The advanced economies of the G7 have reached a “historic” agreement on the taxation of multinational companies. Finance ministers meeting in London agreed to fight tax evasion through measures aimed at making companies pay in the countries where they operate. They also agreed in principle to ratify a global minimum corporate tax rate to counter the possibility that countries undercontribute each other to attract investment. The deal announced on Saturday involving the US, UK, Germany, France, Canada, Italy and Japan, is expected to be submitted to a G20 meeting in July.
What decisions are made?
The first decision that has been ratified is to force multinationals to pay taxes where they operate. The second ruling in the agreement commits states to a minimum overall corporate tax rate of 15% to prevent countries from underestimating each other. The deal will now be discussed in detail at a meeting of G20 finance ministers and central bank governors in July.
“We are committed to finding a fair solution on the allocation of taxing rights, with market countries being assigned taxing rights on at least 20% of profits exceeding a 10% margin for the most multinational companies. large and most profitable. We will ensure proper coordination between the application of the new international tax rules and the removal of all taxes on digital services, and other relevant similar measures, on all businesses. We are also committed to an overall minimum tax of at least 15% country by country. We agree on the importance of advancing the agreement in parallel on the two pillars and look forward to reaching an agreement at the July meeting of G20 finance ministers and central bank governors, ”said the Minister of Finance. press release from G7 finance ministers and central bank governors.
Why the minimum rate?
The move to ratify a 15% floor rate follows a declaration of war against low-tax jurisdictions around the world announced by U.S. Treasury Secretary Janet Yellen, who urged the world’s 20 advanced countries to s ” steer towards the adoption of an income tax in April. She said in a virtual speech to the Chicago Council on Global Affairs that the decision to put in place a minimum rate was an attempt to reverse a “30-year race to the bottom” in which countries resorted to lowering rates. corporate taxation to attract multinational corporations. .
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The US proposal had proposed a 21% higher minimum corporate tax rate, coupled with the cancellation of income exemptions for countries that do not legislate minimum taxes to discourage the transfer of multinational operations. and profits abroad. One of the reasons the United States has pushed for this is purely domestic. It aims to compensate somewhat for the inconvenience that could arise from the Biden administration’s proposed increase in the corporate tax rate in the United States. The proposed increase from 28% to 21% would partially reverse the cut in corporate tax rates from 35% to 21% by the Trump administration through 2017 tax legislation. More importantly, the US proposal includes an increase in the minimum tax that was included in the Trump administration’s tax laws, from 10.5% to 21% – the benchmark corporate minimum tax rate Yellen proposed for other G20 countries.
This increase comes at a time when the pandemic is costing governments around the world.
A global pact on this issue, as articulated by Yellen, is working well for the US government right now. The same is true for most other Western European countries, although some European low-tax jurisdictions like the Netherlands, Ireland and Luxembourg and some in the Caribbean rely heavily on the arbitrage of tax rates to attract multinationals.
The proposal also enjoys some support from the IMF. While China is not likely to have a serious objection to the United States’ appeal, a concern for Beijing would be the impact of such a tax stipulation on Hong Kong – the seventh largest tax haven in the world. world and the largest in Asia, according to a study released earlier this year by the tax justice network. Moreover, China’s frayed relationship with the United States could act as a deterrent in negotiations on a global tax deal.
Who are the targets?
In addition to low-tax jurisdictions, the proposed minimum corporate tax is designed to address the low effective tax rates charged by some of the world’s largest companies, including digital giants such as Apple, Alphabet and Facebook, as well as big companies like Nike and Starbucks. These companies typically rely on complex networks of affiliates to suck profits from major markets to low-tax countries such as Ireland or Caribbean countries such as the British Virgin Islands or the Bahamas, or to countries with higher taxes. ‘Central America such as Panama.
The US Treasury loses nearly $ 50 billion a year due to tax fraud, according to the Tax Justice Network report, with Germany and France also among the biggest losers. India’s annual tax loss due to corporate tax abuse is estimated at over $ 10 billion, according to the report.
What are the issues with the plan?
Aside from the challenges of getting all major nations on the same page, especially since it infringes on the sovereign’s right to decide a nation’s tax policy, the proposal presents other pitfalls. A global minimum rate would essentially remove a tool that countries use to put in place policies that work for them. For example, in the context of the pandemic, IMF and World Bank data suggests that developing countries with less capacity to deliver mega stimulus packages may experience a longer economic hangover than developed countries. A lower tax rate is a tool they can use to alternately stimulate economic activity. Also, a global minimum tax rate will do little to tackle tax evasion.
Where is India at?
With the aim of reviving investment activity, the Minister of Finance Nirmala Sitharaman announced on September 21, 2019 a sharp reduction in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%. The Tax Laws (Amendment) Act 2019 resulted in the insertion of an article (115BAA) in the Income Tax Act 1961 to provide for the preferential tax rate of 22% for corporations existing national conditions subject to certain conditions, in particular that they do not benefit from any specified incentive or deduction. In addition, existing domestic companies that opt for the concessional tax regime will not be required to pay an alternative minimum tax.
This, along with other measures, has been estimated to cost the board Rs 1.45 lakh crore per year. The cuts have effectively brought India’s overall corporate tax rate down to the same level as the 23% average rate in Asian countries. China and South Korea have a tax rate of 25% each, while Malaysia is at 24%, Vietnam at 20%, Thailand at 20%, and Singapore at 17%. The effective tax rate, including surtax and tax, for Indian domestic businesses is approximately 25.17%.
“While taxation is ultimately a sovereign function and depends on the needs and circumstances of the nation, the government is open to participate and engage in the emerging global discussions around the tax structure of the nation. companies. The economic division will examine the pros and cons of the new proposal as it comes along and the government will come to a decision afterwards, ”a senior government official said. The average corporate tax rate is around 29% for existing companies claiming one benefit or another.
Another official said New Delhi “proactively engages” with foreign governments to facilitate and improve the exchange of information under double taxation avoidance agreements, tax agreements. ‘exchange of tax information and multilateral conventions to fill the gaps. In addition, “effective enforcement measures”, including prompt investigation of foreign asset cases, have been initiated, including searches, investigations, levying of taxes, penalties, and so on.
To meet “the challenges posed by companies that carry out their activities by digital means and carry out activities in the country remotely”, the government has implemented the “equalization levy”, implemented in 2016 following a recommendation of a panel set up to deliberate on the taxation of the digital economy. In addition, the Information Technology Act has been amended to introduce the concept of “significant economic presence” to establish a “business connection” in the case of non-residents in India.