Tax structuring involving the use of low tax jurisdictions by multinational corporations, including the “silicon six”, has been in the news for a few years now. The theme of these reports has been that these corporates lowered their tax bill by using creative tax structures and essentially offshored their profits in low tax jurisdictions. Interestingly in almost all cases, the structuring was well within the contours of applicable law. The world over, laws, whether by default or design, have not been able to keep pace with rapid global economic changes, and this has created numerous legitimate opportunities for tax arbitrage.
Recently, the finance ministers of the G7 nations deliberated on this issue and agreed to adopt a global minimum tax of 15 per cent on a country-by-country basis. All the consenting nations will thus be agreeing to tax corporates in their respective countries at a minimum tax rate of 15 per cent, which it is hoped will create a disincentive for corporates looking to shift their profits to low tax jurisdictions. The other pillar of the G7 proposal deals with taxing rights. In order to address the issue of taxing rights of market jurisdictions, the finance ministers of the G7 nations have proposed to award taxing rights on at least 20 per cent of profit, exceeding a 10 per cent margin for the largest and most profitable multinational enterprises.
India’s corporate tax
Historically, the corporate tax rates in India have generally been on the higher side. The current headline corporate tax rate in India ranges from 15% per cent to 30 per cent. Thus, on the face of it, adoption of the proposal would seemingly benefit India since it would reduce opportunities for tax arbitrage and create a more compelling case for foreign companies to expand their physical footprint in India. But a closer examination reveals that the shift may not be quite alluring or straightforward for all foreign companies. For one, the lower band of 15 per cent corporate tax applies mainly to new manufacturing companies, and digital companies are unlikely to qualify. They are more likely to be taxed in a higher band, and thus while the G7 proposal will narrow the gap in tax rates between jurisdictions, it would not eliminate it.
Further, while the G7 proposal mandates that the corporate tax rate is set at a minimum of 15 per cent and that market jurisdiction will be awarded a higher percentage of taxing rights on “profits”, it is not clear how jurisdiction-based tax incentives will be treated or tackled. For example, if the tax laws allow for accelerated or disproportionately weighted expense deductions, the effective taxable profits of a company set up in that jurisdiction are reduced. Similarly, does the adoption of this proposal mean that a consenting country cannot set up special economic zones which are typically subject to lower taxes? India has created multiple such zones in the past and continues to use them, the prime example being the GIFT city in Gujarat. India has also been looking at ways to boost its manufacturing sector and has often offered a slew of tax incentives to companies setting up manufacturing facilities in certain identified areas or zones.
Equalisation levy
India would also need to rethink its controversial equalisation levy since the G7 proposal targets removal of digital service taxes and hopes to provide for “ appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies ”. The economic impact of the removal of the levy will indeed be examined in great depth by the Indian government. It is noteworthy that India collected close to ₹1,500 crore in the first ten months of the last fiscal as an equalisation levy and this number could swell significantly in the years to come.
The G7 summit has no doubt moved the needle forward when it comes to a more equitable distribution of taxes and may at least in theory benefit market jurisdictions like India. However, a fair few issues need ironing out before global consensus is reached on the G7 proposals, including the rationale behind the tax rates and awarding rights proposed. India faces a tricky balancing act, given the conflicting needs of the various constituents of its economy. Simply put, economic interests dictate it may need to figure out how to hunt with hounds and run with the hares concerning these proposals.
Abhay is a partner and Priyanka is a senior associate in the tax practice at Shardul Amarchand Mangaldas & Co