GLOBAL MINIMUM TAX

Base Erosion and Profit Shifting

Group of seven (G7) countries reached a consensus on increasing the global taxation on multinational giants. Global minimum tax will disincentivise multinational companies from tax base erosion and profit shifting (BEPS). BEPS are a set of techniques employed by private companies who have an international presence. It helps them to shift to low tax countries, otherwise called as tax havens, regardless of where they provide services. Tech giants like Amazon and Facebook are usually accused of engaging in BEPS. This leads to heavy losses specially for developing countries like India. Valuable revenue is lost and this affects directly affects development of a country.
Convention on BEPS is an initiative led by OECD and G20 countries. This will prevent private companies from exploiting the loopholes that exist in cross border taxation systems. BEPS convention will work alongside presently functional tax treaties but it will modify their application. It will provide a level playing field for domestic companies. It will also have a dispute resolution mechanism.
Like every law it will have a flip side as well. It will benefit many developing countries but will adversely affect low tax countries who were enjoying the benefits of a booming economy lead by investment. Many economies therefore oppose the convention. The lack of consensus thus stalls the progress of the convention. The organisation for Economic Cooperation and development (OECD) is engaged in negotiations with 140 countries on rules for taxing multinational digital services and eliminating tax base erosion. These long deliberations have not reached any conclusion.
Recent G7 meet is a ray of hope. Global minimum tax rate, decided at 15%, is a mechanism applicable to cross border profits. Governments would have the freedom to impose local corporate tax rate 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.
G7 countries have done their bit by agreeing to a minimum global corporate tax rate of at least 15% apart from the tax a company will pay to the country where they make sales. Now G20 meeting in July 2021 scheduled for Venice will have to show support to the proposal by G7. This will be the first step against tax base erosion. Although many countries will get the benefit from the agreement, there will be negative effect on low tax countries as they might bleed white. Ireland for example made huge profits from multinational companies. Hence Dublin resisted changes in tax rules in European Union. 15% global minimum tax which is decided by G7 is thought as too low according to many experts. Albeit it is a welcome first step. It promises a level playing field for businesses and a positive competition.

India and BEPS
India is an important player in BEPS project and has already amended few domestic laws to tackle the problems related to it. These laws include country-by-country reporting (CbCR), patent box tax regime, amendments to income tax rules amongst other such moves. India can reap the benefits of the convention if all the members adopt the the anti-abuse outcomes of BEPS. The recent developments make India sanguine about BEPS convention.