The G7 agree on global minimum corporate tax rate, what does it mean to India?

Advanced economies of the G7 group of wealthy nations finally reached an agreement and signed a milestone pact to tax multinationals and online technology companies on Saturday. The pact is signed to curb tax erosion and tax abuse by multinationals, adopting measures like making companies pay tax in the countries where they work or conduct business. The countries also agreed in principle on a global minimum corporate tax rate of 15%, to counter the countries that use their low tax regime to lure multinational companies. This deal will put a stop to what US Treasury Secretary Janet Yellen says “30-year race to the bottom”. Finance ministers of the seven countries met in London, the G7 group of countries include the USA, UK,Germany, France, Canada, Italy and Japan. There is still a lot of negotiation trials remaining within the G7 which would take months and even years before the rules come into force. There is a comprehensive consensus on the pact between G7 economies but several other leading economies like China, India, Russia and Brazil will be involved in further talks next month when G20 countries meet in July. India and the US are already at crossroads because of the digital service tax issue, all eyes will be set on the G20 meeting to come up with a remedy.

Who are the G7 nations?

G7 stands for a group of seven nations, it is an intergovernmental organisation that was founded in 1975. The group meets yearly to discuss issues of common interest like international security, energy policy, taxation, global economy et cetera. The G7 countries do not have any formal constitution or headquarters and all the pacts made under G7 or non-binding. The countries that comprise G7 are all advanced and wealthy economies with a high HDI index, high happiness index, high GDP and per capita income. These are the big guns of the town whose decisions influence everyone around them.

What are the key takeaways?

G7 agreed on two main pillars of reforms the first one is to tax multinational companies by adhering to the principle of source-based taxation so that they are forced to pay taxes in the country where they operate. What this decision means is that digital service provider companies conduct business in one country but are not physically present there. They exploit the principle of resident-based taxation, these companies evade tax by constructing a physical infrastructure in tax haven countries like the Bahamas or Singapore. The agreement authorises countries where multinational companies generate revenue taxing rights of at least 20% of profit exceeding a 10% margin for the most valuable firm. The communiqué also mentioned removal of all digital service taxes by respective countries so that the 20% rule can be executed.

The second agreement is setting up a global minimum corporate tax rate which is fixed at 15% on a country by country basis. The US president Joe Biden was pushing the minimum tax rate to be at 21% which is too much.

Who will fall under these new rules?

According to the Biden administration around 100 multinational companies will fall under this new tax regime in pillar one. Amazon won’t fall under the first pillar rules. But Amazon will try to convince European Union and the UK to push for a broader scope to capture parts of the company and raise more taxes from firms. This is called segmentation where profitable parts of a company in respective country are taxed in their own right.

Around 8000 multinational companies will fall under the global minimum corporate tax rate. Big names like Amazon, Apple, Alphabet, Nike, Starbucks and Facebook are anticipated to fall under the ambit. Companies construct an intricate net of subsidiaries to evade taxes. EU tax observatory mentioned that this new rule will also catch companies like oil giants, mining firms and banking firms        

Why 21% tax rate was eased to 15%?

Janet Yellen mentioned that this pact is a milestone towards ending the 30-year race to the bottom. The minimum tax rate will ensure that tax haven countries are no longer luring multinationals to register profits in their country. This will stop the undercutting of taxes and shifting of profits. The US is pushing this is because of domestic reasons as the Biden administration is increasing the corporate tax rate from 21% to 28%. They have strategically decided on rates for the whole world, so if the US increases corporate tax rate in their country it’s going to be the same rate all over the world hence curtail criticism.

If the global minimum tax rate is adopted how much will it raise?

The OECD countries calculated last year that the new tax rules will generate $81 billion additionally each year. Pillar one ruleswould generate an income between $5 billion to $12 billion while pillar two rule; the global corporate tax rate would generate an income between $42 billion to $70 billion. Think tanks and societies like the Tax Justice Network Advocacy estimated that a 21% rate would generate $640 billion. Institute for Public Policy Research estimated the United Kingdom would reap an extra €14.7 billion yearly. Tax haven countries like Ireland can lose €2 billion per year. India records annual tax losses of over $10 billion according to the Tax Justice Network report. The US treasury loses nearly $15 billion per year to tax abuses along with Germany and France.

What are the issues in the new deal?

Apart from the technical challenges of the deal, it will be tough to get all the countries to agree to these new tax rates. This new move can be challenged in United Nations because it impinges on the right of the sovereign nation-states to decide their country’s tax policies. Many countries like the Bahamas, Panama etc use low tax rates as a measure to earn income and stimulate asset creation and investments. If global minimum tax rate is applied these countries will lose a major source of income. In the light of pandemic low income and developing countries can offer only low tax rates to attract investors to generate income. US-China relationship recently went downhill, Asia’s biggest tax haven Hong Kong will suffer the most due to global minimum tax. All these reasons may pose a hindrance in the negotiations when the G20 meet. Also, the global minimum tax rate will not ensure tax avoidance and it will remain a problem for the global economy.

Will India benefit from this deal or lose?

India and the US have recently been fighting over the equalisation levy on digital services charged by the Indian government. India isn’t a tax haven country but a low tax rate is an important tool for the Indian economy. India will experience the pandemic induced economic hangover for an extended period due to the minimum tax rate. The IT act has the concept of significant economic presence to tax corporations in India who operate from outside. India has already engaged in double taxation avoidance agreement, tax information exchange agreements and multilateral conventions to remove loopholes. This common tax rate will not do any function. India recently cut its corporate tax rate to 22% to boost economic activity, bringing it at par with the other Asian countries. India strongly believes the taxation policies are the sovereign right of a nation-state which are made according to necessities and circumstances. The countries should be open for dialogue and discussion oncommon global corporate tax rates.

In a world full of economic inequalities equal tax rate for every nation-state is not rational.