RSTV: THE BIG PICTURE- GLOBAL CORPORATE TAX AND INDIA

G7 countries have reached a deal on taxing multinational companies. G7 Finance ministers have agreed in principle to ratify 15 percent global minimum corporate tax rate to counter the possibility of countries undercutting each other to attract investments.

New deal:

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

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• Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance Act, 1996.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.

Need for a minimum rate:

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

Focus of the plan:

• 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 with the plan:

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

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.

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:

• India has already taken many measures to ensure that companies are taxed where they operate through equalisation levy and bilateral tax agreements.
• 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.

Conclusion:

• It needs to be seen whether India will go through with the deal, in the backdrop of pandemic led economic slowdown. Even if such a tax would enrich India’s coffers.
• The economic division will look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter.
• 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.