"The G7 Finance Ministers have made a significant, unprecedented commitment today that provides tremendous momentum towards achieving a robust global minimum tax," says the statement from US Treasury Secretary Janet Yellen on June 5 following two days of talks between finance ministers and central bank governors of the G7 countries.
These global tax changes are being developed under Pillar One (relating to new nexus and profit allocation rules) and Pillar Two (relating to new global minimum tax rules) of the BEPS 2.0 project.
As per the communiqué on key topics discussed at the meeting, these reforms will see multinationals paying their fair share of taxes in the countries they do business in (with market countries awarded taxing rights on at least 20 percent of profit exceeding a 10 percent margin for the largest and most profitable multinational enterprises). Additionally, the finance ministers have also agreed to the dogma of a global minimum tax rate that warrants such companies pay tax of at least 15 percent on a country-by-country basis.
At a global level, these changes may be challenged by some low-tax jurisdictions such as The British Virgin Islands, The Bahamas, Panama, etc. who have historically enticed foreign investors through tax rate differentials (when compared to other jurisdictions). A key argument that may be taken in this regard is that it encroaches on a nation’s sovereign right to decide its tax policy.
Also, considering the current sentiment emanating from the impact of COVID-19 on global economies, governments may argue that fiscal stimulus relying on tax incentives should be available to finance ministers to shore up economic activity. On the flipside, these reforms may go a long way in putting an end to practices followed by the MNCs leading to base erosion and profit shifting, and in the words of Yellen “end the race-to-the-bottom in corporate taxation” — where countries undercut each other by reducing their headline corporate tax rates.
From the Indian perspective, considering its corporate tax rate already exceeds the proposed global minimum tax rate, it is unlikely to adversely impact companies operating in India. Rather, considering India is a big market for a large number of companies, aligning right to taxation with place of economic contribution is expected to be welcomed by India as it may augur well for the overall tax kitty of the government.
While an in-principle agreement is already reached, allocation principle between market countries is yet to be chalked out at this stage. Also, the global minimum tax rate is aligned to the concessional Indian tax regime of 15 percent for domestic manufacturing companies, thereby not impacting the impetus given to manufacturing sector in India, which should continue to attract investment given availability of labour at economical rates and market capacity.
On the policy front, the Indian tax department has already been wrapping its head around plugging tax leakages under neoteric models which focus on digital/remote means of doing business. The introduction of Equalisation Levy (EL) targets taxation of digital economy and the most recent introduction of concept of ‘Significant Economic Presence’ establishes ‘business connection’ in the case of non-residents satisfying certain (revenue/user-linked) thresholds in India.
The communiqué also provides for ‘coordination between application of new international tax rules and removal of all Digital Services Taxes, and other relevant similar measures, on all companies.’ Should the proposals of Pillar 1 be adopted, we can expect amendments to Indian tax laws, especially with regard to EL provisions. Additionally, tax treaties between jurisdictions may warrant changes to effectuate the reforms.
Get All On Board
In terms of next steps, it is expected that the agreement will now be deliberated upon in greater detail at the July meeting of the G20 finance ministers and central bank governors in Venice, Italy. While the G7 agreement will hold credence at the meeting, arriving at a global accord, particularly on reallocation of profits, may entail further work and efforts on the part of countries backing these changes.
It is important for companies to keep an eye on these developments intimately as they develop in the forthcoming weeks. These reforms may lead to changes in domestic tax laws globally and amendments to tax treaties which may compel businesses to evaluate the latent impact of proposals to their businesses — especially the ones which are making money everywhere but paying taxes only at home.
As rightly denoted by United Kingdom Chancellor Rishi Sunak, these tax reforms are “seismic” in the sense that it could rejig the overall international tax landscape under which MNC’s operate.
(Sidhant Yashpal, a senior tax professional, contributed to this article.)