Facts for Prelims (FFP)
Source: EU
Context: The European Union Tax Observatory’s ‘Global Tax Evasion Report 2024’ discusses tax evasion, the Global Minimum Tax (GMT), and measures to combat tax evasion.
What is Tax Evasion?
Tax evasion is the illegal act of not paying owed taxes to the government by fraudulent means, such as underreporting income, hiding money offshore, or inflating deductions, to reduce tax liability.
Key Highlights of the Report and its Recommendations:
| Highlights | Recommendations |
| $1 trillion profit shifted to tax havens in 2022, despite the BEPS framework | Minimum corporate tax of 25%, closing tax competition loopholes |
| Global billionaires’ low effective tax rates (0% to 0.5%) due to the frequent use of shell companies to avoid income taxation | New 2% global minimum tax on billionaires’ wealth |
| Offshore tax evasion decreased but challenges remain | Create a Global Asset Registry for wealth and assets |
| Policy choices impact tax evasion | Tax long-term residents moving to low-tax countries |
| Multinational corporations shifted $1 trillion to tax havens | Implement unilateral measures for tax collection |
| 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%. | Strengthen economic substance and anti-abuse rules |
Indian Measures to curb tax evasions:
- E-Invoicing
- Fugitive Economic Offenders Act, 2018
- The Black Money (Undisclosed Foreign Income and Assets)
- Imposition of Income Tax Act, 2015
- Prevention of Money Laundering Act, 2002
- Treaties such as Double Tax Avoidance Agreement (DTAA)
- Tax Information Exchange Agreement (TIEA)
- The Benami Transactions Informants Reward Scheme
- Reduced base corporate tax for existing companies to 22 per cent and new manufacturing firms to 15 per cent.
International Reforms to Combat Tax Evasion
- Global Minimum Tax (GMT): Applies a standard minimum tax rate globally, discouraging tax competition.
- OECD proposed a 15% corporate minimum tax on foreign profits of large multinationals.
- In October 2021, 136 countries, including India, set a 15% minimum global tax rate to prevent tax avoidance.
- Automatic Exchange of Information (2017): Introduced to combat offshore tax evasion by wealthy individuals.
