by Sumeet Swarup
No, this is not a Rugby game, or the menu of an evening dinner. These are slang names of techniques used to reduce taxes for corporates around the world. Each has its own intricacies, but to illustrate an Irish Double – a multinational corporate will setup a company in Ireland, assign it an Intellectual property (IP) for a product, and conduct sales across Europe. When this product is sold in EU, laws will allow Ireland (a member EU state) to collect taxes. However, Ireland has a unilateral treaty with Bermuda that allows companies with an IP in Ireland to transfer money to a tax haven like Bermuda without paying any corporate tax in Ireland. Thus the company lands up paying no (or minimal) overall corporate tax. If the tax haven is Malta instead of Bermuda, the scheme is called Single Malt (for Malta). Over the years, many non-manufacturing companies have taken advantage of these techniques. These companies have distinct products or services that are based on an IP or proprietary knowledge, which can easily be assigned cross-border.
In 2017, the US passed a law called the Tax Cuts and Jobs Act – TCJA 2017. An important part of this law concerned Corporate tax, and has 3 noteworthy elements (a) the corporate tax rate was lowered from 35% to 21% (b) it changed the US from a global to a territorial tax system with respect to corporate taxes, implying if a US company has subsidiaries in various countries, each subsidiary will pay the tax of that country, and the funds can be repatriated to the US without paying any US tax (c) one time repatriation of past profits currently sitting in international tax havens will be taxed between 8% and 15.5%. In theory, this law will reduce the international tax avoidance schemes and let more taxes and more capital to flow into the US.
“Rethinking taxes – creating a fair and balanced taxation system” was also the topic of discussion at the recent World Economic Forum Annual Meeting 2019. Speakers included Ms. Heather Long – Economics correspondent, The Washington Post; Mr. Angel Gurria – head of OECD; Mr. Paschal Donohoe – Minister of Finance, Ireland; Mr. Mark Pieth – Chairman of the board, Basel Institute of Governance; Mr. Bastian Obermayer – lead reporter on the Panama papers scandal.
Some important points that were mentioned were – EU has tried to implement a 3% digital sales tax, but it failed to pass Parliament. Spain has decided to unilaterally implement a 3% digital tax, until the EU comes up with a solution. Other European countries are thinking on the same lines. In her speech at the WEF, the German Chancellor called for an International Minimum tax for corporations, with the proceeds being divided amongst vested countries. Most law makers feel that companies should be taxed effectively, and should contribute to “country building”, and loopholes that benefit cross border IP should be quickly closed.
On the other hand, Minister Donohoe of Ireland felt that taxation is a sovereign topic for a country, and it should be allowed to set its own tax rates depending on its National priorities and goals. He mentioned that small countries such as Ireland want to stay competitive by having low taxation.
So what does all this have to do with India?
One, if the US TCJA 2017 law results in companies repatriating funds to the US, and thus investing in domestic investments or safe US securities, it might result in less investments for India, and Indian stock markets.
Two, how do policy makers view multinational companies as an integral part of our economy, rather than targets to be roped in? How do multinational companies view India as not just a consumption market, but get involved in local issues and nation building? How do each side view each other as partners rather than with suspicion?
Three, are there creative and new ways to have the new age companies get involved in national building? Can companies get involved in conducting pilots for solving social issues? Minister Donohoe of Ireland mentioned that they were in favour of taxation being at the stage of value creation instead of consumption. India is also part of the value creation of digital products by offering vast amounts of data to their creation. So instead of limited data flow, India could consider free flow of data, and look at monetizing the value creation.
Four, the OECD has published two reports in the last 1 year – OECD-G20 Base erosion and profit sharing project – Tax challenges arising from digitalization and the OECD Secretary General report to G20 leaders. OECD is coming up with its draft guidelines for digital taxation in 2019. Since these are untested waters, Indian law makers could take cues and tips from OECD and other countries and their experiences.