- By Arkaprobha Das (Batch-2023)
Global Corporate Minimum Tax (GCMT) and its rates (GCMTR) have been making the headlines pretty often over the last couple of weeks. Now, with the G7 countries agreeing on it during the G7 Summit 2021, it becomes imperative that we know what it is and why it is emerging as a buzzword in the business community.
In this article, I aim to explain GCMT starting with the problem it tries to solve, how it aims to solve the problem, and what can be the possible upsides and downsides. So, without further adieu,
let's get down to the juicy bits.
The problem at hand
In a bid to protect their margins, multinational corporations all over the globe try to structure their operations so that they can pay as little tax as is legally possible. To do this, they often open subsidiaries or shift their headquarters to countries like Ireland and the Cayman Islands where tax rates are substantially lower. As a result, the parent countries of these companies lose out on billions of dollars of tax revenue.
Further, as these tax havens often have low tax rates and a business-friendly environment, larger countries like the US have to lower their taxes in order to stay competitive and to attract business to set up their operations on its shores. This has been a key driver of the race to the bottom which has driven the average global corporate tax rate down to the ground.
What is GCMTR and how does it work?
Now, the countries, starting with the US, have come up with an innovative solution to clog the loopholes in corporate taxation and amp up their tax revenue collections. They propose to impose what is known as the Global Corporate Minimum Tax Rate. The GCMTR is the minimum rate of corporate taxes companies will have to pay irrespective
of where it books its profits. For now, the G7 countries have agreed on this rate to be 15% of profit before tax.
Let us see an example of how this system will work. Suppose, there is a US company, ABC Ltd., trying to book profits in Ireland which has a tax rate of 12.5%. With the GCMT in action, the US tax agency will have the right to walk in at this point and collect the gap between GCMTR and 12.5%, which will be 2.5% of its overseas profits. In this manner, ABC Ltd. will have to pay at least 15% corporate tax no matter where it is trying to book profits.
Pros and Cons of GCMTR
Like everything under the sun, GCMTR also has its pros and cons. We would be taking a look at what these are. Let’s start with the pros.
GCMT is expected to greatly cut down on tax losses of the governments, which are usually humongous. To cite an example, the Indian government loses over $10bn per year due to corporate tax abuse. This increase in tax revenues will likely provide more resources to the governments to work towards the welfare of their citizens.
The GCMTR is also expected to spell an end to the decades-long race to the bottom which has driven average global corporate tax rates down from 40% in 1980 to 24% as of 2020. This will bring some much-needed uniformity in global corporate taxation.
Though GCMTR has great potential to change things for the better, it is not all rosy. Getting many countries to be a party to this system is both necessary and challenging. If only a few major countries agree to charge GCMTR, it might give an undue advantage to MNCs whose parent countries do not come under the umbrella. Also, it would take away the tool to curate policies that suit them best from some countries.
That was an explanation of the GCMT. I hope it simplified your understanding of this very important step towards rejuvenating corporate taxation.
(The opinions expressed in this article do not necessarily reflect the opinions of the LitSoc team.)