G-20 finance ministers are due to meet in Washington today to discuss the 15% global minimum tax for multinational companies. Mint takes a look at the global minimum tax and its implications.
What is the global minimum tax?
Last week, the Organization for Economic Co-operation and Development (OECD) finalized a landmark agreement to subject multinational enterprises (MNEs) to a minimum tax of 15% from 2023. A total of 136 countries, including ‘India, have agreed to join the historic agreement. This will help reallocate the profits of more than $ 125 billion from more than 100 large multinationals to ensure that companies pay a fair share of tax in the countries in which they operate. In a digitalized and globalized world economy, this agreement brings about a fundamental reform of international tax rules. .
What is the âtwo pillarâ solution?
The OECD’s two-pillar solution aims to address the tax challenges resulting from the digitization of the global economy. Under Pillar 1, the rights to tax over $ 125 billion in profits are expected to be reallocated to market jurisdictions each year. A worldwide minimum tax rate of 15% on companies should be introduced under pillar 2. This minimum tax rate will apply to companies with turnover above 750 million euros and it is predicted that it would help generate around $ 150 billion in global tax revenue on an annual basis.
What was the trigger for such an agreement?
Due to the pandemic and the resulting financial crisis, countries are looking for alternative and innovative sources of income to rejuvenate their economies. But large multinationals channel their profits to low-tax jurisdictions. This new pact helps ensure that MNEs pay their fair share of taxes owed in the countries where they operate and earn profits.
Will he eliminate tax competition?
The agreement does not seek to eliminate tax competition. On the contrary, it would ensure a more equitable distribution of profits and taxing rights between countries, especially with regard to large profitable multinational companies such as Apple Inc., Google Llc, Amazon.com Inc., Netflix Inc. ., etc. This would help reallocate the right to levy taxes from the home country of MNEs to the host countries where they do business, whether they have a physical presence or not. This will ensure that multinationals with global sales of over â¬ 20 billion and profitability of over 10% are covered by the rules.
And the implications for India?
The tax deal will result in the elimination of existing taxes on digital services and other unilateral measures by 2023. India will have to withdraw the equalization levy introduced in 2016. This levy was intended to tax foreign companies that have customers substantial in the country, but billed through their offshore units. Experts believe that the tax would benefit India, as the effective domestic tax rate is above the threshold and India, being a large potential market, would continue to attract foreign investment.
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