Explained | How would the G-7 global minimum tax affect companies in India

The world's richest countries signed a landmark agreement Saturday committing them to confront corporate tax avoidance and making sure that giant tech companies pay their fair share, Britain's treasury chief said. India, however, was not a part of the G-7 discussion.

The G-7 countries at the meeting also agreed to ratify a global minimum corporate tax rate which would negate the possibility of countries attracting investments by cutting tax rates.

What is the new global minimum tax?

The G-7 ministers agreed in principle to a global minimum tax rate of 15 per cent for multinational companies in each country they operate in.

The global minimum tax rate would apply to overseas profits.

Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could "top-up" their taxes to the minimum rate, eliminating the advantage of shifting profits.

Why is this tax being brought about?

Nations have been grappling with the question of how to deter companies from legally avoiding tax by resorting to tax havens — typically small countries that entice companies with low or zero taxes, even though the firms do little actual business there. They've also been trying to solve the related problem of taxing internet-based companies doing business in countries where they have no physical presence and thus pay little or no tax.

How does this affect India?

Since the minimum tax of 15% is aimed at corporates that operate and show profits in zero or low-tax countries, India or companies operating in India will not be affected in a major way. Though Finance Minister Nirmala Sitharaman in September 2019 announced a cut in corporate taxes to 22% for domestic companies and 15% for newly incorporated manufacturing companies, the tax rate is equal to or higher than the global minimum tax. The cut in taxes brought India's corporate tax on par with the Asian average.

Hence, foreign companies operating in India will not be affected as these companies are already paying taxes as expected by the G-7 countries and do not experience major benefits by showing profits in India.

(With inputs from agencies)

Check out DH latest videos: