Global Corporate Tax

Recently, the heads of the world’s major economies—the Group of 20 (G20) nations has approved a new global minimum corporate tax.

The deal, announced at the G20 summit in Rome, Italy, is “historic” since this is the first time nearly all nations have agreed to such a system.

The New Bare Minimum

G20 and G77, which represent a majority of the world’s nations and nearly the entire global economy, have approved a global minimum corporate tax that, OECD estimates, covers 90% of the global economy.

The new Global tax deal aims to 

1. Prevent multinationals from paying low taxes(or no tax) by booking their profits in tax havens.
2. Make Companies pay taxes wherever they operate or conduct business in, even if they do not have physical presence in the country.

 

Under this deal, there are two “pillars” of taxation on corporations.

Pillar I : The tax provision empowers countries to tax companies where they earn their     revenue.

• Under this, companies’ excess profit–defined as in excess of 10 percent of total revenue will be taxed at 25 per cent.
• It is estimated to affect the world’s top 100 companies.

Pillar-II : Under this, there would be a global minimum tax rate of 15 %.

• It will be applicable to overseas profits of multinational firms with €750 million (about US $866 million) in sales globally.
• Government has the power to impose any local corporate Tax and if a company pays less than the 15 % tax, the government of its home country would have the power to levy a tax to bring it to the minimum rate.

The new deal will significantly raise the taxable revenue and thus the tax. OECD estimates that with the new minimum rate, countries will have $150 billion annually in additional revenues. Countries will get to tax $125 billion of profit due to the provision of taxing wherever companies earn the profits.Thus, the reshuffling of tax revenue will level the playing field for developed and developing countries.

Tax Avoidance: A menace

• The new deal was a bitterly fought battle over rampant tax evasion by multinational firms.
• Nations have been competitively adopting low tax regimesto attract investments that gave rise to what we know as “tax havens”.
• Tax Havens are countries/territories where corporate houses are registered in or operate fromand around 90 per cent of the world’s top 200 companies have a presence in tax havens.
• According to current tax laws, companies pay taxes not at the place of economic activities, but at the tax havens where they are registered.
• Eg: A company might do business in India but it would not pay tax on profits made here since it is registered elsewhere.
• The International Monetary Fund estimates that the global revenue loss to governments due to this tax avoidance was between $200 billion and $600 billion in 2019.
• Corporations avoided taxmassively by shifting $1.38 trillion worth of profit from the countries where they were generated to tax havens.
• Private tax evaderspaid less tax than they should have by storing a total of over $10 trillion in financial assets offshore.
• According to the Tax Justice Network, this revenue losswould be around $500 billion, with lower-income countries losing around $200 billion.
• Eg: In 2019, there were 650 million poor people in the world living under the international poverty line of $1.9 per day.

According to the Corporate Tax Haven Index 2021, prepared by the Tax Justice Network, the OECD countries that set the global tax rules were responsible for over two-thirds of global corporate abuse.