Globalization has benefited our domestic economies, boosted trade, and increased FDI in many countries. However, this has caused a significant impact on a country's corporate income tax regime due to the increase in the pace of integration of national economies and markets in recent years.
The finance ministers of the Group of Seven (G7) countries (Canada, Japan, Germany, Italy, France, United Kingdom, United States) reached the landmark accord of setting up a Global Minimum Corporate Tax Rate (GMCTR) during the 47th G7 summit headed by Mr Borris Johnson. This was to address the issue of double taxation due to the interaction of domestic tax systems with international taxation laws.
What is the Global Minimum Corporate Tax?
Corporate Tax is a direct tax levied on a corporate entity's net income or profit. GMCT or Global Minimum Corporate Taxation is the minimum amount of corporate tax a company, domestic or foreign, must pay on its income. It is an agreement between national leaders to reduce the tax competition between countries and to eliminate the practice of tax evasion and avoidance by large multinational conglomerates.
Global Minimum Corporate Tax History
A brief history of Global Minimum Corporate Tax -
- In 2019, the G-20 countries mandated the OECD (Organization for Economic Cooperation and Development) to address tax evasion by introducing a BEPS (Base Erosion and Profit Shifting) plan.
- The OECD asked the countries in the BEPS framework to adopt a consensus-based outcome instead of the country's individual moves to tax the companies and prevent them from shifting profits to jurisdictions with a lower corporate tax rate.
- A group called Inclusive Framework was formed that has since explored a minimum tax rate among its member states.
- Germany and France published a joint proposal in May 2019 for an effective global minimum tax rate named Pillar Two to stop the race to the bottom.
- The group's 137 member states called the blueprint for Pillar Two in 2020.
- In June 2021, a meeting of the finance ministers of G7 in the leadup to the 2021 G7 Summit endorsed a Global Minimum Corporate Tax rate of at least 15% on the 100 most prominent multinational companies to disincentivize a race to the bottom by countries to attract such multinationals.
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Global Minimum Corporate Tax - Two Pillar Solution Proposed
Global Minimum Corporate Tax would apply to overseas profits of multinational firms with global sales of $868 million.
- Pillar 1 (Minimum tax and subject to tax rules): Governments can still set the local corporate tax rate they want. And if companies pay lower rates in a country, their governments could "top up" their taxes to a minimum of 15%, thus eliminating the advantage of shifting profits.
- Pillar 2 (Reallocation of an additional share of profit to the market jurisdictions): This allows countries where revenues are earned to tax 25% of the largest multinationals' so-called excess profit – defined as profit over 10% of revenue.
Global Minimum Corporate Tax - India's Rank
India has already proactively engaged with foreign governments in double taxation avoidance agreements, tax information exchange agreements, and multilateral conventions to plug loopholes. Therefore, this proposal of a standard tax rate adds no further benefits to India.
Taxation is at the core of a country's sovereignty, but the interaction of domestic tax laws with other countries' tax laws in certain cases leads to gaps and frictions. The Global Minimum Corporate Tax is a novel way of bringing parity in the taxation regimes of countries. It should be adopted reasonably and with a consensus of developed and developing countries. A prudent rate would effectively prevent tax base erosion of the higher-tax jurisdiction.
FAQs on Global Minimum Corporate Tax
Q1. What minimum sales of MNCs should be on whom the Global Minimum Corporate Tax rate would be applicable?
The Global Minimum Corporate Tax Rate would apply to overseas profits of multinational firms with $868 million in sales globally.
Q2. Who heads the 47th G7 countries summit for discussing the Global Minimum Corporate Tax?
The 47th G7 countries summit is headed by the prime minister of the United Kingdom, Mr Borris Johnson, to discuss the impact of the Global Minimum Corporate Tax on various countries' tax laws.
Q3. What is the economic impact of implementing Global Minimum Corporate Tax?
The OECD estimates that the minimum tax will generate $150 Billion in additional global tax revenues annually. By implementing the Global Minimum Corporate Tax rate, taxing rights on profits of more than $125 billion will additionally be shifted to the countries where they are earned from the low tax countries where they are currently booked.
Q4. What is the Two Pillar Solution as per Global Minimum Corporate Tax to avoid double taxation?
As per the Global Minimum Corporate Tax rate, the Two pillar solution is:
Pillar 1 - Minimum tax and subject to tax rules
Pillar 2 - Reallocation of an additional share of profit to the market jurisdictions