Millennium Post

United Nations bats for tax cooperation

The United Nations (UN) has plumped for greater cooperation among countries to put in place a set of safeguards and rules for tax reforms world over, “particularly regarding illicit flows, as well as tax avoidance, often limiting what governments can raise as domestic revenues”. International rules, policies and cooperation play a key role in ensuring that governments have the ability to raise sufficient revenue domestically, since they remain, “the largest and most reliable source for investment in sustainable development”. 

In its recent annual report called the World Economic Situation & Prospects, 2015, the UN rightly contended that while improved domestic policies in tax administration are vital to augmenting revenue collection for sustainable investment, there is a limit to what they can pan out, based on the existing global policy milieu within which illicit financial flows (IFFs) have blossomed. Estimates about the size of IFFs vary. One estimate of untaxed offshore wealth holdings has been set between $ 21 trillion to $ 32 trillion, which if taxed at the floor rates, would yield $ 189 billion a year in new revenue globally. A lower estimate by other studies, however, estimated offshore wealth holdings between $ 5.9 trillion and $ 8.5 trillion in different years.

Although it is difficult to estimate the relative size of the different components of IFFs, the UN report cited some researchers, who argued that commercial tax evasion, which involves cross-border activity to hide money from tax administrations, is one of the principal types of IFFs. Others have noted that corruption is a more egregious source of IFFs in developing countries and that various types of IIFs are intrinsically inter-linked. Even as the amount of money lost to IFFs is subject to interminable wrangles, the UN report said all available evidence incontrovertibly attest that it is substantial and poses a perilous risk to systemic stability, if not set right or left unchecked.

The UN report hit the nail on the head by stating that existing tax codes and weak enforcement foster transfer, mispricing, and tax evasion on a larger scale. Multinational enterprises (MNEs) quite often engage in the dubious transfer mispricing (i.e., the mispricing of cross-border intra-group transactions) to evade taxes. Elaborating their legerdemain for naked self-aggrandisement, the report said they can shift profits to low-tax or no-tax jurisdictions, while shifting losses and deductions to high-tax jurisdictions and thereby paring down their profits and tax liabilities in the latter. National and international tax codes interact in a way that offers loopholes to companies engaged in cross-border trade and existing standards to prevent double taxation “insufficiently address the cases of no or low taxation”, the report rued.

It specifically noted that the pricing of intangibles, such as intellectual property rights (IPRs), are subject to transfer mispricing because of the ease of transferring ownership across international borders and the attendant difficulty in valuing unique intangibles. The provision of other intra- group services, including management, information technology and financial services are frequently subject to transfer mispricing.

A particularly disconcerting facet is that past decades of burgeoning international trade and capital mobility have increased the levels of cross-border economic activity, resulting in greater potential for mispricing, the report said, highlighting the embedded risks. To compound the woes of tax dodged so tangibly, MNEs also engage in aggressive tax planning, including making use of complex corporate structures to exploit mismatches and loopholes in tax systems. The most unacceptable reality is that these tax dodges and ruses, camouflaged as legally permissible commercial business practices under extant tax codes, can “undermine the volume of revenues that government can collect to make public investment in sustainable development”.

Listing out the ill-effects of such questionable tax tergiversation widely practiced by MNEs, the UN report said that such tax avoidance and evasion distort markets and preclude fair and just competition. There are, it is said, unfair advantages gratuitously conferred on MNCs that operate across borders and can cherry-pick jurisdictions to minimise their tax liabilities and score unfair cost competitiveness (often by so-called tax treaty shopping and other means to lower their own tax bills). No wonder, domestic enterprises are being left in an unfair playing field, where there is no scope for such tax avoidance and evasion and this also leaves them with screwing up their “relative cost base” vis-à-vis MNCs and “thus limiting their opportunities for growth”.

The takeaways from this latest UN report for emerging economies like India, which has opened itself to greater foreign direct investment (FDI) in key domestic manufacturing sectors, are too enormous to be brushed aside. Domestic tax authorities must revisit their arcane tax statutes and frame policies tailored to the evolving situation so that they do not get shortchanged by companies that adversely affect their domestic resources for sustainable development. Skills and capacity gaps are large across tax authorities of many developing countries, the UN report noted, adding that international assistance such as Official Development Assistance (ODA) could help overcome these teething problems. India can play a catalytic role here to help itself and also other countries trapped in a similar predicament.

The UN report has cautioned that reforms to the global framework for tax cooperation, which do not properly assess or address distributional impacts, will carry the risk of being ‘counterproductive’.
Most emerging economies and developing countries today face the uphill task of marshalling domestic resources for development. They all but need the UN’s backup, which has universal membership and credible legitimacy through which intergovernmental tax cooperation can receive impetus, with no loopholes left for tax avoidance of business done in their territories by foreign companies. This is important because G-20, with its limited membership, is not a forum to deal with tax issues, while the UN with its universal membership is what matters to convince all member states.IPA
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