GLOBAL MINIMUM TAX - ECONOMY
News: Explained
| The minimum tax on big businesses
What's in the news?
● Members
of the European Union last week
agreed in principle to implement a minimum
tax of 15% on big businesses.
● Last
year, 136 countries had agreed on a plan to redistribute tax rights across
jurisdictions and enforce a minimum tax rate of 15% on large multinational
corporations.
● It
is estimated that the minimum tax rate would boost global tax revenues by $150
billion annually.
Global Minimum Tax:
● EU
members have agreed to implement a minimum tax rate of 15% on big businesses in
accordance with Pillar 2 of the global tax agreement framed by the Organization
for Economic Cooperation and Development (OECD) last year.
● Under
the OECD’s plan, governments will be equipped to impose additional taxes in
case companies are found to be paying taxes that are considered too low.
Why Minimum Tax?
● To
ensure that big businesses with global operations do not benefit by domiciling themselves
in tax havens in order to save on taxes.
● Large
multinational companies have traditionally paid taxes in their home countries
even though they did most of their business in foreign countries. The OECD plan
tries to give more taxing rights to the governments of countries where large
businesses conduct a substantial amount of their business. As a result, large
U.S. tech companies may have to pay more taxes to governments of developing
countries.
What is the need for a global minimum tax?
● Corporate tax rates
across the world have been dropping over the last few decades as a result of
competition between governments to spur economic growth through greater private
investments.
● Global
corporate tax rates have fallen from over 40% in the 1980s to under 25% in
2020, thanks to global tax competition that was kick-started by former U.S.
President Ronald Reagan and former British Prime Minister Margaret Thatcher in
the 1980s.
● The
OECD’s tax plan tries to put an end to
this “race to the bottom” which has made it harder for governments to shore
up the revenues required to fund their rising spending budgets.
● The
minimum tax proposal is particularly relevant at a time when the fiscal state
of governments across the world has deteriorated as seen in the worsening of
public debt metrics.
Significance of Global Minimum Corporate Tax:
● It
would discourage Multinational Companies
to shift their operations to offshore units merely for tax benefits.
● It
would ensure the imposition of a
realistic and uniform corporate tax throughout the world. Over the past
decades, many countries have attracted investment merely by lowering corporate
tax rates. This, in turn, has pushed other countries to lower their rates as
well.
● It
will end the global “race to the bottom”
and help governments collect the revenues required for social spending.
● It
will prevent revenue loss to countries
that occurred on account of lower tax structure in offshore destinations like
Ireland, British Virgin Islands, Bahamas, Panama, etc. Countries lose out an
estimated $100 billion per year in tax revenue due to the absence of GMCT.
● It
would induce the countries to compete on
other factors like better regulatory regimes, ease of doing business,
access to global talent, etc. This healthy competition would create a
sustainable business environment for them.
● It
will prevent the unilateral imposition
of domestic laws by the developed world over the developing countries. For
instance, the US is determined to impose its domestic law version of Pillar Two
at a rate of 21% if 15% GMCT is not adopted.
Challenges ahead:
● It
curtails a nation’s sovereignty.
Every nation possesses an independent right to formulate its domestic policy
based on sovereignty granted under Article 2(1) of the UN charter. Many nations
may reject GMCT on the basis of their sovereign rights.
● Adoption by a few
countries and rejection by others may not yield the
intended results. For the effectiveness of GMCT, it should be adopted uniformly
by all nations.
● The
15% rate may be more for some countries
and less for others. For instance, experts believe the US Congress may not
agree to the 15% proposal, as it was earlier backing a 21% rate. The 15% rate
would generate less revenues. Similarly, nations like Ireland where the tax
rate is 12.5% may reject the proposal as it would impair fiscal autonomy for
smaller jurisdictions to compete with larger economies.
● The
GMCT would be levied by the country where the ultimate parent entity resides.
This may cause a disproportionate tilt in the magnitude of economic power
towards the U.S. as around 30 percent of the Forbes 2000 companies are located
there.
India and Global Minimum Corporate Tax Rate:
● The
Indian Government has said that India is open to participate and engage in
discussions about the Global Minimum corporate tax structure. It would generate additional revenue for the
country.
● The State of Tax Justice
report of 2020 states that India loses over $10 billion in tax revenue due to
the use of offshore structures. The popular
locations include Mauritius, Singapore, and the Netherlands where there is an
almost negligible rate of taxation.
● If
passed, the Indian government can impose a tax on offshore subsidiary units of
Indian companies. The taxation can be to such a level that it enables the
imposition of an effective Global Minimum Corporate Tax on every company.
● Further,
the effective tax rate, inclusive of surcharge and cess, for Indian domestic
companies is around 25.17%. This is above the 15% GCMT, indicating that the
country would continue to attract investment.
WAY FORWARD:
● The
Indian government should look into the pros and cons of the new proposal and take
a view thereafter. It should continue to impose a 2% digital service tax on
foreign companies in order to decrease the magnitude of tax base erosion due to
non-taxation.
● The
next G20 meeting will see whether the G7 accord gets broad support from the world’s
biggest developed and developing countries or not. Here, the countries should
develop a consensus over the proposed rate and the categories to which GMCT
should be applied.
● For
instance, in recent times, the companies have increasingly shifted their income
from intangible sources such as drug patents, software and royalties on
intellectual property to low tax jurisdictions.
● Post
its adoption by G20 countries, prudent steps must be taken for its adoption by
all the UN members to inhibit the creation of tax havens across the world.
The
Global Minimum Corporate Tax is a novel way of bringing parity in the taxation regimes of countries. It should be
adopted at a rational rate and with a consensus of both, the developed and
developing countries. A prudent rate would effectively prevent tax base erosion
of the higher-tax jurisdictions.