Will the global minimum corporate tax be effective?

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The need for a Global Minimum Corporate Tax (GMCT) has been discussed and emphasized since 2019 when the OECD launched it, and three years later, in 2022, everything is ready for the GMCT to come into effect. On October 8, 2021, 136 countries accepted the OECD’s GMCT proposal. Later, the G20 summit endorsed this proposal on October 31, 2021.

The accepted proposal calls for a two-pillar solution to address the challenges of taxation in the digital economy based on a 2015 report on base erosion and profit shifting by the OECD . Under the first pillar, countries will be empowered to tax companies operating in the country with an excess of profits of more than 10% over sales.

The proposed tax rate is 25%. This would allow countries to tax companies where they earn their income and it is estimated that it would shift $125 billion in taxes to countries where companies actually earn income. This measure should affect the top 100 companies in the world.

The second pillar aims to impose a minimum corporate tax rate of 15% worldwide. This minimum tax rate will be imposed on companies whose annual turnover exceeds 750 million euros. Under this pillar, if a company pays less than 15% corporate tax in any country where it operates, its home country can tax the company to meet the minimum of 15%. %. The OECD says the new tax regime will cover 90% of the global economy and add $150 billion to countries’ tax revenues.

The IGM Forum Survey

Chicago Booth’s Initiative on Global Markets (IGM) forum publishes the views of panels of US and European economic experts on current and relevant economic topics. His survey of GMCTs provides an overview of its effectiveness and implications.

A total of 75 experts took part in the survey, including 38 European experts and 37 American experts. The survey consisted of three statements covering the feasibility and implications of GMCT.

The first statement says a GMCT would reduce the benefits for companies to shift their profits to low-tax jurisdictions without skewing where they invest. The survey finds that 76% of US experts agreed that the GMCT would reduce benefits for profit shifting companies. Among the European panel, 71% agreed. Only 2 percent of the entire panel disagreed with the statement.

Although they endorsed the statement, many experts expressed concerns about the challenges of implementing such a global policy that requires the acceptance of all developing countries and tax havens. Robert Shimer of the University of Chicago said the system would affect where companies invest and reduce investment in currently low-tax countries. Several other experts also suggest that the new system would lead to a bias in where companies invest.

The second statement states that “a stable international tax system in which major advanced economies levy a minimum rate on corporate income is feasible.” There seems to be less unanimity and confidence among economists on this issue. While 42% of US experts agreed, 30% were unsure and 9% disagreed. Among European experts, 54% expressed confidence, while 21% were unsure.

Several panelists doubted the political will needed to implement such a policy; many cited the possible lack of cooperation from tax havens. Ireland’s former central bank governor Patrick Honohan pointed to loopholes and corporate lobbying in existing tax systems, suggesting the need for further action beyond a minimum tax rate . Many of these concerns about political cooperation could now be ignored, as within months of the survey, no less than 137 countries have accepted the proposal.

The final statement on the effectiveness of taxing companies where they sell rather than where they produce or are headquartered drew a more uncertain response. The split on this question on both sides of the Atlantic is pronounced. Nearly half of US experts (53%) agreed with the statement, while 26% were unsure. No expert disputed this. In contrast, 31% of European experts agreed, while 42% were unsure, with only 2% disagreeing.

Comparing the two panels, the US panel showed more confidence in destination-based taxation than their European counterparts.

Agreeing with the statement, Kenneth Judd of the University of California at Berkley says, “Taxes should not distort intermediate goods and production decisions, such as the location of headquarters.

What’s in it for India?

Every year, India loses around $10 billion to tax abuse due to profit shifting, the second largest tax revenue loss in Asia. India had already taken measures such as equalization tax, SEP rules and latest digital services tax to minimize tax evasion by foreign companies.

India had also entered into Tax Information Exchange Agreements (TIEAs) with tax havens to access tax enforcement information. The enactment of the GMCT obliges India to remove these policies and move to the proposed two-pillar international standards.

This would mean giving up ₹4,000 crore income he earns from the equalization tax. But the operation of the minimum rate would create a new pocket of revenue from corporate tax equalization shifting profits to tax havens. Tax Justice Network estimates that India will earn around $4 billion a year under the new standards.

Given that the existing corporate tax in India is higher than the proposed global minimum of 15%, the possibility of lower foreign direct investment is irrelevant, especially when the Confederation of Indian Industry ranks the India among one of the top three picks. for IDEs.

Standards to stop corporate tax avoidance have been sought by governments around the world. The GMCT has now given new hopes to fight tax evasion on a global scale. It is estimated that corporations shift about $1.38 trillion in profits to tax havens, and GMCT is proposing to put a stop to that. The IGM survey indicates that the proposed GMCT could effectively counter the problem of base erosion and profit shifting, with the US and European panels strongly vouching for it.

The successful implementation of the agreement implies not excluding any country outside the agreement that could become a tax haven, thus defeating the purpose. Another difficulty in implementation is that the incentives to deviate are too great for countries. Examples such as OPEC and the EU show that it is difficult to coordinate and apply international treaties.

A provision with heavy penalties for violators may deter them from terminating the agreement. Countries must remain vigilant against corporate lobbying that could undermine the tax treaty. It is important to note that its success is more a matter of political will or skill than economics, because it depends on the pressure exerted by large countries on tax havens.

Thus, active and sincere cooperation between countries is necessary for its success. Finally, a global treaty born out of democratic participation and discussion can make tax havens a thing of the past.

Dash is an assistant professor at the Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram, and Sidharth is a master’s student in economics at the University of Kerala.

Published on

February 03, 2022

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