World Company Taxation: The New Naked Minimal


To stop multinationals from evading the authorized cess system, the newly agreed world minimal company tax has clauses to make sure that income stay with wealthy nations.

On 31 October, the heads of the world’s main economies – the Group of 20 (G20) nations – accepted a brand new world minimal company tax. The deal introduced on the G20 summit in Rome, Italy is “historic” as it’s the first time nearly all nations have agreed to such a system. Earlier on October 8, about 136 nations had supported the brand new system.

The deal serves two functions: first, to stop multinationals from paying much less tax (or no tax) by reserving their income in tax havens; And second, to pay taxes wherever they work or do enterprise, even when they don’t have a bodily presence within the nation.

Beneath this deal, there are two “pillars” of taxation on firms. Beneath Pillar 1, which is estimated to have an effect on the highest 100 firms on the earth, governments tax revenue margins of greater than 10 p.c, whereas underneath Pillar 2, the worldwide minimal tax fee can be 15 p.c[seebox[seethebox][देखेंबॉक्स[seetheboxglobal tax regime on the bottom).

The Pillar-1 provision empowers countries to levy taxes on companies where they earn their revenue. Under this, companies’ excess profits – defined as more than 10 per cent of total revenue – will be taxed at 25 per cent.

Pillar 2 will apply to overseas profits of multinational firms with €750 million ($866 million, about Rs 6,400 crore) in sales globally.

Governments have the power to levy any local corporate tax, and if a company pays less than 15 percent tax, its home country can tax it to bring it down to the lowest rate.

The Organization for Economic Co-operation and Development (OECD), an international organization with 38 member states that pushed the deal, says the new arrangement covers 90 percent of the global economy.

“This is a major and historically significant reform that will make our international tax system better and work better in a digital and global economy,” said Mathias Cormann, Secretary-General of the OECD.

tax avoidance

The new deal was a bitter fight over large-scale tax evasion by multinationals. Countries are increasingly adopting lower tax regimes to attract investment. This gave rise to what we know as “tax haven”. These are the countries/territories where the corporate houses are registered or operate from.

In fact, 90 percent of the world’s top 200 companies have their presence in tax havens. As per the current tax laws, companies pay tax not at the place of economic activity, but at the tax haven where they are registered. For example, a company may do business in India, but it will not pay tax on profits made here because it is registered elsewhere.

Further, corporate houses pay tax on the basis of the overall performance of the group and not on individual entities under the group to avoid higher tax rates.

The International Monetary Fund estimates that the global revenue loss to governments due to tax avoidance in 2019 was between $200 billion and $600 billion.

The State of Tax Justice 2020, published by the Tax Justice Network, a UK-based advocacy group, found that “every year $427 billion of tax is lost globally to tax havens, $245 billion in direct corporate tax abuse by multinational corporations.” and $182 billion to personal tax evasion”.

Corporations largely avoided tax by transferring $1.38 trillion worth of profit from the countries where they originated to tax havens.

“Private tax evaders pay less tax by storing a total of more than $10 trillion in financial assets offshore,” the report said.

This is a loss for both developed and developing countries. According to the Tax Justice Network, this revenue loss would be about $500 billion, with low-income countries losing about $200 billion – money they could have used to fund critical development needs.

The report said the tax deficit of these countries is as high as 52 percent of their combined public health budgets.

In 2019, 650 million poor people in the world were living below the international poverty line of $1.9 per day.

If $2 were provided to each of them, one could argue that a $500 billion tax avoidance would have ended global poverty, even if for a few days or weeks.

long conversation

The countries had been negotiating a new tax deal for the past five years. Points discussed or proposed by the OECD include “segmentation approaches that measure profits at the level of a multinational group rather than individual entities, and then measure it as a tax base between countries of operation in proportion to the share of actual economic activity in each.” split into”.

In fact, the OECD already has a ‘Base Erosion and Benefit Transfer Action Plan’. In 2013–15, under this scheme, the OECD aimed to reduce profit sharing between places of registration and actual economic activity.

Currently, many companies report country-wise business activities and profits. It helps in tracking disproportionate tax sharing. India and other countries in the G24 (a sub-group of the G77, which is a coalition of 134 developing countries) pushed for a country’s right to tax based on the company’s place of employment and sales.

The COVID-19 pandemic added urgency to the talks. Rich and poor countries needed more resources to fight the pandemic and its resulting economic fallout. Many countries, including the wealthy, which host the most profit-making multinational corporations, looked to move profits to tax havens.

US President Joe Biden also supported the deal and gave it the necessary impetus to close it.

In a globalized and digital world, companies earn a lot from non-traditional sources – patents, software and royalties on intellectual property. US Treasury Secretary Janet Yellen celebrated the tax deal as a “victory for American households as well as international trade”.

“We have turned decades of relentless negotiations into increased prosperity for both America and the world. Today’s agreement represents a once-in-a-generation achievement for economic diplomacy,” she said after the deal.

