MINIMUM CORPORATE TAX

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).

Important points:

  • 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.
  • 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.

Importance :

  • 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.

SOURCE: THE HINDU ,THE ECONOMIC TIMES ,MINT

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