A brief insight into G7 ‘s proposal for a Global Minimum Tax Rate for Corporations

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What is G7 ?

The Group of 7 (G7) is an informal group of seven countries — the United States, Canada, France, Germany, Italy, Japan and the United Kingdom, the heads of which hold an annual summit with European Union and other invitees. Together the member countries represent 40% of global GDP and 10% of the world’s population. Unlike other bodies such as NATO, the G7 has no legal existence, permanent secretariat or official members. It also has no binding impact on policy and all decisions and commitments made at G7 meetings need to be ratified independently by governing bodies of member states. The presidency of G7 meetings is held by each of the seven countries in turn, each year. The country holding the presidency is responsible for organising and hosting the meeting. The UK holds the G7 presidency for 2021 and has organised the conference for this Saturday at the Carbis Bay Hotel in Cornwall.

Background

During the meeting on 05.06.2021 G7’s  Finance Ministers agreed the principles of an ambitious two Pillar global solution to tackle the tax challenges arising from an increasingly globalized and digital global economy. Under Pillar One of this historic agreement, the largest and most profitable multinationals will be required to pay tax in the countries where they operate – and not just where they have their headquarters. The rules would apply to global firms with at least a 10% profit margin – and would see 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries they operate. The fairer system will mean the countries where the companies operate will raise more tax revenue from large multinationals and help pay for public services in those countries.

Under Pillar Two, the G7 also agreed to the principle of at least 15% global minimum corporation tax operated on a country by country basis, creating a more level playing field for firms and cracking down on tax avoidance.

Decision of G7 leaders on the Global Minimum Tax rate for MNCs.

We need a tax system that is fair across the world. We endorse the historic commitment made by the G7 on 5 June. We will now continue the discussion to reach consensus on a global agreement on an equitable solution on the allocation of taxing rights and an ambitious global minimum tax of at least 15 per cent on a country-by-country basis, through the G20/OECD inclusive framework and look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors. With this, we have taken a significant step towards creating a fairer tax system fit for the 21st century, and reversing a 40-year race to the bottom. Our collaboration will create a stronger level playing field, and it will help raise more tax revenue to support investment and it will crack down on tax avoidance.

Some Implications of the proposed policy:-

  • The adoption of proposed policy will mean that the largest multinational tech giants will pay their fair share of tax in the countries in which they operate.
  • The countries which are having lower or no tax system for companies to attract foreign investments and are considered as tax havens for MNCs would have to adhere to the policy, provided if they consent to the proposed policy, and increase their tax rates at least upto 15%.

Impact on India as per experts:

India stands to gain from the changes in the global tax system. International trade and transactions, in general, have been more tax favourable to developed countries. This is because, for most part of recent industrial history, the flow of valuable trade, services and technology has been largely from developed to developing countries and international tax rules have tended to restrict taxation rights in ‘source’ (developing) countries in favour of ‘resident’ (developed) countries being recipients of income.

Over the years, with increasing economic importance of countries such as China and India, there has been an attempt in course correction through modified rules of international taxation, but it has largely played ‘catch up’ with the traditional business models by seeking to levy flat tax rates on incomes such as royalties, technical service fees, dividends and interest typically paid out by companies in developing countries to providers of technology or owners of capital in developed countries. This pace of glacial progress has recently accelerated with the extraordinary growth of digital commerce.

After several decades, the time-tested rules of requiring a physical place of business to exist in a source country (where income is derived from customers located there) to have a legal right on taxation of such income are slowly giving way to ‘digital’ presence as a threshold for taxing such income. (This aspect has been one of the important pillars of the Base Erosion and Profit Shifting (BEPS) project of the OECD).

India is likely to gain in tax revenue on this account, given the size of its market and the growth opportunities it offers. In fact, the country has been on the forefront to legislate in her domestic tax laws the concept of ‘significant economic presence’ (SEP) to create the ability to levy tax on income generated in India (from Indian customers) by foreign digital commerce companies.

Further, a global minimum corporate tax rate of 15% is also expected to be beneficial to India. The Tax Justice Network estimates the country to gain at least $4bn (Rs 300 bn), equivalent to ~6 % of FY21 corporate tax collections. However, we will need to focus on capacity building and timely resolution of disputes. Besides, it would not hurt FDI to India or create any adverse or incremental tax liability in the hands of foreign investors given that the minimum tax rate for new manufacturing business has recently been legislated at 15% (plus surcharges).

At the same time, in respect of outbound investments, it will prevent base erosion of tax in the country as the government will be able to claw back any shortfall in tax paid below 15 % by an overseas business owned by an Indian resident, once the global threshold rule becomes operational.

Overall, countries with a moderate tax rate system stand to benefit at the cost of ‘tax havens’ with low or nil tax rates.

Just one important caveat — while the modalities are still far from over, given the complexities of the final legal framework and the number of countries involved, the process must not impinge upon predictability — the bedrock of investment decisions and flows.

Next step to be taken

Discussions on the two Pillars have been ongoing for many years – with the Chancellor making securing a global agreement a key priority of the UK’s G7 Presidency. The agreement will now be discussed in further detail at the G20 Financial Ministers & Central Bank Governors meeting in July.

*Source: EY and G7 Summit 2021 Communique.

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