Global Minimum Corporate Tax Rate framework deal

Source: TOI, The HinduBusinessline

What is the news?

In a historic agreement, announced in Paris under the aegis of OECD, 130 countries (out of the 139 involved in talks), including India, have endorsed the OECD/G20 Inclusive Framework Tax Deal.

• It would be the most sweeping change in the international taxation in a century.
• This is part of the proposed OECD Base Erosion and Profit Shifting (BEPS) framework to rework the traditional international tax system to make digital firms pay taxes regardless of their physical presence or measured profits in a country.
• Once implemented, it is expected to prevent globally operating companies from shifting to low tax regions to secure extended profits.
• The G7 had already agreed on a minimum tax rate of at least 15%, in June 2021. The present deal has both elements of the agreement forged by the G7 in June. However, there are some special rules for certain sectors and companies added to it.

Countries which didn’t sign the deal

A total of 130 countries have endorsed the deal. All major economies have signed up including many noted tax havens such as Bermuda, the Cayman Islands and the British Virgin Islands.

• The nine countries that did not sign were the low-tax EU members Ireland, Estonia and Hungary as well as Peru, Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria and Kenya.

Key elements of the tax Deal

The proposed solution consists of two components:

• Pillar one, which is about reallocation of an additional share of profit to the market jurisdictions
• Pillar two consisting of minimum tax and subject to tax rules.

What are the new tax rules?

• The new minimum tax rate of at least 15% would apply to companies with turnover above a 750-million-euro ($889-million) threshold, with only the shipping industry exempted.
• Companies considered in scope would be multinationals with global turnover above 20 billion euros and a pre-tax profit margin above 10%, with the turnover threshold possibly coming down to 10 billion euros after seven years following a review.
• The minimum corporate tax does not require countries to set their rates at the agreed floor, but gives other countries the right to apply a top-up levy to the minimum on companies’ income coming from a country that has a lower rate.
  • Illustration: Country A has a corporate tax rate (CTR) of 20%, Country B has a CTR of 11% and Global minimum corporate tax (GMCT) rate is 15%. There is a Company X that is headquartered in Country A, but reports its income in Country B in order to save tax. Now with GMCT in place, country A can legally impose an additional top-up levy of 4% on Company X.
• Extractive industries and regulated financial services are to be excluded from the rules on where multinationals are taxed
• The deal resolves another issue by ensuring that Amazon.com Inc. will be subject to tax in local jurisdictions

Impact

• Curb tax avoidance: Deal, after implementation, would curtail tax avoidance by making multinational companies pay an effective rate of “at least 15%” and give smaller countries more tax revenue from foreign firms.
• Discourage profit shifting: With a global minimum tax in place, multinational corporations will no longer be able to avoid paying their fair share by hiding profits in lower-tax jurisdictions.
  • Without these new rules, the Biden administration’s planned tax increases could lead to companies relocating their headquarters to low-tax countries. With global minimum taxes, companies would have fewer options outside the U.S. to get lower rates, and that reduces the potential risks of raising taxes.
• Prevent countries from becoming tax havens: This would also discourage countries from lowering tax rates to very low levels, in order to attract business. Now, they would have to compete on other factors like ease of doing business, regulatory system, etc.

What happens now?

The final deal is expected to be reached by October when the G20 leaders meet in Rome next week. Implementation of the deal is expected to start in 2023.

What is India’s position?

India is in favor of a solution based on a consensus. Also, the solution should be simple to implement and simple to comply with. At the same time, the solution should result in the allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.

Terms to know:

OECD