Global attempt on to ensure MNCs cough up proper taxes

OECD, G20 team up to plug loopholes that allow companies evade taxes in jurisdictions they operate to prevent tax base erosion
There is now a serious global attempt to ensure that multinationals pay taxes in the jurisdiction in which they carry out their business. The attempt is being made keeping in view the concept of tax base erosion and profit shifting (BEPS).

BEPS, the new buzzword among tax professionals, has its origin in the evolution of capitalist enterprises into multinational behemoths that directly or indirectly exercise critical control over governments the world over. In a nutshell, BEPS is the concept created by the global tax regime to make multinational enterprises pay taxes in the jurisdictions in which they operate. Most MNCs try to pay zero tax or minimal tax, the consequence of which is erosion of tax base in the respective territory.

BEPS is the outcome of double non-taxation, a situation in which global conglomerates, through deft handling of the laws of the land, do not pay tax anywhere in the world, resulting in the erosion of the tax base of the countries in which they do business. That’s why we need to check the trend.

The Organisation for Economic Co-operation and Development (OECD) and G-20 countries are on the cusp of putting in place a regime that would check BEPS, and the experts on the subject expect India to be ready with relevant laws incorporated in the Income-Tax Act by 2017.

A cardinal feature of ongoing projects on BEPS is that the audited accounts of an MNC have to be shared by the tax authorities in the countries in which the company operates. The OECD/G 20 project on BEPS at present is attempting to bring together these countries to sign a formal agreement to exchange such information.

A coordinated approach by these countries on framing new laws, documentation and co-operation for information are the primary steps in establishing the new system for checking tax base erosion and shifting of profit.

BEPS is increasingly being analysed at most discussions on international taxation. Karl Marx (1818-1883), the prophet of proletariat revolution, foresaw the future of corporate capitalism and the power of the proletariats unfolding at the international stage. As it turned out in the 20th and 21st centuries, it is the modern day multinationals who embody the might of present day capitalism.

At present about 60,000 multinationals operate globally. Although several of Marx’s prognosis have been proved flawed, but his picturisation of future capitalism as gigantic corporates battling for markets all around the world has not been disproved so far.

The search for market is driven by the search for profit and it is the drive for maximisation of profit that propels the MNCs to shift the profit to a low tax or zero tax destinations.

And it is no surprise that global transactions mostly, or at least 60 per cent of them, are between related parties. And the mergers and acquisitions and consolidation may bring the number of global enterprises further down. The figure of 60 per cent is revealed by a WTO research work. This is not just statistics, the impact of which is confined to academia, but a more serious issue with implications of money, power and wealth being controlled by fewer and fewer entities. It is also a testimony of the influence these entities wield over countries they operate in.

Taxation, historically, has several other functions other than collection of revenue. One of them is to deal with a situation in which the poor becomes poorer and rich become richer.

This, along with the main objective of collecting revenue, can be attempted only if the system is capable of fully collecting the taxes due to it. Look at the way countries like India lose out on its share of taxes. India is a colourful market for digital enterprises, yet global giants like Amazon or Google are not liable to pay tax in India, as they are not tax residents in India. This is because the international tax laws are based on taxing entities only at their resident countries. This is an example of tax base erosion caused by failures of the prevailing international tax rules to allocate profits to countries.

Base erosion also results from artificial avoidance of permanent establishment (PE) status, a requirement for levying tax on a cross-border transaction. The rules governing a PE are so complicated that MNCs can easily claim they have no PEs in India.

Base erosion also takes place due to treaty shopping, an exercise in which taxpayers obtain treaty benefits not due to them by undertaking convoluted transactions or by registering companies in tax havens.

India’s best example for double non-taxation and erosion of tax base is the Vodafone tax evasion issue. The transaction that was sought to be taxed was the sale of Hutch Essar by Hutchison International, Hong Kong to British company Vodafone. Hutchison did not pay tax in India. When Vodafone was asked to pay tax, it moved high court where it lost the case. Then the Supreme Court gave the order that India did not have jurisdiction to demand tax from Vodafone on a transaction that took place outside India between two non-residents companies. A closer examination of the development clarifies that neither party is liable to pay tax anywhere in the world after the apex court verdict. Vodafone is not paying tax either in India or Britain, its resident country. Hutchison is not paying tax in India or Hong Kong. This is a classic example of ‘double non-taxation’.

It was in this context that India brought in a retrospective tax that brought the transaction under the tax net. Now look at the international scene. Apple relied on a complex web of offshore entities and the loopholes in the US tax laws to take $44 billion off the US tax net. According to excerpts from a senate sub-committee report, Apple used three foreign subsidiaries that it claimed are not tax residents in any nation.

These examples are pointers to the intent of MNCs i.e. to maximise the profits; even if it is at the expense of the tax base of the countries they do business. Profit motive make these global enterprises turn a blind eye towards the realities of the society in which they conduct their business. Most of them do not see the stark reality that lurks behind every penny lost to the respective country — it deprives, sometimes even of the basic necessities.

The rates of taxes the countries apply range from two per cent to 45 per cent and the MNCs continue to prefer their profit shifted to the locations where the taxes are minimal. This, they prefer to do without appearing to be challenging the laws of the land they operate in. Maneuvering, however appear to be ok with most of them.

The global recession since 2008 has been pushing the countries world over for additional resources that include plugging the leakages in the existing tax base. Prevalence of BEPS in low-income countries, such as India, which depend heavily on corporate tax collections from MNCs, is a result of excessive reliance on the international taxation rules and procedures developed by the developed countries.

The ability of developing countries to bargain for tax laws favourable to them is severely limited due to the historical and economic reasons and the dynamics of international politics that favours the rich and the powerful nations.

Launch of the G20-OECD project on BEPS underlines the need to lift upwards the standards of global tax regime so that the developing countries like India do not lose its legitimate share.