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Global Minimum Tax Deal

Global Minimum Tax Deal:

The Organisation for Economic Cooperation and Development (OECD) has announced that a global deal to ensure big companies pay a Global Minimum Tax (GMT) rate of 15% has been agreed by 136 countries (including India).

  • The countries behind the accord together accounted for over 90% of the global economy.
  • GMT is tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations, including Big Tech majors such as Apple, Alphabet and Facebook.
  • These companies typically rely on complex webs of subsidiaries to hoover profits out of major markets into low-tax countries or Tax Havens such as Ireland, the British Virgin Islands, the Bahamas, or Panama.
  • GMT aimed at squeezing the opportunities for MultiNational Enterprises (MNEs) to indulge in profit shifting, ensuring they pay at least some of their taxes where they do business.
  • Proposed Two Pillar Solution: The global minimum tax rate would apply to overseas profits of multinational firms with $868 million in sales globally.
  • Pillar 1 (Minimum tax and subject to tax rules): Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
  • Pillar 2 (Reallocation of additional share of profit to the market jurisdictions): Allows countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.
  • Timeline: The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023.
  • Countries that have in recent years created national digital services taxes (For example, equalization levy by the Indian Government) will have to repeal them.
  • The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.
  • The economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.