UPSC Articles
ECONOMY/ INTERNATIONAL
Topic: General Studies 2,3:
- Effect of policies and politics of developed and developing countries on India’s interests.
- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Digital taxation & OECD: On a weak pillar
Context: The tax challenges pertaining to the digitalisation of the economy have been a contentious issue over the past decade.
In recognition of this, OECD identified it as one of the main areas of focus of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, leading to the 2015 BEPS Action 1 report.
What is Base erosion and profit shifting (BEPS)?
- BEPS refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
- Although some of the schemes used are illegal, most are not
- BEPS practices cost countries USD 100-240 billion in lost revenue annually.
- Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on
- The implementation of 15 measures to tackle tax avoidance,
- Improve the coherence of international tax rules
- Ensure a more transparent tax environment.
What are the concerns with BEPS?
- Reduced Tax Revenue: Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately.
- Disproportionately impacts domestic small firms: Such tax planning strategies undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level.
- Sets wrong precedent: Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers
What is 2015 BEPS Action 1 report?
In 2015, when the OECD released Action Plan 1 report, that contained the pillars that should guide taxation of the digital economy. It recognised
- Neutrality
- Efficiency
- Certainty and simplicity
- Effectiveness and fairness
- Flexibility
OECD, Taxation on digitalisation and BEPS
- The debate and focus on taxing digital companies peaked when countries started implementing uncoordinated, unilateral measures.
- In January 2019, the OECD released a policy note that said the renewed international discussions will focus on two central pillars: Pillar One and Pillar Two.
- Pillar One will address the broader challenges related to the digitalisation of the economy and will focus on the allocation of taxing rights.
- The aim of Pillar One is to reach a global agreement on adapting the allocation of taxing rights on business profits in a way that expands these rights for market jurisdictions.
- The OECD Blueprint on Pillar one provides a solid foundation for a future agreement that would adhere to the concept of net taxation of income, avoid double taxation and be as simple and easy to administer as possible.
- Pillar Two will sort out the remaining BEPS concerns (collectively, BEPS 2 project)
Concerns
- Changes in International Rules: The reallocation of taxing rights under Pillar One could lead to significant changes in the international tax rules under which multinational businesses operate and could have important consequences on the overall tax liability of businesses and tax revenues of the countries.
- Policy Note lacks Consensus: The Blueprint recognises that it is not a consensus document and that there are several key features of the solution that can only be resolved through political decisions.
- Requires further Political Action: The Blueprint notes that political decisions are required on several issues, including the amount of residual profit to be allocated under the new taxing right, the scope of mandatory binding dispute resolution etc.
- Short on Principles: The Blueprint falls short on a number of principles detailed in 2015 Action 1 report by OECD.
Conclusion
In the absence of a consensus, the uncertainty caused by the unilateral measures is expected to add to the tax woes of multinationals.
Connecting the dots:
