A Race To The Bottom Seems To End

Since our high school days, what have we learnt about the relationship between demand and price? As the prices fall, the demand of that commodity goes up. This is an inverse relationship. This same phenomenon can be seen on a global level when we talk about FDIs and corporate taxes.

Why race to bottom?

To attract more number of multi national companies (i.e. FDIs) , the countries take the route of a price war.. Lower the corporate tax, higher the no. of MNCs get attracted. Ireland gives us a good example for the same. In 1982 Ireland's corporate tax reached its highest at 50 percent, while recently it has reached its lowest which is 12.50 percent. As they lowered the tax, Ireland began to develop. There were more job opportunities. People were no more unemployed. And the companies could also save the tax. So, there was a flood of MNCs investing in Ireland. There are many such countries who are competing to lessen taxes and increase their FDIs.

Can such a race end?

Globally, this practice has always been seen as unfair. Rather people suggest either not to have any corporate tax worldwide or else have a fixed rate. With a similar objective Ms. Yellen, US Treasury Secretary called to the global leaders to come together and agree over a minimum tax rate. The proposal was welcomed by G7 countries and OECD countries. Later G20 countries also agreed upon the same. Now, 90% global GDP producers i.e. 130 countries have agreed to be a part of the deal.

Details of GMT:

To elaborate on it, there are two pillars of this agreement. One aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits, while adding much-needed certainty and stability to the international tax system.

Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there or not.

Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases. This minimum rate has been decided to be 15%.

How does the world look at it?

This international corporate taxation reform is regarded as a fair step to protect the Tax justice and it is a slap on the faces of the tax havens. This deal puts an end to the so-called race to the bottom. Not just the governments but the huge MNCs like Facebook and Amazon have welcomed the reform with open arms as the reform brings a discipline in the taxation culture.

Conclusion:

To summarize, countries who had until now lowered their taxes to bring in more FDIs would not be able to continue with this process anymore. Also, all the big companies, would have to pay a profit share to all the countries they operate in. And, the global minimum tax rate is supposed to be 15%, below which no country engaged within the deal would be able to lower it's corporate tax.

In today's post we have tried to cover most of the essential details about the topic but there is always a scope for further research. We are eager to welcome your write-ups over the sub topics we might have missed in this post. Do mail your write ups to ea.kjsac@somaiya.edu