By Mukesh Butani & Seema Kejriwal
Recently, in an interview to Reuters, United States treasury secretary Janet Yellen said that China and India were not engaging (with the US) on a “global corporate tax deal”, a “part” of which the US is seeking to save from falling apart. In Yellen’s words, “we (the US) have a problem with India. India will not engage with us.”
The global corporate tax deal is an agreement being formulated under a multilateral forum comprising 145 countries. The initiative spearheaded by the Organisation for Economic Co-operation and Development (OECD) is to address the concern of countries about the ability of digital businesses to engage with a country’s population without having any taxable presence in the country.
Developing countries especially are seeking to address this issue on a war footing stating that the olden ways of allocating taxing rights are not “fit for purpose” in the 21st century. These rights are based on rules agreed almost a century ago, largely based on notions of physical presence. It is widely believed that when the rules were finalised in London, during World War II, they were skewed in favour of developed or capital-exporting countries as people from developing or capital-importing nations couldn’t travel due to constraints.
With their metamorphosis from underdeveloped to developing to emerging economies, large economies such as India and China started asserting greater taxing rights. This has been more notable in the past two decades.
The advent of digitalisation took the debate on allocation of taxing rights to a new plane, as digitalisation enabled businesses from developed economies to operate remotely with zero physical presence and yet tap into a large population base.
The stance of developing countries asserting their taxing rights has often reflected in claims made by the tax department during audits. Though most claims have been negated by courts, primarily due to the overriding nature of the treaties, some have been sustained. But more importantly, as a fallout of this, a policy debate has gathered momentum in the past decade.
The OECD, which has been at the forefront of initiatives to tackle anti-avoidance concerns, particularly after the 2008 financial crisis, with the backing of the G-20 developed a 15-point action plan with non-OECD countries, labelling it as an inclusive framework. Since 2015, over 140 jurisdictions have signed for BEPS or Base Erosion and Profit Shifting.
Of the 15 action plans, Action Plan 1, which dealt with allocation of taxes in a digitalised global economy, encompasses the “global corporate tax deal” secretary Yellen has referred to. In its current form, it consists of Pillar One and Pillar Two. Pillar two deals with a global minimum tax of 15% in every country, and Pillar One deals with re-allocating a share of the profits of large multinationals to market jurisdictions.
India opted for an early mover advantage with the first Action Plan 1 report released in 2015 and started levying a digital services tax known as equalisation levy way back in 2016 and followed it with its infamous expansive levy in 2020. Countries such as the UK, Hungary, Austria, Italy, etc. followed suit. Since most of the digital companies were based in the US, the US trade representative viewed it as discriminatory and threatened to impose retaliatory tariffs.
The need for a “global tax deal” brokered by the Biden administration finds its origin in US retaliation. The narrative is shaped to suggest if a global tax deal is not brokered by the OECD and the two pillars do not see the light of day, countries will seek to levy unilateral digital taxes. This may prompt countries to seek retaliation by imposing tariffs that may lead to a global trade war. It is important to note that the US is the only country that has sought to impose a retaliatory tariff.
If Pillar One goes through, India would have to forego its share of digital taxes, commit to not implementing digital or similar taxes in the future, and accept a safe harbour for baseline marketing and distribution activities undertaken in India. In return, India would get the right to tax a miniscule portion of the profits of large businesses (with over 20 billion euros in turnover).
This, too, provided that the respective countries signed up for Pillar One and ratified the same.
Even outside of this, the timelines for concluding the global deal have left nations fatigued, with emerging countries feeling marginalised given that the original agenda was set by the OECD and the decision-making process did not give countries enough time to internally debate and discuss the propositions. India, for one, having actively participated in the inclusive debate since 2015 along with the Global South, turned to the United Nations in 2023 considering the state of affairs and fundamental disagreements on the building blocks of Pillar One.
Interestingly, the US remains non-committal on both Pillar One and Two. The discontent in the US over the Treasury engaging with the OECD without involving the House Committee on Ways and Means has been widely reported.
Against this backdrop, Yellen’s statement on the lack of Indian engagement seems intriguing. Even if India chooses to engage, Pillar One needs a resolution of the US deadlock before it can hope to see the light of day.
India’s ask is to revisit rules that are a century old and no longer fit for purpose in the current way of doing business. The vision of the ruling party, which has taken reins for a third consecutive term, is to make India a $30-trillion economy by 2047. With India’s demographics, it is certainly achievable. It is also likely that India will be in equal parts a capital-importing and -exporting country in the next 10-15 years. India has a unique opportunity of becoming the torchbearer for developing nations with its pragmatism. Equally, it is imperative for India to find a middle ground on issues so that its coffers receive balanced tax collections and a healthy investment regime in the “Amrit Kaal” era envisioned by the government.
The authors are founder and managing partner, and partner, BMR Legal Advocates, respectively
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