A New Tax Floor

The imposition of a global tax rate of at least 15 percent on multinationals by G20 finance ministers recently is a positive effort to deter tax dodging and end tax havens. But it remains to be seen how the contemplated tax structure will be implemented

- Sujit Bhar

LED by G20 countries, a total of 132 nations and territories have signed up to enforce a floor rate of corporate tax on multinational enterprises— some of them larger than small nations—trying to squeeze out revenues due to the company’s country of operation and areas of profit. This has been a major headache in international accounting and this 15 percent floor rate, if enforceable, will bring under control massive base erosion that has happened over the years. The main targets are companies such as Apple, who avoid paying tax in the US, despite selling most of its products there, filing its taxes in Ireland, a low tax zone.

While it remains legal for a company to shift base, the erosion effect will be minimised by the floor rate that companies such as Apple will have to pay, even in Ireland. The Netherlands, another tax haven, has yet to join the group, but if the movement is strong enough and enforcement can be ensured through a tough mechanism, the Netherlands may, one day, agree to join in.

The axiom of freedom of enterprise was taken to the limit by these major enterprises. Apple, for example, has booked revenues of $214.9 billion offshore. Had it been paying its taxes in the US, it would have owed the US government $65.4 billion in taxes. That is a little less than the entire revenue of Reliance Industries.

The amounts are massive. About 50 biggest US companies have stashed approximately $1.6 trillion (a little more than the GDP of Russia) offshore.