Context:

Advanced economies making up the G7 grouping have reached a “historic” deal on taxing multinational companies. Finance ministers meeting in London agreed to counter tax avoidance through measures to make companies pay in the countries where they do business.

They also agreed in principle to ratify a global minimum corporate tax rate to counter the possibility of countries undercutting each other to attract investments.

Relevance:

GS-II: International Relations (Important International Institutions , Foreign Policies affecting India’s Interests), GS-III: Indian Economy

Dimensions of the Article:

  1. Group of Seven (G7)
  2. What are the decisions taken by the G7?
  3. Who are the targets minimum corporate tax rate?
  4. What are the problems with the plan?
  5. Where does India stand?

Group of Seven (G7)

  • The Group of Seven (G7) is an international intergovernmental economic organization consisting of the seven largest developed economies (International Monetary Fund IMF- advanced economies) in the world.
  • G-7 Countries are:
    1. Canada,
    2. France,
    3. Germany,
    4. Italy,
    5. Japan,
    6. The United Kingdom and
    7. The United States.
  • The European Union is sometimes considered an eighth member of the G-7, since it holds all the rights and responsibilities of full members except to chair or host the meeting.
  • G7 Summit is an event conducted annually where world leaders from seven powerful economies of the world come together to discuss burning issues happening around the globe.
  • The major purpose of the G-7 is to discuss and deliberate on international economic issues.
  • G7 is capable of setting the global agenda because decisions taken by these major economic powers have a real impact. Thus, decisions taken at the G7 are not legally binding, but exert strong political influence.
  • It sometimes acts in concert to help resolve other global problems, with a special focus on economic issues.

What are the decisions taken by the G7?

  • The first decision that has been ratified is to force multinationals to pay taxes where they operate.
  • The second decision in the agreement commits states to a global minimum corporate tax rate of 15% to avoid countries undercutting each other. The agreement will now be discussed in detail at a meeting of G20 financial ministers and central bank governors in July.
  • The G7 committed to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.
  • The G7’s decision provides for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies.

Click Here to read about the Global Minimum Corporate Tax Rate proposal and Trend in Corporate Tax rates globally

Who are the targets minimum corporate tax rate?

  • Apart from low-tax jurisdictions, the proposal for a minimum corporate tax are tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations, including digital giants such as Apple, Alphabet and Facebook, as well as major corporations such as Nike and Starbucks.
  • These companies typically rely on complex webs of subsidiaries to hoover profits out of major markets into low-tax countries such as Ireland or Caribbean nations such as the British Virgin Islands or the Bahamas, or to central American nations such as Panama.
  • The US Treasury loses nearly $50 billion a year to tax cheats, according to the Tax Justice Network report, with Germany and France also among the top losers.
  • India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion, according to the report.

What are the problems with the plan?

  • Apart from the challenges of getting all major nations on the same page, especially since this impinges on the right of the sovereign to decide a nation’s tax policy, the proposal has other pitfalls.
  • A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
  • For instance, in the backdrop of the pandemic, IMF and World Bank data suggest that developing countries with less ability to offer mega stimulus packages may experience a longer economic hangover than developed nations.
  • A lower tax rate is a tool they can use to alternatively push economic activity. Also, a global minimum tax rate will do little to tackle tax evasion.

Where does India stand?

  • In a bid to revive investment activity, Indian Finance Minister in 2019 announced a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%.
  • The Taxation Laws (Amendment) Act, 2019 resulted in the Income-Tax Act, 1961 to provide for the concessional tax rate of 22% for existing domestic companies subject to certain conditions including that they do not avail of any specified incentive or deductions.
  • Also, existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.

-Source: The Hindu, Indian Express

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