How Yellen’s call for corporate tax hike affects India

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Treasury secretary Janet Yellen has called on other countries to join the US in setting a global minimum tax for companies. Will global corporate tax rates inch up in the months ahead after years of decline? What are the implications for India? Mint explains.

Why did Yellen call for a review of tax rates?

The US and many other advanced countries have spent trillions of dollars in covid relief over the past year. The US also intends to spend an additional $2 trillion through President Joe Biden’s infrastructure plan that is aimed at boosting economic recovery. Additional resources are expected to be mopped up via a proposed hike in corporate taxes. But if the US hikes rates in isolation, it offers an incentive for companies to relocate. Hence, Yellen is calling for a global coalition—particularly because public debt is likely to be a shared area of concern in most major economies for many years to come.

What are the odds of it turning into reality?

The European Union (EU) has been vocal about the strategies pursued by multinational firms which result in profit flight to subsidiaries that are located in countries with lower tax rates (known as ‘tax avoidance’). For the most part, the US had refused to wade into this discussion. The pandemic seems to have brought the countries on the opposing ends of the Atlantic Ocean together. It is also significant that Yellen’s appeal comes on the eve of the spring meeting of the IMF and the World Bank. The US is also pushing for a multilateral agreement on digital taxation at the OECD by the summer.

The global picture

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The global picture

Where does India stand in the global picture context?

The Tax Justice Network estimates that India loses about $10.3 billion in tax revenue each year due to tax avoidance by businesses. It also loses at least $202 million a year due to tax evasion by individuals who siphon funds out of the country. Political and popular anger has squarely focused on the latter. Business practices still don’t attract public scrutiny.

What are India’s tax trouble spots?

The country’s effective corporate tax rate is middling — neither too high nor too low — compared to other countries. But, there are several countries in the neighbourhood, particularly Singapore and Mauritius, whose tax rates are even lower. Mauritius was a favoured channel for funnelling foreign direct investment (FDI) into India via shell companies till 2017. A subsequent amendment in the bilateral tax treaty closed a loophole that has been exploited for over two decades.

Should India also join a global tax coalition?

In a globalised world, it is easy to register a firm or disclose profits in another jurisdiction. Apple Inc., for instance, has been in the middle of a running feud with the EU over its tax liability in Ireland, a country where tax rates are kept low to attract businesses. India’s new economy startups have also increasingly started to register in Singapore. As these startups turn profitable, troubling questions about taxes — along the lines of what is happening with the likes of Amazon and Google in the US — will inevitably come to India too.

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