Definition:

• Cross-border taxation is the term used to describe the tax-related legal and financial responsibilities that develop when people or businesses operate in many countries and are subject to the tax laws of those nations.
• International tax rules on allocating taxing rights among countries were designed a century ago. 
• Changing business models and a heavy reliance on intangibles rather than capital and labour to generate profits mean they are in certain cases no longer fit for purpose. 
• In particular, existing rules rely on a concept of physical presence for deciding tax calculations, and fail to allocate taxing rights in situations where highly digitised companies can earn substantial profits in a jurisdiction without the need for a physical presence. 
  • Eg: Google has headquarters in the US but has operations in different parts of the world.
• After the Economic crisis(2008), the very low rates of taxes paid by the MNCs was noticed and the G20 gave Organisation for Economic Cooperation and Development(OECD) the responsibility of creating a suitable framework.
• In the next decade, OECD worked with developed and developing countries to find a suitable solution. This process is not yet complete.
• Meanwhile, developing countries have come together under the United Nations Organisation(UN) to form a similar framework.

Issues in Cross Border Taxation:

• Profit Shifting by Multinationals: MNCs shift profits to low-tax countries which reduces tax demands in countries where they operate.
• Tax Competition: Different countries compete by offering low tax rates or preferential terms, encouraging businesses to relocate profits. This affects fair tax collection in other nations.
• Redistribution of Taxing Rights: Disputes over where large corporations, especially tech companies, should pay taxes, whether in the country of residence or where economic activities (markets) occur.
• Complexity of International Tax Solutions: Efforts by the OECD to address tax avoidance have led to complex rules and measures, frustrating countries and stakeholders.
• Sovereignty in Tax Policy: Countries want to retain control over their own tax policies, making it difficult to forge consensus on global tax frameworks.
• Transparency and Inclusivity: Processes in global tax negotiations, like the OECD’s Inclusive Framework, have been criticised for being opaque, with calls for more transparency and equitable representation in decision-making.
• Illicit Financial Flows: Efforts to tackle illegal cross-border financial flows are slow and  complex, mainly in the context of global services and digital transactions.
• Divergent Economic Interests: Countries and regional groups have different economic priorities, making it hard to achieve a unified approach to cross-border taxation. This prolongs the negotiation to form a global framework.

Measures to overcome the issues:

• Global Tax Convention via the UN can be established with transparent, equitable processes for decision-making. 
  • This would involve electing committee members on an equitable basis and publicising country votes to promote accountability and transparency.
  • Rather than duplicating the work done by the OECD, the UN tax body should focus on building and integrating existing frameworks. This will prevent the duplication of efforts and reduce administrative burdens.
• Fair Redistribution of Taxing Rights: Develop clear guidelines to allocate taxing rights between the country of residence (where corporations are headquartered) and the country where economic activities occur (markets), especially for digital services. The goal should be to ensure both developed and developing countries receive a fair share of tax revenue.
• Addressing Tax Competition and Preferential Treaties: Global standards to reduce harmful tax competition between countries should be established.
  • This can involve setting minimum tax rates or limiting preferential terms in bilateral tax treaties that erode the tax bases of other countries, particularly developing nations.
• Sovereignty-Respecting Solutions: It should be ensured that any global tax agreement respects national sovereignty while committing to fair tax rules. This balance could be achieved by allowing flexibility in how countries implement global standards while maintaining overall consistency.
• Inclusive Framework with Developing Country Representation: Participation of developing countries in global tax negotiations, ensures that their concerns are heard and addressed. This can be done through equal representation on negotiation committees and co-chairing roles for developing nations.

• Simplification of International Tax Rules: Avoid too many complex solutions by simplifying international tax rules to make them more practical and accessible for all countries, especially those with limited technical capacity.
• Focus on High-Net-Worth Individuals: Expand the scope of international tax frameworks to include measures that prevent tax evasion and avoidance by high-net-worth individuals.

Conclusion:

• Increasing globalisation and digitalisation calls for clear guidelines and frameworks for cross border taxation. 
• The mechanism created by the OECD and the UN can be brought together to create a robust framework which can ensure equitable division of the tax income.