Discussion on global minimum tax is gaining momentum. The United States is pushing to implement this and has gained the support of the IMF and some other advanced countries for this. However, this type of tax can have a negative impact on developing countries like India. This effect will depend on the agreed upon rate.
The tax is part of pillar 2 of the Organization for Economic Co-operation and Development (OECD) basis erosion and benefit transfer (BEPS) mechanism.
Of all the discussions in the BEPS system, America’s main interest lies in column 2 because it matches the recently made Made in America tax plan by the Biden administration.
Under this plan, the US has proposed to raise the corporation tax from 21 per cent to 28 per cent and the Global Intensive Low Taxed Income (GILTI) tax from 10.5 per cent to 21 per cent. Along with this, it aims to raise an additional Rs 2 lakh crore in tax revenue in the next 15 years so that funds can be arranged for the extensive expenditure sanctioned for COVID and infrastructure.
According to estimates, with the United States raising the corporation tax rate to 28 percent, the effective rate would be 32.34, the highest in the OECD.
Under the GILTI tax regime in the US, tax is currently levied on the shareholders of foreign controlled companies, which is dependent on the active income of the company beyond a limit.
The new GILTI tax structure will ensure that American multinationals will be subjected to extremely high taxes, thereby reducing the attractiveness of foreign investment.
Akhilesh Ranjan, a former member of the Central Board of Direct Taxes and currently adviser to the PWUC, said, “The United States wants a global minimum tax that will deal with its circumvention policy that curbs capital and investment growth.” The imposition of higher taxes in the US will end the attraction of investors for investing here and then they will give prominence to low-tax destinations.
Ranjan pointed out that even though the US is pushing for a much higher global minimum tax rate of 21 per cent, the discussion so far in OECAD is between 10.5 per cent and 12 per cent. It may be a matter of concern for those who have kept the rate below that. India also has lower rates for some companies. Rates are also lower in countries like Vietnam and the Philippines. It is expected that all countries will increase the rates. It has to be seen to what extent other countries accommodate this. ‘ Ranjan has also been India’s chief negotiator at the OECD BEPS.
He said that countries with low tax rates may lose their competitive edge if they need to raise tax rates to reach the minimum level. He said, “If India also has to increase the specific corporation tax rate to 21 per cent, then we will also suffer to some extent in terms of competitiveness.” However, our tax rates are not very low and the normal rate is 25 per cent. The reduced rate only applies to new companies starting production in a given time period. ‘
India had reduced the corporation tax to 15 per cent for manufacturing units set up on or after October 1, 20 September 2023, and started manufacturing before March 31, 2023. It is 17.01 per cent with cess and tariffs.
Amit Maheshwari, partner at tax and consulting company AKM Global, said that there could be great scope for the global minimum tax to be accepted due to the huge economic shock to the US.