In the latter half of the last century, global trade took major strides forward and large companies stretched across borders doing business in different tax jurisdictions, taking advantage of differing tax laws to pay as little in taxes as possible.
While companies have set up head or registered offices in low tax countries like the Netherlands and Ireland to pay taxes on profits at their rates, the situation in recent years has become more complex with the emergence of major digital companies like Amazon, Alphabet (Google), and Facebook which can do business in a country without virtually any physical presence there.
Simultaneously governments have realised what they have been missing out on by way of tax revenues. According to the “State of Tax Justice 2020” report by the non-profit Tax Justice Network, the US has lost $50 billion in tax revenues in a year, and Germany and France are also heavy losers. India has lost $10.3 billion. The annual global tax loss is put at $427 billion.
The call to make global companies pay more taxes has become sharper as the pandemic has gripped the world and created a healthcare emergency. The report has a sub-title: “Tax justice in the time of Covid-19”.
The most powerful global economic grouping, the OECD, has gone quite far in negotiating the details of a multilateral arrangement that will not allow large companies to go tax shopping worldwide.
Minimum tax rate
Now a smaller group within the OECD, the G7 which includes major economies like the US and Japan, has agreed on two major issues and this agreement will go to the OECD in July for fine-tuning. There is still a long way ahead before a multilateral agreement, which will have to include around 140 countries, can be reached but considerable progress has been made.
The deal has two elements. One, there will be a global minimum tax rate of 15 per cent, and two, companies will have to pay a 20 per cent tax on the profits they make beyond 10 per cent (this is a kind of standard deduction if you like) in a country where they do any significant business. Plus, the US would like only about 100 of the most profitable MNCs to be subjected to this tax. Why it cannot be 100 or 90 is not clear.
Those who have been examining large Indian companies find that TCS may fall within the net of 100 biggies but Infosys will remain out. Among the other Indian names which have business and investment across borders are the Tata group and Airtel.
Where does India stand in all this?
Countries that have lower rates and use that as a key tool to attract investment, will have to give up that tool and yield place to countries like India which have a higher tax rate but are well endowed in terms of market size and skills. According to one set of analysts, the effective minimum corporation tax rate here is 17 per cent. Plus, in 2016 India imposed a 2 per cent equalisation levy on non-resident e-commerce companies doing more than Rs 2 crore of business in India.
In recent years, India has also travelled some distance in lowering its taxation rates. In 2019, it sharply cut its tax rate for domestic companies to 22 per cent and new domestic manufacturing companies to 15 per cent (including a surcharge of 17.16 per cent). So that is getting quite close to the proposed minimum and reduces India’s advantage through global adoption of a minimum of 15 per cent. However, according to another set of analysts, the effective rate for companies in India, inclusive of surcharge and cess, works out to 25.17 per cent.
Also Read | G7 leaders vow to end ‘race to bottom’ on taxes
Public debate in recent years has been dominated by non-profits and major tax authorities and tilted heavily against MNCs but some argue that these large companies promote tax efficiency by going tax shopping in search of territories that offer a tax advantage. This puts pressure on countries to have unambiguous tax laws which are efficiently administered.
Besides, there is a lot more to geography than simply the tax rate and livability also plays a role in the location of a centre where most of the top executives of a group are stationed. A global top executive may reject a job offer in New Delhi, the most polluted capital in the world, despite good compensation.
Whatever happens, the future is not bright for tax havens, places where companies are officially registered for tax purposes but have no more than a letterbox like Caymans, Bermuda, and the British Virgin Islands. But more complex is the position of Singapore and Hong Kong which are attractive places to do business plus have low tax rates. The most complex is the position of the UK where all the tax avoidance work is done by highly paid executives in the City (business district) in London and the letterbox is in say the Caymans. The two together make up what is called the ‘UK spider’s web’.
(The writer is a columnist and author)
