G7 corporate tax accord, a ray of hope for cash-strapped nations

G7 United Kingdom 2021
G7 United Kingdom 2021

But is the steep decrease of the minimum global tax rate to 15% too much of a hard bargain?

In the backdrop of large corporate tax losses to economies with very low rates of taxation, the leadership of the G7 countries has reached a consensus about the minimum corporate tax of 15%.

The minimum tax rates proposed by the Biden administration in the course of the last few months in the run up to the G7 Summit in London has fallen from 21% to17 %, and, now finally to 15%.

Finally, something is being done over this serious issue of Base Erosion and Profit Shifting (BEPS) as the corporate tax planning strategies used by multinationals to “shift” profits from higher tax jurisdictions to lower tax jurisdictions are called.

As part of a settlement, the OECD had suggested a unitary taxation of the multinationals with a formulaic apportionment of the revenues across countries on the basis of value aded and sales. However, the G7 consensus is around a minimum global corporate tax rate.

Read: USTR proposes retaliatory action on India’s Digital Services Tax (April 5, 2021)

In this regard the central role played by number of civil society organizations like Tax Justice Network based at London is indeed laudatory.

When everyone had written them off as mavericks all out against the investment bankers in the City, they were tirelessly doing a lot of number crunching of the multinationals and their affiliates.

They were able to prove that a good share of the intra-firm trade happening was with the intent of minimizing their tax liabilities.

For those uninitiated to the topic, the losses on account of corporate tax were estimated by Tax Justice Network at around $500 billion on an annual basis.

It is indeed pertinent to note that the share of the developing countries at $200 billion was far higher in comparison to the advanced economies when one looks in terms of their national income.

They were deprived of resources to ramp up their public infrastructure and health facilities. The developing economies have been affected by this sort of a problem for long through the process of underpricing of exports and over invoicing of imports.

In technical parlance, this is referred to as transfer pricing. Studies by Sanjay Lall and Stephen Hymer have drawn attention to the same.

Nonetheless, it was never an important topic of concern in global gatherings in the eighties or nineties, even when they sustained huge tax losses for the developing countries.

Now that it had come closer to home hurting the interests of leading advanced economies particularly with huge profits being declared by big tech majors in countries like Ireland, it has gained immediate policy initiatives.

Even the rumblings and umbrage which former President Donald Trump took over the stashing of corporate profits abroad played an important role towards hastening this process.

But the international financial centers will come with some new surprises and maneuvers always. The civil society ought to be vigilant about the same.

Though the step is a great leap as a fiscal effort at the international level and a ray of hope for governments cash-strapped to finance the expenditure posed by the coronavirus pandemic, the steep decrease of the minimum global corporate tax rate to 15% is too much of a hard bargain.

(Krishnakumar S. teaches economics at Sri Venkateswara College, University of Delhi)

 

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