The Finance Ministers of seven major economies across the globe, the Group of Seven (G7) countries, during the 47th G7 summit reached the landmark accord of setting up Global Minimum Corporate Tax Rate (GMCTR), which would close cross-border tax loopholes used by some multinational companies.
A 15% minimum global corporation tax rate has been backed up by the G7 countries, and measures have been proposed to ensure that the taxes are paid in countries where businesses operate.
In this article, we shall discuss at length the need for a Global minimum tax and what impact will it leave on economies across the world. Also, India’s stand on this tax implementation has been discussed in the article. Aspirants preparing for the upcoming government and IAS Exam must refer to the data below, as questions based on the same are important from the examination perspective.
Also, candidates must get acquainted with the topic-wise UPSC Syllabus for the prelims and mains examination and accordingly start their preparation. A few other related links are given below:
|Sustainable Development Goals (SDGs)||G77 – Largest Intergovernmental Organization|
|Group of Eight (G8)||Taxation System in India|
|Value-Added Tax (VAT)||Companies Act, 2013|
Global Minimum Corporate Tax – Key Points
- Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made. Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to low tax jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries
- With an agreed global minimum, such tax based erosions can be reduced without causing a financial disadvantage to the firms
- Further, key decisions about the global minimum tax shall be taken by the G20 countries and the Organization for Economic Cooperation and Development (OECD)
- OECD has been the key global organisation for managing tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion.
Global Minimum Tax and its Two Pillars:
The global minimum tax is an international tax reform initiative led by the OECD. It consists of two pillars aimed at ensuring fair taxation for multinational enterprises (MNEs) operating globally.
- Pillar One:
- Allocates a portion of MNEs’ profits to the market or destination countries.
- Based on where consumers or users are located, rather than solely on physical presence.
- Aims to address the challenges of digitalization and profit shifting.
- Pillar Two:
- Establishes a global minimum effective tax rate (ETR) of 15% on a country-by-country basis.
- Applies to MNEs with global revenues exceeding €750 million((~Rs 6,500 crore),), with exceptions.
- If an MNE’s ETR in a country falls below 15%, it must pay a top-up tax to its parent company’s jurisdiction.
- If the parent jurisdiction does not introduce Pillar Two, other countries implementing it can collect the top-up tax.
|What is Corporate Tax?
Corporate Tax is a direct tax levied on the net income or profit of a corporate entity from their business, foreign or domestic. The rate at which the tax is imposed as per the provisions of the Income Tax Act, 1961 is known as the Corporate Tax Rate.
Read in detail about the Corporate Tax at the linked article.
For a better understanding of the Global Minimum Corporate Tax, aspirants can refer to the video given below:
How does the Global Minimum Tax Work?
- In terms of its implementation, this tax will be applicable to companies’ overseas profits. This implies that if a global minimum is applied, governments can still set the local corporate tax rate as per their choice
- In case a company pays lower rates in a particular country, their home governments can “top-up” their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven
Need for Global Minimum Corporate Tax
A fixed global minimum corporate tax rate will bring uniformity in corporate taxation globally. Generally, the corporate giants look for countries to set up their organisation where the corporate tax is very less and exemptions are high, which has resulted in partial growth at the global level.
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Global Minimum Corporate Tax – Impact on India
India is likely to benefit from the Global Minimum Corporate Tax rate of 15%, as the government has been willing to keep the corporate tax rate artificially lower to attract Foreign Direct Investment (FDI).
Concerns for India
- Clarity on Pillar One: Uncertainty exists regarding the implementation of Pillar One, especially due to pushback in the United States. India is concerned about the interaction between Pillar One and Pillar Two and seeks more certainty on both.
- Subject to Tax Rule (STTR): India views the STTR as an integral part of Pillar Two. There is a need for clarity on the scope of the STTR and its implications for Indian taxpayers.
- Timely Implementation: The next full budget in India is scheduled for July 2024, which is also a general election year. India needs to ensure that the implementation of Pillar Two is announced in advance, allowing sufficient time for taxpayers and tax administrators to prepare.
- Impact on Indian MNEs: Large Indian-headquartered MNEs will be significantly impacted by the global minimum tax. The complex rules require substantial accounting and tax information, which may not be readily available. Adapting processes and systems for Pillar Two analysis, compliance, and reporting pose challenges for these MNEs.
- Interaction with Existing Tax System: India has existing tax systems and incentive regimes, such as tax incentives for GIFT City. It is important to assess the interaction between Pillar Two and these existing systems to minimize compliance burdens and avoid unintended outcomes.
- Stakeholder Consultation: India should conduct consultations with relevant stakeholders, including taxpayers and tax experts. This will ensure a comprehensive understanding of the implications of the global minimum tax, address concerns, and minimize complexity and compliance costs.
- Clarity on Implementation Timeline: India should determine a clear timeline for the implementation of Pillar Two to provide certainty to taxpayers and tax administrators. Learning from the experiences of other countries, a consultation period of three to six months is recommended before the implementation.
- Consistent Implementation: India should strive for consistent implementation of the global minimum tax to avoid any adverse effects on its economy and ensure a level playing field for all multinational enterprises operating within the country.
UPSC aspirants can also refer to Global Corporate Tax and India: RSTV- Big Picture discussion for a better understanding of this taxation system.
Challenges in the Way Forward
- One of the biggest challenges is that since the minimum tax rate will be applicable globally, all nations must agree to the aspects of the Global Minimum Corporate Tax. The United Nations Organisation must also be in sync with the ideas of the G7 countries
- A well-defined and structured metric plan is also required. Until that is presented to the nations and approved by all, the final implementation of the tax system cannot be done
- The G20 countries which are all set to meet in July 2021 must also be on board with the terms of the global minimum tax rate
- If the drafting of international taxes is not done appropriately, it may largely affect the low-tax countries.
- The implementation of Pillar Two and the global minimum tax requires careful consideration.
- Stakeholder consultation is vital to address concerns, minimize compliance burdens, and ensure a smooth transition.
- India should initiate the consultation process to provide ample time for preparation and implementation.
Indian and International taxation system based questions is important from the perspective of all major government exams. Aspirants can get a comprehensive list of bank, insurance, SSC, RRB and other major competitive exams at the linked article.
For any further information about the upcoming exams, study material for preparation and strategy to excel, candidates can visit BYJU’S.