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GS Paper: GS3

  • Resource crunch in states after Covid second wave

    The article gives the overview of the impact of second Covid wave on the fiscal health of the States.

    Impact of first Covid wave on fiscal health of states

    • The analysis of the fiscal data for all states with the exception of Goa, Manipur, Meghalaya and Sikkim reveal a grim picture.
    • The aggregate revenue deficit for 24 state governments soared to Rs 4 trillion as per the revised estimates (RE) for 2020-21, up from a modest budgeted amount of Rs 353 billion.
    • And, despite a 16 per cent cut in capital spending, the fiscal deficit of these states deteriorated to Rs 8.7 trillion in 2020-21 (RE), up from the budgeted estimate of Rs 6.0 trillion.

    How states had projected ambitious decline in revenue deficit

    • The budgets for the ongoing fiscal year,  had projected an ambitious, decline in the aggregate revenue deficit to Rs 1.2 trillion, lower than the pre-Covid-19 level of Rs 1.3 trillion in 2019-20.
    • This has benefitted from the considerable expansion in their revenue receipts this year, forecasted at 24.7 per cent, compared to a moderate 12.4 per cent increase in their aggregate revenue expenditure.
    • This anticipated shrinking of the revenue deficit has allowed states to plan for a substantial expansion in their capital expenditure and net lending pegged at 34.1 per cent.
    • This anticipated shrinking also allowed the States to attempt a modest correction in their budgeted fiscal deficit, bringing it down to Rs 7.6 trillion in 2021-22 from Rs 8.7 trillion in 2020-21 (RE).

    Fiscal concerns over second Covid wave

    • The second wave of Covid-19 infections and its spread to rural areas has fanned fiscal concerns.
    •  The curtailed consumption of discretionary items and contact-intensive services will dampen the growth of states’ own tax revenues this year.
    • Moreover, lower mobility during the regional lockdowns will constrain tax revenues that states earn on fuels.
    • The data for the generation of GST e-way bills confirms that the staggered imposition of the localised lockdowns has had an adverse impact on economic activity since April.
    • This will result in a sequential slowdown in GST collections that will be reported in the subsequent two months.
    • Nevertheless, the GST collections is likely to nearly double to Rs 1.7 trillion in the first quarter of this year, up from Rs 0.9 trillion over the same period last year, boosted by the record-high collections in April,
    • That reflected healthy economic activity in March.

    The shortfall and way forward

    •  States’ own tax collections is estimated to trail their budget estimates as they were drawn up before the second wave.
    • For this year,  state GST collections would be at Rs 6.1 trillion, falling below their projected revenues of Rs 8.7 trillion.
    • This indicates a GST compensation requirement of Rs 2.65 trillion — only 38 per cent of which may be met through the expected GST compensation cess collections.
    • Following the meeting of the GST Council, the Finance Minister has indicated that a back-to-back loan of Rs 1.58 trillion will be provided to the states.
    • If the tranches of this loan start flowing to the states soon, it will alleviate their anticipated revenue crunch over the next two months.
    • Already, there has been a sharp rise in the size of the upcoming State Development Loan auction to Rs. 19,550 crore, relative to the modest average size of around Rs. 7,400 crore seen so far in the first eight auctions held in FY2022.

    Conclusion

    In any case, the capital spending budgeted by certain state governments this year appears to be optimistic. Moreover, localised restrictions imposed during the last two months are expected to have constrained activity.

  • Cryptocurrency & India

    The article highlights the need for coherent cryptocurrency policy and avoid missing the benefits offered by the technology.

    Growing dominance of cryptocurrencies

    • Created by Satoshi Nakamoto in 2008, Bitcoin is the most popular cryptocurrency.
    • It is a fully decentralised, peer-to-peer electronic cash system that didn’t need the purview of any third-party financial institution.
    • The Bitcoin, which traded at just $ 0.0008 in 2010, commanded a market price of just under $65,000 this April.
    • Many newer coins were introduced since Bitcoin’s launch, and their cumulative market value touched $ 2.5 trillion this May.
    • Within a span of just over a decade, their value has surpassed the size of economies of most modern nations.
    •  The “cryptomarket” grew by over 500 per cent, even while the pandemic unleashed global economic carnage not seen since the Great Depression.
    • China’s recent crackdown on cryptocurrency had far-reaching consequences.
    • An astounding trillion US dollars were wiped out from the global cryptomarket within a span of 24 hours.
    • This kind of  volatility mentioned above has always been a concern for regulators and investors alike.

