The worldwide minimum corporate tax rate has been described variously as “historic”, “distinctive” and “groundbreaking”. The United States (US) and G7 countries believe that the introduction of a country-based minimum corporate tax rate will end the “race to the bottom” in corporate tax rates and reduce the incentives for tax base erosion and profit shifting (BEPS) practices. However, the proposal is not as simple as it seems.
The G7 finance ministers do not set the global tax agenda. Much of the latest international tax reform took place under the aegis of the G20 countries, which include the US, India and Brazil. The 15-point action plan on BEPS was led by the G20. All major changes after the BEPS were made under the BEPS Inclusive Framework, which includes 139 member countries and 14 observer nations, including over 70% of the Non-Organization for Economic Cooperation and Development (OECD) and non-G20 countries and territories. It is therefore misleading and naive to call the G7 agreement on minimum corporate tax a “global deal”.
The BEPS Inclusive Framework has been discussing the global minimum tax as part of a package since 2018. The package, divided into Pillar 1 and Pillar 2, aims to address the challenges of direct taxation from the digital economy.
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The Pillar 1 approach – the allocation of taxation rights – met with serious objections from developing countries who believed that their taxation rights were not adequately protected. The pillar 2 approach – a global minimum corporate tax rate – will have no teeth of its own without a just and equitable redistribution of taxation rights in the context of the digital economy.
Countries, including India, lose billions of dollars each year to corporate tax avoidance. Large multinational corporations use sophisticated and creative means to avoid paying corporate tax in countries where they do business. It does this primarily through transfer pricing, debt financing and restructuring of intellectual property rights. Profits are taken from high tax areas and shifted to those with low or no corporate tax rate. In this context, the global minimum corporate tax will discourage companies from adopting preferential tax rate structures and regulations to a certain extent.
The question we must ask ourselves is who will benefit most from the proposal? A short answer to that would be the US itself. This is because any “top-up taxes” levied by companies that have paid less than the minimum tax rate in foreign jurisdictions will be repatriated to the US, as most of the large corporations that Preferential tax structures benefit US tax residents. The proposal also came at a time when the US is trying to increase its domestic tax rate from 21% to 28% (higher than the rate in many countries) to fund its $ 2.3 trillion public works plan. So it’s no wonder that the US has suddenly become the pioneer of global tax reform.
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We have to see how countries react to the G7 proposal. The tax rate of 15% is likely to be a bone of contention. Previously, the US had proposed a rate of 21% while the OECD insisted on a rate of 12.5%, apparently to keep Ireland’s interests in mind. The odds of at least 15% can get the ball rolling, but it is too low and will start another “race to the minimum”.
Countries like India have corporate tax rates greater than 15%, but companies pay much less taxes thanks to a number of tax incentives and regulations. The idea of a global proposal for a minimum tax will die faster than we thought if countries continue to offer tax incentives.
The average corporate tax rate has fallen significantly over the past ten years. One explanation for this is that countries have now recognized that optimal corporate tax rates attract foreign investment, which contributes to a country’s overall growth. The global minimum tax proposal is wrongly aimed at smaller countries that have no choice but to keep corporate tax rates low to attract investment and maintain their competitiveness.
India must firmly oppose a US and G7 proposal disguised as an international tax reform. This is especially important when India is in economic distress due to the Covid-19 pandemic. The tax system should be safe and fair, but also flexible. This includes changing tax rates from time to time to suit the immediate and long-term needs and interests of our treasury.
Ashish Goel and Shilpa Goel are Supreme Court attorneys
The views expressed are personal
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