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The US government has taken on the task of nudging global companies to pay a higher corporate tax rate. Its initial suggestion of 21 percent as the global minimum corporate tax rate had rattled some countries, which is why it may have agreed to a lower level of 15 percent to start with. But the US treasury department, helmed by Janet Yellen, clarified this is a floor rate and discussions should continue to push it upwards.
The OECD and G20 groupings are part of this negotiation, which means India will be included in the ambit of these proposals. The 15 percent rate comes as a big relief for India as the Indian government had, in 2019, proposed a lower tax rate-regime for companies, with a new 15 percent base rate (not including surcharge and cess) being allowed for new manufacturing companies set up by FY23. But they will not be allowed to avail various tax exemptions and deductions available to companies paying the higher tax rate, with a few exceptions. India also allowed all companies to avail of a lower base rate of 22 percent against the earlier 30 percent but on condition that they give up most exemptions.
A higher global minimum tax rate of 21 percent would have left India in a sticky position. Not implementing it would be difficult and invite retaliatory action of some sort but doing it would mean going back on its promise to the new manufacturing companies who were availing or planning to avail the 15 percent rate.
Globally, the corporate tax rate is an important factor that determines where companies set up base for tax purposes. The US push will energize the effort that’s been in the works for years now, to nudge multinationals to pay higher tax. How this is now implemented and what impact it will have on the corporate world will become clear in the coming years. The US support implies it expects to gain from this move (it's home to the world's largest corporations) and it’s also separately pushing for an alternate minimum corporate tax to bridge the gap that arises between profits calculated in the company financial statements and the tax financial statements.
Will countries offering a low tax as a big attraction for companies to set up their tax domicile there lose out in the process? Will there be enough loopholes in the final agreement that is thrashed out, to allow companies to still avoid paying higher taxes? A blue sky scenario is one where all companies end up paying more and countries earn more tax on the revenue that is generated within their borders. But this is from the government’s viewpoint.
An increase in corporate tax will mean a commensurate decline in post-tax earnings for companies. This will dent shareholder returns and could hurt valuations as a result. The question is if companies will absorb the higher tax or raise the price of the goods or services they sell to maintain earnings at earlier levels. A highly competitive environment can protect consumers but if all companies are in the same boat of paying higher taxes, then prices could increase all around. A higher tax is meant to create a more equitable society and more importantly, transfer money from companies to governments that they can use to spend on citizens. But then the same citizens may end up paying for it. The next few years will see this interesting tax experiment play out and how this affects where companies set up base.
Investing insights from our independent research team:
SBI Cards – A quintessential consumption play that stands to gain from peaking of second wave
Weekly Tactical Pick | Dollar Industries
Indian Energy Exchange: Strong business performance drives stock to new high
Home First Finance — A worthy long-term bet available at reasonable valuation
From the opinion team’s desk:
Is the carnage in cryptocurrency over or is it just a start?
Gland Pharma’s focus on injectables yields superior growth
Investing in REITs? This is what you should know about the near-term weakness in property markets
Data: A weapon not used in the COVID war in India
Technical picks: Hindalco Industries, CCL, M&M and Polymed (These are published every trading day before markets open and can be read on the app)
What else are we reading today?
Mas Financial – Time to add a good business in a soft patch?
SRF: Superior execution continues for speciality; add stock on decline
Relaxo Footwears: Though there are near-term challenges, long-term prospects strong
Chart of the Day | Metal stocks are beating the broad market hollow
Don’t bet against China’s investment-led growth model (republished from the FT)