Over the last two years, OECD and G20 leaders have been drafting a new Global Tax Deal to reform the taxation of Multi-National Enterprises (MNEs). Regarded as the most crucial tax reform in decades, the Global Tax Deal provides two pillar solutions to the existing tax rule issues. Pillar One applies to re-allocate part of the profit of the biggest MNEs to their ‘market jurisdictions’ (i.e., countries where their consumer are). Pillar Two subjects a much larger group of MNEs to a global minimum corporate tax. Thus, even if the MNEs are operational in low-tax jurisdictions, they must adhere to the minimum tax rate of 15% on their profits.
Though the global tax deal is welcomed for addressing tax avoidance, coherent international tax rules, and addressing taxation challenges in a digital economy, it is also keeping a blindfold to the concerns raised by Global South. Concerns expressed around developed countries capturing “top-up” taxes on MNEs, and new formula-based systems berefting developing countries of their existing digital service taxes. The deal also requires countries to remove all other types of taxes like tax on digital services and other similar taxes, further committing not to introduce any such measures in the future.
The two Pillar solution for addressing the tax challenges due to the digitalization of the global economy has been hauled over the goals for three main reasons. First, it hampers the sovereign rights of any state to levy taxes on MNCs operational in respective countries. Second, it tries to alter how multinationals undertake their tax planning and allocation of operations. It also impacts the company’s decision on hiring and investment globally. Third, it stands to a stagger global economic growth, particularly for developing countries. As per the experts in India, the country may receive much lesser allocation once it withdraws the existing equalization levy. They also fear a flight of profits from India without paying any tax.
Critics point out that the additional higher tax revenues are more likely to go to the more affluent nations and often, the profits are too low to generate significant revenues for Low- and Middle-Income countries (LMICs). Given the lack of clarity on several parameters, it may also invite a litigation and
administrative burden for multinationals and tax authorities, standing to limit the sovereign right to (determine) tax. That’s why India and other developing countries of the Global South are emphasizing the need for prospective solutions to be simple for compliance and administration.
As per Oxfam Tax Policy Lead Susana Ruiz, the OECD tax deal is helping rich countries grow richer instead of controlling the tax havens. The concerns of the Global South are being neglected in this tax deal, potentially leading to slower economic growth and rising global inequalities. As per an estimate by Oxfam, the G7 and EU will score two-thirds of revenue generated with the new regime, while the Global South will recover less than 3%. The tax deal seems unpalatable for many developing countries for their development prospects. Experts fear that LMIC are going to have paltry gains.
Among African countries, there is concern regarding the impact of the implementation on the non-ATAF (African Tax Administrative Forum) member countries and fear that those countries might be pressurized to adopt the Inclusive Framework of OECD. Developing countries like Kenya have also raised concern about arbitration in case of tax disputes. Kenya has a Digital Service Tax (DST) system in place since January 2021. With the new global tax deal, they would be rendered in limbo, unaware of the opportunity cost of switching to the new regime. Officers in Kenya say they have no awareness of whether they would make more or less under the new rule. Many large taxpayers in LMICs would not be covered as the threshold set by pillars is too high. Various MNEs like Uber operational in Kenya do not meet the cut-off set by the OECD but pay DST to Kenya. Switching to a new system would imply losing on these sources of revenue.
Given the importance of revenue from corporate tax to developing countries, especially in the post-Covid world, any reduction in the revenue source would drag down the public policy measures. Developing countries often offer much lower effective tax rates. However, under the global minimum tax regime, developing countries may lose even this meager tax revenue to jurisdictions where MNEs are based.
According to some experts, the fate of the project will ultimately depend on the individual trade-offs that countries face when opting for endorsing it either fully
or partially, or not at all. It is particularly relevant for developing countries which are generally torn between international cooperation and non-cooperation on the one hand, and the eternal promise of additional tax revenues versus simplicity and ease of administration, on the other. Tax reforms with changing global economy and the digital economy’s expansion is crucial. However, it is also equally critical that any international tax proposal considers the welfare and particular needs of the Global South. India’s suggestion in the UN Tax Committee for taxing income from automated digital services by withholding tax on a gross basis stands to generate higher revenues than the OECD approach, along with allowing sovereign taxing rights of source countries. Though, the deal’s goal is to ensure a multilaterally agreed solution by avoiding risks of retaliatory trade sanctions resulting from unilateral approaches such as digital services taxes, it also has to consider the Global South’s goal of funding for mass welfare and development programmes.