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Current Affairs

G7 corporate tax deal

Date: 08 June 2021 Tags: World Economy

Issue

Countries part of G7 grouping have reached an agreement regarding taxation of multinational companies.

 

Background

From a long time, many multinational companies are using loopholes in taxation system to transfer their profits to countries where there are low taxes.

 

Details

  • In addition to this, all the member countries have decided to have a minimum tax rate so as to prevent undercutting to attract foreign investments.

  • Countries such as the UK, US, Germany, Canada, France, Italy and Japan have been part of the agreement. This deal will be discussed during G20 summit.

 

The decisions

The major decision is to tax multi-national companies in countries in which they operate. A minimum tax of 15% will be applied by all countries to prevent undercutting.

 

Significance of the minimum rate

  • The 15% minimum floor rate is important because other countries may use this opportunity to increase their foreign investments.

  • Earlier a race by countries to attract higher investments had led to slashing of rates to minimum, leading to losses in taxes.

 

Target companies

  • World’s biggest corporations such as Google, Apple, and Facebook etc pay one of the lowest taxes in the world considering their profits.

  • These companies make use of large subsidiaries to transfer profits into low tax havens such as Ireland, Bahamas or British Virgin islands. In this way they get to pay low taxes in operating countries.

 

India’s position

  • Indian government is in need of foreign investments and had cut the corporate tax for foreign companies to 22%.

  • By adopting a non-flexible taxation regime, it may lose out on the potential benefits it may have got by keeping tax rates lower.