G-7 tax deal and its impact on India

G-7 tax deal and its impact on India

Introduction

The G-7 is a group of seven countries including the USA, the UK, Canada, France, Germany, Japan and Italy. This is an informal group without any legal backing; however, the fact that these countries account to approximately 40% of the Global GDP and 10% of the world population, their say in any matter becomes weighty.

In a recent meet of the Finance Ministers of these G-7 countries, held in London, the following key decisions have been taken:

  1. The MNCs to be taxed in countries where they generate revenue rather than where they are located. As a result, the MNCs will be taxed in the country of operation.
  2. A global minimum corporate tax rate has been decided at 15% to avoid countries destabilizing other economies.

The above two decisions -referred as the two-pillar strategy, will be further deliberated in the G-20 meeting which is to be held in the month of July 2021.

The large MNCs who have their headquarters in countries with lower tax rates will be affected by the first decision. This is because irrespective of their location or headquarters, they will be taxed in countries from where they generate revenue. The proposal requires the MNCs with at least 10% profit margin to pay tax in countries where they operate and not where they are situated. Further, 20% of profit over and above the 10% profit margin of such MNCs would be reallocated and offered to tax in countries where their operations exist. Therefore, the concept of tax havens established by smaller countries to attract foreign investment may undergo a change. Currently, countries like Ireland, Cyprus, etc., which have low corporate tax rates remain favorite destinations for large corporates to establish their headquarters. Due to this fact, the G-7 decision could be opposed at the G-20 meet.

Further, the proposal to reduce the global tax rate to 15% was initially recommended by the USA in April 2021. This proposal is said to be a step towards checking the practice of MNCs being established in low-tax rate countries. Therefore, both the pillars can be said to be in sync with each other as they aim towards a common objective. This is also said to be a fallout of the Biden’s Government’s tax proposal of increasing the US corporate tax rate.

A projection by the UK’s Tax Justice Network suggests that if the minimum corporate tax rate is fixed at 15%, the G-7 countries could gain $168bn by way of corporate tax income.

How will G-7 tax deal impact India?

Out of the two pillars stated above, India would not be impacted by the first one as India is not a part of the low tax rate countries; however, for the second pillar, India needs to figure out whether the decision will act in its favor or not.

India in 2019 had reduced its corporate tax rate from 30% to 22% in 2019 for companies that do not avail exemptions. Further, for new manufacturing companies, the corporate tax rate was reduced from 25% to 15%. Therefore, India seems to be in line with the global tax rate proposed. However, the tax rate proposal seems to be targeting the e-Commerce operators; India levies equalization levy on such transactions. Therefore, the country derives revenue in a form other than the corporate tax as well. Hence, the country may or may not support the two-pillar strategy of G-7, depending on the detailed modalities. 

Way forward

The proposal will only fly through once the G-20 approves it in its meeting scheduled in July 2021. However, it may not be easy to get a consensus on the issue from the G-20 countries. Especially due to the pandemic, the countries with low tax rates may not agree to forego their current income derived from MNCs. Further, the decision may create chaos for the MNCs which may get affected by this.

Considering the stakes involved, the issue may not conclude soon and we may have to wait longer to see the ‘equitable solution’.

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