GLOBAL MINIMUM CORPORATE TAX RATE
Why in News?
Recently, Finance Ministers from the Group of Seven (G7) nations reached a landmark accord on backing a global minimum corporate tax rate of at least 15%. A group of the world’s richest nations reached a landmark deal to close cross-border tax loopholes used by some of the world’s biggest companies.
About Global Minimum Corporate Tax
- Governments have long grappled with the challenge of taxing global companies (such as Google, Amazon and Facebook) operating across many countries. Such companies generate huge revenues but pay very little tax because they set up offices for tax purposes in low-tax jurisdictions (tax havens).
Also, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
- Global Minimum Corporate Tax is an additional tax imposed on large multinational companies (MNCs), potentially forcing them to pay taxes to countries based on where their goods or services are sold, regardless of whether they have a physical presence in that nation. It will undercut any advantage of shifting to lower-tax places and pressures countries to conform to the global norm.
How would a global minimum tax work?
The global minimum tax rate would apply to overseas profits. 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 minimum rate, eliminating the advantage of shifting profits.
The OECD said that governments broadly agreed on the basic design of the minimum tax but not the rate. Other items still to be negotiated include whether investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring it is compatible with U.S. tax reforms aimed at deterring erosion
Impact on India
1. India is likely to benefit as the effective domestic tax rate is above the threshold, and the country would continue to attract investment. In 2019, India announced a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%. The cuts effectively brought India’s headline corporate tax rate broadly at par with the average 23% rate in Asian countries.
2. In respect of outbound investments, it will prevent base erosion of tax in the country as the government will be able to claw back any shortfall in tax paid below 15% by an overseas business owned by an Indian resident
3. India has already been proactively engaging with foreign governments in double taxation avoidance agreements, tax information exchange agreements, and multilateral conventions to plug loopholes. This proposal of a common tax rate, thereby, adds no further benefits to India.
Need for a Global Minimum Corporate Tax Rate
- Bringing uniformity: It is aimed at ending a decades-long “race to the bottom” in which countries have competed to attract corporate giants with ultra-low tax rates and exemptions.
- Check on tax havens: It neutralizes the low tax incentive and will discourage multinationals from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
- Additional tax revenue to fight pandemic: According to estimates, governments lose $245 billion annually to tax havens. If that money were instead available to governments, they could use it for, among other things, managing their heavy costs for pandemic relief.
- Boost to global economy: by leveling the playing field for businesses and encouraging countries to compete on positive bases, such as educating and training their work forces and investing in research and development and infrastructure.
- Allow taxing global digital MNCs: It will be giving a right to tax a slice of profits of large digital MNCs and will put an end to various digital taxes that have proliferated around the world, similar to equalization levy in India.
- Global consensus: There are challenges of getting all major nations on the same page, especially since this impinges on the right of the sovereign to decide a nation’s tax policy.
Ireland, which has a tax rate of 12.5 percent, has come out against the global minimum tax, arguing that it would be disruptive to its economic model.
- Consensus on tax rate: a minimum tax of 15% may not raise substantial revenues and there is a possibility that other countries may want a higher minimum global tax rate.
- Impact on socio-economic development in developing/ least developed countries: MNCs are a source of foreign direct investment (by lowering tax rates). These corporations help to generate demand with efficient utilisation of resources and create employment in low-income countries.
- Right to sovereignty: Any global minimum tax operates to limit a national government’s ability to exercise tax policy how it sees fit.
- Issue of Digital taxation: Global minimum tax’s lack of clarification on the issue of digital taxation may be further dissuasion to countries like India, who are not in the stage of development so as to not differentiate between distinct sectors and industries.
Significant outcomes of the G7 summit (Carbis Bay Declaration)
• G7 to secure a further 1 billion COVID-19 vaccine doses (over next 12 months either through donating surplus supplies or providing further finance to Covax, UNbacked scheme to distribute vaccines to low- and middle-income countries.
• G7 to increase their climate finance contributions and meet an overdue spending pledge of $100 billion a year to help poorer countries cut carbon emissions.
In a post-Covid world, where all countries will be looking to rejuvenate their economies, there may be some concerns that a global minimum tax could cause that economic recovery to stutter, particularly in countries that are heavily reliant on the inward investment encouraged by tax incentives. Also, some governments believe that an element of appropriate tax competition should still be allowed by any global minimum tax regime, especially for smaller nations in order to enable them to compete with larger countries that have inherent economic advantages. Therefore, there is a need to build a consensus among countries so that the pandemic ridden world is able to come out fast of its economic problems and efforts of development can be speeded up in all the countries of the world.
Questions that could be expected in exam:
Question 1. What is Global Minimum Corporate tax(GMCT)? How do you see the recent meeting of Finance ministers group of G7 nations backing GMCT at minimum rate of 15 percent?
Question 2. In what way Global Minimum Corporate Tax is beneficial to India. Discuss.
Question 3. Explain why does world needed Global Minimum Tax? Also state the hurdles in setting a global Tax rate.