Mohanish Verma, Ex IRS
The proposals and solutions of OECD relating to pillar 1 and pillar 2 have faced a huge set back at least in the short run due to the strong resistance from the Trump administration. This is impacting the international taxation community and the sentiments for the global business as well as economies across the world.
At the outset it is critical to identify the importance of a globally coordinated tax system, the rationale behind it and also the importance of the logistical support needed by the economies even in the remotest part of the world. It is also critical to appreciate that the various economic and market forces are providing indicators through fundamental parameters like GDP share, share of manufacturing, pattern of indebtedness, fiscal deficit to GDP ratio etc. about how economic activities are shaping for the future. Political and historical domination of a few powerful economies can continue in the short run, but they may also be influenced significantly as underlying market forces and economic fundamentals shift.
Most Contentious Issues
World has become one market in many ways with easy mobility, fast communication and the internet with over-ride on territorial jurisdictions. Closed economies are no more viable or possible. Large and small economies both have a critical role to play. For large multinationals, HNI’s and territorial taxation regimes there are important implications related to profitability margins, competition, wealth creation, resource mobilization and fair taxation.
The importance of the subject and the most contentious issues presenting a challenge for various stakeholders can be summarized broadly as follows:
(a) Minimum taxes must be paid by all entities irrespective of their location or markets. All tax regimes must ensure such regulations to counter the malaise of “race to the bottom” in low tax regimes. Large corporates or Wealthy individuals cannot be allowed to escape taxation by shopping jurisdictions.
(b) The nature of business models have changed globally. For ensuring a fair share of taxation amongst different economies proper allocation based on source versus residence based taxation must be ensured. Presently residence- based principles dominate.
(c) The solutions for fair taxation need to be operationally least complicated and perceptibly fair to all. Complicated calculations and ambiguities in adjustments cannot be sustainable. Developed and other economies have to appreciate the need to come to broad agreement, as economic factors change and models are calling for greater synergy. Rethink on ALP, through treaty amendments, Unitary method or other alternatives need follow up?
(d) Urgent need to build and strengthen administrative and regulatory capacities of tax systems in each economy of the world. This is essential to ensure data exchange, regulation and compliance by MNC’s and large entities and HNI’s. No territorial entity can be neglected now.
At present multiple global forums are engaged in finding solutions to these challenges. OECD and UN Models have been at the forefront since several decades. However, in view of changing geopolitics and geo-economics it is now critical for other global forums to get involved for expediting realistic solutions. G-7, G-20, BRICS, AFTA along with OECD and UN must work together in individual as well as global interests.
Economic Dynamics and Indicators
The conflicts and difficulties in arriving at globally acceptable solutions for international taxation is arising due to the changes in fundamental economic strengths of traditionally developed economies and the emerging economies as well as the importance of economies earlier not reckoned as important players.
It is interesting to have a snapshot of some economic parameters in a global economic context.
1. Share of global GDP of G-7 economies has gone down from 42 % in 2002 to 29.6% in 2024. G-7 share expected to fall to 27.5% by 2029.
2. Share of global GDP for BRICS economies has gone up from 26% in 2002 to 36.7% in 2024. BRICS share expected to increase to 38.3% by 2029.
3. In 2024, Government indebtedness for G-7 economies was 126.5% of GDP, while it was 78.2% of GDP for BRICS economies.
4. Normal GDP growth for BRICS economies was 5.5 %, while it was 4% for G-7 economies.
5. Some studies indicate BRICS economies will overtake share of G-7 GDP share by 2032 and in nominal terms by 2050, the share of BRICS economies will be twice the share of G-7 economies.
The fundamental economic indices of different economies are changing rapidly in the current economic environment and international taxation laws, regulations and logistical infrastructures must respond adequately with flexibility and objectivity.
Global Forums- Role and Perspectives.
OECD consists of 34 nations, while G-7 consists of 7 economies and BRICS- relatively new has 10 members. The United Nations is certainly the largest body with global representation, and has now become more active in the area of International Taxation. The UN resolution on November 2023 (by a large majority of 125:48 members) has called for reforms seeking to shift decision making powers of international taxation from OECD to more equitable platform clearly indicating the global mood for change.
OECD has its inherent strengths and has operated through BEPS as Pillar 1 and Pillar 2 for providing suggestions and solutions. They are presently facing challenges due to loss of US support. The BRICS nations are primarily representing the emerging economies with greater momentum, larger markets and also holding stronger promise for research, innovation, scientific and technological development in future. However, they have their limitations to be a strong force by themselves. Absence of a specialized division on taxation is also a handicap. Their members can spearhead common interests through a larger forum like UN.
