Context: In this episode of the Perspective Prog. based on Global Tax Reforms. 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 two-pillar solution will now be delivered to the G20 Finance Ministers meeting in Washington D.C. on 13 October and then to the G20 Leaders Summit in Rome at the end of this month. 
• 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. 
• Today we will discuss and analyse all aspects of this issue and understand it's impact on India and other developing countries.  

The proposal follows a general outline that has been under discussion since 2019. There are two “pillars” of the reform: 
Pillar 1 is focused on changing where large companies pay taxes:-

• Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. This would entail reallocation of some taxing rights over MNEs from their home countries to markets where they have business and earn profits, regardless of whether firms have a physical presence there.

Pillar 2 includes the global minimum tax:-

• Pillar Two seeks to put a floor on competition over corporate income tax, through a global minimum corporate tax rate that countries can use to protect their tax bases.

How would a deal work?

• The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally. 
• Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
• A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.

Why a global minimum tax?

• With budgets strained after the COVID-19 crisis, many governments want more than ever 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.

What will be the economic 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.
• Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
• However, various deductions and exceptions baked into 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.

What are the problems with the plan?

• Apart from the challenges of getting all major nations on the same page, since this impinges on the right of the sovereign to decide a nation’s tax policy, the proposal has other pitfalls.
• A global minimum rate would essentially take away a tool countries use to push policies that suit them. 
• Also, bringing in laws by next year so that it can take effect from 2023 is is a tough task. 
• The deal has also been criticised for lacking teeth: Groups such as Oxfam said the deal would not put an end to tax havens.

Where does India stand?
According to Finance Minister, 

• India is “close” to deciding the specifics of the two-pillar proposal and is in the final stages of deciding on the details.
• India is likely to try and balance its interests, while asserting that taxation is ultimately a “sovereign function”. 
• India may have to withdraw its digital tax or equalisation levy if the global tax deal comes through. 

Note: To address “the challenges posed by the enterprises who conduct their business through digital means and carry out activities in the country remotely”, the government has the ‘Equalisation Levy’, introduced in 2016. 

• Also, the IT Act has been amended to bring in the concept of “Significant Economic Presence” for establishing “business connection” in the case of non-residents in India.

However, India, China, Estonia and Poland have said the minimum tax could harm their ability to attract investment with special lures like research and development credits and special economic zones that offer tax breaks to investors.”

Key Steps taken by India in this direction

• Finance Ministry  on September 21, 2019 had announced a cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%. 
• The Taxation Laws (Amendment) Act, 2019 amends the Income-Tax Act, 1961 to provide for the concessional tax rate for existing domestic companies subject to certain conditions. 
• Also, existing domestic companies opting for the concessional taxation regime will not be required to pay Minimum Alternate Tax.
• This, along with other measures, was estimated to cost the exchequer Rs 1.45 lakh crore annually. The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.
• While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure. 
• The economic division will look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter,”.
• The average corporate tax rate stands at around 29% for existing companies that are claiming some benefit or the other.

Morover, New Delhi was “proactively engaging” with foreign governments with a view to facilitating and enhancing exchange of information under Double Taxation Avoidance Agreements, Tax Information Exchange Agreements and Multilateral Conventions to plug loopholes.