India and 129 countries have supported a proposed global tax deal that is seen as a response to “aggressive tax planning” by businesses and the challenges of taxing the biggest companies in the odd-job economy. that serve local consumers remotely. Mint is examining what’s in it for India.
Why has a global tax regime been proposed?
Businesses have long taken advantage of low-tax countries to artificially reduce their tax expenditures in the markets where they actually make money. With complex intra-group agreements related to the management of intellectual property rights, and assigning various business functions and risks between group units, profits are shown for the unit established in low-tax jurisdictions rather than for the place where the activity is actually carried out. The explosive growth of the digital economy has accentuated this tendency to shift profits. Such an erosion of the tax base has prompted nations to unite for a global deal.
What does this agreement seek to achieve?
It seeks to address the concerns of developed and developing countries regarding corporate taxes. For example, the United States wants to increase corporate taxes by the current 21% to help pay for higher infrastructure spending, but does not want to become a less attractive destination for investors. An agreement can thus help reduce tax arbitrage for investors, given that taxation is now low in some countries (12.5% in Ireland for example). On the flip side, emerging markets like India are big consumers of digital services and want a share of the profits that global tech giants make on their soil.
What will be the potential impact of this pact on India?
India does not need to change its corporate tax rate because it is already at or above the proposed global minimum tax of 15%. India will secure new tax rights on companies in the offshore digital economy with access to Indian consumers. Once the deal materializes, India will remove its equalization tax on companies in the digital economy.
What other provisions are part of the agreement?
In addition to an overall minimum tax of 15%, multinational markets will obtain taxing rights. Multinationals with global turnover exceeding 20 billion euros and pre-tax profit above 10% will initially be covered by global tax. In addition, countries will be able to tax any multinational whose income is greater than or equal to 1 million euros in this market. It is way above what India wants: to tax any multinational that does more ₹2 crore (€ 226,000) in turnover. For small countries with a GDP of less than 40 billion euros, the OECD has proposed a tax threshold of 250,000 euros of pre-tax income.
What are India’s priorities now?
India expects the deal reached earlier this month at an Organization for Economic Co-operation and Development (OECD) meeting in Paris to end with a global tax deal by October. While the OECD announcement in July outlines the scheme, the finer details have yet to be negotiated. India said on July 2 that some issues, including the share of profit attribution to market countries, remained open and needed to be addressed. In addition, India wants the new framework to be sustainable and easy to implement.
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