A new tax floor

By Sujit Bhar

Under the leadership of the G20 countries, a total of 132 nations and territories have signed to impose a minimum corporate tax rate on multinational companies, some of which are larger than small nations, trying to reduce the income owed to the country business operations and profit areas. This has been a major headache in international accounting and this floor rate of 15%, if applicable, will help contain the massive erosion of the tax base that has occurred over the years. The main targets are companies like Apple, which avoid paying taxes in the United States, although they sell most of their products there, filing their taxes in Ireland, a low-tax zone.

If it remains legal for a company to change base, the erosion effect will be minimized by the floor rate that companies like Apple will have to pay, even in Ireland. The Netherlands, another tax haven, have not yet joined the group, but if the movement is strong enough and enforcement can be ensured by a strict mechanism, the Netherlands could one day agree to join it.

The axiom of entrepreneurial freedom has been taken to the extreme by these large companies. Apple, for example, reported $ 214.9 billion in overseas revenue. If he had paid his taxes in the United States, he would have owed the US government $ 65.4 billion in taxes. This is a little less than the total income of Reliance Industries.

The sums are massive. About 50 of the largest US companies have hidden around $ 1.6 trillion (a little more than Russia’s GDP) abroad. These companies include giants like Microsoft, IBM, General Electric, Pfizer, Exxon Mobil, Chevron and Walmart, etc. In total, these companies’ revenues from operations around the world totaled $ 4.2 trillion, slightly less than the GDP of Japan (the third highest in the world, pre-Covid data) and slightly more. than Germany (the fourth highest). In doing so, they reserved their profits so strategically in different tax havens that they ended up paying, on average, 25.9% in tax, far less than the 35% they would have paid in the United States. Other developed countries have even higher tax rates.

The G20 is an informal grouping of member countries of the Organization for Economic Co-operation and Development (OECD), as well as Argentina, Australia, Brazil, Canada, China, France, Germany, Japan, India, Indonesia, Italy, Mexico, Russia, South Africa, Saudi Arabia, South Korea, Turkey, UK, US and EU. Spain is a permanent guest. The current grouping is called G20 +. It’s good that a general consensus has emerged, but how does this tax structure work, even if it is enforceable?

To get a better idea of ​​what has been achieved, we can take the example of India’s tax structure.

The application of the global minimum tax rate is complicated. In India, for example, corporate income taxes are classified as resident company taxes and non-resident company taxes. Tax rates in India for non-resident companies are higher, but an India-based multinational will be taxed on its worldwide income. This complicates matters, as the clauses of Double Taxation Avoidance Agreements (DTAA) with different countries will be at play here. How, then, a fixed floor rate of 15 percent in overseas operations will apply is not clear.

In India, a non-resident corporation is taxed only on income received in India, or accruing or arising, or deemed to accumulate or arising, in India.

Foreign companies that have a permanent establishment (PE) or a branch / project office in India are taxed at the highest base rate of 40%, which together with the applicable surcharge and education tax translates into by a rate of 41.60%, 42.43% or 43.68 percent. India is in the process of putting in place legal structures that will now require all multinational companies to have offices in India, submitting to the country’s legal and financial systems and jurisdictions.

Even India has an Alternative Minimum Tax (MAT) scheme. This is an interesting concept that stems from the government’s plan to bring more corporations into the tax net. Companies can claim multiple concessions according to the law, reducing their taxes to almost zero. With this in mind, the MAT was introduced via the 1987 finance law. When a company has reduced its profit to zero, therefore in the non-taxable bracket, the government considers a certain percentage of its accounting profit as taxable income. It is applied when the taxable income calculated in accordance with the provisions of the Informatics Act is less than 15.5 percent (plus surcharge and tax if applicable) of accounting profit under the Companies Act 2013 He also introduced the MAT credit system. If a business has an accounting profit (i.e. operating profit, before all exemptions) of Rs 100 crore, it is required to pay a minimum tax of Rs 15 crore (the MAT rate has been around 15 percent). However, if the business’s normal tax liability after claiming deductions is Rs 10 crore (which will be less than the MAT), then the business must pay the remaining Rs 5 crore as MAT and use a MAT credit of Rs 5 crore to pay tax in the future.

It can be used, conversely, by Indian multinationals to exist in a minimum tax regime within the general tax system of the country. However, this cannot be a permanent solution, but there are accounting possibilities. Therefore, India can be characterized as a dual tax system, although non-resident businesses find it difficult to benefit from the standard deductions.

While such dual systems exist in India, one of the above-average tax environments in the world, there are several others around the world that can accommodate businesses, despite the signing of this floor level taxation agreement. Therefore, the implementation of such taxation will be difficult.

The counter-argument is: what will the United States gain from this taxation? If Apple, for example, pays its 15% in Ireland and 15% of the micro level of activity it displays in the United States, does that benefit the United States Treasury? These details will likely be reworked at the next G20 meeting and in many other meetings thereafter.

Alternatively, since the change of base has remained legal, one can find, for example, Indian multinationals based in the United Kingdom, as well as in the Netherlands, which completely transfer their accounting base to the Netherlands. Forcing the Netherlands to join the 15 percent league is beyond the scope of the G20. We have seen, in the effort to standardize banking regulations around the world, that this was not acceptable for many geographic areas. In addition, it was accepted at the two-day virtual meeting of the G20 + headquartered in Venice that it was acceptable for competing countries to offer lower tax environments for businesses.

The low price idea shirt is too wrinkled right now to wear to a banquet. Ironing will take time.

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