Members of the European Union agreed in principle to implement a minimum tax of 15% on big businesses. Last year, a global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 136 countries.

 

Background

  • Companies like Apple, Facebook, Google and other tech giants profit enormously from the domestic markets while they make minimal contributions to public coffers.
    • Many countries wanted new taxes on these companies.
  • To address this issue, almost 140 countries started negotiation under the auspices of the OECD (Organisation for Economic Co-operation and Development).
    • They were trying to find an agreement on a global tax overhaul to address how multinationals are taxed in the nations where they have users or consumers.
  • The OECD had proposed two ways —
    • Countries would be allowed to have some rights to tax profits made on the basis of sales in their jurisdictions.
    • It also talked about a global minimum corporate tax rate to stop countries lowering corporate tax rates below that level.

 

Global Tax deal agreed by the OECD

  • The deal has two main elements –
    • Pillar One, which calls for the redistribution of profits generated by the largest companies to the domicile markets where they actually make their sales instead of simply where they are headquartered.
      • A quarter of any profits they make above the 10% threshold will be reallocated to the countries where they were earned and taxed there.
    • Pillar Two, which establishes a global minimum effective tax rate of 15 percent determined on a country-by-country basis.
      • Governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low.
      • The 15% floor under the corporate tax will come in from 2023, provided all countries move such legislation.
  • Firms covered by this deal —
    • This deal will cover firms with global sales above 20 billion Euros ($23 billion) and profit margins above 10%.
    • It is expected to hit digital giants like Amazon, Google and Facebook.

 

Impact of this deal

  • Analysts believe that this deal will end the global race to the bottom and help governments collect the revenues required for social spending.
    • The OECD estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
  • Many believe that 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.
    • As per one estimate, taxing rights on more than $125 billion of profit will be additionally shifted to the countries where they are earned.
  • On the other hand, critics believe that this deal is the threat of tax competition that keeps a check on governments which would otherwise tax their citizens heavily to fund profligate spending programs.
  • 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.

 

Need for a global minimum tax

  • In the past, countries would frequently compete with one another to offer an attractive deal to multinationals companies.
    • Due to this competition, global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020.
  • It made sense when those companies might come in, set up a factory and create jobs.
  • However, the new digital era giants started simply moving profits around, from the regions where they do business to those where they will pay the lowest taxes.
  • Hence, the OECD’s tax plan tries to put an end to this “race to the bottom” by fixing the global minimum tax rate.