Global Minimum Tax

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    In News

    • Recently, the Members of the European Union agreed in principle to implement a minimum tax of 15% on big businesses.
      • The global corporate minimum tax was approved at the G20 Leaders Summit in Rome in 2021.

    Background

    • 136 countries had agreed on a plan to redistribute tax rights across jurisdictions and enforce a minimum tax rate of 15% on large multinational corporations in 2021. 

    What is Global Minimum Tax?

    • Meaning: It is a proposal to impose a minimum rate of taxation on corporate income in most countries of the world by international agreement.
      • The agreement established a two-pillar solution revising tax rules to address profit shifting and tax base erosion caused by tax avoidance practices. 
    • OECD’s Plan: EU members have agreed to implement a minimum tax rate of 15% on big businesses in accordance with Pillar 2 of the global tax agreement framed by the Organisation for Economic Cooperation and Development (OECD). 
      • Pillar 1 of the OECD’s tax plan, on the other hand, tries to address the question of taxing rights.
    • Governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low.  

    Facts/ Data

    • Corporate tax avoidance costs countries anywhere from $100 billion to $240 billion annually.
      • It is equivalent to 4-10% of global corporate income tax revenues.
    • The existing international tax rules are based on agreements made in the 1920s and are today enshrined in the global network of bilateral tax treaties.
      • Old rules provide that the profits of a foreign company can only be taxed in another country where the foreign company has a physical presence. 
      • Most countries only tax the domestic business income of their MNCs but not foreign income on the assumption that foreign business profits will be taxed where they are earned.

    What is the need for a global minimum tax?

    • Decreasing taxes: Corporate tax rates across the world have been dropping over the last few decades because of competition between governments to spur economic growth through greater private investments. 
      • Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020.
    • Race to the bottom: The OECD’s tax plan tries to put an end to this race to the bottom which has made it harder for governments to shore up the revenues required to fund their rising spending budgets. 
    • Deteriorating Fiscal Health: The minimum tax proposal is particularly relevant at a time when the fiscal state of governments across the world has deteriorated as seen in the worsening of public debt metrics.

    Major Challenges

    • Denial by Tax Havens: Some governments, particularly those of traditional tax havens, are likely to disagree and stall the implementation of the OECD’s tax plan.
    • Issue for a developed country: Large U.S. tech companies may have to pay more taxes to governments of developing countries.
    • Lack of compensation: Low tax jurisdictions are likely to resist the OECD’s plan unless they are compensated sufficiently in other ways.
    • Internal rift: within the EU, countries such as Poland have already tried to stall the adoption of the global minimum tax proposal citing various non-economic reasons.
    • Formation of global tax cartel: the OECD’s plan essentially tries to form a global tax cartel; it will always face the risk of losing out to low-tax jurisdictions outside the cartel and cheating by members within the cartel.
    • Developing countries are disproportionately affected because they tend to rely more heavily on corporate income taxes than advanced economies.

    Significance of the move

    • Boost global tax revenues: It is estimated that the minimum tax rate would boost global tax revenues by $150 billion annually.
    • Ending tax havens: This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens to save on taxes.
      • Large multinational companies have traditionally paid taxes in their home countries even though they did most of their business in foreign countries.
    • Taxing rights: The OECD plan tries to give more taxing rights to the governments of countries where large businesses conduct a substantial amount of their business.
    • Countries both within and outside the cartel will have the incentive to boost investments and economic growth within their respective jurisdictions by offering lower tax rates to businesses.

    Way Forward/ Suggestions

    • High tax jurisdictions like the EU are more likely to fully adopt the minimum tax plan as it saves them from having to compete against low tax jurisdictions.
    • The plan will also help counter rising global inequality by making it tougher for large businesses to pay low taxes by availing the services of tax havens.
    • Without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.

    Source: TH