Will India and other developing economies gain from the proposed deal? India will gain only with a comprehensive pact that also covers an agreement to tax digital companies that have no physical presence in countries where they generate revenues and profits. Else, it will not. The focus of the G7 is on the adoption of a global minimum corporate tax.
‘The principles of fairness – that’s what we’ve achieved today,’ declared Britain’s chancellor of the exchequer Rishi Sunak soon after finance ministers of G7 countries agreed to a historic deal that will have all MNCs pay at least 15% corporate tax on their global profits in their own jurisdictions. The reform to revamp the global tax system, steamrolled by the US, will boost the collaborative move towards ending practices by MNCs that lead to base erosion and profit-shifting, and help ease the pressure on public finances due to the Covid-19 pandemic.
Will India and other developing economies gain from the proposed deal? India will gain only with a comprehensive pact that also covers an agreement to tax digital companies that have no physical presence in countries where they generate revenues and profits. Else, it will not. The focus of the G7 is on the adoption of a global minimum corporate tax. This is one of the two pillars (Pillar 2) of the OECD‘s reform blueprint. The other (Pillar 1) is on how to tax MNCs that provide digital services. Pillar 1 and Pillar 2 are not in conflict with each other but must be agreed on together.
The G7 communique acknowledges the importance of moving towards an agreement on both pillars. This is welcome. But a comprehensive deal is a must, given that Pillar 1 is vital for India as the digital economy grows apace.
The current proposal means that Google would have to pay a minimum 15% tax on its global profits. If the company pays an effective 6% corporate tax, say, in the Asian region, it will have to pay a top-up corporate tax of 9% in the US. So, revenues will accrue to the US.
The agreement also says that countries where largest and profitable firms operate would get the right to tax ‘at least 20% of profits exceeding a 10% margin’. But that would cover only top 100 companies (including tech companies) with a turnover that is far higher than the threshold that developing countries want. This will mean that if Google has an overall profitability of 35%, then 20% of the excess 10% (25%) will be distributed to other market jurisdictions.
The technical details still have to be worked out, giving leeway for developing countries to negotiate a better deal.
At the G20 meet on July 9-10 in Venice, India should push for the adoption of Pillar 1 that apportions global profits to the countries in which their users are located, based on the principle that companies must pay tax in every market where they generate value and make profits. The realised value can be estimated from the sales revenue of digital companies from a particular jurisdiction: apportion profits to the sales, and levy the applicable tax rate.
An active participant in the fight against tax havens, India has consistently held that OECD must define a new taxing nexus, and make rules to assign income to that nexus based on gross sales revenue and overall profitability of the enterprise, not just allocate residual profits. It should reiterate this position.
Central Board of Direct Taxes (CBDT) former member Akhilesh Ranjan reckons that even as it is a positive and important step forward, it seems rather presumptuous on the part of G7 to announce an historic global tax reform without having at least all G20 countries on board, and without offering a fair and equitable solution on taxation in a digitalised economy under Pillar 1.
A significant number of countries would have to come on board to approve the G7 deal. The OECD’s framework has estimated about $100 billion a year of extra corporate profits being available for taxation in jurisdictions such as India and Europe, underscoring the need for Pillar 1.
Progress on the deal to revamp the global tax system had been stalled by the Trump administration, leading to a series of unilateral measures that led to the threat of trade sanctions. Sensibly, the Biden regime has revived hopes of an accord. ‘A global minimum tax would end the race to the bottom in corporate taxation,’ said US Treasury Secretary Janet Yellen. It would level the playing field, to a certain extent, in the taxation of MNCs.
Is it the best solution, given that taxation is a sovereign right? This could be debated. India, for example, changed its branding as a high-tax jurisdiction after it cut corporate tax rate for new domestic manufacturing companies to 15% from 30%, and to 22% for domestic companies, provided they eschew exemptions and the minimum alternate tax (MAT) to attract investments. India should be okay with a 15% global minimum tax, but other developing countries want a lower rate.
If Pillar 1 is adopted, it will do away with the need for unilateral levies such as India’s equalisation levy. Surely, there is important work left for India to do when the stars have aligned.