Global Minimum Corporate Tax
Recently, the US Treasury Secretary has urged the world’s 20 advanced nations to move in the direction of adopting a minimum global corporate income tax.
Global Minimum Corporate Tax
- The US proposal envisages a 21% minimum corporate tax rate, coupled with cancelling exemptions on income from countries that do not legislate a minimum tax to discourage the shifting of multinational operations and profits overseas.
- The proposed increase to 28% from 21% would partially reverse the previous Trump administration’s cut in tax rates on companies from 35% to 21% by way of a 2017 tax legislation.
- The US proposal includes an increase to the minimum tax that was included in the Trump administration’s tax legislation, from 10.5% to 21%.
- It is the benchmark minimum corporate tax rate that Yellen has propounded for other G20 countries.
Need for Global Minimum Corporate Tax
- Countries trying to reach bottom of corporate tax rates: It is attempted to reverse a “30-year race to the bottom” in which countries have resorted to slashing corporate tax rates to attract multinational corporations.
- Stable tax systems to raise sufficient revenue: It is important for countries to work with each other in order to end the pressures of tax competition and corporate tax base erosion.
- Large amount of tax loss: The US Treasury loses nearly $50 billion a year to tax cheats, according to the Tax Justice Network report, with Germany and France also among the top losers.
- India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion, according to the report.
- Competitive reduction in corporate tax: The need of the hour is to have a stable tax system so that governments do not lack revenue and there is no obstacle in providing necessary social services and infrastructure.
- The government will make arrangements that companies do not send their profits to other countries or 'tax haven' nations after tax increases.
Arguments in favour of Global Minimum Corporate Tax
- Low-tax jurisdictions: The proposal for a minimum corporate tax is tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations.
- Post-pandemic economic benefits: If the minimum rate of corporate tax is set at 30 per cent worldwide, then the infrastructure of all countries will get a boost and development will be accelerated after the pandemic.
- Corporations will be stopped from moving to tax havens: It will set a floor so that multinationals will pay a minimum tax in each country they operate, so they will no longer be able to shift profits to tax havens.
- The income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to tax havens, allowing companies to avoid paying higher taxes in their traditional home countries.
Arguments against implementing Global Minimum Corporate Tax
- Difficulty in establishing corporations offshore: The plan to peg a minimum tax on overseas corporate income seeks to potentially make it difficult for corporations to shift earnings offshore.
- Difficult task of bringing all nations on one page: It is difficult in getting all major nations on the same page, especially since the idea of global minimum corporate tax impinges on the right of the sovereign to decide a nation’s tax policy.
- Taking away countries from policies which favour them: The global minimum rate would essentially take away a tool that countries use to push policies that suit them.
- The IMF and World Bank data suggest that developing countries with less ability to offer mega stimulus packages may experience a longer economic hangover than developed nations.
- Opposition from global organisation: The President of World Bank has opposed the proposal of minimum corporate tax citing his view that the proposal could hinder poor countries’ ability to attract investment.
Summing up
- Bringing OECD at the forefront of discussion: The European Commission backed the call of minimum global corporate, but said it should be decided after discussions in the Organisation for Economic Cooperation and Development (OECD) which is a group of 37 developed nations.
- It is necessary to cooperation to have among countries to tackle the lure of the tax havens by enacting suitable global policies.
- It is required to support this effort by the US government to build a consensus among the G20 countries to increase the corporate tax rate and to end the race to reduce corporate tax in the world.
- The countries should propose a provision for a turnover-based minimum alternative tax (MAT) to discourage the transfer of profits from one place to another, and dodge countries from where they run businesses.
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