Globalization of Fiscal Capacity: Current Affairs Special Series

Team Adda247 and BankersAdda are here with a Current Affairs Special Series. In this series, candidates will be introduced to current affairs topics daily, which will not only improve their general awareness but also will ensure that the candidates do not lack in any current affairs topic. Today’s Current Affairs topic is the Globalisation of Fiscal Capacity.

Globalization of Fiscal Capacity

It is praiseworthy that G7 backed global minimum corporate tax system has been concurred by 130 countries that are representing more than 90% of global GDP. These countries have agreed to radically overhaul the global tax system to ensure that multinational corporations (MNCs) pay their fair share of tax wherever they operate and make profits.

The reform blueprint is approved by the G7 and now it has been ratified by countries including India and China and many countries in the world. It includes a global minimum corporate tax of 15% and rules that would allow every market where MNCs undertake sales the right to tax their earnings, even if they have no physical presence there. It would eat away the incentive for MNCs to shift profits to tax havens. It would also end base erosion and profit-shifting, and boost revenues for governments battling the pandemic.

The Organisation for Economic Cooperation and Development (OECD) estimates the 15% global minimum tax that would apply to companies with a turnover above Rs.750 million, to yield around $150 billion in extra global tax revenues annually. India should be fine with the 15% rate, but it must negotiate better to get a larger share of the pie. Generally, MNCs shift their tax liability by apportioning a share of costs and profits to a subsidiary in a tax haven or by parking intangible assets (Assets that are not physical in nature but have values like Goodwill, Patents, trademarks, etc.) in these subsidiaries for royalties to accrue there. If a country has a lower corporate tax rate then the US can levy a top-up tax on the parent entity headquartered there. So, the new deal will burst tax-havens. With no surprise, Ireland, Hungary, and some Caribbean nations (which are known for tax havens countries) have not signed on to the deal.

G7 or Group of 7:

The group of 7 is an inter-governmental political forum.

Member countries are Canada, Germany, Italy, France, The United Kingdom, and The United States.

Founded in: 1975

OECD:

Organization for Economic Co-operation and Development is an intergovernmental economic organization with 38 member countries.

Founded on: 30 September 1961

Headquarter: Paris, France