Corporate Minimum Tax – Diplomacy Reshaping Global Economy

Content:

What is the problem with the current corporate taxation?

• In the modern economy, multinational companies can earn huge profits from things like trademarks and intellectual property that are easier than factories to move. 
• Companies can assign the earnings they generate to a subsidiary in a country where tax rates are very low.
• Some countries compete for revenue by using very low rates to lure companies amassing huge tax bases. Even though the tax rates are marginally above zero still these countries earn huge revenues from it.  
• Between 1985 and 2018, the global average corporate headline rate fell from 49% to 24%. 
• By 2016, over half of all U.S. corporate profits were booked in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. 
• White House officials are saying the global minimum would result in almost $60 billion of added U.S. tax revenue.

Impact of Tax Havens on Indian Economy:

Traditionally, tax havens have been used for both Tax Avoidance and Tax Evasion, they have had numerous negative repercussions upon the Indian economy.

Prevents Mobilization Efforts:

• the most fundamental effect that the usage of Tax Havens has on the Indian economy is that it prevents the various mobilization efforts as made by the government of India
• Reduction of Tax liability by the usage of Tax Havens considerably decreases the tax base (as available to the taxation authorities) and this leads to a significant shortage of funds in the hands of the government. 
• This shortage of funds, in turn, leads to the distortion of the government’s plans regarding economic growth and development. 
• In India, tax havens have been a significant barrier towards government expenditure and has had the negative impact of restricting/slowing down the growth rate.

Interferes with implementation of economic policies:

• Reduction of Tax liability by the usage of Tax Havens also interferes with the Indian government’s efforts to implement its economic policies. 
• Though the economic policies have been structured by the government for the benefit of the people, Tax Havens have served as a significant barrier towards the proper execution/implementation of the former. 
• This, too, occurs due to a shortage of funds in the hands of the government.

Store of “Black Money”

• Tax evasion by the usage of Tax Havens to store “Black Money” also dismantles the equity attribute of any tax system
• In India, specifically, reduction of their tax liability by many leads to an increase in the rates of taxes as charged by the government for every assessment year (for the purpose of increasing its revenue) and the burden of that unfortunately ends up falling upon the honest tax payers. 
• As a consequence of this, even the taxpayers who always pay their taxes honestly end up engaging in practices such as tax evasion in order to reduce an already incremental burden.

Unnecessary time consumption of Tax Authorities:

• Base Erosion and Profit Shifting through the usage of Tax Havens leads to an unnecessary consumption of time, effort and energy on behalf of the Indian tax authority. 
• The Indian tax authorities have to constantly engage themselves in developing various policies for the purpose of countering the intricate mechanisms that corporations use in order to shift their profits for the purpose of reducing their tax liability.

Impact on social and moralistic values:

• With the usage of tax havens for tax evasion comes unsocial and immoral activities such as bribery, intimidation, tampering of official records, submission of fake documents etc.
•  These activities create a significant impact on the social and moralistic values of Indian society. 

What is Global Minimum Tax?

• The Global Minimum Tax or Corporate Minimum Tax is an idea to impose a minimum rate of corporate tax all over the globe on earnings of multinational companies.
• The basic idea is simple: Countries would legislate a minimum rate of at least 15% for very big companies with annual revenues over 750 million euros ($864 million) 
• If company earnings go untaxed or lightly taxed in one of the world’s tax havens, their home country would impose a top-up tax that would bring the rate to 15%.
• That would make it pointless for a company to use tax havens, since taxes avoided in the haven would be collected at home.
• The goal: deterring multinationals from stashing profits in countries where they pay little or no taxes — commonly known as tax havens.
• It will end a decadeslong “race to the bottom” that has seen corporate tax rates fall as tax havens sought to attract businesses that used clever accounting to take advantage of low rates in countries where they had little real activity.
• The proposal was finalized in October among 136 countries and sent to the G-20 for a final look after complex talks overseen by the Organization for Economic Cooperation and Development. 
• It would update a century’s worth of international taxation rules to cope with changes brought by digitalization and globalization.

How does the plan address the challenge of taxing digitalized economy? 

• The plan would also let countries tax part of the earnings of the 100 or so biggest multinationals when they do business in places where they have no physical presence, such as through internet retailing or advertising. 
• The tax would only apply to a portion of profits above a profit margin of 10%.
• In return, other countries would abolish their unilateral digital services taxes on U.S. tech giants such as Google, Facebook and Amazon. 
• That would head off trade conflicts with Washington, which argues such taxes unfairly target U.S. companies.

Criticisms of the tax plan:

• Some developing countries and advocacy groups such as Oxfam and the UK-based Tax Justice Network say the 15% rate is too low. 
• Although the global minimum would capture some $150 billion in new revenue for governments, most of it would go to rich countries because they are where many of the biggest multinationals are headquartered.
• The EU Tax Observatory research consortium cautions that exemptions for companies with actual assets and employees in a given country could “exacerbate tax competition by giving firms incentives to move real activity to tax havens.” 
• That means some tax competition among countries would still be possible when actual business operations — as opposed to shifty accounting — are involved.