Explained: Tax Big Tech Where It Generates Profits

The majority of the world’s nations have signed a landmark pact that could force multinational corporations to pay their fair share of taxes in the markets where they operate and make profits. One hundred and thirty-six countries, including India, agreed on Friday to apply a minimum corporate tax rate of 15%, and a fair system of taxing the profits of large companies in the markets where they are made. Kenya, Nigeria, Pakistan and Sri Lanka have yet to join the deal.

The move is part of an evolving consensus that large multinationals are funneling their profits to low-tax jurisdictions to avoid paying taxes. The Organization for Economic Co-operation and Development (OECD), made up mostly of developed economies, has been negotiating a minimum corporate tax rate for a decade. A multilateral convention is due to be signed next year.

The biggest impact is probably on the big tech companies that have largely chosen low-tax jurisdictions for their headquarters.

What decisions are made?

The decisions effectively ratify the OECD’s two-pillar package which aims to ensure that large multinational enterprises (MNEs) “pay taxes where they operate and make a profit.”

  • The first pillar aims to ensure a more equitable distribution of profits and taxing rights between countries with regard to the largest multinationals, including digital companies. This would result in the reallocation of certain taxing rights on MNEs from their home country to the markets where they operate and earn profits, whether or not the companies are physically present there.
  • The second pillar aims to put a floor on corporate tax competition, through a minimum overall corporate tax rate that countries can use to protect their tax base.

The 15% corporate tax floor will come into effect from 2023, provided all countries pass such legislation. This will cover companies with global sales exceeding 20 billion euros ($ 23 billion) and profit margins above 10%. It is proposed to reallocate a quarter of profits above 10% to the countries where they were made and to be taxed there.

The move follows an earlier deal between G7 economies in London in June. The two-pillar solution will be presented at the G20 finance ministers meeting in Washington DC on October 13, and then at the upcoming G20 leaders’ summit in Rome.

The two-pillar solution, according to Sumit Singhania, a partner of Deloitte India, will result in “a redistribution of $ 125 billion in taxable profits per year” and ensure that multinationals pay a minimum tax of 15% once this solution is implemented. A consensus on a global minimum tax “will make tax competition between nations virtually impossible by reducing these opportunities to the rarest of circumstances … Ultimately, two-pillar solutions should be seen as a lasting overhaul of a tax system. centenary international, here to completely change the rule of the global distribution of profits between tax jurisdictions ”.

Why the minimum rate?

The new proposal aims to seize the opportunities for MNEs to engage in profit shifting, ensuring that they pay at least part of their taxes where they do business. According to Amit Singhania, partner, Shardul Amarchand Mangaldas & Co., the two-pillar solution will ensure that “once again the world will be global, at least following the principles of taxation rather than following territorial laws”.

In April this year, US Treasury Secretary Janet Yellen urged the world’s 20 advanced economies to pass a minimum global corporate income tax. A global compact works well for the US government right now. The same is true for most other Western European countries, although some European low-tax jurisdictions like the Netherlands, Ireland and Luxembourg and some in the Caribbean rely heavily on the arbitrage of tax rates to attract multinationals.

The proposal also enjoys some support from the IMF. While China is unlikely to have a serious objection to the US call, one concern for Beijing would be the impact on Hong Kong, the seventh largest tax haven in the world, according to a study released earlier. this year by the advocacy organization Tax Justice. Network. In addition, China’s unstable relationship with the United States could act as a deterrent in the negotiations.

Who are the targets?

In addition to low-tax jurisdictions, the proposals are designed to address the low effective tax rates charged by some of the world’s largest companies, including big tech companies such as Apple, Alphabet and Facebook, as well as those such as Nike and Starbucks. These companies typically rely on complex networks of affiliates to suck profits from major markets to low-tax countries such as Ireland, British Virgin Islands, Bahamas or Panama.

The United States loses nearly $ 50 billion a year to tax evasion, according to the Tax Justice Network report, with Germany and France also among the biggest losers. India’s annual loss due to corporate tax abuse is estimated at over $ 10 billion.

What are the issues with the plan?

In addition to the challenges of getting all major nations on the same page, since this infringes on the sovereign’s right to decide a nation’s tax policy, the proposal presents other pitfalls. A global minimum rate would essentially remove a tool that countries use to put in place policies that work for them. Moreover, passing laws by next year so that they can come into force from 2023 is a difficult task. The deal has also been criticized for its lack of bite: Groups such as Oxfam have said the deal will not end tax havens. ?? Express Explained is now on Telegram. Click here to join our channel (@ieexplained) and stay up to date with the latest

Where is India at?

India, which had reservations about the deal, finally backed it in Paris. Finance Minister Nirmala Sitharaman said last week that India was “on the verge” of deciding the details of the two-pillar proposal and was deciding on the details.

India will likely try to balance its interests, while claiming that taxation is ultimately a “sovereign function”. India may need to withdraw its digital tax or equalization levy if the global tax deal goes through. The OECD has said that the Multilateral Convention (MLC) “will require all parties to remove all taxes on digital services and other similar measures relevant to all businesses, and to undertake not to introduce such measures in the future “.

To meet “the challenges posed by companies that conduct their activities by digital means and carry out activities in the country remotely”, the government has implemented the “equalization levy”, introduced in 2016. In addition, the Computer Law was amended to introduce the concept of “Significant Economic Presence” to establish a “business connection” in the case of non-residents in India.

There are also apprehensions about the impact of this operation on the investment activity. The New York Times reported on October 7: “India, China, Estonia and Poland have said that the minimum tax could hinder their ability to attract investment with special lures like research credits and development and special economic zones that offer tax breaks to investors.

On September 21, 2019, Sitharaman announced a corporate tax reduction for domestic companies to 22% and for new domestic manufacturing companies to 15%. The Tax Laws (Amendment) Act 2019 amends the Income Tax Act 1961 to provide for the preferential tax rate for existing domestic corporations under certain conditions. In addition, existing domestic companies that opt ​​for the concessional tax regime will not be required to pay an alternative minimum tax.

This, along with other measures, has been estimated to cost the board Rs 1.45 lakh crore per year. The effective tax rate, including surtax and tax, for Indian domestic businesses is approximately 25.17%.

“While taxation is ultimately a sovereign function and depends on the needs and circumstances of the nation, the government is open to participate and engage in the emerging global discussions around the tax structure of the nation. companies. The economic division will examine the pros and cons of the new proposal as it comes along and the government will come to a decision afterwards, ”a senior government official said. The average corporate tax rate is around 29% for existing companies claiming one benefit or another.

Another official said New Delhi “proactively engages” with foreign governments to facilitate and improve the exchange of information under double taxation avoidance agreements, tax agreements. ‘exchange of tax information and multilateral conventions to fill the gaps.

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