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Unitary taxation system for MNEs

Topics Covered:

  1. Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

 

Unitary taxation system for MNEs

 

What to study?

For Prelims and mains: Unitary taxation- need, Significance, challenges and outcomes.

 

Context: United Nations Conference on Trade and Development (UNCTAD) in its Trade and Development Report 2019 has recommended for the adoption of a unitary taxation system for the Multi-National Enterprises (MNEs).

 

The proposal:

  • The profits of MNEs are generated collectively at the group level. Hence, unitary taxation should be applied by combining it with a global minimum effective corporate tax rate on all MNE profits.
  • Such an approach would simplify the global taxation system and is expected to increase tax revenues for all countries.

 

Need for and significance:

  • There was a dire need for this change, as the current international corporate taxation norms consider affiliates of MNEs as independent entities and treat taxable transactions between different entities of MNEs as unrelated.
  • The fiscal revenues of a country could be augmented through fair taxation of the digital economy.

 

Concerns:

The tax-motivated illicit financial flows of MNEs are estimated to deprive developing countries of $50 billion to $200 billion a year in terms of the fiscal revenues.

 

Background:

The international tax system needs a paradigm shift. The rules devised over 80 years ago treat the different parts of a multinational enterprise as if they were independent entities, although they also give national tax authorities powers to adjust the accounts of these entities. This creates a perverse incentive for multinationals to create ever more complex groups in order to minimise taxes, exploiting the various definitions of the residence of legal persons and the source of income. While states may attempt to combat these strategies, they also compete to offer tax incentives, many of which facilitate such techniques to undermine other countries’ taxes.

 

About United Nations Conference on Trade and Development (UNCTAD):

UNCTAD is a permanent intergovernmental body established by the United NationsGeneral Assembly in 1964.

  • It is part of the UN Secretariat.
  • It reports to the UN General Assembly and the Economic and Social Council, but has its own membership, leadership, and budget.
  • It is also a part of the United Nations Development Group.
  • It supports developing countries to access the benefits of a globalized economy more fairly and effectively. Along with other UN departments and agencies, it also measures the progress made in the Sustainable Development Goals, as set out in Agenda 2030.

 

Reports published by UNCTAD are:

  1. Trade and Development Report
  2. World Investment Report
  3. Technology and Innovation Report
  4. Digital Economy Report

 

Sources: the Hindu.