A Bigger Slice Of The Tax Pie?
BY AADRIKA SHUKLA / 25 SEPTEMBER, 2021
The G20 countries are attempting to address the growing digitalisation of businesses in a way that generates equitable outcomes for all stakeholders in the tax environment- through a global minimum tax.
t the G20 summit in London on 2nd April 2009, member governments swore to do everything they can to re-establish certainty and fast track development and employment; as a comprehensive, green and supportable retrieval for all. The Organisation for Economic Co-operation and Development (OECD), an international institution dedicated to developing ‘better policies for better lives’, worked along with the G20 governments. During the 2009 summit, the G20 and OECD worked together on a number of papers, policy briefs, reports as well as other things.
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They reviewed an array of affairs such as challenges faced on the way to a sustainable recovery. One of these was that of tax co-operation. Corporate taxation is an extremely vexed international policy issue. Negotiators have been seeking to bridge the gap between where multinational corporations do business and where they book profits for years. Governments have had their fill, by lowering the advantages from leeching earnings to havens, the proposed minimum tax of at least 15% would reduce corporations' incentives to manipulate the system.
What is BEPS?
Almost all countries, especially developing countries, are affected by domestic tax Base Erosion and Profit shifting (BEPS). BEPS comprises of two components: Base Erosion, which has to do with the reduction of taxable bases, and Profit Shifting which has to do with the practice of shifting taxable profits from high-tax countries to low-tax countries. Therefore BEPS as a whole refers to the tax planning strategies that take advantage of tax loopholes to relocate earnings to low or no-tax jurisdictions artificially, or to erode tax bases by deducting payments like interest or royalties. While some of these scams are illegal, the majority are not, because businesses that operate across borders can utilise BEPS to obtain a competitive edge over domestic businesses, however affecting the fairness of tax systems.
Many multinational corporations do not have a large physical presence, such as a factory or a place of business, in any country and can therefore shift income from their digital operations to low-tax jurisdictions, saving money on taxes.
The steady digitalisation of the economy is adding a slew of new issues to the mix, particularly in terms of tax payments. Many multinational corporations do not have a large physical presence, such as a factory or a place of business, in any country and can therefore shift income from their digital operations to low-tax jurisdictions, saving money on taxes. If taxpayers observe multinational firms legitimately evading income tax, it affects all taxpayers' willingness to comply voluntarily.
Pictured: Illustration by Antonio Sortino via Pinterest
BEPS is particularly prevalent and so, even more harmful for poor countries, which rely heavily on corporate income tax, particularly from these very multinational corporations. It is extremely critical to ensure that targeted nations receive support to address their specific needs and can participate successfully in the international tax standard-setting process.
Combatting BEPS
Effectively addressing BEPS, which costs countries an estimated USD 100-240 billion in lost corporate income tax receipts each year, and is 4-10% of global corporate income tax collection, is a worldwide issue that necessitates a coordinated global strategy. So, in 2015, the OECD formed the G20/OECD Inclusive Framework on BEPS (IF) at the request of the G20 Leaders, which provides governments with local and international tools to combat tax evasion. The IF has agreed on a two pillar solution for this problem.
Effectively addressing BEPS costs countries an estimated USD 100-24 billion in lost corporate income tax receipts each year,
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The first pillar aims to address the concern that businesses generate value in certain market jurisdictions (through access to their large user bases), but the associated revenue is subject to minimal taxation due to a lack of physical tax presence in that region. Under the current rules, the first pillar would provide countries a portion of profits taxed there, while the tax is still collected where the company has it’s fiscal base. Multinational corporations operate in a multitude of locations, oil giant Bharat Petroleum for instance, is present in 85 countries, but typically pays taxes on revenues exclusively in their home country. Initially, this pillar would apply only to the top 100 or so companies, before expanding after seven years.
