A legal fiction blocking billions in climate finance will be challenged this week

Bemnet Agata is a communications officer at the Tax Justice Network, where Alison Schultz is a research fellow.

We are entering an age of permanent volatility.

Climate change is making extreme weather more destructive. Geopolitical tensions are disrupting energy markets and supply chains. Governments are expected not only to decarbonise their economies, but to protect them against an increasingly unpredictable world. That requires sustained public investment at precisely the moment repeated shocks are placing ever greater pressure on public finances.

Governments are rightly debating how to mobilise the trillions needed for the energy transition. Yet one of the largest untapped sources of climate finance requires neither higher corporate tax rates nor new international funds. It lies in correcting one of the oldest assumptions underpinning the international corporate tax system.

One of the stranger features of the modern economy is that we no longer disagree about what a multinational corporation is—until the conversation turns to tax.

Investors value Apple as a single global business. Consumers experience it as a single company. Its executives manage it as an integrated enterprise, allocating capital, production and marketing across continents according to commercial strategy rather than national borders. Nobody seriously believes its subsidiaries are independent businesses negotiating with one another as though they were unrelated companies.

Yet this is precisely the legal fiction upon which the international corporate tax system was built—and continues to rest.

That legal fiction does more than misdescribe how multinational businesses operate. It enables profits to be shifted away from the places where real economic activity takes place and into jurisdictions where little or no tax is paid. This not only erodes public revenues, but also undermines the level playing field by giving multinational corporations tax advantages that purely domestic businesses cannot replicate.

$500 billion a year

Taxing multinational corporations as the integrated businesses they actually are could generate around $500 billion in additional corporate tax revenues every year. That’s almost 40% of the $1.3 trillion in annual climate finance that, two years ago, governments agreed should be mobilised by 2035. That is exactly what governments are negotiating this week under the United Nations Framework Convention on International Tax Cooperation in New York.

Imagine Apple sold one million iPhones in Kenya. Few people would dispute that those sales depend on the Kenyan economy. Every iPhone arrives through Kenyan ports, travels on Kenyan roads, is sold by Kenyan workers, connects through Kenyan telecommunications infrastructure and is protected by Kenyan courts. Apple’s success depends not only on its own innovation, but on the public investments and institutions that make economic activity possible.

The negotiations underway under the United Nations Framework Convention on International Tax Cooperation would replace this legal fiction with a system known as unitary taxation with formulary apportionment. Rather than allowing multinational corporations to pay tax where they say their profits arise, it would allocate taxing rights according to where they undertake genuine economic activity—where they employ workers, manufacture goods, provide services and sell to customers. It would replace today’s pay where you say model with one based on pay where you play

This is not about increasing corporate tax rates. It is about deciding where multinational corporations should pay tax on the profits they already earn. Allocating taxing rights in this way would benefit countries across the income spectrum. While higher-income countries would gain the most in absolute terms, lower-income countries would see the largest proportional increases.

France, for example, would collect an additional US$25.5 billion each year, while Kenya would increase its corporate tax revenues by 406%. At a time of mounting climate costs, those revenues could help governments drive the transition to clean energy while investing in the resilience needed to withstand future shocks.

An overdue correction

The strongest argument for reform, however, is not the scale of the projected revenue gains. It is that the proposal corrects a century-old foundational error by bringing international tax rules into closer alignment with how the modern economy actually works.

Every successful market depends on foundations that no company creates alone: public investment, functioning institutions and the participation of millions of workers and consumers. If multinational profits are generated collectively across many countries, the rules governing where those profits are taxed should recognise that reality rather than the legal and accounting artifices that determine where profits appear on paper.

The international tax system remains an outlier. Every other area of economic governance has long since recognised multinational corporations as integrated global businesses. Tax rules remain the last custodian of the legal fiction that multinational corporations are not, in fact, multinational.

The debate taking place in New York is therefore about much more than tax. It is about whether the rules underpinning the global economy still reflect the economy they are meant to govern—and whether they equip governments with the fiscal capacity to confront the defining challenges of the twenty-first century.

Energy sovereignty without fiscal sovereignty is an unfinished transition. Countries cannot build a more secure and resilient future if the wealth generated within their economies continues to escape taxation where it is created.

Recovering those revenues would strengthen public finances, giving governments not only the resources to accelerate the energy transition but also the fiscal capacity to plan, coordinate and sustain it over the long term. In an age of permanent volatility, that capacity may prove to be every country’s most important climate adaptation strategy.

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