Global Minimum Tax

Global Minimum Tax

Why in News?

  • EU members have recently 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 Organisation for Economic Cooperation and Development (OECD) in 2021.

Highlights

  • 136 countries including India had agreed on a plan to redistribute tax rights across jurisdictions and enforce a minimum tax rate of 15% on large multinational corporations.
  • A Global Minimum Tax (GMT) applies a standard minimum tax rate to a defined corporate income base worldwide.
  • The OECD developed a proposal featuring a corporate minimum tax of 15% on foreign profits of large multinationals, which would give countries new annual tax revenues of USD 150 billion.
  • The framework of GMT aims to discourage nations from tax competition through lower tax rates that result in corporate profit shifting and tax base erosion.
  • It aims to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens in order to save on taxes.
  • The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.
  • Since the OECD’s plan essentially tries to form a global tax cartel, it will always face the risk of losing out to low-tax jurisdictions outside the cartel and cheating by members within the cartel.
  • After all, countries both within and outside the cartel will have the incentive to boost investments and economic growth within their respective jurisdictions by offering lower tax rates to businesses.
  • This is a structural problem that will persist as long as the global tax cartel continues to exist.
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