Global Minimum Corporate Tax

Why in news?
  • A landmark agreement was signed by the Finance Ministers of the Group of Seven nations (G7) setting a Global Minimum Corporate Tax Rate (GMCTR).
  • They agreed to a global minimum corporate tax rate of 15%.
  • The rationale is to discourage multi-national corporations from shifting their operations to offshore units solely to take advantage of tax benefits.
Why USA initiated it?
  • The proposal was initially floated by USA as it plans to pump in massive amounts in its infrastructure in the years to come.
  • This push will be funded from the planned higher Corporate Tax Rates (28% from current 21%).
  • A Global Minimum Corporate Tax Rate (GMCTR) is therefore necessary for USA to prevent Base Erosion and Profit Shifting.
What is Base Erosion and Profit Shifting (BEPS)?
  • BEPS is a practice by MNCs of artificially shifting profits from the country where they are generated to those countries which have low or no taxes (tax havens).
  • Intangible incomes such as patents on pharmaceuticals, software, and royalties are shifted to low tax jurisdictions thus reducing tax burden in home countries.
  • This is unfair to the country where the profits are generated as well as to those companies which operate domestically.
  • As per OECD, countries are loosing between 100bn $ to 240bn $ annually due to BEPS.
  • BEPS Action plan: Post 2008 financial crisis OECD and G20 came together to formulate this plan to prevent BEPS. India is also a signatory to this plan.
Global Minimum Corporate Tax (GMCT) :
  • Corporate Tax is a direct tax imposed on the net profits or income of corporate entities.
  • GMCT represents the minimum tax amount companies must pay on their foreign and domestic profits.
  • It prevents profit shifting to tax havens so that home governments can charge a certain minimum tax rate.
Benefits of Global Minimum Corporate Tax:
  • Uniformity: It will bring uniformity in tax rates and help avoid the irrational competition of ultra-low tax rates and exemptions.
  • Reduce Tax Loss: It will prevent countries from losing revenue because of lower tax rates in offshore locations like Ireland, British Virgin Islands, Bahamas, Panama, etc.
  • Sustainable Business Environment: It will create healthy competition as countries will have to compete on other factors like regulatory regimes, ease of doing business, etc.
  • Level Playing Field: It will help domestic companies to effectively compete with MNCs.
  • G7 deciding for the World: The grouping of G7 is of developed economies and these countries thrusting their priorities on others may not be liked by others.
  • Better transparency, compliance and accountability: It will ensure integrity of tax systems and better compliance leading to higher tax incomes.
  • Economic revival: The additional revenue generated from this will help to revive the economy of pandemic affected countries.
  • Sovereignty: Taxation is a sovereign function and arguably GNCTR violates it. Under Article 2(1) of the UN charter, every nation is granted the right to formulate its own domestic policy.
  • Consensus building: It will be difficult to build consensus over the issue between the developed and developing World.
  • Developing countries: Lower tax rates is an attractive incentive used by developing countries to counter the advantages of developed nations in attracting investments. In its absence, the economic balance of power will decisively shift in favour of developed countries.
Impacts on India:
  • India has been part of the Pillar Two discussions of OECD and has not objected in principle to the proposal.
  • 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.
  • India has therefore ratified Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
  • India is set to benefit from this measure as it will plug BEPS happening from India.
Posted by Jawwad Kazi on 1st Jul 2021