Global Minimum Tax Pact Set to Reshape MNC Taxation
Overview
A global agreement establishing a 15% minimum tax for multinational corporations with revenues over €750 million moves toward implementation. Reached under the OECD/G20 framework, this pact aims to curb profit shifting and create a fairer playing field, although exemptions for U.S. multinationals present a drawback. India stands to gain from increased tax fairness and potential revenue.
Global Minimum Tax Pact Moves Towards Implementation
A significant accord involving 147 countries and jurisdictions within the OECD/G20 inclusive framework is paving the way for a global minimum tax. This initiative, building on the framework agreed in October 2021, aims to establish a 15% floor for corporate taxation, targeting large multinational enterprises (MNEs) to deter profit shifting to low-tax jurisdictions. Despite challenges previously voiced by the Trump administration regarding U.S. involvement and taxation policies, the ongoing implementation marks a substantial step in recalibrating international tax rules.
Curbing Profit Shifting with Pillar Two
Under "Pillar Two" of the agreement, MNEs with annual revenues exceeding €750 million will be subject to a minimum effective tax rate of 15%. If an MNE's tax liability in a particular jurisdiction falls below this threshold, tax authorities will have the power to impose a "top-up tax" to meet the 15% requirement. This mechanism is designed to eliminate the incentive for companies to use complex tax arrangements.
India Poised for Fairer Taxation
For India, the pact promises a more level playing field between domestic businesses and large foreign corporations. It could also enhance tax revenues by ensuring that MNEs operating within its borders pay a minimum effective rate. The agreement is seen as a positive development despite some concessions.
US Exemptions Present a Setback
A notable compromise in the agreement exempts U.S. multinational companies from certain provisions. This means tech giants like Microsoft, Apple, Alphabet, and Amazon might not be compelled to pay the minimum tax in jurisdictions where they generate substantial profits. This exemption is a concession that weakens the universal application of the new tax regime.
Pillar One Prospects
The agreement also encompasses "Pillar One," which addresses profit allocation for the largest MNEs. This pillar targets companies with global revenues of €20 billion and pre-tax profits above 10%, aiming to reallocate a portion of profits to market jurisdictions where revenue is earned. Implementation of Pillar One could further benefit countries like India, particularly concerning taxation of digital services.
