G-7 to Fix the Global Corporate Tax at Minimum 15%

The G-7 countries have recently reached a decision regarding the Global Corporate Tax. India and South Africa that were guests to the G-7 summit shall also be significantly impacted by these tax decisions.

The concept behind it is to bring in the minimum rate of corporate tax at the global level. The finance ministers of G-7 countries have recently reached a historic deal on putting in place a Global Corporate Tax. With respect to the tax, the minimum rate which has been fixed is 15%.

The context of the decision regarding the tax is rather wide. Multinational companies on both sides of the Atlantic follow the system of locating the headquarters wherever the tax rate is the lowest.

There has been a fair amount of study on this by the Organization for Economic Co-operation and Development (OECD). The OECD is actually not just an organization of the rich countries but also has got a very strong taxation policy understanding. They had done a base erosion and profit shift study. This was to basically see that companies have a presence in a particular country while being located somewhere where the tax rate is lower. Thus the company effectively ends up paying tax at a much lower rate. Smaller countries offer lower taxes to companies as a result of which bigger countries lose out on tax revenues.

Now with the issue of inequality and others coming up, there has been a steady pressure that it shouldn’t end. The G-7 group wants there to be a minimum 15% tax rate on all multinational companies and this shall travel to G-20. This rate is irrespective of whichever place the multinational company is so the advantage of country-shifting or treaty-shopping shouldn’t stay.

To deal with the issue of tax avoidance the G-7 came up with this working. However, this will have a significant impact on the corporate sector.

In India, the manufacturing policy that was announced in the budget of last year the interest rate was reduced for manufacturing companies. This included those companies that would be set up by 2023. So in the Indian context, the global corporate tax brings a kind of equality. It brings equality to those companies operating in India but not located here and therefore, not paying any taxes.

Globally the challenge would be to counter country-specific policies and instances. Some companies are operating and located in areas and countries that have given specific concessions.

Generally among the G-7, there was an understanding of a minimum flow rate, and a concept of market countries was also put forward. The thought behind this was that many countries were thinking of a digital transaction tax or a different type of tax. This was because people were doing business in the country but not being located there and therefore, not being taxed. Thus this decision of the G-7 is a welcomed move to address the different challenges that many countries are facing.