From UPSC perspective, the following things are important :
Prelims level : Base Erosion and Profit Shifting
Mains level : Paper 3- Global minimum tax and its impact
The article deals with the recent proposal from the US Treasury Secretary for the global corporate minimum tax rate and its implications for India.
What is global minimum tax
- Treasury Secretary Janet Yellen has thrown the weight of the U.S. government behind a push for a global corporate minimum tax rate.
- It is being proposed that the race to the bottom for corporate tax rates be reversed.
Base Erosion and Profit Shifting programme and issues with it
- Big tech companies were able to operate in large markets such as India without physical presence and profits could be relatively easily relocated to low-tax jurisdictions through financial manoeuvres.
- The Base Erosion and Profit Shifting (BEPS) programme was initiated in 2013 to curb practices that allowed companies to reduce their tax liabilities by exploiting loopholes in the tax law.
- The OECD co-opted countries in the framework by suggesting that a consensus-based outcome would be superior to a patchwork of independent changes.
- Developing countries weren’t sure if they would receive the right to tax the mobile incomes of tech companies.
- Addressing this concern, the OECD published a policy note that bifurcated the challenge into two pillars.
- Pillar one was to address the issue of reallocation of taxing rights whereas all remaining BEPS issues would be addressed by pillar two.
- Most contentious issue in the blueprint is that only a fraction of the profits will be allocated to markets.
- So, the tax base of countries, including India, remains exposed to the risk of under or non-taxation.
- To fix this, countries have implemented a digital services tax on revenues.
- In response, the US launched, in 2020, inquiries under the Trade Act 1974 and is now proposing tariffs as means to curb the proliferation of such measures.
Finding consensus-based solution: Minimum tax rate
- The Biden administration has assured its participation in finding a consensus-based solution.
- However, recently the US Treasury suggested that it will apply the pillar one proposal to top 100 companies and will not accept any result that is discriminatory to US companies.
- The US now supports a simplification of the proposal. However, it remains to be seen how the final version pans out for markets such as India.
- Shifting to pillar two, it is now being proposed that the US corporate tax rate be raised to 28 per cent.
- It is being suggested that a minimum tax rate be defined for the world.
- This minimum rate is not yet defined, but once this rate is fixed, a multinational enterprise’s effective tax rate in each jurisdiction will be compared with the minimum and where a lower rate is paid, a top-up tax will apply.
- But who gets to tax the remaining profits?
- As per the current design, the country where the ultimate parent entity resides is where the tax is first applicable.
- Given that nearly 30 per cent of the Forbes 2000 companies are in the US, the implementation of this proposal best serves the needs of the US.
Impact on India
- For India, committing to such a global standard needs to be assessed carefully, especially since the proposal will apply to companies with global revenues above Euro 750 million.
- Moreover, India has witnessed a consistent rise in the effective tax rate which is now close to 26 per cent.
Consider the question “What are the reasons that led to the idea of global minimum tax? How it will impact India?”
For the rise in US tax rates to pay off, it requires other countries to reform their tax systems accordingly and, most importantly, allow for the taxation of incomes that are perceived to be undertaxed.