We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of June 2021.
- The 'Focus Point' covers the contours of the G7 deal and the issues concerning the Minimum Global Corporation Tax.
- Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
- Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
- Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
We hope you find our newsletter useful and we look forward to your feedback.
G7's Minimum Global Corporation Tax - the greater good?
G71, a group of the world's seven richest nations, inked a historic deal backing a minimum global corporation tax rate of at least 15%. The deal is supposedly a new framework for ending low tax-havens. A meeting of 140 sovereign nations and countries known as the Inclusive Framework meeting is proposed to be hosted by the Organisation of Economic Cooperation and Development (OECD) to seek an agreement on the said new global tax framework. Details agreed at the meeting would then be passed on to the finance ministers and central bank governors of the G20 nations. The G202 nations are most likely to endorse the proposed minimum corporate tax rate, as per the tabloids. Although a detailed deal document of G7 is awaited, we have encapsulated below certain dimensions of the deal and a few contours which could be relevant during its implementation.
Crucial aspects of the deal
- The G7 deal came gained momentum shortly after the Biden Tax Plan, which included a proposal to increase the corporate tax rates in the United States. The tax plan also emphasized that the US treasury department will push for global coordination on an international tax rate that would apply to multinational corporations regardless of where they locate their headquarters.
- The aim of having a minimum corporate tax rate is allegedly to stop tech giants from shifting their profits to low-tax havens. The nations where the tech giants actually operate must be able to get their share of tax. If we inspect the typical conduit arrangement, the corporates do not carry out actual operations in the country where it is established.
There is typically no income arising in such nations, ultimately resulting in no tax outflow. In such a scenario, having a minimum corporate tax rate in such countries may not serve the purpose as the nations where the companies do actually operate still remain deprived of their share of taxation.
- Furthermore, it has been noticed that although the domestic tax rates happen to be one of the important factors while deciding the location of the company, other paramount factors are also considered. These factors include the ease of incorporating companies with no or minimum documentation, the purpose of having a shell company, favorable tax treaties between the nations. To have a better understanding, let's look at the following example:
- Prior to the amendment of the India-Mauritius tax treaty, India received a huge Foreign Direct Investment routed through Mauritius. The India-Mauritius tax treaty did not provide any tax for capital gains. Many companies were incorporated with the only objective of making an investment in India. It is to be noted that the domestic corporate tax rate in Mauritius was 15%. However, given that there were none or minimum operations in Mauritius, the companies had no or minimum tax liability in Mauritius.
- Similarly, even with tax rates of more than 20%, the state of Delaware continues to be a hub of such companies due to its lenient incorporation rules.
- In the era of digitalization, technology has surpassed the need of having physical corporate offices. The challenge has shifted from taxing such companies to drawing nexus of the digital transaction. The OECD had framed BEPS Action Plan 1 (i.e., Tax Challenges arising from digitalization), providing guidance and measures to curb the tax avoidance by the tech companies. The action plan was aimed for proper allocation of tax among the nations where the companies actually operate. Although the aim of the G7 deal is aligned with OECD, ironically, the US has not backed the OECD's action plan. Instead, various nations that adopted digital taxation faced an investigation under Section 301, leading to higher tariff payments on exports made to the US.
- Even where the countries adopt the minimum corporate tax rate proposal, it would be important to see if the tax exemptions given to certain specified units like Special Economic Zones, Export Oriented Units, etc., are affected by the proposal or not. Further, there are certain countries where the corporate tax rate is applicable only for a select few industries, e.g., the UAE has a corporate tax rate ranging up to 55%. However, the corporate tax rate is applicable only for oil, gas and petrochemical companies and branch offices of foreign branches. It would be interesting to see how such nations adapt to the proposed minimum corporate tax rate.
- If one examines the corporate tax rates around the globe, only a handful of the nations have a corporate tax rate of below 15%. This category includes the tax heavens, the majority of which lie in the European region. The other low tax jurisdictions include nations like Barbados, Uzbekistan, Hungary, etc. These nations are mostly developing nations. The rate of taxation in any country is determined after considering a whole set of factors. Some of the examples could be as under:
- Where the country receives a major share of its revenue from modes other than tax, e.g., tourism, the government may not impose a higher rate of taxes for collecting revenue;
- A developing or underdeveloped nation struggling with issues like unemployment would want to attract higher foreign direct investment by offering low tax rates;
- A country with a lack of adequate infrastructure may look at providing lower tax rate;
Thus, forcing the worldwide countries to gear up to higher tax rates may hamper the genuine ultimate objective with which a nation offered a low tax rate in the first place. The G20 nations should formulate the rules after considering such situations besides following the concept of 'the greater good.'
From the aforementioned dimensions, it can be said that though the deals have been proposed with the intention to curb the tax avoidance techniques used by the MNCs by using the low tax jurisdiction, it is unlikely that increasing the corporate tax rates alone would be helpful. The greater challenge is not just to tax the shell companies but also to ensure that the shell companies cannot be used as an instrument for tax avoidance. This shall be possible only when the loopholes in the bilateral treaties are plugged, as when the transactions include two or more nations, changes in bilateral law have limited implications.
Also, while aiming for better tax allocation among the nations where the tech companies actually operate, the most important trait of digitalization has been left out. As the methods of doing business have changed, modifications in the old tax laws would not serve the purpose.
1. G7 includes the US, UK, Canada, France, Germany, Italy and Japan.
2. It includes European Union, Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, Turkey, United Kingdom, United States and South Africa
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.