ISSUES OF INTERNATIONAL TAXATION AND ROLE OF IMF
ABSTRACT
International taxation is the study or determination of tax on a person or entity subject to the tax laws of several countries or, in some cases, the international aspects of a single country's tax laws. But since no rose is without a thorn so does there are certain issues that come with international taxation and these difficulties are faced by the tax governing body.
This article discusses the various issues of international taxation and how pandemic has impacted international taxation system with certain prominent issues. The article also briefly talks about the role of IMF in regulation of illegal tax evasion.
KEYWORDS: Tax evasion, MNCs, spillovers, Transfer pricing, IMF.?
INTRODUCTION
International tax difficulties are a source of concern for both rich and developing countries, with evidence of multinational corporations' sophisticated tax planning. MNCs can lower their tax bills by exploiting flaws in the international tax framework's design. The rise of the digital economy has added to the complexity of the international tax system. Concerns about the worldwide tax system have prompted major international tax initiatives as well as demands for more fundamental reform. The problem for developing countries is figuring out how to respond to these worldwide tax problems, which include a variety of international tax efforts.
Developing countries want MNC?investment and the benefits it brings, as well as tax revenues from MNC?activities to help them meet their fiscal obligations, such as funding the Sustainable Development Goals. Many worldwide tax reform projects are created by and for rich economies, and as a result, they may be too complicated and?ineffective in developing countries. The challenges with the international tax structure for developing countries are examined in this article.
MAJOR ISSUES IN INTERNATIONAL TAXATION
In general, current measures are focused on two issues: tax avoidance by multinational corporations and tax evasion by wealthy people. However, the core issue in each case is the basic difficulty of national tax policy causing cross-country spillovers. The current concerns about tax avoidance and evasion are a very obvious instance of such spillovers: they exploit flaws and inconsistencies in the international tax framework that come from integrating national tax systems. However, even in the absence of erosion and evasion, implementing national tax policy without addressing the spillovers to other nations might cause distortions.
TAX AVOIDANCE BY MNCs
Multinational tax avoidance has emerged as a major threat to governments' much-needed revenue and, ultimately, citizens' trust in the tax system—not just in industrialized nations, but also in developing and emerging economies. Recent high-profile incidents of multinational corporations paying extremely low tax rates have sparked widespread public outrage in many affluent economies, and similar concerns are growing in many developing countries.
When it was assumed that a physical presence was required to do business, the current international tax architecture was born. However, technological advancements have enabled many more enterprises to engage in considerable economic activity without the physical connection required to be subject to corporation income tax, such as providing services over the internet.
Intellectual property rights and other intangibles, which are easy to move but difficult to evaluate, have become increasingly important.
In some circumstances, otherwise benign arrangements raise the danger of avoidance. While tax treaties have long been thought to be useful for facilitating investment flows, they have in many cases allowed the host country's tax base to leak elsewhere, notably through treaty shopping. Some issues occur merely as a result of inconsistencies in national practice.
TAX EVASION BY INDIVIDUALS
When low-tax jurisdictions refuse to exchange taxpayer information with international tax authorities, opportunities for tax evasion expand. Individuals in most nations are taxed on their international income in their native country (with credit for any taxes paid abroad). However, unless the home country can get information on assets or income located overseas, this cannot be successfully enforced. Though the scope of the problem is difficult to determine, there are indications that it is significant. For example, an IRS investigation of U.S. taxpayers with UBS accounts resulted in the revelation of 4,450 accounts. In general, it is estimated that over 6% of global household net financial wealth roughly $4.5 trillion is unrecorded and located in tax havens.
Inflating balance sheets by removing funds that are not subject to taxation or other legal requirements can expose countries to risk; and, for some countries, international actions to discourage these activities, such as those described below, may necessitate changes in broader development strategies.
Financial institutions and experts like lawyers and accountants have been utilized to conceal tax evasion proceeds. While procedures to pierce the veil have long been part of the anti-money laundering (AML) standard, they were only recently expanded to tax problems. The synergies between the anti-money laundering and revenue administration systems have great promise, but they also pose institutional problems in terms of local and international collaboration.
