Global Minimum Corporate Tax – What Will it Mean for India?

[By Prerna Mayea and Harshal Sareen]

The authors are students at the Institute of Law, Nirma University.

Many events have been witnessed recently, such as the G7 nation’s approval and the United States’ proposal for Global Minimum Corporate Tax Rate [“GMCTR”] which shows that a global movement towards a comprehensive overhaul of the global tax system has gained traction. In a study by the Tax Justice Network, countries lose $475 billion to tax havens and $245 billion owing to corporate tax avoidance. Due to the upheaval caused by the Covid-19 pandemic, the economies of some countries are on the brink of depression. The countries across the globe have suffered a loss of $79.69 billion. The US has therefore proposed a worldwide minimum tax rate of 15%.

Introduction 

GMCTR implies a global minimum tax rate that corporations across the world must pay, regardless of the country they are based. This initiative can be considered as a global response to ensure that tax is paid by the corporations where they operate since multinational corporations often tend to show reluctance while paying taxes on their earned profits. In order to do so, corporations exploit the loopholes in the taxation laws and opt for a worldwide practice known as Base Erosion and Profit Shifting (BEPS), where large corporations incorporate themselves in lower-tax countries like the Cayman Islands and Ireland (tax havens) to avoid high tax in the countries where they operate. As a consequence, it deprives a country of its revenue from taxes.

Consequently, the taxation regime needed to be revised in light of such problems. Therefore, to counter this tax avoidance and reinvigorate the battered economy GMCTR has gained attention recently. This can be a much-awaited decision since it would fix up the loopholes pertaining to cross-border taxations and restore economic stability to a pandemic-ravaged world. Therefore, with the prospect of introducing GMCTR it is imperative to analyse its impact upon the Indian Taxation system. In this post, the authors seek to discuss the opportunities as well as the issues that India might face with the introduction of GMCTR.

Indian Taxation Scenario

Before delving into the implementation of GMCTR, it is important to take note of the present taxation scenario in the country. Like other developing and developed nations, India is also not immune to the tax losses arising on account of companies exploiting the loopholes in the taxation laws. Tax losses in India have been estimated at over $10 million. This problem was also realized by the Indian government and it took bold steps to curb the problem of tax evasion.

In 2016, the government introduced an equalization levy to tax the income of multinational e-commerce companies engaging in regular transactions with companies in India, irrespective of their place of permanent establishment. It also implemented the General Anti-Avoidance Rule (GAAR) in 2017 to keep a check on transactions aimed at avoiding tax.

India has also proactively engaged with several countries in the Double Taxation Avoidance Agreement (DTAA), provided under Section 90 of the Income Tax Act 1961, with a focus to provide relief on dual incidence of taxation on the same declared asset in two different nations. Relief from double taxation has also been provided to non-resident Indians on income accrued through foreign retirement benefits accounts in the federal budget 2021.

Implementation of the GMCTR can be seen as a positive step to further reduce any tax evasions in the country. It will also provide India a strong footing in the G20 summit scheduled in July 2021, to renegotiate its DTAA which has not been signed by several countries for years.

Impact on Foreign Direct Investment 

Various multinational corporations invest in different countries which leads to the generation of employment opportunities and efficient utilization of national resources. In order to attract these businesses, a country uses its sovereign power to regulate corporate taxes in order to attract global corporations.

Therefore, in September 2019, India had reformed the corporate tax rates by slashing it down to 22% (for existing companies not seeking exemption) and 25% (for existing companies not receiving exemptions), and 15% for newly incorporated companies. This was done to give a boost to the crippling economy and attract new investments in the country. Further, the corporate tax was also much lower in other countries like 25% in Vietnam, 17% in Singapore and 25% in China. By reducing its rate, India was also now in a position to give competitive position to attract foreign investors. The move yielded positive results and India witnessed the highest inflow of Foreign Direct Investment (FDI) in the financial year 2020-21, amounting to $81.72 billion.

On a positive note, India’s tax rate for domestic companies was fixed at 22% (plus 10% surcharge and 4% cess) by the insertion of Section 115 BAA, Income Tax Act, 1961, thus being higher than the global minimum corporate tax rate, India can continue to attract FDI. Further, it has been argued that apart from lower tax rates, India also provides a conducive environment for foreign investments due to good quality of labour at competitive rates, several relaxations and incentives, vast growing internal market and private sector as well as technological and innovation capabilities. Therefore, it can continue to attract FDI without any significant adverse impact.

However, it is feared that with the introduction of a GMCTR, investment opportunities for developing and under-developed countries will be eroded to a great extent. With severe economic disparities around the globe, the introduction of GMCTR will mean that countries that choose to offer low corporate tax rates will lose their competitive edge against giant global economies.

Implementation Challenges 

Since every coin has two sides, the introduction of GMCTR along with the opportunities also poses several challenges. It is very likely that GMCTR would pose several implementation challenges in India. The foremost challenge is getting the majority of nations on board. Further, with the implementation of GMCTR, if the government revenues are impacted negatively, it will create a barrier in providing necessary social services and requisite infrastructure necessary for fast-paced growth of the nation.

The country’s approach to the pandemic has been focused on social spending and development of the health infrastructure, and only then focus on the economic spending and fiscal stimulus in the budget through public spending on infrastructure. It is pertinent to note that corporate tax accounts for 25% of the total tax revenue of the central government. After the recent cut in corporate tax in 2019, any further reduction can lead to an economic hangover in the country which is severely coping up with the pandemic. In these crucial times of health emergency, it cannot afford to have an economic setback. Therefore, it is the need of the hour to have a stable taxation system in place for a pandemic-ridden country to tackle its economic problems and speed up its development.

The minimum corporate tax rate will also hit special economic zones, export industry, green investments, investment in backward areas and other ventures for which tax incentives and subsidies are provided by the government. Despite the nominal corporate tax rate being imposed, these financial entities used to pay zero tax due to taxation reliefs. In order to reserve these taxation incentives and benefits to entities, amends will have to be made in the legislative regime. It has to be ensured that the implementation is effective and transparent so that entities are not able to exploit any loopholes in the policy.

Conclusion

The policy decision regarding GMCTR would again be placed before G20 nations in July 2021, a single biggest chance to revamp the international framework for taxing corporations.

The question of whether GMCTR is a favorable move or an impediment varies from country to country. USA’s reason to push for GMCTR seems to be purely domestic i.e. to raise $2.5 trillion revenue in the next 15 years by increasing the corporate tax. However, tax havens like Panama, Bahamas, etc. most likely will show reluctance to agree upon this policy, because generally lower taxation rates attract more investors and with GMCTR tax havens would not be in a favorable position. Additionally, even though a reduction in tax rate can lead to lower tax evasions and significant tax profits, it can also decrease the government’s income substantially. In the future, if any further decrease in the tax rate is not balanced with an increase in foreign investment, the government will fall short on the revenues.

To sum up, GMCTR surely accrues several benefits to many developing nations by allowing them to tax profits of multinational digital corporations. It will also help in bringing the much-needed uniformity in the international taxation regime, and eliminate various digital taxes, pursuant to consensus being reached amongst the nations. Therefore, it is best for India to approach this proposal with cautious optimism.

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