Often, MNCs are known to shift their tax liability by assigning a share of costs and profits to a subsidiary in a low-tax jurisdiction or by parking intangible assets such as intellectual property in subsidiaries in tax havens, so that royalties would accrue there.
The G7 finance ministers have done well to secure a historic deal to have a minimum tax of 15% on corporate incomes in every country, and to accord every market where multinational companies undertake sales the right to tax their earnings. The reform in the global tax system will, if carried through into binding, multilateral tax pacts, deter MNCs from using differences in tax rules to shift profits to tax havens, prevent base erosion and profit shifting, and help governments to collect more taxes.
Often, MNCs are known to shift their tax liability by assigning a share of costs and profits to a subsidiary in a low-tax jurisdiction or by parking intangible assets such as intellectual property in subsidiaries in tax havens, so that royalties would accrue there. A global minimum tax rate would mean that countries would lose their sovereign right to set a tax rate below the floor. This would damage tax havens. Estimates suggest that during 2000-18, the US Treasury was deprived of around $100 billion in revenue annually as US companies booked half of all foreign profits in seven low-tax jurisdictions. Ireland, the headquarters for many tech giants, levies tax at 12.5%, and MNCs try to reduce it further by using transfer pricing. The accord by G7 is based on the proposal initiated by the Organisation for Economic Cooperation and Development (OECD) that has two pillars. Pillar 2 is the effective minimum corporate tax rate that every MNC would have to pay. India should be okay with a 15% minimum rate. Pillar 1 targets, among others, digital giants that generate revenues from a market without having a physical presence there. It seeks to apportion global profits to the countries where its users are located. It is based on the principle that companies must pay tax in every market where they generate value and make profits.
However, agreement must be reached on Pillar 1 and Pillar 2 simultaneously. That would make unilateral digital taxes such as the equalisation levy redundant, and ease trade tensions. Much work lies ahead.