The global tax landscape is at a critical juncture with the introduction of the Global Minimum Corporate Tax Rate (GMCTR). Spearheaded by the Organisation for Economic Co-operation and Development (OECD) and endorsed by the G20, this tax reform aims to curb tax base erosion and profit shifting by multinational enterprises (MNEs). For India, this initiative presents both opportunities and challenges, as the government prepares to integrate the global minimum tax into its domestic framework while safeguarding national interests.

I. The Concept of Global Minimum Corporate Tax

The Global Minimum Corporate Tax is a proposed baseline tax rate of 15% on the profits of multinational corporations. The tax is designed to ensure that large corporations pay a minimum level of tax regardless of where they are headquartered or operate. This framework, also known as Pillar Two of the OECD’s Base Erosion and Profit Shifting (BEPS) project, aims to eliminate the advantage of shifting profits to low-tax jurisdictions.

Under the new rules, if a multinational corporation pays less than the minimum tax rate in a particular jurisdiction, the parent entity would be required to pay a “top-up tax” to meet the 15% threshold. This ensures that MNCs cannot exploit tax havens to reduce their tax liabilities.

II. Recent Developments in India

India is actively preparing to implement the global minimum tax. In October 2024, reports indicated that India was working on draft legislation to incorporate the GMCTR into the Income Tax Act. This proposal is expected to be presented in the Union Budget 2025. The Central Board of Direct Taxes (CBDT) is likely to issue notifications and guidelines to facilitate the new tax regime.

India’s Support for Pillar Two

India has expressed strong support for Pillar Two, recognizing the importance of a global minimum tax to address tax avoidance practices by large corporations. The government believes that implementing the GMCTR will create a level playing field and protect India’s tax base from erosion.

However, India has been cautious about signing Pillar One, which focuses on reallocating taxing rights to market jurisdictions. The government has raised concerns about dispute resolution mechanisms and the treatment of withholding taxes under Pillar One. These issues remain key sticking points in ongoing negotiations.

III. Key Objectives of the Global Minimum Tax Agreement

The GMCTR is designed to achieve several critical objectives:

1. Modernizing International Tax Rules: Updating century-old tax rules to reflect the realities of a digital and globalized economy.
2. Addressing Profit Shifting: Ensuring that MNCs pay taxes in the countries where they operate, rather than just where they are headquartered.
3. Preventing a Race to the Bottom: Eliminating the practice of countries competing to offer the lowest tax rates to attract corporate giants.

For India, the global minimum tax represents an opportunity to safeguard its sovereign tax rights while participating in a globally coordinated tax framework.

IV. Why is the Global Minimum Corporate Tax Needed?

The introduction of a global minimum corporate tax addresses several pressing issues:

1. Standardizing Corporate Taxation

Large corporations often establish operations in countries with low tax rates to reduce their overall tax burden. This practice, known as profit shifting, results in significant revenue losses for high-tax countries. The GMCTR aims to bring uniformity to corporate taxation worldwide, ensuring that all countries benefit from fair tax contributions.

2. Addressing Tax Havens

Many MNCs use tax havens such as Ireland, the British Virgin Islands, or Panama to shelter profits from higher taxes. The GMCTR eliminates the advantage of shifting profits to these jurisdictions by imposing a top-up tax in the home country.

3. Promoting Fairness and Equity

The GMCTR aims to create a level playing field by ensuring that MNCs pay a fair share of taxes in the countries where they generate revenue. This promotes tax equity and reduces the reliance on low-tax jurisdictions.

V. Impact of the Global Minimum Tax on India

India’s existing corporate tax rates are already above the 15% threshold proposed by the GMCTR, making the country well-positioned to comply with the new rules. However, the implementation of Pillar Two presents both opportunities and challenges for Indian businesses.

1. Positive Impact on Investments

The GMCTR will reduce the incentive for profit shifting, creating a level playing field for businesses in India. The country’s existing tax regime, including tax incentives for Special Economic Zones (SEZs) and GIFT City, remains attractive for Foreign Direct Investments (FDI).

2. Challenges for Indian Multinational Enterprises (MNEs)

Large Indian-headquartered MNEs will face challenges in adapting their accounting and tax processes to comply with the complex rules of Pillar Two. These challenges include:

• Detailed Global Profit Disclosures: MNEs will need to provide comprehensive disclosures on their global profits.
• Compliance Mechanisms: Implementing compliance mechanisms to ensure adherence to the new tax rules.
• Administrative Burden: Increased administrative burdens for tax reporting and compliance.

3. Interaction with Existing Tax Systems

India’s Special Economic Zones (SEZs)/ GIFT City and tax incentive schemes must be carefully assessed to avoid unintended consequences. The government must ensure that the GMCTR does not erode the benefits offered under these schemes

VI. Implementation Challenges

India faces several challenges in implementing the GMCTR:

1. Aligning with Domestic Policies: Integrating the GMCTR with India’s existing tax framework requires careful planning to maintain policy coherence.
2. Stakeholder Consultation: Engaging with businesses, tax professionals, and other stakeholders is essential to address concerns and ensure a smooth transition to the new tax regime.
3. International Coordination: Collaborating with other countries to finalize the global tax agreement is crucial to ensure consistency in implementation.

VII. Recent Global Developments

Several countries have already taken steps to implement the GMCTR:

• South Africa: The Global Minimum Tax Act was signed into law in December 2024.
• Thailand: The country will implement a 15% minimum corporate tax from January 2025.
• Singapore: Issued regulations and a guidebook to prepare businesses for the new tax regime.
• New Zealand: Will require subsidiaries of MNEs to comply with the 15% minimum tax rate starting January 2025.

India is expected to follow suit by introducing its own global minimum tax framework in the Union Budget 2025.

VIII. Way Forward for India

To effectively implement the GMCTR, India must take several steps:

• Provide Clear Timelines: Announce a clear timeline for the implementation of Pillar Two to give businesses sufficient time to prepare.
• Conduct Stakeholder Consultations: Engage with businesses, tax experts, and industry bodies to address potential challenges.
• Strengthen Compliance Mechanisms: Equip tax authorities and businesses with the necessary tools to comply with the new rules.
• Ensure Consistency: Ensure that the implementation of the GMCTR aligns with India’s broader economic policies and tax incentives.

IX. Conclusion

The Global Minimum Corporate Tax Rate represents a significant shift in international taxation policy. For India, this initiative offers an opportunity to address tax base erosion while maintaining its sovereign tax rights. However, the country must carefully navigate the challenges of implementing Pillar Two, ensuring a smooth transition for businesses and preserving its economic competitiveness.

By proactively engaging in multilateral negotiations and adapting its domestic tax policies, India can strengthen its tax regime, attract more investments, and secure its position as a key player in the evolving global tax landscape.  The upcoming Union Budget 2025 would be keenly watched to understand the regulations which could be introduced in this regard.