With the rise of the digital economy, the challenges to tax it are also increasing. E-commerce has enabled service providers to create a consumer base anywhere in the world. The transaction occurring between these entities does not touch the jurisdiction’s financial system creating a void in terms of monitoring and taxing the transaction. These intangible inputs and differences in national prices help companies and create difficulties for tax collecting authorities across the globe.
India takes over G20 Presidency from December 1 , 2022 to November 30, 2023, a year that might see the global economy transitioning from bad to worse phase according to the IMF’s revised global economic growth estimates. As it leads the world through a perfect storm, India will have to deliver economic solutions to mitigate the global woes and also boost its own trade. Focus on some prominent issues like international taxation will be important in this case.
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A report titled ‘The State of Tax Justice 2020’ stated that every year $427 billion aggregate global tax loss is caused due to global tax abuse by multinational companies (MNCs) and evasion by private players. It further added that India is losing more than $10.3 billion (nearly Rs 75,000 crore) every year due to international corporate tax abuse and private tax evasion.
Among the different tax avoidance strategies, the prominent one is transfer pricing. It is a method used by multinational corporations to shift profits to tax havens while avoiding tax in developed countries. Forbes wrote in its ‘Transfer Pricing As Tax Avoidance’, “Multinationals report vast profits in tax havens like the Cayman Islands, Luxembourg, Switzerland and Ireland. Economists have documented massive shifts of multinational corporations' profits to tax havens, in amounts wildly out of proportion to any economic activity taking place there. Some income is not taxed anywhere.”
Another important issue under the transfer pricing is IP (Intellectual Property) migration. This strategy enables companies, especially the pharmaceutical and software companies, to minimize tax in their markets. Forbes mentioned, “IP is the largest component of the value of most multinationals. Most IP has already been sent to tax havens, so that the associated royalty income can be booked there.”
With the rise of the digital economy, the challenges to tax it are also increasing. E-commerce has enabled service providers to create a consumer base anywhere in the world. The transaction occurring between these entities does not touch the jurisdiction’s financial system creating a void in terms of monitoring and taxing the transaction. These intangible inputs and differences in national prices help companies and create difficulties for tax collecting authorities across the globe. Rohinton Sidhwa, Partner, Deloitte India believes that digital economy taxation is the most required reform in international taxation.
The Organisation for Economic Co-operation and Development (OECD) and G20 came up with an inclusive framework called BEPS 2.0 to which 137 countries are signatories. This framework aims to implement two pillars by 2023 which will address multiple issues related to global taxation.
The pillar one of the framework aims at taxing income of the MNCs in the country from where revenues are sourced (irrespective of the of permanent establishment in a jurisdiction). But this pillar predominantly focuses on large MNCs (100 of the world’s largest and most profitable MNEs to countries worldwide- mentioned by OECD). What about MNCs which are not under the category of ‘largest and most profitable’ or have little lesser global revenue than $23.6 billion, an OECD criteria to define ‘largest and most profitable’? India in its G20 presidency must pave a way to tax the rest of the MNCs too.
Sidhwa said that there is no global consensus on pillar one yet and that would be an important challenge in front of the G20 president. There are other critical questions that still remain unanswered in the BEPS 2.0 framework. Though the blueprints of pillar one and two are released, there are still many areas that require deliberation and further development before issuing the final recommendations.
ITR (previously known International Tax Review magazine) in its ‘How will the G20/OECD’s pillar one and pillar two project affect disputes?’ stated that proposals in pillar two are largely prescriptive but there are still areas that can create challenges for many businesses. It mentioned, “Such challenges may, for example, include the determination of jurisdictional effective tax rates, the coordination of the switch-over rule with treaty requirements, and for US multinationals, coordination with the various base-erosion measures enacted through the Tax Cuts and Jobs Act of 2017.”
It further added that pillar two provides details on how controversies regarding these points could be ‘avoided’ but does not “propose a formal mechanism or process to prevent or resolve controversies”. It wrote, “unless this is addressed, its implementation may create additional challenges for businesses and tax authorities to resolve controversy through traditional means.”
Harsh V Pant, Vice President – Studies and Foreign Policy at Observer Research Foundation, said that there is a wide disparity between various stakeholders and India can be a bridge between developing and developed world in framing these new rules for the new economic age. It is the most significant way through which India can enhance its profile as a global economic power in its G20 presidency.
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