What does the G7 corporate tax deal mean for India and the world?
(Representational Image) | Photo Credit: iStock Images  The G7 grouping of advanced economies has secured a "historic" agreement on taxing multinational corporations. Finance ministers meeting in London agreed to combat tax evasion by requiring corporations to pay taxes in the countries where they do business. The first decision that has been ratified is to require multinational corporations to pay taxes in the countries where they operate. The agreement's second conclusion commits governments to a worldwide minimum corporate tax rate of 15% in order to prevent countries from undercutting one another. The deal will now be addressed in depth at a meeting of G20 finance ministers and central bank governors in July. We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises. We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies. We also commit to a global minimum tax of at least 15% on a country-by-country basis. We agree on the importance of progressing agreement in parallel on both Pillars and look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors, the G7 finance ministers and central bank governors communiqu said. The decision to ratify a 15% floor rate follows US Treasury Secretary Janet Yellen's declaration of war on low-tax regimes around the world in April when she encouraged the world's 20 major economies to embrace a minimum global corporate income tax. In a virtual speech to the Chicago Council on Global Affairs, she stated that the initiative to enact a minimum rate was an attempt to halt a 30-year race to the bottom in which countries have resorted to reducing corporate tax rates in order to attract multinational firms. To deter multinational operations and earnings from migrating overseas, the US proposal advocated a higher 21% minimum corporation tax rate, as well as the cancellation of exemptions on income from countries that do not have a minimum tax. One of the reasons the United States pushed for this was essentially domestic in nature. The planned rise from 21% to 28% would partially undo the previous Trump administration's 2017 tax reform that reduced corporate tax rates from 35% to 21%. More notably, the US proposal raises the minimum corporation tax rate, which was contained in the Trump administration's tax policy, from 10.5 percent to 21 percent - the benchmark minimum corporate tax rate that Yellen has set. This surge comes at a time when governments around the world are bearing the brunt of the pandemic's costs. A global pact on this subject, as proposed by Yellen, is advantageous to the US government at this moment. The same is true for the majority of other Western European countries, despite the fact that several low-tax European jurisdictions, such as the Netherlands, Ireland, and Luxembourg, as well as some Caribbean jurisdictions, rely heavily on tax rate arbitrage to recruit MNCs. The IMF has also expressed some interest in the plan. While China is unlikely to object seriously to the US request, the impact of such a tax stipulation on Hong Kong  the seventh-largest tax haven in the world and the largest in Asia, according to a study published earlier this year by the advocacy group Tax Justice Network  would be a source of concern for Beijing. Furthermore, China's strained relationship with the United States may act as a barrier in discussions for a worldwide tax treaty. Aside from low-tax jurisdictions, the proposal for a minimum corporate tax is aimed at addressing the low effective tax rates paid by some of the world's largest firms, including digital titans such as Apple, Alphabet, and Facebook, as well as major firms such as Nike and Starbucks. These firms generally rely on sophisticated webs of subsidiaries to divert income from major markets to low-tax jurisdictions such as Ireland or Caribbean jurisdictions such as the British Virgin Islands or the Bahamas, or to Central American jurisdictions such as Panama. According to the Tax Justice Network report, the US Treasury loses about $50 billion a year to tax evasion, with Germany and France being among the top losers. According to the report, India's yearly tax loss owing to corporate tax evasion is projected to be more than $10 billion. Aside from the difficulties of putting all major nations on the same page, especially as this violates the sovereign's authority to establish a nation's tax policy, the concept has other flaws. A worldwide minimum rate would simply remove a tool that countries use to advocate policies that benefit them. For a fact, in the context of the pandemic, IMF and World Bank data indicates that underdeveloped countries, which lack the ability to give massive stimulus packages, may suffer a lengthier economic hangover than rich countries. A reduced tax rate is one instrument they can employ to stimulate economic growth. Furthermore, a global minimum tax rate will do little to combat tax avoidance. In an effort to spur investment, Finance Minister Nirmala Sitharaman announced on September 21, 2019, a substantial reduction in corporate taxes for domestic enterprises to 22 percent and for new domestic manufacturing enterprises to 15 percent. The Taxation Laws (Amendment) Act of 2019 resulted in the addition of a section (115BAA) to the Income-Tax Act of 1961 to provide for a concessional tax rate of 22% for existing domestic companies subject to certain conditions, including that they do not take advantage of any specified incentive or deduction. Existing domestic enterprises that choose the concessionary taxation regime will also be exempt from paying the Minimum Alternate Tax. This, together with other measures, was anticipated to cost the government Rs 1.45 lakh crore each year. The reductions effectively brought India's headline corporate tax rate in line with the average Asian rate of 23 percent. China and South Korea each have a 25% tax rate, while Malaysia has a 24% tax rate, Vietnam has a 20% tax rate, Thailand has a 20% tax rate, and Singapore has a 17% tax rate. For Indian domestic enterprises, the effective tax rate, including surcharge and cess, is roughly 25.17 percent. While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure. The economic division will look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter, said a senior government official. For current businesses that are claiming some sort of benefit, the average corporate tax rate is roughly 29 percent. Another official stated that New Delhi was proactively engaging with other governments in order to facilitate and improve information exchange under Double Taxation Avoidance Agreements, Tax Information Exchange Agreements, and Multilateral Conventions to close loopholes. Furthermore, effective enforcement actions, such as rapid investigation in foreign asset cases, have been undertaken, including searches, inquiries, levy of taxes, penalties, and so on, as well as the filing of prosecution complaints, when relevant. To address the issues faced by firms that conduct their business through digital means and carry out activities in the country remotely, the government enacted the Equalisation Levy' in 2016, in response to a recommendation by a group formed to discuss taxes of the digital economy. In addition, the IT Act has been updated to include the idea of "Significant Economic Presence" for establishing a "business relationship" in the case of non-residents in India.