Authored By: Sri Durga O
Government Law College, Tirunelveli
Abstract
The Global Minimum Corporate Tax (GMCT) marks a landmark in the history of international taxation. Designed to curb profit shifting and restore fairness in global corporate taxation, it seeks to ensure that multinational enterprises pay at least a 15% tax wherever they operate. This reform, led by the OECD and G20, redefines fiscal sovereignty and aims to end harmful tax competition among nations. While the initiative enhances transparency and cooperation, it also poses new challenges for implementation, particularly in developing countries such as India. This article examines the global framework of the GMCT, its implications for national sovereignty, and its potential to shape the future of international economic governance.
Introduction
In an era of globalized commerce, multinational enterprises (MNEs) have become adept at shifting profits to jurisdictions with lower tax rates to minimize liabilities. This practice—commonly referred to as base erosion and profit shifting (BEPS)—has eroded national tax bases and fueled concerns about fairness in global taxation.[1]
Recognizing these challenges, the Organisation for Economic Co-operation and Development (OECD) and the G20 launched the Inclusive Framework on BEPS in 2013, aimed at curbing aggressive tax avoidance practices.[2]In 2021, this cooperation produced a Two-Pillar Solution to modernize international tax rules. Pillar One reallocates part of the taxing rights to market jurisdictions, while Pillar Two introduces a global minimum corporate tax rate of 15%.[3]
The GMCT seeks to ensure that all large corporations—those with revenues above €750 million—pay at least a minimum level of tax in each jurisdiction.[4]The reform’s goals are to end the “race to the bottom,” reduce inequality, and strengthen public finances worldwide. Yet, it has reignited debates on fiscal sovereignty, policy autonomy, and fair competition in the international economic order.[5]
Evolution of the Global Minimum Corporate Tax
The roots of the global minimum tax can be traced to the OECD’s BEPS Project, which exposed how MNEs exploit mismatches in tax systems to shift profits artificially.[6] The initiative evolved through international consensus, culminating in the 2021 OECD/G20 Inclusive Framework Agreement, endorsed by over 135 jurisdictions.[7]
Under Pillar Two, an MNE’s income in any jurisdiction is subject to an effective tax rate (ETR) of at least 15%.[8] If a subsidiary pays less, the parent entity’s home country may impose a top-up tax to reach the threshold.[9] This prevents firms from booking profits in tax havens and ensures that income is taxed somewhere.
The European Union (EU) adopted the model through the EU Minimum Tax Directive (2022/2523), requiring all Member States to implement it by 2024.[10] Other economies such as Japan, South Korea, and the United Kingdom have announced similar frameworks.[11]
This global coordination reflects an emerging trend: tax policy, once a purely domestic affair, is now part of international governance.[12]
Legal Dimensions and the Sovereignty Debate
Fiscal Sovereignty in International Law
Fiscal sovereignty gives each state the right to design and apply its own tax system.[13] However, the GMCT introduces a coordinated constraint—a universal floor rate below which taxation cannot fall. While voluntary, it exerts indirect pressure on non-participating states, as their tax advantages can be neutralized through the top-up mechanism.[14] This shift reflects a new understanding of sovereignty: one grounded not in isolation, but in cooperation.[15] India’s judiciary has long recognized the distinction between legitimate tax planning and impermissible avoidance schemes, as established in McDowell & Co. Ltd. V. Commercial Tax Officer[16], reinforcing that sovereign tax policies must be applied in good faith and cannot be undermined through artificial arrangements.
The Nature of International Obligations
Unlike traditional treaties, the global minimum tax is not a legally binding convention. Each country must enact its own domestic law consistent with OECD’s Global Anti-Base Erosion (GloBE) Rules.[17]This hybrid approach maintains national autonomy while ensuring global uniformity.
Yet, some scholars warn of “tax imperialism,” arguing that OECD-led initiatives disproportionately reflect the interests of developed nations.[18] Developing countries often face administrative burdens without equal decision-making power.[19]
Implementation and Policy Challenges
The implementation of the GMCT presents legal, administrative, and developmental challenges.
Uneven Global Implementation
While many OECD members are implementing the rules, several developing countries remain hesitant due to complexity and limited resources.[20] This creates a risk of fragmentation, where inconsistent adoption may lead to double taxation or legal uncertainty.[21]
B. Administrative Burden
The Globe framework demands sophisticated data management and coordination across tax authorities.[22]Many developing nations lack such systems, making enforcement costly.[23] India’s experience in Vodafone International Holdings BV v. Union of India[24] demonstrates the complexities of taxing cross-border corporate transactions, highlighting the administrative and legal challenges that countries may face when implementing a global minimum tax
Economic Impact
Critics argue that the minimum tax may reduce investment in low-tax jurisdictions that depend on fiscal incentives.[25] However, proponents believe it will level the playing field and curb harmful competition.[26]
Governance and Inclusivity
The OECD’s leadership has drawn calls for a more inclusive governance model, possibly under UN oversight, to ensure fair representation for all economies.[27]
The Indian Perspective: Opportunities and Concerns
India has long supported global tax fairness while protecting its fiscal interests.[28] As a major member of the OECD/G20 Inclusive Framework, India recognizes the value of the minimum tax but remains cautious about its domestic implications.[29]
India’s corporate tax rate—22% for existing companies and 15% for new manufacturing firms—already aligns with the global minimum rate.[30] However, the country’s reliance on India also faces administrative challenges in coordinating the GMCT with its Equalisation Levy and Significant Economic Presence rules.[32] India’s existing General Anti-Avoidance Rules (GAAR)[33] provide a domestic mechanism to prevent aggressive tax planning, reflecting the country’s proactive approach to aligning with global anti-base erosion standards. Yet, the reform offers opportunities for stable revenue, increased investor confidence, and enhanced credibility in global markets.[34]
The Way Forward: Policy Suggestions
- Inclusive Governance: Transfer discussions to a more balanced forum, ensuring Global South representation.[35]
- Simplified Administration: Provide technical aid to developing nations to implement Pillar Two efficiently.[36]
- Reform Incentives: Replace low-tax strategies with targeted grants or innovation subsidies.[37]
- Transparency: Expand information-sharing and country-by-country reporting to improve compliance.[38]
- Gradual Transition: Introduce phased enforcement to prevent economic shocks in emerging markets.[39]
Conclusion
The Global Minimum Corporate Tax represents a decisive step toward international tax fairness. By creating a floor for corporate taxation, it curbs harmful competition and restores equity among nations. Yet, it also redefines fiscal sovereignty, requiring states to balance autonomy with cooperation.
