About global minimum tax: The minimum tax on big businesses

Source: The post is based on the article “The minimum tax on big businesses” published in The Hindu on 20th December 2022

What is the News?

Members of the European Union have agreed in principle to implement a minimum tax of 15% on big businesses.

What have EU members agreed on?

EU members have agreed to implement a minimum tax rate of 15% on big businesses in accordance with Pillar 2 of the global tax agreement framed by the Organisation for Economic Cooperation and Development (OECD). 

Under the OECD’s plan, governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low. This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens in order to save on taxes.

What is the need for a global minimum tax?

Corporate tax rates across the world have been dropping over the last few decades as a result of competition between governments to spur economic growth through greater private investments. Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020.

The OECD’s tax plan tries to put an end to this “race to the bottom” which has made it harder for governments to shore up the revenues required to fund their rising spending budgets. 

How do the countries view global minimum tax?

Some governments particularly those of traditional tax havens are likely to disagree and stall the implementation of the OECD’s tax plan. 

High-tax jurisdictions like the EU are more likely to fully adopt the minimum tax plan as it saves them from having to compete against low-tax jurisdictions. 

Low tax jurisdictions, on the other hand, are likely to resist the OECD’s plan unless they are compensated sufficiently in other ways. 

What are the benefits and drawbacks of OECDs global tax plan?

Firstly, supporters of the OECD’s tax plan believe that it will end the global “race to the bottom” and help governments collect the revenues required for social spending.

Secondly, it will also help counter rising global inequality by making it tougher for large businesses to pay low taxes by availing the services of tax havens. 

However, critics of the OECD’s proposal argue that without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.

In other words, these critics believe that it is the threat of tax competition that keeps a check on governments which would otherwise tax their citizens heavily to fund profligate spending programs.