India is seemingly positioned to be at loggerheads with the United States of America on the latest decision by Group of Seven (G7) countries to back a proposal for creating a common global corporate tax structure for multinationals, according to a report by MoneyControl.
What is this proposed corporate tax structure?
On May 5, G7 countries which include United States, Japan, Germany, Britain, France, Italy and Canada, introduced a proposal for a global corporation tax rate that said that countries should tax their homegrown companies’ overseas profits at least 15 per cent. This was brought in seemingly to close cross-border tax loopholes used by world’s biggest companies, said a report by Reuters.
The report said that this accord would form the basis of a global pact next month. This proposal has also been aimed at ending a decades-old race in which countries have competed to attract corporate giants with low tax rates and exemptions, the report added. The 47th G7 summit is set to take place in Cornwall, United Kingdom, on June 11–13.
Who are the intended targets of this proposal?
According to Indian Express, digital giants such as Apple, Alphabet and Facebook shell out low effective rates of tax. The report said that these companies rely on subsidiaries to profit out of major markets into low tax countries such as Ireland, or Caribbean nations such as the British Virgin Islands or the Bahamas. India’s annual tax loss due to such corporate tax practices is around $10 million. The USA loses nearly $50 billion due to this, the report added.
Finance Ministers in the United Kingdom, are already plotting to rope in Amazon’s lucrative cloud-computing business to ensure it pays more corporate tax under this new G7 proposal, a report by the Financial Times said.
Where does India stand?
A provision of this G7 proposal, which has been in contention in regards to rights of sovereignty, is that countries would have to revoke their respective digital services tax if the global corporate tax comes into effect. A global minimum rate threshold would take away the right of a country to push policies that suits itself.
India for instance charges all foreign entities up to 2 per cent on their earnings through digital businesses based in or which targets the Indian market. This covers most American internet majors.
This particular digital tax of India (and of other countries such as Italy, Spain, Turkey, and the UK who have similar taxes) was being scrutinised by the United States Trade Representatives as they deemed these policies as ‘discrimination against US digital companies’. They decided to impose retaliatory tariffs on certain goods from countries including India, but suspended the tariff “for up to 180 days to provide additional time to complete the ongoing multilateral negotiations on international taxation at the OECD and in the G20 process”
An anonymous Indian government official was quoted by MoneyControl as saying, “The (G7) proposal, in its core, is not acceptable since India will not support a system under which international rules will dictate the right of sovereign nations to fix corporate tax rates,” he said. The Indian government will reportedly officially comment on the matter later.
However, the report said that India may consider the proposal because the G7 proposal also promises to award ‘taxing rights on at least 20 per cent of profit exceeding a 10 per cent margin for the largest and most profitable multinational enterprises’ for countries where MNCs operate.
What is India’s digital tax or Google Tax?
First brought into force in 2016, the Equalisation Levy or popularly called Google Tax was targetted at offshore firms hosting advertisements aimed at Indian consumers. In 2020, the Finance Act enhance the scope of this levy and broadened it to cover e-commerce supplies or services.
This levy works along with the the Goods and Services Tax (GST) on cross-border transactions. It covers a range of digital transactions including business-to-business (B2B) transactions, business-to-consumer (B2C) transactions, e-commerce marketplaces and digital services.
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