The Group of Seven (G7) countries have backed the proposal to impose a common global corporate tax.
It is aimed at preventing multinational businesses from evading taxes and also squeezing the havens which attract tax evaders due to the low-rate jurisdictions.
What are the decisions taken?
The tax proposal endorsed by the G7 countries (US, UK, Germany, France, Canada, Italy and Japan) has two parts.
The agreement made will now be discussed in detail at a meeting of G20 financial ministers and central bank governors in July 2021.
First part - Countries around the world should tax their home companies' overseas profits at a rate of at least 15%.
This 15% of global minimum corporate tax would deter the practice of using accounting schemes to shift profits to a few very low-tax countries.
Often, these tax havens are the Caribbean Islands such as Bahamas or British Virgin Islands.
Or at times, it is countries like Ireland where the corporate tax rate is as low as 12.5%.
Second part - This allows countries to tax a share of the profits earned by companies "that have no physical presence but have substantial sales."
For instance, this could be though selling digital advertising.
What is the rationale?
The G-7 statement echoes an earlier US proposal.
The US had urged the world’s 20 advanced nations to move in the direction of adopting a minimum global corporate income tax.
It urged countries to tax part of the earnings of the largest and most profitable companies if they are doing business within their borders.
It also supported awarding countries the right to tax 20% or more of profit exceeding a 10% profit margin.
The decision to ratify the 15% floor rate follows from the same route to deal with low-tax jurisdictions around the globe.
It is also to address the low effective rates of tax shelled out by some of the world’s biggest corporations.
These include digital giants such as Apple, Alphabet and Facebook, as well as major corporations such as Nike and Starbucks.
Who will benefit?
The proposal works well for the US government at this time.
The same holds true for most other countries in western Europe.
This is true even as some low-tax European jurisdictions and some in the Caribbean rely largely on tax rate arbitrage to attract MNCs.
The second part of the G7 proposal is expected to impact companies that rely on the digital medium to drive their profits.
However, after the imposition of a common global corporate tax, countries are advised to revoke their respective digital services taxes.
This is would end up benefitting the Silicon Valley companies.
[The US considers those unilateral digital taxes to be unfair trade measures that single out the American tech companies such as Google, Amazon and Facebook.]
What are the problems with the plan?
There are challenges in getting all countries to agree for the proposal.
This is especially because it impinges on the right of the sovereign to decide a nation’s tax policy.
A global minimum rate would also take away a tool that countries use to push policies that suit them.
For instance, in the backdrop of the pandemic, developing countries with less ability to offer mega stimulus packages may experience a longer economic hangover than developed nations.
A lower tax rate is a tool they can use to alternatively push economic activity.
What does it mean for other countries?
China is not likely to have a serious objection with the US call.
But an area of concern for Beijing would be the impact of such a tax stipulation on Hong Kong.
Hong Kong is notably the seventh-largest tax haven in the world and the largest in Asia.
Also, China’s strained relationship with the US could be a deterrent in negotiations on a global tax deal.
India - In a bid to revive investment activity, the FinMin, in 2019, announced a sharp cut in corporate taxes for domestic companies to 22%.
And for new domestic manufacturing companies, it was brought to 15%.
The cuts effectively brought India’s headline corporate tax rate broadly at par with the average 23% rate in Asian countries.
India is likely to look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter.
