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Global Minimum Corporate Tax Rate (GMCTR)

Global Minimum Corporate Tax Rate (GMCTR)

Why in news?

  • Recently, the Finance Ministers from the Group of Seven (G7) nations reached a landmark accord setting a Global Minimum Corporate Tax Rate (GMCTR).
  • A group of the world’s richest nations reached a landmark deal to close cross-border tax loopholes used by some of the world’s biggest companies.
  • The deal aims to end what U.S. Treasury Secretary has called a “30-year race to the bottom on corporate tax rates” as countries compete to lure multinationals.

About Global Minimum Corporate Tax Rate

  • Corporation tax is a direct tax imposed on the net income or profit that enterprises make from their businesses.
  • G7 would back a minimum global corporation tax rate of at least 15%, and put in place measures to ensure taxes were paid in the countries where businesses operate.
  • Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
  • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.        Global Minimum Corporate Tax Rate (GMCTR)
  • With a broadly agreed global minimum tax, the US administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage, allowing them to compete on innovation, infrastructure and other attributes.

How does the Global Minimum Tax work?

  • In terms of its implementation, this tax will be applicable to companies’ overseas profits. This implies that if a global minimum is applied, governments can still set the local corporate tax rate as per their choice
  • In case a company pays lower rates in a particular country, their home governments can “top-up” their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven
  • A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment.

Need of Global Minimum Corporate Tax Rate

  • Reduce Tax Loss: Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to low tax jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries (tax base erosion of the higher-tax jurisdictions). These companies typically rely on complex webs of subsidiaries to hoover profits out of major markets into low-tax countries such as Ireland or Caribbean nations such as the British Virgin Islands or the Bahamas, or to central American nations such as Panama. India’s annual tax loss due to corporate tax abuse is estimated at over USD 10 billion.
  • To Bring Uniformity: GMCTR will end a decades-long race to the bottom in which countries have competed to attract corporate giants with ultra-low tax rates and exemptions. And it will bring uniformity in corporate taxation worldwide.

India’s stand

  • While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure.
  • India is likely to benefit from the global minimum 15% corporate tax rate pact as the effective domestic tax rate is above the threshold, and the country would continue to attract investment.
  • In September 2019, the government had reduced the corporate tax rate to 22% for companies that gave up all exemptions and incentives. Further, a 15% rate was offered to new manufacturing firms.
  • The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.

Conclusion

  • A G20 meeting scheduled for Venice in July 2021 will see whether the G7 accord gets broad support from the world’s biggest developed and developing countries.
  • Much still needs to be ironed out – including the metrics that will determine how and to which multinational companies the tax will be applied.
  • There should be appropriate coordination between the application of the new international tax rules including the Digital Services Taxes. Any final agreement could have major repercussions for low-tax countries and tax havens.            Global Minimum Corporate Tax Rate (GMCTR)

 

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