What should India’s response be to the global corporate minimum tax debate?

There appears to be growing momentum around the world for a transformation of the global tax system, following the decision by US Treasury Secretary Janet Yellen comments last week, and various other developments on the international tax front.

The development of a “global minimum corporate tax rate” – in essence, setting a minimum rate that companies around the world must pay, regardless of the jurisdiction in which they are registered, is a step forward. welcome idea, put forward by arguably the most important decision maker in the global economy, Secretary Yellen.

This is a measure designed to tackle a global phenomenon known as Base Erosion and Profit Shifting (BEPS), in which large companies register in low-income jurisdictions. taxation to avoid paying higher corporate tax rates in the countries where they actually operate. An overall minimum This rate would ensure that companies would have to pay wherever they are registered, with income distributed according to the extent of their activity in the respective countries.

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United States Secretary of the Treasury Janet Yellen. Photo: Reuters / Files

Overall it is valued that corporate tax evasion costs countries around the world $ 300 to $ 500 billion in lost revenue every year, not to mention economist Gabriel Zucman’s estimate that in 2017, $ 8.7 trillion accumulated in global wealth was stored in these low-tax jurisdictions (which we more colloquially call tax havens).

The United States is Planning tackle this problem of loss of income through measures, in particular among others, the fixing of a global minimum tax on companies, which would be 21%. Secretary Yellen’s announcement comes at a time when the international community is increasingly interested in the issue, with broad support from organizations like the G20, the OECD, and the UN FACTI Panel for an overall minimum tax rate. The UN FACTI Panel (or High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda) is a document of particular importance to developing countries, highlighting the loss caused by tax evasion on the capacity of developing countries to finance development measures.

The level at which the rate should be set is itself a contentious issue, and it will be one of the central points of discussion in the negotiations to come. Countries like Ireland, with one of the lowest corporate tax rates (12.5%) in the world, have been hesitant by adhering to the US 21% proposal. However, as organizations like the Financial Transparency Coalition have Underline, setting the minimum tax rate so low (which the OECD envisioned) would only undermine the cause of rising tax revenues globally, and would be a Pyrrhic victory.

The FACTI panel report had suggested a rate of around 20-30%, with the Independent Commission on International Business Tax Reform (ICRICT) approving an overall minimum tax rate of 25%. An OECD report however, found significant earnings gains, even at the lower limit of 12.5%. A to study by the Non-Partisan Tax Foundation also found that the average statutory corporate tax rate around the world is around 23.85%, which would mean that it would be pegged at a rate significantly lower than it may not not be particularly advantageous. He also found that rates have been falling steadily since 1980, when the legal rate was around 40%.

Normative changes in international taxation

The American decision, in itself, must be greeted as a significant step forward in the global movement for financial transparency and tax justice. The very fact of recognizing tax competition as being detrimental to state revenues and to the well-being of the population represents a significant symbolic advance. As Janet Yellen noted – “[A] The consequence of an interconnected world has been a 30-year race to the bottom in corporate tax rates. “

An important question also arises as to how this global minimum tax affects the interrelated issue of digital taxation. Much of this move towards a global minimum tax has been sparked by the mobility of capital in the digital economy and the ability of digital businesses to shift their production capacities in ways that resource-dependent businesses cannot. However, this implies that the tax is not on digital activities in itself. That is to say, targeting transactions of goods and services occurring exclusively over the Internet, in particular the value generated by tracking customers (“users”). While the new corporate tax would undoubtedly include these businesses, being a short-term solution, it is unlikely to solve the long-term problem of taxing the digital economy.

Consequently, the proposals of the new American government (the current exemption being far more user-friendly with Big Tech than its predecessor) will also likely end programs that exclusively target digital companies (such as the European Commission offers new digital tax). A few weeks earlier, however, Biden had criticized the UK and the EU for their unilateral “digital withdrawals” and had threatens retaliatory tariffs on their products.

The EU, in fact, has said it will continue to implement the digital tax regardless of OECD rules on minimum taxation, although the US requisition of project leadership will test stubbornness. of the EU.

Indian reluctance is natural

It also remains to be seen how India will react to this new American proposal. A report suggests that the Indian government is not in favor of the new minimum tax rate – the argument being that the new proposal would not be favorable to the Indian economy or Indian businesses. Indian statutory corporate tax rates were already reduced from 30% to 22% in November 2019. The government’s overall push to increase business investment in India perhaps suggests another rate cut on the horizon – with an indication of things to come perhaps the reduction earlier from the legal rate for new manufacturing companies to 15%. Analysts fear this is a short-sighted approach. Indeed, the fall in rates in 2019 only led to reduction in government revenue at a time of increased need, without a concomitant acceleration in economic growth.

However, the reluctance reported by the government raises some important issues. Although the “race to the bottom” has been mutually detrimental to the incomes of all countries, mechanisms and policies must also be put in place to ensure investment in developing countries. It could take the form of the IMF proposed solidarity tax – a temporary surtax on the “winners” (those who have received large payments in the past year) of the pandemic (individuals and businesses). The US government has so far shown no great interest in this regard. However, the IMF itself could go a long way further away by supporting the recovery process in developing countries (through measures including issuing new credits and forgiving previous debt) – its rhetoric often covering its active role (even during pandemic) by reducing public spending on its lending needs.

The other related question that arises is the future of the digital equalization tax in India (or the “Google tax”). Taxes of this type have been consistently criticized by the United States as unfairly targeting a particular sector, and the current government appears to agree with its predecessor on this issue. The lack of clarification of the global minimum tax on the issue of digital taxation may be an additional deterrent for countries like India, which are not in the development stage so as not to differentiate distinct sectors and industries.

Therefore, while much remains to be done to achieve parity in international financial relations and advance the goals of global tax justice, the global corporate minimum tax could go a long way towards achieving these goals. Countries like India should not hesitate to embrace this proposal and should approach the idea with cautious optimism.

Madhav Ramachandran works with the Center for Budget and Governance Accountability, and can be contacted at [email protected]

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