Corporate Tax

What the G7 corporate tax proposals imply for India

For such changes to be successful it would also be important to see how these changes are implemented around the world, and active participation by all countries would be important.

The finance ministers of the G7 have basically agreed on a global minimum corporate tax rate of 15% and taxation of profits by country of sale – in line with the OECD work plan under Pillar 1 and Pillar 2, which was developed to expand the taxation rights of the market jurisdictions and address the current ones Risks from structures that allow MNCs to shift profits to jurisdictions where they are subject to no / very low taxation.

MNCs, the G7 suggests, must pay tax on at least 20% of profits that exceed the 10% margin in the country where they make sales. In other words, a multinational corporation, regardless of its physical presence, must pay taxes based on the generation of revenue / sales to a jurisdiction. While this would affect all MNCs, those who benefit from the digital economy will be hardest hit. This should benefit countries like India with a large consumer base.

The G7 has also agreed on a worldwide minimum tax rate of 15% for companies. Over the past four decades, the average corporate tax rate worldwide has fallen from ~ 40% to ~ 24%, with several countries offering a zero tax system. The proposed rate is above the 12.5% ​​recommended by the OECD in Pillar 2. This should significantly increase corporate tax revenues in all economies.

This will help eliminate the tax benefits of branches / subsidiaries in low tax / zero tax areas. The proposal takes a practical approach that provides a minimum global tax rate of 15% and does not force tax havens to increase their corporate income tax. This will be of considerable importance for the home countries of the MNCs who have business arms in tax havens like Ireland, Cayman Islands, etc.

India has long advocated the need to tax the digital economy and taxation based on customer location. In the absence of a global standard, India introduced the countervailing levy in 2016, which aims to tax the digital advertising revenue of MNCs like Facebook, Google, etc. In 2020, the scope of the countervailing levy was expanded to include overseas companies selling goods and services online for customers in India. As the G7 states agree to taxation based on the location of the customer, India is confirmed. However, there may be some overlap between the countervailing charge and the proposed taxation due to customer location that may need to be addressed.

In addition, the 15% minimum tax rate will affect Indian multinationals with offices in low-tax / non-tax areas such as the United Arab Emirates, Cayman Islands, etc. This will discourage the establishment of such structures. In the future, investment structures would be developed on the basis of commercial and economic conditions, and taxes could not be the driving factor. India loses $ 10 billion each year to global tax abuse, according to the State of Justice report. These reforms would help curb such tax abuse.

While this is a step in the right direction, large economies such as China, India and Brazil were not included. However, they will participate in the discussions at the G20 finance ministers meeting in July and are expected to approve the proposals. However, the benefits and effects of such changes will be determined when the fine print becomes available. For such changes to be successful it would also be important to see how these changes are implemented around the world, and active participation by all countries would be important.

Tax partner, EY India. Views are personal

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