Global Minimum Tax Deal

In News

• Recently, a global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 136 countries.

What will the global minimum tax deal mean?

• Meaning: The new proposal is aimed at squeezing the opportunities for MNEs to indulge in profit shifting, ensuring they pay at least some of their taxes where they do business.
• Negotiation by OECD: The two-pillar package – the outcome of negotiations coordinated by the OECD for much of the last decade – aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits, while adding much-needed certainty and stability to the international tax system.
  • Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
  • Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.

• Signed by: One hundred and thirty-six countries, including India, agreed to enforce a minimum corporate tax rate of 15%, and an equitable system of taxing profits of big companies in markets where they are earned. 
• Not yet signed: Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – had not yet joined the agreement, but the countries behind the accord together accounted for over 90% of the global economy.

Who are the targets?

• Apart from low-tax jurisdictions, the proposals are tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations, including Big Tech majors such as Apple, Alphabet and Facebook, as well as those such as Nike and Starbucks.
  • These companies typically rely on complex webs of subsidiaries to hoover profits out of major markets into low-tax countries such as Ireland, the British Virgin Islands, the Bahamas, or Panama.
• The US loses nearly $50 billion a year to tax cheats, according to the Tax Justice Network report, with Germany and France also among the top losers. 
• India’s annual loss due to corporate tax abuse is estimated at over $10 billion.

Working of tax deal

• Applicable to: The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally. 
• Local Tax Valid: Governments could still 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 15% minimum, eliminating the advantage of shifting profits.
• Excess Profit: A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.

Significance of the tax

• Fair Share: A majority of the world’s nations have signed a historic pact that could force multinational companies to pay their fair share of tax in markets where they operate and earn profits. 
• Ending Tax competition: The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.
• Necessary for Government: With budgets strained after the COVID-19 crisis, many governments want more than ever to discourage multinationals from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
• Patent angle: Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

Economic Impact

• Revenue generation: The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
• Shift to source countries: Taxing rights on more than $125 billion of profit will be additionally shifted to the countries where they are earned from the low tax countries where they are currently booked.
• Boost to Home Economies: The deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
• Limits Impact on Low Income Countries: Various deductions and exceptions baked into the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups base their European operations.

Where does India stand?

• Reservation to accepting: 
  • India has had reservations about the deal, ultimately backing it in Paris. 
  • India is likely to try and balance its interests, while asserting that taxation is ultimately a “sovereign function”. 
• Withdraw: 
  • India may have to withdraw its digital tax or equalisation levy if the global tax deal comes through. 
  • OECD said the Multilateral Convention (MLC) will “require all parties to remove all Digital Services Taxes and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future.”
• Equalisation levy: 
  • To address “the challenges posed by the enterprises who conduct their business through digital means and carry out activities in the country remotely”, the government has the ‘Equalisation Levy’, introduced in 2016. 
• Amended IT  Act:
  • Also, the IT Act has been amended to bring in the concept of “Significant Economic Presence” for establishing “business connection” in the case of non-residents in India.
• Investment activity:
  • There are apprehensions on the impact of this deal on investment activity. 
  • India, China, Estonia and Poland have said the minimum tax could harm their ability to attract investment with special lures like research and development credits and special economic zones that offer tax breaks to investors.
• Plugging loopholes: India has already been proactively engaging with foreign governments in double taxation avoidance agreements, tax information exchange agreements, and multilateral conventions to plug loopholes. This proposal of a common tax rate, thereby, adds no further benefits to India.

Challenges

• Getting all major nations on the same page.
• It impinges on the right of the sovereign to decide a nation’s tax policy.
• A global minimum rate would essentially take away a tool countries use to push policies that suit them. 
• Bringing in laws by next year so that it can take effect from 2023 is a tough task. 
• The deal has also been criticised for lacking teeth: Groups such as Oxfam said the deal would not put an end to tax havens. 

Conclusion

• The two-pillar solution will ensure that once again, the world will be global, at least in following the principles of taxation.
• It will ensure the minimum payment of taxes by various multinationals.

Source: IE