The minimum global corporation tax can stop the menace

Tax is a source of revenue for a Government of a country. However, taxes can at times come in the way of subjective development of individuals or a company and further push these individuals and large business houses to find a way to avoid them by using loopholes in tax laws and guidelines.

There is a thin line of distinction between tax avoidance and tax planning.Tax planning is the arrangement of financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. Tax avoidance is dodging tax without actually breaking the law. Tax planning is something which is expected from a taxpayer and tax avoidance is something which is beyond the expectation of the government.

Tax havens or offshore financial centresare the most-preferred route by companies worldwide to minimize their tax burden by avoiding taxes. These countries or jurisdictions offer minimal tax liability to foreign individuals and companies and do not require businesses to operate out of their territories to receive tax benefits.

Some of the top tax havens in the world are Bermuda, The Netherlands, Luxembourg, Cayman Islands, Singapore, the Channel Islands, Isle of Man, Mauritius, Switzerland, and Ireland, etc. Some of the 50 biggest US companies that have allegedly stashed approximately $1.6 trillion offshore include Microsoft, IBM, General Electric, Pfizer, Exxon Mobil, Chevron, Walmart.

Till now, Apple booked an amount of $214.9 billion offshore. It uses Ireland as a tax haven. Apple would have owed the US Government $65.4 billion in taxes if tax haven benefits were not used. On a much lower scale, Nike holds $10.7 billion offshore. It uses Bermuda as a tax haven. It would have paid $3.6 billion for taxes if tax haven benefits were not used.  This implies Nike pays a mere 1.4 per cent tax rate to foreign governments on those offshore profits, indicating that nearly all of the money is officially held by subsidiaries in tax havens. Similarly, Goldman Sachs holds $28.6 billion offshore and also uses Bermuda as a tax haven.

Overall, the American companies earned over $4.2 trillion in profits globally, but they used offshore tax havens to lower their effective overall tax rate to just 25.9 per cent, which was well below the US statutory rate of 35 per cent and even lower than the average levels paid in other developed countries.

Large Indian companies have also taken advantage to loopholes in Indian taxation laws. Before 1995, Reliance was infamously known as zero tax company in India, as it used to pay zero or close to zero tax each year through subsidiaries and by exploiting the loopholes in the taxation system. The  subsidiaries used to make raw materials and other components in countries with low tax rates and the Indian parent company purchased these raw materials at prices more than the tangible cost, thereby reducing their net income and the subsidiaries escaped from paying taxes in India.

Similarly, Tata Industries sold their shareholding in Idea cellular in 2007 to Birla TMT Holdings through its subsidiary called Apex situated in Mauritius and through this, avoided to pay tax in India. Income tax officials flagged this deal and determined the capital gains tax in this deal was to the tune of Rs 1,00,000 crore. However, the Income Tax Appellate Tribunal held that as there was no transfer of assets by a tax resident of India to a non-resident, they cannot be taxed on capital gains that arose on sale of Idea shares by its Mauritius subsidiary.

Governments worldwide face huge loss of revenue due to these tax avoidance strategies. According to the February 2021 report by UN High Level Panel on Financial Accountability, Transparency and Integrity, every year, countries collectively lose somewhere between $500-600 billion due to the universal global corporate practice of profit-shifting.

However, the recent G7 accord could be the beginning of the end for tax havens.On June 5 this year, G7 countries reached a landmark deal to impose higher global taxation on large multinationals by agreeing to back a minimum global corporation tax rate of atleast 15 per cent on global profits.This means that if a corporation pays lower rates in a particular country, their home Governments could ‘top-up’ their taxes to the minimum rate, thus eliminating the advantage of ‘shifting profits’. This could be the ground-breaking decision to stop the menace of tax havens. Or would the corporate giants still find new loopholes? Only time will tell.

(The writer is Associate Professor at Amity University, Noida. The views expressed are personal.)