Careful deliberations are needed before accepting the formula for taxing digital MNEs
The commitment made by G7 finance ministers regarding corporate tax rates marks a big step forward in the fight against tax evasion and profit shifting. The agreement addresses two issues: tax competition among countries resulting in companies shifting their base to those that offer the lowest rates of taxation; and the problems that arise in taxing profits of digital multinational enterprises. The agreement to set the minimum global corporate tax rate at 15 per cent is an improvement on the original proposal of the US Treasury Secretary, Janet Yellen. The minimum rate of 21 per cent proposed earlier appeared to be specifically aimed at preventing further profit shifting from the US, due to the corporate tax rate hike proposed by the Biden administration. The higher rate would also have hindered structural corporate tax reforms in countries, including India. Corporate tax rate was slashed to 22 per cent in India in 2019 for companies willing to forego all tax incentives or deductions; the rate was set at 15 per cent for new manufacturing companies. With the new agreement fixing the global tax rate at 15 per cent, there will be sufficient room for India to move its tax rate lower, if deemed necessary. This proposal seems conducive to India as it will help prevent base erosion to low tax jurisdictions.
The G-7 agreement proposes to remove all existing digital taxes to usher in the new system. Indian authorities need to consider whether the formula suggested is suitable. The issue can be discussed with G-20 countries in July to arrive at a formula that is acceptable to all.