The G7 nations have proposed in a meeting held in Buckingham on 5 June, 2021 to impose minimum corporate tax (MCT) @15% on MNCs, primarily big tech giants (FAAG), irrespective of which country they provide digital services to earn revenues and the country they belong to. In both cases, the MNC’s may have to pay MCT @15% under the proposal.
The issue is that companies follow a system of locating their business wherever the tax rate is lower and opt for tax avoidance. In response, the countries, especially Netherlands, Ireland, Luxembourg, Western Europe have also resorted to slashing their corporate tax rates to attract MNCs.
MNCs opt to create many of their subsidiaries to make maximum profits out of major markets in low-tax countries. As a result, other service recipient countries lose out on tax revenues.
The challenge of the G7 proposal may be that some countries will have to reorient their existing tax structure and the accounting for companies in the backdrop of the new taxation, which could be tricky. Secondly, the threshold of 15% MCT as a norm might bring transparency, but the question is: will every country accept this proposal especially when it is tabled amongst G20?
Countries which aren’t doing well economically, the lower tax rate will not push their economy.
India loses annual tax loss at over $10 billion and the U.S. Treasury loses nearly $50 billion a year due to corporate tax evasion. This proposal will turn good for India as companies wouldn’t hesitate to invest in India irrespective of the tax rate being retained higher than 15% since we have made significant progress globally by now.
Will it be feasible to have uniform MCT for all the nations? The proposal will emerge with many issues as it moves forward for discussions.