G7 tax deal and its effect in developing and poor countries.

Author: Meghraj Sunil Bhosale

Institution: NMIMS Kirit P Mehta School Of Law, Mumbai

What is G7?

 A Group of seven or G7 is a consortium of 7 of the world’s advanced and largest economies. They are United States, UK, Germany, France, Italy, Canada, Japan.

What is G7 corporate tax deal? 

The finance ministers of those seven developed countries meeting in London agreed to all or any counter tax avoiding through measures to make companies pay within the countries they are doing business.

They also agreed the upon the in principle to ratify a worldwide minimum corporate rate to counter the likelihood to countries undercutting one another to draw  huge in investments.

Why the minimum tax rate?

The decision to endorse corporate tax follows from a declaration of war on low tax countries round the globe as , which was announced by US Treasury Secretary Janet Yellen.

She she Italso  urged the world’s 20 advanced nations (G20) to move in the direction of adopting minimum global corporate income tax.

This deal places a minimum rate in place, attemptinged to reverse a 30-year rat race in which countries have slashed corporate tax rates to attract multinational corporations.

The Finance Ministers of seven major economies across the world , the Group of Seven (G7) countries, during the 47th G7 summit reached the landmark accord of putting in place Global Minimum Corporate Tax Rate (GMCTR), which would close cross-border tax ambiguities used by some multinational companies. 

What is G7 Tax Deal?

● Major economies are aspiring to discouragedon’t want multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made. Increasingly, income has transferred to low tax jurisdictions from ambiguous sources such as drug patents, software and royalties on intellectual property has transferred to low tax jurisdictions, allowing companies to avoid paying higher taxes in their home countries 

● With an agreed global minimum tax, thisese tax -based destruction can be reduced without causing a financial disadvantage to the firms. 

● Furthermore, key decisions about the global minimum tax shall be taken by the G20 countries and the Organization for Economic Cooperation and Development (OECD) .

● OECD has been the key global organisation for managing tax negotiations among 140 countries for years, on rules for taxing cross-border digital services and curbing tax base erosion .

● In terms of its implementation, this tax will be applicable to companies for overseas profits. This implies that if a global minimum tax is applied, governments can still set the local corporate tax rate as per their choice 

● In case a company pays lower rates in a particular country, their home governments can ‘add-on’ their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven.

What is Corporate Tax? 

Corporate Tax is defined as a tax levied on average income or profit of a company or an entity from their business, foreign or domestic. Corporate Tax Rate is calculated The rate at which the tax is imposed according tos per the provisions of the Income Tax Act, 1961. is known as the Corporate Tax Rate. 

India is likely to benefit from the Global Minimum Corporate Tax rate of 15%, as the government has been willing to keep the corporate tax rate artificially lower to attract Foreign Direct Investment (FDI). As of June 2021, the corporate tax rate for New manufacturing companies is 15% and for companies that do not want to claim any exemption or incentives, the corporate tax rate is 25.17%. 

Challenges Faced By India And Other Developing Countries

● One of the biggest challenges is that since the minimum tax rate will be applicable globally, all nations must agree to the aspects of the Global Minimum Corporate Tax. The United Nations Organisation must also be in synchronize with the ideas of the G7 countries.

● A well-defined and structured plan is the need of the hour. Until that is presented to the nations and approved by all, the final implementation of the tax system cannot be done.

● The G20 countries which are all set to meet in July 20221 must also be committed to the terms of the global minimum tax rate.

● If the drafting of the international taxes is not done aptly, it may largely affect the low-tax countries.

For developing nationscountries like India, the agreement concludedreached by the G7 Finance Ministers on June 5 on proposed changes to international tax rules under ‘schedule I’one’ and ‘schedule IItwo’ , on proposed changes to international tax rules may bring little in terms of new tax revenue while imposing new restrictions on tax sovereignty.

• The G7 countries committed to imposing a minimum tax of 15 percent on a country-by-country basis and to reaching an equitable solution on the allocation of taxing rights. It is considered a significantlandmark deal, putting an end , marking an end to the race to the bottom in corporate tax rates.

Although t While the agreement on rate is a huge political victory for the G7, it is important to contemplateconsider what developing nationcountries like India stand to getain from such an agreement.

• The G7 bulletincommunique makes it transparentclear that the schedule Ione and IItwo manifestosproposals are to be understoodconsidered as a  a conglomerationpackage deal.

• For illustrationexample, Alphabet’s (i.e., Google’s parent company’s) global estimatedrate of profit was 22.5% in 2019 was 22.5 percent. 2.5% percent would be made available for issuingdistribution to source countries. With about 34% percent of Alphabet’s sales in Asian Pacific nationscountries, there shall would be about 0.8% percent of Alphabet’s profitsurplus to be distributedvided among nationsbetween countries in the region. However, it shallcould be even lesss if certain regulationsules onregarding the pillar one approach are embracedadopted; the actualexact manner way in which the profits shallwould be distribursedted are remains to be seen only then.

• India’s domestic tax policy is in correspondancealready generally coherent with the intent of the minimum tax. Other than the recent ammendentsreduction in corporate tax rates from 15% to 27% for new domestic manufacturing companies to 15 percent, the effective corporate tax rate in India has increased over the years to 27 percent.

  • Schedule two would not affect the general corporate tax rate in India  as tThere is also a minimum alternate tax applicable to domestic companies. Therefore, schedule two would not affect the general corporate tax rate in India.

• On the other hand, India offers a multitude of incentives for operations within its recently created financial special economic zone. It is possible then that investments in such zone, largely from foreign investors, may dry up if the taxes will be grazed back. HenceThus, such an accordgreement mightcould restrict India’s pliabilityflexibility to modifyadjust its tax system to obtainachieve its economic intentobjectives.

• Whenith thehe change in administration in the United States changed, there was a edgysharp change in the tax situationnarrative as well. The US Treasury secretary Janet Yallen proposed a hike along with other G7 members in the domestic corporate tax rate and a minimum rate set at 21 percent.

• Countries such as France and Ireland expressed their reservations with this rate, although France and Germany were early supporters of a minimum tax in the EU.

Conclusion

The G7 agreement could have significance in G20 discussions. However, this global tax deal could be met with a lot of potential opposition from countries having lower tax rates, and it could be challenging to reach a consensus. The deal also contravenesinfringes upon the right of a particular nation to decide upon its tax policy.

India is likely to benefit from global minimum 15 percent corporate tax rate deal because, current domestic tax rate is above this verge and it would continue to draw investment.

References:

https://www.ictd.ac/blog/g7-tax-deal-historic-global/ https://www.businesstoday.in/opinion/columns/story/global-digital-tax-will-india-benefit-from-g7s-proposal-299700-2021-06-25 

https://www.journalofaccountancy.com/news/2021/jun/what-is-global-minimum-tax-g7.html

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