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Wednesday, July 17, 2024

Pakistan not part of the OECD’s global minimum corporate tax rate deal

The global minimum corporate tax rate deal is an initiative pushed by the US. It aims to make the rich corporations pay their fair share of taxes.

On October 8, the Organization for Economic Cooperation and Development (OECD) announced that 136 countries had agreed to a global minimum tax rate deal. The global minimum tax rate deal establishes a 15% minimum corporate tax rate, starting 2023. These 136 countries represent more than 90% of the global GDP.

The global minimum corporate tax rate would help countries collect around $150 billion in new revenues annually.  Taxing rights on more than $125 billion of profit would be shifted to countries where big multinationals earn their income.

Only four countries have not joined in the deal and Pakistan is one of them, with the other three countries being Kenya, Sri Lanka and Nigeria. The establishment of a global minimum corporate tax rate for multinationals is aimed at curbing the practice of multinationals shifting operations to tax havens

Read More: PM Khan congratulates Pakistan for historic tax collection

As part of the ‘two-pillar’ solution, OECD claims that more than $125 billion will be re-channeled from approximately 100 of the globe’s largest multinationals. This initiative now has the consent of all G20 and OECD countries. Estonia, Hungary and Ireland are also on board after their initial resistance to the idea of a global minimum corporate tax rate, because these countries already have low tax rates to lure in multinational firms.

The new 15% minimum tax rate applies to businesses with a revenue of  at least $867 million. This includes multibillion-dollar firms such as Amazon, Apple and Facebook. In addition to this, the OECD plan also specifies that multinational enterprises will have to pay their fair share of taxes wherever they do business irrespective of whether or not they have a physical presence there. Companies in financial services and extractive industries are exempted from this global minimum corporate tax rate.

Read More: Tax relief worth Rs465 billion given since August: Hammad Azhar

This agreement is spearheaded by the United States of America and co-ordinated by the OECD. OECD Secretary General Mathias Cormann touted the agreement as a decisive diplomatic victory that will make the international tax arrangements “fairer”.

Reasons for Pakistan’s hesitance to be part of minimum global tax rate deal

Pakistan, like other countries, charges Digital Service Tax (DST) on all E-commerce and digital economy payments. Interestingly, countries have agreed to immediately halt all new digital taxes. This is one of the reasons for Pakistan’s reluctance to be a part of this deal.

Abolishing digital taxes has been a key goal for the United States throughout the negotiations, as it deems such measures as discriminatory against its own tech companies.

Furthermore, Pakistan charges withholding taxes on payments to non-residents ranging from 10% to 20% on Passive Incomes e.g. FTS, interest and royalty. As per pillar one of the OECD deal, all withholding taxes on E-Commerce and digital MNCs are to be abolished.

To top it all, Pakistani authorities believe that removal of our sovereign taxes would be a step backwards for tax collection.

Moreover, Pakistan is opposed to the 15% minimum tax rate for MNCs. If the Biden administration – ironically supportive of the 15% tax rate – has been aiming to increase taxation on corporations and wealthy citizens to fund the “Build Back Better” plan, then surely a developing country has the right to call for a higher tax rate for “wealthy”.

Reallocation Concerns

Under the new system, multinationals earning more than 20 billion euros in revenue annually and having a profit margin above 10% are targeted. Pakistan maintains that allocation of 25% is way less than the required percentage.

Implementing the global minimum tax is a decision subject to approval by every country’s law making body. At what point the treaty will be implemented globally remains to be seen.