Tuesday, September 21, 2021
EditorialsEditorial: Taming tax avoidance

Editorial: Taming tax avoidance

Published: 3rd Jul 2021 12:00 am | Updated: 2nd Jul 2021 6:26 pm

Tax avoidance by large multinational companies operating across different geographies has been a concern for many nations. Now, 130 countries coming together and agreeing on a global minimum corporate tax rate of 15% is a historic step in the efforts to overhaul the taxation rules for international companies. This is also seen as a major victory for the Biden Administration, which has unveiled a plan for revenue-raising and spending and sought international backing for it. Officials from 130 countries, including India and China, met virtually, and agreed over the broad outlines of what would be the most sweeping change in international taxation in a century. Among them were all the Group of 20 major economies. India and China initially had some reservations about the move but eventually came on board. The individual nations will now need to pass laws ensuring that companies headquartered in their countries pay a minimum tax rate of at least 15% in each nation in which they operate, reducing the scope for tax avoidance. The Organization for Economic Cooperation and Development (OECD), which guided the protracted negotiations, estimates that governments lose revenue to the tune of $100-240 billion to tax avoidance each year. The landmark agreement, which came after years of intense work and negotiations, will ensure that large MNCs pay their fair share of tax everywhere. For decades, big corporations have exploited the loopholes in the taxation laws to avoid taxes.

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Major economies in the world have been trying to discourage multinationals from shifting profits — and tax revenues — to low-tax countries regardless of where their sales are made. Increasingly, the income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries. The idea of creating a universal protocol to stop companies from looking for a good tax jurisdiction has been around for some time. In response to growing pressure for a digital service tax on big technology companies like Google and Facebook that sell goods and services around the globe, the OECD initiated efforts to reach a deal on how and where to tax them. It took a lot of convincing to do before an agreement on minimum tax would be reached. Understandably, it is not an easy task to persuade the countries to give up their competitive edge by raising tax rates. For any international regulation to work, all countries will need to start enforcement at the same time. Creating a level-playing field is a battle worth fighting. It will help make life a bit fairer for everyone, rich and poor countries alike.

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