q-what-do-you-understand-about-global-minimum-tax-highlight-its-underlying-principle-and-purpose-also-analyse-its-impact-on-india

Q) What do you understand about Global Minimum Tax? Highlight its underlying principle and purpose. Also analyse its impact on India.

Why this Question?

Issue of current importance.

Key demand of the Question 

Explain the possible concerns of cyber security threats posing the country, discuss what needs to be done to handle them and specifically provide for a detailed discussion on solutions to address.

Directive 

Analyse – When asked to analyse, you have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary. 

Introduction 

Briefly introduce the concept of global minimum tax and why it has been in news.

Body 

In the first part, explain how a global minimum tax works and discuss the underlying reasons for it.

In the next part, discuss its significance and the underlying challenges

Conclusion 

Conclude with a way forward and its impact on India.

Model Answers

Advanced economies making up the G7 grouping have reached a “historic” deal on taxing multinational companies. Finance ministers meeting in London agreed to counter tax avoidance through measures to make companies pay in the countries where they do business. The deal announced Saturday involving the US, the UK, Germany, France, Canada, Italy and Japan, is likely to be put before a G20 meeting in July.

Underlying principle behind the tax deal

  1. The aim is to reach an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.
  2. The G7 will strive to provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies.
  3. They also commit to a global minimum tax of at least 15% on a country-by-country basis. This decision comes as a war on low-tax jurisdictions and the increase comes at a time when the pandemic is costing governments across the world.
  4. A global pact on this issue works well for the US government at this time. The same holds true for most other countries in western Europe, even as some low-tax European jurisdictions such as the Netherlands, Ireland and Luxembourg and some in the Caribbean rely largely on tax rate arbitrage to attract MNCs.
  5. Apart from low-tax jurisdictions, the proposals for a minimum corporate tax are tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations, including digital giants such as Apple, Alphabet and Facebook, as well as major corporations such as Nike and Starbucks.
  6. These companies typically rely on complex webs of subsidiaries to hoover profits out of major markets into low-tax countries such as Ireland or Caribbean nations such as the British Virgin Islands or the Bahamas, or to central American nations such as Panama.

Challenges with the move

  1. Apart from the challenges of getting all major nations on the same page, especially since this impinges on the right of the sovereign to decide a nation’s tax policy, the proposal has other pitfalls.
  2. A global minimum rate would essentially take away a tool that countries use to push policies that suit them. For instance, in the backdrop of the pandemic, IMF and World Bank data suggest that developing countries with less ability to offer mega stimulus packages may experience a longer economic hangover than developed nations.
  3. A lower tax rate is a tool they can use to alternatively push economic activity. Also, a global minimum tax rate will do little to tackle tax evasion.

Impact on India

  1. India has already taken many measures to ensure that companies are taxed where they operate through equalisation levy and bilateral tax agreements.
  2. 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.
  3. In a bid to revive investment activity, the Finance Minister in 2019 announced a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%.
  4. The Taxation Laws (Amendment) Act, 2019 resulted in the insertion of a section (115BAA) to the Income-Tax Act, 1961 to provide for the concessional tax rate of 22% for existing domestic companies subject to certain conditions including that they do not avail of any specified incentive or deductions.
  5. Also, existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.

Even though a lot more remains to be done to achieve parity in international financial relations and the advancement of the goals of global tax justice, the global corporate minimum tax could go a long way in the accomplishment of these aims. Countries like India should not be recalcitrant about signing on to this proposal, and should approach this idea with cautious optimism.