With zero/low tax rates being the chief attraction/reason why profits and investments have copiously flown into tax havens, nations have been cutting their tax rates, to remain attractive/competitive, to attract MNC investments into their territory.
Tax havens and tax evasion, are two sides of the same coin. They help the rich multinational corporates and individuals to evade taxes on income, by shifting the profits to their territory and thus avoid paying tax on them in the country where they were earned. These include the likes of Switzerland, Bahamas, Guernsey, Channel Islands, BVI, etc. and are zero tax, low tax, or negotiated tax territories, that help companies to avoid paying tax on profits earned. The estimated loss of revenue by way of taxes to nations due to these tax havens, was about $ 427 bn last year and India’s share in it was $10 bn. The irony is that tax havens were originally a creation of the developed western nations, to encourage tax evasion, money laundering, and proceeds of crime/corruption, in poor third world nations and hand over this ill-gotten loot to the tax havens to manage, with Switzerland being the most classic case. The national wealth of poor nations has been looted, due to the criminal support provided by tax heavens.
The chickens have now come home to roost and it is the very western nations, who encouraged and benefitted from such tax havens, that now claim that they are victims of tax evasion perpetrated by tax havens and that it must stop. The USA alone loses tax revenue of about $ 150 bn per year, due to the shifting of profits by American corporates to tax havens, and that its corporates have stashed away about $1.5 trn in such havens, due to such tax evasion. No amount of carrot and stick policies by the US presidents have managed to stop this giant tax evasion and the flight of profits/capital from USA, to nations like the Bahamas, Switzerland, etc.
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With zero/low tax rates being the chief attraction/reason why profits and investments have copiously flown into tax havens, nations have been cutting their tax rates, to remain attractive/competitive, to attract MNC investments into their territory. Between 1985 to 2020, corporate tax rates across major economies fell from 49% to 21%, as they tried to become attractive investment destinations. In September 2019, even India cut its corporate tax rate to 22% for domestic companies and 15% for those setting up a manufacturing business in India, in order to attract foreign investment. It did that to be able to compete with the likes of Vietnam, Bangladesh, Thailand, Sri Lanka, Indonesia, etc., which compete with India for the same pie of foreign capital. It is these low tax rates that the FM cites, seeking to attract foreign capital to India.
FM Nirmala Sitaraman cut the corporate tax to 22% in 2019
The USA has now become the biggest sufferer of the global competitive tax rate regimes and having failed to stop corporates and tax havens from indulging in such tax evasion, it is now seeking to convince other developed nations to adopt a global minimum tax for corporations and stamp out the advantage that corporates have, by booking their income in tax havens. It is persuading the OECD to fix a global minimum tax of 21% such that irrespective of where they pay taxes, there would be a minimum tax liability of 21% on corporates. The proposal would then be that if say a US corporate has paid income tax at 6% in any nation, then the USA will have the right to collect an additional tax of 15% on such profits, thus negating the attraction/advantage of a tax haven. The OECD nations which also consist of tax havens like Switzerland are expected to reject this proposal and so would American corporates for obvious reasons, putting all on a path of collision and controversy.
India too has suffered immensely due to the shifting of profits/wealth to tax havens, and on the surface, a global minimum tax rate looks attractive. But that is truly not the case. India today itself offers a concessional/competitive tax rate, which if it increases, will reduce its attraction as an investment destination. If tax rates were common worldwide, it would make foreign investment go to countries where infrastructure is robust and the regulatory ecosystem is supportive of business, which is just not so in the case of India. But for an attractive corporate tax rate of 15% and a domestic market, India will be unable to compete with developed nations to attract foreign investment, with its patchy infrastructure and uncertain/onerous regulatory & compliance issues. Till that is not done, India needs a low tax rate to be an attractive investment destination and it will not be in its interest to accept the American proposal of a global minimum tax.
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