India likely to benefit from global minimum 15% corporate tax pact: Experts

by mehekkaoberoi

Background:-

  • India  in September 2019 slashed corporate taxes for domestic companies to 22 per cent and to 15 per cent for new domestic manufacturing units.
  •  The concessional tax rate was extended to the existing domestic companies as well, subject to certain conditions.
  • In a statement issued , OECD Secretary-General Mathias Cormann said the consensus among the G7 Finance Ministers, including on a minimum level of global taxation, is a landmark step toward the global consensus necessary to reform the international tax system.
  • Advanced economies making up the G7 grouping have reached a “historic” deal on taxing multinational companies. Finance ministers meeting in London agreed to counter tax avoidance through measures to make companies pay in the countries where they do business.
  • They also agreed in principle to ratify a global minimum corporate tax rate to counter the possibility of countries undercutting each other to attract investments. The deal announced Saturday involving the US, the UK, Germany, France, Canada, Italy and Japan, is likely to be put before a G20 meeting in July.
  • They also agreed to put in place measures to ensure businesses pay taxes in the countries where they operate, a move aimed at plugging loopholes in cross-border taxation.

Linkages:-

  • Governments have long grappled with the challenge of taxing global companies operating across many countries.
  • That challenge has grown with the boom in huge tech corporations like Amazon and Facebook.
  • At the moment companies can set up local branches in countries that have relatively low corporate tax rates and declare profits there.
  • That means they only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. This is legal and commonly done.
  • The deal aims to stop this from happening in two ways.
  • Firstly the G7 will aim to make companies pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits.
  • Secondly, they want a global minimum tax rate so as to avoid countries undercutting each other with low tax rates.

Current Scenario :-

  • India is likely to benefit from the global minimum 15 per cent corporate tax rate pact inked by the world’s richest nations as the effective domestic tax rate is above the threshold, and the country would continue to attract investment, tax experts.
  • Even the recently announced lower rate of 15 per cent for new manufacturing units in India just about meets this new threshold, thus, not affecting this much needed boost to manufacturing in India.
  • the global corporate tax pact is a path breaking one, especially for large and developing countries like India which would always find it very difficult to keep corporate tax rates artificially lower in a bid to increase much needed foreign direct investments in the country.
  • The Finance Ministers of G-7 countries, comprising US, UK, Germany, France, Canada, Italy and Japan,  reached a landmark deal on taxing multinational companies as per which the minimum global tax rate would be at least 15 per cent.
  • The deal announced on Saturday, between the US, the UK, France, Germany, Canada, Italy and Japan, plus the EU, could see billions of dollars flow to governments to pay off debts incurred during the Covid crisis.
  • Negotiated over many years, it will put pressure on other countries to follow suit, including at a meeting of the G20 next month, which includes China, Russia and Brazil.
  • This decision adds important momentum to the coming discussions among the 139 member countries and jurisdictions of the OECD/G20 Inclusive Framework on BEPS, where we continue to seek a final agreement ensuring that multinational companies pay their fair share everywhere.
  • The decision of the Group of seven (G-7) advanced economies would be placed before the G-20 countries, a group of developing and developed nations, in a meeting scheduled for July in Venice.

Impact:-

  • Since India’s effective tax rate is above the global minimum tax rate, it would not impact companies doing business in India.
  • The global minimum rate impacts companies using low-tax jurisdiction to achieve low global tax cost.
  • Moreover, India attracts foreign investment owing to its large internal market, quality labour at competitive rates, strategic location for exports, and a thriving private sector.
  • India will benefit as it is a big market for a large number of tech companies.
  • Experts suggest that India’s effective tax rate is still above the global minimum tax rate, which would not impact companies doing business in India.
  • Also, the global minimum tax of at least 15 per cent means that in all probability the concessional Indian tax regime would still work, and India would continue to attract investment.

Content contributed by- Vaishnavi Dahivalikar

0 comment

Related Articles