A plan is being backed by global leaders to ensure multinational companies pay their fair share of tax wherever they operate. The pact, championed by the Organization for Economic Cooperation and Development, is expected to put in place a minimum global corporate tax rate of 15%.
It is intended to reform the global tax system to make it fit for the digital age and is likely to impact many MNCs.
With national budgets under strain from economic stimulus measures, governments around the world want a new playbook on taxation.
This deal might give the lion’s share of revenue to the largest OECD members at a time when lower-income countries already lose the greatest share of tax revenue to corporate tax abuse.
Profit shifting is a practice used by some multinational companies to pay less tax than they should. Corporations do this by moving the profit they make in major markets such as the U.K., where they manufacture products or sell goods or services, into low-tax countries like Ireland. This profit is then taxed at a very low rate — or possibly not at all — depending on the rate of corporate tax in that country or jurisdiction.
Economists estimate that countries are missing out on more than $427 billion in tax every year as a result of international corporate tax avoidance and private tax evasion.
To fix this long-running problem, the OECD has proposed a two-pillar solution. Pillar one is aimed at the world’s top 100 companies, with global annual revenue above $20 billion. The levy will apply to companies’ profit margins of over 10%.
Pillar two is the global minimum corporate tax rate of 15%. This is thought to be of much greater importance than pillar one and could raise as much as $275 billion of additional revenues if applied worldwide.
The OECD agreement allows companies to pay a lower rate than 15% in countries where they have many employees or tangible assets such as factories and machinery.
Indian IT and ITeS firms may be a key point of leverage in the ongoing negotiations as the US tries to secure better terms for tech giants that are based in the US.
The ongoing pandemic has forced MNCs to re-evaluate their business models and supply chains across the globe which has changed the international tax regimewith a unique opportunity for India to attract foreign investments and regain its status as one of the fastest growing large economies in near future.