Daily Current Affairs – 27th September, 2016Devendra Vishwakarma
- Historical and contemporary perceptions of tax have characterized it as a necessary extraction, a penalty. A likely fallout of this statutory burden is that there is an innate urge to either mitigate the liability or even eliminate it.
- Tax avoidance is when a lawful mitigation of tax burden takes place.
- Tax evasion is where a seepage in the boundaries set by fiscal laws is discovered, and which is then used to escape the tax net to a great extent or altogether.
- The genesis of tax notoriety is where prima faciethe tax mitigation exercise appears legitimate, but in reality, it may be an abusive tax avoidance strategy which may lead to very low payment or no payment of taxes.
- Corporate taxes imposed on multinational corporations (MNCs) are major sources of revenue for most economies. Corporate tax payers shifting their tax liabilities from a high tax jurisdiction to a low- or no-tax jurisdiction, massive revenue losses are imminent for the fiscal jurisdiction where the taxes should have been ideally paid.
- With some creative accounting techniques and existing loopholes in different fiscal jurisdictions across the world, tax evasion has emerged as a global woe in the last few decades.
Various countermeasures have been deployed by states, either at an individual level or as members of different economic groups.
- The north and south have come together and there is a conscious attempt to tackle the reckless acts of base erosion and profit shifting (BEPS). The BEPS action plan is a step in that direction where the developing and the developed have jointly worked on strategies to curb the exploitation of gaps and mismatches in tax rules, which can be used to artificially shift profits to low- or no-tax locations.
Since a majority of corporate entities in such jurisdictions have little or no economic activity and are mere subterfuges (tricks), it is all the more critical to identify and penalize such entities.
Some jurisdictions have also taken the initiative of revising or updating their existing Double Taxation Avoidance Agreements (DTAAs) to plug the existing loopholes.
- Another important instrument of tackling tax notoriety is the Tax Information Exchange Agreements. These bilateral agreements act as information bridges between different fiscal jurisdictions and they aid in the establishment of tax transparency.
Despite some major limitations, various fiscal jurisdictions have already gone ahead with signing such agreements.
Further, novel techniques such as the Diverted Profits Tax, popularly known as the Google Tax, are providing more salvo to the tax administrators in tackling aggressive tax planning.
Apple’s Case in Ireland
- A colossal decision by the European Commission has taken the fight against “aggressive tax planning” by corporations to a new turf altogether.
- In a nutshell, the subject matter of this dispute was the selective treatment, a sweet deal, granted by Ireland to Apple Ireland.
- Apple Ireland recorded a €16 billion profit in 2011, but the effective tax rate on the same amount was just 0.05% in same period. In 2014, the rate in effect declined to 0.005% in 2014 even as the profits grew.
- These corporate tax rates are significantly lower than the corporate tax rates applicable in any other EU member state.
- Thus, the European Commission has questioned this entire special tax arrangement extended by Ireland to Apple on grounds of illegal state aid and failure to reflect economic reality.
- This retrospective action against Apple focusses on compensating Ireland for a loss of revenue in at least the last decade. Then again, it is also a clear message to all EU member states not to slacken their taxes excessively and maintain diligence when entering into special arrangements with MNCs.