The Global Minimum Corporate Tax

Globalisation has always been a positive force in the world's economic progress. In this internationally competitive environment, nations are seeking to compete and earn more. But is globalisation always really ‘that’ good? Well, maybe, not always! If we mix tax policy, global speculation, local government decisions, and various international organizations, we get the most talked-about deal these days – The global Minimum Corporate Tax Rate (GMCTR) deal.


GMCTR is a worldwide deal initially backed by G-7 (Group of 7)I nations that would apply to companies’ overseas profits. As of now, it is not backed by just G-7 but 130 nations, including India. The deal has two parts, the main one being that countries around the world should tax their companies’ overseas profits @ 15% (minimum). For example, a US corporation based in a tax haven is now required to pay US taxes. The second section of the agreement states that it permits nations to tax a portion of the profit made by firms who have no physical presence but make significant revenues through digital services or advertising. Simplifying it, the corporates will have to pay the nations where they are physically based and to the nations where they are making profits through online presence.


If this global deal is implemented carefully, India is at the benefit as it loses $10 billion annually due to the ‘tax haven culture’ II and this deal generally talks about putting an end to the tax havens era. Also, for a long time, India has been a better consumer of digital services than a provider, which aids India in taxing the fair revenues earned by multinationals from Indian customers. If that happens, India will have to remove its equalization levy. Many other nations have imposed such taxes on digital services earlier, which after such a deal will be removed. Big tech giants such as Facebook and Google are seen as supportive of the deal. Amazon, however, wants this deal to be backed by Organisation for Economic Co-operation and Development (OECD)III. So far so good, but there is a catch (as always)!


This measure by G-7’s Finance ministers has received a lot of backlashes from OXFAM IV. As per OXFAM, the tax rate @15% is too low. It says “It is similar to the soft rates charged by tax havens.” Going with this perspective, 15% is a low rate and maybe not that fair a deal as the bar is set too low, that companies will find some loophole and overstep it to avoid tax. As per OXFAM, this deal is unfair as it is incapable to curb inequalities caused by the novel coronavirus pandemic. It does, however, cause problems for developing and poor countries that have relied on their low tax rate strategy to attract foreign investment. This agreement will only be feasible if all of the countries sign it. Many countries, notably Sri Lanka and Kenya, have yet to sign the agreement and have suggested that further talks may be required. Also, many developing economies are not happy about rescinding the equalization levies or limiting their options to tax digital MNCs in the future.


The major point of speculation of the deal is regarding tax evasion. The deal is being signed up for preventing tax evasions, but to what extent can it prevent that? To be very clear, GMCTR will not do that much for profit-sharing and preventing tax evasions. OECD as of now has backed just the 15% tax payment part and not the other half of the deal, which means that profit goes into the pockets of ‘home’ countries and not ‘source’ countries.

Moreover, only 20 to 30 percent of their so-called “residual” profit above that threshold would be subject to tax in the countries where it is generated. This new rule may therefore generate less than US$10 billion of additional revenue globally per year. A group of researchers calls the US the money laundering nation and companies will manage to come up with some loopholes, for that, the penalizing criteria have not been talked about anywhere. A deal like this would take at least 5 years to get started and since it is curbing individual nation’s power to decide on tax policy, it is not quite sure if the deal would work.


I. G-7 or Group of 7- The Group of Seven (G7) is an inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

II. Tax haven - a country or independent area where taxes are levied at a low rate.

III. OECD - Organisation for Economic Co-operation and Development (OECD) is an international organisation that works to build better policies for better lives.

IV. Oxfam - A global movement of people, working together to end the injustice of poverty.


References:


https://www.drishtiias.com/daily-updates/daily-news-analysis/global-minimum-corporate-tax-rate-g7

https://timesofindia.indiatimes.com/blogs/Swaminomics/why-g7s-global-minimum-corporate-tax-wont-work/

https://www.channelnewsasia.com/news/commentary/g7-tax-deal-minimum-corporate-mnc-revenue-country-business-15187068