    India’s approach

    • Law enforcement and taxation agencies have called for a ban, expressing concerns over cryptocurrencies being used as instruments for illicit activities, including money laundering and terror funding.
    • In 2018, the Reserve Bank barred our financial institutions from supporting crypto transactions — but the Supreme Court overturned it in 2020.
    • Yet, Indian banks still block these transactions, and the government has circulated a draft bill outlawing all cryptocurrency activities, which has been under discussion since 2019.
    • The Reserve Bank has announced the launch of a private blockchain-supported official digital currency, similar to the digital Yuan.
    • India is increasingly mimicking China’s paradoxical attempt to centralise a decentralised ecosystem.
    • India is trying to decouple cryptocurrencies from their underlying blockchain technology, and still derive benefit.
    • Unfortunately, this is impractical, and shows a lack of understanding of this disruptive innovation.
    • The funds that have gone into the Indian blockchain start-ups are less than 0.2 per cent of the amount the sector raised globally.
    • The current central government approach makes it near-impossible for entrepreneurs and investors to acquire much economic benefit.

    Need for regulation

    • Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams.
    •  However, regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
    • India has not been able to tick these boxes, and we’re in danger of missing out in the global race altogether.

    Way forward

    • Any new regulations made in this sector should prevent the misuse of these digital assets without hindering innovation and investments.
    • Provisions have to be made to route the value extracted from these networks transparently into our financial system.
    • Regulatory uncertainties over India’s position on cryptocurrency highlights the need for clear-headed policy-making.

    Consider the question “India was a late adopter in all the previous phases of the digital revolution be it the semiconductors, the internet or smartphones. Do you think the same is happening again in India’s adoption of cryptocurrencies and blockchain technology?”

    Conclusion

    We are currently on the cusp of the next phase, which would be led by technologies like blockchain. We have the potential to channel our human capital, expertise and resources into this revolution, and emerge as one of the winners of this wave. All we need to do is to get our policymaking right.

     

  • Data is an essential weapon against Covid

    The article highlights how data played an important role in decision-making in dealing with the Covid-19 pandemic. 

    Importance of data in decision making

    • The COVID-19 pandemic has highlighted globally how important data is to governments in decision-making.
    • Epidemiological data is of paramount significance for targeting and implementing control measures for public health in a timely manner
    • Such data was used effectively in the evidence-based response and decision-making in countries like South Korea.
    • Modern response to pandemics has focused on exploiting all the available data to inform policy action in real time.

    How data analysis helped during pandemic

    • Data analysis has revealed the need for continuous and repeated tracking of case numbers, fatalities and recoveries.
    • The epidemiological concept of flattening the curve and its predictions are results of data analysis and modelling.
    • Understanding testing adequacy or lack thereof allows us to measure our preparedness, prognostic versus diagnostic ability, and shape our responses to identify, manage, and care for new cases.
    • Epidemic outbreak data like case data, medical and treatment data can be used to understand disease pathogenesis and severity.
    • Genome sequencing surveillance helps identify and track viral genome sequence variants in real time and the evolution of the virus.
    •  The concept of open access to various data enables models to improve forecast and study the spread of the disease.’

    Integration and analysis of multiple datatypes

    • The integration and analysis of multiple heterogeneous datatypes eventually would yield a holistic picture.
    • This helps guide policy decisions for control and management of public health.
    • When genome surveillance data is correlated with the magnitude of cases and their outcomes, then we can understand the transmissibility or infectivity of the virus.
    • Geographical mapping of prevalence of mutants allows us to understand viral spread and explain recoveries or deaths in a specific area.
    • The roll out of vaccinations can shape viral evolution and drug-treatment strategies.
    • Surveillance through studying genome sequencing of the virus, coupled to other epidemiological data allows us to identify these connections.

    Challenges

    • Part of the challenge lies in the standardisation of data collection, curation, annotation and the integration of data analytics pipelines for outbreak analytics.

