Global Minimum Tax: Meaning, Features, Challenges and Global Impact

The Global Minimum Tax (GMT) is one of the most ambitious international tax reforms aimed at curbing tax avoidance by multinational corporations (MNCs). Conceived in a world where profits can be shifted easily across borders, the policy seeks to ensure that large companies pay a minimum effective corporate tax of 15%, regardless of where they operate. While the idea promises greater fairness and revenue stability, recent exemptions—especially for US multinationals—have raised serious concerns about its effectiveness.

What is the Global Minimum Tax?

The Global Minimum Tax is a framework under Pillar Two of the OECD’s international tax reforms, designed to prevent a “race to the bottom” in corporate taxation. It ensures that if a multinational pays less than 15% tax in one country, its home country can impose a top-up tax to make up the difference.

The agreement was brokered in 2021 under the leadership of the Organisation for Economic Co-operation and Development and endorsed by over 145 countries.

Objectives of the Global Minimum Tax

• Prevent profit shifting to low-tax jurisdictions

• Create a level playing field between countries

• Protect national tax bases

• Enhance fairness in the global tax system

• Strengthen multilateral economic cooperation

Key Features of the Global Minimum Tax

• Minimum Rate: 15% effective corporate tax

• Coverage: Large multinational enterprises (generally €750 million+ revenue)

• Top-up Tax Mechanism: Applied if profits are undertaxed abroad

• Safe Harbour Provisions: Simplified compliance for certain jurisdictions

• Implementation Timeline: Most countries aim for full rollout by 2026–27

Role of OECD and G7

The deal was politically backed by the G7, which played a crucial role in building early consensus among advanced economies. The OECD provided the technical framework, dispute resolution mechanisms, and compliance guidelines.

Recent Developments: US Exemptions and Controversy

Despite supporting the 2021 agreement initially, the US later demanded carve-outs for its multinationals. Under President Donald Trump, Washington threatened retaliatory taxes, pushing the OECD to introduce safe harbour exemptions for companies headquartered in jurisdictions deemed to meet “minimum taxation standards.”

This move:

• Diluted the original intent of the GMT

• Triggered demands for similar exemptions by other countries

• Raised concerns over unequal treatment and credibility

Challenges Facing the Global Minimum Tax

1. Political Resistance

Major economies prioritising national competitiveness weaken collective enforcement.

2. Unequal Exemptions

Carve-outs for powerful countries undermine trust among developing nations.

3. Compliance Costs

Businesses face high implementation and reporting costs, especially in the EU.

4. Developing Country Concerns

Limited administrative capacity reduces benefits for lower-income countries.

Implications for India and Developing Economies

For countries like India, the Global Minimum Tax offers both opportunities and risks:

• Positive: Reduced profit shifting, higher tax revenues

• Negative: Loss of competitive tax incentives, dependence on OECD-driven rules

India has supported the framework but continues to push for fairer allocation of taxing rights under Pillar One.

Way Forward

To remain effective, the Global Minimum Tax must:

• Minimise selective exemptions

• Strengthen review and enforcement mechanisms

• Ensure equitable benefits for developing economies

• Balance simplicity with fairness

Conclusion

The Global Minimum Tax represents a historic step toward reforming international taxation in a globalised economy. However, recent exemptions—especially for US multinationals—have weakened its moral and practical authority. Whether the GMT evolves into a robust global standard or a diluted compromise will depend on sustained political will and genuine multilateral cooperation.

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