For years UAE and other GCC countries had allowed investors investing in businesses in their countries the benefit of no or low corporate taxes. Even other countries all over the globe tend to keep their corporate taxes low in order to attract investors to their shore. But things are about to change with the new deal with respect to Corporate Tax.
The new deal was first discussed in a meeting by G7 leaders in June’21. On October 8th 2021, the Organization for Economic Cooperation and Development (OECD) hosted the meeting and announced the proposed deal. After being considered by finance ministers of 20 countries on October 13th in Washington D.C., G20 leaders endorsed this deal at the summit in Rome at the end of October. The main driving force for this deal was US President Joe Biden.
Janet Yellen, US Treasury Secretary said, “Today’s agreement represents once-in-a-generation accomplishment for economic diplomacy. Rather than competing on our ability to offer low corporate tax America will now compete on the skills of our workers and our capacity to innovate, which is a race we can win.” This deal is meant to end the tradition of countries outbidding each other by offering lower corporate taxes or ‘race to the bottom’.
What the new deal entails?
- All countries in agreement with the deal will enforce global minimum corporate tax of 15 %. Countries would have to implement this individually as per the rules of the OECD created model.
- This deal would prevent big profitable multinational companies from putting their profits in countries where they don’t have to pay any tax or if they do have to, it is an extremely low amount. This would ensure that the tax that was being evaded abroad would be paid at home.
- Because of digitalization and globalization a company need not have a physical presence in a country and yet earn a profit via businesses like web advertising or online retailing. Aside from the minimum tax, a country will be allowed to tax such companies a percentage of their earnings.
Why so many countries have agreed to the deal?
The global COVID-19 pandemic had crippled the economy of most nations across the globe. Trying to recover from this huge hit, nations are trying to boost their revenues. Implementing this deal would ensure that about $150 billion gets added to the Government treasury.
- As many big multinational companies have their headquarters in US, getting the tax legislation that had been proposed by Joe Biden, which is required for this deal approved might be tricky. The project might get rejected if the Congress rejects the legislation.
- According to Tax fairness and anti-poverty advocates, bulk of new revenue will go to wealthier countries and developing countries who depend on corporate tax would get less.
- For this very reason many developing countries have raised objections. As per G-24 group of developing countries, the deal will be ‘sub-optimal’ and ‘not sustainable even in the short run’ without bigger share of revenue from redistributed profits.
- Countries like Pakistan, Sri Lanka, Nigeria and Kenya had refused to sign this deal.
When countries with headquarters of major multinational companies would implement the minimum corporate tax, this new deal would have maximum desired effect.
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