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.
Global minimum tax:
- It is a proposal to impose a minimum rate of taxation on corporate income in most countries of the world by international agreement.
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).
Need:
| 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.
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.
It tries to put an end to the “race to the bottom” which has made it harder for Governments to shore up the revenues required to fund their rising spending budgets. A race to the bottom refers to heightened competition between nations, states, or companies, where product quality or rational economic decisions are sacrificed in order to gain a competitive advantage or reduction in product manufacturing costs. |
Major Challenges
Denial by Tax Havens: Some Governments, particularly those of traditional tax havens, are likely to disagree and stall the implementation of the OECD’s tax plan.
Issue for a developed country: Large U.S. tech companies may have to pay more taxes to governments of developing countries.
Lack of compensation: Low tax jurisdictions are likely to resist the OECD’s plan unless they are compensated sufficiently in other ways.
Formation of global tax cartel: the OECD’s plan essentially tries to form a global tax cartel; it will always face the risk of losing out to low-tax jurisdictions outside the cartel and cheating by members within the cartel.
Developing countries are disproportionately affected because they tend to rely more heavily on corporate income taxes than advanced economies.
It impinges on the right of the sovereign to decide a nation’s tax policy. A global minimum rate would essentially take away a tool country use to push policies that suit them. |
- 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.
- 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.
Way Forward/ Suggestions
- High tax jurisdictions like the EU are more likely to fully adopt the minimum tax plan as it saves them from having to compete against low tax jurisdictions.
- 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.
- Without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.
