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Mega multinational effort combats tax avoidance

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The OECD-led landmark deal will pave the way for putting an end to the practice of MNC's shifting operations to tax havens. For digital markets like India, this agreement will go a long way in pushing the e-commerce giants into setting up their companies within the country.

By ATIM KABRA


In what is being termed as a once-in-a-generation event, 136 countries representing nearly 90 per cent of the global economy backed a landmark agreement to set a minimum tax rate for companies around the world. This is a major step towards minimizing tax avoidance by large multinational corporations (MNCs) and is being seen as a significant step towards rationalization and realization of incremental taxes by a majority of countries.

This development obviously comes at the expense of tax havens and low tax countries such as Ireland and Hungary that have emerged as popular destinations for billings by multinational corporations who would often base their physical presence in these low tax jurisdictions and bill for their goods and services from these countries. More often than not, a big chunk of profits would be retained in these centers rather than be repatriated back to the home base where such profits were liable for higher taxes. Base erosion and profit shifting (BEPS) have marred the revenue receipts of many governments across the globe. BEPS refers to tax planning strategies of multinational corporations that exploit gaps and mismatches in tax rules to avoid paying tax.

The fundamental principle underpinning the agreement is the concept of taxation being based on where goods and services are sold rather than where the companies have a physical presence. This enables taxation receipts by countries where the consumers are situated and plugs in the taxation loophole which allowed billings to originate from low tax countries.

This agreement was coordinated by Organisation for Economic Cooperation and Development (OECD) and creates a framework for a minimum tax of 15 per cent to be levied from the year 2023. The agreement is being interpreted as a ‘crack down’ on tax havens but is not yet a certainty as it requires not only a ratification by the US Congress but also each and every country which is a party to this agreement.

Concessions were made to holdout countries like Hungary and Ireland which have emerged as favorite centers for holding profits by allowing a transitional period of 10 years for the proposed change to take effect. Besides, the agreement will only apply to the corporates with revenues in excess of €750 million.

Also there are a few holdout nations like Kenya, Nigeria, Pakistan and Sri Lanka which held this agreement to be not in the best interest of the developing countries.

The landmark agreement is expected to generate approximately $150 billion for governments across the world besides being a deterrent for large MNCs holding profits in low tax jurisdictions. India is probably one of the largest digital markets where e-commerce giants are battling for market leadership with no clear winner in sight. It is also a significant market for B2B products and services.

This agreement would go a long way in pushing the e-commerce giants into establishing a physical presence within the country and in parallel, obviate the need for new localized taxation for digitally delivered goods and services consumed within the country. The government stands to benefit with taxation on digital products and services flowing into its coffers. 

Germany in October

German efficiency and discipline is on full display this October. Two things jump out at any visitor. First, the battle against Covid is on full display with almost everyone wearing a surgical mask inside any premises that you walk into. No fabric masks, no designer polymer masks, but only type FFP2 and the surgical masks are deemed acceptable in public.

The second thing that hits you is the trust levels reposed in the individuals by the State. There is no overt or covert threat against not wearing a mask; no policemen peeking inside your cars; no threats of being banished from the state but as people go about their lives in a normal fashion and the basic precautions have become a part of the attire and the behavior. There are Covid testing centers dotting the landscape and one can see people queuing up to get themselves tested.

Be it public transportation or breakfast or coffee joints, everybody is adorned with masks. Inquiring about vaccination certificate is the norm even if you’re going for a casual dining. Yet, there seems to be a higher level of trust embedded in fellow human beings with very few establishments actually insisting on checking the vaccination certificates. It is assumed that you would do what is not only in your best interest but also in the interest of everybody around you. Hand sanitizers are almost everywhere. Germany has reported nearly 4.3 million infections with over 95,000 deaths. But with less than 150,000 active cases, Germany is cited as a success story in the fight against Covid today.

Germany was not amongst the first countries to be hit by the Covid and was able to take precautions in time, preventing an overwhelming of the medical healthcare system. The combination of citizens’ cooperation with the authorities and the general sense of responsibility they carry not only to oneself but to others too, stands out as one of the biggest reasons for Germany’s successful Covid management. 

Atim Kabra is a keen observer of global social, political & economic trends and is based in Singapore. He is also the Founding Director at Frontline Strategy Funds

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