View: There are thorny questions about the global minimum tax

On June 5, G7 finance ministers agreed on global tax reforms that would grant taxing rights to market jurisdiction over a portion of the profits of all the largest multinationals as well as a minimum tax worldwide by 15%. It is based on the US proposal, but builds on the latest OECD Approach to Base Erosion and Profit Shifting (Beps) 2.0 approved at the G7 summit.

The G7 proposal effectively adds a new tax regime to the existing corporate tax regime and goes to some extent to address India’s position on taxing digital giants. From the start of the initial Pillar 1 discussion, India has expressed its position on establishing a significant economic presence for the granting of SMS sending rights to the jurisdiction of the market. Many questions remain regarding the implementation of the proposal suggested in the G7 communiqué.

Questions remain as to whether the tax would be on accounting or accounting profits and what accounting standards would be used (as there is no harmonization of accounting standards around the world). The exact details of Pillar 1 implementation can take months to develop.

Pillar 2 of the proposal suggests a minimum tax rate of 15%, although some countries are arguing for a higher rate. India already levies a tax on digital giants to the tune of 2% of their income above 20 million yen. India’s effective corporate tax rate of 25.17% for domestic businesses is higher than the 15% agreed under the G7 proposal.

In addition, the new provision aimed at attracting new investment in the manufacturing sector, which provides for the concessional effective tax rate of 17.01% for new businesses, will not be affected by the global minimum tax, as the rate is already above the minimum tax rate. The Alternative Minimum Tax (MAT) in India is also higher than the base rate of 15% proposed by the G7.

However, there will be challenges due to the exclusions. Britain, for example, is already pushing for the exclusion of London-based financial services companies. Likewise, China may seek to carve out specific industries and special economic zones (SEZs). Certain exceptions will considerably affect the functioning of pillar 1 and may lead to a “Swiss cheese” effect.

The proposed global minimum tax could be implemented through an amendment to national tax laws in India, while Pillar 1 may need to be implemented through the signing and ratification of a new multilateral instrument ( IM). The experience of the implementation of existing MLIs shows the significant delays that occur between the effective signature and the ratification of the agreement. This, in turn, suggests that the equalization tax India already imposes on digital businesses will be in place during the transition for a few years.

There is an emerging consensus that more rigorous dispute resolution is needed when these two pillars are implemented. An effective resolution process to deal with disputes arising from the implementation of these proposals could force India to reverse its longstanding opposition to binding tax arbitration.

India has a voice at the G20 table. However, there is now intense political pressure to achieve consensus. It will be interesting to see the reaction of the finance ministers of the G20 countries to the G7 proposal when they meet on July 9 and 10 in Venice, and of the 138 members of the inclusive framework which includes many low-tax jurisdictions.