Need for Global Taxation Policy

ABSTRACT

With the budget strained after COVID-19, many governments to discourage profit shifting to low tax jurisdictions. A global initiative can effectively counter the problems of base erosion and profit shifting. India loses about 10 billion dollars to tax abuse through profit sharing annually. India has taken many steps towards reduction of shifting profits however an operation of a universal standard of minimum tax would create new pockets of revenue.

What is global taxation???

Global taxation is a system for the collection of taxes by a central international revenue service which empowers countries to tax companies where they earn their revenue.???????????????????????????????????????????????????????????????????????????

It is the means by which companies contribute to societies around the world. As business transcends beyond borders it has become a necessity for governments to ensure that taxation is transparent and non-discriminatory.

The Policy

The Organisation for Economic Cooperation and Development(OECD) negotiated on a agreement on an outline for new tax rules. 140 countries negotiated out of which 136 countries signed. The other 4 include Sri Lanka, Pakistan, Nigeria and Kenya.

The policy consist of a two-pillar reform which is the outcome of negotiations coordinated by the OECD for much of the last decade. It aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits, while adding much-needed certainty and stability to the international tax system.

Pillar One:

A tax of certain amount to be levied on those companies which receives more than 20 billion Euros in revenue and profit margin more than 10%. A portion of their profit would be taxed at the place where the sales are made. The tax rate is 25%. This ensures a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies.?

?Pillar Two: Global Minimum Tax

It consist of rules for companies with more than 750 Million in revenue. The 3 Rules are

1. Income Inclusion Rule-where the income of a company within foreign jurisdiction will be included as taxable income of the parent company ay the rate of 5%.
2. Under Tax Payment Rule-allow for withholding tax on cross border payments.
3. Subject to tax rule-used in tax treaties to give the countries the ability to pay tax that might otherwise only have to pay a low rate, which at 9%

It seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.It aims for a global minimum tax rate of atleast 15%

Need for the policy

As business has crossed countries and moved beyond borders, it has become necessary to implement a global tax policy? to help for fairer tax regimes. With digitalisation and globalisation of the world economy the policy works better and international coordination is required if companies are going to invest internationally and participate in world trade.

• Avoid Tax Evasion

Large Corporations tend to avoid tax by shifting their profits from countries where the revenue is generated to tax havens? and private tax evaders pay lesser tax by storing their financial assets offshore. This causes a loss to both developed and developing countries. The policy helps to prevent MNC’s from paying low to no tax and avoid tax evasion by accounting their profits in the books.

• Re-allocating taxing rights

It ensures MNEs pay tax in places where they operate and conduct business even if they are not physically present in that country. Large MNCs are traditionally taxed where they declare profit rather than where they do business. This allows companies to declare profit at low tax jurisdictions and so consequently having to pay tax at a low rate rather than where the business is conducted. A global policy would enable for re-allocation of some taxing rights over MNEs from their home countries to other countries where their markets where their markets are being used for business activities and thereby earning profits there, regardless of whether firms have a physical presence there.

• Prevents double taxation

Double taxation is where companies are taxed for the same earnings more than once. Uncoordinated actions whether unilateral or bilateral by governments can lead to risk of double taxation and impedes cross border transactions.

• Standard Rate

A standard tax rate would be applied to an income base worldwide. It would reduce tax based competitions among nations. With a fixed minimum rate there would not be any tax influenced competition between nations rather it would be more influenced by quality and infrastructure and skill of workforce.

The two-pillar package will provide much needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimize the strength and the quality of the post-COVID recovery.

Shortcomings:

The proposal for 15% will increase inequality. The richer countries will benefit from it and the poor countries will recover a small percentage despite being home to more than a third of the world’s population.

The rate set is so low that it doesn’t help stop profit shifting and tax havens are being normalised through them. The race to the bottom endangers financing in high tax countries. Lower tax rate countries attract foreign investment from higher tax jurisdictions.

Tax laws in various countries varies in complexity and internal revenue codes resulting in different tax basis and rules. The minimum tax policy caters to only a specific set of companies.?

India

India loses about 10 billion dollars to tax abuse through profit sharing annually. India has taken many steps towards reduction of shifting profits which includes measures like SEP rules, equalisation levy, TIEAs etc. However an operation of a universal standard of minimum tax would create new pockets of revenue. The enactment of Global Minimum Tax would imply switching from the above measures to the 2 pillar system.

Conclusion?

With the budget strained after COVID-19, many governments to discourage profit shifting to low tax jurisdictions. The OECD estimates an additional global tax annually however the impact of the global policy will depends on its interaction with the domestic tax rules and how different countries change their fiscal regimes. It is expected that this deal will encourage MNCs to shift their income to their country thereby improving their home economy. The GMT has given new hopes to fight tax evasion on an international scale. A provision for heavy penalty for offenders can persuade them to enter into the agreement and pressure on the tax havens by major countries can determine the impact of the policy.

Participants in the negotiation have set a plan for effective implementation in 2023. An active and sincere effort from the countries are necessary for its success.