GLOBAL MINIMUM TAX RATE

1. Context

2. What is Global Minumum Tax Rate?

• The Organisation for Economic Cooperation and Development (OECD) has stated that 136 nations have reached an agreement on a global pact to ensure that large corporations pay a Global Minimum Tax (GMT) rate of 15 percent. This rate will be referred to as the "GMT" (including India).
• Together, the economies of the countries that supported the deal amounted to more than 90 percent of the total world GDP. The Global minimum corporate tax arrangement was supported by the G20 leaders for implementation beginning in 2023. The Organisation for Economic Cooperation and Development (OECD) reports that Kenya, Nigeria, Pakistan, and Sri Lanka have not yet signed the pact.
• If an agreement on a global minimum tax rate is reached, India may be required to remove the equalization levy and the digital services tax, as well as make a commitment not to implement new taxes of this kind in the future. The international tax system is undergoing a significant overhaul, and as part of this process, 136 countries including India, have agreed to a revamp of global tax norms.
• The goal of this reform is to ensure that multinational corporations pay taxes whenever they operate, at a rate of at least 15 percent.
• EU members have agreed to implement a minimum tax rate on big business by Pillar 2 of the global tax agreement framed by the Organisation for Economic Cooperation and Development (OECD) last year. This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens to save on taxes.

3. Need for a Global Minimum Tax Rate?

3.1 Financial diversion to tax heavens:

Income from intangible sources such as drug patents, software, and royalties on intellectual property has increasingly migrated to Tax havens, allowing companies to avoid paying higher taxes in their traditional home countries.

The GMT targets to stop this outflow of tax revenue from the origin countries.

3.2 Mobilizing Financial Resources:

The OECD has estimated that the minimum tax will generate $150 billion in additional global tax revenues annually.

3.3 Global Tax Reforms:

After the inception of the Base Erosion and Profit Shifting (BEPS) program, the proposal for GMT is another positive step towards global taxation reforms.

BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. OECD has issued 15 action items to address this.

4. Future Concerns

• Some governments, particularly those of traditional tax havens, are likely to disagree and stall the implementation of the OECD's tax plan. High-tax jurisdictions like the EU are more likely to fully adopt the minimum tax plan as it saves them from having to compete against low-tax jurisdictions.
• Low-tax jurisdictions, on the other hand, are likely to resist the OECD's plan unless they are compensated sufficiently. Since the OECD's plan essentially tries to form a global tax cartel, it will always face the risk of losing out to low-tax jurisdictions outside the cartel and cheating by numbers with the cartel.
• After all, countries both within and outside the cartel will have the incentive to boost investments and economic growth within their respective jurisdictions by offering lower tax rates to businesses.

5. What good will the OECD's tax plan do to the global economy?

• Many believe that the plan will also help counter rising global inequality by making it tougher for large businesses to pay low taxes by availing the services of tax havens.
• Critics of the OECD's proposal, however, see the global minimum tax as a threat. They argue that without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.

For Prelims and Mains

Source: The Hindu