Q What is global minimum tax?
- The US Treasury Secretary has urged G20 nations to move towards a global minimum corporate tax.
- It is being proposed that the ‘race to the bottom for corporate tax’ in which countries have resorted to slashing corporate tax rates to attract multinational corporations (MNCs) rates be reversed.
Q What is Base Erosion and Profit Shifting programme and issues with it?
- Big tech companies were able to operate in large markets such as India without physical presence and profits could be relatively easily relocated to low-tax jurisdictions through financial manoeuvres.
- The Base Erosion and Profit Shifting (BEPS) programme was initiated in 2013 to curb practices that allowed companies to reduce their tax liabilities by exploiting loopholes in the tax law.
- The OECD co-opted countries in the framework by suggesting that a consensus-based outcome would be superior to a patchwork of independent changes.
- Developing countries weren’t sure if they would receive the right to tax the mobile incomes of tech companies.
- Addressing this concern, the OECD published a policy note that bifurcated the challenge into two pillars.
- Pillar one was to address the issue of reallocation of taxing rights whereas all remaining BEPS issues would be addressed by pillar two.
- Most contentious issue in the blueprint is that only a fraction of the profits will be allocated to markets.
- So, the tax base of countries, including India, remains exposed to the risk of under or non-taxation.
Q What is US Proposal on a Global Minimum Corporate Tax Rate?
- The US proposal envisages a 21% minimum corporate tax rate, coupled with cancelling exemptions on income from countries that do not legislate a minimum tax to discourage the shifting of multinational operations and profits overseas.
- The proposal for a minimum corporate tax is tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations, including digital giants such as Apple, Alphabet and Facebook, as well as major corporations such as Nike and Starbucks.
- These companies typically rely on complex webs of subsidiaries to hoover profits out of major markets into low-tax countries such as Ireland or Caribbean nations such as the British Virgin Islands or the Bahamas, or to central American nations such as Panama.
Q What is position of India in Corporate Taxation?
- In a bid to revive investment activity, the Finance Minister announced, in September 2019, 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 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.
- Also, the existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.
- The cuts effectively brought India’s headline corporate tax rate broadly at par with the average 23% rate in Asian countries.
- China and South Korea have a tax rate of 25% each, while Malaysia is at 24%, Vietnam at 20%, Thailand at 20% and Singapore at 17%.
- The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.
- The average corporate tax rate stands at around 29% for existing companies that are claiming some benefit or the other.