Global Minimum Corporate Tax

What does this mean? What are its implications? How its going to affect India among other nations?

If you’re a firm that makes tremendous profits year after year by moving money to low-tax jurisdictions, you’re in for some unpleasant news.

Gone are the days when you could produce a lot of money from both tangible and intangible sources, move your money from high-tax countries to low- or no-tax countries, and enjoy the numerous delights of money.

The finance ministers of the world’s seven richest and most affluent countries met in London to continue their ongoing conversation about the global problem of multinational firms evading taxes. The meeting resulted in the ministers agreeing to a minimum global company tax rate of at least 15% at the same table. “After years of discussion,G7 Finance Ministers have reached a historic agreement to reform the global tax system to make it for global digital age”. British finance minister Rishi Sunak told reporters when asked about the same. He expressed gratitude to all of his G7 counterparts for finally being able to reach a historic landmark agreement that would tackle the issue of profit shifting by various firms.

The idea of a global minimum corporate tax isn’t new; there have been discussions about it before, but it has only recently gained traction as one of the world’s major leaders, the United States of America, has been attempting to deal with massive amounts of tax evasion by large American corporations such as Facebook and Amazon,and in same context, US Secretary of the treasury Jane Yellen reiterated the positive implications of having this minimum corporate tax accepted globally. Furthermore, the Biden administration has increased the corporate tax rate from 21% to 28%, and with such high tax rates, multinational firms will seek to open headquarters in nations where they will have to spend much less, resulting in a significant revenue loss for the US.

What does it mean?

As the name implies, the global minimum corporate tax (GMCT) is a tax that will be imposed on businesses and corporations all over the world; no country will be able to keep its corporate tax rates below the suggested minimum of 15%. This is the bare minimum that all governments must adhere to; there is no upper limit to such levies.

Why is it being proposed?

Corporate taxes account for a significant portion of a country’s total revenue. A nation must ensure the social welfare of its residents, which necessitates the expenditure of funds to invest in infrastructure, which will in turn provide jobs for its citizens. It can raise the funds it requires through a variety of methods, including borrowing from international financial institutions and borrowing from the general public. The revenue obtained by the first two methods creates an obligation for the country, but there is no such responsibility in the case of taxes. It is for this reason that taxes are essential for any country to meet its obligations.

Big businesses earn a lot of money and are continually looking for methods to avoid paying higher taxes. If the countries in which they primarily operate impose greater taxes, they attempt to shift their profits to low-tax jurisdictions such as Ireland (12.5 percent tax rate), the Bahamas (0% tax rate), and so on. As a result, their home countries receive less money, while lower tax jurisdictions receive more. According to the Tax Justice Network, the US Treasury loses roughly $50 billion each year as a result of the massive amount of Base Erosion Shifting System. Germany and France are also among the top losers, according to the same analysis.

This concept of a global minimum corporate tax rate was proposed in order to force multinational corporations to pay taxes in the countries where their businesses operate. Having a global minimum tax will ensure that these large corporations do not engage in profit shifting and tax evasion strategies, as well as that they do not compromise on innovation and the use of newly created technologies.

How will it be implemented?

Assume there is a country A with a 15% effective corporate tax rate, i.e. the GMCT, and another country B with a 5% effective corporate tax rate. For a corporation operating in nation A, a tax rate of only 5% would be an appealing force, and it would strive to discover ways to shift its profits to country B in order to avoid paying higher taxes. Opening subsidiaries in another country is one technique for a country to move its earnings to another country. As a result, firm A will establish a subsidiary in Country B and transfer a significant portion of its profit from activities in Country A to Country B. Now, if the subsidiary makes a profit of 100 crores, it will only have to pay taxes of 5%, that is, 5 crores. Following the implementation of the worldwide minimum corporation tax rate, country A can reduce 5 percent (tax in country B) from 15 percent (tax in country A) and require the firm to pay the resulting tax at the rate of 15-5=10% to the home country.

What are its implications?

The proposed global minimum business tax has both favorable and unfavorable consequences.
The following are some of the advantages:

  • Increased accountability of the global corporations.
  • Transparency in the system.
  • Increased employment opportunities in the traditional country.
  • Increased capital formation in the home country.
  •  Reduced liabilities for a nation, liabilities created by internal and external borrowings.
  • Negative Implications:-

    • The investments made my these big multinational companies in lower tax countries are the major source of revenue of those nations. Implementing minimum tax rate would take away a major part of their revenue.

  • A number of employment opportunities are created by companies in poor countries, implementation of new tax regime will devoid them of such opportunities.
  • Foreign direct Investment(FDI) to poor countries will reduce, making it difficult for them to fulfill their import needs.
  • The problem of avoiding the payment of taxes by rampant exploitation of loopholes will still remain.
  • Tax collection is a sovereign right of any nation, that makes it more difficult for making all the nations agree on this
  • proposal.

    What are the challenges in its implementation?

    As already mentioned above, the profits that MNCs shift to lower tax jurisdictions result in creation of newer employment opportunities in such countries and this in turn ensure the welfare of its citizens. A number of poor countries don’t have enough resources to raise money for infrastructure development, the investments made by global companies provide them money to develop required infrastructure and to ensure the fulfillment of other requirements. Considering the importance of such investments in poor countries, its challenging to get them on board.

    Countries such as Ireland, Bahamas, Bermuda and Caribbean nations have benefited to a large extent from the ongoing profit shifting system and its not easy to make all of them agree on foregoing a large amount of money.

    Another global power apart from USA, i.e., China would also pose difficulty in its implementation as Hong-Kong is one of the major tax havens and generates money through foreign direct investments. Also, there is major trade war going on between China and USA and China would not so easily bend down to something proposed by US.

    How it is going to affect India?

    India too isn’t immune to the huge loss caused by the tax evasions of its corporations. According to Tax Justice Network, based in U.K., India loses $10.3 annually to the global tax abuse by multinational corporations. So, the implementation of proposed tax system would mean increased revenue for the government of India and reduction in huge borrowings done by the government.

    According to a report brought out by Press Trust of India, the experts in tax domain believe that India will be most likely benefiting from the GMCT as the effective corporate tax rate in India is 22%, much less than the proposed minimum tax rate of 15% and so India will keep attracting the global companies to come and invest in the country. Also, according to Rakesh Nangia, the chairman of Nangia Andersen India, the major points of attraction in India for Big MNCs are its large internal market, quality labor at cheap rates, strategic locations for exports and a prospering private sector. So, overall, India won’t be much affected even if the implementation of global corporate minimum tax comes into force.

    On the other hand, there are prevailing concerns in India that a lot of companies such as e-commerce ones have a “significant presence in India” but still do not pay taxes to the country. And for this only. the country advocated the idea of implementing ” equalization levy” in 2016. Post 2016, this concept of equalization levy has been extended to e-commerce companies as well. The levy aimed at taxing the income earned by such multinational companies who don’t have any permanent physical presence in India but generate huge amount of income from the country. 

    India has also signed a pact with US for the exchange of country by country report(cbc), through which if there is any US company operating in India through its subsidiaries, it would provide reports about its total revenue to US administration and US will in turn, provide the same to India so that India can tax the generated income according to its tax rates.

    India has also implemented the Multilateral Convention to implement Tax Treaty related measures to prevent Base Erosion profit shifting and ratified the same.

    India already has implemented above discussed reforms in order to ensure the payment of required taxes from global companies. Considering this, India need to be careful of not driving these companies away from India because of a large number of already existing regulations.

    The landmark deal will be discussed once again in the presence of all the countries constituting the group of 20 (G-20) and based on those discussions, further implementation challenges will be worked upon.