The noose has started to tighten around multinational corporations. The Group of Seven, a cabal of the world’s richest nations, are close to signing an agreement that will force these giant corporations to pay a reasonable tax in the countries where they earn their greatest slice of profits. The agreement, which is very thin on specifics, rests squarely on two main pillars. The first pillar seeks to usher in changes in the international tax system in an increasingly digital world by reallocating taxation rights on business profits in such a manner that these are no longer linked to physical presence. Instead, countries will be permitted to collect taxes from multinational corporations based on the share of profits they earn from consumers in that jurisdiction. Under the G7 agreement, these corporate behemoths can be taxed in any country where they make more than 10 per cent of profit on sales. The company will have to pay taxes at least 20 per cent above this profit threshold. The second pillar is designed to fix a minimum global corporate tax rate of 15 per cent — a move that is designed to stop countries from deliberately lowering their tax rates in order to persuade multinational corporations to set up their headquarters in these jurisdictions. This would mean that Google and Facebook, for instance, would no longer be able to locate their base in Ireland where the tax rate is as low as 12.5 per cent.

The G7 agreement marks the culmination of discussions that have been going on since 2013 when the Organisation for Economic Co-Operation and Development and the Group of 20 nations, a broader alliance that includes India, tried to rewrite international tax rules. This led to the creation of the Base Erosion and Profit Shifting project to address the global problem of unrealized corporate taxes. The OECD had estimated back then that the world suffered an annual loss of anywhere between 4 to 10 per cent of global corporate income tax or roughly $100 to 240 billion. A meeting of the G-20 is scheduled in July where India will join the negotiations. However, it will take a few more years before the 139 nations in the world are able to sew up all the loose ends.

The tardy progress over the BEPS framework had prompted countries like India to levy their versions of a digital tax. India imposed an equalization levy in 2016 that mandates every entity in India to withhold 6 per cent of the payment for specified services received from a non-resident entity. India may no longer be able to levy these digital taxes once the global tax agreement is in place. Some experts suggest that India may end up with lower revenues in the new regime than what it earns now. The 10 per cent profit threshold poses problems because multinational companies do not break down their profits by tax jurisdictions. Unless that is done, countries like India may continue to suffer.