The World Inequality Report, released recently, has suggested raising the proposed global minimum tax rate on multinationals from the 15 per cent, which is agreed upon now. It said the 15 per cent rate would lead to a race among countries to reduce their corporation tax rates to that level, a risk that would reduce if the rate was raised to, say, 25 per cent.

       It calculated a 15 per cent tax rate would result in a €500-million tax gain a year for India without a carve-out and €400-million tax gain a year with a carve-out.

       On the other hand, a 25 per cent tax rate will lead to a €1.4-billion tax gain a year for India without a carve-out but a €1.2-billion tax gain a year with a carve-out. Carve-outs allow corporations with sufficient activity in low-tax countries to be exempt from the minimum tax.

       The report, brought out by the France-based World Inequality Lab, said the agreement was flawed in several key aspects. It said the 15 per cent rate is lower than what working-class and middle class people typically pay in high-income countries. It is also lower than the average statutory rate that corporations face in those places.

       “There is a risk that such a low reference point might trigger an additional reduction in statutory corporate tax rates in the countries that currently apply higher rates, thus reinforcing the ‘race to the bottom’ with corporate taxation observed since the 1980s,” said the report authored by Lucas Chancel, co-director of the World Inequality Lab, and coordinated by famed French economist Thomas Piketty, among others.

       A higher rate of 25 per cent will reduce the risk of such a counterproductive outcome, it said.

       According to the agreement reached under the aegis of the Organization for Economic Co-operation and Devel-opment (OECD) and later endorsed by the G-20 in October, there is a two-pillar approach to taxation.

       Pillar-2 introduces a global minimum corporate tax rate at 15 per cent. The new minimum tax rate will apply to companies with revenues above €750 million and is estimated to generate around $150 billion in additional global tax revenues annually.

       Under Pillar-1, multinationals with global sales above €20 billion and profitability above 10 per cent — the kind of companies that can be regarded as winners of globalisation — will be covered by the new rules, with 25 per cent of profits above the 10 per cent threshold to be reallocated to market jurisdictions. This will generate additional tax revenues of $125 billion annually.

       Rakesh Nangia, chairman, Nangia Andersen India, said many developing countries stipulated tax rates higher than 15 per cent. If they continue to levy taxes at higher rates, they are likely to remain victims of profit-shifting to locations where the rate is kept at the minimum of 15 per cent. If they lower the rate to 15 per cent, they will significantly lose much-needed tax revenues.

       On the contrary, the most advanced countries that account for a disproportionate share of the world’s multinationals could set corporate tax rates way above the minimum since the cost of relocating headquarters and operating from an alternative location may outweigh any marginal benefit in tax saving.

       Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm, said according to the OECD, there was an expected increase in additional tax revenues to the extent of around $150 billion annually arising out of this deal though it was likely to cover only the top 100 multinational companies.

       The proposal, while designed to stop the “race to the bottom” by developing countries to attract multinationals to their land by lowering their corporate tax rates, will now have to compete on other factors as well like infrastructure and employment generation. Developing markets lack infrastructure and may not be able to compete effectively on factors other than tax, he said.

       Another reason of concern for developing countries is that the OECD threshold for applicability of Pillar 1 and 2 is quite high, he said.

       India introduced a 6 per cent equalisation levy for digital advertising services in 2016. Later, in April 2020, it widened the scope to impose 2 per cent tax on non-resident e-commerce players. India has collected Rs 1,600 crore by way of the levy so far this fiscal, almost twice the last year's figure. India is likely to withdraw the equalization levy once the OECD agreement comes into effect.

       From India’s perspective, the equalization levy which was imposed as a unilateral measure by India on digital transactions will be rolled back as a part of the commitment made by India in the past. It is pertinent to note that India’s current threshold for equalization levy is around €230,000 (Rs 2 crore) whereas the annual global turnover threshold to fall under the scope of Pillar 1 is € 20 billion, Maheshwari said.

       "This raises significant concerns as to the tax collections which are likely to be lesser now," he said.