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Source: The Hindu, Business Standard, Livemint
What is the news?
A day after joining the OECD-G20 framework for a global minimum tax, the Finance Ministry said significant issues including share of profit allocation and scope of subject-to-tax rules were yet to be addressed, and a ‘consensus agreement’ was expected by October.
- A majority of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting members (including India) adopted a statement containing an outline of a consensus solution to address tax challenges arising from digitalisation of the economy.
Rationale behind the deal
- Deal presents a new way of sharing out the rights to tax profits that will give more revenues to countries in which businesses have customers. This overturns a longstanding principle of international taxation, under which profits are taxed where value is generated, which traditionally was where businesses had a physical presence.
- This ensures that these MNCs pay more taxes in countries where they have customers or users than from where they operate.
How much additional tax revenue would be generated?
Estimates suggest that $150 billion of additional tax revenues would be generated due to the new rules.
Also Read: Global Minimum Corporate Tax & India – Explained |
India has agreed to a lower threshold. Why?
India and other developing countries were fighting to include companies with at least Euro 1 billion in revenues, as against the final proposal of Euro 20 billion revenues and a profit margin above 10%. This would bring only the top 100 global companies under the digital tax deal (New Delhi was so far pitching for a much lower threshold to cover around 5,000 international firms).
So, why has India agreed upon a lower threshold? Here’s the reason:
Protecting its own revenues: The greater the threshold, the chances of Indian companies getting in there is that much smaller. India wants to see that its revenues are never impacted. The threshold will be reviewed after seven years to cut it to Euro 10 million.
- Example: Most of the sales of Indian multinationals like Tata Consultancy Services (TCS) or Infosys are outside India. If all their profits are allocated outside the country, New Delhi could have lost revenue had the threshold been lower. It is not the same with the US. because big companies like Google park their profits in lower tax jurisdictions (Ireland), so the US will not lose any revenue from the deal.
Why some countries haven’t joined the agreement?
Countries like Ireland argue that the freedom of small countries to offer low taxes is essential to attracting foreign investment by compensating for some of their less appealing features, such as a small domestic market.
How have big international corporations reacted?
Big companies have welcomed the deal as it would help eliminate the threat of overlapping national taxes like those in France and the U.K.
Also Read: OECD/G20 Inclusive Framework Tax Deal |
Terms to know: