G7 corporate tax deal

Topics Covered: Important International institutions, agencies and fora, their structure, mandate.

G7 corporate tax deal:

Context:

Finance ministers from wealthy G7 nations have endorsed a new global corporate tax deal.

• The agreement will now be discussed in detail at a meeting of G20 financial ministers and central bank governors in July.

Highlights of the new deal:

1. The aim is to counter tax avoidance to make companies pay in the countries where they do business.
2. The agreement commits states to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.

Need for a minimum rate:

1. The decision to ratify a 15% floor rate follows from a declaration of war on low-tax jurisdictions around the globe by the US.
2. The rationale behind this move is to discourage the shifting of multinational operations and profits overseas.

Focus of the plan:

1. The minimum rate 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. 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.

Issues/problems with the plan:

1. Impinges on the right of sovereign nations to decide a nation’s tax policy.
2. A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
3. Also, a global minimum tax rate will do little to tackle tax evasion.

Is this the end of tax havens?

If the deal does not kill off tax havens entirely, it will make them far less attractive for many firms looking to cut their tax bill but also burnish their credentials with investors focusing on environmental, social and corporate governance.

Impact on India:

Since India’s effective tax rate is above the global minimum tax rate, it would not impact companies doing business in India. The global minimum rate impacts companies using low-tax jurisdiction to achieve low global tax cost. Moreover, India attracts foreign investment owing to its large internal market, quality labour at competitive rates, strategic location for exports, and a thriving private sector.

Insta Curious:

Do you know what Tax Cheat is? Read Here

Do you think there is any difference between Tax Cheat and Tax Fraud?

InstaLinks:

Prelims Link:

1. About G7 nations.
2. What are G20 and G8 groups.
3. Corporate tax structure in India.
4. Equalisation levy in India.

Mains Link:

Discuss the need for a global minimum corporate tax.

Sources: Indian Express.