Finance Ministers from the G7 nations have reached a significant agreement to support the establishment of a global minimum corporate tax rate of at least 15%, which could serve as the foundation for a worldwide consensus on taxation.
Global Minimum Tax Rate:
- Objective: Major economies are seeking to deter multinational corporations from transferring profits to low-tax jurisdictions, regardless of where their sales occur.
- Shift to Intangible Income: Income from intangible sources like patents, software, and intellectual property has shifted to these low-tax regions, enabling companies to evade higher taxes in their home countries.
- Application: The global minimum tax rate would be applicable to foreign profits. Governments can still set local corporate tax rates, but if companies pay less in a specific country, their home governments can impose additional taxes to meet the minimum rate.
- USA’s Motivation: The USA aims to reduce tax base erosion without disadvantaging American firms, fostering competition in innovation, infrastructure, and other aspects.
- Targets: The proposal targets not only low-tax jurisdictions but also addresses low effective tax rates paid by major corporations, including digital giants like Apple, Alphabet, and Facebook, and multinational corporations like Nike and Starbucks.
Process of Tax Avoidance:
- Strategy: Companies use complex networks of subsidiaries to channel profits from major markets into low-tax countries such as Ireland or Caribbean nations like the British Virgin Islands or the Bahamas, exacerbating tax avoidance.
- India’s Loss: India faces an estimated annual tax loss of over $10 billion due to corporate tax abuse, according to the Tax Justice Network report.
- Global Impact: The US Treasury loses nearly $50 billion annually to tax evasion, with Germany and France also among the top losers.
Impact on India:
- Tax Sovereignty: A global minimum tax rate could limit India’s ability to tailor policies to its needs, potentially resulting in a more extended economic recovery compared to other developed nations.
- Multilateralism: Such a tax policy may hinder multilateral cooperation and create disparities across the world.
- Deglobalization: Critics argue that a 15% minimum tax rate is too low and restricts countries like India that rely on globalization for investment.
- Differential Treatment: Lower taxes can compensate for challenging investment environments, such as India’s North East and hill states.
- Digital Taxes: The lack of clarity on digital taxation within the global minimum tax framework may discourage countries like India from implementing digital equalization levies.
Measures to Overcome Challenges:
- Leveraging Strengths: India can attract foreign investment through its large internal market, skilled labor at competitive rates, strategic export location, and a thriving private sector.
- Skill Development and Infrastructure: Focus on skill development, transportation cost reduction, and improving ease of doing business indicators.
- Clarity on Digital Taxation: India should seek more clarity on digital equalization levies to assert its right to tax income generated within its jurisdiction.
- International Engagement: Actively engage with foreign governments to enhance information exchange under Double Taxation Avoidance Agreements, Tax Information Exchange Agreements, and Multilateral Conventions to prevent tax evasion.
- Effective Enforcement: Take strong enforcement actions, including expedited investigations in foreign asset cases, penalties, and prosecution, as applicable.
Implementing a global minimum corporate tax rate of 15% poses challenges to India’s economy. However, with proactive measures to protect its interests, India can navigate these challenges and potentially benefit from the international tax reforms.