Moneycontrol Pro Panorama | G7 tax deal a step forward, but fault lines remain

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The big news over the weekend was the Group of Seven, or G7, countries agreeing to a global minimum tax accord. The idea is to prevent multinational companies from saving taxes by shifting to low tax countries and also make them pay taxes in countries from where they derive profits even if they have no physical presence.

There are two components to the deal: a global minimum tax rate of 15 percent, and the right for countries to tax one-fifth of the excess profits (defined as gains above a 10 percent profit margin) of the largest multinationals in the world.

This has been called historic and the hope is that it will stop the downward spiral of corporate tax rates termed the “race to the bottom”.

According to the Tax Foundation, the unweighted average worldwide statutory tax rate has declined from 40.11 percent in 1980 to 23.85 percent now. If these proposals are implemented, it could increase global corporate income tax revenues by $80 billion a year, estimates the Organisation for Economic Cooperation and Development.

But this is the first step in a long journey. This agreement has to be sold to the wider G20 group of nations -- India is one among them -- next month and then to a wider world at large.

There are still a lot of issues that need to be thrashed out. One is the definition of many things from profit margins to the ‘largest and most profitable multinational enterprises’. OECD’s framework ultimately envisages a system where multinational firms pay taxes in every country where they have users/derive revenues, proportionally. That means the likes of Google and Facebook will pay taxes in Europe and India. This will make redundant taxes like India’s equalisation levy, but is yet to be agreed upon.

Then, there is the question of the tax rate itself. The G7 communique talks about a “global minimum tax of at least 15%”. The US, for instance, had proposed 21 percent earlier. Tax havens like Ireland would like it to be closer to its 12.5 percent. This has to be thrashed out. Already NGOs like Oxfam are complaining that the 15 percent is so low a bar that companies can simply “step over it”.

Remember also that it is not easy for countries to give up the sovereign right to change tax rates. And for what gains?

The OECD projections could be gross overestimates, argues the FT’s Lex column (free to read for MC Pro subscribers here) citing the example of Amazon which can escape the net because of its low profit margin.

Still, the G7 agreement has set in process a structural shift in the world economy. In his column today, Manas Chakravarty says the spending taps opened by the pandemic might have contributed in no small way to advanced nations wanting to increase their tax revenues. But the larger issue his piece tackles is this: after half a century of neo-liberalism, is the pendulum swinging back to social democracy?  Read here to find out more.

Do check out these investing insights from our research team:

Nazara Technologies: Immense potential for growth

Sharda Cropchem: Undeterred by domestic COVID woes

HEG: Multiple expansion over; earnings recovery to play out

Bharat Forge’s long-term potential looks strong

What else are we reading today?

Wary of inflation? A bit of it is actually good for growth

Is ESG investing a fad?

Microfinance, down but not out, is ripe for value investing

Don’t dismiss market bubbles — Some leave lasting progress behind (republished from the FT)

Technical picks : Grasim, BHEL, Bank Nifty and ICICI Prudential Life (These are published every trading day before markets open and can be read on the app)

Ravi Krishnan

Moneycontrol Pro