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What the global minimum tax deal means for India

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The finance ministers of G-20 countries are scheduled to meet today in Washington to discuss the global minimum tax of 15% for multinational enterprises. Mint looks at the global minimum tax and its implications.

The finance ministers of G-20 countries are scheduled to meet today in Washington to discuss the global minimum tax of 15% for multinational enterprises. Mint looks at the global minimum tax and its implications.

What is the global minimum tax?

Last week, the Organization for Economic Co-operation and Development (OECD) finalized a landmark agreement to subject multinational enterprises (MNEs) to a minimum 15% tax from 2023. A total of 136 countries, including India, have agreed to join the historic agreement. This will help reallocate profits of over $125 billion from over 100 large MNEs to help ensure companies pay a fair share of tax in the countries they operate in. In a digitalized and globalized world economy, this deal brings in a fundamental reform in international tax rules.

What is the ‘Two Pillar’ solution?

The Two Pillar solution of the OECD seeks to address tax challenges that are an outcome of digitalization of the world economy. Under Pillar 1, taxing rights on more than $125 billion of profit are anticipated to be reallocated to market jurisdictions each year. A global minimum corporate tax rate of 15% is sought to be introduced under Pillar 2. This minimum tax rate will apply to companies with revenues over €750 million and the prediction is that it would help generate about $150 billion in global tax revenues on an annual basis.

Global tax
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Global tax

What was the trigger for such a deal?

Due to the pandemic and the resulting financial crisis, countries are looking for alternative and innovative sources of revenue to rejuvenate their economies. But large MNEs route their profits through low tax jurisdictions. This new pact helps ensure that MNEs pay their fair share of taxes due in countries where they operate and earn profits.

Will it eliminate tax competition?

The deal doesn’t seek to eliminate tax competition. Rather, it would ensure a fairer allocation of profit and taxing rights among countries, especially with reference to large and profitable MNEs such as Apple Inc., Google Llc, Amazon.com Inc., Netflix Inc. etc. It would help re-allocate the right to levy taxes from the home country of MNEs to the host nations where they do business —whether they have a physical presence or not. This will ensure that MNEs with global sales of over €20 billion and profitability of over 10% are covered by the rules.

And the implications for India?

The tax deal will mean removal of existing digital service taxes and other unilateral measures by 2023. India will need to withdraw the equalization levy that was introduced in 2016. This levy was aimed at taxing foreign firms that have a substantial client base in the country, but were billing via their offshore units. Experts believe the tax would be advantageous for India as the effective domestic tax rate is above the threshold and India, being a large potential market, would continue to attract foreign investments.

 

 

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