India’s stand on customer-location taxation is vindicated. Also, a global floor tax-rate will end the charm of tax havens
G7 finance ministers have, in principle, agreed to a global minimum corporate tax rate of 15% and taxation of profits based on country of sales—aligned with the OECD workplan under Pillar 1 and Pillar 2, developed to expand taxing rights of market jurisdictions and address ongoing risks from structures allowing MNCs to shift profit to jurisdictions where they are subject to no/very low taxation.
MNCs, the G7 proposes, must pay taxes on at least 20% of the profit exceeding 10% margin in the country where they have sales. In other words, an MNC must pay taxes to a jurisdiction, based on generation of revenue/sales, irrespective of physical presence. While this would impact all MNCs, those benefiting from the digital economy will be impacted the most. Countries like India that have a large consumer base are likely to benefit from this.
G7 has also agreed on a global minimum corporate tax rate of 15%. In the last four decades, average corporate tax globally has fallen to ~24% from ~40%, with several countries offering zero-tax regimes. The proposed rate is higher than the 12.5% recommended by OECD in Pillar 2. This is expected to significantly increase corporate tax revenues across economies.
This will help eliminate the tax benefits from branches/subsidiaries in low/zero tax jurisdictions. The proposal has adopted a practical approach, of having a global minimum tax rate of 15% and not forcing tax-havens to increase their corporate tax. This is going to be of significant consequence for home-countries of those MNCs that have business arms in tax-havens like Ireland, Cayman Island, etc.
India has long advocated the need to tax the digital economy and taxation based on location of customer. In the absence of any global standard, India introduced the equalisation levy in 2016 that aims to tax the digital advertising revenue of MNCs like Facebook, Google, etc. In 2020, the scope of equalisation levy was expanded to include foreign entities selling goods and services online to customers in India. With the G7 countries agreeing to tax based on customer-location, India stands vindicated. However, there may be overlap between equalisation levy and the proposed taxation based on customer location that may need to be addressed.
Further, the minimum tax rate of 15% will impact Indian MNCs with presence in low/no tax jurisdictions like the UAE, Cayman Islands, etc. This will act as a deterrent for setting up such structures. Going forward, investment structures would be devised based on commercial and economic conditions, and tax may not be the driving factor. As per the State of Justice report, India loses $10 billion every year to global tax abuse. These reforms would help in plugging such tax abuse.
While this is a step in the right direction, major economies like China, India, and Brazil were not part of this. However, they shall participate in discussions during the July meeting of the G20 finance ministers and will likely agree to the suggestions. However, the benefit and impact of such changes will be determined once the fine print is available. Further, for such changes to be successful, it would also be critical to see the manner in which such changes would be implemented across the globe and active participation by all countries would be important.
Tax Partner, EY India. Views are personal