Off the hook

The Trump administration’s decision to withdraw from the OECD global tax deal undermines over a decade of global efforts aimed at curbing tax evasion and ensuring that countries can tax profits generated within their jurisdiction. The move threatens the progress made in taxing digital multinational companies and enforcing minimum corporate tax rates.

The Global Tax Deal and Its Objectives:

• OECD Global Tax Deal: In 2021, the OECD global tax deal aimed to curb tax evasion by digital multinational corporations (MNCs). The treaty had two key pillars: the right for countries to tax digital MNC profits generated within their jurisdiction and a 15% global minimum corporate tax rate for MNCs earning over €750 million.
• Global Consensus: Around 130 countries, including major economies like the US, Germany, and France, supported this treaty, and 55 countries had already implemented laws to comply with the new tax framework. India was one of the signatories, hoping to reduce tax avoidance by large corporations operating globally.
• Trump Administration’s Withdrawal: In January 2024, the Trump administration issued a memorandum withdrawing the US from the OECD global tax deal. It declared that any commitments made by the Biden administration regarding the deal lacked authority unless approved by Congress, endangering the treaty's future and threatening global tax reforms.

The Potential Impact of US Withdrawal on Global Tax Efforts:

• Protection of Digital MNCs: The withdrawal reflects the Trump administration’s support for US-based digital MNCs, such as Apple, Microsoft, Alphabet, and Amazon, which often use low-tax jurisdictions to avoid paying taxes. The administration has also indicated potential retaliatory actions against countries taxing US companies under this treaty.
• Global Setback for Tax Reforms: The US, which initially led the global tax reform movement, now jeopardizes the success of this deal. Countries that had reluctantly agreed to the tax treaty may reconsider their participation, as the absence of US support undermines the deal's global consensus.
• Rise of Tax Havens and Money Laundering: With the US stepping back, tax havens and low-tax jurisdictions that facilitate tax evasion could see a resurgence. This could encourage illegal practices like money laundering and round-tripping, and undermine global cooperation on tax transparency and information sharing.

India’s Role and Future Path:

• Continued Efforts to Combat Tax Evasion: India must persist in its efforts to combat tax evasion by digital MNCs despite the setback from the US withdrawal. Maintaining strong tax enforcement and compliance with global standards is crucial for India’s economic growth and fairness in global taxation.
• Form Alliances for Information Sharing: India should continue forging alliances with other countries to enhance information sharing on tax-related matters. Collaborating with like-minded nations will ensure that global tax evasion practices are kept in check, despite challenges posed by US policies.
• Advocate for Equitable Taxation Policies: India must also advocate for equitable tax policies that ensure large corporations pay their fair share of taxes, especially in developing countries. Fostering international dialogue on taxation will be key to ensuring a level playing field and counteracting the return of tax avoidance practices.

Practice Question:

Q. Evaluate the potential global economic and diplomatic implications of the Trump administration’s decision to withdraw from the OECD global tax deal. How can India continue its efforts to combat tax evasion in light of this development?