[‘Daily News Updates’ will provide you with a simplified understanding of the important economic/financial events across the country]
G7 Countries Reach a Historic Agreement towards a Global Minimum Tax Rate
The G-7 countries, on Saturday, reached a historic agreement that aims to eliminate cross-border tax loopholes used by many MNCs to avoid paying higher taxes. MNCs typically shift their profits to low-tax countries in a bid to pay lower taxes, regardless of where their sales are made. Last year, we had published an article on how Apple and Ireland won the biggest tax battle in history and explained the double-Irish structure of avoiding higher taxes.
//Under the double Irish structure, there are two subsidiaries registered in Ireland (let’s say- A & B). A is a tax-resident in Ireland, and it is responsible for all sales of the company ABC ltd. across Europe. Even if the goods are sold in other parts of Europe, profits are booked in Ireland.
B is a tax-resident in a tax haven like the Bahamas, which imposes 0 % corporate taxes. It is possible for B to be registered in Ireland and be a tax-resident in the Bahamas because of Irish tax laws as per which B will be taxed in the Bahamas if it has a ‘management and controlling presence’ in that country. Now B owns the intellectual property rights of ABC ltd for sales of its products across Europe. Therefore, A has to pay a royalty to B. If A pays a substantial part of its profit as royalty, its taxable profit declared in Ireland will be very low. But B will make high profits, but it will not be taxed as the Bahamas has zero taxes. This is the double Irish structure. //
This is just one way in which companies avoid paying a higher tax rate in their home country. The current agreement seeks to correct this. As per the agreement, every multinational will be forced to pay taxes where they operate. Also, any Government will still be able to set whatever local corporate tax rate they want. But there will be a global minimum tax rate of 15 %, and if a multinational seeks to pay lower taxes by shifting its profits to a tax-haven (say 6%), the multinational’s home country can top-up the tax rate to this minimum rate (by imposing the extra 9%). This will eliminate the advantages of shifting altogether. Next month, the agreement will be discussed in the G20 meeting at Venice, of which India is also a part, to form a broader consensus on this idea.
China’s Crackdown on Bitcoin Mining
China accounts for up to three-quarters of the world’s total bitcoin supply (owing to its extensive bitcoin mining operations). However, in late May, the Chinese Government signalled that they would crack down on bitcoin mining and trading operations, causing the entire cryptocurrency market to crash. The primary reason is that bitcoin mining requires enormous amounts of electricity, something which is available cheaply and in abundance in China (for attracting foreign investments). Consider this report by the Mint– “They (miners) set up mining operations adjacent to hydropower producers in the mountainous Sichuan and Yunnan provinces where turbines churn snowmelt and seasonal downpours into electricity. When river flows eased each winter, miners packed their computers and headed north to coal-rich Xinjiang and Inner Mongolia.”
As per Time, “If the global bitcoin mining industry were a country, it would be the 29th biggest consumer of power in the world on a list of nations by energy use.” This unchecked use of power is at odds with Beijing’s political priorities as it seeks to reduce its carbon footprint by 2025 and achieve ambitious goals on the climate front. In response to the announcement made by the Government, electricity producers started ejecting miners from their grid. While the days for bitcoin mining in China might be numbered, countries like the US could gain by increasing their share in the global supply of bitcoins.
[BITCOIN- WHAT & HOW- ALL YOUR QUESTIONS ANSWERED]
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If the MNC gets taxed additionally i e.,9% extra by its home country, which is over and above 6% already paid, wouldn’t this come under double taxation ?
The idea is that every multinational will get taxed at 15 % (rate may change if/when adopted globally); the proceeds going to different exchequers. In double taxation, the same profits get taxed twice at two different stages. Here it will be taxed only once, at 15 %.