OECD estimates the 15% global minimum tax that would apply to companies with a turnover above Rs 750 million, to yield around $150 billion in extra global tax revenues annually.
It is commendable that 130 countries, representing more than 90% of global GDP, have agreed to radically overhaul the global tax system to ensure that multinational corporations (MNCs) pay their fair share of tax wherever they operate and make profits. The reform blueprint, approved by the G7 and now ratified by countries including India and China, includes a global minimum corporate tax of 15% (read: Pillar 2), and rules that would allow every market where MNCs undertake sales the right to tax their earnings, even if they have no physical presence there (read: Pillar 1). It would erode the incentive for MNCs to shift profits to tax havens, end base erosion and profit-shifting, and boost revenues for governments battling the pandemic.
The Organisation for Economic Cooperation and Development (OECD) estimates the 15% global minimum tax that would apply to companies with a turnover above ₹750 million, to yield around $150 billion in extra global tax revenues annually. India should be fine with the 15% rate, but must negotiate better on Pillar 1 to get a larger share of the pie. Often, MNCs shift their tax liability by apportioning a share of costs and profits to a subsidiary in a tax haven or by parking intangible assets in these subsidiaries for royalties to accrue there. If a country has a lower corporate tax rate, the US can impose a top-up tax on the parent entity headquartered there. So, the new deal will break tax havens. Not surprisingly, Ireland, Hungary and some Caribbean nations have not signed on to the deal.
The OECD estimates the amount of profits expected to be reallocated to market jurisdictions at over $100 billion. The deal allows countries — where these large and profitable firms operate — the right to tax 20-30% of the residual profit (defined as profit in excess of 10% of the revenue). Extractives and financial services regulation have been excluded. India must press for a higher allocation, especially if it has to do away with the equalisation levy. With the broad agreement in place, there is scope for give and take.