    Way forward

    • Ensuring data availability and quality under operational constraints is critical.
    • The use of data standards instils consistency, reduces errors and enables transparency.
    • Embedded in the idea of data sharing lies the concept of data security and confidentiality.
    • Concerns of privacy and security calls for a systemic infrastructure with built-in safeguards to ensure data encryption while preserving anonymity and ensuring privacy.
    • As our dependence on data-based decisions becomes more and more critical, an urgent charter for standardised digital health data in India is required.

    Consider the question “The COVID-19 pandemic has highlighted globally how important data is to governments in decision-making. Explain how data helps in decision making and challenges in evidence-based decision making based on data.”

    Conclusion

    Rational and scientific methods necessitate data without which neither can we have information, nor knowledge or wisdom. Data sharing, and transparency and timely dissemination of data are critical to overcome the pandemic.

  • Why are edible oils getting costlier?

    Edible oil prices have risen sharply in recent months.

    How much have edible oil prices rising?

    • The prices of six edible oils — groundnut oil, mustard oil, vanaspati, soya oil, sunflower oil, and palm oil — have risen between 20% and 56% at all-India levels in the last year.
    • The prices of soya oil and sunflower oil, too, have increased more than 50% since last year.
    • In fact, the monthly average retail prices of all six edible oils soared to an 11-year high in May 2021.
    • The sharp increase in cooking oil prices has come at a time when household incomes have been hit due to Covid-19.

    Trends of oil consumption in India

    • With rising incomes and changing food habits, consumption of edible oils has been rising over the years.
    • While mustard oil is consumed mostly in rural areas, the share of refined oils —sunflower oil and soyabean oil — is higher in urban areas.

    How much is produced domestically and how much is imported?

    • In 2019-20, domestic availability of edible oils from both primary sources (oilseeds like mustard, groundnut etc.) and secondary sources (such as coconut, oil palm, rice bran oil, cottonseed) was only 10.65 million tonnes against the total domestic demand of 24 million tonnes.
    • Thus, India depends on imports to meet its demand.
    • In 2019-20, the country imported about 13.35 million tonnes of edible oils or about 56% of the demand.
    • This mainly comprised palm (7 million tonnes), soyabean (3.5 millon tonnes) and sunflower (2.5 million tonnes).
    • The major sources of these imports are Argentina and Brazil for soyabeen oil; Indonesia and Malaysia palm oil; and Ukraine and Argentina again for sunflower oil.

    Answer this PYQ from CSP 2019:

    Q.Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

    (a) Spices

    (b) Fresh fruits

    (c) Pulses

    (d) Vegetable oils

    Global prices rising

    • The increase in domestic prices is basically a reflection of international prices because India meets 56% of its domestic demand through imports.
    • In the international market, prices of edible oils have jumped sharply in recent months due to various factors.
    • Even the FAO price index (2014-2016=100) for vegetable oils, an indicator of the movement of edible oil prices in the international market, has soared to 162 in April this year, compared to 81 in April last year.

    But why are international prices rising?

    • One of the reasons is the thrust on making biofuel from vegetable oil. There is a shifting of edible oils from food basket to fuel basket.
    • There has been a thrust on making renewable fuel from soyabean oil in the US, Brazil and other countries.
    • Other factors include buying by China, labour issues in Malaysia, the impact of La Niña on palm and soya producing areas, and export duties on crude palm oil in Indonesia and Malaysia.

    What are the options before the government?

    • One of the short-term options for reducing edible oil prices is to lower import duties.
    • However, the edible oil industry is not in favor of reducing duties.
    • If import duties are reduced, international prices will go up, and neither will the government get revenue nor will the consumer benefit.
    • The government can rather subsidize edible oils and make them available to the poor under the Public Distribution System.

  • [pib] National AI Portal INDIAai

    The ‘National AI Portal (https://indiaai.gov.in)’, celebrated its first anniversary on May 28, 2021.

    National AI Portal

    • INDIAai is the National AI Portal of India – a central hub for everything AI in India and beyond.
    • A joint initiative of MeitY, NeGD and NASSCOM, the website aims to be the trusted content powerhouse in the backdrop of India’s journey to global prominence in Artificial Intelligence.
    • It serves as a central hub for AI related news, learning, articles, events and activities etc., in India and beyond.
    • It has been set up to prepare the nation for an AI future.
    • It is the single central knowledge hub on artificial intelligence and allied fields for aspiring entrepreneurs, students, professionals, academics, and everyone else.
    • The portal focuses on creating and nurturing a unified AI ecosystem for driving excellence and leadership in India’s AI journey, to foster economic growth and improve lives through it.

