The stock of FDI in India, as per the Reserve Bank of India (RBI), is now about $220 billion or 12% of GDP. Multinationals have a long history here. It had a steady course – not counting the aberration in the 1970s, when IBM and Coca-Cola were sent packing. An RBI study says that the 745 foreign firms that have invested in India had an overall return on equity of about 13% in the year ended March 2011.

The Indian units of global consumer goods firms such as Hindustan Unilever, Nestle and Colgate-Palmolive have posted returns of over 95%, 110% and 150%, respectively, on an average during the last three years, more than double the 35-42% returns reported by Indian companies such as Dabur and Godrej Consumer (source: the Economic Times, August 22, 2012).

Some multinationals in India, however, have much higher returns and consequently much higher valuations. The market value of Indian affiliates of Suzuki, BAT, Holcim, Daichi Sankyo and Unilever had respectively 59, 44, 42, 32 and 15 percent of their global market value (source: Bloomberg). Nestle India is valued at 50 times its profits; more than double the ratio of its Swiss parent.

Obviously these companies are doing very well and some of them therefore pay more and more royalty fees to their parents. India, it therefore appears, may not after all be a bad destination for investment. The Economic Times reported on February 13 that Renault-Nissan alliance might, even now, step up investment in India.

Recently, the income-tax appellate tribunal (ITAT) ruled that a significant portion of advertising, marketing and promotional (AMP) expenses incurred by the Indian arms to promote the brand and trademarks of the multinational parent firms will be taxable in India. Further, Indian tax officials have served notices to Nokia, Shell, Vodafone and Hindalco for alleged transfer pricing manipulations to channelize profits to their subsidiaries in low- or zero-tax countries. While Vodafone and Shell India plan to challenge the tax notices, Nokia has argued that it is inconsistent with Indian standards of fair play and governance, and thus unacceptable. Industry lobbies and the media have termed the move to issue notices a breach of “friendlier and non-adversarial tax environment”.

Let us now see what the global views on this so-called problem of tax avoidance by MNCs are. OECD director Pascal Saint Amans has said in this regard that “If you are a multinational you will be able to reduce your taxes substantially because the international tax structure is completely out of date. Therefore, OECD urges global tax clampdown on MNCs.”

In Britain, a public accounts committee recently said, “Global firms that pay little or no taxes are an insult to British business. Three major companies found guilty, in this respect, are Starbucks, Amazon and Google. One specific example may interest readers. Barclays tried to avoid paying VAT of millions of pounds in a deal in which it outsourced computer work to India and Philippines and also transferred about 1,400 staff in UK to Accenture and then seconded back to Barclays without staff moving their desks. Britain is to lead a coordinated international crackdown of tax avoidance by global firms. Chancellor George Osborne said, “With Germany and now France, we have asked the OECD to take this work forward and we will make it an important priority of our G8 presidency next year."

In the US, tax avoidance has helped push corporate income tax revenue, as a share of all federal revenue, to historically low levels. According to the congressional research service, the share of corporate income taxes has fallen from a high of 32.1 percent of federal tax revenue in 1952 to just 8.9 percent in 2009. Meanwhile, payroll taxes – which almost every income earner, rich, middle-income and poor, must pay – have skyrocketed from 9.7 percent of federal revenue to 40 percent.

The problems in our taxation of multinational companies stem mainly from the complicated, often unworkable, approach used to try to determine how much of a corporation's worldwide earnings relate to its local activities and therefore are subject to local tax. In essence, the authorities must try to scrutinise every movement of goods and services between a multinational company's domestic and foreign operations, and then attempt to assure that a fair, "arm's length" "transfer price" was assigned (on paper) to each real or notional transaction.

The Guardian and Bloomberg have published extensive, well-researched stories describing the process by which multinationals succeed in minimising taxes in countries in which they do business. Here is an example: suppose a US multinational wants to sell high-margin Chinese-made products to German customers. It puts its IP in a tax haven, and requires its Chinese manufacturing affiliate to pay royalties. It converts its German distributor to a stripped-risk intermediary called a commissionaire to limit what would otherwise be sales margins taxable in Germany. Those profits are booked to a principal company in a European haven as compensation for assuming inventory risk. No profits are taxed in the US, and little in Germany (Source: Forbes, Transfer Pricing As Tax Avoidance, June 25, 2010).

All this calls for global cooperation and even tax-sharing arrangements in order to plug loopholes and ensure tax compliance. An overhaul of global tax rules would also overcome constraints of a web of bilateral tax treaties that shield MNCs now.