Interview: Sudhir Kapadia, EY India Tax Leader – ‘OECD tax deal directionally good for India; being a large market, the country stands to gain’

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October 20, 2021 3:00 AM

According to the latest OECD framework agreement, Pillar One will apply to multinational enterprises (MNEs) with profitability above 10% and global turnover above €20 billion.

oced tax

India will gain in terms of tax revenues as well as through more inbound investments after the implementation of the OECD Inclusive Framework on Base Erosion and Profit Shifting from 2023, EY India Tax Leader Sudhir Kapadia told FE’s Prasanta Sahu. The new regime is aimed at addressing the tax challenges arising from the digitalisation of the global economies.

According to the latest OECD framework agreement, Pillar One will apply to multinational enterprises (MNEs) 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 over 10% of revenue. Pillar Two introduces a global minimum corporate tax rate set at 15%. India will gain by being a part of the global tax deal than being out of it, Kapadia asserted. Excerpts.

Under Pillar One, taxing rights on more than $125 billion of profit are expected to be reallocated to market jurisdictions each year. How much India will gain from this?

It is difficult to quantify at this stage. But India will get more tax revenues than `2,000-3,000 crore that it gets annually from the equalisation levy.

Under Pillar Two, the minimum tax of 15% is estimated to generate around $150 billion in additional global tax revenues annually. How much could be India’s share in this?

It is more of a business advantage than a revenue augmentation for India. Indian MNEs operating outside India in low tax jurisdictions is not very high in number. I don’t think this would generate significant revenues for India. But it will benefit India by eliminating one of the dimensions of competition, which creates more level playing for India. India doesn’t have to compete on tax rates with low tax jurisdictions.

Some analysts feel India’s targeted income and investment-linked incentives may be adversely affected, due to the proposed tax threshold. The subsidiaries of foreign MNEs in SEZs claim Section 10AA of IT Act benefits, and entities in infrastructure claim deductions under Section 80-IA series may come within Pillar 2 radar due to the effective tax rate being below 15%…

The government has introduced sunset mechanisms for SEZ units. Tax benefits to those units are being grandfathered. Secondly, the government has introduced a lower corporate tax rate (of 25% including surcharge) without deduction as a choice. So, the importance of these deductions is on the wane.

Will India have to abolish the equalization levy and the special economic presence tax after the new global tax deal is implemented?

Those will have to be withdrawn effective from 2023 as per the current timeline. Once India is part of the global mechanism, the country has to remove them. But, on balance, India will gain much more compared with the loss of revenue due to the withdrawal of the equalization levy.

The threshold for equalization levy in India is very low while the threshold for under OECD formula is very high…

India collects annually `2,000-3,000 crore from the equalization levy. It is a very modest number. It has been exaggerated that India will lose out.

India could have benefited more, had the profit reallocation to markets been more than the proposed 25% of the profit before tax over 10% of revenue?

Obviously, countries, where these companies are located, don’t want to give up their rights. But, it’s good for India to be part of the deal, which is a bit like the WTO. It is better to be in it rather than out of it. India will gain something out of this profit reallocation. So, 25% seems okay. After all, it is super-profits that are sought to be reallocated not normal profits.

Can you elaborate on how India could be a net gainer from the OECD’s two-pillar taxation approach for MNEs?

The global minimum tax will not adversely impact inbound investments. India’s minimum tax rate is 15% for new manufacturing units. That is just about the same as the proposed threshold minimum. So, an overseas company will not have any disadvantage even if they avail of the lowest rate of 15% tax for new manufacturing units in India. For inbound investments, the competition based on the tax rate is something which India can now avoid because the attraction to keep rates very low will diminish with other countries also. So, the 15% tax rate suits India well.

On the outbound investments, it helps India. Right now, the Indian multinational footprint is fairly modest. But it will keep growing as the economy grows. The incentive for Indian companies to set up overseas operations or a subsidiary in a low tax jurisdiction goes away as India will get the right to top up the difference. Today, an Indian MNE can set up a unit in a zero-tax jurisdiction and legitimately pay no taxes there and not distribute profits back to India. Under the OECD multilateral pact, India will get the right to top up. Since those profits in tax havens are untaxed, India will get a right to tax them at the minimum rate of 15%.

India has been at the forefront advocating for a tax based on the market or in simple terms, based on the number of consumers in the country for the digital commerce activity. So, I will say it is a good initial step as it will apply to very large 100-odd companies due to the large turnover threshold. In the first phase, in quantum terms, India may not benefit tremendously, but the gain will be better than what it is today. Directionally, it will get better for a country like India. Any country like India with a large market will benefit from the market basis of taxation of digital commerce.

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