Context:
Tax evasion and avoidance by multinational corporations (MNCs) and high-net-worth individuals (HNIs) pose significant challenges to governments worldwide, particularly in developing countries. These nations require tax revenues to:
- Improve infrastructure and human development.
- Address environmental challenges.
- Manage debt and fiscal deficits, which have worsened due to global economic disruptions like the pandemic and supply chain shocks.
What Is Tax Evasion?
Tax evasion is an illegal activity in which a person or entity deliberately avoids paying a true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code.
Common Strategies for Tax Avoidance
MNCs and HNIs exploit legal loopholes to shift profits to low-tax jurisdictions using tactics such as:
- Transfer Pricing Manipulation
- Inflating service costs from subsidiaries in tax havens to shift profits.
- Artificially High Interest Payments
- Taking loans from related entities in low-tax countries at excessive interest rates.
- Use of Intangible Assets
- Registering trademarks, patents, and intellectual property (IP) in tax havens, forcing high-tax subsidiaries to pay royalties.
- Real Estate Investments
- With the introduction of multilateral financial information exchange in 2017, tax evaders shifted wealth from offshore bank accounts to real estate to avoid financial scrutiny.
Case Study: Dubai has become a major destination for tax-related real estate holdings, with Indians reportedly owning 20% of foreign-owned properties some of which may be linked to tax evasion.
Global Policy Responses and Their Challenges
Major International Initiatives
- OECD’s BEPS Framework (2013)
- The G20 tasked the OECD with addressing Base Erosion and Profit Shifting (BEPS).
- A 15-point action plan was developed, with 140 countries working towards international tax coordination.
- The Inclusive Framework (2017)
- Introduced multilateral exchange of financial information among banks.
- Expanded to over 100 countries by 2023, reducing global bank secrecy and cutting offshore tax evasion by one-third.
- The 2021 Global Minimum Tax Agreement
- 140+ countries agreed to a minimum corporate tax rate of 15%.
- This was expected to increase global tax revenue by 10%, but actual collections fell far below expectations due to loopholes.
Persistent Challenges
| Challenge | Impact |
|---|---|
| Loopholes & Tax Competition | Some nations offer incentives to attract corporations, continuing a “race to the bottom.” |
| Shell Companies | Billionaires use offshore shell firms to reduce tax payments below 0.5% of their wealth. |
| US Corporations & Tax Havens | Around 40% of profit shifting to tax havens is done by US-based MNCs, costing global tax systems nearly 10% of corporate tax revenues. |
| Lack of US Participation in CRS | The Common Reporting Standard (CRS) for financial transparency lacks US involvement, limiting its global effectiveness. |
Proposed Policy Reforms
Recommendations from the Global Tax Evasion Report
- Increase Global Minimum Tax to 25% – A stronger tax floor would reduce tax-motivated profit shifting.
- Plug Loopholes in Tax Treaties – Avoid base erosion through stricter enforcement and better monitoring.
- Introduce a 2% Wealth Tax on Billionaires – A global billionaire tax could curb extreme tax avoidance.
- Tax Long-Term Residents Moving to Low-Tax Countries – Discourage individuals from relocating purely for tax benefits.
- Unilateral Actions if Global Consensus Fails – Countries should implement stronger tax measures individually.
Key Questions & Challenges
- Can countries act unilaterally?
- Some nations may tighten tax policies on their own, but this risks pushing corporations to more lenient jurisdictions.
- Will the US allow stricter global tax rules?
- Given that US MNCs benefit the most from tax havens, American support remains uncertain.
- Do developing nations have enough power to enforce tax reforms?
- Without stronger international cooperation, developing countries lack leverage against powerful multinational firms.
While recent global tax reforms have made progress, major gaps remain due to loopholes, tax competition, and reluctance from powerful nations and corporations. The fight against tax evasion requires stronger global cooperation, stricter enforcement, and innovative policy solutions. Until then, tax evasion will continue to undermine economic equity and fiscal stability worldwide.
Source: BS
