Global Minimum Tax on big businesses
21, Dec 2022
Prelims level : International Relations Mains level : GS-II International Relations | Bilateral, Regional and Global Groupings and agreements involving India
Why in News?
- Members of the EU last week agreed in principle to implement a global minimum tax of 15% on big businesses.
Global Minimum Corporate Tax:
- Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
- Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions.
- This has allowed companies to avoid paying higher taxes in their traditional home countries.
What is the recent EU agreement?
- EU members have agreed to implement a minimum tax rate of 15% on big businesses in accordance with Pillar 2 of the global tax agreement framed by the OECD last year.
- Under the OECD’s plan, governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low.
- This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens in order to save on taxes.
Need for a global minimum tax:
- Corporate tax rates across the world have been dropping over the last few decades as a result of competition between governments to spur economic growth through greater private investments.
- Large multinational companies have traditionally paid taxes in their home countries even though they did most of their business in foreign countries.
- The OECD plan tries to give more taxing rights to the governments of countries where large businesses conduct a substantial amount of their business.
- As a result, large US tech companies may have to pay more taxes to the governments of developing countries.
History of such taxes:
- Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020.
- The global tax competition was kick-started by former US President Ronald Reagan and former British PM Margaret Thatcher in the 1980s.
- The OECD’s tax plan tries to put an end to this “race to the bottom” which has made it harder for governments to shore up the revenues required to fund their rising spending budgets.
- The minimum tax proposal is particularly relevant at a time when the fiscal state of governments across the world has deteriorated as seen in the worsening of public debt metrics.
Response to the EU move:
- Some governments, particularly those of traditional tax havens, are likely to disagree and stall the implementation of the OECD’s tax plan.
- High tax jurisdictions like the EU are more likely to fully adopt the minimum tax plan as it saves them from having to compete against low tax jurisdictions.
- Low tax jurisdictions, on the other hand, are likely to resist the OECD’s plan unless they are compensated sufficiently in other ways.
- 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.
- The plan will also help counter rising global inequality by making it tougher for large businesses to pay low taxes by availing the services of tax havens.
- Critics of the OECD’s proposal, however, see the global minimum tax as a threat.
- They argue that without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.
- In other words, these critics believe that it is the threat of tax competition that keeps a check on governments that would otherwise tax their citizens heavily to fund profligate spending programs.