The historic pact inked by G7, a group of the world's richest nations, to back a minimum global corporation tax rate of at least 15 per cent will benefit India as the effective domestic tax rate is above the threshold, and the country would continue to attract investment, as per tax experts.
The Group of Seven on Saturday reached a landmark deal to close cross-border tax loopholes used by some of the world's biggest companies. The Finance Ministers of G7 countries, which comprise of US, UK, Germany, Canada, France, Italy and Japan, said they would back a minimum global tax rate of 15 per cent for multinational companies.
Besides, they agreed to put in place measures to ensure taxes are paid in the countries where businesses operate, a move aimed at plugging loopholes in cross-border taxation.
Consulting firm AKM Global Tax Partner Amit Maheshwari said the pact is expected to benefit India as it is a big market for a large number of tech companies.
"It remains to be seen how the allocation would be between market countries. Also, the global minimum tax of at least 15 per cent means that in all probability the concessional Indian tax regime would still work, and India would continue to attract investment," Maheshwari
said.
In September 2019, India cut corporate tax for domestic companies to 22 per cent and 15 per cent for new manufacturing units. The concessional tax rate was extended to existing domestic companies as well, subject to certain conditions.
Nangia Andersen India Chairman Rakesh Nangia said while the G7 commitment to global minimum tax rate of 15 per cent works well for US and most other countries in western Europe, it may face challenge from some low-tax European jurisdictions such as the Netherlands, Ireland and Luxembourg and some in the Caribbean which rely largely on tax rate arbitrage to attract MNCs.
"The global pact would face the challenge of getting other major nations on the same page, since this impinges on the right of the sovereign to decide a nation's tax policy," Nangia added.
Since India's effective tax rate is above the global minimum tax rate, it would not impact companies doing business in India. "The global minimum rate impacts companies using low-tax jurisdiction to achieve low global tax cost. Moreover, India attracts foreign investment owing to its large internal market, quality labour at competitive rates, strategic location for exports, and a thriving private sector," Nangia said.
EY India National Tax Leader Sudhir Kapadia said the global corporate tax pact is a path breaking one, especially for large and developing countries like India which would always find it very difficult to keep corporate tax rates artificially lower in a bid to increase much needed foreign direct investments in the country.
"Even the recently announced lower rate of 15 per cent for new manufacturing units in India just about meets this new threshold, thus, not affecting this much needed boost to manufacturing in India. Equally important is the explicit granting of taxing rights to "market countries" for a share of global profits of multinational corporations, thus aligning right to taxation with place of economic contribution," Kapadia said.
The decision taken by the G7 countries will be placed before G20 countries, a group of developing and developed nations, in a meeting scheduled for July in Venice.
While the G7 agreement will have a lot of weight in the G20/OECD discussions, it would require a lot of work to reach global consensus, Maheshwari said. "Countries like Ireland are expected to have a challenging time and may oppose this minimum tax rate. However, a minimum tax of 15 per cent may not raise substantial revenues and there is a possibility that other countries may want a higher minimum global tax rate," he added.
Deloitte India Partner Rohinton Sidhwa said the benefit of the minimum tax rate should accrue by first giving a right to tax a part of profit of large global digital MNCs.
Besides, it will also bring an end to various digital taxes that have proliferated around the world similar to the equalisation levy in India, he said, adding that it will also pave the way for changes in global tax treaties pursuant to the consensus being reached.
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