Seal a tax deal

Minimum global corporate tax rate solves many problems

The group of seven industrialised countries, or G-7, has agreed in principle on what may become the largest and most far-reaching reshaping of the global tax landscape in decades. Meeting at Lancaster House in London, the G-7’s finance ministers agreed on a deal that would create a more uniform corporate tax structure and minimise profit shifting by multinationals. Besides an agreement that countries will tax corporate profits at a rate of “at least 15 per cent”, it was agreed that large companies with profit margins in a country that exceed at least 10 per cent will see 20 per cent of that profit reallocated from the country in which they are headquartered to the country in which they make sales, and subject to tax therein.

This follows years of campaigning by several European Union giants and France in particular. Under the previous administration in Washington, led by Donald Trump, the French-led European effort to corner US-origin big tech companies in particular into paying taxes in their jurisdictions of operation had led to increased economic tensions. Indeed, there were even threats of sanctions and various unilateral measures were passed by the US — which were suspended but are technically still valid — against countries that introduced “digital taxes” targeting US big tech. But the new proposal, spearheaded by the current US Treasury Secretary Janet Yellen, gets around the accusations of “unfair” targeting by bringing into the scope of this action all large companies, though Ms Yellen has confirmed that “by almost any measure” the US global tech giants would be included.

The next steps will have to be taken at the meeting of finance ministers of the group of 20 large economies, or G-20, in Italy, and then perhaps at previously slow-moving talks involving almost all the national players — about 140 countries — at the Organisation for Economic Cooperation and Development, or OECD. India will have to take the lead on behalf of developing economies in this discussion. In just the past week, the US formally introduced and then immediately suspended punitive tariffs against India, Italy, Austria, Spain, Turkey, and the United Kingdom after a “Special 301” investigation introduced under the previous US administration found that those countries’ digital taxes were discriminatory trade taxes. The Indian variant of this tax — a 2 per cent “equalisation levy” on non-resident e-commerce companies doing more than Rs 2 crore worth of business in India — delivered only about Rs 2 crore in revenue in April 2020. The US pointed out that the Indian digital services tax wound up effectively protecting Indian digital players from competition. The opportunity now exists to reform this stopgap approach with a larger and more comprehensive deal.

Globally, corporate income tax rates have fallen from an average of over 40 per cent to under 25 per cent today. This race to the bottom may have energised corporate earnings and investment. But it has also squeezed governments and forced them to raise other forms of taxes. In the context of heavy borrowing worldwide during the pandemic, it is understandable that there is new energy to control the erosion of the tax base. Even after governments expanded borrowing following the 2008 crisis, they had sought collaboration to shut down “tax havens”. A fairer and more predictable tax system that allows taxes to be raised from companies at the locations where they make their profits is overdue. It is essential that this momentum not be lost, and the G-20 and OECD processes set the final seal on this deal.