[Opinion] BEPS 2.0 | The Beginning of the End for Tax Havens?

Vishal Gupta & Shahrukh Kamal – [2024] 164 taxmann.com 95 (Article)

In today’s interconnected world, the economy has gone beyond the national borders, creating a truly global marketplace. Businesses now operate across multiple jurisdictions, bringing significant benefits to local economies and themselves i.e. economies of scale, access to larger market base. This cross-border presence promotes job creation, social upliftment, and large-scale production advantages, fostering economic growth on both local and international levels. However, with these benefits come intricate challenges, particularly regarding the taxation of profits for organizations with a multinational footprint.

The rise of globalization has fundamentally altered the way businesses operate. No longer confined to their home countries, organizations have established extensive networks of subsidiaries, branches, and partnerships across the globe. This international reach not only boosts their competitive edge but also enhances the economic landscapes of the countries they operate in. Local economies benefit through increased employment opportunities, technology transfers, and improved infrastructure, while businesses gain access to diverse markets and resources, reducing operational costs and increasing efficiency.

The digital economy has further revolutionized global business operations. Companies can now reach customer bases worldwide without the necessity of a physical presence. For instance, software firms serve global clientele from remote locations, leveraging cloud computing and digital platforms. Similarly, businesses often establish offshore units to capitalize on lower labour costs, thus optimizing their profit margins. This digital transformation has blurred traditional geographical boundaries, posing significant questions about tax jurisdiction and revenue allocation.

The expansion of multinational corporations (MNCs) into various jurisdictions has complicated the landscape of corporate taxation. Traditional tax systems, which rely on physical presence and residency principles, struggle to keep pace with the digital economy’s fluid nature. Under these older rules, tax revenues primarily accrue to the country where a business is legally registered. This approach, however, often leaves the countries where the actual economic activities occur—and where the income is generated—without their fair share of tax revenue.

For example, if a tech giant headquartered in Country A generates substantial income from customers in Country B through online services, the existing tax framework allows Country A to claim most, if not all, of the tax revenue. Country B, despite being the source of the income, receives little to no tax benefits. This inequitable distribution raises fundamental questions about fairness and sustainability in global taxation.

Conversely, if tax rights were exclusively granted to the country of revenue origin, host countries, which provide essential infrastructure and regulatory environments, might lose out. This delicate situation calls for a rationalized approach to international taxation, ensuring fair revenue distribution while maintaining the effectiveness of countries as business hubs.

The government of various countries have tried to bridge this gap by introducing bilateral treaties known as Double Tax Avoidance Agreements (“DTAA”), which sets the right to tax the income by the respective countries. These agreements primarily ensure that the same income is not taxed twice and hence it fails to cover the escapement of income at lower or nil rate of tax.

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