G7 global corporate Tax Deal

The Group of Seven (G7) countries have backed the proposal to impose a common global corporate tax.
It would be aimed at preventing multinational businesses from evading taxes and also squeeze the havens which attract tax evaders due to the low-rate jurisdictions.
The consensus to adopt a common tax rate was reached at the G7 finance ministers' meeting held in Buckingham (London) on June 5.

THE PROPOSAL

The tax proposal endorsed by the US, the UK, France and other G7 countries has two parts.
The main part of the proposal states that countries around the world should tax their home companies' overseas profits at a rate of at least 15%.
The companies have multiple branches spread across various jurisdictions, they transfer the bulk of their profit in accounts set up in countries that offer the lowest tax rate.
Often, these tax havens are the Caribbean Islands such as Bahamas or British Virgin Islands, or at times, countries like Ireland where the corporate tax rate is as low as 12.5% -- lower than the proposed minimum rate of 15%.
The second part of the proposal which the G7 countries have adopted allows countries to tax a share of the profits earned by companies that have no physical presence but have substantial sales, for instance through selling digital advertising.
Most of the digital behemoths have welcomed the G7 agreement.

WHY PUSH FROM US?

The US proposal had proposed a higher 21 per cent minimum corporate tax rate.
This 15 percent of global minimum corporate tax would deter the practice of using accounting schemes to shift profits to a few very low-tax countries.
One of the reasons the US pushed for this is purely domestic.
It aims to somewhat offset any disadvantages that might arise from the Biden administration’s proposed increase in the US corporate tax rate.
The proposed increase to 28% from 21% would partially reverse the previous Trump administration’s cut in tax rates on companies from 35% to 21% by way of a 2017 tax legislation.

CHALLENGES

The challenges of getting all major nations on the same page, especially since this impinges on the right of the sovereign to decide a nation’s tax policy.
A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
A global minimum tax rate will do little to tackle tax evasion.

WHERE INDIA STANDS?

India’s headline corporate tax rate broadly at par with the average 23% rate in Asian countries.
The Indian govt. said, "while taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure.
The economic division will look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter.

The G-7 or ‘Group of Seven’ are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
It is an intergovernmental organisation that was formed in 1975 by the top economies of the time as an informal forum to discuss pressing world issues.
Canada joined the group in 1976.
The European Union began attending in 1977.
The G-7 was known as the ‘G-8’ for several years after the original seven were joined by Russia in 1997.
The Group returned to being called G-7 after Russia was expelled as a member in 2014 following the latter’s annexation of the Crimea region of Ukraine.
The decisions taken by leaders during annual summits are non-binding.

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