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Global minimum tax may impact India's special rate on manufacturing firms

Global minimum corporate tax: There is a lot of buzz around the global minimum tax, with the United States, which has been pressing hard for its imposition, finding support from IMF and some advanced countries. However, the tax may have repercussions for developing countries such as India, based on the rate agreed.

The tax is part of Pillar-2 of the Base Erosion and Profit Sharing (BEPS) framework of The Organisation for Economic Co-operation and Development (OECD). Of all discussions in the BEPS framework, the main interest of the US lies in Pillar-2, as it aligns with the recently unveiled Made-in-America tax plan by the Biden administration.

Under this plan, the US has proposed to raise the corporation tax rate to 28 per cent from 21 per cent and global intangible low taxed income (GILTI) tax to 21 per cent from 10.5 per cent. With this, it aims to raise an additional $2 trillion in tax revenue over the next 15 years in order to fund the massive expenditure sanctioned for Covid and infrastructure.

According to estimates, the increase in corporation tax rate by the US to 28 per cent would take the effective tax rate up to 32.34 per cent, accounting for state and local taxes, the highest tax rate in  the OECD.

The GILTI regime in the US currently imposes tax on US corporate shareholders of “controlled foreign companies,” based on the company’s active income in excess of a threshold. The new GILTI tax structure will ensure that US multinationals would be taxed at a significantly higher rate, making offshore investments less attractive.

"They (US) want a global minimum tax that ties up with their domestic tax policy to prevent flight of capital and investment. A higher tax rate in the US will make it unattractive for investors, who will prefer destinations with a lower tax rate” said Akhilesh Ranjan, former member,  Central Board of Direct Taxes and currently Adviser to PwC.  

Ranjan pointed out that while the US is pressing for a much higher global minimum tax rate of 21 per cent, discussions at the OECD so far were in the range of 10.5-12 per cent.

“That may be an area of concern for a lot of developing countries that have brought the rate down below that. India also has a lower rate for some companies. Countries like Vietnam and the Philippines also have a lower rate. Their expectation is that all countries will increase their rate. That has to be seen, how far, other countries will accommodate that,” said Ranjan, who was also India's chief negotiator at OECD BEPS.

He added that all countries with lower tax rates may lose their competitive edge if they are required to raise tax rates to attain the minimum level.

“In case India also has to increase the 'special' corporation tax rate up to 21 per cent, then we will also lose out in terms of competitiveness to some extent. However, our tax rates are not too low and the normal rate is 25 per cent. The lower rate applies only for new companies commencing production in a  given timeframe,” he said.

India had in September 2019 cut corporation tax rates for manufacturing units that are set up on or after October 1 and which start production before March 31, 2023, to 15 per cent. With cess and surcharges it comes to 17.01 per cent.

Amit Maheshwari, partner, AKM Global, a tax and consulting firm, said there is a good chance that the global minimum tax would be accepted due to the sheer economic clout of the US and the move is welcome. "However, the idea that after the global minimum tax, countries should not compete on taxes but on infrastructure and other facilities to attract investments as being proposed by the US may not be fair to all. Many countries, especially the developing ones, use tax as an instrument to attract investments," he said.

To buttress his point, he said India's incentive to tax manufacturing companies at 15 per cent could be nullified if the US goes ahead with the minimum tax.

Maheshwari pointed out that not all countries can compete with developed nations like the US on innovation, infrastructure and other attributes.

"One problem could be that countries can artificially keep the headline tax rate higher than the minimum tax but give substantial breaks, credits to reduce the effective tax rate. This will of course reduce the incentive to shift profits to tax havens," he said.

The US proposal has found support from countries such as France, Germany and multilateral institutions such as the International Monetary Fund.

IMF chief economist Gita Gopinath recently said current disparities in national corporate tax rates had triggered "a large amount" of tax shifting and avoidance, reducing the tax base on which governments could collect revenues to fund needed economic and social spending.

In response to a query over this, Nangia Andersen LLP, a consultancy firm, said while countries such as France and Germany have extended their support to this tax, others such as India that have cut corporation tax rates to attract MNCs would come under pressure to raise taxes.

"It is believed that it is easier said than done as it will be like asking countries to give up their competitive edge," the consultancy firm said.

It said since the discussions on the issue are at a nascent stage, it is not clear whether countries would agree to the proposal, how would the reporting be done, what would be the taxable income and how would the provisions be enforced.

Ajay Rotti, partner, Dhruva Advisors LLP, said India isn't one of the countries with a low headline corporation tax rate. "So, this shouldn't have a major impact on the tax rates in India. It could impact MNCs that are having significant profits in low-tax countries," he said. "If the minimum rate is fixed above 25 per cent, then profits in countries with lower tax rates will be impacted and the effective rate on the MNC will go up." 

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