The G7 nations recently met to address tax avoidance by big tech companies. Tech companies have been using ‘Tax Havens’ for many years to reduce their federal tax liability. Let’s have a look at how G7 decided to crackdown on tech companies and other MNCs doing tax avoidance.
Crux of the Matter
What is The G7?
Group of Seven is an informal group of world’s 7 largest developed democracies. The objective is to address issues regarding world economy. G7 includes United Kingdom, United States, France, Canada, Germany, Italy, and Japan.
G7 Summit 2021
G7 made a “historic” deal for taxing multinational companies. This deal was made to prevent tax avoidance by making MNCs pay tax in the country they operate. Countries will now charge 15% minimum corporate tax rate on the MNCs.
How Tech Giants Are Taxed?
They are taxed based on where they are headquartered. The international tax system, since pre-digital era, focused on labour, production and capital. In case of tech companies, no physical product is produced and thus identification of where economic activity is taking place is difficult.
It is a place where tax rates are low. Tech companies set-up shell companies in such countries and channel their profits through them. Countries lose around $427 billion every year due to tax evasion (2019) whereas India lost around $10 billion due to similar evasion (2019).
Problems With The Proposal
Some countries rely on low taxation rates to attract foreign investments. Global minimum taxation rate will take away the tool which these developing countries have. This will slow down the economic growth of such countries.
Impact On India
It won’t affect the MNCs doing business in India as India’s effective corporate taxation rate is higher than the global minimum tax rate. India attracts foreign investment through cheap labour rates and large internal market instead of lower taxation rates.
War In India – Google Tax
Tech giants can avoid paying 6% ‘Google tax’ in India if they set-up an Indian unit. The new IT rules also compel tech companies to set up Indian units for grievance redressal. However, if they set up Indian unit to avoid Google tax or for grievance redressal, they will be taxed at a higher rate of 40%.
- Originally called BRIC, the name was an acronym of the countries Brazil, Russia, India and China. The term was coined by economist Jim O’ Neill in 2001. South Africa joined the organization in 2010 officially and the acronym since then is BRICS.