Global Minimum Corporate Tax Rate: G7

• 08 Jun 2021

Why in News

Recently, the Finance Ministers from the Group of Seven (G7) nations reached a landmark accord setting a Global Minimum Corporate Tax Rate (GMCTR).

• The agreement could form the basis of a worldwide deal. It will now be discussed in detail at a meeting of G20 financial ministers and central bank governors in July 2021.
• G7 also agreed to move towards making companies declare their environmental impact in a more standard way so investors can decide more easily whether to fund them.

Group of Seven (G7)

• It is an intergovernmental organisation that was formed in 1975.
• The bloc meets annually to discuss issues of common interest like global economic governance, international security and energy policy.
• The G7 countries are the UK, Canada, France, Germany, Italy, Japan and the US.
  
  • All the G7 countries and India are a part of G20.
• The G7 does not have a formal constitution or a fixed headquarters. The decisions taken by leaders during annual summits are non-binding.

Key Points

• Global Minimum Corporate Tax Rate:
  
  • About:
    
    • G7 would back a minimum global corporation tax rate of at least 15%, and put in place measures to ensure taxes were paid in the countries where businesses operate.
      
      • Corporation tax is a direct tax imposed on the net income or profit that enterprises make from their businesses.
  • Applicability:
    
    • It would apply to companies’ overseas profits. Therefore, if countries agree on a global minimum, governments could still set whatever local corporate tax rate they want.
    • But if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven.
      
      • A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment.
• Need of GMCTR:
  
  • Reduce Tax Loss:
    
    • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to low tax jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries (tax base erosion of the higher-tax jurisdictions).
    • These companies typically rely on complex webs of subsidiaries to hoover profits out of major markets into low-tax countries such as Ireland or Caribbean nations such as the British Virgin Islands or the Bahamas, or to central American nations such as Panama.
    • India’s annual tax loss due to corporate tax abuse is estimated at over USD 10 billion.
  • To Bring Uniformity:
    
    • GMCTR will end a decades-long race to the bottom in which countries have competed to attract corporate giants with ultra-low tax rates and exemptions. And it will bring uniformity in corporate taxation worldwide.
• Challenges:
  
  • Uniting Nations:
    
    • Getting all major nations on the same page is a problem, since the GMCTR impinges on the right of the sovereign to decide a nation’s tax policy.
  • Policy Issues:
    
    • A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
    • A lower tax rate is a tool they can use to alternatively push economic activity. Also, a global minimum tax rate will do little to tackle tax evasion.
• Other International Effort:
  
  • The Organization for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.
• India’s Stand:
  
  • While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure.
  • India is likely to benefit from the global minimum 15% corporate tax rate pact as the effective domestic tax rate is above the threshold, and the country would continue to attract investment.
    
    • In September 2019, the government had reduced the corporate tax rate to 22% for companies that gave up all exemptions and incentives. Further, a 15% rate was offered to new manufacturing firms.
    • The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.

Way Forward

• A G20 meeting scheduled for Venice in July 2021 will see whether the G7 accord gets broad support from the world's biggest developed and developing countries.
• Much still needs to be ironed out - including the metrics that will determine how and to which multinational companies the tax will be applied.
• There should be appropriate coordination between the application of the new international tax rules including the Digital Services Taxes. Any final agreement could have major repercussions for low-tax countries and tax havens.

Source:TH