Will global minimum corporate tax deliver?

Santosh Kumar Dash |Sidharth R | Updated on: Feb 03, 2022
It is estimated that corporates shift around $1.38 trillion worth of profit to tax havens

It is estimated that corporates shift around $1.38 trillion worth of profit to tax havens

A Initiative on Global Markets survey indicates that the proposed tax can effectively counter the problem of base erosion and profit shifting

The need for a global minimum corporate tax (GMCT) has been discussed and stressed upon from 2019 when the OECD initiated it, and three years later, in 2022, all is set for GMCT to come into effect. On October 8, 2021, 136 nations agreed to the GMCT proposal by the OECD. Later, the G20 summit approved 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 OECD. Under the first pillar, the countries will be empowered to tax corporations operating in the country and having an excess profit of more than 10 per cent on sales.

The tax rate is proposed to be 25 per cent. This would enable the countries to tax corporations wherever they earn their revenue and is estimated to shift $125 billion worth of taxes to countries where the companies actually earn revenue. This measure is expected to affect the top 100 companies of the world.

The second pillar seeks to impose a minimum corporate tax rate of 15 per cent all over the world. This minimum tax rate will be imposed on corporates with annual revenues of more than €750 million. Under this pillar, if a company pays less than 15 per cent corporate tax in any country that it operates, its home country can impose a tax on the company to reach the minimum of 15 per cent. The OECD claims that the new tax regime will cover 90 per cent of the global economy and add $150 billion to countries’ tax revenue.

The IGM Forum Survey

The Initiative on Global Markets (IGM) forum of Chicago Booth publishes the US and European economic expert panels’ views on current and relevant economic topics. Its survey on GMCT provides a comprehensive view of its effectiveness and implications.

A total of 75 experts participated in the survey, of whom 38 were European experts, and 37 were US experts. The survey consisted of three statements covering the achievability and implications of the GMCT.

The first statement states that a GMCT would reduce the benefits to companies of shifting profits to low-tax jurisdictions without biasing where they invest. The survey finds 76 per cent of the US experts agreed that the GMCT would reduce benefits for profit-shifting companies. Among the European panel, 71 per cent concurred. Only 2 per cent of the whole panel disagreed with the statement.

Despite agreeing to the statement, many experts expressed their concerns on the challenges to implementing such a global policy that needs the acceptance of all developing countries and tax havens. Robert Shimer at the University of Chicago stated that the system would affect where the 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 the corporates invest.

The second statement says that ‘A stable international tax system in which the major advanced economies collect a minimum rate on corporate income is achievable’. There seems to be less unanimity and confidence among the economists on this question. While 42 per cent of the US experts agreed to it, 30 per cent were uncertain, and 9 per cent disagreed. Among the European experts, 54 per cent expressed confidence, whereas 21 per cent were uncertain.

Several panellists were doubtful of the political will it takes to implement such a policy; many quoted the possible lack of cooperation from tax havens. The former central bank governor of Ireland, Patrick Honohan, pointed out the presence of loopholes and corporate lobbying in the existing tax systems, suggesting the need for additional actions beyond a minimum rate of taxation. Much of these concerns on political cooperation could be overlooked now, as some months after the survey, as many as 137 countries have agreed to the proposal.

The final statement on the efficiency of taxing corporates where they make their sale rather than where they produce or have headquarters saw a more uncertain response. The divide on this question by both sides of the Atlantic is pronounced. Almost half of the US experts (53 per cent) agreed to the statement, whereas 26 per cent were uncertain. No expert disagreed with it. In contrast, 31 per cent of European experts concurred, while 42 per cent were uncertain, with only 2 per cent 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, Berkley says, ‘Taxes should not distort intermediate goods and production decisions, such as headquarters locations.’

What is there for India?

India loses about $10 billion to tax abuse through profit shifting every year — the second-largest tax revenue loss in Asia. India had already taken measures like equalisation levy, SEP rules, and the latest digital services tax to minimise tax evasion by foreign corporates.

India had also gotten into Tax Information Exchange Agreements (TIEAs) with tax havens for access to information on tax enforcement. The enactment of GMCT requires India to take down these policies and switch to the proposed two-pillar international norms.

This would mean forgoing revenue of ₹4,000 crore which it earns through equalisation levy. But the operation of minimum rate would create a new pocket of revenue arising from the equalisation of taxes of corporates shifting profits to tax havens. Tax Justice Network estimates India to gain about $4 billion annually under the new norms.

As the existing corporate tax in India is above the proposed global minimum of 15 per cent, the chance of a dip in foreign direct investment is off the table, especially when the Confederation of Indian Industry rates India to be among one of the top three choices for FDI.

Norms to put an end to tax evasion by corporates have been sought out by governments across the world. The GMCT has now given fresh hopes of fighting tax evasion globally. It is estimated that corporates shift around $1.38 trillion worth of profit to tax havens, and GMCT proposes to halt this. The IGM survey indicates that the proposed GMCT could effectively counter the problem of base erosion and profit shifting with both the American and European panels strongly vouching for it.

The successful implementation of the deal involves not excluding any country outside the agreement that can become tax havens, thus defeating the objective. Another difficulty in the implementation is that the incentive to deviate are too large for countries. Examples such as OPEC and the EU show that it is difficult to coordinate and enforce international treaties.

A provision of heavy penalties for the offenders can dissuade them from rescinding from the agreement. Countries must remain vigilant against corporate lobbying that may jeopardise the tax treaty. Importantly, its success is more of a political will or skill than economics since it depends on how much pressure major countries exert on the tax havens.

Thus, active and sincere cooperation among the 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 Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram, and Sidharth is a MA student in Economics at the University of Kerala

Published on February 03, 2022
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