GLOBAL MINIMUM TAX

IN NEWS:

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

GLOBAL MINIMUM CORPORATE TAX:

• Corporate Tax is a direct tax levied on the net income or profit of a corporate entity from their business.
• Over the years, countries have resorted to slashing corporate tax rates to attract multinational corporations. This has led to the formation of tax havens and MNCs relocating to them.
• The proposal to impose a common global corporate tax concept was put forth by the US. The US proposal envisages a 21% minimum corporate tax rate. This is now agreed with modifications and jointly formulated by the G7 group.
• The idea is very much in line with the Pillar Two blueprint of OECD.

FEATURES:

• The tax proposal the G7 countries has two parts:

1. Countries around the world should tax their home companies' overseas profits at a rate of at least 15 percent.
2. Allow countries to tax a share of the profits earned by companies "that have no physical presence but have substantial sales", for instance through selling digital advertising.

• Governments could still set their local corporate taxes. 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.

WHY GLOBAL TAX?

• Prevent base erosion and profit shifting:
  • Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Companies with multiple branches spread across various jurisdictions transfer the bulk of their profit to countries that offer the lowest tax rate.
  • A global minimum corporate tax would deter the practice of using accounting schemes to shift profits to a few very low-tax countries.
• Bring stability to international tax system:
  • A global minimum tax rate can prevent countries from undercutting each other with low tax rates to attract investment.
• Tax intangibles:
  • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to tax havens, allowing companies to avoid paying higher taxes in their traditional home countries. A global tax will help tax such evasions.
• Promote better compliance:
  • The agreement that states that countries would have to revoke their respective digital services taxes after the imposition of a common global corporate tax, like France’s GAFA tax. This would benefit companies that rely on the digital medium to drive their profits.
• Tax digital businesses:
  • Reform the global tax system to make it fit for the global digital age and crucially to make sure that it’s fair, so that the right companies pay the right tax in the right places
• Improve government resources:
  • The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax revenue due to the use of offshore structures. A global tax can help India recover some of this lost revenue.
• Enhance global competitiveness:
  • With tax incentives neutralised, countries may have to compete on other factors like better regulatory regimes, ease of doing business, access to global talent, among others.

CHALLENGES:

• Attaining global consensus: The proposal has caused pushback from countries such as Ireland, which made a case for fiscal autonomy for smaller jurisdictions to compete with larger economies.
• Finalising rate: While the OECD was considering a 10-12% rate, the U.S. proposed a 21% rate. Even at 15%, it is unclear whether countries like Ireland would agree, given that it currently levies at a marginal rate of 12.5%.
• Question over sovereignty: Countries have stated that the proposal infringes upon their tax sovereignty and that the fight against unfair tax competition should not become a fight against competitive tax systems.
• Pandemic-induced crisis: As economies struggle amid the COVID-19 pandemic, a tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.

CONCLUSION:

• The idea would now be tabled before the Group of 20 (G20) states that are expected to convene in July for a meeting.