Global corporate taxation: The new bare minimum

News: Recently, the G20 nations approved a new global minimum corporate tax. The new taxation regime covers 90% of the global economy.

While OECD countries see this as a significant reform in a digitalised and globalised world economy, many sees this deal as not inclusive of the developing countries.

What are the important provisions under the deal?

Under this deal, there are two “pillars” of taxation on corporations.

Pillar-1: The tax provision empowers countries to tax companies where they earn their revenue. Under this, companies’ excess profit–defined as in excess of 10% of total revenue–will be taxed at 25%. It is estimated to affect the world’s top 100 companies.

Pillar-2: It will be applicable to overseas profits of multinational firms with €750 million (about 6,400 crore) in sales globally. If a company pays less than the 15% tax, the government of its home country would have the power to levy a tax to bring it to the minimum.

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What is the reason for bringing in a new global minimum corporate tax?

Want for more resources by states: Countries, rich and poor, needed more resources to fight the pandemic and the consequent economic fallouts.

OECD estimates that with the new minimum rate, countries will have $150 billion annually in additional revenues. This money they could use to fund critical development requirements.

International demand: India and other countries in G24 (a sub-group of G77) pushed for a nation’s right to tax based on location of a company’s employment and sales.

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What are the issues/challenges in the new deal?

Firstly, according to experts, the rate will hardly help meet the main objective of stopping profit-shifting and evasion. Though Pillar 2 sets a global minimum rate, with very low tax rates at 15%, the incentives to shift profit will remain substantial.

Secondly, the deal applies to a very small part of the corporate profits and is also limited to a few companies.

Thirdly, Experts say the 15% tax rate is not ambitious enough. Earlier this year, UN Financial Accountability, Transparency and Integrity (FACTI) recommended 20-30 per cent global corporate tax.

Finally, many developing countries, though signatory to the deal, have expressed concerns about the implementation of these new taxing rules. Condition on countries to remove all unilateral taxes on technology companies will significantly impact their revenues. Because, many countries earn a significant revenue by levying tax on digital services. This tax covers a larger number of companies for tax revenue and in many cases, they earn more than the expected tax under the new regime.

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What is the way forward?

Only a UN tax convention, where global rules are determined by democracy not plutocracy, can make tax havens a thing of the past

The recent initiative by heads of states to agree on a UN-led tax global convention based on the tax reform blueprint prepared by FACTI is a step in the right direction.

Source: This post is based on the article “Global corporate taxation: The new bare minimum” published in DTE on 3^rd Dec 2021.