Present trends clearly indicate that interests of all global and regional forums must be respected and considered for an amicable solution. ATAF (African Nations) consists of 41 members and many of them have been going through rapid economic transformation. Every economy in the world today is aspiring for resources and also for a fair share of taxation. The domination by handful of developed economies is therefore facing the heat.
Global tax competitiveness is here to stay and any knee jerk reactions by individual economies will only result in sub-optimal economic outcomes for all stakeholders. On the other hand, there are domestic challenges for resource mobilization which individual nations face. The latest UK budget reforms is resulting in high inheritance taxes and HNI’s are planning to move elsewhere. Global forums and all economies cannot ensure unanimity on all issues, but considering economic dynamics, fairness and aspirations of all, some coordination and synergy is certainly possible and also urgently required.
Indian Role in a Global Canvas.
India is one of the fastest growing economies of the world and effectively represents the interests of emerging markets and
developing economies. It is also an important link between traditionally developed economies and rest of the world. Resolving conflicts and arriving at consensus at a global level is of immense importance. India is an active and vocal member in almost global forums like United Nations, OECD (as an invitee), G-7 (as an invitee), G-20, BRICS and also has positive communication with regional forums like AFTA (Africa Tax Forum).
In the present context it is ironical that none of the forums are in a position to find amicable solutions on matters of international taxation due to geo-political reasons and basic conflict of interests. The strong posturing by the United States since Trump administration has announced withdrawal of its support for OECD pillar 1&2 proposals, has been a major setback. The overt and covert conflict between OECD/G7 and BRICS, due to US pressure is also resulting in breakdown of ongoing efforts to find acceptable cross border taxation solutions.
UN has recently become more active and made suggestions to find solutions through new bilateral treaty amendments and more active intergovernmental interactions (inter-governmental committee). The OECD created the Inclusive Framework consisting of 141 members, for ensuring widespread participation. Solutions are possible only through cooperation and credible coordinators who can convince each economy of their individual interests and acceptability of norms and systems, which should be largely acceptable but never perfect.
By themselves neither the OECD nor BRICS or G7 can find solutions. Economies in G-20 and BRICS can spear head amicable solutions as it would take care of interests of most economies around the world. Peer pressure amongst these groups can smoothen the sharper divides. India and China have emerged as dynamic potential economies with momentum, but India may have higher credibility and communicative powers with most important stakeholder nations. Further, India is at the cusp of turning around and has larger stakes to play a crucial role in the global stage. Bringing together the various flavors and interest of stakeholders from the developed world, emerging economies and also the smallest economies is the need of the hour.
Perhaps India is in a unique position to understand the various perspectives and use its credibility, communication and goodwill to expedite and facilitate solutions in the near future. Focused initiatives and alternatives are being proposed also by Niti Aayog in India, in a domestic and global context.
Who wins or loses without a solution
Can the present state of uncertainty or unilateralism in international taxation continue indefinitely? Certainly not. However, the delay in coming to acceptable norms and regulations is resulting in continued gains for developed economies with residence-based taxation, low taxation regimes and gains for large MNC’s and HNI’s and sub optimal economic outcomes due to unfair share of many economies whose markets are being disrupted with loss of taxation for them.
Inadequate logistical support and poor taxation systems in smaller economies is hampering data collection and exchange, illegal financial flows, taxation losses for tax regimes and abnormal and unfair profits and gains for specific entities. A laxity in regulating financial transactions internationally also has other social and political implications which have serios consequences like terrorism and money laundering.
The winds of change have already arrived and the share of GDP, share of manufacturing, strength of economies and markets provide hints for the global economies to give way for a new tax system and to reallocate and share the taxes in fair manner. The global market needs synergy with more harmonized systems, lesser legal and administrative loopholes to ensure a higher degree of fairness for all.
If global forums do not coordinate and develop this synergy, the market forces will certainly do it sooner or later. No economy can get away with larger share of taxes and similarly those entities paying no taxes also will not be tolerated. Perhaps these are natural laws of taxation in the long run!!
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(The author is an Ex- Principal Chief Commissioner of Income Tax, IRS. He was also a Visiting Researcher at Georgetown University, Washington DC and has various publications on taxation and public policy issues. The views are personal.)
