Road towards a Global Minimum Corporate Tax

Synopsis:

The US has proposed a 15% Global Minimum Corporate Tax that will prevent tax avoidance by companies. The tax would be beneficial for India. But many counties will not accept the tax structure.

Background:

The Base Erosion and Profit Shifting (BEPS) programme were initiated in 2013. It aims to curb practices that allowed companies to reduce their tax liabilities by exploiting loopholes in the tax law. But to tax Big tech companies the countries have to sign a BEPS agreement among themselves.

So the OECD also asked the countries in the BEPS framework to adopt a consensus-based outcome instead of the country’s individual moves.

Challenges to the BEPS framework:

• Over the past decades, there are many countries that enacted tax policies specifically aimed at attracting multinational business. These countries attract investment by lowering corporate tax rates. This, in turn, has pushed other countries to lower their rates as well to remain competitive.
• Also, there are few Developing countries as well that are not sure if they will receive the right to tax the mobile incomes of Big tech companies

The OECD policy note:

• Addressing these concerns, On 12 October 2020, the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) released ‘blueprints’ on Pillar One and Pillar Two. 
  • It aims to reach a multilateral consensus-based solution to the tax challenges due to the digitalization of the world economy.
  • Pillar 1: It addresses the issue of reallocation of taxing rights to all the countries
  • Pillar 2: This pillar aims to address all the remaining issues in the BEPS program.
• The US has recently put forward a proposal to impose a 15% Global Minimum Corporate Tax on companies in consonance with Pillar two.

What is Global Minimum Corporate Tax?

• It is a type of corporate tax. Under this, If a company moves some of its operations to another country having low-tax jurisdiction, then the company have to pay the difference between that minimum rate and whatever the firm paid on its overseas earnings.
• For example, assume Country A has a corporate tax rate of 20 percent and Country B has a corporate tax rate of 11 percent. If the global minimum tax rate is 15 percent. Consider a situation, where Company X is headquartered in Country A, but it reports income in Country B. Then Country A will increase the taxes paid by Company X. This is equal to the percentage-point difference between Country B’s rate and the global minimum rate(15 percent).
  In short, Company X will have to pay an additional 4 percent of the tax to Country A.

The rationale behind the 15% Global Minimum Corporate Tax proposal:

• The US aims to minimize tax incentives and force companies to choose a place in a particular country based on commercial benefits.
  • For example, It is intended to discourage American companies from inverting their structures and operate outside the US, due to the increase in the U.S. corporate tax rate.
• The proposal, if passed, will give other countries the right to “tax back”. For example, countries can tax, 
  • Other jurisdictions have either not exercised their primary taxing right or 
  • Have exercised it at low levels of effective taxation.

Challenges surrounding the proposal:

• First, the OECD was considering a 10-12% Global rate. A high rate of 15% may not be accepted by smaller countries like Ireland. Ireland charges a marginal rate of 12.5 %. They argue that a Global minimum tax would impair fiscal autonomy for smaller jurisdictions to compete with larger economies.
• Second, the US had earlier proposed a rate of 21% that would have generated greater revenues. However, a proposal of a 15% rate may not be passed by the US congress.

India and the Global Minimum Corporate Tax rate:

• India did not object to the proposal as the same would generate additional revenue for the country.
  • The State of Tax Justice report of 2020 states that India loses over $10 billion in tax revenue due to the use of offshore structures. The popular locations include Mauritius, Singapore, and the Netherlands where there is an almost negligible rate of taxation.
• If passed, the Indian government can impose a tax on offshore subsidiary units of Indian companies. The taxation can be to such a level that it enables the imposition of an effective Global Minimum Tax on every company. 

Suggestions

• The acceptance of a Global Minimum Corporate Tax would induce the countries to compete on other factors like better regulatory regimes, ease of doing business, access to global talent, etc.
• However, if consensus is not built on a 15% rate, then the US can apply its domestic law version of Pillar Two at a rate of 21%.
• Nonetheless, the countries should focus on encouraging trade and economic activity in the post-pandemic era rather than debating over disagreements on tax allocations.

Source: The Hindu