India and other developing countries have objected to a provision in a multilateral convention that bars nations from enacting any future digital services taxes such as equalization levy, saying the clause will unduly restrict sovereign rights to make laws, a development seen delaying a global tax deal to address digitaisation challenges.
“We should be conscious that any commitment beyond a political commitment, will effectively constrain future law-making powers of sovereign jurisdictions,” according to the comments submitted by the G-24 (Group of 24 countries that includes India) on the Progress Report on Amount A of Pillar One of the proposed OECD/G20 tax deal.
According to the OECD framework agreement, Pillar One will apply to multinational companies with profitability above 10% and global turnover above €20 billion. The profit to be reallocated to markets will be calculated as 25% of the profit before tax (Amount A) in excess of 10% of revenue. Pillar Two suggests a minimum 15% tax rate.
In March this year, finance minister Nirmala Sitharaman had justifying the 2% equalisation levy (EL) imposed by India on the supply of services by multinational enterprises, saying it was a sovereign right to tax revenues earned from operations in the country.
“After arriving at some measure of consensus, implementation of Pillar One would require changes in domestic laws of member countries to align with the pillar one framework. In particular, for a country like India where a ” digital service tax” like equalisation levy is already in play, a careful evaluation of the impact of final measures under pillar one will need to be done before India agreed to withdrawal of EL. Similar considerations will govern the future course of action for other countries as well. Hence, it is very likely that the roadmap to implementation may get extended,” said Sudhir Kapadia, Tax Partner, EY India.
The G24 has also objected to inclusion of withholding taxes in Amount A as it will lead to erosion of existing taxing rights and will make Pillar One unattractive and meaningless for the developing countries. “G-24, therefore, strongly urges the Inclusive Framework to keep withholding taxes out of Amount A allocation,” the grouping said.
The developing countries also expressed strong concern about proposed dispute resolution mechanism, saying independent experts should not perform what is in essence a sovereign function.
“Panels will be tasked to adjudicate disputes/disagreements related to the allocation of Amount A to market jurisdictions. The panels will be expected to perform what is in essence a sovereign audit function for Amount A and till date, there seem to be no tax administrations that outsource their audit function to independent parties,” G24 said.
On October 8, 2021, 136 out of the 140 countries have politically committed to potentially fundamental changes to the international corporate tax system. The global tax deal is proposed to come into effect in 2024.