Global minimum tax deal

In News

• Recently the ‘G20 Ministerial Symposium on Tax and Development’ was held in Bali, Indonesia.

More about the news

• Suggestions by India around tax deal:
  • The Indian Finance Minister called on G20 countries to ensure that developing nations do not face any “unintended consequences” and earn “meaningful revenues” from the proposed global minimum tax deal.
    • The concerns of developing nations should also be addressed while formulating rules for the proposed two-pillar tax deal to ensure a fairer and more inclusive tax system.
  • The Indian Finance Minister called on the G20 inclusive framework to support the active participation of all members in the finalisation of the technical aspects of the two-pillar solution.
• The proposed two-pillar solution consists of the following components: 
  • Pillar One: 
    • It is about reallocation of an additional share of profit to the market jurisdictions.
  • Pillar Two: 
    • It consists of minimum tax and is subject to tax rules.

Global minimum tax deal

• Meaning: 
  • It is a global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation 
• 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.
• Significance of the two pillars:
  • Pillar One 
    • This 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 
    • It 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.
  • 

How would a deal work?

• The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally. 
• 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.
• 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 deal:

• 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.
• Curbing Tax Evasion: 
  • Major economies are aiming to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made. It will help those initiatives.
• Economic impact:
  • The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
• Prevent cross-border taxation: 
  • It will put in place measures to ensure businesses pay taxes in the countries where they operate, a move aimed at plugging loopholes in cross-border taxation.
  • Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
• 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.

Challenges:

• For the developing countries:
  • Many in developing countries remain sceptical about the gains from the deal, particularly under Pillar One. 
  • They argue that the deal will mostly benefit the rich OECD nations that are home to most of the large MNCs.
• Loss to companies:
  • The global minimum rate will impact companies using low-tax jurisdiction to achieve low global tax cost.
• The rise in personal income tax rates is feared: 
  • One outcome of the deal is a possible contraction of the corporate tax revenues of governments from the lowering of rate to 15%. 
  • That will force governments to raise resources from other sources. Thus, a rise in personal income tax rates is feared.
• Achieving Consensus: 
  • The global pact would face the challenge of getting other major nations on the same page, since this impinges on the right of the sovereign to decide a nation’s tax policy. The battle for low-tax countries will be more about building support for a minimum rate as close as possible to its 12.5% or seeking certain exemptions.

Way Forward 

• 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.
  • In fact, it is anticipated that India’s digital tax revenue might decrease as a result of the OECD tax deal.
• India attracts foreign investment owing to its large internal market, quality labour at competitive rates, strategic location for exports and a thriving private sector.
• In all probability, the concessional Indian tax regime would still work, and India would continue to attract investment.
• The global tax system must support and empower developing countries in their efforts to mobilise resources. “
• In executing the two-pillar solution, we must guard against any unintended consequences which may have an adverse impact for developing countries.

Source:FM