The Limits of Combating Global Tax Evasion

Despite policy efforts, MNCs and HNIs continue to evade taxes as international agreements remain elusive

- M GOVINDA RAO

The menace of tax evasion and avoidance by multinational corporations and high-net-worth individuals — by relocating to low-tax jurisdictions and tax havens — has been a matter of serious global concern. This is particularly so in developing countries, as they require the much-needed resources to augment infrastructure and human development, combat environmental challenges, and control deficits and debt for macro-stability, especially in the aftermath of the economic challenges created by the pandemic and international hostilities, which have disrupted global supply chains and adversely impacted production costs and energy prices.

In this context, the recent report on global tax evasion by the EU Tax Observatory, hosted by the Paris School of Economics, focusing on international tax evasion and wilful avoidance, requires close attention.

Multinationals and high-net-worth individuals (HNIs) dodge taxes in a variety of ways. The most common way for multinationals is through the transfer pricing mechanism, in which a subsidiary in a high-tax country purchases management or financial services from a related entity in a low-tax country at an inflated price, shifting profits to the lower-tax jurisdiction. Another way is to borrow funds in a high-tax country from a related party in low-tax country at high interest rates and transfer profits in the guise of interest payments. Yet another way is to locate the headquarters in tax havens and assign intangible assets such as trademarks, intellectual property rights, and logos, and extract royalties for the user rights on the subsidiaries in high-tax countries.

While a number of multinational companies resort to such practices, the issue is particularly pronounced among multinational digital companies that can easily locate their headquarters to low-tax jurisdictions and evade tax payments.