Yellen’s proposal of a minimum global corporate tax rate is not feasible
There are no easy solutions to the long-drawn battle between tax authorities and multinational corporations, who practise tax evasion to perfection. Profit shifting by these companies through affiliates set up in low tax jurisdictions has resulted in substantial loss of tax revenue for countries. The proliferation of digital companies without physical presence in any country, has compounded the problem. The recent proposal of the US Treasury Secretary, Janet Yellen, asking countries to agree on a minimum corporate tax rate to address this issue, is however too simplistic. She decried the “30-year race to the bottom” brought about by tax competition between countries. The context of Yellen’s pitch is clear. The Biden administration wants to move the corporate tax rate in the US to 28 per cent from 21 per cent to help fund its large stimulus plan. By urging other countries to fix a floor for tax rates, the US government is trying to preempt another round of tax avoidance by US based companies following this rate hike.
That said, there is a need to check the revenue loss through these tax evasion practices. While the OECD’s Base Erosion and Profit Shifting project tried to address this issue, long-standing problems continue to exist. An international consensus is the way forward. The OECD’s “inclusive framework”, released last October is a step in the right direction. It seeks to address the problems posed by digitisation by proposing to ask MNCs in automated digital services and consumer facing businesses to pay tax based on a formula — one that uses the share of sales to reallocate profit to countries where the products are sold. While the resistance of MNCs to the equalisation levy imposed in India indicates that further proposals to tax them will be contested, this is the way forward. Quick fix solutions such as uniform tax rate are unlikely to work.