KNOW MORE ABOUT GMT

WHY THE NEED FOR GMT?

The call for the minimum tax was proposed to reverse the corporate tax rates which allowed the companies to reduce the tax liabilities by exploiting the loopholes in the tax law. The BEPS (base erosion profit shifting) program (2013) was also intended for the same above cause. Earlier, the techno-giants claimed that physical presence was not necessary to operate in large markets such as India and resorted to lowering tax jurisdictions wherein the country in the operation of the company was deprived of its share of tax and profit. So, this very deal forces multinationals to pay taxes where they operate and avoid undercutting global minimal corporate tax at the brim of 15%. The draft backed up by IMF is shaped also to address the tax cheats by the MNCs which raises annual tax loss due to corporate tax abuse.

HOW WOULD IT AFFECT INDIA?

The draft proposal was approved in July; execution on papers, expected as early as 2023, countries would enact the minimum tax requirement into their laws. This tax also implies the fact that tax incentives that exist in treaty rates or local tax systems may shortly be unavailable. India here might gain a dicey slant as the recent push to bring in foreign investors through international financial services is through incentivizing or through decelerating the tax rates to attract more FDIs. Though India might get a share of the profits of companies operating in the digital world, it must carefully weigh the costs and benefits of considering the shift in the structure. Developing countries are often dilemmatic of global rules and apprehensions on one side and national priorities on the other.

A low tax rate is also a tool to shore up the plunging economy from the recession hangover which is used by the developing or underdeveloped countries; which is a staunch reviving pillar in the ongoing pandemic. According to Indian revenue sources, as the taxation and its implementation rests in the nation’s sovereign functionality, the government is open to participate and engage in discussions globally about the tax structure. The economic division is yet to focus on the pros and cons of the same; which is now gearing up for the arrangements of the much anticipated third wave.

THE AMERICAN PROPOSAL.

Nations have used their freedom to set corporate taxes that will help attract multinational companies to their homelands. Countries like Netherlands, Singapore, Irelands have been successful in attracting all the giant companies, we can see the economic development in these countries due to low corporate tax.

United States Federal Corporate Tax Rate has been 21% from 2018. In 2021 President Biden proposed that Congress raise the corporate tax from 21% to 28%. If that happens several big tech giant companies will shelter in lower tax rates countries and many tax havens. Implementation of GMT will not only restrict multinational companies from escaping the taxes but will also the US in increasing its tax rate to 28%.

GMT SPURNED BY 9 COUNTRIES.

130 out of 139 OECD countries support a 15% global minimum tax rate. But nine countries Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Sri Lanka, St. Vincent, Peru, and the Grenadines did not sign the framework.

Ireland, with a 12.5% corporate tax rate, said it has “reservations” about the proposal but would be open to negotiations. Hungary, which has a corporate tax of 9% rejected the deal saying 15% was too high. “The global minimum tax would obstruct economic growth, the planned 15% tax rate is too high and it shouldn’t be levied on real economic activity," Hungary finance minister Mihaly Varga said. (FOX Business, Megan Henney)

All major US tech companies have their headquarters in Ireland to minimize their taxes. Ireland earns a lot of profits due to its tax system. It’s one of the places they go when fleeing U.S. tax rates. Accepting the GMT deal would be devastating for these countries as they won’t be able to provide the same luxury as they were able to do before. In general, why would any economically developing country give up one of its national advantages which attracts all the multinational companies to their homelands??