By Anjan Roy
Remember MAT, or the minimum alternative tax, that was proposed in the union budget years back in the UPA government days. The measure was conjured up by the then finance minister to bring some Indian corporate biggies under the tax which had avoided paying any tax whatsoever by taking advantage of perfectly legal tax breaks. It was hotly contested then, including some Indian subsidiaries of multinational corporations.
Now, the champion of global capitalism, America, has proposed a global version of that minimum alternate tax. American treasury secretary, Janet Yellen, who was former boss of the US Federal Reserve Bank, had mooted the idea of a tax on global big companies who avoid paying taxes in the USA by choosing to locate their tax headquarters in low rate countries.
The genesis of this system was back after the second world war, when world’s economic administrators bowed to the principle that multiple taxation of the profits of multinational corporation would thwart their development to the detriment of all countries. Hence, they were given choice of tax locations.
That began a process of competitive lowering of tax rates to attract investments from corporates. Some locations specialised in these practices. Some offered very low tax rates, some offered zero rates to attract activities in their countries. Some Caribbean locations were so successful that they came into global focus.
Close to a decade back the issue had created a trans-Atlantic row. Pfizer had decided to shift its tax headquarters from USA to Britain to take advantage of tax laws. That meant a hefty loss of revenue of the US. Britain got the advantage of moving a good part of Pfizer headquarters from New York to London. US tax authorities had protested.
The Pfizer case had shown the complexities of the multinational taxation system in vogue. The Economist magazine had described it as a “black box” of taxation which was understood by only a handful of tax experts across the world. The corps of taxation lawyers made massive revenues at the cost of the public exchequer.
In course of these deliberations, the real extent of the practices were realised and the countries affected —mostly developed ones— started discussing ways of correcting things. The deliberations gave rise to what came to be known as BEPS agreement, that is, base erosion and profit shifting. By moving tax headquarters or registered offices, companies had eroded the tax base in countries where the bulk of their activity was located. This also meant shifting profits away from their activity centres to low rate regimes.
Nothing concrete had happened despite hectic consultations, mainly because the US did not pursue the matter long enough and the primary conflict over Pfizer case was resolved.
But now, the extent of profit shifting through registration of corporate headquarters in tax heavens had touched the stratospheric levels. Some estimates put tax avoidance at around $240 billion a year.
But it would be naive to presume that an ordered regime of global minimum corporate tax should emerge quickly. The United States on its own had proposed a uniform corporate tax rate of 21%. Many countries have prevailing rates at much lower levels than that. Ireland, for example, had a corporate tax rate of 12.5% which attracted major tech firms to locate their headquarters in that country.
In fact, there is an existing tax dispute between Ireland and the EU over its tax treatment of tech giants and EU tax authorities have imposed a much higher tax liability on tech firms located in Ireland.
Besides, no country would admit giving up their tax sovereignty to another. Countries would retain the right to fix tax rates to themselves. Many of the European countries have already opposed the US proposal to keep corporate income tax rate at 21%. Once again, it is believed that if there is some agreement among even the developed countries which are members of the OECD, it should be between 10% and 15%.
As of now, Caymans Islands, Bermuda have zero rate tax, where as Lichtenstein, Hong Kong and even Singapore, have lower tax rates. Average corporation tax rates have dropped all over the world from 49% three decades back to around 14% now.
There are several other aspects of the broader question than tax rate and reallocation of tax liability to where the principal activity was located.
With the emergence of the digital services, a wide area has opened up where digital services were being offered and payments made and no taxes could be collected on any of these activities. For example the digital services were offered to customers from another country and revenues are being earned from payment against services as well as advertisements. However, these revenues could not be taxed although revenues are a direct result of economic activity in the country where services are being taken.
India, for example, has proposed tax on digital services even when the service companies are located outside the country but revenues are being generated from within India. The United States have however steadfastly and doggedly opposed any idea of taxing digital services.
There are differences on this count between United States and Europe. Some reciprocal measures are being considered by the US in case digital services are taxed in any country on companies located in the US. Any reciprocal steps by US would attract counter measures as well.
At any rate, the taxation of corporate giants have now been raised now because the covid pandemic crisis had called for massive government spending. Governments are casting their greedy eyes all around to get a few extra dollops of money. Taxing the corporate giants a portion of their mind boggling income is a legitimate cause. But global disagreements over the thorny issues should not altogether derail the process of capturing a legitimate share from their incomes. After all, these multinationals would not make their incomes unless some extensive public infrastructure were available at cheap rates. They are gaining from out of external public goods and should at least pay their fair share. (IPA Service)