For India and other developing economies, the challenge lies not in acceptance but in effective adaptation—aligning domestic policy with international norms while safeguarding growth and investment. The future of global taxation will depend on inclusivity, transparency, and shared commitment to fairness in an interdependent world.
Reference(S):
- Anuj Kapoor, Global Minimum Tax with a Focus on Developing Countries: India as a Case Study, 9 Int’l J. Legal Multidisciplinary Stud. Hum. 154 (2021).
- Reuven S. Avi-Yonah, “Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State,” 113 Harv. L. Rev. 1573 (2022).
- Jane G. Gravelle, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy, Cong. Research Serv., R47174 (2023).
- McDowell & Co. Ltd. V. Commercial Tax Officer, (1986) 2 SCC 669 (India).
- Vodafone Int’l Holdings BV v. Union of India, (2012) 6 SCC 613 (India).
- Income Tax Act, 1961, § 97A (GAAR).
- OECD/G20 Inclusive Framework on BEPS, Action Plan on Base Erosion and Profit Shifting (OECD 2013).
- OECD, Global Anti-Base Erosion (GloBE) Model Rules – Pillar Two (2021).
- IBFD, Global Minimum Tax Reform and the Future of Tax Competition (2022).
- United Nations, Resolution on Promoting Inclusive and Effective International Tax Cooperation, A/RES/78/230 (2023).
[1] OECD, Action Plan on Base Erosion and Profit Shifting (2013).
[2] OECD/G20 Inclusive Framework on BEPS, Progress Report 2023 (2023).
[3] OECD/G20 Inclusive Framework, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Oct. 8, 2021).
[4] OECD, Global Anti-Base Erosion (GloBE) Model Rules – Pillar Two (2021).
[5] Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 1573 (2022).
[6] OECD, BEPS Action 11: Measuring and Monitoring BEPS (2015).
[7] OECD/G20 Inclusive Framework, Statement on the Two-Pillar Solution (Oct. 2021).
[8] OECD, GloBE Model Rules, supra note 4.
[9] OECD, Minimum Tax Implementation Handbook (Pillar Two) (2023).
[10] Council Directive (EU) 2022/2523 of 14 Dec. 2022, 2022 O.J. (L 328) 1.
[11] European Commission, Minimum Corporate Taxation: Implementation across the EU (2024).
[12] Jane G. Gravelle, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy, Cong. Research Serv., R47174 (2023).
[13] Michael Devereux, “Fiscal Sovereignty and International Tax Reform,” 74 Brit. Tax Rev. 67 (2021).
[14] OECD, GloBE Administrative Guidance (2023).
[15] Allison Christians, “Sovereignty in the Era of Global Tax Governance,” 45 Yale J. Int’l L. 1 (2021).
[16] McDowell & Co. Ltd. v. Commercial Tax Officer, (1986) 2 SCC 669.
[17] OECD, Minimum Tax Implementation Handbook (Pillar Two), supra note 9.
[18] Alex Cobham & Petr Janský, “Global Minimum Tax: Who Wins and Who Loses?” Tax Justice Network Report (2022).
[19] United Nations, Resolution on Promoting Inclusive and Effective International Tax Cooperation, U.N. Doc. A/RES/78/230 (2023).
[20] OECD, Progress Report on BEPS Implementation (2023).
[21] Avi-Yonah, supra note 5
[22].OECD, Administrative Guidance on Pillar Two Rules (June 2024).
[23] IMF, Tax Policy Design in Developing Economies (2022).
[24] Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613.
[25] Cobham & Janský, supra note 17.
[26] European Commission, EU Tax Observatory Annual Report (2024).
[27] United Nations, supra note 18.
[28] Ministry of Finance (India), India’s Position on Global Tax Reform (2023).
[29] Anuj Kapoor, Global Minimum Tax with a Focus on Developing Countries: India as a Case Study, 9 Int’l J. Legal Multidisciplinary Stud. Hum. 154 (2021).
[30] Income-tax Act, 1961, §§115BAA–BAB (India).
[31] IBFD, Global Minimum Tax Reform and the Future of Tax Competition (2022).
[32] Government of India, Finance Act (2021).
[33] Income Tax Act, 1961, § 97A (General Anti-Avoidance Rule); see also Press Release, Ministry of Finance, India, Implementation of GAAR Provisions (2017).
[34] OECD, Country-by-Country Reporting: India Review (2023).
[35] United Nations, supra note 18.
[36] IMF, supra note 22.
[37] OECD, Policy Note on Sustainable Tax Incentives (2024).
[38] OECD, Automatic Exchange of Information Portal (2023).
[39] OECD, Implementation Progress Report on Pillar Two (2024
