Moneycontrol Pro Panorama | Where does India stand in the global tax agreement?

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Nobody likes to pay taxes. But grumble as we might, taxes fund a government’s effort to keep the economy running. But in a globalised world, companies discovered they could move their tax base to low-tax countries, even as they continued to sell in their home market and countries across the world. When you add digitalised to globalised, then this took wings further as companies did not even have to step foot into a country to sell. The Internet became the new trade outpost. When governments saw their tax revenues decline, they took measures to curb it but met with little success.

India is no stranger to this problem. It took measures to tax corporate or other profits that were escaping being taxed. For instance, even if a company was situated in a tax haven, if the shares being sold represent an asset, such as a steel plant in India, then our government would tax the capital gains on sale of the company. Over the years, India has continued tightening the screws. The one relatively recent measure that attracted huge attention globally was the equalisation levy, also called the digital tax. This was levied on online transactions done in India, such as e-commerce or online advertising, irrespective of where the company was situated as a tax resident.

Europe too had made similar moves. It also urged other governments to come together to set a global minimum tax, an effort steered by the Organisation for Economic Co-operation and Development (OECD). But the US, home to the world’s largest corporations and especially of the digital variety, was never really interested in what it saw as a threat to its own interests. When the Republicans were in power, there was little interest in hurting corporate interests. The initiative acquired urgency after the new government made it a priority, with Janet Yellen taking the lead.

What has been decided? One, the global minimum corporate tax has been set at 15 percent on companies with a minimum revenue of EUR750 million (Rs 6,500 crore). A difference from the earlier negotiations is that there is no built-in ability to increase this rate, a concession made to get Ireland to come on board. The country, with a tax rate of 12.5 percent, is a favoured destination for technology companies and is hoping that a slender increase will not be a major disincentive for companies registered there.

But other concessions have been made to countries, according to news reports, and only when these become public after the final agreements are signed will we know the full impact. India is not expected to be affected by the minimum tax, as even a new lower tax rate announced in 2019 for new manufacturing companies is higher than 15 percent.

But the real challenge for India is the deal on the equalisation levy front, and as this analysis in today’s edition points out the devil may lie in the details. And those are not known now. The decision by all countries is being painted as a win-win for all, countries and companies. The OECD statement says that an additional $150billion in taxes will become available from the new minimum tax rate, but which countries this will go to is not clear. It may be fair to assume a large portion will go to developed markets like the US.

The tax agreement proposes that on the equalisation levy front, a new structure will be in place for companies with a minimum global revenue of EUR20 billion (Rs 1,74,000 crore). On revenue earned in countries where they are not ordinarily taxable, such as India for example, this will become taxable. How? The first 10 percent profit margin will not be taxed. Of the remaining 90 percent, only a fourth will be taxed as income in the country where the sale took place. That’s a sweet deal for foreign companies. No wonder then that they are pleased with the outcome of this deal. They may have agreed for a higher minimum tax, but in return escape equalisation levies in countries they operate in.

And, it’s no wonder that developing countries were opposing the deal. The FT had reported that India too agreed to the deal at the last minute. But it’s not known whether any concessions were made for India just as they were for Ireland. Four developing countries, Kenya, Sri Lanka, Pakistan and Nigeria have not signed up as yet.

The OECD says $125 billion in profit will be reallocated to other countries to be taxed at their domestic rates. But this could include developed countries as well. There are several questions that arise. Will India earn more revenues from the taxing rights on revenue compared to what it is earning now? What if companies show a less than 10 percent profit margin on revenues earned in India? Will it be allowed to continue with a digital tax on companies with revenues below EUR 20 billion? Will developing countries be allowed to renegotiate if their revenues after the deal goes into effect suffer? These are all questions to which we will get answers only in the months and years ahead.

When the government moves legislative changes to its own tax laws to give effect to the new tax deal, we will have a better picture of the implications for India’s tax revenues. There is a deadline of 2023 for the deal to come into effect and India should negotiate on the fine print to make sure there are enough safeguards to protect its interests.

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Ravi Ananthanarayanan
Moneycontrol Pro