What is Global Minimum Tax?

• A global minimum tax is a proposal to impose a minimum rate of taxation on corporate income in most countries of the world by international agreement.

• In 2021, 136 countries and jurisdictions agreed to a proposal from the Organisation for Economic Co-operation and Development (OECD). It was set to take effect in 2023, but has since been delayed to 2024.

• The proposal was designed to discourage tax-motivated profit shifting and tax base erosion by multinational corporations (MNCs).

Two Pillars

• The framework has two pillars, one dealing with transnational and digital companies and the other with low-tax jurisdictions to address cross-border profit shifting.

• The first pillar ensures that large multinational enterprises, including digital companies, pay tax where they operate and earn profits. Most such companies have so far been paying low taxes by shifting profits to low-tax jurisdictions.

• Under Pillar One, taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year.

• The second pillar seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate (currently proposed at 15%) that countries can use to protect their tax bases.

• If implemented, countries such as the Netherlands and Luxembourg that offer lower tax rates, and so-called tax havens such as Bahamas or British Virgin Islands, could lose their sheen. It is estimated that the minimum tax rate would boost global tax revenues by $150 billion annually.

• Supporters of the OECD’s tax plan believe that it will end the global “race to the bottom” and help governments collect the revenues required for social spending.

Impacts on India

• A global minimum corporate tax rate of 15% is expected to be beneficial to India. It will enable tax creation by individuals operating in India but not located in India and hence not paying any taxes.

• The Tax Justice Network estimates the country to gain at least $4bn (Rs 300 bn) corporate tax collections. However, we will need to focus on capacity building and timely resolution of disputes.

• Further, it will prevent base erosion of tax in the country as the government will be able to claw back any shortfall in tax paid below 15 % by an overseas business owned by an Indian resident, once the global threshold rule becomes operational.

• Overall, countries with a moderate tax rate system stand to benefit at the cost of ‘tax havens’ with low or nil tax rates.