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Global Minimum Tax

Global Minimum Tax:

EU members have agreed to implement a minimum tax rate of 15% on big businesses in accordance with Pillar 2 of the global tax agreement framed by the Organisation for Economic Cooperation and Development (OECD) in 2021.

  • In 2021, 136 countries including India had agreed on a plan to redistribute tax rights across jurisdictions and enforce a minimum tax rate of 15% on large multinational corporations.
  • A Global Minimum Tax (GMT) applies a standard minimum tax rate to a defined corporate income base worldwide.
  • The OECD developed a proposal featuring a corporate minimum tax of 15% on foreign profits of large multinationals, which would give countries new annual tax revenues of USD 150 billion.
  • The framework of GMT aims to discourage nations from tax competition through lower tax rates that result in corporate profit shifting and tax base erosion.
  • Key Points of the Plan:
    • Two Pillar Plan:
      • Pillar 1: 25% of profits of the largest and most profitable Multinational Enterprise (MNEs) above a set profit margin would be reallocated to the market jurisdictions where the MNE’s users and customers are located.
        • It also provides for a simplified and streamlined approach to the application of the arm’s length principle to in-country baseline marketing and distribution activities.
      • Pillar 2: It provides a minimum 15% tax on corporate profit, putting a floor on tax competition.
        • This will apply to multinational groups with annual global revenues of over 750 million euros.
        • Governments across the world will impose additional taxes on the foreign profits of MNEs headquartered in their jurisdiction at least to the agreed minimum rate.
        • This means that if a company’s earnings go untaxed or lightly taxed in one of the tax havens, their home country would impose a top-up tax that would bring the effective rate to 15%.