Is global tax reform closer to reality now?
2 min read . Updated: 28 Feb 2023, 12:52 AM IST
PremiumFinance ministers and central bank chiefs from G20 nations, officials from other nations and multilateral agencies last week debated reforming the global tax architecture to stop cross-border tax avoidance by MNCs
Finance ministers and central bank chiefs from G20 nations, officials from other nations and multilateral agencies last week debated reforming the global tax architecture to stop cross-border tax avoidance by MNCs. Are they close to getting it done? Mint explains:
What does the global tax reform seek?
The idea is to stop multinational corporations (MNCs) artificially shifting profits from the country where their consumers are to a low or no-tax country by exploiting loopholes in tax laws that are tailor made for a conventional brick-and-mortar industry. The reform seeks to modify the regulatory architecture to prevent two things: arrangements by MNCs to recognise profits in the lowest taxed jurisdictions and a ‘race to the bottom’ by individual governments to attract investments with lower tax rates. As per the latest count, 142 nations have agreed to the reform.
How is this being done?
The proposals being negotiated have two pillars. The first seeks to re-allocate part of the profits of large MNCs above a specified threshold for taxation in countries where their customers are. This would help countries like India to get a slice of such profits through taxes. The second pillar, called the ‘GloBE’ proposal, recommends a global minimum corporate tax rate of 15% and ways to ensure that MNCs pay up this minimum level of tax on income arising in each of the markets where they operate. It also proposes a ‘top-up tax’ on profits in any market whenever the effective tax rate falls below 15%.
How will India benefit?
Pillar one is more relevant to India where large western tech giants have a market: taxing rights on about $200 billion in global profits of companies will boost revenue. The part that will come to India will replace its unilaterally imposed equalisation levy on online advertisements and e-commerce supplies by non-resident firms. Receipts from the equalisation levy has never crossed $1 billion annually.
Is the reform close to becoming reality?
For it to become a reality, nations have to sign a legally binding multilateral convention. The G20 Chair’s outcome document issued on Friday said world leaders will continue cooperation for a fair and modern tax system and that the treaty could be signed in the first half of 2023. As per OECD’s report to G20, the idea of a global minimum tax is now becoming a reality, with all EU members, the UK, Switzerland, Japan, Korea and Singapore moving legislation in this regard.
What are the challenges?
Given that work on the global tax reform started back in 2013, it remains to be seen how quickly world leaders could sign a legally binding treaty. Businesses wouldn’t want a complex tax to add to their regulatory burden. Negotiations are still on regarding the global minimum tax rate. Tax authorities in developing countries need to develop regulatory capacity for administering complex tax rules. For MNCs, the changes are set to impact how they recognise profits and costs in financial statements.