Context
Advanced economies making up the G7 grouping have reached a “historic” deal on taxing multinational companies. They have agreed to counter tax avoidance through measures to make companies pay in the countries where they do business.
They also agreed in principle to ratify a global minimum corporate tax rate to counter the possibility of countries undercutting each other to attract investments.
What are the decisions taken?
- The first decision is to force multinationals to pay taxes where they operate.
- The second decision in the agreement commits states to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.
- The agreement will now be discussed in detail at a meeting of G20 financial ministers and central bank governors in July.
Who are the targets?
- Low-tax jurisdictions, tax havens shell companies by some of the world’s biggest corporations such as Apple, Alphabet and Facebook, etc.
Challenges and problems
- Getting all major nations on the same page due to right of the sovereign to decide the nation’s tax policy.
- A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
- Also, a global minimum tax rate will do little to tackle tax evasion.
Where does India stand?
- India already had announced a sharp cut in corporate taxes for domestic companies to 22% and for new domestic manufacturing companies to 15%, broadly at par with the average 23% rate in Asian countries.
- Also, existing domestic companies opting for the concessional taxation regime will not be required to pay any Minimum Alternate Tax.
- The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.
- The economic division will look into the pros and cons of the new proposal and then will decide.
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Corporate tax in some major Asian Countries
- China and South Korea have a tax rate of 25% each, while Malaysia is at 24%, Vietnam at 20%, Thailand at 20% and Singapore at 17%.
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About G7
- The G7 (Group of Seven) is an organisation made up of the world's seven largest so-called advanced economies. They are Canada, France, Germany, Italy, Japan, the UK and the United States.
- Russia joined in 1998, creating the "G8", but was excluded in 2014 for its takeover of Crimea.
- China has never been a member, despite its large economy, as its relatively low level of wealth per person is not seen as an advanced economy in the way the G7 members are.
- Representatives from the European Union are usually present and India, South Korea and Australia have been invited this year.
- The UK holds the G7 presidency for 2021