    B2BASICS

    Artificial intelligence (AI) is a wide-ranging branch of computer science concerned with building smart machines capable of performing tasks that typically require human intelligence. AI is an interdisciplinary science with multiple approaches, but advancements in machine learning and deep learning are creating a paradigm shift in virtually every sector of the tech industry.

  • New IT Rules 2021

    The article highlights the issues with the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021.

    Important provision made in the IT Rules 2021

    • The Rules mandate duties such as removal of non-consensual intimate pictures within 24 hours.
    • The rules also mandates publication of compliance reports to increase transparency.
    • Rules provides for setting up of a dispute resolution mechanism for content removal.
    • It provides for adding a label to information for users to know whether content is advertised, owned, sponsored or exclusively controlled.

    Issues with the rules

    1) Affects right to free speech and expression

    • The Supreme Court, in the case of Life Insurance Corpn. Of India vs Prof. Manubhai D. Shah (1992) had elevated ‘the freedom to circulate one’s views as the lifeline of any democratic institution’.
    • So, the rules need to be critically scrutinised for the recent barriers being imposed by it.

    2) Violation of legal principles

    • The rules were framed by the Ministry of Electronics and Information Technology (MeiTY).
    • However, the Second Schedule of the Business Rules, 1961 does not empower MeiTY to frame regulations for digital media.
    • This power belongs to the Ministry of Information and Broadcasting.
    • This action violates the legal principle of ‘colourable legislation’ where the legislature cannot do something indirectly if it is not possible to do so directly.
    • Moreover, the Information Technology Act, 2000, does not regulate digital media.
    • Therefore, the new IT Rules which claim to be a piece of subordinate legislation of the IT Act, goes beyond the rule-making power conferred upon them by the IT Act.
    • This makes the Rules ultra vires to the Act.

    3) Deprives the fair recourse to intermediary

    • An intermediary is now supposed to take down content within 36 hours upon receiving orders from the Government.
    • This deprives the intermediary of a fair recourse in the event that it disagrees with the Government’s order due to a strict timeline.

    4) Privacy violation

    • These Rules undermine the right to privacy by imposing a traceability requirement.
    • The immunity that users received from end-to-end encryption was that intermediaries did not have access to the contents of their messages.
    • Imposing this mandatory requirement of traceability will break this immunity, thereby weakening the security of the privacy of these conversations.
    • This will also render all the data from these conversations vulnerable to attack from ill-intentioned third parties.
    • The threat here is not only one of privacy but to the extent of invasion and deprivation from a safe space.
    • Recent data breach affecting a popular pizza delivery chain and also several airlines highlights the risks involved in such move in the absence of data protection law.
    • Instead of eliminate the fake news, the Rules proceed to hurriedly to take down whatever authority may deem as “fake news”.

    5) Operational cost

    • The Rules create additional operational costs for intermediaries by requiring them to have Indian resident nodal officers, compliance officers and grievance officers.
    • Intermediaries are also required to have offices located in India.
    • This makes profit making a far-fetched goal for multinational corporations and start-up intermediary enterprises.
    • Therefore, not only do these Rules place a barrier on the “marketplace of ideas” but also on the economic market of intermediaries in general by adding redundant financial burdens.

    Consider the question “What are the challenges associated with the social media? How the  Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 will help is dealing with these challenges? What are the issues with these rules?”

    Conclusion

    Democracy stands undermined in direct proportion to every attack made on the citizen’s right. The IT Rules 2021 have tilt towards violation of rights. Therefore, these rules need reconsideration.

  • Odisha’s blackbucks double in 6 years

    Odisha’s blackbuck population has doubled in the last six years, according to figures from the latest population census.

    Blackbucks in Odisha

    • Blackbucks are found only in the Ganjam district in the southern part of the state, which is where the census was carried out.
    • It is known in Odisha and Ganjam as Krushnasara Mruga.
    • The people of Ganjam believe the sighting of a blackbuck in a paddy field is a harbinger of luck for them.
    • It used to be sighted in the Balukhand-Konark Wildlife Sanctuary in Puri district till 2012-13, but now has vanished from the area.
    • The blackbuck is a Schedule-1 animal according to the Wild Life (Protection) Act, 1972 (amended in 1992) and is considered as ‘Vulnerable’ according to the Red Data Book.

