Tax Avoidance by Multinationals – It is easier for an entity like Multinational Companies (MNCs) to divert profits and channelize them to some unprofitable source to save tax. It is often seen that in spite of holding huge turnover, bigfoot MNCs like Amazon, Netflix, etc. escape tax provisions and deep down their actual earned profits. To catch such entities red-handed, a new proposal has been tabled for discussion from the member’s committee of Organisation for Economic Co-operation and Development (OECD).
Organization for Economic Co-operation and Development (OECD) in response to such bizarre tax saving attempts have initiated for preparing themselves for tax system on an international level which will be made applicable to all MNCs.
The thought of abiding the tax regime by the entities under a standard tax code, came after the major tax conflict happened in the United States where about 60 out of 500 international MNCs including Amazon, Netflix, paid no tax in 2018, even having a turnover about 79 Billion dollars. Contributing to this, digitization has also impacted the efforts in their favor in countries like India, diversion of funds and tax avoidance by MNCs are rising at a pace.
To take down MNCs effecting tax avoidance, OECD has initiated a reform in present tax regime holding the proposal for approvals and suggestions in records, OECD will frame a finalized international tax system by 2020.
OECD proposed a pillar base setup of capturing MNCs to tax rules.
The First pillar base would be placed indicating the tax net of international players to put in clear words “Where the profits of these corporate entities are held for tax purposes?”
The rationale behind this was to determine a definite way of tax assessment of big entities either by placing them under a single roof as a single firm and taxing their aggregate profits with a single tax slab after subjecting to some factors like employment, sales, and resources used or by taking the aggregate of profits redistributed by them with other firms internationally.
In this place, Organisation for Economic Co-operation and Development (OECD) proposed for a three-tier profit allocation mechanism in which the profits which are re-distributed internationally will be considered up to the so-called residual share of multinationals for tax estimation. For tax purposes, it shall be further adjusted with some fixed remuneration for baseline marketing and distribution activities undertaken by entities.
The Second pillar prescribes for fixing a minimum corporate tax net for these entities at a global level. This might create a standard tax liability on these entities with which they would become incapable of exploiting country favored tax incentives.
The Pillar Two specifies for certain rules for member countries to have them in their respective country tax policies before the proposal of a single international tax base comes to life, including the income inclusion rule, the undertaxed payment rule, switch overrule and the subject to tax rule.
The prevailing international income tax system was developed in 1920, which is nearly a century old. Not matching modernized ways of business, it fails to take down profit shifting of big fat entities.
With the above initiatives of OECD, it will tend to make it more difficult for all major firms to avoid tax arrangements.
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