A new global tax law aims to reduce tax competition among countries and prevent tax evasion by MNCs.
Under the advocacy of the Paris-based Organization for Economic Cooperation and Development (OECD), 136 countries, including India, have agreed on a bold new framework for global corporate minimum tax.
Tax rates vary from country to country and are decided by the country’s internal laws. In this day and age of globalization, it is very common for multinational corporations to operate across borders. They can thus select a country to operate out of, that has a lower tax rate.
On the other hand, countries looking for multinational businesses to operate within their borders can reduce their tax rates to attract such businesses. This creates a race to the bottom, where there is always someone else that can offer lower taxes and woo the multinationals away.
Such a race damages not only the country that loses a foreign investor, but also the one that gains the foreign company, as they can charge very low revenue. The only true gainers in this are the global businesses themselves, who can go window shopping on how low a tax they want to pay.
Some corporate businesses that have intangible assets, such as income from patents and software licences, or which can function completely digitally, such as Big Tech, can just keep moving their assets between different tax jurisdictions.
The new global corporate minimum tax law seeks to put an end to this and create an even playing field for all countries. The tax law sets a global minimum of 15% tax and makes it harder for big companies to avoid taxation. This deal was not easy to achieve and faced a fair amount of resistance. The negotiations, which had been going on for four years, were sped up by the economic distresses of the COVID-19 pandemic. Finally, when Ireland, Estonia, and Hungary dropped their opposition, the tax laws were globally accepted.
While this is a great win for economic diplomacy, a lot remains to be done. For starters, of the 140 countries that were part of the negotiations, 136 countries including India have agreed to the tax laws, while Kenya, Nigeria, Pakistan, and Sri Lanka have held back for now.
And the law itself is not self-implementing, meaning that for it to be effective, the member countries need to change their tax laws. While the OECD has set a 2023 guideline for the implementation of these laws, it will largely depend on the internal legislative processes of the member countries.