Economy

Tax avoided by corporate groups can eradicate global poverty

As economic slowdown murmur becomes loud across the world, the debate over income inequality gains volume

 
By Richard Mahapatra
Last Updated: Tuesday 20 August 2019
Global revenue loss to government due to this tax avoidance stands between $200 billion and $600 billion, according to International Monetary Fund estimates. Photo: Getty Images
Global revenue loss to government due to this tax avoidance stands between $200 billion and $600 billion, according to International Monetary Fund estimates. Photo: Getty Images Global revenue loss to government due to this tax avoidance stands between $200 billion and $600 billion, according to International Monetary Fund estimates. Photo: Getty Images

Despite the “historic” decision of abrogation of Constitution’s Article 370, the news that still made it to newspapers’ front pages was economic slowdown. Even an expectedly Kashmir-preoccupied Prime Minister and his Cabinet had to spare time to meet corporate honchos.

Apparently, the Prime Minister’s Office was handed over a short note on steps to be taken immediately to rescue the economy. Soon, the news on imminent tax rebates/cuts for corporate houses started making rounds.

The strategy to rescue the economy, very regularly and still surprisingly, always focuses on increasing the rural population’s consumption. It means people should have money in hand to spend. This, in turn, will lead to sale and so the profitability of corporate houses would increase. More profits for them mean more tax revenue for the government.

As we know, the government spends this revenue on welfare programmes. This will also lead to reduction of poverty among rural population.

But do corporate houses pay tax as per their income?

We all know about the “tax havens”. These are the countries / territories from where corporate houses operate, or are registered in. And according to current tax laws, they pay taxes not on the real place of economic activities.

For example, a company might be doing business in India but, being registered in a tax haven, it would not pay tax on profits made in the country of operation. Second, corporate houses pay tax based on their overall group economic performance, not on individual entity under the group. In decent vernacular, we call this “tax avoidance”.

The International Monetary Fund (IMF) estimates the global revenue loss to government due to this tax avoidance at between $200 billion and $600 billion. This is a loss to both developed and developing countries.

According to Tax Justice Network, a think-tank, this revenue loss would be around $500 billion — with lower-income countries losing around $200 billion.

There are 650 million poor people in the world living under the international poverty line of $1.9 per day. If one sends a money order of $2 to each of the world’s poor, one can argue the avoided tax of $500 billion would eradicate global poverty, even if it’s for a few days or weeks.  

There are global negotiations now on how to curb this tyranny of tax avoidance by multinational companies. Last summer the Organization for Economic Co-operation and Development (OECD) discussed a strategy and agreement on how to curtail this.

The points discussed or proposed by OECD include “apportionment approaches that assess profits at the level of the multinational group, rather than individual entities, and then apportion it as tax base between countries of operation in proportion to the share of real economic activity in each”.

In fact, the OECD has a plan called ‘Base Erosion and Profit Shifting Action Plan’ already in place. During 2013-15, under this plan, it made the goal of reducing profit sharing between places of registration and real economic activity.

Currently, many companies do report on country-by-country business activities and profits. This data helps track disproportionate tax sharing.

In fact, India and other countries in the G24 group pushed for rights of countries to tax based on location of a company’s employment and sales. This, they claim, will lead to avoidance of tax. But it is easier said than done.

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