The new bare minimum

The newly agreed global minimum corporate tax to prevent ultinational firms from avoiding the legal cess regime is riddled ith clauses to ensure that profits stay with the rich nations

- RICHARD MAHAPATRA NEW DELHI

ON OCTOBER 31, the heads of the world’s major econo-mies—the Group of 20 (G20) nations—approved a new global minimum corporate tax. The deal, announced at the G20 summit in Rome, Italy, is “historic” since this is the first time nearly all nations have agreed to such a system. Earlier, on October 8, some 136 countries had endorsed the new regime.

The deal has two aims: first, to prevent multinationals from paying low taxes (or no tax) by booking their profits in tax havens; and second, to make them pay taxes wherever they operate or conduct business in, even if they do not have physical presence in the country.

Under this deal, there are two “pillars” of taxation on corporations. Under Pillar-1, which is estimated to affect the world's top 100 companies, governments would levy tax on profit margins of above 10 per cent, while under Pillar-2, there would be a global minimum tax rate of 15 per cent (see 'Global tax regime' on p17).

Pillar-1 provisions empower countries to tax companies where they earn their revenue. Under this, companies’ excess profit—defined as in excess of 10 per cent of total revenue—will be taxed at 25 per cent.

Pillar-2 will be applicable to overseas profits of multinational firms with €750 million (US $866 million) in sales globally. Governments have the power to impose any local corporate tax, and if a company pays less than 15 per cent tax, its home country can levy a tax to bring it to the minimum rate.