A new global tax deal is in the offing if one goes by the proposal of the G7 leaders in mid-June and the follow-up approval of 130 countries under the Organisation for Economic Cooperation and Development (OECD). Yet, a crucial piece of the puzzle will be found at the gathering of the Finance Ministers and Central Bank Governors of the G20 economies in Venice next week.
Response beyond the G7
Of course, expecting a uniform response across the board is easier said than done. It is too early to predict all outcomes. Yet, some issues are obvious.
Many developing economies use lower tax rates as a tool to push policies that suit them – this new global tax deal may kill that fatted calf. Also, some countries like India use legitimate tax incentives and tax breaks for specific purposes such as facilitating investments in export industries, backward areas, special economic zones, green companies, or promotion of research and development and accelerated depreciation.
Besides, it has to be borne in mind that the tax reforms may not apply to small and medium-sized enterprises (SMEs) as they fall beneath the expected threshold.
| Top economies | Effective Tax Rate (%) |
| United States | 21 |
| Euro Area* | 22.7 |
| China | 25 |
| Japan** | 30.62 |
| Germany | 30 |
| United Kingdom | 19 |
| France | 26.5 |
| India | 25.17 |
| Italy | 24 |
| Brazil | 34 |
| Canada | 26.5 |
| South Korea | 25 |
| Russia | 20 |
| Singapore | 17 |
| Australia | 30 |
| Mexico | 30 |
| Indonesia | 22 |
| South Africa | 28 |
| Netherlands | 25 |
| Switzerland | 14.93 |
| Saudi Arabia | 20 |
* An average of the corporate income tax rate
** The highest corporate tax rate for companies with taxable income above 8 million JPY a year based in Tokyo. Source: Tradingeconomics.com
With the US already on board, China is not likely to have severe objections. However, its tense relationship with the US could be a deterrent in negotiations on a global tax deal. An area of concern for Beijing would be the impact of such a tax stipulation on Hong Kong — the 7th largest tax haven in the world and the largest in Asia.
Since France and Germany were already in the can for the initially proposed 21 per cent rate, they should be good with the latest version too.
For the countries which act as tax havens due to their low tax rates, the choice is equally hard and a no-brainer. In the last few years, especially after the Base Erosion Profit Shifting (BEPS) initiative from the OECD, there is increasingly more data on the outcomes of this profit shifting. For instance, the Tax Justice Network found that in the midst of the Covid-19 pandemic, the worst-hit countries had lost heavily to the tax havens and their enablers.
Based on data from US firms, it is found that these firms shifted billions in profits into the Dutch tax haven each year ($44 billion in 2017) instead of declaring profits in the EU countries where they were generated. The Dutch corporate tax rates in practice can often be under 5 per cent.
A study in 2017, found that the Netherlands was part of a small group of countries which channel the majority of the global corporate offshore investment to and from the havens. These ‘conduit’ offshore financial centres includes the United Kingdom, Ireland, Singapore and Switzerland.
In the world after Covid-19, these OFCs may just have to swallow the changes as and when they become operational. And many of them indicated precisely that lending their nod to the G7 tax deal.
It is, therefore, no surprise that the United Arab Emirates and neighbouring GCC countries are expected to introduce corporate tax regimes in the near term.
The first G7 proposal puts pressure on many GCC countries to broaden their tax bases by introducing corporate income taxes. If the Middle East and North Africa (MENA) jurisdictions do not introduce a minimum level of taxation, tax collections will flow to other jurisdictions.
Similarly, the new proposal will essentially neutralize any tax advantage that a multinational corporation may derive from Singapore which is seen as a structured doorway into South Asia/Asia. They will be weighing the impact of the global minimum tax against the effectiveness and benefit of operating from regional HQ Singapore. Though Singapore pegs its corporate tax rate at 17%, the effective rate may be much lower due to incentives.
What about India?
India, in September 2019, announced a sharp cut in corporate taxes for domestic companies to 22% (effective tax rate ~ 25.17%) and for new domestic manufacturing companies to 15% (effectively around 17% though the headline number just about meets the new proposed threshold).
Hence, India will perhaps have no quibble with the first part of the G7 proposal, and may actually benefit from it. The second half of the proposal will need to be carefully evaluated mainly due to the already existing equalisation levy introduced by India in 2016.
Like some other economies, India started taxing digital MNCs based on their revenues, and not profits through this levy. In addition, the IT Act was amended to bring in the concept of significant economic presence for establishing a business connection in the case of non-residents in India. The silver lining here – in the interim, there is likely to be no/little argument on India’s proactive levy, specially from the US.
The introduction of global tax rules may lead to some IT companies such as TCS paying more in other jurisdictions, though others such as Infosys may remain unaffected. Some business houses such as Bharti Group may lose its current tax benefits.
In conclusion, the agreement is a significant moment and it is off to a flying start. Nevertheless, it is only a deal between the seven most ‘la-di-dah’ economies. One swallow, or in this case, seven swallows do not a summer make.
The intermediate milestones include a G20 sign-off and then a nod by the 139 countries under the OECD Inclusive Framework. It is unlikely to end up in smoke given the current global political thinking. However, a global tax deal is nowhere near close to sealed and the fine print may take years to negotiate and execute.
For now, all eyes are on the G20 financial ministers and central bank governors who will huddle together for more conversations and negotiations in Venice on July 9-10.
Read also: Proposed G7 tax deal sets the agenda for reform, expect pushback though
Pankaj Vasani is a seasoned business leader, finance expert, and board member with over two decades of experience in senior executive roles and as a board & audit committee member. Over the years, he has donned various hats – Group CFO, Finance Head, CEO, Tax/Legal/Compliance Head, and Board of Directors. He has held leadership roles with Vodafone, Publicis, Coca-Cola, & Subros. By education, he is a Chartered Accountant (England & Wales), Chartered Accountant (India), Certified Public Accountant (Australia) & Lawyer (Delhi Univ., India).
