Agreement on ‘Global Minimum Corporation Tax Rate’ concluded

Agreement on ‘Global Minimum Corporation Tax Rate’ concluded

According to the Organization for Economic Co-operation and Development (OECD), an agreement has been reached on the global minimum corporate tax rate.

138 countries including India have agreed a global pact to ensure payment of a minimum tax rate of 15% by large companies and to make tax evasion by them difficult.

Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined the agreement.

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting provides a two-pillar solution to address the tax challenges arising from the digitization of the economy.

Pillar One: This applies to about 100 largest and most profitable multinational enterprises (MNEs). These MNEs are enterprises with a global turnover of more than EUR 20 billion and a profitability of more than 10%. It reallocates part of the profits of those companies to the places where they sell their products or provide services.

Pillar Two: This applies to relatively large MNEs, ie companies generating annual revenues in excess of EUR 750 million. This will bring these enterprises under a global minimum corporation tax of 15% from the year 2023.

Significance:

  • Decades of ‘unfair competition’ will be put to an end. Notably, countries have long been competing to attract MNEs with ultra-low tax rates and exemptions.
  • Helpful in generating additional tax revenue to fight the pandemic.
  • It will help in establishing control over tax haven countries.
  • Providing equal conditions for businesses will help boost the global economy.

Base Erosion and Profit Shifting: BEPS

BEPS refers to tax planning strategies used by multinational enterprises (MNEs), which take advantage of the flaws in tax rules to avoid paying taxes. They artificially transfer their profits to places with low tax rates or tax free, where they conduct either little or negligible economic activity. As a result, they have to pay extremely low or zero overall corporation tax.

Source – The Hindu

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