By Dinesh Kanabar and Aditya Hans
The rules for taxing international business income, which have prevailed for more than 100 years, have created opportunities for Base Erosion and Profit Shifting (BEPS) in the digitalised and globalised business environment. OECD’s BEPS 1.0, published in 2015, comprised 15 action plans that aimed to enhance transparency, prevent treaty abuse, align taxation with substance, and ensure that profits are taxed where the economic activities generating the profits are conducted and where value is created. India’s adoption of the equalisation levy, significant economic presence, interest limitation rules, and country-by-country reporting (CbCR) under BEPS 1.0 aimed to capture tax revenues from the digital economy and prevent profit shifting. Although implementation of BEPS 1.0 Action Plans attempted to change the international tax landscape and improved the fairness of tax systems to a certain extent, there was a key unresolved issue of BEPS 1.0—addressing the tax challenges arising from the digitalisation of the economy.
This inability of BEPS Action Plan 1 to resolve the challenges of taxing the digital economy emerged as the genesis for Pillar One—a proposal to tax large multi-national enterprises (MNEs), defined as having a global turnover of more than20 billion euros—in jurisdictions where they have a significant consumer presence, even if they lack a physical presence . While the initial blueprint for Pillar One targeted MNEs engaged in the business of Automated Digital Services (ADS) and Consumer Facing Businesses (CFB), the revised framework issued in 2021 expanded the scope to all MNEs satisfying the turnover threshold criteria. The current turnover criteria is proposed to be reduced after seven years to include more MNEs group within the ambit of Pillar One framework. The final framework for Pillar One is yet to be published by the OECD.
On the other hand, the developing economies were intrigued by MNEs’ practice of shifting profits to low-taxed foreign subsidiaries/entities, thereby undermining the integrity of existing international tax rules. Previous attempts to tackle this through controlled foreign company (CFC) regulations did not yield much impact because MNEs could adapt by shifting their headquarters to jurisdictions with more lenient or non-existent CFC rules. Accordingly, Pillar Two-GloBE Rules were proposed, imposing a global minimum tax on MNEs (defined here as having a global turnover of more than 750 million euros) to discourage profit shifting and ensure that they pay a minimum Effective Tax Rate (ETR) of 15% in respect of every jurisdiction where they operate.
To elaborate on the Pillar Two-GloBE Rules proposal, consider an MNE group, headquartered in Jurisdiction A, having a constituent entity (CE) in Jurisdiction B where its ETR is 9% basis the complicated computation mechanism as laid down in the GloBE Rules. The shortfall of 6% (15% minus 9%) is the Top-Up Tax (TUT). The rules provide Jurisdiction B with the first right to collect such TUT through by introducing a Qualified Domestic Minimum Top-up Tax (QDMTT) in its domestic laws. If Jurisdiction B does not introduce a QDMTT, then the right to collect such TUT goes to the jurisdiction of Ultimate Parent Entity (Jurisdiction A, in this instance) through an Income Inclusion Rule (IIR)—only if GloBE Rules are introduced by the jurisdiction of the Ultimate Parent Entity. Lastly, if Jurisdiction A also does not introduce an IIR, then the right goes to other jurisdictions where the MNE operates, through an Undertaxed Payments Rule (UTPR). In effect, the Pillar Two-GloBE Rules are formulated to make in-scope MNEs liable to an ETR of 15% in respect of profits earned, in each of the jurisdiction in which they operate. Thus, Pillar Two is a tool to discourage tax competition.
At present, 142 countries (including India) have formed an Inclusive Framework (IF), and all of them, except Pakistan, Sri Lanka, and Nigeria, have come together to endorse the BEPS 2.0 proposals. The OECD issued a Report on Pillar Two Blueprint in October 2020 outlining the potential financial impacts of the global minimum tax and has since come up with seven more documents on Pillar Two-GloBE Rules, two of which are in public consultation while the other five are final documents. These documents contain extensive literature on legislative provisions, commentary to rules, examples, safe harbour rules, GloBE Information Return template, tax certainty procedures, and administrative guidance. According to corporate tax statistics from the OECD, based on 2018 CbCR data, approximately 160 MNEs headquartered in India will be affected by the GloBE Rules. Furthermore, based on publicly available information for FY22, it is estimated that the number of in-scope India- headquartered MNEs would be about 200. India, though being part of the IF which endorsed Pillar Two-GloBE Rules, is yet to introduce such provisions in its domestic laws. Does it mean that the India-headquartered MNEs can sit back and relax?
An interesting fact about Pillar Two-GloBE Rules are that it is not necessary for each IF jurisdiction to adopt the GloBE rules to trigger a compliance obligation for the MNEs. The GloBE Rules have been framed and agreed to be applied as a ‘common approach’. This means that jurisdictions are not required to formerly adopt the GloBE rules, but if they choose to do so, they agree to implement and administer them in a way that is consistent with the agreed outcomes set out under those rules. Even if a jurisdiction does not implement the rules, agreement on a common approach means that one jurisdiction accepts the application of the GloBE Rules by another in respect of MNEs operating in its jurisdiction. This implies that India-headquartered MNEs having presence in jurisdictions which have already adopted the GloBE Rules need to gear up and be prepared to comply with the legislative provisions of the rules.
Despite some initial roadblocks from Hungary and Poland, the Council of the EU adopted the EU Minimum Tax Directive in December 2022. This Directive ensures that the GloBE Rules are implemented in a coordinated manner throughout the EU from 2024. Among the EU countries, Netherlands, Sweden, and Germany have made significant progress in their adoption of the Directive, to introduce GloBE Rules from 2024. A number of other leading economies, namely Japan (2024), South Korea (2024), Switzerland (2024), UK (2024), Australia (2024), New Zealand (2024) and Singapore (2025), have initiated the process of adopting GloBE Rules and issued draft legislation while other economies, namely Mexico, Canada, Mauritius, and Malaysia, have formally indicated to introduce the GloBE Rules.
India is an IF member and a signatory to the ‘common approach’, whereby it has committed to respect the rights of other IF countries to impose legitimate top-up taxes on eligible entities. Additionally, Article 8.1 of GloBE Rules states that if the UPE jurisdiction has not adopted the GloBE Rules, but the MNE group has entities located in other jurisdictions that have introduced the GloBE Rules, then such Rules apply to the MNE group as a whole and GloBE Information Return (GIR) is required to be filed via a Designated Filing Entity (surrogate filing). Even if a single jurisdiction implements GloBE Rules, then the MNE group must follow them irrespective of whether the UPE jurisdiction has implemented such rules or not.
The GIR is a 22-page template requiring extensive information (approximately 250 data points per entity) about all entities of an MNE group. India-headquartered MNEs need to make diligent efforts to recalibrate their tax strategies, performing additional calculations and implementing robust systems to meet the compliance obligations under the GloBE framework. Further, MNEs with operations in two types of jurisdictions—ones that are introducing the GloBE Rules w.e.f. 2024 and others delaying introduction—must grasp the interplay between the different aspects of the rules and diverse timelines for implementation.
The GloBE Rules are no longer a distant rumour but a tangible force knocking at our doors. It is thus imperative that the in-scope Indian MNEs must now wake up and navigate this new era of taxation with finesse and adaptability.
Writers are respectively, CEO, and partner, Dhruva Advisors LLP