The U.S. Treasury Secretary has urged G20 nations to adopt a global minimum corporate tax rate to prevent the “30-year race to the bottom” that has seen countries slash corporate tax rates in a bid to attract multinational corporations (MNCs).
The Global Minimum Corporate Tax Rate Proposal
This proposal, initiated by the US, proposes a 21% minimum corporate tax rate. It also recommends abolishing exemptions on income from countries that do not impose a minimum tax. The aim is to discourage MNCs from shifting their operations and profits overseas. The initiative is designed to address the low effective tax rates paid by some of the world’s largest corporations, such as Apple, Alphabet and Facebook, as well as Starbucks and Nike.
Rationale Behind the US Proposal
The proposal is to offset potential negatives that could arise from a proposed increase in the US corporate tax rate. This proposed increase, from 21% to 28%, would partially reverse the previous cut from 35% to 21% in the 2017 tax legislation. This comes at a time when governments worldwide are dealing with the financial cost of the pandemic and the US is pushing for a USD 2.3 trillion infrastructure upgrade.
Significance of the Proposal
A global agreement, particularly during the pandemic, could benefit the US and many Western European countries. Yet, it could adversely affect low-tax European jurisdictions such as Ireland, the Netherlands, and Luxembourg, and certain Caribbean nations that rely on tax rate arbitrage to attract MNCs. The initiative seeks to make it more difficult for corporations to transfer earnings offshore.
International Response to the Proposal
The proposal has received backing from the European Commission and has support from Germany, France, the OECD, G20, and the International Monetary Fund. China is not expected to object strongly, although concerns may arise over the impact on Hong Kong, a significant tax haven.
Challenges Associated with the Proposal
The proposal intrudes upon a nation’s sovereignty to determine its own tax policy. This global minimum corporate tax rate may limit countries from using lower tax rates as a tool to stimulate economic activity. The proposal may also do little in curbing tax evasion.
India’s Position on Corporate Tax
India has cut its corporate taxes for domestic companies to 22% and 15% for new domestic manufacturing companies in a bid to stimulate investment activity. The cuts bring India’s overall corporate tax rate broadly in line with regional averages. To address the challenges posed by digital enterprises conducting business remotely, the government has introduced the ‘Equalisation Levy.’
Current International Tax Agreements
India actively engages with foreign governments to facilitate and enhance information exchange under Double Taxation Avoidance Agreements, Tax Information Exchange Agreements and Multilateral Conventions to plug loopholes.
What is Corporation Tax?
Corporation Tax or Corporate Tax is a direct tax applied on the net income or profit of a corporate entity from their business, whether foreign or domestic. The tax is imposed as per the provisions of the Income Tax Act, 1961.
About Minimum Alternate Tax (MAT)
The MAT was introduced to curb the number of zero tax paying companies. It is calculated at 15% of the book profit or at the usual corporate rates, whichever is higher, is payable as tax.
Definition of Domestic and Foreign Companies
A domestic company is one registered under the Indian Companies Act (2013) whereas a foreign company is one which is not registered under this act and has control & management located outside India.
Tax Haven Explained
A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment.
