Follow Us:
Monday, August 15, 2022

Review the deal

Shifting to global minimum tax framework will end competitive tax cuts. But developing economies need to weigh costs

By: Editorial |
Updated: June 10, 2021 8:08:04 am
finance minister, G-7 nations, global tax architecture, corporate taxation, international treaties, indian express editorialCompanies routinely make use of loopholes in international treaties to circumvent paying taxes in either the country of operation or where the parent company is headquartered.

On Saturday, finance ministers of the G-7 nations reached a landmark agreement that is likely to have far-reaching ramifications for the global tax architecture. The G-7 nations have, in principle, agreed on measures to make companies pay more taxes in their countries of operation, and to shift to a global minimum tax framework of at least 15 per cent — signalling an end of the race to the bottom in global corporate taxation.

Companies routinely make use of loopholes in international treaties to circumvent paying taxes in either the country of operation or where the parent company is headquartered. Moreover, the global race to cut taxes has also impacted government revenues, reducing the fiscal space available to them to support their economies. Support for such proposals now reflects the need of these countries to shore up their revenues, and bring down their deficits/debts to more manageable levels. According to the US Congressional Budget Office, the US federal budget deficit is expected to touch $2.3 trillion or 10.3 per cent of GDP in 2021, while debt held by the public will touch 102 per cent of GDP by end 2021.

But developing economies like India also need to consider the arguments against such proposals. The right to tax a company operating in its territory is a sovereign right — agreeing to such a proposal may be tantamount to giving up this right. Doing so also implies that countries that have resorted to using tax incentives for attracting capital may not be able to do so. India had, for instance, in 2019, brought down the tax rate for new domestic manufacturing companies to 15 per cent. There is also the issue of the first right to tax. Who does it go to? Will any untaxed profit, stemming from lower tax rates in the country of operation, go to where the parent company’s headquarter is situated? Considering that companies that are able to take advantage of tax arbitrage possibilities are based out of the developed world, the benefits are likely to flow disproportionately to them. While countries like India may get a share of the profits of companies operating in the digital world, measures such as the equalisation levy are likely to be negotiated away. India must carefully weigh the costs and benefits of shifting to such an architecture. It needs to strike a balance between global rules and national priorities.

Subscriber Only Stories
Delhi Confidential: Who will hoist the Tricolour at the AICC headquarters...Premium
Justice Uday Umesh Lalit: ‘If (our) action is not up to the mark, s...Premium
India@100: A digitally-powered and sustainable innovation hubPremium
Imagining India at 100: Where Health is recognised as being critical for ...Premium

📣 Join our Telegram channel (The Indian Express) for the latest news and updates

For all the latest Opinion News, download Indian Express App.

  • Newsguard
  • The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
  • Newsguard
First published on: 10-06-2021 at 03:25:43 am
0 Comment(s) *
* The moderation of comments is automated and not cleared manually by

Featured Stories