Tax Abuse In India — Billions Flying Away

Story

India is losing over USD 10.3 billion in taxes every year due to tax abuse by multinational companies (MNCs).

The Report

The State of Tax Justice 2020 is a first-of-its-kind annual report that reveals how much tax each country in the world lost due to international corporate tax abuse and tax evasion.

It is prepared by Tax Justice Network — London based independent global network dealing in the area of taxes and financial regulation.

Few highlights from the report:

• Countries are losing over USD 427 billion in taxes every year due to tax abuse and evasion. To put that into perspective, that’s nearly 34 million nurses’ salaries lost every year or one nurse’s yearly salary lost per second.
• Out of USD 427 billion, MNCs are responsible for USD 245 billion in tax evasion. The remaining USD 182 billion is lost to wealthy individuals hiding their incomes offshore.
• Higher-income countries like the US lose out on a lot more tax than low-income countries. However, the impact on low-income countries is far greater.

In line with this, just last month, a report accused big tech companies (Facebook, Google, Microsoft) of avoiding paying taxes as much as USD 2.8 billion in ‘poorer countries’, including India.

How do MNCs avoid taxes?

Tax avoidance, as opposed to tax evasion, is not illegal per se. One of the most common strategies employed by MNCs is profit shifting. This is when a company’s profits are shifted from higher-tax countries to lower ones.

For example, an Indian entity company can push its profits to its sister company in Bermuda. By doing this, you are showing lower profits in India. Since taxes are based on profits, the company will end up paying lower taxes to the Indian government. On the other hand, Bermuda has zero corporate tax, so the company will pay no taxes over there.

Possible Solution

The Organisation for Economic Co-operation and Development (OECD) is currently working to solve this exact issue. OECD is an intergovernmental organization that works to build better policies around the economy. India is presently a non-member of the organization, but it does have a working relationship with it.

They are looking to address the issue through policies that ensure MNCs pay their fair share of taxes in the country where they operate. The proposition is that:

“since the profit is generated from the consumer element of the economy, then that fraction should be taken into account when calculating the profits … for example, a US company selling into India … then some portion of their profit should be reallocated to the Indian jurisdiction.”

Currently, this idea is tabled for further negotiation and discussion. Due to the on-going pandemic, global finance ministers will be working together to reach a consensus on this proposition by mid-2021.