General Studies Paper 3 (Indian Economy)
Question:- 19. What do you understand by Global Minimum Corporate Tax? Discuss the challenges associated with it. Answer in 250 words.
Jul 19, 2022
Answer:-

INTRODUCTION:

The global minimum corporate tax rate, or simply the global minimum tax (abbreviated GMCT or GMCTR), is a minimum rate of tax on corporate income internationally agreed upon and accepted by individual jurisdictions. Each country would be eligible to a share of revenue generated by the tax. The aim is to reduce tax competition between countries and discourage multinational corporations (MNC) from profit shifting to achieve tax avoidance.

In 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.The agreement established a two-pillar solution focused on revising tax rules to address profit shifting and base erosion caused by tax avoidance practices and to meet challenges created by the increasingly digitalized global economy. Big multinationals such as Apple, Alphabet and Facebook, as well as those such as Nike and Starbucks are funneling profits through low-tax jurisdictions to avoid paying taxes. The new proposal is thus aimed at minimizing the opportunities for multinational enterprises (MNEs) to indulge in profit shifting.

 

CHALLENGES:

  1. 1.Sovereign right to tax: Bringing consensus among all major nations, since this impinges on the right of the sovereign to decide a nation’s tax policy.
  2. 2.There are apprehensions that the minimum tax could affect countries’ ability to attract investment with features like research and development credits and special economic zones that offer tax breaks to investors.
  3. 3.It neutralizes the low tax incentive: Investments in certain countries will entirely erode with time hence, creating economic turmoil in these countries. Also, tax havens such as British Virgin Islands or the Cayman Islands will no longer have incentive to offer reduced or zero tax rates to MNC and will have to increase their headline corporate tax rates making them less attractive to multi-national companies.
  4. 4.Consensus on tax rate: a minimum tax of 15% may not generate a significant amount of revenue, and it is possible that other nations may desire a greater global minimum tax rate.

 

CONCLUSION:

Although there is a growing call for making the tax regime inclusive, there should be appropriate coordination between the application of the new international tax rules. Any final agreement could have major repercussions for low-tax countries and tax havens. A UN tax convention, where global rules are determined by democracy not plutocracy, can make the implementation and coordination smoother with time.