What is a global minimum tax and what will it mean?

#GS3 #ECONOMY #GS2 #IR 

Context:

  • G7 nations have concluded to close cross-border tax loopholes.
  • Global minimum corporate tax rate, an agreement that could form the basis of a worldwide deal.

Background:

  • The US proposal for global minimum tax
  • In its recent proposal, the U.S. sought to impose a global minimum tax on foreign income earned by U.S. corporations.
  • The proposal is meant to disincentivise American companies from inverting their structures thanks to the rise within the U.S. corporate rate .
  • The U.S. is now discussing a floor of 15% for the minimum rate .
  • The proposal is analogous to Pillar Two, apart from the speed of the effective minimum tax.

Similarity with Pillar Two Proposal

  • The Pillar Two proposal was the Organisation for Economic Co-operation and Development’s (OECD) decide to plug the remaining Base Erosion and Profit Shifting (BEPS) issues
  • It provides jurisdictions the proper to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
  • For instance, if an Indian-headquartered multinational corporation (MNC) has an entity in Singapore or Netherlands through which global operations are run, and its income from global operations isn't taxed at an efficient rate of 10% or 15%, then it is often taxed in India.
  • India has been a part of the Pillar Two discussions and has not objected in theory to the proposal.

How Global Minimum Tax would benefit India?

  • The proposal, alongside the increased bill for U.S. companies, may benefit the Indian revenue department.
  • The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax income thanks to the utilization of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and therefore the Netherlands.
  • This is supported by the overseas direct investment (ODI) data from 2000 to 2021 published by the Federal Reserve Bank of India.
  • Start-ups and enormous Indian conglomerates commonly use offshore structures for conducting global operations.
  • Revenue from such operations is usually retained offshore and not repatriated to India.
  • Tax advantages incentivize such structures, because of which taxes on such income aren't paid in India.
  • Once these proposals are implemented, Indian companies would need to pay additional taxes on their offshore structures to the extent that the effective rate of tax is less than the global minimum rate.

Challenges associated with it:

  • Lack of consensus: Several countries have taken a special approach to the speed of worldwide minimum tax.
  • While France and Germany have expressed support, the EU has raised concerns regarding the high rate proposed by the us .
  • Tax sovereignty issue: Countries have stated that the proposal infringes upon their tax sovereignty which the fight against unfair tax competition shouldn't become a fight against competitive tax systems.

Conclusion

  • As economies struggle amid the COVID-19 pandemic, the need of encouraging trade and economic activity should be prioritised over disagreements on tax allocations.
  •  A tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.

 

SOURCE: THE HINDU

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