What is the global minimum tax rate? The Organization for Economic Co-operation and Development (OECD) finalized a landmark agreement to subject multinational enterprises (MNEs) to a minimum of 15% tax from 2023. A total of 136 countries, including India, have agreed to join the historic agreement.
The deal aims to stop large firms from booking profits in low-tax nations regardless of where their clients are, an issue that has become ever more pressing with the growth of ‘Big Tech’ giants that can easily do business across borders.
What has happened?
A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 360 countries, the organization for economic cooperation and development said.
The OECD said 4 countries – Kenya, Nigeria, Pakistan, and Sri Lanka had not joined yet the agreement, but that the countries behind the Accord together accounted for over 90% of the global economy.
Why global minimum tax?
With budget strained after the CoVID-19 crisis, many governments more than ever discourage multinationals from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions,
Allowing companies to avoid paying taxes in their additional home countries. the minimum tax other provisions aim to put an end to a decade of tax competition between governments to attract foreign investment.
How will it work?
The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million ) in sales globally.
The government could still set whatever Local corporate tax rate they want, but if companies pay lower rates in a particular country, their home government could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
A second track of the overhaul would allow countries where revenues are earned, to tax up 25% of the largest multinationals’ so-called excess profits – defined as profit in excess of 10% revenue.
The OECD which has steered the negotiation estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
Taxing rights on more than 125 billion of profit will be additionally shifted to the countries where they are earned from the low tax countries where they are currently booked.
Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
However, various deductions and exceptions baked into the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups base their European operations.
7 thoughts on “136 Nations Including India Agree to a Minimum Global Tax Rate of 15%”
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