Global Minimum Tax

In News

Recently, Finance Ministers from the Group of Seven (G7) nations reached a landmark accord setting a global minimum corporate tax rate.

About

• The G-7 countries would back a minimum global corporation tax rate of at least 15%, and put in place measures to ensure taxes were paid in the countries where businesses operate.
• It will be a reform of the global tax system to make it fit for the global digital age.
• The Organization for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion and profit shifting (BEPS), including a global corporate minimum tax.

Functioning of Global Minimum Tax

• The global minimum tax rate would apply to companies’ overseas profits. Therefore, if countries agree on a global minimum tax, governments could still set whatever local corporate tax rate they want.
• 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.
• Other items still to be negotiated include- 
  • whether industries like investment funds and real estate investment trusts should be covered;
  • when to apply the new rate and 
  • ensuring it is compatible with the 2017 U.S. tax reforms aimed at deterring tax-base erosion.

Significance

• Uniformity of Tax: This will reach an equitable solution on the allocation of taxing rights. It paves the way for changes in global tax treaties pursuant to the consensus being reached.
• Curbing Tax Evasion: Major economies are aiming to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made. It will help those initiatives.
• Extra Tax: The minimum is expected to make up the bulk of the $50 billion-$80 billion in extra tax that the OECD estimates firms will end up paying globally under deals on both fronts.
• Prevent cross-border taxation: It will put in place measures to ensure businesses pay taxes in the countries where they operate, a move aimed at plugging loopholes in cross-border taxation.
• Ending Digital Taxes: It will put an end to the various digital taxes that have proliferated around the world similar to the equalization levy in India.

Issues 

• Affects Companies: The global minimum rate impacts companies using low-tax jurisdiction to achieve low global tax cost. Any final agreement could have major repercussions for low-tax countries and tax havens.
• Loss of Revenue: A minimum tax of 15 per cent may not raise substantial revenues. Rich nations have already struggled for years to agree on a way to raise more revenue from large multinationals such as Google, Amazon and Facebook, which often book profits in jurisdictions where they pay little or no tax.
• Loss of Investments: Some low-tax European jurisdictions such as the Netherlands, Ireland and Luxembourg and some in the Caribbean rely largely on tax rate arbitrage to attract MNCs. There is a possibility that other countries may want a higher minimum global tax rate to compensate for the loss.
• Achieving Consensus: The global pact would face the challenge of getting other major nations on the same page, since this impinges on the right of the sovereign to decide a nation’s tax policy. The battle for low-tax countries will be more about building support for a minimum rate as close as possible to its 12.5% or seeking certain exemptions.

Suggestions

• Decide on the metrics that will determine how and to which multinational companies the tax will be applied. 
• Formulate policy or rules on what will happen in the meantime to digital services taxes on big technology companies in various jurisdictions.

Impact on India

• India is likely to benefit from the global minimum 15 per cent corporate tax rate pact inked by the world’s richest nations as the effective domestic tax rate is above the threshold.
• India is expected to benefit as it is a big market for a large number of tech companies. Moreover, India attracts foreign investment owing to its large internal market, quality labour at competitive rates, strategic location for exports and a thriving private sector.
• In all probability, the concessional Indian tax regime would still work, and India would continue to attract investment.
• The global corporate tax pact is a path breaking one, especially for large and developing countries like India which would always find it very difficult to keep corporate tax rates artificially lower in a bid to increase much needed foreign direct investments in the country.

Conclusion

• The Global Minimum Tax is a landmark step toward the global consensus necessary to reform the international tax system.
• There should be appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes.
• If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an accord.

Sources: TH