Where to tax a Company
- The global financial crisis exposed the inadequacies in how multinational corporations contribute to national tax revenues, sparking worldwide debate. In response, the G20, with the OECD's technical expertise, initiated the Base Erosion and Profit Shifting (BEPS) project.
- This initiative introduced 15 action points to enhance transparency in cross-border income reporting and curb tax avoidance, offering low-income countries a seat at the table through the Inclusive Framework (IF).
- However, as the process moved into the contentious area of redistributing taxing rights, particularly concerning large tech companies, consensus became elusive, especially on where these companies should pay taxes—their country of residence or their market.
- Key Points:
- Shift to the UN: Disillusioned by the OECD's complex and protracted negotiations, 125 countries, including India, supported a UN-led global tax convention in 2023. This move signaled a desire for a more inclusive and transparent approach to global tax governance, despite opposition from powerful nations like the US and UK.
- Building on Existing Frameworks: The OECD has already established robust systems for information exchange and anti-abuse measures. The UN must consider how to integrate these existing frameworks to avoid duplicating efforts and to leverage the progress already made.
- Divergent Interests and Sovereignty: Economic interests vary widely among countries, making consensus on global tax policy challenging. The UN convention emphasizes sovereignty and fair allocation of taxing rights, a shift in international tax thinking, but the concept of fairness remains undefined, which could complicate negotiations.
- Transparency and Inclusivity: The UN's formal processes, including the election of committee members and public voting records, offer a more transparent and democratic model than the OECD's IF. This approach could enhance accountability and encourage broader engagement from civil society and experts.
- Challenges Ahead: Securing the support of influential nations like the US and UK will be crucial for the success of the UN’s efforts. Without their participation, the implementation of any new global tax protocols will face significant hurdles.
- The UN breaks away from the practice at IF by establishing formal processes including that of election of members of the negotiating committee on an equitable basis.
- Public information on country votes also lends transparency. It allows experts and civil society to identify and engage with the naysayers.