Trunk Economics | August 21, 2024MNCs better watch, the clock is ticking on a new GMT
MONEY, IT IS OFTEN SAID, FOLLOWS the path of least resistance.
In other words, funds flow to geographies where there are fewer regulatory frictions and rigidities. That is why in the world of high finance where billions of dollars move across continents at the click of a button one sees some cities stand out as the most proficient centres attracting the highest amount of money. Think Singapore in APAC, think London in Europe, think New York in the US.
It is not for nothing why when the US Fed Reserve sneezes, markets across the world catches cold. And that is why, when the US printed trillions of dollars to pump-prime the economy in the aftermath of the sub-prime crisis and the stunning collapse of several Wall Street icons including the erstwhile Lehman Brothers, large slices of those monies flew into emerging markets, including India, chasing high returns.
While this inter-connectedness of investments in the financial markets is fairly evident in an increasingly `flat’ world, there is something epochal that is taking place in the world of physical investments that could have a significant bearing on the functioning of multinational corporations (MNCs).
MNCs, by nature, chase the jurisdiction of least taxes. Think Bermuda. Think Isle of Man. Think Cayman Islands.
A determined and collaborative effort is on to roll out a Global Minimum Tax (GMT) initiative, implying MNCs will have to pay a uniform minimum tax of 15 per cent, regardless of where they operate from. We could well be witnessing the beginning of the end of the economic attractiveness of exotic tax havens.
MNCs, show a strong preference to base themselves, on paper, in low tax principalities and shift their profits to these dominions even though their operations and earnings come from countries outside of these protectorates.
Time for a GMT
There is now a collaborative and determined effort to standardize tax rules through a Global Minimum Tax (GMT) initiative. Once in place and rolled out on scale, the initiative, which the Organisation for Economic Cooperation and Development (OECD) has proposed, will ensure that multinational enterprises (MNCs) with revenues above EUR 750 million will be subject to a 15% effective minimum tax rate wherever they operate.
The nature and scale of this exercise is ambitious and grand, perhaps the biggest coordinated and worldwide tax reform ever to be attempted in global economic history.
GMT seeks to end the rampant practice of profit shifting by MNCs who seek to minimise tax payout and maximise their earnings. Once GMT kicks-in across a critical mass of countries, MNCs will have to pay a uniform minimum tax of 15 percent, regardless of where they operate from.
Its implementation, however, may have administrative, accounting and technological hurdles. For instance, here we are talking about not just reconciling quarterly and annual accounts, but also validating these on a global scale on a real time basis.
The G20, arguably the most influential league of the richest economies, is onboard on this. We could well be witnessing the beginning of the end of the economic attractiveness of exotic tax havens, known as much for friendly tax rates and rules as for their picturesque and magnificent landscapes.
GMT, in global economic parlance, is set to acquire a whole new meaning, far removed from Greenwich Mean Time, the synonym for reference point for all time on Earth.
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