25/06/21

INTERNATIONAL TAX: Global minimum tax faces ‘long and rocky path’ to implementation after G20 endorsement.

As published on scmp.com/economy, Friday 25 June, 2021.

A new global minimum corporate tax could take up to five years to come into effect if endorsed by the Group of 20 (G20), with countries such as India likely to be beneficiaries, tax consultants say.
G20 finance leaders are set to endorse a global corporate tax floor aimed at preventing multinationals from shifting profits to jurisdictions where they pay little or no tax when they meet next month, according to a draft communique reviewed by Reuters.

No tax rate was mentioned in the document, but earlier this month Group of 7 (G7) finance ministers agreed to set global minimum tax rate of at least 15 per cent.

“The initiative to set up a global minimum tax faces a long and rocky path to implementation, as it will require the agreement of sitting governments and lawmakers, including in the EU and the US,” said Swarup Gupta, industry manager at The Economist Intelligence Unit.

“However, a reform broadly along these lines is likely to take effect in the next two to five years.”
The G7 proposal needs to be agreed to by nearly 140 countries known as the Inclusive Framework at an online meeting next week hosted by the Paris-based Organisation for Economic Cooperation and Development. Details of the meeting will then be sent to G20 finance ministers and central bank governors before they gather in Venice next month.

Gupta said non-G7 members of the G20 would be “broadly favourable to the reform, although apart from China their governments and firms are unlikely to be important net tax recipients or payers”.

China, which has a nominal corporate tax rate of 25 per cent and grants a 15 per cent rate to some hi-tech companies, has not yet released an official position on the reform.
Aside from tax havens such as the Bahamas, Cayman Islands and Jersey, which had a zero tax rate, the global minimum rate would target earnings from digital goods made by technology firms, Gupta said.

The new tax plan would lift corporate tax revenues for rich countries and China, which is expected to be the second-largest recipient of increased tax revenues, Gupta added.

“The main sectoral implications remain ill-defined, but heavier taxes would likely fall on technology firms, which broadly back the measures given that they prohibit the imposition of digital service taxes (DSTs), and pharmaceutical firms, which have made few comments on the proposal,” Gupta said.

Google, Apple and Amazon are expected to pay more taxes under the G7 proposal. It could also pave the way for the removal of unilateral DSTs that some countries, such as India, currently use to tax these internet giants, said Alberto Vettoretti, managing partner at Hong Kong-based advisory Dezan Shira & Associates.

A global minimum corporate tax rate will be appealing to India, which not only has a high domestic corporate tax rate, but introduced an additional 2 per cent DST last year, Vettoretti said.

“Our stance is that the measures proposed to tax multinational corporations based on where they operate and implementing a minimum corporate tax definitely appeals to India, considering the fact that it is also a victim of profit erosion,” he said.

“India has been an active observer of OECD guidelines … which is what led it to introduce the digital tax/equalisation levy in the country. We thus expect India to support this global minimum tax given that the corporate tax rate in India is considerably high as compared to other countries or tax havens.”

Endorsing the global minimum tax rate will help India streamline its taxes, making it easier for foreign companies to do business there, Vettoretti said.

But India might also drive a hard bargain at the next G20 meeting in October, as it cannot be expected to completely roll back its DST.

The same could be said for many countries in the Asia-Pacific region, which were starting to roll out their own DSTs, Vettoretti said.