Global Minimum Corporate Tax

• 12 Apr 2021

Why in News

The US Treasury Secretary has urged G20 nations to move towards a global minimum corporate tax.

• It is an attempt to reverse a “30-year race to the bottom” in which countries have resorted to slashing corporate tax rates to attract multinational corporations (MNCs).

Key Points

• Proposal on a Global Minimum Corporate Tax Rate:
  
  • The US proposal envisages a 21% minimum corporate tax rate, 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.
  • The proposal for a minimum corporate tax is 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.
    
    • 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.
• US’ Reasons for the Proposal:
  
  • The proposal aims to somewhat offset any disadvantages that might arise from the proposed increase in the US corporate tax rate.
    
    • The proposed increase to 28% from 21% would partially reverse the previous cut in tax rates on companies from 35% to 21% by way of a 2017 tax legislation.
  • The increase in corporation tax comes at a time when the pandemic is costing governments across the world, and is also timed with the US’s push for a USD 2.3 trillion infrastructure upgrade proposal.
• Significance:
  
  • A global compact on this issue, at the time of pandemic, will work well for the US government and 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.
  • The plan to peg a minimum tax on overseas corporate income seeks to potentially make it difficult for corporations to shift earnings offshore.
  • The average headline corporate tax rate in advanced economies has fallen from 32% in 2000 to just over 23% by 2018.
    
    • That is largely because smaller countries such as Ireland, the Netherlands and Singapore have attracted footloose businesses by offering low corporate tax rates.
      
      • Footloose industry is a general term for an industry that can be placed and located at any location without effect from factors such as resources or transport.
    • Multinational companies with increasingly intangible assets such as the global tech firms have shifted some actual business and a lot of profits into these tax havens and low-tax jurisdictions, lowering their global tax bills.
• International Response:
  
  • The European Commission backed the proposal, but the global minimum rate should be decided after discussions in the Organisation for Economic Cooperation and Development (OECD).
    
    • The European nations, including Germany and France have supported the US proposal.
    • The OECD and Group of Twenty (G20) have been leading the Base Erosion and Profit Shifting (BEPS) initiative—a multilateral negotiation with over 135 countries, including the United States—since 2013.
    • BEPS refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
  • China is not likely to have a serious objection with the US call, but an area of concern for Beijing would be the impact of such a tax stipulation on Hong Kong, the seventh-largest tax haven in the world and the largest in Asia.
  • The US proposal also has support from the International Monetary Fund (IMF).
• Challenges:
  
  • The proposal impinges on the right of the sovereign to decide a nation’s tax policy.
    
    • Taxation is ultimately a sovereign function, and depending upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure.
  • A global minimum rate would essentially take away a tool that countries use to push policies that suit them. A lower tax rate is a tool they can use to alternatively push economic activity.
    
    • 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.
    • Also, a global minimum tax rate will do little to tackle tax evasion.

India’s Position

• Cut in Corporate Tax:
  
  • In a bid to revive investment activity, the Finance Minister announced, in September 2019, a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%.
    
    • 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.
    • Also, the existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.
  • The cuts effectively brought India’s headline corporate tax rate broadly at par with the average 23% rate in Asian countries.
    
    • China and South Korea have a tax rate of 25% each, while Malaysia is at 24%, Vietnam at 20%, Thailand at 20% and Singapore at 17%.
    • The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.
    • The average corporate tax rate stands at around 29% for existing companies that are claiming some benefit or the other.
• Equalisation Levy:
  
  • To address the challenges posed by the enterprises who conduct their business through digital means and carry out activities in the country remotely, the government has the ‘Equalisation Levy’.
  • The equalization levy is aimed at taxing foreign companies which have a significant local client base in India but are billing them through their offshore units, effectively escaping the country’s tax system.
  • The Income-tax Act, 1961 has been amended to bring in the concept of “Significant Economic Presence” for establishing “business connection” in the case of non-residents in India.
• Agreements for Exchange of Information:
  
  • India has been proactively engaging with foreign governments with a view to facilitating and enhancing exchange of information under Double Taxation Avoidance Agreements, Tax Information Exchange Agreements and Multilateral Conventions to plug loopholes.
    
    • Such agreements promote cooperation in tax matters.
  • Besides, effective enforcement actions including expeditious investigation in foreign assets cases have been launched, including searches, enquiries, levy of taxes, penalties, etc.

Corporate Tax

• Corporation Tax or Corporate Tax is a direct tax levied on the net income or profit of a corporate entity from their business, foreign or domestic.
• The rate at which the tax is imposed as per the provisions of the Income Tax Act, 1961 is known as the Corporate Tax Rate.
• The Corporate Tax rate is based on a slab rate system depending on the type of corporate entity and the different revenues earned by each of corporate entities.

Minimum Alternate Tax

• At times it may happen that a taxpayer, being a company, may have generated income during the year, but by taking the advantage of various provisions of Income-tax Law (like exemptions, deductions, depreciation, etc.), it may have reduced its tax liability or may not have paid any tax at all.
• Due to an increase in the number of zero tax paying companies, Minimum Alternate Tax (MAT) was introduced by the Finance Act, 1987 with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance Act, 1996.
• MAT is calculated at 15% on the book profit (the profit shown in the profit and loss account) or at the usual corporate rates, and whichever is higher is payable as tax.
• All companies in India, whether domestic or foreign, fall under this provision. MAT was later extended to cover non-corporate entities as well.
• MAT is an important tool with which tax avoidance can be prevented.

Domestic Company

• Domestic company is one which is registered under the Companies Act of India (2013) and also includes the company registered in the foreign countries having control and management wholly situated in India.
• A domestic company includes private as well as public companies.

Foreign Company

• Foreign company is one which is not registered under the Companies Act of India and has control & management located outside India.

Tax Heaven

• A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment.

Source: IE