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G7 tax pact good for India, but the way is full of challenges: Experts

Economic TImes |
Pranay Bhatia , Partner and Leader
Tax and Regulatory Services
|

08 June 2021

The G7 grouping--comprising the US, the UK, Germany, France, Canada, Italy and Japan—has reached a historic corporate tax pact. The nations favoured a 15 per cent global minimum corporate tax rate and also proposed to grant a taxing right to the market jurisdiction in cases where companies are accessing markets without physical presence. The pact is aimed at plugging loopholes in international taxation. How will the proposals impact India and big technology giants like Facebook, Amazon, Google, etc? ETCFO discusses with experts.

The historic corporate tax deal struck by the G7 Grouping over the weekend augurs well for market economies like India on the face of it, but there seem to be plenty of questions that need to be debated yet and the world is in for a long haul to arrive at a uniform international tax framework, said experts.

The G7 nations--comprising the US, the UK, Germany, France, Canada, Italy and Japan—favoured a 15 per cent global minimum corporate tax rate and also agreed to grant a taxing right to the market jurisdiction in cases where companies are accessing markets without physical presence.

The pact is aimed at plugging loopholes in international taxation.

The historic corporate tax deal struck by the G7 Grouping over the weekend augurs well for market economies like India on the face of it, but there seem to be plenty of questions that need to be debated yet and the world is in for a long haul to arrive at a uniform international tax framework, said experts.

The G7 nations--comprising the US, the UK, Germany, France, Canada, Italy and Japan—favoured a 15 per cent global minimum corporate tax rate and also agreed to grant a taxing right to the market jurisdiction in cases where companies are accessing markets without physical presence.

The pact is aimed at plugging loopholes in international taxation.

“The first proposal will not impact India directly since all tax rates applicable to corporations in India are higher than 15 per cent. In any case, India is not a low tax jurisdiction for this to have been aimed at India… But what would really impact India is the second proposal of granting taxing rights to the market jurisdiction. It is this second part which can lead to India getting a right to tax FB, Google, etc.,” Ajay Rotti, Partner, Dhruva Advisors told ETCFO.

Rakesh Nangia, chairman, Nangia Andersen agreed. The grant of taxing rights to market countries of share of profits of the largest and most profitable multinational enterprises would ensure “fair” and “equitable taxation”, he said.

“…the multilateral agreement would help remove distortions and inequities in taxation and afford tax certainty. It has been agreed by the tech giants that the pact is a “significant step towards strengthening public confidence in the global tax system,” said Nangia.

But a long haul...

The action now moves to the G20 meeting scheduled in July 2021. The consensus at the G20 and Inclusive framework of OECD is the next step. But it will be long before the light is seen at the end of this tunnel, experts believe.

For instance, on the second proposal talking about granting taxing rights to market countries like India, the exact quantum and how that quantum will be established is likely to be a matter of “significant debate”, they said. Currently, the G7 pact proposed that the governments should get the right to tax at least 20 per cent of the profit in their country earned by a mutinational over 10 per cent margin.

Even on the first proposal, it is seen difficult to get support from the low-tax jurisdictions, which largely depend on tax rate arbitrage to attract multinational enterprises, Nangia of Nangia Andersen, added to the discussion. Experts emphasised that jurisdictions like Ireland, which currently attract a 12.5 per cent rate, are going to offer a lot of resistance on the table.

A tax expert at a Big Four consulting firm concurred and feared that the G7 proposals may end up creating chaos, which is highly unwarranted amid the Covid environment, he said. “The proposals are a step in the right direction; But the ‘how’ is not clear. Chaos is certainly possible. Low-tax jurisdictions are not going give up easily on their claims,” the Partner said, requesting anonymity.

Also, industry observers further stated that how the pact will be enacted in the law, and how the agreement will be administered by multiple countries are key aspects needed to be watched from here on.

“Eventually, multinationals are going to pass their tax burden onto the consumers, as regulations become tighter across the world,” Bhatia signed off.

Source:- cfo.economictimes.indiatimes.com/news/g7-tax-pact-good-for-india-but-the-way-is-full-of-challenges-experts/83328291