What is GMCT?
On 8 October 2021, 136 countries agreed to a plan of Organisation for Economic Co-operation and Development (OECD) to implement 15% global minimum tax rate, starting in 2023. As part of this project, the OECD proposed the idea of a global minimum corporate tax rate. Even the G7 Finance Ministers have called for a global minimum corporation tax rate of a minimum of 15%. Under this, large international corporations would be subject to a minimum 15% tax as well as an additional 25% tax on “excess profits.”
Global Minimum Corporate Tax (GMCT) is a direct tax imposed on net income or profit that enterprises make from their businesses. It came into being to prevent multinational enterprises from shifting profits and tax revenues to low-tax jurisdictions. It was introduced to reform the international tax scenario to prevent cross border tension and trade wars. In this system of taxation, countries would be taxed not only where they are headquartered but also where they operate.
Need of Global Minimum Corporate Tax (GMCT)
The need for a global minimum corporate tax (GMCT) arose due to increasing trend of MNCs’ shifting their profits to low-tax jurisdictions popularly known as tax havens. Tax havens offer a combination of favourable tax policies, financial secrecy and regulatory regimes that attract foreign individuals and businesses seeking to minimize their tax liability and maintain financial privacy. Through GMCT, countries aim to create a more balanced and sustainable global tax framework, which will stop the race to bottom of reducing corporate tax to attract foreign investment. Currently, income from intangible sources such as drug patents, software and royalties on intellectual property is migrated to avoid higher taxes in their traditional home countries. GMCT will address this issue of tax avoidance by closing cross-border tax loopholes. It also helps in promoting fairness, supporting domestic revenue generation, reducing the prevalence of tax havens, and fostering international cooperation.
Global Minimum Tax and its Two Pillars:
The proposed two-pillar solution consists of two components:
1. Pillar One focuses on addressing the allocation of taxing rights between countries. It aims to ensure that multinational enterprises (MNEs) pay taxes in the jurisdictions where they conduct significant business activities and generate profits, even if they do not have a physical presence there. It is based on where consumers or users are located, and not on company’s physical presence.
2. Pillar Two aims to set a global minimum tax rate. Under this, if a company’s effective tax rate in a particular jurisdiction is lower than the agreed minimum rate, the company’s home country can apply a “top-up tax” to bring the effective tax rate up to the minimum level. If the parent jurisdiction does not introduce Pillar Two, other countries implementing it can collect the top-up tax. This mechanism is intended to create a more level playing field and reduce tax competition among countries. It applies to companies with global revenues exceeding €750 million (~Rs 6,500 crore), with exceptions.
However, the deal requires countries to remove all digital services tax and other similar measures, and commit not to introduce such measures in the future.
Global Minimum Corporate Tax – Challenges
1. A nation’s tax policy is sovereign in nature, hence a global minimum rate would decrease the flexibility to make policies that suit the nations.
2. Smaller countries with lower tax brackets have been opposed to this move as it could prove to be disruptive for their economies.
3. Developing nations with decreased abilities to offer economic packages could have greater economic stalemate according to IMF and WB.
4. It will act as a hindrance to economic stimulus provided through lower tax rate by various countries.
5. It has no provision to tackle tax evasion and would make rigid tax commitments with little or no flexibility at all.
Impact of GMCT on India:
1. It will increase tax base by including individuals/businesses which are currently not paying appropriate taxes because they are only operating in India but not located in India.
2. It will lead to economic growth because increase in tax revenues of government will be utilized for various developmental projects, infrastructure improvement, and social welfare initiatives.
3. It will create a level playing field for Indian companies as MNC will have lesser disposable profits to reinvest.
Conclusion:
A Global Minimum Corporate Tax regime would benefit the international community regarding smoother tax regulations. However, the interests of various other nations, especially developing countries, should be kept in mind regarding providing some flexibility in tax rates so that it does not hinder economic growth.
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This piece was expertly co-authored by CA Nitin Bansal, a Special Invitee to the Committee for Development of International Trade, Services and WTO at ICAI, and Ankit Kumar, a dedicated Management Scholar.
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