Thanks to prodding by India as the incumbent G20 Chair, the OECD announced during the recent meeting of G20 finance ministers and central bank governors that it would “explore the scope” of standardised, automatic information-sharing among countries on cross-border real estate holdings and deals. To start with, “readily available” data would be shared “on a voluntary basis,” via existing gateways, but the aim is to shift to a model giving government agencies direct access to real-time data, it said. The move by the global body may seem largely symbolic for now. Yet, it signals that the intent to prevent any erosion of the recent gains in global tax transparency is reasonably strong. The concerns over durable fiscal capacity have tended to rise in recent years, with the world struggling to deal with a protracted economic turmoil. Rich nations are no exception to this.
The OECD’s move immediately followed the decision of 136 countries to tie themselves to its two-pillar global tax reform plan. It was also a logical extension of the crypto-asset reporting framework, which it approved in last August. The two-pillar plan aims to ensure that each country will get a share of the tax on profits earned in its jurisdiction, even if it is collected elsewhere. It also seeks to arrest the “race to the bottom” among countries as far the corporate tax rate is concerned, with the endorsement of a minimum tax of 15% on multinational companies’ global income.
While the ongoing global drive for tax transparency is beneficial to most countries, its success is far more critical to India. The country is home to 180 million of the world’s poor, but has tax and other fiscal resources far unequal to the huge public investments required to meet the sustainable development goals. Despite the steps taken by the government over the years to expand the tax base, India’s tax-GDP ratio has stagnated at around 20%, a far cry from the rates even among peers like Brazil (31%) and South Africa (27%).
Cross-border real estate holdings are an increasing tool for HNIs and the super-rich to hide wealth and evade tax. The shift to this asset class has gained momentum, even as financial information exchange within and among countries has increased in currency and usefulness. It is significantly more difficult now to hide assets like or obfuscate beneficial ownership via complex corporate layering. The realty sector largely escaped this information network and sleuthing. To illustrate, 80% of the real estate money laundering cases in the US are being traced to funds originating from outside that country, including India. There are growing instances of India HNIs being booked in money laundering cases in the US, UK and elsewhere.
At the same time, anecdotal evidence suggest inequality in India is only turning starker, exposing the inadequacy of tax incidence at the top of the income pyramid. With India’s corporate tax rate being slashed to the level of advanced economies, the rich have an incentive to transfer wealth to incorporated firms and start-ups, and aid capital formation in the economy. Tracking tax evaders among them more aggressively would help expedite this shift. It is an exaggeration to say that the rising trend of HNI migration is caused by tax bite. To be sure, only a small fraction of the rich would still migrate, and even they leave the country for quality jobs, better education, and in search of higher standards of life.