In recent, Finance Ministers from the Group of Seven (G7) rich nations reached a landmark accord setting a global minimum corporate tax rate, an agreement that could form the basis of a worldwide deal.
A group of the world’s richest nations reached a landmark deal to close cross-border tax loopholes used by some of the world’s biggest companies.
The deal aims to end what U.S. Treasury Secretary has called a “30-year race to the bottom on corporate tax rates” as countries compete to lure multinationals.
What is Minimum Alternate Tax?
- 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- Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance Act, 1996.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 was later extended to cover non-corporate entities as well. MAT is an important tool with which tax avoidance can be prevented.
- 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.
- MAT is calculated at 15% on the book profit that 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.
Why a global minimum tax rate?
Major economies are aiming to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made.
Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
Now, with its proposal for a minimum 15% tax rate, the USA administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage, allowing competition on innovation, infrastructure and other attributes.
Who are the targets?
- Apart from low-tax jurisdictions, the proposal 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.
- 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.
- India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion, according to the Tax Justice Network report.
- The US Treasury loses nearly $50 billion a year to tax cheats, according to the Tax Justice Network report, with Germany and France also among the top losers.
Where are the talks at?
- The Organization for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.
- The OECD and G20 countries aim to reach consensus on both by mid-year, but the talks on a global corporate minimum are technically simpler and less contentious.
- If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an accord.
- The minimum is expected to make up the bulk of the $50 billion-$80 billion in extra tax that the OECD estimates firms will end up paying globally under deals on both fronts.
How would a global minimum tax work?
The global minimum tax rate would apply to overseas profits.
Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the minimum rate, eliminating the advantage of shifting profits.
The OECD said that governments broadly agreed on the basic design of the minimum tax but not the rate.
Other items still to be negotiated include whether investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring it is compatible with U.S. tax reforms aimed at deterring erosion.
Where does India stand?
In a bid to revive investment activity, Finance Ministry in 2019 announced 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, existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.
Impact on India:
Tax avoidance will continue to remain a troubling issue for the global economy. It will further be problematic to enforce such a policy in a federal government structured country like India. A lower tax rate is a tool for India to alternatively push economic activity.
- If the proposal comes into effect, India may experience a longer economic hangover than other developed nations with less ability to offer mega stimulus packages.
- Multilateralism will further stumble in such a tax policy. The policy will create haves and have-nots across the world.
- While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the governments should be open to participate and engage in the emerging discussions globally around the corporate tax structure.
- 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’, introduced in 2016 following a recommendation by a panel constituted to deliberate on taxation of the digital economy.
- Also, 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.
- India has already been proactively engaging with foreign governments in double taxation avoidance agreements, tax information exchange agreements, and multilateral conventions to plug loopholes. This proposal of a common tax rate, thereby, adds no further benefits to India.
Multinationals are a source of foreign direct investment. These corporations help to generate demand with efficient utilisation of resources and create employment in low-income countries. Nations have used their freedom to set corporation tax rates as a way to attract such businesses.
Smaller countries such as Ireland, the Netherlands and Singapore have attracted footloose businesses by offering low corporate tax rates.
The global minimum tax rate will finish off every opportunity for such countries whose only weapon to attract these companies is lower taxes.
In a world where there are income inequalities across geographies, a minimum global corporation tax rate could crowd out investment opportunities.