India and majority members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on July 1 adopted a high-level statement outlining a consensus solution to address tax challenges arising from the digitalisation of the economy.
As per a statement from the Centre, the proposed solution consists of two components – Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consisting of minimum tax and subject to tax rules.
Some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed.
Technical details of the proposal will be worked out in the coming months and a consensus agreement is expected by October.
“The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets, consideration of demand side factors in profit allocation, need to seriously address the issue of cross border profit shifting and need for subject to tax rule to stop treaty shopping,” the statement added.
It further noted that India is in favour of a consensus solution which is “simple to implement and simple to comply.”
“At the same time, the solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies. India will continue to be constructively engaged for reaching a consensus based ready to implement solution with Pillar one and Pillar two as a package by October and contribute positively for the advancement of the international tax agenda,” it said.
Impact on India
"The Pillar I of the OECD's/G20's two-pillar solutions to address tax challenge of digitalization of economy, seeks to usher in a special purpose nexus rule and profit allocation formula for reallocating a part of super normal profits of the largest (sales more than 20 billion Euros) and most profitable (more than 10 per cent global profitability) multinational groups, amongst market countries like India and China," Sumit Singhania, Partner at Deloitte India, told Moneycontrol.
With regards to India, this outcome will have quantitative benefits since it will ensure India gets its fair share of corporate tax on earnings from massive market it provides to MNEs, Singhania said.
"The broader agreement reached on Pillar II solutions is the most significant step towards ending the’ race to the bottom’ that countries have indulged in for decades. A global Min tax rule will ensure level playing field for countries like India that offers massive market for MNEs without providing a tax safe harbor," he added.
Singhania stressed that the latest developments would have potential to significantly contain the practice of treaty shopping, whereby companies or individuals attempt to indirectly access the benefits of a tax treaty between two jurisdictions without being a resident of one of those jurisdictions.
With regards to foreign direct investment flows into India from traditionally popular jurisdictions such as Singapore and Mauritius being affected as a result of this, Singhania said it was unlikely to have much bearing since investments from these jurisdictions are predicated on a number of non-tax leverages such as access to mature capital market /investors’ preference etc. That said, the impact of Min tax will now need to adequately factored in each such investment, he added.
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