The recent G7 proposal of a global minimum tax has mixed implications for Indian corporations, foreign majors operating here and the tax authorities
The framework approved by G7 is not an appealing one for New Delhi to accept because the effective tax India will levy may well be less than the scope of the digital tax it currently deploys
The global minimum corporation tax of 15 per cent suggested by the G7 nations at the summit of their finance ministers last weekend, could make life more taxing for some large Indian IT companies. The tax could, for instance, cost TCS, India’s largest IT services company, more under the new tax treatment, but Infosys may just about get away because it still does not rank among the top 100 digital multinationals by size.
Indian conglomerates such as Airtel and Tata group with substantial investments abroad may not be able to retain the benefits of their tax shelters abroad because, under the structure of this tax, Indian revenue authorities could mop up the differential tax.
All these tax scenarios are, of course, going to be intensely argued before they enter the statute books. The agreement in London, will now be debated by the G20 group of finance ministers later this year. Only after the heads of state of the G20 accept the framework would this agreement be adopted by the legislatures of the respective countries. So it is a long road ahead.
International attention is, nevertheless, focused on how, after years of debate, the G7 nations have accepted a two-pillar solution to taxing multinational companies more intensely. Pillar two has drawn more attention — it mandates a minimum rate of 15 per cent corporation tax, effectively ending the attraction of tax havens for multinational companies. For Indian tax authorities, it is pillar one of this agreement which carries the more serious macro-implications.
Under this pillar is the question of tax treatment of IT or digital companies. US Treasury Secretary Janet Yellen has said she wants countries to get the “taxing rights on at least 20 per cent of profit exceeding a 10 per cent margin for the largest and most profitable multinational enterprises”. Behind the ringing tone note the words, largest and most profitable.
The US had carried a position to the London summit that only about 100 of the most profitable multi-national enterprises globally should be subject to this tax. Most such companies globally are the digital giants. In other words, if these companies have a significant market presence in any economy, they have to pay a substantive tax there. The Organisation for Economic Cooperation and Development (OECD), the club of rich countries representing the European Union interests more strongly, wanted no limit on the number of enterprises covered. The two italicised words imply that the US position has carried the day.
For India, this means that TCS might be subject to this tax abroad, wherever it has a presence. Interestingly, going by the same metric, Amazon with a lower than 10 per cent operating profit margin, will not fit into this club.
The Indian government is unlikely to agree to this position since all digital services companies, including Amazon, pay a 2 per cent tax on their transactions here. The US government last week set India and five other countries, including the UK and Germany, a time frame of 180 days to halt the tax and accept multilateral talks for a new taxation framework or face potential retaliatory tariffs from Washington.
The multilateral framework approved by G7 is, therefore, not an appealing one for New Delhi to accept because the effective tax India will levy may well be less than the scope of the digital tax it currently deploys. Also, Indian revenue authorities are keen to be able to potentially access more than the “20 per cent of profit exceeding the 10 per cent margin” of foreign companies that do business in India. The G7 declaration has used the word “at least,” signifying that it is a floor, but chances are it could become a ceiling.
Otherwise, India could face a situation where as more domestic companies graduate to the 100 multinational club, those tapping into the Indian market will be able to duck the tax. This is possible since the foreign multinationals will be taxable on their India exposure. Profitability of these companies will be certainly thin, in any case lower than the threshold of 10 per cent.
The flip side is a brighter one for the tax department. Whenever Indian companies do a merger or acquisition abroad, they set up a special purpose vehicle to carry out the transaction. These vehicles earlier carried a Mauritius address, but lately also a Cayman Island registration. Both these destinations offer a zero corporation tax rate. India has a double taxation avoidance treaty with Mauritius and none with Cayman but the effect was the same. India earns no tax from these transactions. Under the proposed pillar two, India could soon impose the 15 per cent tax and demand compliance. Essentially countries like India can now demand that whenever an underlying Indian asset is taxed at a lower rate abroad, the companies will pay a tax to India also. The aggregate tax must add up to the magic number of 15 per cent.
It helps that the effective minimum corporation tax rate in India is at present about 17 per cent. This means India does not have to bother about tweaking its rate. These goodies will begin to roll in once the G7 agreement is ratified by the wider G20 group. The Indian tax authorities will be able to pass an omnibus correction to all the double taxation avoidance agreements. The correction will be deemed to have been inserted in each treaty. It will be a landmark amendment that could raise India’s ability to tax offshore transactions by a quantum jump.