Efforts for a minimum overall tax rate

Lubna Kably | TNN

Grace Pérez-Navarro, deputy director, Center of Tax Policy and Administration at the Organisation for Economic Cooperation and Development ( OECD ), spoke to TOI on the sidelines of a recently held conference, organised by the Foundation for International Tax ation and the International Bureau of Fiscal Documentation. India is part of the Inclusive Framework (a group of 135 countries) working towards a unified approach for a two-part package of proposals. “Pillar 1” is aimed at enabling countries where significant customers reside, to tax highly digitalised large multinational enterprises (MNEs) — such as Google or Facebook. “Pillar 2”, the topic of this interview, proposes a global effective minimum tax rate on all income earned by MNEs. OECD It is making it easier for countries to reach a consensus. Excerpts from the interview (with explanatory notes from TOI):

Why is there a need for GloBE (Global Anti-Base Erosion Proposal)?

Pérez-Navarro: Initially, we were looking for solutions to the fiscal challenges arising from the digital economy and received a series of proposals from countries, including the Franco-German joint proposal (now known as Pillar 2). Part of the reason they made this proposal was because it was a broad way to deal with digitalization, but it was also a way to deal with the remaining problems of Base Erosion and Profit Sharing (BEPS) that existed, as due to that countries had low tax rates We knew, and they knew that the US UU. They will not accept a digital only solution because it would be perceived as an objective for American companies. Pillar 2 was inspired by the GILTI regime in the USA. UU. The Franco-German joint proposal aims to ensure that all MNEs pay a minimum level of taxes.

(TOI’s notes: Countries often adopt low tax rates to attract investments. India recently introduced a low rate of 15% for manufacturing companies incorporated on or after October 1, 2019 that commence operations before March 31, 2023. To counter ill-effects, as MNEs can shift profits to countries where the tax rate is nil or very low, OECD is facilitating a unified approach where countries will agree to a global effective minimum tax rate on all income, with a mechanism for ‘tax back’ by another country, if this minimum rate is not adhered to. Pillar 2 is also termed as Global Anti-Base Erosion Proposal (GloBE) and has four components. Two key ones are the inclusion rule and the under-taxed payments rule. Under the former, if a MNE operates abroad, through a branch or a controlled entity and the tax rate in this country (country B) is below the global minimum rate, then the country where the parent is based can recover the difference (known as tax back). The under-taxed payment rules will deny deductions for payments or impose a withholding tax for payment to a related party, if the recipient is not subject to the minimum effective tax rate. To explain, Global Intangible Low Tax ed Income (GILTI) is the income earned by foreign affiliates of US companies from intangible assets like patents, trademarks, etc. It was introduced to deter companies from using intangibles to take profits out of the US and is subject to a worldwide minimum tax of between 10.5 to 13.125%)

The French finance minister recently mentioned that 12.5% ​​seems to be a good starting point for a minimum corporate tax rate. Your point of view?

Pérez-Navarro: Well, we haven't started discussing this in the Inclusive Framework yet. Certainly, the rate suggested by the French finance minister seems to be within the range. Many people think of 12.5%, because that is the Irish corporate tax rate. Even if you look at GILTI, this rate is at the baseball stadium. Countries will have to weigh how long they will take, what does that do in terms of behavioral changes not only for companies but also for those countries that have very low or zero tax rates. If it is too low, then will these countries decide? Allow us also a piece of this cake and promulgate a rate that is at this level? The Inclusive Framework will have to consider several aspects when discussing this rate.

Do countries risk losing their fiscal sovereignty?

Perez-Navarro: The OECD is not dictating a global minimum tax rate. It is the Inclusive Framework — the 135 members who will decide. Pillar 2 is really a protection of a country’s tax base, so if a country doesn’t want to protect its tax base, should other countries care? (*Shrugs*). In Pillar 2, you don’t need all countries to implement it, in order for it to be effective — this I think is a big difference. But on Pillar 1, you do need everybody, because you are talking of a different way of determining profits for MNEs and allocating profits between countries.

Will the global combination, which allows companies to set high tax rates against low tax rates, harm the entire objective?

Pérez-Navarro: The Inclusive Framework has not yet made a decision. There is an obvious risk that the more you mix different countries, the more you will have to dilute the expected effect of Pillar 2. I think that at this stage most countries would prefer a jurisdictional approach rather than a global approach. . In January, the Inclusive Framework will discuss several key issues that still need to be addressed. By the end of 2020, it is the architecture solution that we need to finalize. People are thinking of an independent multilateral agreement for implementation, since countries that do not have tax treaties must also be included.

(TOI Notes: Because the GloBE proposal is based on an effective tax rate test, it must include rules that stipulate the extent to which the MNE can mix low and high taxes. Under a global combination approach, an MNE would be required to pay an average minimum tax rate on all its foreign income, while under an entity approach, an EMN will pay taxes at the minimum or higher rate with respect to each group entity.Finally, under a jurisdictional approach, the EMN pays taxes to above the minimum rate in each foreign jurisdiction where it operates).

For a complete interview, go to www.timesofindia.com