The uncertainty of turning coronavirus has not spared the national public finances. Since 2020, countries around the world have faced high fiscal deficits and rising borrowing costs. The International Monetary Fund predicts that this trend will not be reversed anytime soon. This period has also been marked by the increasing importance of inequalities. For one, stock markets have risen despite the impact on growth. All these factors have encouraged governments to consider reforming the old tax system laden with incentives and are likely to avoid it. For example, the US is seeking to undo the rate cuts by the Tax Cuts and Jobs Act in 2017 considering a mark-to-market tax on financial instruments, while the UK explored a revision of the capital gains tax, However failed.
The tax increase is an unpopular reform, and acceptable in uncertain times such as war where the government assumes unparalleled importance in daily life. But the situation with sporadic lockdown cannot be compared to war. Conscious of such a reality, India has taken a more pragmatic approach, resisting the temptation to raise taxes. Instead, the government has reached out to taxpayers large and small and made peace with them, whether through dispute settlement under trust-to-trust, the introduction of faceless assessments, the taxpayers’ charter, or on offshore indirect transfers. Sudden reversal of retrospective tax. , a sign of confidence in the tax system.
While domestic tax reforms are still a work in progress, efforts to reach a global agreement on taxing cross-border income of MNEs have been somewhat successful. The pandemic was among the precipitating factors. For nearly three years, countries were at a standstill over who gets the right to tax and on what basis the supernatural profits of the big tech giants. Then with the pandemic and its impact on the profitability of large MNEs, several market countries like India, UK, Spain and Italy unilaterally implemented digital services tax. The US did not take this development well, especially since many technology giants are US-headquartered. To bring about a state of anarchy, the Organization for Economic Co-operation and Development (OECD) took charge and put forward its proposal. It was completely clear that the US acceptance of the proposal was a decisive factor in reaching an agreement and therefore the proposal was recalculated several times.
America’s household spending plan was based on an increase in revenue. This may not be realized if other countries continue to offer incentives and discounts to shifty capital. So, the US became actively involved in the talks in July, with suggestions that instead of the tech giants, the world’s top 100 companies would pay higher taxes. The suggestion was made in the final design of the OECD tax deal. In October, 136 countries agreed to share a quarter of the profits of more than 10% of companies with global revenues of more than $20 billion, with market jurisdictions including India. It was also agreed that companies with annual revenues of €750 million or more would pay a minimum of 15% tax in each jurisdiction, failing which the tax difference would be collected by the country of the company’s last parent entity. With the broad outline of the plan finalised, countries await details of the plan to reform the century-old tax system.
It is interesting that even though countries have stuck to a change in domestic law, a paradigm shift is underway for international tax. In part, this has been possible because the change would only affect select companies and would not alter national corporate tax systems. If implemented, the deal would only fragment tax systems where the old regime applied to smaller firms while the global deal covered large corporations. As a result, countries expect to earn more revenue without needing to change their tax systems. Still, they should question whether the benefits outweigh the administrative complexity of the plan.
As the world prepares to start the new year, the financial legacy of the pandemic will not be easily erased. To bridge the gap, which is already expected to widen with the ongoing low-carbon transition, tax rates and base are expected to increase gradually, although the pace and nature of the increase has to be factored in to higher economic objectives such as higher households. Will need to be calibrated accordingly. Investment.
While there is enthusiasm for multilateral agreements, the economic vision should not be overshadowed by diplomatic victories. India has long made its case for tax sovereignty which includes the right to tax as well as the right to encourage activities that are important to its development. Therefore, even if countries have agreed to better tax large MNEs, countries like India should evaluate their own gains from implementing the deal instead of an equalization levy as well as the taxes arising from implementing the minimum tax. The location should also be evaluated.
The challenges of finance have paved the way for a sustainable recovery; In the years to come, it is expected that tax policy will continue to be a strategic ally of this transition.
Suranjali Tandon is an assistant professor at the National Institute of Public Finance and Policy. Thoughts are personal.
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