Global minimum tax

Recently, the Organisation for Economic Cooperation and Development (OECD) has announced that a global deal to ensure big companies pay a Global Minimum Tax (GMT) rate of 15% has been agreed by 136 countries (including India). The countries behind the accord together accounted for over 90% of the global economy.

Need for GMT:

• Mobilising Financial Resources: With budgets strained after the Covid-19 crisis, many governments want more than ever to discourage multinationals from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
• Stopping Financial Diversion to Tax Havens: Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to Tax Havens, allowing companies to avoid paying higher taxes in their traditional home countries.

What is Global Minimum Tax?

The global minimum tax rate would apply to overseas profits of multinational firms with $868 million in sales globally.it provide ‘Two pillar solution’

Pillar 1 (Minimum tax and subject to tax rules): Governments could still set whatever local corporate tax rate they want, but 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.

Pillar 2 (Reallocation of additional share of profit to the market jurisdictions): Allows countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.

The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023.