The new deal will significantly increase taxable revenue and thus tax.

The OECD estimates that with the new minimum rate, countries would have $150 billion annually in additional revenue.

The provision for levying a tax wherever companies make profits would tax countries for $125 billion in profits.

Prima facie, reshuffling in tax revenue will level the playing field for developed and developing countries.

According to The State of Tax Justice 2020, developed countries (represented in the OECD) and the G20 are responsible for 98 percent of total tax losses. Developing and poor countries account for only 2 percent of such losses.

The G20 that approved the new deal was actually accountable for 26.7 percent of the global tax deficit in 2020 ($114 billion). Due to tax avoidance, G20 countries lost more than $290 billion in 2020. The Tax Prepared Corporate Tax Haven Index 2021 Justice Network said OECD countries that set global tax rules were responsible for more than two-thirds of global corporate abuse.

remain so

As the details unfold, it becomes clear that the deal will hardly benefit developing countries and profits will continue to go to richer countries.

Companies may not have to take the path of tax havens and still avoid or continue to avoid taxes.

In addition, the deal applies to a very small portion of corporate profits and is limited to a few companies. Effectively, the deal targets the top 100 companies in the world. Countries will now have 10 years to implement the tax, starting in 2023, instead of the proposed original five years.

Experts say the 15 per cent tax rate is not ambitious enough. Before the deal was signed, the proposed draft had a rate of “at least 15 percent”.

“At least” offered scope for a higher tax rate. Earlier this year, the United Nations Financial Accountability, Transparency and Integrity (FACTI) recommended a global corporate tax of 20-30 percent.

The Independent Commission for the Reform of International Corporate Taxation, an international coalition of intergovernmental, civil society and labor organizations, called for the implementation of a 25 percent global minimum tax. Estimates suggest that the 38 poorest countries at a tax rate of 25 percent would have an additional $17 billion annually at the rate of 15 percent.

Many developing countries that have signed the deal, however, have expressed concerns about the implementation of these new tax rules, which condition them to remove all unilateral taxes on technology companies. Many countries generate significant revenue by taxing digital services. In addition, this tax covers a large number of companies for tax revenue and in many cases they earn more than the tax required under the new regime.

According to international non-profit organization Oxfam, the new tax regime will only affect 69 multinational companies and will only apply to “super profits” over 10 percent. Oxfam estimates that 52 developing countries would receive 0.025 percent of their collective GDP in additional annual tax revenue from the Pillar-1 proposal.

Oxfam’s head of tax policy, Susanna Ruiz, said:

What could have been a landmark settlement to end the era of tax havens is fast becoming a rather prosperous country stitch-up.

According to him, “The proposal for a fixed global rate of 15 percent would benefit rich countries enormously and increase inequality. The G7 and the EU would take home two-thirds of the new cash it would bring, while the world’s poorest countries would draw from a third of the world’s.” Will recover less than 3 per cent despite being home to more population.”

For Alex Cobham, chief executive of the Tax Justice Network, the rate will hardly help fulfill the main objective of profit-shifting and preventing evasion. “Pillar 2 sets a global minimum rate, but at 15 percent so low that the incentive will be enough to move profit; and with the vast amount of revenue captured by the US and some others,” he said.

Many say the OECD-broker deal does not address the concerns of developing countries and that the redistribution of the tax is not justified. There is also a growing demand to make the tax system inclusive.

Dereje Alemayehu, executive director of the Global Alliance for Tax Justice, says, “The OECD’s repeated failure to deliver on its promises – above all, its promise to be ‘inclusive’ – makes it imperative to bring the talks to a legitimate alternative: the United Nations “

A recent initiative coincides with this call by heads of state to agree a United Nations-led tax global conference based on a tax reform blueprint prepared by FACTI. Moran Harari, lead researcher of indices at the Tax Justice Network, said: “In order to gain approval from its most powerful member states, the OECD had to reduce its global tax rules to the point of obsolescence. Instead of eliminating tax havens, the OECD The global rules of the U.S. normalized them. Only a United Nations tax convention, where global rules are set by a democracy, not a majority, can make tax havens a thing of the past.”




global tax regime

The G20 and G77, which represent most of the world’s countries and almost the entire global economy, have approved a global minimum corporate tax that, the OECD estimates, covers 90% of the global economy. The mechanism has two “pillars”:

column-1

Estimated to affect the top 100 companies in the world. The tax provision gives countries the right to tax the companies where they earn their revenue. Under this, 25 per cent tax will be levied on excess profits (defined as more than 10 per cent of total revenue) of companies.

column-2

Will apply to overseas profits of multinational firms with €750 million (approximately US$866 million) in sales globally. The global minimum tax rate is 15 percent. If a company pays less than 15 percent tax, the government of its home country will have the power to tax it to bring it down to the lowest rate.

This the first time. was published in practicalPrint edition of (dated 16-30 November, 2021).






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