Global minimum tax may hurt Make in India push

US’ proposal has found support from France and Germany, as well as the IMF

The US’ proposal to impose a global minimum tax on large companies, which has found support from the IMF and a few advanced countries, may hurt India's massive manufacturing push, if the rate agreed upon is higher than what the country offers, say experts.

However, such a tax may have repercussions for developing countries such as India, depending on the rate agreed.

Tax is part of the Pillar 2 of the base erosion and profit sharing (BEPS) framework of the Organisation for Economic Cooperation and Development (OECD).

Of all discussions in the BEPS framework, the US' main interest lies in Pillar 2 as it aligns with the recently-unveiled Made in America tax plan by the Biden administration.

Under this plan, the US has proposed to raise the corporation tax rate to 28 per cent from 21 per cent and global intangible low taxed income (GILTI) tax to 21 per cent from 10.5 per cent.

With this, it aims to raise an additional $2 trillion in tax revenue over the next 15 years in order to fund massive expenditure sanctioned for Covid and infrastructure.

According to estimates, the increase in corporation tax rate by the US to 28 per cent would take the effective rate to 32.34 per cent, the highest in the OECD.

The GILTI regime in the US currently imposes tax on American corporate shareholders of “controlled foreign companies,” based on the company’s active income in excess of a threshold.

The new GILTI tax structure will ensure that US multinationals would be taxed at a significantly higher rate, making offshore investments less attractive.

“It (US) wants a global minimum tax that ties up with its domestic tax policy to prevent flight of capital and investment. A higher tax rate in the US will make it unattractive for investors, who will prefer destinations with a lower tax rate,” said Akhilesh Ranjan, former member, Central Board of Direct Taxes and currently Adviser to PWC.

Ranjan pointed out that while the US is pressing for a much higher global minimum tax rate of 21 per cent, discussions at the OECD so far were in the range of 10.5 per cent-12 per cent.

“That may be an area of concern for a lot of developing countries that have brought the rate below that. India also has a lower rate for some companies. Countries like Vietnam and the Philippines also have a lower rate. The expectation is that all countries will increase their rates. It is to be seen how far other countries accommodate that,” said Ranjan, who was also India’s chief negotiator at OECD BEPS.

He added that all countries with lower tax rates may lose their competitive edge if they need to raise tax rates to attain the minimum level.

“In case India also has to increase the ‘special’ corporation tax rate up to 21 per cent, then we will also lose out in terms of competitiveness to some extent. However, our tax rates are not too low and the normal rate is 25 per cent. The lower rate applies only to new companies commencing production in a given timeframe,” he said.

India had, in September 2019, cut corporation tax rates for manufacturing units that are set up on or after October 1 and which start production before March 31, 2023, to 15 per cent. With cess and surcharges it comes to 17.01 per cent.

Amit Maheshwari, partner at AKM Global, a tax and consulting firm, said there could be a good chance that the global minimum tax could be accepted due to the sheer economic clout of the US.

“However, the idea that after the global minimum tax, countries should not compete on taxes but on infrastructure and other facilities to attract investments — as being proposed by the US — may not be fair to all. Many countries, especially developing nations, use tax as an instrument to attract investments,” he said.

To buttress his point, he said India’s incentive to tax manufacturing companies at 15 per cent could be nullified if the US goes ahead with the minimum tax plan.

The US proposal has found support from countries such as France, and Germany as well as multilateral institutions such as the International Monetary Fund.

IMF chief economist Gita Gopinath recently said current disparities in national corporation tax rates had triggered “a large amount” of tax shifting and tax avoidance. This reduced the tax base on which governments could collect revenues to fund economic and social spending.

In reply to a query over this, Nangia Andersen LLP, a consultancy firm, said while countries such as France and Germany have extended their support to this tax, others such as India, which cut corporation tax rates to attract MNCS, would come under pressure to raise taxes.

“It is easier said than done as it will be like asking countries to give up their competitive edge,” the consultancy firm said.