The global tax revolution

New regime may bring in ‘Golden Era’ of direct taxes

International tax jurisprudence received a shot in the arm when to introduce for taxing multinational corporations (MNCs) operating the globe over. For over a century now, the corporate tax system was based on the application of the twin principles of the source rule and the residence rule. All that a MNC had to do to avoid high tax in a country where they did business was to get registered in a tax haven. Globalisation allowed MNCs to replace fears of double taxation with the joys of double non-taxation by exploiting mismatches between the tax laws of various countries and by cutting taxable profits. A digitalised world made their task easier.

Tax havens came in handy for the MNCs. It became easier with the rise of intangible assets, which could easily be shifted from one country to another. But shifting of profits to low tax havens deprived poor countries of revenue by as much as 5% as compared to an alternative system where profits are taxed based on the current location of companies, revenues, their employees and their wage codes. Small countries wanted investments on a grand scale. That could be achieved with low direct taxes. Countries like Belgium, Britain, India and Indonesia brought in Digital Services Taxes on the local sales of foreign firms with online platforms. The U.S. objected and threatened retaliatory tariffs.