The second pillar of this solution recommends a global minimum tax of 15%, which is yet to be confirmed. This will be a uniform minimum rate of corporate income tax imposed by individual jurisdictions on MNCs whose revenue will be taxable beyond a certain decided level. The motive is to deter these multinational corporations from making international investment decisions based on low tax rates which exist in countries as an incentive, attracting international investment.
Finance authorities and economists around the world understand that this tax rivalry among countries to attract foreign investment has resulted in a downward spiral. As US Treasury Secretary Janet Yellen puts it, "We've had a global race to the bottom in corporate taxation and we hope to put an end to that," This levelling down is producing significant revenue loss and jeopardising government funding in higher-tax countries. Low-tax jurisdictions market their lower rates in order to tempt foreign investment away from countries with higher tax rates.
Photo Credits : Janet Yellen by Greg Nash via The New York Times
In recent years, multinationals with intangible property income, such as royalties from trademark, patent, and software licensing, have transferred such rights to lower-tax jurisdictions in order to avoid paying higher taxes in their home countries and the countries where their income is produced. Such global laws that prevent profit shifting to low-tax nations would lessen tax competition and provide a more equitable allocation of tax revenues.
The Inclusive Framework now includes over 130 members from a wide range of economic characteristics, including a considerable number of developing nations. On an equal level, all members participate and are dedicated to putting the BEPS measures in place, as well as conducting peer reviews, and finalising the remaining standard-setting work, in particular in relation to transfer pricing. Out of the 139 countries that participated in the talks, 131 including India have agreed to this proposal.
Unfortunately, low income nations can’t participate in these discussions which are especially crucial to them because of lack of manpower and funds, and are therefore at a disadvantage here in terms of active negotiation for their needs
Credits : by Perry Tse via South China Morning Post
The final framework is expected to be concluded by October this year, until then there is an array of issues that still need to be confronted. As mentioned earlier, a number of nations are yet to approve the minimum tax rate and until that happens, inadequacy in laws will continue to benefit certain corporations and give a competitive edge to the countries that don’t accept. Furthermore, even if all the countries do accept the proposal, there is an underlying concern to all of it, which affects poor and developing countries that rely heavily on corporate taxation.
Can these countries procure any actual benefit from this minimum tax revenue? The proposed rate of 15% is already well below most poor and developing countries’ current rate, leaving room to play bait for foreign investment, reducing the impact to a bare minimum.Quite obviously, tax evasion is a problem that both affluent and poor countries want to address. Unfortunately, low income nations can’t participate in these discussions which are especially crucial to them because of lack of manpower and funds, and are therefore at a disadvantage here in terms of active negotiation for their needs. At the end of the day, establishing a worldwide minimum rate may not translate to a level playing field, as the G20 nations recurrently claim, and much more work remains to be done in this area.
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Keywords
G20 Summit, corporate tax, OECD, BEPS, MNCs, low-income nations, race to the bottom, Janet Yellen, Bharat Petroleum, income tax, tax evasion
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References
“International Taxation - Organisation for Economic Co-Operation and Development.” OECD, 2021,
www.oecd.org/g20/topics/international-taxation.
Nair, R. (2021) What Is the Global Minimum Tax 130 Countries Agreed to Be Part of & Why It’s Important for India. The Print.
Mellisa G. & Sharon B. (2021). Global Minimum Tax: An Easy Fix?. International Tax Review.
www.internationaltaxreview.com/article/b1sqtdczb210ty/global-minimum-tax-an-easy-fix.
Executive Summary | Tax Challenges Arising from Digitalisation – Economic Impact Assessment : Inclusive Framework on BEPS | OECD ILibrary. OECD ILibrary, www.oecd-ilibrary.org/sites/0e3cc2d4-en/index.html?itemId=/content/publication/0e3cc2d4-en.
Aqib A. & Maria C.(2021). The Benefits of Setting a Lower Limit on Corporate Taxation. IMF Blog
blogs.imf.org/2021/06/09/the-benefits-of-setting-a-lower-limit-on-corporate-taxation.
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