    Reasons for their rise

    • Improvement of habitats, the protection given by the local people and forest staff were some of the reasons for the increase of the population.
    • The people of Ganjam had been enthusiastically protecting the animal like the Bishnois of western Rajasthan and the Vala Rajputs of Saurashtra.

    Answer this PYQ:

    Q.With reference to ‘Eco-Sensitive Zones’, which of the following statements is/are correct?

    1. Eco-Sensitive Zones are the areas that are declared under the Wildlife (Protection) Act, 1972.
    2. The purpose of the declaration of Eco-Sensitive Zones is to prohibit all kinds of human activities, in those zones except agriculture.

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    Back2Basics: Wildlife (Protection) Act, 1972

    • WPA provides for the protection of the country’s wild animals, birds, and plant species, in order to ensure environmental and ecological security.
    • It provides for the protection of a listed species of animals, birds, and plants, and also for the establishment of a network of ecologically important protected areas in the country.
    • It provides for various types of protected areas such as Wildlife Sanctuaries, National Parks, etc.
    • There are six schedules provided in the WPA for the protection of wildlife species which can be concisely summarized as under:
    Schedule I: These species need rigorous protection and therefore, the harshest penalties for violation of the law are for species under this Schedule.
    Schedule II: Animals under this list are accorded high protection. They cannot be hunted except under threat to human life.
    Schedule III & IV: This list is for species that are not endangered. This includes protected species but the penalty for any violation is less compared to the first two schedules.
    Schedule V: This schedule contains animals which can be hunted.
    Schedule VI: This list contains plants that are forbidden from cultivation.

     

  • [pib] Bharat Ratna Professor CNR Rao

    Bharat Ratna Professor C.N.R. Rao has received the International Eni Award 2020 for research into renewable energy sources and energy storage, also called the Energy Frontier award.

    Who is CNR Rao?

    • Rao is an Indian chemist who has worked mainly in solid-state and structural chemistry.
    • Rao is one of the world’s foremost solid state and materials chemists. He has contributed to the development of the field over five decades.

    His scientific contributions

    His work on transition metal oxides has led to a basic understanding of novel phenomena and the relationship between materials properties and the structural chemistry of these materials.

    • Rao was one of the earliest to synthesize two-dimensional oxide materials such as La2CuO4.
    • He was one of the first to synthesize 123 cuprates, the first liquid nitrogen-temperature superconductor in 1987. He was also the first to synthesis Y junction carbon nanotubes in the mid-1990s.
    • His work has led to a systematic study of compositionally controlled metal-insulator transitions.
    • Such studies have had a profound impact in application fields such as colossal magnetoresistance and high-temperature superconductivity.
    • He has made immense contributions to nanomaterials over the last two decades, besides his work on hybrid materials.

    Answer this PYQ from CSP 2020 in the comment box:

    Q. With reference to carbon nanotubes, consider the following statements:

    1. They can be used as carriers of drugs and antigens in the human body.
    2. They can be made into artificial blood capillaries for an injured part of the human body.
    3. They can be used in biochemical sensors.
    4. Carbon nanotubes are biodegradable.
    Which of the statements given above are correct?
    (a) 1 and 2 only
    (b) 2, 3, and 4 only
    (c) 1, 3, and 4 only
    (d) 1, 2, 3 and 4

    Citations for the Energy Frontiers award

    • Professor Rao has been working on hydrogen energy as the only source of energy for the benefit of all mankind.
    • Hydrogen storage, photochemical and electrochemical production of hydrogen, solar production of hydrogen, and non-metallic catalysis were the highlights of his work.
    • The EF award has been conferred for his work on metal oxides, carbon nanotubes, and other materials and two-dimensional systems, including graphene, boron-nitrogen-carbon hybrid materials, and molybdenum sulfide (Molybdenite – MoS2) for energy applications and green hydrogen production.
    • Green hydrogen production can be achieved through various processes, including the photodissociation of water, thermal dissociation, and electrolysis activated by electricity produced from solar or wind energy.

    Significance of this award

    • This is considered to be the Nobel Prize in Energy Research.

  • Explained: Social Media and Safe Harbour

    The new rules for social media platforms and digital news outlets called the Intermediary Guidelines and Digital Media Ethics Code has come into effect.

