The Organisation for Economic Cooperation and Development’s (OECD’s) efforts at creating a global action to stop tax avoidance by MNCs will be of some significance to several such firms operating in India. The project has been called Base Erosion Profit Shifting and has brought together 60 countries including India. It seeks to counteract a process by which MNCs are able to show reduced profits or no profits at all in their businesses.
Of the 15 items listed by the OECD three are of particular relevance to India. One is the issue of permanent establishment. There are foreign companies operating in India but the Companies Act does not apply to them. Generally foreign institutional investors do not have a place of permanent establishment in India and hence they do not submit accounts in the manner other companies do.Hence there is a feeling on the part of tax experts that they should not pay the minimum alternate tax.
The second is treaty shopping, by which companies are able to take advantage of favourable tax treaties between two countries even if they are not registered in either of them. Its related phenomenon is round tripping, by which a business or a firm sells an asset to an entity in another location only to buy it back and inflating the cost. The third is the most vexatious issue of transfer pricing, by avoiding which subsidiaries of MNCs are able to sell to mother corporations at prices far removed from the ones prevailing in the market. Over the past few years companies such as Vodafone, Shell, Nokia and Cairn have received notice from the tax department. When the G-20 finance ministers meet in Peru later this week and this instrument is signed upon, more order can be expected in the flows of global money.
Much of business sentiment depends on movements in international finance. However, its unabated flows in a country’s stocks might just end up creating enclaves of prosperity. Similarly a sudden jerk can take money offshore, dampening the business climate. It is to this a Union minister had alluded before a meeting on the Sustainable Development Goals and it is this that must be checked.