Context: In a declaration of war on low-tax jurisdictions around the globe, US has urged the world’s 20 advanced nations to move in the direction of adopting a minimum global corporate income tax rate– in essence, setting a minimum rate for corporations all over the world to pay regardless of which jurisdiction they are registered in.
- This is a move designed to tackle a worldwide phenomenon known as Base Erosion and Profit Shifting (BEPS), wherein large corporations register in low-tax jurisdictions to avoid paying higher rates of corporate tax prevalent in the countries they actually operate in.
- A global minimum corporate tax rate would ensure that companies would have to pay wherever they were registered, with revenues being apportioned according to the extent of their activity in the respective countries.
- This announcement from US comes at a time of increasing international interest in the issue, with broad support from organizations like the G20, the OECD, and the UN FACTI Panel for a global minimum tax rate.
- The UN FACTI Panel (or the High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda) is a document of particular import for developing countries, stressing the loss caused by tax avoidance on the ability to develop countries to finance developmental measures.
- Much of this movement towards a global minimum tax has been instigated by the mobility of capital in the digital economy and the ability of digital companies to shift productive capacities in a way that resource-dependent companies cannot.
- US has said the move attempted to reverse a “30-year race to the bottom” in which countries have resorted to slashing corporate tax rates to attract multinational corporations.
- The US proposal envisages a 21% minimum corporate tax rate for other G20 countries, 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.
- One of the reasons the US is pushing for this is purely domestic.
- It aims to somewhat offset any disadvantages that might arise from the Biden administration’s proposed increase in the US corporate tax rate.
- 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.
- To address “the challenges posed by the enterprises who conduct their business through digital means and carry out activities in the country remotely”, the Indian government has the ‘Equalisation Levy’, introduced in 2016.
- Also, the IT Act has been amended to bring in the concept of “Significant Economic Presence” for establishing “business connection” in the case of non-residents in India.
IMF’s proposed Solidarity Tax
- A temporary additional tax on the high earners and companies that prospered in the coronavirus crisis to show solidarity with those who were hit hardest by the pandemic to reduce social inequalities that have been exacerbated by the economic and health crisis of the past year.