G7 corporate tax deal
GS PAPER III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Context: Advanced economies making up the G7 grouping have reached a “historic” deal on taxing multinational companies.
- Finance ministers meeting in London agreed to counter tax avoidance through measures to make companies pay in the countries where they do business.
- They also agreed in principle to ratify a global minimum corporate tax rate to counter the possibility of countries undercutting each other to attract investments.
- The deal announced involved the US, the UK, Germany, France, Canada, Italy and Japan, is likely to be put before a G20 meeting in July.
What are the decisions taken?
- The first decision that has been ratified is to force multinationals to pay taxes where they operate.
- The second decision in the agreement commits states to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.
- Committed for reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.
- It will provide an appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies.
- It also commit to a global minimum tax of at least 15% on a country-by-country basis.
- On the importance of progressing agreement in parallel on both Pillars and look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors.
Why the minimum rate?
- The decision to ratify a 15% floor rate follows from a declaration of war on low-tax jurisdictions around the globe announced by US Treasury Secretary, who had urged the world’s 20 advanced nations to move in the direction of adopting a minimum global corporate income tax.
- This move aim to put a minimum rate in place to reverse a “30-year race to the bottom” in which countries have resorted to slashing corporate tax rates to attract multinational corporations.
- The US proposal had proposed a higher 21 per cent minimum corporate tax rate, coupled with cancelling exemptions on income from countries that do not legislate a minimum tax to discourage the shifting of multinational operations and profits overseas.
- One of the reasons the US pushed for this is purely domestic. It aims to offset any disadvantages that might arise from the Biden administration’s proposed increase in the US corporate tax rate.
- This increase comes at a time when the pandemic is costing governments across the world.
- The proposal also has some degree of support from the IMF.
- While China is not likely to have a serious objection with the US call, an area of concern for Beijing would be the impact of such a tax stipulation on Hong Kong — the seventh-largest tax haven in the world and the largest in Asia.
Who are the targets?
- Apart from low-tax jurisdictions, the proposal for a minimum corporate tax are tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations, including digital giants such as Apple, Alphabet and Facebook, as well as major corporations 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 or Caribbean nations such as the British Virgin Islands or the Bahamas, or to central American nations such as Panama.
- India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion, according to the report.
What are the problems with the plan?
- Apart from the challenges of getting all major nations on the same page, given the right of the sovereign to decide a nation’s tax policy, the proposal has other pitfalls.
- A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
- A lower tax rate is a tool they can use to alternatively push economic activity. Also, a global minimum tax rate will do little to tackle tax evasion.
Where does India stand?
- In a bid to revive investment activity, Finance Minister announced a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%.
- The Taxation Laws (Amendment) Act, 2019 resulted in the insertion of a section (115BAA) to the Income-Tax Act, 1961 to provide for the concessional tax rate of 22% for existing domestic companies subject to certain conditions including that they do not avail of any specified incentive or deductions.
- Also, existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.
- The cuts effectively brought India’s headline corporate tax rate broadly at par with the average 23% rate in Asian countries.
- China and South Korea have a tax rate of 25% each, while Malaysia is at 24%, Vietnam at 20%, Thailand at 20% and Singapore at 17%.
- The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.
- While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure.
- The economic division will look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter.
- The average corporate tax rate stands at around 29% for existing companies that are claiming some benefit or the other.
- New Delhi is “proactively engaging” with foreign governments with a view to facilitating and enhancing exchange of information under Double Taxation Avoidance Agreements, Tax Information Exchange Agreements and Multilateral Conventions to plug loopholes.
- Besides, “effective enforcement actions” including expeditious investigation in foreign assets cases have been launched, including searches, enquiries, levy of taxes, penalties, etc and filing of prosecution complaints, wherever applicable.
- 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’.
- 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.