How not to tax multi-national corporations

The global discourse on international tax reform has gained momentum, particularly after the global financial crisis revealed the low tax rates paid by multinational corporations. Efforts led by the OECD and the G20 have aimed at addressing profit-shifting and tax avoidance. In 2023, a significant development occurred when 125 countries, including India, supported a UN global tax convention, challenging the dominance of the OECD framework.

OECD and Global Tax Reforms

• OECD’s Efforts: The OECD developed fifteen action points to enhance transparency and address cross-border tax avoidance. This included inviting low-income countries to participate in the Inclusive Framework (IF) to level the playing field.
• Complexities and Criticism: The OECD’s attempts to address redistribution of taxing rights, particularly for large tech companies, led to complex solutions. The process faced criticism from developing countries and led to calls for a new approach.
• UN Tax Convention Proposal: In response to dissatisfaction with the OECD framework, 125 countries voted for a UN global tax convention in 2023. This move indicates a shift towards a more inclusive and equitable tax governance structure.

Challenges and Institutional Overlap

• Institutional Frameworks: The OECD has established robust mechanisms for information exchange and anti-abuse measures. The UN’s proposal needs to address potential duplication and ensure that new frameworks build on existing strengths.
• Economic Interests and Sovereignty: Diverging economic interests and concerns about national sovereignty pose challenges for the UN convention. Ensuring fair allocation of taxing rights while respecting sovereignty remains a complex issue.
• Revised Focus and Transparency: The UN convention introduces formal processes and greater transparency compared to the OECD framework. This includes equitable election processes and public information on country votes.

Future Prospects and Implementation

• Implementation Challenges: The UN convention faces obstacles in gaining acceptance from key countries like the US and UK. These countries’ reluctance may impact the adoption of the new protocols.
• Focus Areas: The convention’s emphasis on tax avoidance by high-net-worth individuals and fair allocation of taxing rights represents a shift in international tax policy. However, the concept of fairness remains undefined.
• Pragmatic Approach: A successful implementation would require addressing cross-border services, digital economy concerns, and illicit financial flows. Engaging with resistant countries and ensuring effective protocols will be crucial.

Mains Question:

Q. Evaluate the implications of the UN global tax convention for international tax governance. How does it address the shortcomings of the OECD framework, and what challenges are likely to arise in its implementation? Discuss the potential impact on global tax fairness and sovereignty.