From UPSC perspective, the following things are important :
Prelims level : BEPS, Global Minimum Tax
Mains level : Narrative for the Global Minimum Corporate Tax
The US has anticipated support from the G7 industrial democracies for the Biden Administration’s proposed 15%-plus global minimum corporate tax.
Multinational corporations rather monopolies don’t like to pay their fair share of taxes. They’ll do everything in their power to exploit loopholes and minimize their tax liability. Most companies simply open offices in destinations where tax rates are low or negligible. And at the end of it all, they’ll have done just enough to avoid paying billions of dollars in taxes.
Global Minimum Corporate Tax
- Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
- Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions.
- This has allowed companies to avoid paying higher taxes in their traditional home countries.
- With a broadly agreed global minimum tax, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage.
How would such tax work?
- The global minimum tax rate would apply to companies’ overseas profits.
- Therefore, if countries agree on a global minimum, governments could still set whatever local corporate tax rate they want.
- But if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven.
- The Biden administration has said it wants to deny exemptions for taxes paid to countries that don’t agree to a minimum rate.
Back2Basics: Base Erosion and Profit Shifting (BEPS)
- BEPS refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions.
- It thus “erodes” the “tax base” of the higher-tax jurisdictions.
- Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven.
- It is alleged that BEPS is associated mostly with American technology and life science multinationals.