Context: US administration wants to end profit-shifting to tax havens by big tech firms & other multinationals and urged G20 nations to move towards a global minimum corporate tax.
What is the Global minimum corporate income tax?

• It is a type of corporate tax. Under this, If a company moves some of its operations to another country having low-tax jurisdiction, then the company have to pay the difference between that minimum rate and whatever the firm paid on its overseas earnings.

For example, assume Country A has a corporate tax rate of 20 percent and Country B has a corporate tax rate of 11 percent. If the global minimum tax rate is 15 percent. Consider a situation, where Company X is headquartered in Country A, but it reports income in Country B. Then Country A will increase the taxes paid by Company X. This is equal to the percentage-point difference between Country B’s rate and the global minimum rate(15 percent).

• In short, Company X will have to pay an additional 4 percent of the tax to Country A.

Key Proposal

• US proposal envisages a 21% minimum corporate tax rate, coupled with cancelling exemptions on income from countries that do not legislate a minimum tax to discourage the shifting of multinational operations and profits overseas.

There are two key strands of the plan, broadly following the work of the OECD’s “pillar one” and “pillar two” blueprints for global tax reforms set out in October.

• Under pillar one, taxing rights would be granted to a portion of a multinational’s profits based on where its customers reside, irrespective of the company’s physical presence in that location. The Biden plan includes a threshold that would mean this captures the world’s 100 biggest multinationals but not smaller companies.
• Under pillar two, governments would still be able to set whatever local corporate tax rate they wanted. But as part of a global minimum rule, if companies paid lower rates in a particular country their home governments could claim “top-ups” to the agreed tax floor, eliminating the advantage of shifting profits to a tax haven.

Why is a global minimum tax required?

• Tax systems around the world have been increasingly left behind in recent years by the rise of globalisation and digital media companies such as Google, Amazon, Apple and Facebook. They are firms operating across international borders that can shift profits around to exploit the most attractive low-tax locations.
• Hence,it is an attempt to reverse a “30-year race to the bottom” in which countries have resorted to slashing corporate tax rates to attract multinational corporations (MNCs).

India’s Stand

• Indian Government has said that it is open to participate and engage in discussions about the Global Minimum corporate tax structure.
• It said that the government will look into the pros and cons of the new proposal and take a view thereafter.

Global Response

• The European nations, including Germany and France have supported the US proposal.

Note: OECD and Group of Twenty (G20) have been leading the Base Erosion and Profit Shifting (BEPS) initiative—a multilateral negotiation with over 135 countries, including the United States—since 2013.

• Therefore, European Commission backed the proposal, but the global minimum rate should be decided after discussions in the Organisation for Economic Cooperation and Development (OECD).

Benefits

• It will work well for the US government and for most other countries in western Europe becauseof their low-tax jurisdiction.
• It potentially make it difficult for corporations to shift earnings offshore.

Challenges

• The proposal impinges on the right of the sovereign to decide a nation’s tax policy.
• It would essentially take away a tool that countries use to push policies that suit them.
• Amid Pandemic,  IMF and World Bank data suggest that developing countries with less ability to offer mega stimulus packages may experience a longer economic hangover than developed nations.