Principles on Business and Human Rights, these 31 principles are only non-legally binding guidelines that cannot be enforced against MNEs and do not create any new international law obligations. ¹¹⁹ Regardless, the implementation of these guiding principles has been slow, ¹²⁰ necessitating stricter measures against tax avoidance.

An MNE's performance in fulfilling its human rights responsibilities ¹²¹ and even corporate social responsibility, a form of soft law, ¹²² could be inhibited by its aggressive tax arrangements. MNEs reducing their tax liability in a manner contrary to the spirit or intention of the ICESCR could amount to MNEs breaching their responsibility to respect human rights. ¹²³ Such tax arrangements on top of undermining the ICESCR could also run contrary to any sustainability frameworks that may be applicable to an MNE, including sustainability standards (such as the Global Reporting Initiative's pioneering GRI 207 Sustainability Reporting Standard), ¹²⁴ benchmarks (such as the Dow Jones Sustainability Index), and certifications (such as the Fair Tax Mark). ¹²⁵ However, the laws on private actors’ obligations to mobilise resources remain less defined at this stage such that MNEs are mostly not accountable for avoiding tax, when it still may neither be considered unlawful nor a form of human rights abuse or infringement despite being able to harm the protection of human rights.

E. Solutions

The above tax law weaknesses with respect to states’ obligations and MNEs’ responsibilities in relation to tax avoidance continue to erode the amount of resources available to achieve human rights and sustainability objectives. While MNEs technically are unable to infringe the ICESCR and be held liable for its violation, their tax-related actions complemented by the inactions of their corresponding states could undermine the rights adopted under the ICESCR, other human rights and sustainability goals. A major advancement in tackling international tax avoidance under a multi-jurisdictional tax system has been through the OECD BEPS Inclusive Framework's two-pillar solution.

The two-pillar solution by dealing with base erosion and profit shifting can help mobilise and maximise domestic resources that could crucially be used to uphold sustainability and human rights objectives, as embodied by the SDGs and the ICESCR, and help support the fundamental needs of developing economies. Pillar 1 redistributes the taxation rights over MNEs to such developing economies where the MNEs’ consumers, users, and economic and value-creating activities are. Pillar 2 establishes a global minimum effective tax rate of 15 per cent that would further reduce the incentive for MNEs to shift profits out of developing economies into low or no-tax jurisdictions while alleviating the need for developing economies to inefficiently provide tax incentives to attract foreign investment. In doing so to combat tax avoidance, the two-pillar solution possesses theoretical dimensions that support sustainability and human rights holistically, furthering its primary purpose of realising greater international tax equity and economic equality.

As effective as the two-pillar solution could be in dealing with tax avoidance, it nevertheless remains that addressing tax avoidance to maximise domestic tax revenues as a purely pecuniary approach may not automatically or singularly improve sustainability and human rights outcomes. Countering tax avoidance, which boosts resource generation and government revenues, would only be able to secure these outcomes when other conditions notedly those relating to effective resource allocation and expenditure under the principles of redistribution and regulation are met, as elaborated in Part I. Maximising financial resources alone would be insufficient to completely attain the SDGs or implement the ICESCR when other factors beyond public finance ¹²⁶ are also involved to achieve truly sustainable outcomes. These include good governance through monetary and other forms of governmental policy, financial and other forms of regulation, ¹²⁷ and the workings of the private sector which encompass international trade and investment, enhanced when basic human rights such as those espoused under the ICESCR are upheld.

Conclusion

Taxation can help to foster more sustainable and responsible societies. It is an important instrument that states can employ to influence human behaviour and encourage a more sustainable community, while generating proceeds that can be invested into sustainability and human rights. ¹²⁸ To what extent can implications relating to sustainability and human rights be drawn from lawful actions and inactions of the taxation sphere? When considering the maximisation of financial resources as the significant first step towards procuring the goods and services that can improve sustainability and human rights outcomes, which tax avoidance can hinder and divert finances away from, this can be to a large extent.

But the limitations of taxation as a tool for sustainability must be recognised. Taxation may not always sustain and preserve a society, largely when used solitarily or unwisely. In addition, there are gaps in the current international tax system, significantly with respect to the tax avoidance arrangements of MNEs that would undermine the maximisation of financial resources. Even if tax avoidance were to be completely eradicated and financial resources were to be gainfully maximised, this cannot entirely attain the SDGs or fully implement the rights under the ICESCR, as they ultimately cannot be merely purchased but must be cultivated.

Meanwhile, taxation's linkages with sustainability and human rights to date have not usually been explicitly codified in hard or even soft law, exemplified by the SDGs and ICESCR. ¹²⁹ Actions and inactions that are lawful may still be a threat to sustainability and human rights, markedly in areas where domestic or international law should but has yet to intervene. Without the intervention of states, MNEs remain without any legal obligation to not avoid tax and would only continue to operate under an imperfect social or moral responsibility to. ¹³⁰ This may additionally obfuscate stakeholders as to whether tax avoidance by MNEs could threaten the SDGs and human rights. ¹³¹

It is imperative to safeguard human rights, morals, and livelihoods which will help realise more sustainable outcomes when and notwithstanding the law remains unduly silent on a systemic issue. Doing so in a modern society requires the genuine participation of the society's public and private players especially within the realm of tax, a key pillar of good governance and sustainability. The private sector, by fulfilling its taxation and other responsibilities, is well-placed to assist states in achieving these outcomes. Naturally, governments are obliged to play a larger role because of their legitimate sovereign power over their civilisations, ¹³² including the regulation of the private sector. The legal and political tax-related decisions of governments can have drastic repercussions for sustainability and human rights. Greater intergovernmental tax cooperation and regulation ¹³³ can help maximise financial resources and neutralise tax avoidance, to build a more sustainable world.