    New guidelines for digital media

    • The guidelines had asked all social media platforms to set up a grievances redressal and compliance mechanism.
    • This included appointing a resident grievance officer, chief compliance officer and a nodal contact person.
    • The IT Ministry had also asked these platforms to submit monthly reports on complaints received from users and action taken.
    • A third requirement was for instant messaging apps was to make provisions for tracking the first originator of a message.
    • Failure to comply with any one of these requirements would take away the indemnity provided to social media intermediaries under Section 79 of the Information Technology Act.

    What is Section 79 of the IT Act?

    • Section 79 says any intermediary shall not be held legally or otherwise liable for any third party information, data, or communication link made available or hosted on its platform.
    • This protection, the Act says, shall be applicable if the said intermediary does not in any way, initiate the transmission of the message in question, select the receiver of the transmitted message and does not modify any information contained in the transmission.
    • This means that as long as a platform acts just as the messenger carrying a message from point A to point B, without interfering in any manner, it will be safe from any legal prosecution.
    • The intermediary must not tamper with any evidence of these messages or content present on its platform, failing which it loses its protection under the Act.

    Effect of non-compliance

    • As of now, nothing changes overnight. Social media intermediaries will continue to function as they were, without any hiccups.
    • People will also be able to post and share content on their pages without any disturbance.
    • Social media intermediaries such as Twitter, Facebook, and Instagram have so far not appointed any officer or contact person as required under the new rules.
    • They have also failed to submit monthly action taken reports on grievances and complaints submitted to them by users. Thus, protection under Section 79 of the IT Act does will not hold for them.

    Liabilities with the new rules

    • Further, Rule 4(a) of the IT Rules mandates that significant social media intermediaries must appoint a chief compliance officer (CCO) who would be held liable in case the intermediary fails to observe the due diligence requirements.
    • This means that if a tweet, a Facebook post or a post on Instagram violates the local laws, the law enforcement agency would be well within its rights to book not only the person sharing the content but the executives of these companies as well.

    Global norms on safe harbour protection

    • As most of the bigger social media intermediaries have their headquarters in the US, the most keenly watched is Section 230 of the 1996 Communications Decency Act.
    • This provides Internet companies a safe harbour from any content users post of these platforms.
    • Experts believe it is this provision in the US law that enabled companies such as Facebook, Twitter, and Google to become global conglomerates.
    • Like Section 79 of India’s IT Act, this Section 230 states that “no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider”.
    • This effectively means that the intermediary shall only be like a bookstore owner who cannot be held accountable for the books in the store unless there is a connection.

    Repercussions of the rules in India

    • WhatsApp has approached the Delhi High Court challenging the new Rules which include a requirement for social media platforms to compulsorily enable “the identification of the first originator of the information” in India upon government or court order.
    • It argued that this provision forces it “to break end-to-end encryption on its messaging service, as well as the privacy principles underlying it.

    Must read:

    [Burning Issue] New IT Rules 2021

  • What is Global Minimum Corporate Tax?

    Global_Minimum_Corporate_Tax

    The US has anticipated support from the G7 industrial democracies for the Biden Administration’s proposed 15%-plus global minimum corporate tax.

    Multinational corporations rather monopolies don’t like to pay their fair share of taxes. They’ll do everything in their power to exploit loopholes and minimize their tax liability. Most companies simply open offices in destinations where tax rates are low or negligible. And at the end of it all, they’ll have done just enough to avoid paying billions of dollars in taxes.

    Global Minimum Corporate Tax

    • Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
    • Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions.
    • This has allowed companies to avoid paying higher taxes in their traditional home countries.
    • With a broadly agreed global minimum tax, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage.

    How would such tax work?

    • The global minimum tax rate would apply to companies’ overseas profits.
    • Therefore, if countries agree on a global minimum, governments could still set whatever local corporate tax rate they want.
    • But if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven.
    • The Biden administration has said it wants to deny exemptions for taxes paid to countries that don’t agree to a minimum rate.

    Back2Basics: Base Erosion and Profit Shifting (BEPS)

    • BEPS refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions.
    • It thus “erodes” the “tax base” of the higher-tax jurisdictions.
    • Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven.
    • It is alleged that BEPS is associated mostly with American technology and life science multinationals.