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Current Affairs

Global minimum tax agreement

Date: 12 October 2021 Tags: Miscellaneous

Issue

About 136 countries have agreed to a proposal by Organisation for Economic Cooperation and Development to make big companies pay a minimum tax rate of 15%.

 

Background

Many countries around the world use low tax destinations to operate their business even though they earn revenues in other countries.

 

Details

  • The deal aims to overhaul of global tax norms to ensure that multinationals pay taxes wherever they operate at a minimum 15% rate.

  • The countries who have agreed to sign the deal together accounted for over 90% of the global economy. Pakistan, Sri Lanka, Nigeria and Kenya are yet to sign.

 

Need for the law

  • After the pandemic, countries are facing revenue crunch. Shifting of profits to low tax havens has deteriorated sources of income.

  • Income from sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, causing huge losses to home countries.

 

Working

  • Multinational firms with overseas profits worth 750 million Euros ($868 million) would come under the ambit of the law.

  • The governments are not barred from setting their own tax rates. If companies are paying low tax rates in haven countries, home countries can raise their tax rates to 15%.

  • It allows countries where revenues are earned to tax 25% of the largest multinationals’ excess profits.

 

Pillar of deal

  • Pillar one is about reallocation of additional share of profit to the market jurisdictions

  • Pillar Two consisting of minimum tax and subject to tax rules.

 

Significance

  • Global minimum taxation will make tax competition amongst nations rather unfeasible.

  • It will result in withdrawal of digital Services tax and any such similar taxes /levies in future.

  • The minimum tax is expected to generate $150 billion in additional global tax revenues annually.

 

Way ahead

Finance ministers of Group of 20 economic powers have to formally endorse the deal. Countries will have to bring a law in this effect.