Today, Verum had woken up with a smile on her face. The air was crisp with the coming of the winter. Verum sighed in contentment at the thought of soup and hot chocolate. But then Verum’s crystal ball began spinning, and it popped out one word – taxes!
“Taxes?” shrieked Verum, “Are you telling me today’s news is about taxes?”
She sighed and tried to understand the news. Fortunately, Verum knew a bit about today’s topic. She announced, “The Organisation for Economic Cooperation and Development (OECD) said 136 countries have agreed to a global tax deal. According to this deal, big companies will pay a minimum 15% tax rate in all these countries. Because of this, they won’t be able to avoid paying taxes.”
“Verum, could you start from the beginning?” said Orak, “What are taxes?”
“Scorch, could you answer that?” said Verum.
“A government supports itself financially with the amount of money it collects from its citizens. These amounts paid by the citizens to the government are called taxes. The government collects them through various means. We pay taxes when we buy something, say a packet of biscuits.
Some taxes are collected as a proportion of people’s incomes. There is a fixed amount for different salary slabs. The government uses this money to fund facilities for the people such as healthcare, education, infrastructure building, and so on,” explained Scorch.
“And just like individuals pay taxes, so do companies. However, some companies move their operations to those countries where the tax rates are low. And they end up paying lower taxes,” added Verum.
“Tell us more about the new global tax deal!” said Felix.
“The deal has two pillars,” started Verum, “Some companies are active in more than one country. They are called Multinational Enterprises (MNEs). According to the Pillar One of the deal, these companies can be taxed in the country where its customer base is located, even if the company doesn’t have physical offices there. Profits of these MNEs will also be allocated to such countries.”
“And Pillar Two introduces the global minimum tax rate of 15%,” added Verum, “This tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around $ 150 billion in additional global tax revenues annually.”
“That’s interesting,” said Scorch.