In July 2016, during a joint press conference former President of the USA, Barack Obama said
“Globalization is a fact – because of technology, because of the integrated global supply chain, because of changes in transportation and we are not going to be able to build a wall around that.”
In the last few decades, globalization has become an integrated part of almost every nation in the world. India which opted for huge reforms i.e., liberalization, privatization, and globalization (LPG) in 1991 has made it one of the fastest-growing economies in the world. Today people of India actively engage with the goods and services of foreign brands like Google, Apple, Microsoft, Nike, Hyundai, Samsung, McDonald’s, Dominos, etc… This engagement is a product of globalization.
But globalization has also led to inequality where the rich are becoming richer. Forbes’ 2021 World’s Billionaires list shows Elon Musk has become more than 500% richer than he was a year ago and this is just one individual, there are many like Jeff Bezos, Mukesh Ambani, etc… All this happened when the world was in the grasp of the Covid-19 pandemic where people were struggling for basic needs like food, shelter, transportation, medical facilities, etc…
In such a scenario, it is the duty and obligation of the state to introduce instruments to tackle such inequality or in general darker side of capitalism. The global minimum corporate tax which is proposed by the US is one of such tools. Slashing the tax rate, to lure the benefits of capitalism, has been a very prevalent practice in the last 3 decades. Nations are competing to attract big MNCs especially developing countries like India because these corporations bring with them technology, growth, and development, employment, investment, etc…
Recently, the US Treasury secretary has urged the world’s 20 advanced nations to move towards Global minimum corporate tax. The aim of minimum corporate tax is to deal with which tax havens such as Ireland, British Virgin island, Panama, etc… The US has proposed a 21% minimum corporate tax rate, coupled with canceling exemption on income from countries that do not legislate a minimum tax to discourage the shifting of multinational operations and profits overseas.
Multinational companies with increasing intangible assets such as global tech firms have shifted some actual business and a lot of profits into these tax havens and low tax jurisdiction, lowering their tax bills. This proposal has come at a time when the world is grappled with the covid-19 pandemic and governments need funds to develop health infrastructure, run free vaccination drives, give support to MSMEs, unemployment allowances, etc… European nations, including Germany and France, have backed the proposal but nations like Netherland, Ireland, Luxembourg, and some Caribbean rely largely on tax rate arbitrage to attract MNCs.
Even though the minimum global tax is backed by many prominent nations, it will be very challenging to implement it. Firstly, taxation is ultimately a sovereign function and depending upon the needs and circumstances of the nation according to which it formulates tax policy. So, there is a question of sovereignty. Secondly, taxation is one of the biggest tools for any nation for growth and development especially for poor and developing nations who can’t afford to lose economic benefits generated by MNCs. So, not all countries can afford what developed countries can. Thirdly, countries can artificially keep headline tax rate higher than minimum tax but give substantial breaks, credits to reduce the effective tax rate.
India has also long faced threats from tax havens like Singapore. India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion (figure globally is $427 billion). The Indian government is openly engaging in discussion around the minimum global corporate tax on US proposal. But pros and cons should be analyzed before taking the final stand.