Taxing thoughts

There are no easy solutions to the long-drawn battle between tax authorities and multinational corporations, who practise tax evasion to perfection. Profit shifting by these companies through affiliates set up in low tax jurisdictions has resulted in substantial loss of tax revenue for countries. The proliferation of digital companies without physical presence in any country, has compounded the problem. The recent proposal of the US Treasury Secretary, Janet Yellen, asking countries to agree on a minimum corporate tax rate to address this issue, is however too simplistic. She decried the “30-year race to the bottom” brought about by tax competition between countries. The context of Yellen’s pitch is clear. The Biden administration wants to move the corporate tax rate in the US to 28 per cent from 21 per cent to help fund its large stimulus plan. By urging other countries to fix a floor for tax rates, the US government is trying to preempt another round of tax avoidance by US based companies following this rate hike.

This idea, however, goes against the sovereign right of a country to impose taxes based on its growth and welfare objectives. India, for instance, has been trying to simplify and lower its corporate tax structure since 2015-16. The effective corporate tax rate in India at 22 per cent is competitive compared with other emerging economies. The lower rate incentivises companies to spend more on future expansion; it also helps attract foreign capital. It may be recalled that the Trump administration had slashed corporate tax rates aggressively to boost growth. It does not seem fair to ask other nations to move away from their chosen tax policies merely because the US wants to hike tax rates. Countries with extremely low or zero corporate tax rates may not accept this proposal since they get substantial revenue from MNCs’ local operations. Even if tax competition among countries were to be reduced, companies will try to reduce their outgo by utilising exemptions, deductions and so on, provided by statute.

That said, there is a need to check the revenue loss through these tax evasion practices. While the OECD’s Base Erosion and Profit Shifting project tried to address this issue, long-standing problems continue to exist. An international consensus is the way forward. The OECD’s “inclusive framework”, released last October is a step in the right direction. It seeks to address the problems posed by digitisation by proposing to ask MNCs in automated digital services and consumer facing businesses to pay tax based on a formula — one that uses the share of sales to reallocate profit to countries where the products are sold. While the resistance of MNCs to the equalisation levy imposed in India indicates that further proposals to tax them will be contested, this is the way forward. Quick fix solutions such as uniform tax rate are unlikely to work.

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