Global minimum corporate tax rate
07/06/2021

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Context:

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

About:

  • G7 has backed a minimum global corporation tax rate of at least 15%.
  • They also seek to put in place measures to ensure that taxes are paid in the countries where businesses operate based on the principle of ‘Significant Economic Presence’.

How would a global minimum tax work?

  • The global minimum tax rate would apply to overseas profits of a multinational.
  • The envisaged framework allows individual governments to 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, thus eliminating the advantage of shifting profits.

Reasons for the move:

  • A global minimum corporate tax will allow the major economies to discourage multinationals from shifting profits — and tax revenues — to low-tax countries.
  • This proposal from the major economies aims to reduce tax base erosion without putting their firms at a financial disadvantage, allowing competition on innovation, infrastructure, and other attributes.

Significance:

Reduce tax base erosion:

  • This measure will help close cross-border tax loopholes used by some of the world’s biggest companies, thus will help limit base erosion and profit sharing (BEPS).
  • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to the low tax jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
    • As per some estimates, countries are losing $427 billion every year to tax havens. India suffers an annual loss of $10.3 billion from global tax abuse.

In tune with changed pattern of economy:

  • This agreement marks a much necessary reform of the global tax system to make it fit for the current global digital age where cross-border digital services are gaining prominence.

End the so-called race to the bottom and its negative consequences:

  • The introduction of a global minimum corporate tax will contribute to ending the decades-long “race to the bottom on corporate tax rates”, in which countries have resorted to ultra-low tax rates and tax exemptions to lure multinationals companies to invest.
  • Such measures have cost such countries hundreds of billions of dollars whereas the corporate entities have only grown richer.

Form the basis of a global pact:

  • This landmark agreement could form the basis of a worldwide deal.
  • The Organization for Economic Cooperation and Development has been coordinating tax negotiations among 140 countries on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax. The OECD and G20 countries aim to reach consensus on both by mid-year.

Move towards more equitable taxing rights:

  • The agreement has committed to reaching an equitable solution on the allocation of taxing rights. It will focus on protecting the interest of the market countries by awarding such countries certain degree of taxing rights on the profits of the multinational enterprises.
  • This will help ensure that MNCs would pay taxes where they operate and record their profits from based on the concept of ‘Significant Economic Presence’.

Challenges:

  • Any final agreement could have major repercussions for low-tax countries and tax havens and is bound to be opposed by such countries.
  • Though there seems to be broad agreement on the framework of a global minimum corporate tax, there continue to be differences over the rate of such a tax.
  • The inclusion of investment funds and real estate investment trusts under such a system could also lead to some differences during the negotiations.
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