The Union Budget 2023-24 is likely to announce a roadmap for the implementation of the Pillar 2 solution of the Global Anti Base Erosion Rules (GloBE) of the OECD and G-20, which seeks to ensure that multinational corporations are subjected to a minimum effective tax of 15% in every country they operate.
While a change in the tax rates through the Finance Bill is unlikely (India’s corporate tax rate is anywhere higher than the Pillar 2 threshold), finance minister Nirmala Sitharaman is expected to initiate work on Pillar 2 compliance and give some guidance on how the relevant proposals will be taken forward in the domestic context.
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The OECD/G20 inclusive framework is aimed at equipping governments with domestic and international instruments to tackle tax avoidance by firms operating in multiple countries.
The Pillar 1 will seek reallocation of consolidated profits of multinational enterprises to jurisdictions where their products and services and ensure standardisation of the remuneration of routine marketing and distribution activities. This is seen to be effective given the rapid expansion of digital economy.
It is expected that the Pillar 2 of the GloBE may be implemented sometime in 2023 but the OECD first has to release an implementation framework and rules. Implementation of Pillar 1 is likely to be delayed to 2024.
Pillar 2 aims to levy a global minimum corporate tax of 15% on any company with over €750 million of annual revenue. Over 135 countries have signed up for this plan.
Experts believe that an announcement in the Union Budget is expected to give clarity to Indian and global multinational companies and could possibly help them prepare for the new system. A proposal for setting up a committee to look into the implementation or come out with a draft report would also be a welcome move, they said.
Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm states noted that there is an increased momentum on the implementation part for Pillar 2. Recently, in December 2022, the OECD published new Pillar 2 documents as implementation package covering guidance on safe harbours and penalty relief, the information returns and tax certainty with respect to the global minimum tax rules.
“India has committed to roll back its unilateral taxes such as equalisation levy once the Pillar 2 is in place. However, it can be expected that there should be an explicit clarification as well by the government that the equalisation levy (EL) is a temporary measure,” he said.
Saurrav Sood, Practice Leader – International Tax and Transfer Pricing, SW India noted that at present, India’s corporate tax rate is higher than the global minimum tax rate so it seems there will not be much to do at India level.
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“In order to put these things to perspective by bringing policy changes, it seems India is adopting a wait and watch approach. Where many countries have come out with draft changes to their domestic tax law through a consultation paper, it seems India is waiting for the announcement of OECD of its implementation framework of Pillar 2,” he said.
Equalisation levy or Google tax was introduced in India in 2016 with the intent to tax cross-border digital transactions. It was seen as a temporary measure at the time. The government then introduced the concept of significant economic presence.
Experts have also sought clarity on these issues. “ Guidanace on applicability of equalisation levy for the digital economy and e-commerce sector vis-a-vis adoption of Pillar 1 will mitigate duplication of taxes,” said Samir Kanabar, Partner, EY India.