Taxing big tech where it earn profits

Synopsis: India signed a deal to enforce GMCT in India, but it has to alter its taxation system to bring respective reforms.

Introduction

India with another 135 countries agreed to enforce a pact to impose a minimum corporate tax rate of 15%, and an equitable system of taxing profits of big companies in markets where they are earned. Kenya, Nigeria, Pakistan and Sri Lanka have not yet joined the deal.

What are the rules prescribed under Global Minimum Corporate Tax and the challenges associated with it?

To whom does this rule apply?

It will cover firms with global sales above 20 bn Euros ($23 billion) and profit margins above 10%. A quarter of any profits above 10% is proposed to be reallocated to the countries where they were earned and taxed there.

Why taxing big techs is essential?

The losses due to “tax abuse” have been estimated by the Tax Justice Institute (The State of Tax Justice 2020 report) at nearly $427 billion annually. Of this staggering amount, nearly $245 billion is lost to “multinational corporations shifting profit into tax havens in order to underreport how much profit they actually made in the countries where they do business.

Only, the remaining “$182 billion is lost to wealthy individuals hiding undeclared assets and incomes in offshore locations.  So, taxing big techs is essential to curb the profit-shifting of MNCs.

What are the concerns of India?

According to New York Times reports, it said that India, China, Estonia and Poland are worried that 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.”

 According to OECD, 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. In this context, India may have to withdraw its digital tax or equalisation levy if the global tax deal comes through.

So India is still figuring how to balance its interests.

Source: This post is based on the article “Taxing big tech where it earn profits” published in Indian Express on 11^th October 2021.