In a declaration of war on low-tax jurisdictions around the globe, US Treasury Secretary Janet Yellen has urged the world’s 20 advanced nations to move in the direction of adopting a minimum global corporate income tax. She said the move attempted to reverse a “30-year race to the bottom” in which countries have resorted to slashing corporate tax rates to attract multinational corporations.
“Competitiveness is about more than how US-headquartered companies fare against other companies in global merger and acquisition bids… It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods,” Yellen said in a virtual speech to the Chicago Council on Global Affairs. “It is important to work with other countries to end the pressures of tax competition and corporate tax base erosion,” Yellen said, indicating that the US would work with other advanced economies in the Group of 20 to achieve this.
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The plan, and why
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. One of the reasons the US is pushing for this is purely domestic. It aims to somewhat offset any disadvantages that might arise from the Biden administration’s proposed increase in the US corporate tax rate. The proposed increase to 28% from 21% would partially reverse the previous Trump administration’s cut in tax rates on companies from 35% to 21% by way of a 2017 tax legislation. More importantly, the US proposal includes an increase to the minimum tax that was included in the Trump administration’s tax legislation, from 10.5% to 21% — the benchmark minimum corporate tax rate that Yellen has propounded for other G20 countries.
This increase comes at a time when the pandemic is costing governments across the world, and is also timed with the US’s push for a $2.3 trillion infrastructure upgrade proposal. The plan to peg a minimum tax on overseas corporate income seeks to potentially make it difficult for corporations to shift earnings offshore. A global compact on this issue, as enunciated by Yellen, works well for the US government at this time. The same holds true for most other countries in western Europe, even as some low-tax European jurisdictions such as the Netherlands, Ireland and Luxembourg and some in the Caribbean rely largely on tax rate arbitrage to attract MNCs.
Yellen’s speech came just as the spring meetings of the World Bank and International Monetary Fund (IMF) began in a virtual format, effectively setting the stage for broader discussions on this issue. A day later, the European Commission backed the call, but said the global minimum rate should be decided after discussions in the Organisation for Economic Cooperation and Development — a group of 37 developed nations. “We remain committed to ensuring that all businesses, including digital ones, pay their fair share of tax, where it is rightfully due,” European Commission spokesman Dan Ferrie told a news briefing Tuesday, when asked about Yellen’s proposal. There were statements of support over the week from European nations, including Germany and France.
The proposal also has some degree of support from the IMF. While China is not likely to have a serious objection with the US call, an area of concern for Beijing would be the impact of such a tax stipulation on Hong Kong — the seventh-largest tax haven in the world and the largest in Asia, according to a study published earlier this year by the advocacy body Tax Justice Network. Plus, China’s frayed relationship with the US could be a deterrent in negotiations on a global tax deal.
Apart from low-tax jurisdictions, the proposal for a minimum corporate tax are 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.
The US Treasury loses nearly $50 billion a year to tax cheats, according to the Tax Justice Network report, with Germany and France also among the top losers. India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion, according to the report.
Apart from the challenges of getting all major nations on the same page, especially since this impinges on the right of the sovereign to decide a nation’s tax policy, the proposal has other pitfalls. A global minimum rate would essentially take away a tool that countries use to push policies that suit them. For instance, in the backdrop of the pandemic, 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. Also, a global minimum tax rate will do little to tackle tax evasion.
Where India stands
In a bid to revive investment activity, Finance Minister Nirmala Sitharaman announced, on September 21, 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, existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.
This, along with other measures, was estimated to cost the exchequer Rs 1.45 lakh crore annually. 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%.
“While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure. The economic division will look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter,” said a senior government official. The average corporate tax rate stands at around 29% for existing companies that are claiming some benefit or the other.
Another official said New Delhi was “proactively engaging” with foreign governments with a view to facilitating and enhancing exchange of information under Double Taxation Avoidance Agreements, Tax Information Exchange Agreements and Multilateral Conventions to plug loopholes. Besides, “effective enforcement actions” including expeditious investigation in foreign assets cases have been launched, including searches, enquiries, levy of taxes, penalties, etc and filing of prosecution complaints, wherever applicable.
To address “the challenges posed by the enterprises who conduct their business through digital means and carry out activities in the country remotely”, the government has the ‘Equalisation Levy’, introduced in 2016 following a recommendation by a panel constituted to deliberate on taxation of the digital economy. Also, the IT Act has been amended to bring in the concept of “Significant Economic Presence” for establishing “business connection” in the case of non-residents in India.
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