The global minimum tax: A great beginning despite inbuilt biases

towards a global minimum tax rate
The global minimum tax will affect less than 10,000 large companies, but the 15% tax could raise an additional $150 billion for national governments.

A global minimum tax: The leaders of G20 nations on Saturday backed a historic global deal to tax multinational companies at a minimum rate of 15%. The gathered finance ministers also urged hold-out countries to sign up. Earlier last month at an OECD Summit, 131 nations had agreed on tax reforms that would eliminate zero tax status for aggressive tax planners.

This latest G20 endorsement will ensure that it becomes a reality following years of negotiations. The new tax architecture is expected to kick in by 2023. The two endorsed pillars are: Reallocation of profits of multinational enterprises following the BEPS principles and effective global minimum tax of 15%. The finance ministers of the 20 largest economies — Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the US, UK, and EU – had in July agreed on a 15% tax rate. The historic decision was ratified by the summit on Saturday.

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Big tech, MNCs under tax net

Digital giants such as Google, Apple, Tencent, Alibaba and Microsoft will now pay their fair share of taxes in all the jurisdictions in which they operate. The famous Google tax and India’s equalisation levy will be subsumed in the Global Minimum Tax over time. As regulations around transfer pricing and double tax avoidance also converge following the OECD’s extensive efforts, the world will see the emergence of a fairer, less complex and transparent tax mechanism that will raise the tax to GDP ratio of the world to an extent that will enable climate change to become affordable.

Also, the collaborative spirit that information exchange fosters will be a positive force that will finally deter tax evasion and will bring aggressive tax havens to the mainstream. A simpler, more digital and automatically computed tax obligation will likely follow in 3-5 years and beyond that, expensive tax litigation will reduce.

The global minimum tax will affect less than 10,000 large companies, but the 15% tax could raise an additional $150 billion for national governments. Also, countries that have turned into mere markets for global products and services will accrue taxes on profits made in their territories. Multinationals operate in many countries — Oil giant BP operates in 85 countries, but pays income taxes on profits in tax havens cherry-picked for their low tax rates. Perhaps the Covid-19 pandemic provided the thrust on changing attitudes and drove towards more fairness.

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Towards a global minimum tax

The path to full realisation of these agreed tax transformations is by no means short or easy. Massive pushbacks will emerge and the level of litigation will go up temporarily, but the new direction is visible. We will now see an accelerated thrust on domestic tax legislation, on portalisation of tax compliance by multinationals and a pivot to digital tax services.

Filers and compilers will gain a new found ascendancy over tax planners and minimisers. The balance of power will shift to compliance as boards all over the world get behind this new direction. The entire gamut of service offered will transform and shift to the digitally enhanced providers. Also, the tracking of flows through global systems will make tax avoidance and evasion get early detected and so pursued with a vigour backed by data.

There are apprehensions that the new global corporate tax regime will continue to carry the inequalities of the existing system. Some countries are expected to benefit more from the new tax than others. According to an estimate, the US revenue gains from the global minimum tax will be 15 times that of China. The gains of 52 developing countries would be in the region of $1.5-2 billion a year, just a small fraction of the gains of the rich nations. But even sceptics would agree this is the beginning of a fairer tax regime.

A new tax world is emerging. An early pivot to compliance supported by enlightened boards will drive competitive advantage. Embrace lower litigation, simplicity and compliance and the tax world will welcome you as its new citizen.

(Shailesh Haribhakti is a renowned chartered accountant and corporate leader based in Mumbai.)

Shailesh Haribhakti

Shailesh Haribhakti is a Chartered and Cost Accountant, an internal auditor and a certified financial planner. He is a board chairman, audit committee chair and independent director at some of the country's most preeminent organisations. He is a thought leader on the Indian economy and public policy.