Relevance: GS-3: Groupings & Agreements Involving India or Affecting India's Interests

Key Phrases: Global Minimum Corporate Tax, Organisation for Economic Co-operation and Development (OECD), Oxfam International, Tax Haven, Tax Base Erosion, Profit Shifting, etc.

Why in News?

• Efforts to deliver the most significant changes to global tax rules in a century will face fresh delays after as it would take longer than planned to reach a formal agreement on how countries with large consumer markets collect more corporate tax revenue.

What Is a Global Minimum Corporate Tax?

• A Global Minimum Corporate Tax (GMCT) is a tax regime established by an international agreement whereby participating countries would impose a specific minimum tax rate on corporate income subject to the respective jurisdictions’ tax laws.
• Each country would be entitled to share in the revenue generated by the tax.
• The Organization for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a GMCT.

Why do governments want a GMCT rate?

• Large Multinational Corporations have traditionally been taxed based on where they declare their profits rather than where they do business.
• This allowed several large companies to avoid paying high taxes in countries where they do most of their business by shifting their profits to low-tax jurisdictions.
• So, an American company like Apple, for instance, can avoid paying high taxes in the United States by declaring its profits as belonging to a subsidiary company in Ireland, where tax rates are lower.
• This practice of profit shifting has affected the tax revenues of governments and forced them to act.

What are Pillar 1 and Pillar 2 of the New Global Tax Regime?

• Pillar one (Reallocation of profits):
  • Pillar one is concerned with new profit allocation rules applying to the largest and most profitable Multinational Enterprises (MNEs) with worldwide revenue greater than €20 billion and profitability above 10%.
  • This amount could also be in 7 years reduced to €10 billion if the implementation succeeds.
  • This pillar redistributes excess profits of MNEs to jurisdictions, where consumers or users are located, regardless of whether firms are in those jurisdictions physically present.
  • The amount redistributed will be computed as 20-30% of the residual profits of companies in scope.
• Pillar two (Global Minimum Corporate Tax of 15%):
  • Pillar two introduces a new GMCT of 15% for corporations in scope.
  • It will apply to multinational groups with revenue exceeding EUR 750 million.
  • If a company pays less than the 15 percent tax, the government of its home country would have the power to levy a tax to bring it to the minimum rate.

What will be the economic impact?

• The OECD estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
• 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.
• It is estimated that corporates shift around $1.38 trillion worth of profit to tax havens and GMCT proposes to halt this.
• Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
• It will help stop the “race to the bottom” as countries compete against each other to cut taxes to attract businesses.
• This will shore up tax revenues and help governments invest in social development.

Criticism:

• Non-profit organization Oxfam International has criticized the deal, arguing that the minimum corporate tax rate of 15% is too low.
• It has also been argued that most of the tax collected under the new setup will go to rich countries and widen inequality between countries.
• Other critics believe that the GMCT may kill the various economic benefits that come with tax competition among countries.
• They see tax competition as a force of good that compels governments to keep taxes low and helps the world economy grow.
• They also defend so-called tax havens such as Ireland, Switzerland, Bermuda, and other countries, saying that they benefit citizens of high-tax countries.
• Without tax havens, they argue, companies will be subject to much higher taxes in their home countries, which in turn will suppress their ability to serve consumers in their countries.

What is there for India?

• India loses about $10 billion to tax abuse through profit shifting every year — the second-largest tax revenue loss in Asia.
• India had already taken measures like equalisation levy, SEP rules, and the latest Digital Services Tax to minimise tax evasion by foreign corporates.
• India had also gotten into Tax Information Exchange Agreements (TIEAs) with tax havens for access to information on tax enforcement.
• The operation of the minimum rate would create a new pocket of revenue arising from the equalisation of taxes of corporates shifting profits to tax havens.
• Tax Justice Network estimates India to gain about $4 billion annually under the new norms.
• As the existing corporate tax in India is above the proposed global minimum of 15 percent, the chance of a dip in Foreign Direct Investment is off the table, especially when the Confederation of Indian Industry rates India to be among one of the top three choices for FDI.

Conclusion:

• Active and sincere cooperation among the countries is necessary for its success.
• A global treaty born out of democratic participation and discussion can make tax havens a thing of the past.

Source: Live-Mint

Mains Question:

Q. Critically examine the proposed Global Minimum Corporate Tax regime. (250 words).