Context: G7 countries have reached a deal on taxing multinational companies. G7 Finance ministers have agreed in principle to ratify 15 percent global minimum corporate tax rate to counter the possibility of countries undercutting each other to attract investments. The deal is now likely to be put before a G20 meeting in July this year. In this episode we will discuss and analyse all aspects of this issue.

Key Highlights

• The first decision that has been ratified is to force multinationals to pay taxes where they operate.
• The second decision in the agreement commits states to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.
• The G7 commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.
• The deal will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes.

About G7 corporate tax deal

• The 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 involving the US, the UK, Germany, France, Canada, Italy and Japan, is likely to be put before a G20 meeting in July.

Reasons for minimum corporate tax rate

• The decision to ratify a 15% floor rate follows from a declaration of war on low-tax jurisdictions around the globe announced by US Treasury Secretary.
• She had urged the world’s 20 advanced nations to move in the direction of adopting a minimum global corporate income tax.
• The move to put a minimum rate in place attempted to reverse a “30-year race to the bottom” in which countries have resorted to slashing corporate tax rates to attract multinational corporations.

Concerns associated with G7 corporate tax deal

• It impinges on the right of the sovereign to decide a nation’s tax policy apart from the challenges of getting all major nations on the same page.
• A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
• The 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.
• A lower tax rate is a tool they can use to alternatively push economic activity and a global minimum tax rate will do little to tackle tax evasion.

India’s position on G7 corporate tax deal

• In 2019, the finance minister announced a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%.
• The Taxation Laws (Amendment) Act, 2019 resulted in the insertion of a section (115BAA) to the Income-Tax Act, 1961.
• It aims to provide for the concessional tax rate of 22% for existing domestic companies subject to certain conditions including that they do not avail of any specified incentive or deductions.
• The cuts effectively brought India’s headline corporate tax rate broadly at par with the average 23% rate in Asian countries.