Context: The US President Donald Trump signed an executive order to withdraw from the landmark 2021 Global Corporate Minimum Tax deal, citing that it has no force or effect in the U.S.. The global agreement was negotiated by the Biden administration with nearly 140 countries, under the aegis of OECD.
Relevance of the Topic: Prelims: Global Corporate Minimum Tax: Benefits, Challenges
What is Global Corporate Minimum Tax?
- A global corporate minimum tax is a framework to impose a minimum rate of taxation on corporate income in most countries of the world.
- The 2021 Agreement:
- In October 2021, 136 countries agreed to a proposal from the Organisation for Economic Co-operation and Development (OECD).
- OECD’s Proposal: Corporate minimum tax of 15% on foreign profits of large multinationals. Expected to generate additional tax revenues of $150 billion, globally.
- Objective: To discourage tax-motivated profit shifting and tax base erosion by multinational corporations (MNCs).
Two Pillar Plan of Global Corporate Minimum Tax
- Pillar 1: Reallocation of Profits:
- 25% of profits above a set profit margin of the largest profitable Multinational Enterprise (MNEs) will be reallocated to the market jurisdictions where the MNE’s users and customers are based. Ensures fair taxation in countries where economic activities occur.
- Includes measures to ensure dispute prevention & resolution to address any risk of double taxation.
- Pillar 2: Minimum Corporate Tax
- It sets a minimum 15% tax on corporate profit, putting a floor on tax competition.
- If a company’s earnings go untaxed or lightly taxed in one of the tax havens, their home country would impose a top-up tax that would bring the effective rate to 15%.
Rationale behind Global Minimum Corporate Tax
- Prevent Base erosion and Profit Shifting: Discourage MNCs to shift their operations to off-shore units merely for tax benefits.
- Ends the Race to the Bottom: Halts the trend when countries excessively reduce their tax rates to attract investments. This has pushed other countries to lower their rates as well.
- Prevent revenue loss to countries:
- Countries lose out an estimated $100 billion per year in tax revenue, in absence of GMCT.
- Revenue loss occurs on account of lower tax structure in off-shore destinations like Ireland, British Virgin Islands, Bahamas, Panama etc.
- Encourages better competitive practices: GMCT would induce the countries to compete on other factors like better regulatory regimes, ease of doing business, access to global talent, etc. This healthy competition would create a sustainable business environment.
Challenges in the adoption of Global Minimum Corporate Tax
- Impact on Sovereignty: Perceived as infringement to the independent right of formulating tax policies, especially by smaller economies.
- One Size fits all approach: The 15% rate may be too high for some countries and less for others.
- Disproportionate tilt: GMCT would be levied by the country where the ultimate parent entity resides. This heavily favours home countries of MNCs (mainly developed countries).