Global minimum corporate tax rate may benefit the US, but not India

April 22, 2021 5:40 AM

How the global minimum corporate tax policy is set to put India’s growth to a halt

The government should therefore consider how the arm’s length principle can be applied to a SEP.The government should therefore consider how the arm’s length principle can be applied to a SEP.

By Rajesh Mehta

While India seemed to evolve amidst the Covid-19-pandemic-led opportunities, the recent urging by the US Treasury Secretary Janet Yellen to the G20 nations to move towards a global minimum corporate tax can weaken it from realising long-term economic prosperity. The American proposal to adopt a minimum global corporate income tax in an attempt to reverse a “30-year race to the bottom” comes across as an unfavourable solution to the underlying problem of tax evasion. Although the novel argument addresses a vital issue common among many nations, yet the solution carries more adverse impacts for developing countries.

The American proposal envisages a 21% minimum global corporate income tax fused with cancelled exemptions on income from countries that do not regulate a minimum tax aimed to deter the shifting of multinational operations and profits overseas. The plan tailors to address the low effective rates of tax forked out by some of the world’s biggest corporations. Digital giants such as Apple, Alphabet and Facebook have been relying on complicated networks of subsidiaries to hoover profits (25-30%) out of tax havens such as Ireland and the Bahamas. Recent figures show that Amazon pays 11.8%, Apple 14.4% and Facebook 12.2%, which is even lower than the global effective rates. This has left the government coffers increasingly short.

Although the justification suggests that it is vital to work with different countries to end the burdens of tax competition and corporate tax-based erosion, the reason behind the American push appears to be domestic. It primarily intends to compensate for any flaws that might arise from the Joe Biden administration’s proposed increase in the US corporate tax rate. The US is eyeing to get $2.5 trillion in 15 years by raising corporate tax rates from 21% currently to 28%. However, doing so in isolation will put the US at a disadvantage vis-à-vis tax havens. Therefore, it wants everyone to follow its lead. Furthermore, it wants to fund its ambitious $2-trillion infrastructure projects from the proceeds of tax revenue. With the proposal being suggested, the US—being the biggest economy by far in terms of consumption and corporations also looking to lock companies at home—aims to emerge as a dominant player.

India’s annual tax losses due to corporate tax abuse are estimated at over $10 billion, according to the Tax Justice Network report. Although the Equalisation Levy addresses the challenges posed by the enterprises that administer their business through digital means, India stands on the same page with the US as far as digital tax issues are concerned. Nonetheless, the suggestion of the proposal at such a time is bound to cost more than the benefits accrued for India.

Multinationals are a source of foreign direct investment. These corporations help to generate demand with efficient utilisation of resources and create employment in low-income countries. Nations have used their freedom to set corporation tax rates as a way to attract such businesses. Smaller countries such as Ireland, the Netherlands and Singapore have attracted footloose businesses by offering low corporate tax rates. The global minimum tax rate will finish off every opportunity for such countries whose only weapon to attract these companies is lower taxes. In a world where there are income inequalities across geographies, a minimum global corporation tax rate could crowd out investment opportunities.

India has already been proactively engaging with foreign governments in double taxation avoidance agreements, tax information exchange agreements, and multilateral conventions to plug loopholes. This proposal of a common tax rate, thereby, adds no further benefits to India. Tax avoidance will continue to remain a troubling issue for the global economy. It will further be problematic to enforce such a policy in a federal government structured country like India. A lower tax rate is a tool for India to alternatively push economic activity. If the proposal comes into effect, India may experience a longer economic hangover than other developed nations with less ability to offer mega stimulus packages. Multilateralism will further stumble in such a tax policy. The policy will create haves and have-nots across the world.

According to economic theory, the US seems right in claiming a win-win situation for all the nations. However, in the real world, the policy will create unwanted hurdles for many developing countries’ growth paths, especially India. In today’s crucial times of health emergency, inclusive and unconditional policies must be designed in place of such inward-looking and protectionist plans. The policy itself puts a question on globalisation as it will be beneficial only for the US to become a monopoly. We, as a nation, thereby, should restrict the implementation of the policy. To witness stronger global ties in the times to come, it is imperative that the US should reconsider its proposal at the earliest.

The author is a consultant and columnist working on market entry, innovation & public policy. Views are personal

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