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SPILLOVERS
These cross-country spillovers resulting from interactions between national tax systems are example of international avoidance and evasion difficulties. Tax measures supporting the use of conduit firms, for example, or low withholding taxes combined with a reluctance to share information with foreign tax authorities, are examples of aggressive tax planning and evasion that can harm the revenues of other countries. As a result, the tax base changes across countries, and in other circumstances, it almost completely vanishes. Taxpayers and tax authorities often incur enormous administrative costs as a result of this procedure, investment flows may be affected, and significant expertise is devoted to jobs of dubious social benefit.
However, spillover effects can take many different forms. Even if all tax regulations were followed to the letter, incentives created by discrepancies and inconsistencies in national tax systems could affect genuine actions. Changes in the total amount of corporate taxation in one nation are likely to have an impact on activity and revenue in other countries. However, there are other different types of spillover that could occur. For example, a number of advanced countries have moved or been persuaded to shift away from a residence-based' system of taxing active business revenue, in which they tax such income occurring overseas but credit foreign taxes paid, to a territorial' system, in which such income is simply excluded. As a result, host countries may face greater pressure to offer tax incentives, lower tax rates, and take other measures that erode their revenue base, because any tax they charge will now be a final burden for the investor rather than being offset by reduced taxation in their home country. As a result, these countries, eager to attract investment, may face greater pressure to offer tax incentives, lower tax rates, and take other measures that erode their revenue base.
HOW COVID HAS BROUGHT CHALLENGES FOR INTERNATIONAL TAXATION?
Transfer Pricing- To begin with, the arm's length concept applies to transfer pricing. Even in the current extraordinary circumstances, transfer pricing policies must assure compliance with the arm's length principle. The key problem for multinationals is to show through their transfer pricing paperwork that losses or low earnings are attributable to the COVID-19 crisis, not to transfer pricing manipulations. To achieve this, businesses must:
In view of this, multinational corporations should take all necessary steps to protect the content of their operations in all jurisdictions where they expand their business, such as using replacement local directors where available.
Permanent Establishment- Many enterprises with cross-border activities have had to manage employment relations with frontier workers who are unable to return to their residence place and/or implement smart working with the effect that the place of employment is transferred to the employees' domicile as a result of the covid restrictions imposed.
In principle, a permanent establishment cannot be regarded to qualify at the so-called home-office, according to the OECD. This is particularly true given that such a temporary method of work was implemented just to meet with certain constraints imposed by national legislators in the event of force majeure. Given the foregoing, it is critical that businesses limit any modifications to their tax strategies to those that are strictly necessary to comply with current regulations. In any case, each business should evaluate the tax treatment of workers and operations on an individual basis to ensure that all relevant facts and circumstances are taken into account.
UNDERSTANDING THE ROLE OF IMF
The OECD is well positioned to lead technical work on international taxation due to its history and experience. It has traditionally developed agreed standards for its members and indirectly for other countries through its Committee on Fiscal Affairs (CFA), most notably for bilateral treaties and standards for preventing abusive transfer pricing, but also in other related technical areas. The IMF is a participant in the CFA as an observer, and its personnel maintain tight and positive relationships with their counterparts. The Worldwide Monetary Fund and the World Bank have recently highlighted the fragility of an international financial system that might scarcely withstand a wave of countries defaulting on debt repayments, jeopardizing global economic recovery following the pandemic.
The debt issue can only be solved if a permanent multilateral framework is established that recognizes shared and binding rules for both debtor and creditor countries.
The G20's new tax model would establish a global minimum tax rate for corporations for the first time, putting an end to tax havens' exploitative behaviours and damaging tax competitiveness.
The agreement has not yet been signed, but the existing contents of the accord must be revised if we are serious about creating a really fair fiscal playing field that will constrain large company abuses and create substantial new revenue for all, especially poor countries.
CONCLUSION
Emerging globalization has been shown to improve the Indian economy, but it also poses a difficulty to Indian tax authorities in terms of collecting dues relating to international transactions. However, looking at the other side of the picture, it appears that dealing with essential taxes issues is not a tough chore. Here, the revenue department should take the initiative to delegate work to ensure that the right image of transactions is obtained and tax avoidance is avoided.
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