Synopsis: Global agreement on taxing multinational corporations and way forward for India
After several years of negotiations, 136 countries, representing over 90 per cent of global output, finalised the agreement last week to tax multinational corporations. Since almost all members of the OECD’s framework on base erosion and profit shifting have agreed, tax avoidance for multinational corporations would become difficult once it’s implemented.
The two-pillar tax solution will now be presented before the finance ministers of the G20 countries this week and later at the G20 leaders’ summit.
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What is the need for such Agreement?
A global agreement on taxing multinational corporations had become necessary because of a variety of reasons.
Increasing Tax evasion: With the increasing dominance of digital technology and intellectual property, it became easier for large corporations to avoid taxes in their home countries or where the income was being generated by shifting profits to low-tax jurisdictions. The US has said it will end the race to the bottom in terms of corporate taxation
Need for increased fiscal resources: The agreement was also being driven by the need to raise more revenue to finance the increasing demands on national budgets in several countries, particularly after Covid-19.
To ease friction between countries: The deal is expected to provide stability to the international tax system and reduce overall friction.
What is the way forward for India?
Through equalisation levy India has collected about Rs 1,600 crore in the current fiscal year so far. India will need to withdraw such taxes once the agreement is implemented.
Given the potential for digital services in the country, it is important to make sure that the government doesn’t lose out on revenue, and that multinational firms pay their fair share in India.
Once the new tax rules are accepted and implemented, it will be extremely difficult to get them changed. Thus, India should use the upcoming G20 meetings to press its position.
Source: This post is based on the article “Taxing multinationals” published in “Business Standard” on 12th October 2021.