MINIMUM TAX ON BIG BUSINESSES

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Context

Members of the European Union agreed in principle to implement a minimum tax of 15% on big businesses.

Global Minimum Corporate Tax Rate

The global minimum corporate tax rate, or simply the global minimum tax, is a minimum rate of tax on corporate income internationally agreed upon and accepted by individual jurisdictions. Each country would be eligible for a share of revenue generated by the tax. The aim is to reduce tax competition between countries and discourage multinational corporations (MNC) from profit shifting to achieve tax avoidance.
136 countries had agreed on a plan to redistribute tax rights across jurisdictions and enforce a minimum tax rate of 15% on large multinational corporations. It is estimated that the minimum tax rate would boost global tax revenues by $150 billion annually.

Background

EU members have agreed to implement a minimum tax rate of 15% on big businesses in accordance with Pillar 2 of the global tax agreement framed by the Organisation for Economic Cooperation and Development (OECD) in 2021.
Under the OECD’s plan, governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low. This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens in order to save on taxes.
Pillar 1 of the OECD’s tax plan, on the other hand, tries to address the question of taxing rights. Large multinational companies have traditionally paid taxes in their home countries even though they did most of their business in foreign countries.
The OECD plan tries to give more taxing rights to the governments of countries where large businesses conduct a substantial amount of their business. As a result, large U.S. tech companies may have to pay more taxes to the governments of developing countries.

What is the need for a global minimum tax?

Corporate tax rates across the world have been dropping over the last few decades as a result of competition between governments to spur economic growth through greater private investments.
Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020, due to global tax competition that was kick-started by former U.S. President Ronald Reagan and former British Prime Minister Margaret Thatcher in the 1980s.
The OECD’s tax plan tries to put an end to this “race to the bottom” which has made it harder for governments to shore up the revenues required to fund their rising spending budgets. The minimum tax proposal is particularly relevant at a time when the fiscal state of governments across the world has deteriorated as seen in the worsening of public debt metrics.
The global minimum tax is expected to generate around $150 billion in new global tax revenues annually. The cumulative impact is that tax havens would no longer exist since taxes avoided in the haven would be collected at home.
This means that if a company’s earnings go untaxed or lightly taxed in one of the tax havens, their home country would impose a top-up tax that would bring the effective rate to 15%.

Implications

The plan will help counter rising global inequality by making it tougher for large businesses to pay low taxes by availing the services of tax havens. Critics of the OECD’s proposal, however, see the global minimum tax as a threat. They argue that without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.
In other words, these critics believe that it is the threat of tax competition that keeps a check on governments that would otherwise tax their citizens heavily to fund profligate spending programs.

Global Minimum Tax: The India Impact

India loses about $10 billion to tax abuse through profit shifting every year — the second-largest tax revenue loss in Asia. India had already taken measures like equalisation levy, SEP rules, and the latest digital services tax to minimise tax evasion by foreign corporates.
India had also gotten into Tax Information Exchange Agreements (TIEAs) with tax havens for access to information on tax enforcement. The enactment of GMCT requires India to take down these policies and switch to the proposed two-pillar international norms.
Norms to put an end to tax evasion by corporates have been sought out by governments across the world. The GMCT has now given fresh hopes of fighting tax evasion globally.

Wrapping it up

Countries must remain vigilant against corporate lobbying that may jeopardize the tax treaty. Importantly, its success is more of a political will or skill than economics since it depends on how much pressure major countries exert on the tax havens.
Thus, active and sincere cooperation among the countries is necessary for its success. Finally, a global treaty born out of democratic participation and discussion can make tax havens a thing of the past.