Why a global minimum tax? Major economies are aiming to discourage multinationals from shifting profits — and tax revenues — to low-tax countries regardless of where their sales are made.
A large group of rich nations, which includes the US and UK, has reached a landmark deal to squeeze more money out of multinational companies such as Amazon and Google and reduce their incentive to shift profits to low-tax offshore havens. This essentially means hundreds of billions of dollars could flow into the coffers of governments left cash-strapped by the pandemic.
A primer on what it means for the world:
Global minimum tax, why is there a need now?
Current global tax rules date back to the 1920s and struggle with multinational tech giants that sell services remotely and attribute much of their profits to intellectual property held in low-tax jurisdictions.
Major economies are aiming to discourage multinationals from shifting profits. Income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their home countries.
How will it work?
The global minimum tax rate would apply to overseas profits. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the minimum rate, eliminating the advantage of shifting profits.
The OECD said last month that governments broadly agreed on the basic design of the minimum tax but not the rate. Tax experts say that is the thorniest issue, although the G7 accord creates strong momentum around the 15%-plus level.
Other items still to be negotiated include whether investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring it is compatible with the United States’ tax reforms aimed at deterring erosion.
A G20 meeting scheduled for Venice next month will see whether the G7 accord gets broad support from the world’s biggest countries. Much still needs to be ironed out — including the metrics that will determine how and to which multinational companies the tax will be applied. Any final agreement could have major repercussions for low-tax countries and tax havens. The Irish economy has boomed with the influx of billions of dollars in investment from multinationals. Dublin, which has resisted European Union attempts to harmonize its tax rules, is unlikely to accept a higher minimum rate without a fight.
What does all of this mean for India?
For India, if income is paid from here to a country where the rate of tax is less than 15% (Ireland, Luxembourg, Netherlands for instance) India will have the right to tax that income if there is a digital nexus.
(Source: Reuters, Deloitte India and Twitter)