India gears up to sign global tax deal; what’s in it for nations?

In December, 135 nations signed a ground-breaking tax overhaul deal that, among other things, ensures governments can charge at least 15% tax on foreign entities operating within their shores. The deal, put together by the G20 and Organisation for Economic Cooperation and Development (OECD), introduces the global minimum tax so that governments can impose levies on large, profitable multinational companies that use legal loopholes for tax avoidance.

Once fully enacted, the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting is expected to vastly impact the global economy, how corporates split their operations and resources between headquarters and other geographies, and foreign investment dynamics across the world.

It is now expected that Budget 2022 will offer some guidance on how India plans to join in. A Mint report said the Finance Ministry is looking into legislative provisions that would be required in the Income Tax Act so that India can join the deal. While the Budget will provide the basic outline, the fine-tuning will be done after negotiations, it added.

What the tax framework is about

The primary aim of the global tax framework is to help all nations tax companies that operate in their territories. For decades together large, profitable companies have moved their headquarters to low-tax jurisdictions such as the Bahamas and Mauritius. They typically park their funds there and make huge tax savings.

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The new deal ensures a 15% global minimum tax, which means no big company can avoid paying taxes altogether in the countries they actually function in. This rate will apply to multinational corporations (MNCs) with annual revenues of over $867 million. The aim is to make tax havens less attractive, and ensure nations don’t forego the tax money that is rightfully theirs.

Further, to suit the digital era, the deal allows countries to levy taxes on large and profitable MNCs based on where their goods and services are sold, and not where they are headquartered. European countries have been crying hoarse over their inability to tax US tech giants such as Amazon, Facebook and Google, which have a limited physical presence in other countries but sell extensively across the world.

Per OECD estimates, the new deal will help raise $150 billion annually from MNCs that have taken refuge in tax havens till now. India, which already has an equalisation levy (popularly known as ‘Google tax’) for global tech firms that cater to local customers, is likely to scrape it once the new deal takes effect.