Appositeness and Aftermath of Global Minimum Corporate Tax

INTRODUCTION

On 5th June, 2021, the Lancaster House meeting hosted by Chancellor Rishi Sunak resulted in all
of the G7 finance ministers agreeing upon a historic international reform meant to change the
global taxation scenario and the ways in which international corporations operate. The seismic
agreement being referred to here is that of the Global Minimum Corporate Tax. The agreement
seeks to ensure that global behemoths pay an equal share of taxes to the countries they operate
in.1 The deal, under its pillar 1, makes it necessary for large multinational corporations, with at
least 10% profit margin, to pay taxes in each country of operation rather than in only the country
where they are headquartered at. Furthermore, in pillar 2 of the agreement, the G7 has also
agreed, in principle, to a minimum of 15% global corporate tax on a country by country basis.
It’ll also become mandatory for the companies to report the environmental impact of their
business.2 While the agreement yet remains to be discussed in further G20 and OECD summits,
let us analyze its possible implications.

RAISON D'ÊTRE OF A GLOBAL MINIMUM CORPORATE TAX

The developed democracies constituting the G7 group make up a total of 45 percent of the global
economy today, which is considerably lower as compared to their earlier aggregate of 70 percent
about three decades ago.3

These governments have been trying hard to prevent MNCs from dodging taxes by cleverly
locating themselves in tax havens. Globalization introduced a challenge of taxing such global
companies, situated across multiple nations, for the governments all over the world. A sudden
rise in tech behemoths such as Amazon, Alphabet and Facebook has further contributed to this
problem.4

The corporate practice of profit-shifting has introduced many complications over the decades and
is the major driving force of this agreement.

1
https://www.mondaq.com/Article/1082652#:~:text=The%20second%20pillar%20would%20impose,tax
%20avoidance%20and%20jurisdiction%20shopping.
2
https://www.g7uk.org/g7-finance-ministers-agree-historic-global-tax-agreement/
3
https://www.cfr.org/backgrounder/where-g7-headed
4
https://www.bbc.com/news/world-57368247
Profit shifting is a tactic commonly used by large MNCs so as to avoid taxes by moving its
profits from a country where it manufactures products, or sells goods and services in, to a tax
haven.

After shifting the profits, the company then under-reports the value of its profit in the country
where it manufactures products and pays less tax in that country. It’s estimated that through this
practice, MNCs cost countries $245 billion in lost corporate tax each year.5

This practice is also referred to as domestic tax base erosion and profit shifting (BEPS) and is
used legitimately by big corporations to cunningly exploit the gaps and mismatches between
various taxation systems all over the world.6

The G7 nations believe that agreeing to a global minimum taxation limit can potentially address
this decades old conundrum. However, every coin has two sides to it. A global taxation proposal
seems an instrumental idea in concept but raises some critical concerns as well.

SHORTCOMINGS OF A MINIMUM TAX REGIME

The primary issue at hand lies in ensuring a uniform applicability of such an agreement across
various jurisdictions and warranting a centralized management process that all the countries
would subscribe to. Figuring out numerous tax policies across nations and tackling tax rates
which keep changing constantly makes the job even harder.7

Upon diving a bit deeper into the subject, we realize that there are more complications than one
recognizes at the first glance. Smaller nations such as that of Ireland, Singapore and Netherlands
attract MNCs by offering tax incentives which could be put at peril by a minimum tax proposal.
Ireland offers a corporate tax of 12.5 percent against a tax of 19 and 21 percent imposed by the
UK and the USA respectively.8 The current minimum value of 15 percent will allow such small
countries to retain the tax incentives without triggering minimum tax concerns. However, the
phrase “at least 15%” is a cause of worry as it leaves option for future modifications.
5
https://taxjustice.net/faq/what-is-profit-shifting/
6
https://www.oecd.org/tax/beps/
7
https://qrius.com/will-a-global-minimum-corporate-tax-work/
8
https://www.taxpolicycenter.org/briefing-book/how-does-corporate-income-tax-work#:~:text=Business%20Taxes,-
1%2F4%3E&text=The%20United%20States%20imposes%20a,from%209%20percent%20in%202017.
An increase is even more probable given that the USA is already proposing a domestic GILTI
tax rate of 21% across the country. A further increase in the global minimum tax rate would only
help the USA in achieving its objective. Similarly, five out of seven G7 countries have a
corporate taxation of near (UK at 19%) or more (France, Italy, Japan and USA at 32%, 24%,
23.2% and 21% respectively) than the proposed GILTI tax rate. 9 This creates the possibility of
higher minimum tax rate in the future.

The Double Taxation Conundrum

Double taxation is the situation in which tax is levied on the same income but by two or more
separate jurisdictions. It occurs commonly in the cases of MNCs as their profits are taxed
multiple times, first in the country in which they are generated and second, when the profits are
distributed to other jurisdictions.

One way of mitigating double taxation is an altogether exclusion of the income earned in a
foreign nation. This would not be applicable in the case of a global minimum tax agreement as it
goes against its primary purpose, particularly the objective of Pillar 1. On the contrary, if the
corporations pay lower tax in a country, their home-countries could simply “top-up” their taxes
to the minimum rate, nullifying any advantage gained by the companies. Furthermore, the
absence of any kind of double taxation avoidance agreement in the proposed minimum taxation
regime contributes to the cause of apprehension against it.10

WAY FORWARD

9
https://www.reuters.com/business/finance/what-is-global-minimum-tax-what-will-it-mean-2021-06-05/
10
https://home.kpmg/xx/en/home/insights/2021/05/global-minimum-tax-an-easy-fix.html
The concept of a global minimum taxation is potentially capable of tackling the complication of
BEPS, given that it gets executed suitably. Along with a proper execution, it needs to be ensured
that the freedom of smaller nations be preserved and taxation remains a sovereign function. It
shouldn’t be forgotten that along with big MNCs, young corporations seeking to expand their
business abroad are also an important stakeholder in the mentioned state of affairs.

A robust grievance addressal system must be formulated before giving a green flag to this
seismic agreement.