Over the last decade, governments are witnessing a strange phenomenon on the taxation front. There is creation of income domestically and then its migration to foreign countries without paying taxes. Companies are growing but their tax contribution is declining.
In India, the controversial retrospective tax amendment was an aborted attempt to catch such tax avoidance arrangements made by big multinationals.
Many western economies are under stress now form falling growth and reduced income were thinking about restricting tax avoidance.
A major development here is the launch of famous Google tax last week. It is tax introduced by Britain on such companies adopting aggressive tax planning and tax avoidance. The tax is nick named as Google as it aims to penalize companies like Google who deliberately creates arrangements to avoid tax.
Multinational firms like Google have big physical presence- warehouses, retail outlets and employees without significant tax payment.
Historically, smart efforts by companies to build special arrangements to avoid taxes are not equally countered by governments who ultimately became losers in this game. Government is not as smart as big MNCs who often create tax avoidance with special arrangements using their platforms in different countries. Tax collectors remained helpless. In this regard, the Google tax is a surprising and welcome development.
Though the tax introduced in Britain is good in terms of its intention, whether Britain only has the right to tax cross national income with an arbitrary nature is a questionable issue. Besides, how the tax can be imposed, collected, and treated under tax treaties between countries will determine the future of this new born baby. Though problems may remain, the Google tax is a declaration of war on tax avoidance by big MNCs.