• Indian government desperate to raise more tax revenues.
•  It missed its tax targets  last fiscal year, (poor goods and services tax (GST) collections). 
• Its declared budgetary target for the current year requires tax receipts to increase by around 25%, when the first quarter increase was only 6%.

MNCs Tax Evasion:

• MNCs manage to avoid taxation in most countries, by shifting their declared costs and revenues through transfer pricing across subsidiaries, practices described as “base erosion and profit shifting” (BEPS). 
• Digital companies, some of the largest of which make billions of dollars in profits across the globe, but pay barely any taxes anywhere. 
• The International Monetary Fund has estimated that countries lose $500 billion a year because of this.

Base erosion and profit shifting (BEPS):

• Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to “shift” profits from higher–tax jurisdictions to lower–tax jurisdictions, thus “eroding” the “tax–base” of the higher–tax jurisdictions
• The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as also “exploiting gaps and mismatches in tax rules
• Initiatives to curb BEPS by the OECD and the Trump administration have failed.

Way forward:

Idea Proposed by the Independent Commission for the Reform of International Corporate Taxation, or ICRICT

• Since an MNC actually functions as one entity, it should be treated that way for tax purposes. So the total global profits of a multinational should be calculated, and then apportioned across countries according to some formula based on sales, employment and users (for digital companies).Ex: US
• A minimum corporate tax should be internationally agreed upon for this to prevent companies shifting to low tax jurisdictions (ICRICT has suggested 25%)
• Indian government has already proposed in a white paper that it could take such a unilateral initiative for digital companies.

The OECD G20 Base Erosion and Profit Shifting Project (or BEPS Project):

• It is an OECD/G20 project to set up an international framework to combat tax avoidance by multinational enterprises (“MNEs”) using base erosion and profit shifting tools
• The aim of the project is to mitigate tax code loopholes and country-to-country inconsistencies so that corporations cannot shift profits from a country with a high corporate tax rate to countries with a low tax rate.
• Implementation phase, 116 countries are involved, including a majority of developing countries.
• The BEPS project looks to develop multilateral dialogue and could be achieved thanks to a successful international cooperation, unavoidable when it comes to such a domestic and sovereign topic.
• The European Commission and the US have unilaterally  taken actions in 2017-2018 that implement several key measures of the BEPS project

Concerns:

• Arbitrary separation between what OECD calls “routine” and “residual” profits, and the proposal that only residual profits will be subject to unitary taxation. This has no economic justification, since profits are anyway net of various costs and interest.
• The proposal does not clearly specify the criteria for determining routine profits
• Formula to be used to distribute taxable profits. The OECD suggests only sales revenues as the criterion, but developing countries would lose out from this because they are often the producers of commodities that are consumed in the advanced economies.

Conclusion:

• A government that is currently ineffective in battling both economic slowdown and declining tax revenues cannot afford to neglect this crucial opportunity.