Global Tax Reforms

Oct 11: Global Tax Reforms – https://youtu.be/JQYdB01MMw8

INTERNATIONAL/ ECONOMY

• GS-2: Effect of policies and politics of developed and developing countries on India’s interests
• GS-3: Indian Economy and issues relating to planning, mobilization, of resources

Global Tax Reforms

Context: After years of intensive negotiations to bring the international tax system into the 21st century, 136 countries have reached an agreement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. This will ensure big companies pay a minimum tax rate of 15%, making it harder for them to avoid taxation.

What is the global minimum tax deal?

The global minimum tax agreement does not seek to eliminate tax competition but puts multilaterally agreed limitations on it. 

• Under Pillar One of the agreements, taxing rights on more than 125 billion US Dollars of profit are expected to be reallocated to market jurisdictions each year.
• Pillar Two of this agreement introduces a global minimum corporate tax rate at 15%. The new minimum tax rate will apply to companies with revenue above 750 million Euros and is estimated to generate around 150 billion US dollars in additional global tax revenues annually. 
• Further benefits are also expected from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.

Why a global minimum tax?

• With budgets strained after the COVID-19 crisis, many governments want to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made.
• Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
• The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.

The Impact

• The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
• Taxing rights on more than $125 billion of profit will be additionally shifted to the countries were they are earned from the low tax countries where they are currently booked.
• The deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
• However, various deductions and exceptions included in the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups base their European operations.

Can you answer the following questions?

What is the global minimum tax deal and what will it mean for developing countries like India?