In the recent Group of Seven (G7), Finance Ministers from the rich nations reached a landmark accord setting a global minimum corporate tax rate. A historic agreement that could form the basis of a worldwide trade deal to close cross-border tax apertures used by some of the world’s conglomerates.
The deal aims to end what the U.S. Treasury Secretary has called a “30-year race to the bottom on corporate tax rates” as countries compete to attract multinationals interests.
Why a global minimum tax rate?
Tax is not a modern concept to the world. It is simply how a government collects money to invest in various welfare and development projects. However, due to the COVID-19 pandemic, many countries are suffering from economic backwardness as the companies are shut for months. Under the purview of this, all major economies are aiming to increase tax. However, with this comes the predicament that if they will increase the tax investors may leave their land and open up their company in other countries where tax is low like Mauritius, Cayman island as these countries are also known as ‘Tax Havens’ because they provide very low tax to the companies.
Hence, the motive of the global minimum tax rate is to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made.
Now, the world’s richest countries have come forward with their proposal for a minimum 15% tax rate. The USA administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage, allowing competition on innovation, infrastructure and other attributes.
What is Base Erosion?
Base Erosion and Profit Shifting (BEPS) intimates tax avoidance strategies that Multinational Corporations (MNCs) operate for reducing their tax bases. Typically, a company pays tax for the incomes or profits they make. However in recent times to save taxes and avoid paying taxes on profits, MNCs are deploying sophisticated and refined tax planning practices by shifting their incomes/profits to other countries, especially to tax havens. Such practices eroded the tax base.
Who are the targets of the G7 proposition?
The proposal for a minimum corporate tax is structured in the interest to address the low effective rates of tax shucked out by some of the world’s biggest enterprises, including digital giants such as Apple, Alphabet and Facebook, as well as major corporations such as Nike and Starbucks. Furthermore, the proposal also interests the low-tax jurisdictions. The aforementioned companies and the other conglomerates function through a complex network of subsidiaries to manoeuvre profits out of major markets into low-tax countries such as Ireland or Caribbean nations such as the Bahamas, or to central American nations such as Panama.
The need of the proposal looks gleaming as according to the Tax Justice Network report, India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion. The US Treasury loses nearly $50 billion a year to tax cheats with Germany and France also among the top losers.
Minimum Alternate Tax: A tool to prevent Tax Avoidance
As the private entities and companies began to rise, there was also an increase in the number of zero tax-paying companies. To keep a check on the tax avoidance, Minimum Alternate Tax (MAT) was introduced by the Finance Act, 1987 with effect from the assessment year 1988–89. However, it was withdrawn by the Finance Act, 1990 to be later reintroduced by the Finance Act, 1996 and extended to cover non-corporate entities as well. MAT is an important tool with which tax avoidance can be prevented. MAT is estimated at 15% on the book profit that is shown in the profit and loss account or at the usual corporate rates, and whichever is higher is payable as tax.
If we delve more into the prevailing scenario of tax avoidance, we cannot overlook how companies, the taxpayers hide the generated profit by taking the advantage of various provisions of Income-tax Law like exemptions, deductions, depreciation, etc. All these provisions reduce its tax liability or sometimes may exempt all taxes.
All companies in India, whether domestic or foreign, fall under this provision.
India and its Taxes
India and taxes is a very intertwined complex relationship and policies like global minimum tax are problematic to enforce such a policy in a federal government structured country like India. A lower tax rate is a tool for India to alternatively push economic activity.
In 2019, the Finance Ministry announced a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15% in order to promote domestic enterprises in India.
The Taxation Laws (Amendment) Act, 2019 issued in the introduction of a section (115BAA) to the Income-Tax Act, 1961. It provides for the concessional tax rate of 22% for existing domestic companies with terms and conditions including that they do not avail of any specified incentive or deductions. Furthermore, existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.
Taxation is ultimately a sovereign function and it depends upon the socio-economic circumstances of the nation. The governments should indulge in discourse and engage in emerging discussions globally around the corporate tax structure.
The proposal, if comes to effect, will leave India in a longer economic hangover with respect to the other developed nations with less ability to offer mega stimulus packages.
India has already been proactively engaging with foreign governments in double taxation avoidance agreements, tax information exchange agreements, and multilateral conventions to plug loopholes. This proposal of a common tax rate, thereby, adds no further benefits to India.
Tax avoidance will continue to remain a troubling issue for the global economy. However, Multinationals are a source of foreign direct investment. The big shot corporations favour demand and utilisation of resources in creating employment in low-income countries.
Smaller countries such as Ireland, the Netherlands and Singapore have used the freedom to set corporation tax rates to attract businesses by offering low corporate tax rates. The unified global minimum tax rate will put an end for such countries to attract businesses by offering lower taxes.