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GS-II : International Relations International issues

10 April, 2021
4 Min Read

Global Minimum Corporate Income Tax

The US Treasury Secretary has urged the world’s 20 advanced nations to move in the direction of adopting a global minimum corporate income tax.

What is the Global Minimum Corporate Tax Rate?

It is a type of corporate tax.
Under this, If a company moves some of its operations to another country having low-tax jurisdiction, then the company have to pay the difference between that minimum rate and whatever the firm paid on its overseas earnings.
For example, assume Country A has a corporate tax rate of 20 per cent and Country B has a corporate tax rate of 11 per cent. If the global minimum tax rate is 15 per cent. Consider a situation, where Company X is headquartered in Country A, but it reports income in Country B. Then Country A will increase the taxes paid by Company X. This is equal to the percentage-point difference between Country B’s rate and the global minimum rate(15 per cent).
In short, Company X will have to pay an additional 4 per cent of the tax to Country A

Why this appeal by US Treasury?

The goal of a global Corporate minimum tax is to end a 30-year race to the corporate tax rates.
Over the past decades, a number of countries have enacted tax policies specifically aimed at attracting multinational businesses. These countries attract investment by lowering corporate tax rates. This, in turn, has pushed other countries to lower their rates as well to remain competitive.
Responding to the incentives created by these laws, many multinational corporations have moved their assets to low tax countries. Particularly their ownership of the intellectual property to countries offering them low or even no-tax treatment for the assets they produce.
This has impacted countries around the world. As they lose out on an estimated $100 billion per year in tax revenue. India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion.

US proposal

The US has proposed a 21% Global minimum corporate tax rate.
Further, the US also suggest cancelling exemptions on income from countries that do not legislate a minimum tax.
This is aimed to discourage the shifting of multinational operations and profits overseas.

India’s Stand on Global Minimum Corporate Tax Rate:

The Indian Government has said that it is open to participating and engaging in discussions about the Global Minimum corporate tax structure.
It said that the government will look into the pros and cons of the new proposal and take a view thereafter.

Source: TH

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