Global Minimum Tax

Why in News

• Recently, the Members of the European Union agreed in principle to implement a minimum tax of 15% on big businesses.
  • The global corporate minimum tax was approved at the G20 Leaders Summit in Rome in 2021.

Background

• 136 countries had agreed on a plan to redistribute tax rights across jurisdictions and enforce a minimum tax rate of 15% on large multinational corporations in 2021.

What is Global Minimum Tax?

• Meaning: It is a proposal to impose a minimum rate of taxation on corporate income in most countries of the world by international agreement.
  • The agreement established a two-pillar solution revising tax rules to address profit shifting and tax base erosion caused by tax avoidance practices.
• OECD’s Plan: EU members have agreed to implement a minimum tax rate of 15% on big businesses in accordance with Pillar 2 of the global tax agreement framed by the Organisation for Economic Cooperation and Development (OECD).
  • Pillar 1 of the OECD’s tax plan, on the other hand, tries to address the question of taxing rights.
• Governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low.

What is the need for a global minimum tax?

• Decreasing taxes: Corporate tax rates across the world have been dropping over the last few decades because of competition between governments to spur economic growth through greater private investments.
  • Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020.
• Race to the bottom: The OECD’s tax plan tries to put an end to this race to the bottom which has made it harder for governments to shore up the revenues required to fund their rising spending budgets.
• Deteriorating Fiscal Health: The minimum tax proposal is particularly relevant at a time when the fiscal state of governments across the world has deteriorated as seen in the worsening of public debt metrics.

Significance of the move

• Boost global tax revenues: It is estimated that the minimum tax rate would boost global tax revenues by $150 billion annually.
• Ending tax havens: This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens to save on taxes.
  • Large multinational companies have traditionally paid taxes in their home countries even though they did most of their business in foreign countries.
• Taxing rights: The OECD plan tries to give more taxing rights to the governments of countries where large businesses conduct a substantial amount of their business.
• Countries both within and outside the cartel will have the incentive to boost investments and economic growth within their respective jurisdictions by offering lower tax rates to businesses.