Last month, India along with 129 other countries agreed to implement a Global Minimum Tax, which is proposed to be levied on large multinational companies. The rate of tax as decided will be of 15 per cent. As various as nations try to control large Global Technology Giants who manages their tax outflow and pay only a small percentage of their profits as taxes.
Lets understand the fine prints of this new proposal and its implications on India and Indian Companies
Global minimum tax
This proposition requires all nations to force somewhere around a minimum tax of 15% on global organizations. This tax has been proposed by the US as an action to counter endeavors by major multinational firms to escape taxes in the country of operations. As such, it targets fostering a taxation structure that is applicable for a digital and globalized world. It is important for the inclusive framework on Base Erosion and Profit Shifting settled upon by G20 nations and Organization for Economic Cooperation and Development.
The proposal has two parts
a. Re-allocation of additional share of profit to the market jurisdictions
b. Minimum taxation
Main Reason for implementation Global Minimum Tax
This tax has been proposed explicitly with an objective to bring large technology firms under the Tax net. Such companies doesn’t have any factory or such operations place and route their earning to tax heavens or lower tax jurisdictions through the digital route. Thus they avoid the tax burden on their profits due to higher tax slabs in the country of operations. The proposal of Minimum tax rate across globe was in the wake of scrutiny of two large tech giants i.e Facebook and Alphabet.
However, it is pertinent that till most countries across globe does not agree to this, companies may still keep reaping the benefits due to these loopholes.
Implementation of Global Minimum Tax.
With 130 countries on board, major pointers about Global Minimum Tax are agreed till now. However many other fine prints are yet to be framed or finalized. With an aim to implement the same by 2023, all such fine prints are expected to be decided by October this year itself.
Impact for India
India has a large user base for platforms like google, facebook, instagram, etc, which remains the major contributors of revenues for these companies. Thus, strongly favoring the proposal however does have some reservations on few significant issue like profit sharing mechanism, etc. It is yet to be decided that how the profits of such global tech firms will be divided or apportioned among the countries for the purpose of taxation.
India, being the important market for such multinational giants will negotiate hard to get better share of apportioned profits of such tech firms. Moreover, it is always preferable to implement “simple to understand” solutions which makes it easier to comply with.
Implications on Indian Multinational Companies
Since the minimum tax of 15% is aimed at corporates that operate and show profits in zero or low-tax countries, India or companies operating in India will not be affected in a major way. FM announced a cut in corporate taxes to 22% for domestic companies and 15% for newly incorporated manufacturing companies in September 2019, however the tax rate is equal to or higher than the global minimum tax.
The cut in tax rates brought India’s corporate tax on par with the average Asian economies. Hence, foreign companies operating in India will not be affected as these companies are already paying taxes as expected by the G-7 countries and do not experience major benefits by showing profits in India.