An Unfair Tax Proposal

Context: The United States (US) Treasury’s call for a global minimum tax rate to impose company's income and removing preferential rate structures for companies is unfair to developing economies as it best serves the need of the US and other developed nations.

About international tax reforms: The Base Erosion and Profit Shifting (BEPS) programme was initiated in 2013 by Organisation for Economic Co-operation and Development (OECD) to curb practices that allowed companies to reduce their tax liabilities by exploiting loopholes in the tax law.

• For e.g., Big tech companies were able to plan activities such that physical presence was not necessary to operate in large markets such as India. Relatively, profits could be easily relocated to low-tax jurisdictions through financial manoeuvres.
• Two pillars of international tax reform: Addressing the concern of developing countries about their right to tax the mobile incomes of tech companies, the OECD bifurcated the challenge into two pillars.
  • Pillar one: Aims to address the issue of reallocation of taxing rights.
  • Pillar two: All remaining BEPS issues would be addressed under it.

Challenges in the international tax reforms: faced by developing countries like India.

• Risk of under or non-taxation: Blueprints of the BEPS shared in October 2020 shows that only a fraction of the profits will go the markets like India.
  • To fix this, countries have implemented a digital services tax on revenues. However, this has been retaliated by the US through its tariff proposals under Trade Act 1974.
  • The US Treasury suggested that it will apply the pillar one proposal to top 100 companies and will not accept any result that is discriminatory to US companies.
• Raising of the corporate tax rate: Under pillar two, it is now being proposed that the US corporate tax rate be raised to 28% and is being sought along with the harmonization of rate around the world.
  • This gives a push towards a global minimum tax rate be defined for the world.
  • Unfortunately, as per the current design, the country where the ultimate parent entity resides is where the tax is first applicable, whereby nearly 30% of the Forbes 2000 companies are in the US.
  • In the meantime, India has witnessed a consistent rise in the effective tax rate, which is now close to 26%.

Conclusion: It is perhaps time to reflect if the two pillars of international tax reform are meant to support the superstructure of developed countries.