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Proposed Global Minimum Corporate Tax of G-7 and implications to Economy of other Countries Especially China’? – Center of Policy Research & Governance


Tanvi Singal*

The Covid- 19 pandemic has led to the disparaging global economy, with even the mature economies bearing the brunt. Economic recovery in the post-pandemic world depends on instrumental policies for doing business while yielding tax revenue and promoting investment. With countries being wary of dependence on a single supply chain, there is a focus on developing resilient supply chains and carrying out domestic economic measures. This might take the form of increased government expenditure for which it needs adequate revenue, of which the tax revenue constitutes a larger share. Therefore, any policies put forth on an international scale should meet up these pre- requites for economic revival. The big MNCs have a more significant role in running the world economy featuring economic statistics and offering massive corporate tax levels.
A corporate tax is a tax on the profits of a corporation and is paid on the company’s taxable income after deducting all the expenses. It is a source of income to the country’s Government, and till now, these taxes varied widely across countries, with some countries considered tax havens due to their lower tax rates. This had given the large MNCs a leeway in exploiting the loopholes and employing ordinary tax jurisdiction to avoid paying higher taxes which has significantly lead to tax revenue loss for countries, especially the advanced (G-7) economies, home to the significant MNCs. Interestingly, this tax race to the bottom started as a consensus among these G-7 countries in the 1990s to set up policies to reduce government welfare expansion and call for easy flow of multinational capital. Therefore, to argue that it has always been the G-7 nations that have set a tone for the global economy is a justifiable claim to the recently proposed international minimum corporate tax. Therefore, it becomes a debatable question about who takes the lead in the emerging global order contingent upon multilateralism.
G7 countries have negotiated and reached a landmark agreement of at least 15% global minimum corporate tax to plug the loopholes in the international taxation system. These advanced economies have put forward a twofold decision:
1) Ensure MNCs pay taxes in the countries they operate, that are, accrue profits.
2) To curb low tax jurisdiction by MNCs through implementing a global minimum corporation tax of 15%.
This will make the big firms better accountable to the home country and the host countries by adding to the tax revenue. In addition, the pandemic has taken a toll on the government revenue, and this 15% minimum tax might add to the cash-starved government coffers, especially these advanced economies.
OECD and G-7 countries have played their card as this minimum rate of 15% accrue out maximum benefit (60%) to them as they are the advanced economies with major MNCs.
To set up this tax, ‘other countries’- developing countries and China need to get on board. This includes significant tax havens such as Ireland, Netherland, Luxembourg etc., which have attracted MNCs through low tax jurisdiction and might oppose this decision. Looking forward to a meeting with G-20 countries – the grouping of developed and developing economies in July in Venice, this rate will be further discussed upon on mutual terms.
This proposed tax is more likely to affect other economies, but the more significant issue pertains to China, and there is contention whether China will support this decision on not. Why is the Chinese decision pertinent apart from other countries? Since China is the second-largest economy after the USA, the say of China plays an essential role in setting up this international rules-based tax order, also because it is a heavyweight in global business. Therefore, any economic decisions taken by China will cast an effect on other economies and the entire world economy. Even the financial experts predict the likelihood of China overpowering the US economy, emerging as the giant economy seeing its uptake in global trade and the most stable economy after the dreadful pandemic. Therefore, Chinese contention over this issue attracts a key focus.
There are various facets to this issue in China.
The Border and Road Initiative (BRI) is a Chinese initiative to build infrastructure across countries, integrate them into the global supply chain, and extract benefits for the Chinese economy. Major companies involved are Chinese, but certain MNCs are collaborating with Government-funded Chinese companies in BRI by setting up joint ventures in China. The global minimum tax of 15% will exclusively yield benefits to Chinese tax revenue since BRI is a major initiative by China, and so there will be no shifting incentive. In addition, major Chinese tech companies will be debarred from the digital tax imposed by countries like UK and France.
On the other hand, aversion from China can come from the fact that Hong Kong is one of the biggest tax havens, and this proposed setup will reduce incentives for MNCs to invest here, thus leading to economic fallout. Another perspective on this issue is China’s emphasis on the BRICS nations multilateralism through a recent joint statement by a Chinese foreign spokesperson vehemently reiterating that there is a significant difference in multilateralism between the BRICS nations what ‘developed countries’ delineate. He significantly asserted that the BRICS owes its allegiance to the purposes and principles of the UN charter, adhering to the foundational principles of inclusivity, consultation and mutual benefits by not succumbing to hegemonic tendencies. He further added, “We pursue openness, inclusiveness and win-win cooperation and reject bloc politics and ideological confrontation.”
As already mentioned, this 15% global minimum corporate tax is better likely to benefit the advanced G-7 economies about nothing less than bloc politics, thus excluding the developing countries. It is argued that this proposed tax will continue to help India since the domestic tax is already above the threshold. Therefore, the stake of India is quite unpredictable- whether India will side with the low-income countries or continue to benefit. Considering its growing bilateral relations with the USA and not so stable ties with China, what terms will India deliberate upon is another compelling question. But China playing a diplomatic role to advance its objective of acquiring ASEAN, BRICS and other developing economies back against ‘The West’, might either oppose this 15% tax or negotiate fairer terms that equally benefit these developing economies. Also, who establishes the order of 21st-century global economy with shifting power arrangements will likely determine the stature of any country (the USA or China) in the new competitive international order.
Hence, anything that China does will have far-reaching repercussions on any global decision as China is a rising global power with a powerful vision and commitment. Therefore, it is crucial to keep track of the Chinese actions as history proves Chinese manipulation tactics to its advantage. Thus, any agreement fostered should take cognizance of the possible Chinese reaction and make provisions for the same considering the contemporary geopolitics with a better focus on soft power jurisdiction.

(Ms. Tanvi Singal is currently majoring in Political Science and Economics from St. Stephen’s College, University of Delhi, India.)