Many of the world’s wealthiest people have utilised tax havens and other illicit methods to escape taxation, according to the Pandora Papers investigation. This has pushed the notion of tax justice to the forefront, as well as why eliminating tax evasion and tax havens should be considered a human rights problem.
Simply put, tax justice is that those who owe the tax should pay it. The notion of tax justice states that taxes should be paid evenly by all those who are obligated to pay them.
The Present Situation :-
- Annual Global Loss: According to the Tax Justice Institute’s ‘The State of Tax Justice Report, 2020,’ the annual global loss due to tax abuse (Tax Evasion and Avoidance) is about $427 billion.
- “Multinational companies (MNCs) transferring earnings into tax havens” account for almost $245 billion of this. Wealthy individuals who hide undeclared assets and earnings overseas lose the remaining $182 billion.
- Inequitable Impact: Tax evasion has a greater impact on low-income nations, as they lose a significantly bigger proportion of their GDP than higher-income ones.
- Role of Higher-income Countries: Higher-income countries play an important role, since they facilitate 98 percent of all worldwide tax losses, while losing $382 billion in revenue each year.
- According to the Tax Justice Institute’s Corporate Tax Haven Index 2021, nations that are members of the Organisation for Economic Co-operation and Development (OECD) are responsible for 68 percent of global corporate tax abuse threats.
- India: India is placed 47 in the 2020 Financial Secrecy Index produced by the Tax Justice Institute, according to the Tax Justice Network, with a low secrecy score of 47.84.
- India loses $10 billion in tax revenue each year as a result of international tax evasion. This is equal to 0.41 percent of India’s yearly GDP.
- Mauritius, Singapore, and the Netherlands are the top nations where the most tax evasion occurs.
Steps Taken to Control Tax Evasion :-
Global Steps :-
- Statement from the OECD’s Inclusive Framework: The Statement of the Inclusive Framework employs a two-pillar approach.
- Pillar one affects around 100 of the world’s largest and most successful multinational corporations, redistributing a portion of their profits to the nations where they sell their goods and offer services.
- Under Pillar 2, any firm with yearly sales of more than EUR 750 million would now be subject to an effective minimum rate of 15%.
- According to the OECD, the global minimum tax may yield an additional $150 billion in worldwide tax income per year.
Steps by India :-
- The Fugitive Economic Offenders Act of 2018: The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act of 2015 o The Prevention of Money Laundering Act of 2002
- Cooperation on a Global Scale:
- Double Taxation Avoidance Agreements (DTAAs): India is aggressively pursuing Double Taxation Avoidance Agreements (DTAAs), Tax Information Exchange Agreements (TIEAs), and Multilateral Conventions with other countries.
- Automatic Information Exchange: It will considerably aid worldwide efforts to prevent tax evasion by proactively exchanging financial data.
- Foreign Account Tax Compliance Act of USA: Under the US Foreign Account Tax Compliance Act, India has entered into an information-sharing arrangement with the US.
Way Forward :-
- The ABCs of Tax Justice: The three transparency measures aimed to combat corporate and private tax misuse and other wrongdoing should be implemented in all major economies. Automatic information interchange, beneficial ownership registration, and country-by-country reporting are the three.
- Automatic exchange of information (AEOI) is a data-sharing mechanism between nations that allows for the transmission of information about firms and four persons doing cross-border transactions in each country.
- Beneficial ownership registration is the practise of registering the beneficial owners of corporations and other legal entities. A beneficial owner is the individual who owns, controls, or earns benefits from a business or legal entity. This will uncover the corporate curtain that many people hide behind in order to evade accountability.
- Public country-by-country reporting is an accounting procedure aimed at exposing multinational firms that divert profits to tax havens to avoid paying taxes.
- Unitary Taxation: This is a method of taxing multinational firms based on where they really work, such as employing people, operating factories, and selling goods and services, rather than where they set up shell companies to avoid paying taxes, such as in tax havens.
- A UN Convention on Tax: Establishing a UN Tax Convention would allow international tax regulations to be established through a truly representative UN process that represents the requirements of governments all around the world.
- A UN agreement on tax can compel countries to adhere to legally enforceable and fair corporation tax norms.
- Global Asset Register: It is a proposal to establish a comprehensive international registry of all wealth and assets in order to provide policymakers and the general public with the information they need to combat global tax evasion and inequality.
- Specific to India:
- More transparency from businesses about how much profit they make and how much tax they pay in each country where they do business.
- Indian Finance Code: In India, there is a need to simplify taxes rules. In this context, the Financial Sector Legislative Reforms Commission’s recommendations must be implemented: • The Commission proposed the Indian Financial Code, which would contain new legislation for the Indian financial system, which is fragmented, with gaps, overlaps, inconsistency, and arbitrary.
- Adopting International Best Practice: India may consider revising the standard of treatment clause to line it with international standards and to incorporate the customary norm of fair and equitable treatment protection. India should also explain the Model BIT’s open-ended conditions. India may face fewer disputes and BIT claims as a result of this.
Inequality, corruption, and democracy are all fueled by corporate tax avoidance. To correct this inequity, our tax and financial systems must be reprogrammed to give equal weight to the requirements of all members of society, rather than prioritising the wishes of the richest multinational businesses.
India and other developing countries, for example, have a pressing need to boost tax income in order to fund important operations. To attain this goal, tax evasion techniques must be eliminated, and an equitable tax system must be developed in order to achieve tax justice.