A new UN report has recommended the adoption of a system of unitary taxation of multinational enterprises (MNEs) of the group as a whole, stating that such an approach would simplify the global tax system and help increase tax revenues for all countries.
There is a need for a change as the current international corporate tax norms that consider affiliates of MNEs as independent entities and treat taxable transactions between different entities of MNEs as unrelated are only facilitating tax-motivated illicit financial flows, according to the UNCTAD’s Trade and Development Report 2019 released on Wednesday.
Tax-motivated illicit financial flows of MNEs are estimated to deprive developing countries of $ 50 billion to $ 200 billion a year in fiscal revenues, said the report with the theme ‘Financing a Global Green New Deal’.
“India will end up getting much more in corporate taxes if it were to along with other countries adopt the report’s recommendation of unitary system of taxation of MNEs rather than the current model of treating the MNE affiliates as arms-length entities”, Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University, said at the launch event of the report here.
Recognising that profits of MNEs are generated collectively at the group level, the report recommends that unitary taxation should be combined with a global minimum effective corporate tax rate on all MNE profits set at around 20-25 per cent, which is the average of current nominal rates across the world.
To distribute the revenues from such reformed corporate taxes across countries, the report supports “formulatory apportionment”, whereby the total taxes of an MNE group are allocated across countries according to an agreed formula, ideally one that prioritises employment and productive physical assets over total sales.
“This approach of treating every multinational as a single unit at the group level is being recommended for all MNEs and not only for the big international digital or tech companies”, Ghosh added.
Digital economy
The report highlights that fiscal revenues of countries could be augmented through fair taxation of the digital economy. The rapid digitalisation of economic activity is changing how value is created, measured and distributed, adding new challenges to the international tax framework.
Mitigating serious fiscal leakages requires a fresh examination of existing international corporate tax norms and rules to determine which jurisdiction has taxing rights, the treatment of cross border transactions between the different bodies of an MNE and the measurement of value creation when intangible assets and the users of data become a significant source of value.
The report maintains that fair taxing rights in a digital economy requires using the concept of significant economic presence in terms of revenue from sales or transactions that exceed certain levels.
It also recognised that several countries have taken unilateral measures while waiting for international consensus on this matter. A simple estimation of potential additional tax revenues from such unilateral measures ranges between $ 11 billion and $ 28 billion for developing countries, the UNCTAD report said.