Minimum tax on big businesses

(MainsGS2: Effect of policies and politics of developed and developing countries on India’s interests)

Context:

• Last year, 136 countries had agreed on a plan to redistribute tax rights across jurisdictions and enforce a minimum tax rate of 15% on large multinational corporations.
• Following the plan, recently members of the European Union agreed in principle to implement a minimum tax of 15% on big businesses.

More taxing rights:

• Under the OECD’s plan, governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low.
• This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens in order to save on taxes.
• Large multinational companies have traditionally paid taxes in their home countries even though they did most of their business in foreign countries.
• The OECD plan tries to give more taxing rights to the governments of countries where large businesses conduct a substantial amount of their business.
• As a result, large U.S. tech companies may have to pay more taxes to governments of developing countries.

Need for a global minimum tax:

• Corporate tax rates across the world have been dropping over the last few decades as a result of competition between governments to spur economic growth through greater private investments.
• Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020.
• The OECD’s tax plan tries to put an end to this “race to the bottom” which has made it harder for governments to shore up the revenues required to fund their rising spending budgets.
• The minimum tax proposal is particularly relevant at a time when the fiscal state of governments across the world has deteriorated as seen in the worsening of public debt metrics.

Implementation of tax plan:

• Some governments, particularly those of traditional tax havens, are likely to disagree and stall the implementation of the OECD’s tax plan.
• High tax jurisdictions like the EU are more likely to fully adopt the minimum tax plan as it saves them from having to compete against low tax jurisdictions.
• Low tax jurisdictions, on the other hand, are likely to resist the OECD’s plan unless they are compensated sufficiently in other ways.
• Since the OECD’s plan essentially tries to form a global tax cartel, it will always face the risk of losing out to low-tax jurisdictions outside the cartel and cheating by members within the cartel. 
• After all, countries both within and outside the cartel will have the incentive to boost investments and economic growth within their respective jurisdictions by offering lower tax rates to businesses. 

Collect the revenues required:

• Supporters of the OECD’s tax plan believe that it will end the global “race to the bottom” and help governments collect the revenues required for social spending.
• Many believe that the plan will also help counter rising global inequality by making it tougher for large businesses to pay low taxes by availing the services of tax havens. 
• Critics of the OECD’s proposal, however, see the global minimum tax as a threat. 
• They argue that without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.

Conclusion:

• Many experts believe that there is the threat of tax competition that keeps a check on governments which would otherwise tax their citizens heavily to fund profligate spending programs.