EJ Explains| Global Minimum Tax gets a nod from 136 countries, tax havens loops finally closed?

There is a new tax in town, the Global Minimum Tax. The finance ministers of the world's richest countries have recently agreed to back a tax overhaul that aims to take away corporations from hiding away in tax-friendly countries. Here is all you need to know about the tax overhaul.

What is Global Minimum Tax?

The new proposal basically means that corporations around the world will need to pay at least a 15% tax on their earnings irrespective of where they are ‘headquartered’.

Why was it needed?

The bid is being made to discourage internationally present companies from shifting profits and tax revenues - to low-tax countries regardless of where their sales are made. Increasingly corporate income from intangible sources like software and patents is being migrated to tax havens, allowing companies to keep away from paying higher taxes in their traditional home countries. Some small countries entice companies with low or zero taxes, even though the firms do little actual business there. A study in 2018 concluded that around 40 per cent of multinationals’ overseas profits are artificially shifted to low-tax countries. As per some estimates, corporate tax avoidance costs countries around the world $300 to $500 billion in lost revenues each year.

How does it plug the global tax loophole?

Global companies will no longer be in a position to dodge their tax obligations by booking their profits in the lowest-tax countries regardless of where they generated the revenue as the global minimum tax rate would apply to overseas profits. Although, governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could "top-up" their taxes to the minimum rate, eliminating the advantage of shifting profits.

Paradise lost for tax havens?

Bermuda, the British Virgin Islands and the Cayman Islands have been long standing tax havens for corporations and only make revenue from fees of ‘corporate services’ from companies registered in the region. It’s not just small islands, several EU countries, such as Ireland and Cyprus, have lured investment with a low corporate-income-tax rate (both levy 12.5%). Corporate tax now accounts for a record 20% of Ireland’s total tax take.

What about tech giants?

A big hit of taxes likely to the e-commerce and tech giants which have placed themselves comfortably in tax friendly zones. Amazon’s case was cited by many backers of the tax as why it was urgently needed. Amazon has seen its profits soar during the pandemic – a record 44 billion Euros in European sales alone. Yet, their tax returns filed in Luxembourg showed no tax was paid due to the tax deal it has in the country. An oxfam study shows that while the average US worker pays a tax rate of 22%, Amazon’s US federal tax rate last year was just 9%, despite earning a record $20 billion in US profits. However social media giant Facebook has welcomed the tax overhaul as a step in the right direction.

What does it mean for India?

Experts say said the global corporate tax pact is a path-breaking one, especially for large and developing countries like India which would always find it very difficult to keep corporate tax rates artificially lower in a bid to increase much-needed foreign direct investments in the country. This also opens the doors to giving taxing rights to "market countries" for a share of the global profits of multinational corporations.