Critically analyse the menace of profit shifting by corporates to tax havens and suggest measures to deal with such corporate tax evasion. (200 words)
Refer – Business Line
Enrich the answer from other sources, if the question demands.
IAS Parliament 6 years
KEY POINTS
· According to a report published by the United Nations University World Institute for Development Economics Research in 2017, India loses $41.17 billion, or 2.34 per cent of its gross domestic product (GDP), as a result of corporate tax avoidance.
· More than 40 per cent of profits made by multinationals are artificially transferred to tax havens.
· Ten per cent of global GDP is hidden in tax havens as deposits, shares, bonds and investment funds.
Issue
· Multinationals fix the prices of transactions between their subsidiaries to guarantee that their revenues are taxed in countries where tax rates are lower — and not necessarily where their economic activity and the creation of value really take place.
· With financial globalisation, the opportunities for tax optimisation for multinationals have multiplied.
· All these procedures are so complex that it is almost impossible to keep track of where the money goes.
Impact
· Rising Inequality – These tax evasions are compensated with higher contributions from the middle and working classes, making it much more difficult for these population groups to save or accumulate wealth.
· For that reason, this issue increases levels of inequality all over the world.
· Job crisis – It erodes the respect for the law and discourages the creation of jobs, as it benefits those who transfer their wealth abroad instead of investing in the countries where this income is generated.
· It also makes it more difficult for governments to manage, as these unrecorded funds cannot be taken into account in the traditional databases used to calculate economic activity and measure real inequality.
Suggestions
· Global financial registry – An important part of the wealth kept in tax havens is concentrated in dummy corporations, which clearly aim to keep their final beneficiaries unidentifiable.
· A GFR of the real and final individual beneficiaries of these companies, bank accounts and properties would be a crucial measure to deal with this.
· If all countries had access to information about the final beneficiaries, it would make the strategy of covering up funds through chains of legal vehicles obsolete.
· For this reason, the development of this registry should be a central axis of improved tax cooperation between the countries all over the world.
