The OECD’s efforts to tackle profit-shifting opportunities under its Base Erosion and Profit Shifting (BEPS) project received a major fillip when the G7 countries agreed on backing a global minimum tax (GMT) rate of at least 15%. This follows the support the Biden administration extended towards introducing this tax, though initially at 21%, but now revised to a minimum of 15%.
The basic framework of how the GMT would operate can be explained as follows: A company, being a tax resident of one country derives certain income from the source country. With these provisions in place, in a situation where the source country levies tax at less than the GMT (presently being discussed at 15%), the resident country would have a right to recover the differential tax from the company.
Details of how these provisions would be introduced and implemented by countries across the globe would have to be evaluated. The other consensus arrived by the G7 group was on introducing appropriate provisions to ensure that businesses are compelled to pay taxes in the countries where they operate.
The G7 agreement on both these measures is being termed as historic and is likely to enable the OECD to conclude its discussions and arrive at a consensus on how digital economy companies should be taxed. Every change in law, however, entails its own set of challenges. For starters, could these provisions likely trigger newer tax planning schemes? Secondly, countries have introduced unilateral and bilateral measures within their tax laws such as digital services tax, significant economic presence, etc. To mitigate any undue hardships for businesses, these measures should be either repealed or integrated with the proposed provisions. Lastly, it has been recorded that larger companies could pass on these additional tax costs to their consumers by revising the pricing. Appropriate measures should thus be introduced to ensure that the desired objective of recovering taxes from the companies themselves is achieved.
With the advent of these measures, the tax arbitrage offered by low-tax jurisdictions, which has conventionally been paramount in deciding where businesses should set up their base while exploring investment opportunities outside their home countries, is likely to be bridged. From an Indian perspective, Indian businesses which have typically routed their foreign investments through destinations offering lower income taxes, would need to revisit their structures to evaluate the impact of these proposed provisions. For foreign businesses operating in India, investments into India are not likely to be affected adversely since the lowest corporate tax rate India levies is 15% (for newly set up manufacturing companies), which is at par with the current recommendation on GMT. Viewed from a different perspective, India is likely to attract further investments, specifically in the manufacturing sector with its policy of reducing corporate taxes and other parameters, including the corporate tax rates being comparable across the globe.
In the longer run, a consensus of all the stakeholders is essential to provide certainty and a healthy environment for businesses to operate, which in turn shall encourage businesses to pay their fair share of taxes.
Views are personal. Bhatia is Partner & Leader, Tax & Regulatory Services, BDO India; Shah is Director, Tax & Regulatory Services, BDO India.