A Far-Reaching Tax Measure

Context: The push for a global minimum corporate tax may help India, but it can also cause international disagreements.

About global minimum corporate tax proposal

• Proposed as Pillar Two of the Organisation for Economic Co-operation and Development (OECD), it aimed to:
  • Plug remaining Base Erosion and Profit Shifting (BEPS) issues.
  • Provide jurisdictions with the right to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
• The objective is to minimise tax incentives and ensure that companies choose to be situated in a particular country based on other commercial benefits.
• Minimum effective tax rate is proposed at more than 10%, possibly up to 15%; however, US proposed to impose a global minimum tax on foreign income earned by US corporations at 21% rate.

Need for a global minimum corporate tax

• Pandemic impact: Pandemic necessitates reducing tax incentives to fund increased fiscal demand.
• Redefining competitiveness: With tax incentives neutralised, countries to compete on other factors like better regulatory regimes, ease of doing business, access to global talent etc.

Concerns against the proposal

• Fight against unfair tax competition becoming a fight against competitive tax systems: Burdening businesses minimising the benefits of the competitive tax system.
• Harm to the economies: US proposal of 21% perceived too high by many stakeholders, including EU.
  • Ireland made a case for fiscal autonomy for smaller jurisdictions to compete with larger economies.
  • A tax-related trade war or entrenchment of unilateral levies amidst pandemic may further harm both global and national economies.

Advantages to India in a global minimum tax regime: Likely to benefit Indian revenue department -

• Checking tax revenue loss: As per the State of Tax Justice report of 2020, India loses over $10 billion in tax revenue due to the use of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and the Netherlands.
• Disincentivises practice of not repatriating offshore profits: As the proposal minimised undue tax rate differences across jurisdictions.