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Global Tax Evasion Report 2024

  • 25 Oct 2023
  • 7 min read

For Prelims: Global Tax Evasion Report 2024, Tax Evasion, European Union Tax Observatory, Global Minimum Tax.

For Mains: Global Tax Evasion Report 2024, Inclusive growth and issues arising from it.

Source: ET

Why in News?

Recently, the European Union Tax Observatory has released 'Global Tax Evasion Report 2024' highlighting several critical issues related to tax evasion, the Global Minimum Tax (GMT) on billionaires, and measures to combat tax evasion.

  • The report investigates the effects of international reforms adopted over the past 10 years, such as the automatic international exchange of bank information, and the international agreement on a global minimum tax for MNCs, among other issues.

What is Tax Evasion?

  • Tax evasion is the illegal act of not paying taxes that one owes to the government by underreporting income, inflating deductions, hiding money in offshore accounts, or using other fraudulent means to reduce one's tax liability.
  • It is a deliberate and unlawful attempt to reduce tax obligations by misrepresenting or concealing financial information.

What are the International Reforms to Combat Tax Evasion?

  • Global Minimum Tax (GMT):
    • A GMT applies a standard minimum tax rate to a defined corporate income base worldwide.
    • The Organization for Economic Cooperation and Development (OECD) developed a proposal featuring a corporate minimum tax of 15% on foreign profits of large multinationals, which would give countries new annual tax revenues of USD 150 billion.
    • In October 2021, a group of 136 countries, including India, set a minimum global tax rate of 15% for MNCs and sought to make it harder for them to avoid taxation.
    • The framework of GMT aims to discourage nations from tax competition through lower tax rates that result in corporate profit shifting and tax base erosion.
  • Automatic Exchange of Information:
    • The automatic exchange of information was introduced in 2017 to fight offshore tax evasion by wealthy individuals.

What are the Key Highlights of the Report?

  • Challenges in Curbing Offshore Tax Evasion:
    • Offshore tax evasion has decreased over the past decade. In 2013, 10% of the world's GDP was stored in global tax havens, but now only 25% of this wealth remains untaxed.
    • However, challenges remain, including non-compliance by offshore financial institutions and limitations in the automatic exchange of bank information.
  • Tax Rates Equivalent to 0%:
    • Global billionaires have effective tax rates equivalent to 0% to 0.5% of their wealth, due to the frequent use of shell companies to avoid income taxation.
    • US billionaires have an effective tax rate equivalent to 0.5% of their wealth and French billionaires a tax rate of zero.
  • Profit Shifting by MNCs:
    • Multinational corporations (MNCs) have shifted around USD 1 trillion to tax havens in 2022, equivalent to 35% of the profits they earned outside their headquarters countries.
    • The report red-flagged the trend of “Greenwashing the Global Minimum Tax” wherein MNCs can use ‘green’ tax credits for low carbon transition to reduce their tax rates way below the minimum of 15%.
  • Importance of Policy Choices:
    • Tax evasion, wealth concealment, and profit shifting to tax havens are not natural occurrences but results of policy choices or the failure to make necessary choices.
    • There is a need to evaluate the consequences of tax policies and make improvements for sustainable tax systems.
  • Recommendations:
    • The report advocates for a global minimum tax on billionaires, proposing a rate of 2% of their wealth. Institute mechanisms to tax wealthy people who have been long-term residents in a country and choose to move to a low-tax country.
      • This measure is seen as essential for governments worldwide to increase their revenue, address wealth inequality, and fund critical services like education, healthcare, and infrastructure.
    • Reform the international agreement on minimum corporate taxation to implement a rate of 25% and remove the loopholes in it that foster tax competition.
    • Implement unilateral measures to collect some of the tax deficits of multinational companies and billionaires in case global agreements on these issues fail.
    • Move towards the creation of a Global Asset Registry to better fight tax evasion.
    • Strengthen the application of economic substance and anti-abuse rules.

What is the Difference Between Income and Wealth Taxes?

  • Wealth taxes are assessed on the wealth stock, or the total amount of net wealth owned by a taxpayer, whereas income taxes are levied on the flow from the wealth stock.
  • Example of a wealth tax: Estate taxes, gift taxes, and inheritance taxes are examples of one-time or infrequently assessed wealth taxes.

What are the Government Measures to Curb Tax Evasion?

UPSC Civil Services Examination, Previous Year Question (PYQ)

Q. The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in the context of (2016)

(a) mining operation by multinational companies in resource-rich but backward areas
(b) curbing of the tax evasion by multinational companies
(c) exploitation of genetic resources of a country by multinational companies
(d) lack of consideration of environmental costs in the planning and implementation of developmental projects

Ans: (b)

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