By Mohanish Verma.
The United Nations has recently observed that fair and inclusive tax systems are essential for strengthening domestic fiscal and financial policies. This was observed in a special meeting on International Cooperation in Tax Matters.
The need for convergence of tax systems across the world needs to be highlighted also in view of solutions like Pillar 2 of OECD or other suggestions proposed by the United Nations. Though these systems across nations do follow some basic principles but are primarily designed to meet their domestic requirements and compulsions. These include economic, social and political factors. The global economy and business have changed drastically in the past few years due to technology and internet-driven business models. Domestic compulsions and global dynamics of taxation are often in conflict due to divergent priorities.
Domestic Regime
Income tax, VAT, GST, Green taxes, Property taxes, Poll taxes, Carbon taxes, corporate taxes and Digital taxes have evolved over time with changing economic activities structures and patterns. Tax systems across the world have been reinventing themselves, though not always in any organized objective manner. Issues of equity, ease of administration, simplicity of laws and overall fairness are underlying principles for any tax system, but internal reviews and coordination with global systems have mostly been absent.
The complexities of the rapidly changing nature of activities, technology and digitally driven businesses and the emergence of large global multinational enterprises with impact across many economies have made it a really daunting task to ensure a stable, sustainable structure for fair taxation.
Understanding the generic patterns of tax systems in different large and small economies can provide insights into the critical characteristics and compulsions of each tax regime. Arriving at global solutions is very heavily dependent on understanding the domestic tax systems and the economic, and political requirements. Availability of capacities to collect and analyze data, other administrative logistics and stages of economic development are not uniform amongst nations and will need to be appreciated and upgraded through global cooperation. The knowledge and experience sharing amongst tax regimes has to be enhanced.
Since there is a need for synergy, the domestic systems must have the flexibility to coordinate with global changes and evolve new regulations as well as have mechanisms to protect their own interests.
Objectives of global tax systems:
Countries like the USA and the EU have more stable systems while others in many developing nations are still having fragile ones due to poor capacities and resources, as well as more dynamic changes in their economic activities.
Adam Smith proposed the canons of taxation as equity, certainty, convenience and economy. However, in today’s world, objectives of a tax system also considering the global context should aim at (1) Taxing potentially prosperous sectors and sections in each economic regime with a perception of fairness (2) Data exchange, management and analysis on a real-time basis for global responses, have to be ensured. (3) Keeping laws and rules simple to understand and implement in most sectors and categories. International standards should be developed where possible. (4) Tax rules and legislation should be flexible and respond with the least lag. (5) Dispute resolution mechanisms must be quick and effective, with international credibility. (6) Capacity enhancement of tax administrations in view of dynamic economic changes is critical. International support and cooperation for improving domestic tax capacity systems have to be boosted.
Global and domestic objectives in tax systems need better synchronization. A careful understanding and analysis can provide the basis for developing structures and mechanisms along with regulations in domestic regimes which will support the development of globally acceptable guidelines and reduce conflicts as well as enhance fair taxation principles. Such developments are crucial also to taxpayer’s perception of transparency and global certainty. Tax evasion and “planning” to move to low tax regimes will also be discouraged.
Indian Tax System and the global perspective.
The Indian domestic tax system has been responding proactively in the past few years and has been trying to ensure a high concentration index, low cost of collection, and low erosion index by resorting to the latest technology including artificial intelligence to detect evasion and data analysis. In the context of OECD, for fair allocation of taxes, under the Indian proposal, India would tax large multinationals operating within it by taking their global profit margin and multiplying it by the average of Indian tangible assets, payroll/number of employees, and sales or users, resulting in a percentage of global profits allocable to India. That profit is then subject to the regular Indian corporate tax. The domestic and global interests need to converge.
In India, efforts to converge with the global priorities have been made in many areas like (a) Automatic Exchange of information across nations (b) Advance Pricing Agreements. (c) Tax Treaty arrangements with various nations to synchronize mutual needs. (d) Continuous engagements with OECD on Pillars 1 and 2 with emphasis on the interests of emerging nations like India and China (e) Exploring possibilities of developing acceptable global systems and norms through the UN Model for alternatives to the OECD suggestions.
The fundamental problems of diverse interests and lack of basic uniformity in tax systems amongst nations have probably not been actively explored. India has been making conscious efforts to highlight the need for cohesive action by all.
Stronger synergy – A necessity.
In an emerging complex economic scenario both at domestic and international levels, there is a need to enhance the capacities of tax systems with greater cohesion and speed. The 2 pillar suggestions of the OECD and UN Models are being actively considered for solutions. They need to be less complicated, catering to the political, social and economic needs and flexibilities of developed, emerging and underdeveloped economies. Integration and convergence of domestic tax systems with the international mechanisms of data sharing and development of paradigms for a fair share of taxation by global entities should be expedited. Perhaps there is a strong need to standardize some components of all domestic tax systems while some aspects can be kept flexible. In the long run, such synergy will be a compulsion for a fair domestic and global tax regime to co-exist.
The author is a senior serving IRS Officer.
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