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The United States has proposed to impose a global minimum tax for companies with huge profits, which found support from Germany and France as well as the International Monetary Fund (IMF).
What it is like you are an emerging economy and instead of global investors investing in your economy, they are investing in developed countries! Basically, global investors seek to invest in countries that are developing as the growth rate is faster than those who are developed and returns would comparatively be more. Introducing a global tax policy while not taking care of underdeveloped countries is just like that. Against the interest of developing countries. And that can hurt emerging economies like India and Vietnam continuously pushes for infrastructure development for their betterment and seeks foreign investments. India has announced a massive manufacturing push over the years under the current central government and got record inflows at the same time, and if it agreed to comply with the tax policy, it would be against its interests. Although it would depend on rates if higher than today. To simplify, emerging economies impose lower tax rates compared to developed nations with a view to attracting foreign investments. That is the reason majority of factories in developing nations are foreign-funded, especially in Asia.
If we study in detail, we would find that corporate policies by the Biden administration, in which the US has raised corporate taxes to 28%, would be the same as what is proposed globally. The GILTI tax structure applies to US companies, which currently collect taxes based on a company's profits, making sure that big companies pay significantly higher taxes. Moreover, a new policy by the administration was in the news this week, that would impose taxes on wealthy people as high as 43% in the US with a view to financing the people who suffered during the pandemic and impacted by the inequality in the society. But the case is, the Biden administration wants to introduce a tax on the rich not only in the USA but also to the globe. In other words, the US wants the world to join them in implementing their domestic policy globally, renamed as the Global Minimum Tax Policy. This will subsequently help the US's interests as higher taxes in the country would make global investors go with other options with lower tax rates, especially in underdeveloped countries, where government supports foreign investors. Raising the corporate tax rates naming it the global policy would be against the interests of those countries as they maintain lower taxes to attract the same investors.
In India's case, an expert said it would be a difference of 28% to 43% and 10% to 12% on companies. However, it would not be a huge difference for rich Indians as they have to pay nearly 43% of taxes with an income of more than $10 million a year. But the problem is with the corporate taxes. The country had already decreased its corporate taxes in 2019. A sudden increase in taxes, especially a massive hike will create fear among stakeholders like investors and companies. Years of investments in emerging economies would be nothing. India has already seen massive foreign inflows during the last 2-3 years. In fact, India is one of the countries in the world that attracts record foreign investments. According to data, FDI (Foreign Direct Investment) equity inflow received from April to November 2020 was $43.85 billion, the highest ever in the first eight months of the financial year.
Moreover, India has already adopted the Base Erosion and Profit Shifting (BEPS) framework. Also, companies in India, have to share their revenue with the government, and this policy would be completely different as it taxes on profits. Big companies like Amazon and Alphabet, spend their entire profits on Research and Development (R&D), showing zero profit on accounts and paying nothing in taxes, although they are one of the companies with the highest revenues in the world and the largest companies in the world.
Another thing is India has tax-free treaties with many countries, for example, Netherlands, in which many companies set headquarters in such countries and then set their subsidiary in India. The recent example we have is Tesla. Tesla India Motors and Renewables Private Limited is a subsidiary company of Tesla's Netherland firm. Likes of Google and Amazon, discover different kinds of loopholes to trick tax authorities across the globe. First, Biden's policy should focus on hindering these kinds of tricks from the major companies.
The policy would majorly affect the Asian region as most of the economies such as India, the Philippines, Vietnam, Taiwan are developing and has huge foreign establishments in their countries. It was also expected that Asian GDP would surpass the combined GDP of other continents in 2020 but the coronavirus pandemic halted the growth for a while, as graphed below. The policy will change everything, including the perspective of investors from investing in a company with good returns to investing in a company with good infrastructure and investing in a country with efficient infrastructure so that the transportation of goods can be faster, unlike the emerging economies have and like developed countries such as the USA and China have. In terms of Chinese infrastructure, there is no competition as the country has designated corridors for the transportation of goods.
According to an expert, there is the possibility of the wide acceptance of the policy due to the transparent economic influence of the USA and its democratic values, as already accepted by the big influential economies like Germany and France as well as International Monetary Fund.
This idea, with some changes focusing on developing economies and benefitting both the parties, would be better, although some countries would start giving their own definition of developing countries, which the policy should consider first.