Tax Reforms

Global minimum tax may help India but can cause international disagreements

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Global Minimum corporate tax and issues associated with it

The article deals with the issue of global minimum tax proposal floated by the US, challenges it faces and its implications for India.

The US proposal for global minimum tax

  • In its recent proposal, the U.S. sought to impose a global minimum tax on foreign income earned by U.S. corporations.
  • The proposal is intended to disincentivise American companies from inverting their structures due to the increase in the U.S. corporate tax rate.
  • The U.S. is now discussing a floor of 15% for the minimum tax rate.
  • The proposal is similar to Pillar Two, except for the rate of the effective minimum tax.

Similarity with Pillar Two Proposal

  • The Pillar Two proposal was the Organisation for Economic Co-operation and Development’s (OECD) plan to plug the remaining Base Erosion and Profit Shifting (BEPS) issues
  • It provide jurisdictions the right to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
  • For instance, if an Indian-headquartered multinational corporation (MNC) has an entity in Singapore or the Netherlands through which global operations are run, and its income from global operations is not taxed at an effective rate of 10% or 15%, then it can be taxed in India.
  • India has been part of the Pillar Two discussions and has not objected in principle to the proposal.

How Global Minimum Tax would benefit India?

  • The proposal, along with the increased tax bill for U.S. companies, may benefit the Indian revenue department.
  • The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax revenue due to the use of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and the Netherlands.
  • This is supported by the overseas direct investment (ODI) data from 2000 to 2021 published by the Reserve Bank of India.
  • Start-ups and large Indian conglomerates commonly use offshore structures for conducting global operations.
  • Revenue from such operations is often retained offshore and not repatriated to India.
  • Tax advantages incentivise such structures, due to which taxes on such income are not paid in India.
  • Once these proposals are implemented, Indian companies would have to pay additional taxes on their offshore structures to the extent that the effective rate of tax is lower than the global minimum tax rate.

Challenges

  • Lack of consensus: Several countries have taken a different approach to the rate of global minimum tax.
  • While France and Germany have expressed support, the EU has raised concerns regarding the high rate proposed by the United States.
  • Tax sovereignty issue: Countries have stated that the proposal infringes upon their tax sovereignty and that the fight against unfair tax competition should not become a fight against competitive tax systems.

Consider the question “What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India?” 

Conclusion

As economies struggle amid the COVID-19 pandemic, the necessity of encouraging trade and economic activity should be prioritised over disagreements on tax allocations. A tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.

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