MNCs must pay taxes where they operate

The decision of the Group of 7 (G-7) industrialised countries, taken at a meeting in London last week, on taxation of multinational companies, including Big Tech companies, will have important consequences. It was in principle decided at the meeting to fix a floor rate of 15% for corporate taxes across the world so that there will be a uniform tax rate which will help to avoid profit-shifting and tax avoidance to a great extent. Apart from setting a global tax rate, it was also decided that countries would have the power to tax companies based on the revenues that they earn in the countries where they operate. At present, the taxes are paid in the countries where they are headquartered or registered. Countries where multinationals generate revenue would be awarded new taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable firms.

It is considered to be a landmark decision because it is for the first time that a unified tax rate is proposed across the world. The global tax regime will undergo a big change if it is accepted. At present, most countries do not benefit much by way of tax from the operations of multi-national companies in their jurisdictions. Their profits are mostly parked in tax havens, though the countries of their origin get some revenues through taxes. The idea of taxing them in individual countries has been discussed for long and the Covid distress has given a boost to the idea. The European Union (EU) countries had campaigned for it, but the Trump administration had rejected it. The Biden administration has accepted the proposal. The plan for a global rate can capture up to 8,000 companies and it is estimated that at least $81 billion can be raised in fresh taxes every year under the plan.

There is a long way to go for the principle to become practice. It will now have to be discussed and decided by the Group of 20 (G-20) countries and later by 140 countries of the Organisation for Economic Cooperation and Development (OECD). India is expected to gain from the new plan as it is estimated to be losing up to $10 billion every year because of tax manipulations by MNCs. But it may also have to consider negatives, like a possible dilution of the sovereign right to tax and compromising on the freedom to give tax incentives to companies to attract investments. Even if the proposal moves forward, it will take a long time for it to be accepted and then to become a reality because creating a global tax system and its rules and regulations is an extremely difficult and complex task.