GLOBAL MINIMUM CORPORATE TAX

corporate tax

Background

According to the report, International Monetary Fund’s World Economic Outlook (IMFWEO), India is the world’s sixth-largest economy, on track to become the third-largest by 2025, thus it’s critical to monitor its financial activity both within and beyond the country. The government levies taxes on its residents to produce revenue, create jobs and provide various services. It is also specified in the constitution that the state and central governments have the right to collect income taxes from their citizens. As a responsible citizen, you should pay your taxes on time. Recently, in the G-20 summit of 140 countries which took place in Rome, Italy out of which 136 countries and the four others Kenya, Srilanka, Nigeria and Pakistan abstained for now else all others approved the idea of global minimum corporate tax which helps the countries to eliminate the “race to the bottom”. This is the first time that all the countries present there in the meeting agreed to the same without any counter questions or demands and an agreement was reached at an Organization for Economic Cooperation and Development summit to end tax rivalry that has caused global company tax rates to plummet over the years.

What is the global minimum corporate tax?

A global corporate minimum tax is a tax regime established by an international agreement in which countries that sign the agreement apply a specific minimum tax rate on company revenue subject to their respective jurisdictions’ tax laws. This was brought up by the countries for the elimination of the ongoing race to the bottom between large multi-national companies situated in different parts of the world. The agreement which is newly signed on Oct. 8 between the 136 countries, imposed a 15% bare minimum tax that should be levied on all the MNCs for their business profits, starting from 2023. It provides a “two-pillar strategy” that focuses on modifying tax rules to combat profit shifting and base erosion caused by multinational corporations’ tax-dodging techniques, as well as to address issues posed by the increasingly digitalized global economy. The OECD’s two-pillar solution, according to them, “does not seek to eliminate tax competition, but puts multilaterally agreed to limitations on it, and will see countries collect around USD 150 billion in new revenues annually.” In simpler terms, a global corporate minimum tax is a uniform minimum rate of corporate income tax imposed by individual jurisdictions following an international treaty. Proponents of a global corporate minimum tax argue that it should be implemented to deter multinational corporations (MNCs) from making international investment decisions based on low tax rates and moving earnings from high-tax to low-tax countries regardless of where profits are made.

What is the need for a Global Minimum Corporate Tax?

Traditionally, large international firms have been taxed primarily on where they declare their profits rather than where they do business. Several huge corporations were able to avoid paying high taxes in the nations where they perform the majority of their business by relocating their profits to low-tax jurisdictions. Following the covid-19 crisis, developed as well as developing countries faced a huge impact on their well-established or establishing economies which bring a need to implement the GMCT policy.

The deal has two motives of stand:

First, stop large multinational firms from earning profits in tax havens and paying little or no tax (A tax haven is a foreign country or corporation that investors from other countries utilise to evade or reduce income taxes). A tax haven is a country or area with a low tax rate where people seek to live or do business in order to avoid paying higher taxes in their home countries.) It also attempts to put an end to the business sector’s long-running race to the bottom. Second, to compel them to pay taxes in the nations where they operate or do business, even if they are not physically present. As though governments have the authority to levy any local corporate tax, and if a firm pays less than 15% tax, its home country can impose a tax to bring it up to the minimal amount.

How would global minimum corporate tax work?

Large multinational companies whose annual turnover is $864 Million has to pay GMCT. It means if the companies are getting exemption from the countries to which they are exporting the good their home country (in which they are originally situated on established) will charge a tax up to 15% or more so that the companies would not get exemption from paying tax and taking unwanted profits which would hamper the GDP of their home country. As India is a developing country it is very prominent for her to take advantage of every MNCs profit through tax to improve its GDP growth. Let’s understood it better with an example:- If the profits of the MNCs from the investment will not be taxed by Country B (business country), the global minimum tax would allow Country A (home country) to apply the minimum rate of 15 per cent to those profits.

What impact it will put on India?

As per the Indian economical experts, India is likely to benefit from the global minimum corporate tax because it will not hinder India’s ability to attract foreign investment and the establishment of multinational corporations. They also stated that this bare minimum tax rate would be extremely beneficial to developing countries such as India. If we talk in economical terms India’s Foreign Direct Investment (FDI) will not be affected by the domestic tax rate change in the economy. According to a survey, India stands on the top three positions for foreign direct investment as it comprises of skilled workforce with market potential and political stability these some are the key factors behind attracting the FDI investors in the capital of the Indian market. Overall, India has lost billions as a result of the Covid-19 restriction, which has had a significant influence on its economic growth and created a difficult position for the workforce. However, India is likely to benefit from the global minimum corporate tax arrangement rather than lose anything.

Conclusion

As, India is the 2nd largest loser in Asia to the global tax abuse committed by the MNCs, losing US$ 10.32 billion annually, equivalent to the annual salary of 4.23 million nurses This is proof that India always faces abuse in terms of tax by the MNCs and it’s a developing country and the corporate sector take unusually benefit from the lower tax rates and make more profit. As per my understanding of this topic so far, Global Minimum Corporate Tax is the much-needed thing of the recent time as this helps the agreed countries to impose a minimum amount of tax and can prevent the companies to get the privilege of countries which have a low tax rate as this will going to implement for all the nations. But, on the other hand, If we impose such levies on businesses, many of them would choose not to enter the nation at all, leaving our economy in the same state as it was before 1991. There must be a compelling explanation why we have not yet imposed such taxes. Otherwise, they would have imposed it long overall, the implementation of GMCT can help us in improvising our economy also it has some disadvantages so its necessary to look at both the sides of the aspect and then implement the required changes.

Author(s) Name: Khushi Bhavsar (Dharmashastra National Law University, Jabalpur)

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