Commending the “justified and right for the law” new provision in establishing a unified minimum corporate tax rate, Managing Partner of OP Khaitan & Co, Gautam Khaitan assesses the benefits of the reform, the future of the step and the possible challenges down the road.
“The provision could close cross-border tax loopholes used by corporations and now demand more accountability in parts of these corporations who were using tax havens below the belt to defer with tax obligations that they were supposed to shoulder” says Gautam Khaitan.
Income tax include one of the biggest streams of national revenue for any country. These include a substantial share of contribution to the nation’s reserve from multinational corporations and big performing businesses. The rates of taxes to be paid by these gigantic organisations include a simple mathematics of the taxable income subtracted by the costs of expenses. In practise, however, corporations have habitually influenced these tax dues by lowering statutory rates with some easy provisions like tax loopholes, government subsidies or drawing deductions of different kinds.
Many esteemed tech-giants and corporations exempt themselves from paying taxes by various other resorts, one being registering themselves as S-corporations, doing which they can completely pass-through these tax obligations, and the taxes are instead paid through individual tax returns. We also see a history of business magnates and their enterprises who skip years in tax dues and do not uphold discipline in payments.
Drawing from these unregulated corporate taxing provisions, members of G7 nations which are United States of America, Canada, Britain, France, Germany, Italy and Japan, have of late resorted to bring in a fair trial into the system and establish a regulatory framework for corporations to abide by. In its historic announcement at 47th G7 summit held on 11-13 June, 2021 in Cornwall at United Kingdom, the world’s wealthiest nations agreed on a uniform minimum 15% corporate taxes that are to be paid by all organisations and tech-giants in a country where they operate.
The G7 countries are expecting to reach a final tax agreement at the July gathering of the expanded G20 finance ministers group. The provision makes it mandatory for multinationals to regularly and religiously be contributors of tax revenue to not only the nation where their headquarters are set, but also to the country’s where their branches operate. Gautam Khaitan comments how the new ordeal is “justified and right for the law”. He expresses how the provision could now demand more accountability in parts of these corporations who were using tax havens below the belt to defer with tax obligations that they were supposed to shoulder.
The uniform minimum rates of taxes are certain to benefit the countries by ensuring fair tax collection, increasing their national revenue reserve now and having the utmost benefits of FDIs. The accord further helps in plugging the loopholes in regard of Cross border taxations for these MNCs. It will be difficult to get support from the low-tax jurisdictions, which largely depend on tax rate arbitrage to attract. MNC’s. Gautam Khaitan marks “Our country stands to benefit from this agreement.
It will not be difficult for India to incorporate these global provisions nor will we have to undergo any major transformation in our existing corporate taxes system.” In the year 2019, India has officially fixed its rates of corporate taxes for domestic companies at 22 per cent and for new domestic manufacturing units at 15%. Under the provision, our tax framework can still operate with healthy rates and will continue to attract foreign direct investments. Prior to the resolution, India had been struggling to keep a balance between wanting more FDIs within its boundaries and yet not being able to keep artificially low tax rates to attract the prior.
The G7 resolution brings a happy solution to this and the country can now expect more investments without having to compromise with too low rates of tax revenues. Analysing the challenges down the road, Gautam Khaitan predicts how “the uniform rates might not be something that all nations will readily agree to. The bigger challenge that lies ahead is to include nation-states into agreeing on this comprehensive deal”.
He points out how the feature of paying taxes to countries where the units of a company operates will also mean that corporations will now have to pay in multiple places- something that doesn’t favour ease of conducting business for these ventures. He further comments on how many nations might not agree to the rates that are fixed, for 15% is fairly a low number to start with, something that might be a big competitive disadvantage to so nations.
The nation yet awaits to see the provision in practise with an optimistic light of regulating corporates to abide by tax laws and undertake their part to the country’s development.
Gautam Khaitan is an eminent lawyer in the country and the Managing Partner of the OP Khaitan & Co. With over three decades of experience as a corporate lawyer, he has handled various litigation matters for many national and multinational companies, along with banks and financial institutions around the world.