Riddle of the global minimum corporate tax rate
Senior Journalist
THE silence of India’s economic experts on the global minimum corporate tax of 15 per cent, which was agreed upon by G-7, the club of rich, industrialised countries, in the first week of June, followed by the approval of G-20 countries, which includes India, and further support for the measure from 130 other nations, is intriguing yet understandable. Even as India observed 30 years of the revolutionary economic reforms of 1991, which ended the supposedly closed socialist era since independence and opened the economy to market forces, the news from the global leaders of free market economy must have come as a dampener. One of the key arguments for reforms in India was that low taxation is a necessary incentive to attract foreign investment as well as encourage greater economic productivity.
India’s free market pundits have argued about reducing corporate tax, but corporate tax rate never fell below 21 per cent from about 40 per cent at its peak since 1991. India will not have much problem with the new global minimum corporate tax rate. But it will not be able to adopt radical — and radical in the context of taxes always means low rates — tax measures to encourage domestic industry as well as attract foreign investments. The picture would have been radically different if the argument had been for a maximum global corporate tax rate of 15 per cent. The issue is not just about tax havens with their zero tax rates. Ireland has been attracting the tech multinational giants like Apple and Microsoft with its 12.5 per cent corporate tax rate, which falls below the new minimum rate of 15 per cent. It is also about competitive tax rates as there are competitive tariffs and competitive wage rates.
The question is about multinational companies like Apple, Amazon, Alphabet (Google) moving their operations to countries with low tax rates, to avoid tax payments either in the country where they started their businesses from and where they base their corporate headquarters in the US. These corporates are also avoiding payment of taxes in countries where their goods and services are sold because they operate from a country with a lower tax rate. This has been the case with Apple doing business in European Union (EU) countries and refusing to pay taxes in these countries because it is doing so from its base in Ireland, its operational headquarters.
The US feels cheated because all the tech giants are American, and their corporate headquarters are in America. It feels that it is being cheated of its rightful share of the taxes. So, it seems to feel that if there is a uniform tax obligation, it might discourage these multinational companies from moving their operations to other countries. But tax rate alone might not be the reason for a company to look to other countries. There are other issues involved in the matter. The educational levels of the work-force as well as wage rates. The United States Treasury Secretary Janet Yellen argues that the global minimum corporate tax would help the middle class and that the companies would invest in the education of the workforce and in research and development.
The multinational corporations are likely to argue that if the tax rates are lower, they will spend more on the wage bill, which is unlikely, and more on research and development, which is likely. It is the technological edge over the competitors that will keep the giants ahead in the race. And many of the technological breakthroughs, especially in the information technology field, have happened in America because American tech giants have been spending considerable amounts on research and development. And there is the enviable scientific and technological research in the American university system which feeds into the companies.
The minimum global corporate tax rate may force tax havens like Cayman Islands to shut shop, but it may not create the level playing field in terms of low tax rates. Yellen had said after the decision that this will end the tendency to beat down the tax rates. There was a time, perhaps a quarter century ago or more, when beating down the tax rate seemed to be the way forward in building free market economies. What then has changed? If the market forces were allowed free play, then the tax rates and many other things will have their own natural levels. Why are the rich countries of G-7, led by the US, imposing this rule of minimum corporate tax? And why is it that other countries have fallen in line so quickly, and without any reservations? The only reason this has been so seems to be that governments do not want to lose taxes, their assured income, and the companies look as greedily at their profits. In the taxes versus profits tussle, governments look to ways of increasing their tax revenue, and the companies their profit margins. There is this basic difference between governments and companies. Governments have all the companies to tax. A company’s tax prospects are limited to its own enterprise.
The question that arises is: what is the minimum tax that governments can impose going by the fairness principle? Is the proposed 15 per cent minimum global corporate tax rate a fair one? Many companies may say that it is not a fair deal because it is easier for bigger companies with larger profits to part with the 15 per cent tax, and it is a burden for individual companies with smaller turnovers. Similarly, for smaller economies, the 15 per cent minimum corporate tax rate might look attractive, but it will be a great burden on the smaller companies operating inside the smaller economies.
The important question is how this consensus about the global minimum corporate tax rate was forged. How much did the G-7 rich countries arm-twist G-20 emerging economies and the rest of the lower income countries? Why is the G-7 dictating tax rates to the rest of the world?
