Article by Padmini Subhashree
(Policy Analyst at Citizens’ Foundation for Policy Solutions, New Delhi-based public policy cum-foreign policy think tank)
On July 15, 2020, Apple Inc. emerged victorious in a major legal battle with the European Union (EU) when the bloc’s second-highest court ruled in the company’s favour, absolving it from a tax obligation in the amount of $14.8 billion, that it supposedly owed Ireland. The court set aside the European Commission’s argument that the company was illegally given special treatment. Earlier this year, Google and Facebook were embroiled in a spat with the Australian Government for refusing to share ten percent of their advertising revenue as compensation with the Australian news media. These developments come at a time when the debate over maintenance of tax obligations by multi-national tech companies is gaining ground, especially when national governments are looking everywhere to tap a greater number of revenue-generating sources to be expended towards the cost of managing the pandemic.
The right to preserve personal wealth and the socio-economic obligation to pay local communities for their services rendered in the creation of such wealth has been a chancy topic of debate ever since feudal behavior was cast aside. Corporations have left no stone unturned in guarding against loss of their revenues through taxation, because they consider it borne out of their conscientious effort and enterprise. Governments, on the other hand, assert the importance of public infrastructure, labour, community support and other incentives that contribute towards the success of any such enterprise. More importantly, the justiciability of income redistribution to achieve equitable wealth is what motivates the government’s agenda to push for taxation.
Base Erosion and Profit Shifting (BEPS)
Companies, therefore, have devised ways to evade taxation by restructuring their policies and sidestepping regulatory norms. The World Economic Forum estimated a loss of around US$240 billion in corporate profits which is shifted out of 79 countries every year. The losses have become more pronounced since the advent of multinational corporations into foreign territories with limited or no taxing liabilities. Once they incorporate in these low tax regimes, they engage in a calibrated exercise to shift their debts, register their intangible assets (trademarks, copyrights, etc.) and transfer prices into the tax haven economies. This is the premise of BEPS, which refers to tax-planning strategies that exploit gaps and mismatches in tax rules to avoid paying tax.
Nevertheless, governments are no longer impervious to these indiscretions. On account of rising presence of tech companies in different national jurisdictions, local administrations have begun advocating greater control and regulation over their activities which have famously compromised on issues ranging from citizens’ data collection, privacy, exposure to unmoderated content, influencing popular discourses, intervention in state elections, etc.
When India implemented the 6% equalization levy on digital companies’ advertising revenue in 2016, the tech-world rose in revolt. That didn’t stop the government from increasing the amount of levy by an additional 2% applicable on overseas commercial purchases by India-based companies. There is also a strong international consensus emerging in the Organisation for Economic Development (OECD) to devise and implement a uniform taxation regime for multinational companies. India has stood out in such presence by advocating stricter and more accountable formulae to compute taxes by increasing reliance on ‘residual profits’ over ‘routine profits’.
The idea that the rich are fundamentally accountable to the public because the latter was a major instrument in the generation of the former’s wealth, is a dialogue that plays well in government manifestos and preamble of tax legislations. However, the same narrative doesn’t sit well when the established government of the day entertains the whims of the rich and influential to enlist their support in achieving popular mandates like job creation and investment. The attempt by the rich to normalize their growth by furthering the eponymous (give a man a fish and teach a man to fish) tale has been furthered in the truly polemic spirit of capitalism. But the population has gradually veered away from this spirit as they stood witness to the insatiable ‘fishing appetites’ of the rich. It worsened especially when the rich continued doing so while simultaneously batting against discourses like taxation without representation.
This indifference has culminated in the form of increased state censure. A government is only as good as the measure of its populist approval and such approval cannot be garnered without reprehending the class which is reproached by the rest of the population. Tech companies stand out in character by drawing their revenues merely through their virtual presence in jurisdictions where they don’t usually conduct chartered operations. This has convinced local governments in these jurisdictions to campaign against the culture of allowing unmoderated access to their markets and an unbalanced revenue-sharing arrangement designed by the companies for their own benefit.
The Way Ahead
The OECD has, therefore, attempted to find a common ground between those taxing and the ones taxed, by establishing a universal corporate taxing regime. The idea behind OECD/G20 Inclusive Framework on BEPS has found support among countries to implement a value-centric tax framework. It essentially suggests that profits be taxed in the jurisdiction where economic activities generating such profit are performed, i.e. where value is created.
Although it is a sensible initiative, it has added to the grievances of developed countries and corporations based therein as it erodes their plausible deniability over conducting operations in developing jurisdictions which are the major markets for their operation. This is an exception to the ‘corporations versus countries dynamic because it essentially involves both the parties from the developed world rise in unison against the taxation policies of the developing world. It has, however, transformed the manner of appraisal that developing destinations used to get from investors. Instead of viewing them as service providers, countries like India have now systematically insisted upon being viewed as consumer bases or market jurisdictions. It seems like a conscious effort to alleviate corporate patronage and distinguish ourselves as an indispensable cog in their profit machinery.
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Picture Courtesy: Photo by The New York Public Library on Unsplash