A collection of 136 countries, including the G-20 member nations and the Organization for Economic Cooperation and Development, has agreed on the OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) after months of negotiations.
The framework provides a two-pillar solution to address the tax challenges arising from the digitalisation of the global economy, as well as prevents a proverbial ‘race to the bottom’ by countries looking to slash tax rates to attract investment.
"It’s an important win for tax diplomacy and a seminal moment in international tax history. A consensus on pillar one and pillar two are key to secure a more certain and stable tax regime for multinationals and governments,” said Gouri Puri, Partner at Shardul Amarchand Mangaldas and Co.
Now, the 136 nations that include India, will begin another round of discussions to decide the finer details of the framework. It is also expected to be discussed in the upcoming IMF-World Bank meeting, which Finance Minister Nirmala Sitharaman is expected to attend.
The Two Pillars
According to the framework, Pillar One would ensure that large multinational tech companies like Amazon, Google and others pay more taxes in countries where they have customers or users regardless of where they operate from but may not have physical or intellectual property in all of those markets, which make it difficult to tax them.
Under this Pillar, which will be signed in 2022 and be enforced from 2023, multinational enterprises with global turnover above 20 billion euros and pre-tax profit above 10 percent of revenue (known as super normal profit) will have to pay 25 percent of the profit before tax.
This 25 percent will be divided among countries on a nexus-based allocation system, which will now be negotiated.
Pillar Two, which was supposed to be implemented by 2023 but now has been deferred to 2024, mandates a global minimum tax of 15 per cent. It is aimed to eliminate the concept of race to the bottom in terms of tax competition. Even a tax haven like Ireland, which till recently was opposed to the proposal, and has a corporate tax rate of 12.5 percent, has agreed to come on board.
“Consensus on minimum tax will practically make tax competition among nations rather unfeasible by narrowing down any such opportunities to rarest circumstances.” Said Sumit Singhania, Partner, Deloitte India.
Singhania said that the two-pillar solutions finally agreed will result into redistribution of $125-billion taxable profits annually, and ensure global companies pay a minimum of 15 percent tax once these measures are implemented.
“The two-pillar solutions ought to be reckoned as enduring overhaul of century-old international tax regime, that’s here to change the rule of the global profit allocation among taxing jurisdictions completely,” he said.
“While the fine print is awaited, India is balancing its interests both as an importer and an exporter of capital, goods and services. The deal will prevent a race to the bottom among countries,” said Gouri Puri.
What this means for India
While there is a lot of work to be done by the OECD-G-20 members, one thing is clear, India will have to let go to equalisation levy, or ‘Google Tax’ as it is referred to, by 2023.
Google tax applies to non-resident e-commerce operators. While it applied only to digital advertising services till 2019-20 at the rate of 6 percent, the government widened the scope to impose a 2 per cent tax on non-resident e-commerce players from 2020-21. It covers players like Adobe, Uber, Udemy, Zoom, Expedia, Alibaba, IKEA, LinkedIn, Spotify, and eBay.
The government's earnings from the equalisation levy almost doubled to Rs 2,057 crore in FY21 from Rs 1,136 crore in the previous year. The collection stood at Rs 338.6 crore in 2016-17, Rs 589.4 crore in 2017-18 and reached Rs 938.9 crore in 2018-19.
“The OECD has sought for an immediate and upfront withdrawal of unilateral Digital Services Tax and a commitment not to introduce such measures in the future,” said Sandeep Jhunjhunwala, Partner, Nangia Andersen.
Jhunjhunwala said that as of today, no newly enacted digital services tax or other relevant similar measures would be imposed on any company from October 8, 2021 and existing ones will also cease to apply from 2023.
India has also conceded ground in that it has agreed to distribution among nations of 25 percent of super-normal profits as against its stand for at least 30 percent.
Policymakers in the finance ministry, however, hope that once Pillar Two comes into force, it would benefit India as the countries won’t be vying with each other to slash corporate tax rates.
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