Context: Advanced economies making up the G7 grouping have reached a “historic” deal on taxing multinational companies.

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.