Global Minimum Tax

(GS Paper-3, Economy
Source- Economic and political weekly)

Context-

  • At the G-7 meet held in London on 5th June 2021, a historic agreement was made to set the Global minimum tax rate.

Key points related to Global Minimum Tax-

  • The main aim of the deal is to end the “30-year race to the bottom on corporate tax rates” as countries compete to attract multinationals.
  • Major global economies are focusing on dispiriting multinationals from shifting profits and tax revenues to low-tax countries despite where their sales are made.
  • Gradually, income from non-physical sources such as drug patents, software, and royalties on intellectual property has drifted to these jurisdictions, permitting companies to avoid paying higher taxes in their traditional home countries.
  • The Biden administration hopes to reduce such tax base erosion without placing American firms at a financial disadvantage with its proposal for a minimum 15% tax rate and allowing competition on innovation, infrastructure, and other features.
  • The ‘Global Intangible Low-Taxed Income,’ (GILTI), tax rate was only 10.5% – half the domestic corporate tax rate.
  • The G7 talks feed into a much broader, existing effort. The Organization for Economic Cooperation and Development (OECD) has been synchronizing tax negotiations among 140 countries for years on rules for taxing cross-border digital services and holding back tax base erosion, including a global corporate minimum tax.
  • The OECD and G20 countries plan to reach an agreement on both by mid-year, but the talks on a global corporate minimum are technically simpler and less disputable. If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an agreement.
  • The minimum is expected to make up the bulk of the $50 billion-$80 billion in extra tax that the OECD estimates firms will end up paying globally under deals on both fronts.

Mechanism of Global Minimum Work-

  • The global minimum tax rate would apply to profits earned abroad.
  • Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the minimum rate, eradicating the benefit of shifting profits.
  • The basic design of the minimum tax is not the concern but the rate is the most difficult issue.
  • The discussion aims around the U.S. proposal of a minimum global corporation tax rate of 15% – above the level in countries such as Ireland but below the lowest G7 level.
  • Any final agreement to this could pose a major consequence for low-tax countries and tax havens.
  • The Irish economy has roared with the inflow of billions of dollars in investment from multinationals. Dublin, which has countered European Union efforts to harmonize its tax rules, is doubtful to accept a higher minimum rate without a fight.
  • However, the battle for low-tax countries is less likely to be about ruining the overall talks and more about raising support for a minimum rate as close as possible to its 12.5% or looking for certain exemptions.

Download Daily Current Affairs of 09 Jun 2021

Khyati Khare

Plutus IAS Current Affairs Team

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