G7 Corporate tax deal: What is the deal and how it will impact India?- Explainer of the Day

The finance ministers of the world’s most advanced economies met in London and agreed to counter the tax avoidance through the measures in order to make firms pay in the nations where they do business.

Created On: Jun 7, 2021 14:13 ISTModified On: Jun 7, 2021 14:13 IST
G7 Finance Ministers Meet

The advanced economies of the G7 grouping which includes, the UK, the US, France, Germany, Canada, Japan, and Italy, reached a historic deal on taxing the multinational companies.

The finance ministers of the world’s most advanced economies met in London and agreed to counter the tax avoidance through the measures in order to make firms pay in the nations where they do business.

The Ministers also agreed to ratify a global minimum corporate tax rate for countering the possibility of countries undercutting each other to attract investments.

The corporate tax deal which was announced on June 5, 2021, with the involvement of G7 nations, is most likely to put forward before a G20 meeting in July 2021. It will be discussed in detail at a meeting of G20 financial ministers and central bank governors.

What were the key decisions taken by G7 nations?

•  The first decision taken by the G7 nations that have been ratified is to force the multinational companies to pay taxes where they operate.

•  In the agreement, the second decision states to a minimum global corporate tax rate of 15% to avoid the countries undercutting each other.

What did the G7 Finance Ministers say regarding the decisions?

As per the G7 Finance Ministers and Central Bank Governors Communique:

•  G7 grouping commits to reaching an equitable solution on the allocation of taxing rights, with market countries awarded the taxing rights on at least 20% of profit exceeding a 10% margin for the largest and the most profitable multinational enterprises.

•  The finance ministers stated that they will provide for appropriate coordination between the application of new international tax rules and the removal of All Digital Services Tax, as well as, other relevant similar measures, on all the companies.

•  The G7 nations also assured to commit to a global minimum tax of at least 15% on a country-by-country basis.

•  The ministers agreed on the significance of processing the agreement in parallel on both pillars. They added that they look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors.

Why the global minimum corporate tax rate?

The decision of ratifying a 15% floor rate by G7 nations is after a declaration of war on low-tax jurisdictions around the globe which was announced by the US Treasury Secretary Janet Yellen. She had urged the world’s 20 advanced nations to move in a direction of adopting a minimum global corporate income tax in April 2021.

She said that the move to put a minimum rate in place is an attempt to reverse a ’30-year race to the bottom’ in which the nations have restored to slashing corporate tax rates in order to attract multinational corporations.

The US had proposed a higher 21% minimum corporate tax rate, along with canceling exemptions on the income from the countries that do not legislate a minimum tax to discourage shifting of multinational operations and profits overseas.

One of the reasons that the US pushed for this is purely domestic as it aims to somewhat offset any form of disadvantages that might arise from Biden’s proposed increase in the US corporate tax rate to 28% from 21%.

The global pact on this issue will work well for the US at this time and the same also holds true for most other countries in Western Europe, even as some low tax European jurisdiction such as Ireland, Netherlands, and Luxembourg and some in the Caribbean rely largely on the tax rate arbitrage to attract the multinationals.

The proposal also has some form of degree of support from the International Monetary Fund.

Global minimum corporate tax on MNCs:  Who are the targets?

The proposal for a minimum corporate tax, apart from the low tax jurisdictions, is tailored to address the low effective rates of tax that are shelled out by some of the biggest corporations of the world. It includes digital giants such as Alphabet, Apple, and Facebook as well as major corporations such as Starbucks and Nike.

These firms rely on complex webs of subsidiaries to gather profits out of the major markets into the low-tax countries such as Caribbean nations like the British Virgin Islands or the Bahamas or Ireland, or to Central American nations such as Panama.

As per a report, India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion.

Global Minimum Corporate Tax: What does it mean for India?

Finance Minister Nirmala Sitharaman in 2019, in order to revive the investment activity, announced a sharp cut in the corporate taxes for the domestic companies to 22% and for the new domestic manufacturing companies to 15%.

The Taxation Laws (Amendment) Act, 2019 resulted in an insertion of a section to the Income Tax Act, 1961, in order to provide the concessional tax rate of 22% for the existing domestic companies. Also, these companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.

This, along with other measures, was estimated to cost the exchequer Rs. 1.45 lakh annually. The cuts also brought India’s headline corporate tax rate broadly at par with the average 23% rate in the Asian nations. The effective tax rate for Indian domestic companies is around 25.17%.

While taxation is a sovereign function and depends upon the circumstances of the nations, the Indian government is open to participate and engage in the emerging discussions globally around the corporate tax structure. The economic division of India will look into the pro and cons of the new proposal as and when the time will come.

What are the problems with the global minimum corporate tax plan?

Apart from bringing all the major nations on the same page, particularly since this impinges on the right of the sovereign to decide a nation’s tax policy, the ambitious proposal by G7 nations also has other pitfalls.

•  A global minimum rate will take away a tool that the countries use to push policies that suit them. For example, in the backdrop of the COVID-19 pandemic, World Bank and IMF data suggested that the developing nations with less ability to offer the mega stimulus package may experience a longer economic hangover than the developed countries.

•  A lower tax rate is also a tool that the developing countries can use to alternatively push the economic activity.

•  A global minimum tax rate will also do little to tackle tax evasion.

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