Global pact on minimum tax deal agreed as Nations back 15% rate

A global deal has been agreed by 136 countries, to set a minimum tax rate of 15 percent as governments look to end a race to the bottom on corporate taxation. This is one of the sweeping overhauls of international tax rules finalised on Friday (October 8, 2021) at an Inclusive Framework meeting under the umbrella of the Organisation for Economic Co-operation and Development (OECD). The OECD said four countries – Kenya, Nigeria, Pakistan, and Sri Lanka – had not yet joined the agreement, but that the countries behind the accord together accounted for over 90% of the global economy.

The proposed two-pillar solution of the global tax deal consists of two components —Pillar One which is about reallocation of an additional share of profit to the market jurisdictions (countries where the customer base is) and Pillar Two consisting of minimum tax and subject to tax rules.

Under the Pillar-one of the agreement, technology giants like Amazon, Facebook, Google and other big global multinationals will be required to pay taxes in countries where their goods or services are sold. The Pillar-two of the agreement ensures that Multinational Enterprises (MNEs) will be required to pay a minimum 15% global tax rate from 2023, in countries where their goods or services are sold.

The global minimum tax and other changes envisaged in the agreement are aimed at cracking down on tax havens that have drained countries of much-needed revenue. For example, Ireland with a low corporate tax rate of 12.5% had emerged as a tax heaven for tech firms like Google, Facebook, and Apple, etc. Besides, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries. Thus, Pillar –two ensures that these companies pay a fair share of tax wherever they operate and generate profits, even if they have no physical presence there. It means if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits to tax heavens.

The pact agreed now provides that no newly enacted digital services taxes will be imposed on any company from October 8, 2021, and until the earlier of December 31, 2023, or the coming into force of the agreement. This is to restrain any country party to the agreement to unilaterally impose such levies. Accordingly, India being party to the agreement will have to repeal the digital services tax or the equalisation levy introduced on June 1, 2016, and gives a commitment not to introduce such measures in the future if the global minimum tax deal comes through. At present, under equalisation levy (EL) an Indian payer is required to deduct 6% on payments (if in excess of Rupees one lakh in a year) to a non-resident entity – say Google or Facebook for online advertisements. The scope of EL was further expanded to cover non-resident E-commerce operators (whose turnover was over Rs.2 crore in a year). They would have to pay tax @2% on the consideration received for online sales of goods or services.

OECD which has been leading the negotiations said the new minimum tax rate would apply to companies with annual revenue of more than 750 million EUROs (USD 866 million) and would generate around USD 150 billion in additional global tax revenue per year. “Today’s agreement will make our international tax arrangements fairer and work better,” Mathias Cormann, the organization’s secretary-general, said in a statement. “We must now work swiftly and diligently to ensure the effective implementation of this major reform, he said.”