GLOBAL MINIMUM TAX (Syllabus: GS Paper 3 – Economy)

Context: Italy's Economy Minister announced that the previously planned June deadline for finalizing an agreement on a global minimum tax for multinationals will not be met, ahead of the G7 finance summit.

Global Minimum Tax

• About: A GMT imposes a universally standardized minimum tax rate on a specified corporate income base across the world.
• GMCT (Global Minimum Corporate Tax Rate): The GMCT, or GMCTR, represents an international agreement among national leaders. 
• Aim: To mitigate tax competition and prevent the evasion of corporate taxes by establishing a universal minimum corporate tax rate across the globe.
• Tax Competition: The global minimum tax seeks to alleviate tax competition by instituting a consistent global baseline. 
• This ensures that the impact of low tax rates or fiscal policies aimed at reducing tax burdens is significantly reduced.
• OECD's Landmark Reform: The OECD has played a pivotal role by publishing detailed rules for the implementation of a groundbreaking reform in the international tax system. 

o This reform mandates that Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate starting in 2023.

Two Pillars of the Plan

• Pillar 1: A quarter (25%) of the profits exceeding a defined profit margin for the largest and most profitable MNEs will be redistributed to the market jurisdictions where the MNE's users and customers are situated.
• Pillar 2:

o Minimum 15% Corporate Tax Rate: The provision mandates a minimum 15% tax on corporate profits, establishing a baseline to curb tax competition.

o Scope of Application: This requirement is applicable to multinational groups with annual global revenues exceeding 750 million euros.

Organisation for Economic Co-operation and Development (OECD)

• About: OECD is an association of 38 member countries, most being rich developed nations that attract migrant workers and students. 

o India is not a member of OECD.

• Founded: 1961, by 18 European nations, plus the United States and Canada.
• Headquarters: Paris, France.
• Aim: Fostering economic development and cooperation and fighting poverty through the promotion of economic stability.