Global Minimum Tax - Boon or Bane




On June 5th 2021, the Finance Ministers of G7 economies reached a landmark agreement in London on levying a global minimum corporate tax of 15%. The agreement has then been further discussed in detail at a meeting of G20 finance ministers and central bank governors in July.

 

Why this decision?

The G7 economies - the US, the UK, Germany, France, Canada, Italy and Japan ratified the decision to force multinationals to pay taxes where they operate. For the last few decades, countries have been slashing their corporate tax rates to attract investments from multinational corporations. A global tax rate would put a stop to this ‘race to the bottom’ phenomenon. This would also prevent the shifting of profits by multinationals to countries with low tax rates, also called tax havens. This way they could avoid paying taxes in countries where they are headquartered. This shifting of profits by MNCs has led to the “eroding” of “tax-base” of the higher-tax jurisdictions.


As countries are tackling the COVID pandemic and finding it difficult to finance their expenditures, they are mulling to increase tax rates; however, the possible base erosion raises a concern. A global tax rate would prevent this phenomenon of Base Erosion and Profit Shifting (BEPS).

 

What are the concerns?

The countries that are set to lose due to this proposal are the low-tax jurisdictions or tax havens like Bermuda, The Netherlands, Ireland, Mauritius, Luxembourg, Switzerland etc., who attracted a major part of their investment due to their low tax rates. It’s also to be seen how these countries would be accommodated. If, indeed, a small concession is allowed to these countries, the whole idea would go in vain.


Another major concern is that the developed countries are set to gain more from the policy than developing countries. Estimates by the UK’s Tax Justice Network suggest that the G7 countries would gain $168bn with a 15% global minimum corporate tax rate, while all other countries would only gain $107bn. Lowering the tax rate is a tool developing economies use to push economic activity and a global tax would deny them the ability to do so.


Every system has some loopholes. These can be misused and the system can be cheated. So, the new system should be able to minimize these flaws. Also, the policy will not have any impact on tax evasion. Tax avoidance is an act of legal methods to avoid taxes by misusing the loopholes, while tax evasion is an illegal activity to deliberately avoid paying taxes.


The policy will be a great step if it can address these issues of accommodation and inadequacies, and also increase the tax revenues of both developed and developing economies equally.

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