Tax Angle

Published: Dec 29, 2020
Updated: Dec 29, 2020

Brave new world of global minimum tax

In a sign of increasing global focus on the issue of tax evasion by large corporate entities, as many as 136 countries under the umbrella of the OECD have agreed on a minimum global tax rate of 15%. The idea is to stop the flow of corporate profits to tax havens, in the process denying home countries much-needed tax revenue. But, as Shivanand Pandit points out, the 10-year grace period on the proposed global corporate tax rate, and other exemptions, may be a big dampener. However, the deal is still welcome as it will help establish a more just global tax system and free countries from long-drawn litigations with large MNCs.

A group of 136 sovereign nations fixed a minimum global tax rate of 15% for large corporate entities and sought to make it tougher for them to circumvent taxation in a breakthrough agreement that US President Joe Biden said ‘levelled the playing ground’. The Paris-based Organization for Economic Cooperation and Development (OECD) on October 8, 2021 declared that its members have consented to fix a universal minimum tax rate for corporate establishments from 2023. Out of the 140 nations concerned, 136 backed the deal, with Kenya, Nigeria, Pakistan and Sri Lanka refraining for now.

The Global Minimum Tax is shaped to tackle the low amount of tax paid by a few of the world’s giant entities comprising Big Tech companies like Apple, Alphabet and Facebook. These corporations usually rely on complex webs of subsidiaries to ‘hoover’ gains out of major markets into low-tax countries or tax havens such as Ireland, the British Virgin Islands, the Bahamas and Panama. Between 1985 and 2018, the global average corporate tax rate fell from 49% to 24%. By 2016, more than 50% of all US corporate profits were booked in seven tax havens, namely Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. That costs the US treasury $100 billion a year, according to sources.

The deal targets to end a 40-year-old ‘race to the bottom’ by aligning a ground for nations that have sought to entice investment and jobs by taxing transnational companies softly, effectually permitting them to shop around for low tax rates. The 15% floor approved is well below the corporate tax rate which averages approximately 24% in industrialised nations. This global tax reform sows the seeds of how tax collaboration will function globally so as to stop tax evasion by multinational entities who seek to gain from varying and unglued tax laws and regulations to reduce their total effective tax rate. Numerous economists anticipate that the deal will motivate multinationals to deport capital to their country of headquarters, giving a booster dose to those economies.

Many governments, which are fiscally injured by the deadly Covid-19, want more than ever to dispirit multinational entities from transferring profits – and tax revenues – to low-tax nations irrespective of where their sales have occurred. Progressively, income from intangible sources such as drug patents, software and royalties on intellectual property has transferred to these countries, permitting companies to escape paying higher taxes in their traditional home nations. The minimum tax and other provisions target to put an end to tax competition between governments to attract foreign investment.

TALE OF TWO PILLARS

The new tax proposal follows a general plan that has been under debate since 2019. There are two ‘pillars’ of the reform — Pillar 1 and Pillar 2. This is an upshot of the prolonged global effort of the OECD, which started with the Base Erosion and Profit Shifting (‘BEPS’) project. BEPS refers to tax evasion plans that exploit gaps and disparities in tax rules to artificially transfer profits to low or no-tax zones. The OECD has issued 15 Action Items to address this. Pillar 1 is centred on changing where big corporate units pay taxes and Pillar 2 comprises the global minimum tax. Both pillars embrace multiple components.

‘NO TEETH’

In contrast, some developing nations looking for a greater minimum tax rate say their interests have been neglected to adapt to the welfares of wealthier nations like Ireland, which had refused to approve the deal with a minimum tax rate of more than 15%. Economy Minister of Argentina Martin Guzman mentioned that suggestions on the table compelled developing nations to select between ‘something bad and something worse’. While Nigeria, Kenya and Sri Lanka did not support the deal, Pakistan’s non-participation came as a shock.

There was also displeasure among few campaign clusters such as Oxfam, which felt the deal would not stop tax havens. Oxfam tax policy lead Susana Ruiz mentioned, “At the last minute, a colossal 10-year grace period was slapped onto the global corporate tax of 15 percent, and additional loopholes leave it with practically no teeth. The tax devil is in the details, including a complex web of exemptions.” Thus, organizations with real assets and payrolls in a nation can safeguard some of their income evasion from the new minimum tax rate.

As a final point, with 136 nations accounting for 90% of the global GDP approving the agreement, there is likely to be a considerable drop in tax dodging following its execution. Making low-tax territories such as Ireland, Estonia and Hungary join the deal lays the path for soft implementation. However, the last word has not yet been written on this, as national governments will have to back the deal. But the deal should be welcomed by all dominions since it will help establish a more just global tax system and free countries from long-drawn litigations with large MNCs. Nonetheless, the nations that support the agreement are assumed to bring it into their law books next year so that it can be implemented from 2023. This will be a tough task for many. The deal also encroaches on the right of the sovereign to determine a nation’s tax strategy and fundamentally snatches weapons that nations utilize to push policies that match them. Overall, the deal itself is a wonder – getting 136 autonomous nations to come to one common ground on international taxation positions the platform for even closer teamwork.

Shivanand Pandit is a tax specialist, financial adviser, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com or 9822983420