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Synopsis: A Global minimum tax rate is beneficial for the US. But India need to rethink before joining such international tax proposals
The US Treasury’s call for a global minimum tax rate is gaining a global endorsement. But the goal of a global minimum tax is not only to end the race to the corporate tax but also to end the right to the tax of developing countries.
Base Erosion and Profit Shifting (BEPS) Programme:
- Big tech companies are able to conduct economic activities in countries without their physical presence. Further, they also move profits to low-tax jurisdictions.
- The Base Erosion and Profit Shifting (BEPS) programme were initiated in 2013. It aims to curb practices that allowed companies to reduce their tax liabilities by exploiting loopholes in the tax law. But to tax Big tech companies the countries have to sign a BEPS agreement among themselves.
- So the OECD also asked the countries in the BEPS framework to adopt a consensus-based outcome instead of the country’s individual moves.
Challenges to BEPS Programme:
But there are few countries that are not ready to sign BEPS agreements.
- Over the past decades, there are many countries that enacted tax policies specifically aimed at attracting multinational business. These countries attract investment by lowering corporate tax rates. This, in turn, has pushed other countries to lower their rates as well to remain competitive.
- Also, there are few Developing countries as well that are not sure if they will receive the right to tax the mobile incomes of Big tech companies
The OECD policy to solve BEPS issues:
Addressing this concern, the OECD published a policy note. In that, it bifurcated the challenge of BEPS into two pillars.
- Pillar 1: It addresses the issue of reallocation of taxing rights to all the countries
- Pillar 2: This pillar aims to address all the remaining issues in the BEPS program.
Concerns with the OECD policy proposal:
The blueprints of this policy proposal were released in October 2020. But, the experts mention few concerns with the OECD policy note. Such as,
- Complexity in taxing Big techs: The experts found the policy of OECD as a more complex one to implement.
- Profit allocation: This is the most contentious provision of the policy. As the policy allocated only a fraction of the profits of Big Techs to the markets(Operating country of Big techs). The policy also allocated more profits to the source country.
Intermediate Taxation of Big Tech:
- With the blueprints are under consideration, the Big techs gained profits. On the other hand, the tax base of countries, including India, remains exposed to the risk of under or non-taxation.
- To fix this situation, countries implemented digital services tax on revenues of Big tech companies.
- But the US on the other hand launched inquiries on these countries under their Trade Act 1974.
The path to global minimum tax rate:
After the Biden administration came into force in the US, it agreed to work on a consensus-based solution.
- Further, the US Treasury suggested that it will apply the pillar 1 proposal to the top 100 companies. This includes showing a non-discriminatory policy to the US companies in the top 100. Further, the US also working on simplification of the proposal.
- With regard to pillar 2 proposals, the US decided to raise the corporate tax rate to 28 percent. This is decided along with the harmonisation of rates across countries. This includes,
- Defining minimum tax rate for the world, after the global consensus on the effective tax rate for companies. (So, the minimum tax rate is not yet decided)
- After fixing the minimum tax rate, the countries will compare the multinational enterprise’s effective tax rate in each jurisdiction. Especially in places where the low tax rate is paid.
- A top-up tax will apply for the remaining profits. But there is an ambiguity on who will tax these remaining profits?
- In general, the country, where the ultimate parent entity resides, is where the tax is first applicable. Applying that concept, then 30 percent of the Forbes 2000 companies are located in the US. So, the implementation of this proposal best serves the needs of the US.
Can India join the minimum tax rate proposal?
- India needs to assess the situation carefully. Because the proposal will apply to companies with global revenues above Euro 750 million. So, committing wrongly will lose India’s taxing rights.
- Moreover, India also witnessed a consistent rise in the effective tax rate, which is now close to 26 percent.
- Further, committing such a minimum tax rate also need India to reform its tax systems accordingly. Especially allowing foreign countries to tax the incomes that are perceived to be under-taxed in India.
For the past few years, India adopted legal measures to tax incomes of companies that avoid physical presence in India. But if global consensus is there for a minimum tax rate, then it is necessary for India to reflect the two pillars of international tax reform.
Source: The Indian Express