Taxation of MNCs

Source-This post on Taxation of MNCs has been created based on the article “How not to tax multi-national corporations” published in “The Indian Express” on 24 August 2024.

UPSC Syllabus-GS Paper-2- Important International Institutions, agencies and fora – their Structure, Mandate.

Context– After the global financial crisis, the G20 asked the OECD(Organization for Economic Co-operation and Development) to tackle low tax rates by multinationals. Over ten years, the OECD developed fifteen action points to improve transparency and prevent tax avoidance.

It also established the Inclusive Framework (IF) to ensure low-income countries were included equally with developed nations, due to global changes and growing tax competition.

What are the Challenges in Tax Redistribution?

1) The main issue was whether large tech companies should be taxed in their home country (like the US) or in the markets where they operate, such as India.

2) The OECD had difficulty reaching a consensus, as its solutions became more complex with each revision.

Read More- Base Erosion and Profit Shifting

Disillusioned countries and regional groups started pushing for an UN-based intergovernmental tax body.

What is the UN Tax Convention Proposal?

In 2023, 125 countries, including India, backed a UN global tax convention. However, 48 countries, including the UK and the US, opposed it.

Despite the opposition, the UN moved forward with the draft. The final version, released on August 15, was rejected by just eight countries, including the US and the UK, while the previously divided EU countries abstained from voting.

What Factors Will Shape the UN’s Effectiveness in International Taxation?

1) Institutional Overlap- The OECD has invested heavily in systems for information sharing and preventing abuse. Replicating these at the UN may not be needed.  UN convention notes this overlap and suggests combining both systems.However,there is no certainty about how well this will be done.

2) Economic Interests: Conflicting economic interests make it difficult to agree on cross-border tax issues. Balancing national sovereignty with fair taxing rights is challenging.

3) Consensus Building -It’s unclear if major countries like the US and the UK will accept the UN’s tax convention, especially since countries can choose to sign or reject it. The UN’s success in international taxation will depend on how well it can address these issues and work with existing frameworks.

Way ahead- The UN’s method of formal processes, like fair member elections and transparent voting, differs from the IF’s practices. This transparency helps engage experts and the public more effectively. A practical approach will be needed to tackle issues like cross-border services, digital transactions, and illicit financial flows.

Question for practice

What is the UN Tax Convention Proposal, and what factors will determine how effective the UN will be in international taxation?