By Akhilesh Ranjan and Jitendra Jain

The OECD is currently working on a project comprising 140+ countries (‘the Inclusive Framework’) to redesign the current international tax system. The project consists of two Pillars. Pillar One aims at allocating a portion of profit of large and highly profitable multinational enterprises (MNEs) to the destination or market country, where consumers or users are based. The second proposal, known as Pillar Two or global minimum tax, will ensure that MNEs pay a minimum level of tax in all the countries where they operate, i.e., minimum effective tax rate (ETR) of 15% on a country-by-country basis.

Pillar Two applies to MNEs with global revenues above €750 million (~Rs 6,500 crore), with certain exceptions. If an in-scope MNE’s ETR in a country is below 15%, it will have to pay a top-up tax to the country where its parent company is located. For example, if an Indian MNE has an ETR of 10% in Singapore, it will have to pay a top-up tax of 5% to India. However, Singapore can also collect the top-up tax if it introduces a qualified domestic minimum tax. If neither India nor Singapore introduce the Pillar Two, the top-up tax will be collected by other countries that have introduced it.

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Pillar Two has been designed in such a way that even if one country legislates it, the entire top-up tax could be collected by that country. Therefore, no country, including India, would like to be left behind in the implementation process. The Inclusive Framework has finalised the Pillar Two model rules and the commentary. Now it is up to the countries to implement the Pillar Two rules via domestic law changes.

While there is uncertainty around Pillar One implementation in view of pushback in the US, Pillar Two is almost a reality as more than 50 countries are in different phases of implementation of Pillar Two. We are witnessing two waves of implementation of Pillar Two globally: 2024 and 2025. Certain countries such as Korea, Japan, Australia, New Zealand, the UK, the Netherlands, and Switzerland have either concluded consultation or published draft rules targeting implementation of Pillar Two with effect from 2024. Several countries are also in the process of implementing qualified domestic minimum tax, which would allow them to collect the shortfall in taxes from MNEs in their own countries instead of the parent’s jurisdiction.

India is among the active participants in the discussions at the Inclusive Framework. One of the elements of Pillar Two is the subject to tax rule (STTR). It subjects intragroup base eroding payments from a developing to a developed country to a minimum tax of 9%. India is pushing for broadening the scope of the STTR. India views both the STTR and the Pillar Two as an integrated package and Pillar One and Pillar Two as a package. Therefore, it appears that taxpayers will get to know about India’s intention of implementing Pillar Two only after there is more clarity on the scope of the STTR and more certainty on Pillar One. However, India should not wait for that.

The next full budget of the Indian government would be in July 2024, given 2024 is the general election year. The last thing taxpayers would want is that India announces the implementation of Pillar Two in July 2024 and that too from FY25.

The global minimum tax will have a significant impact on the large Indian-headquartered MNEs as the rules are complex and require substantial accounting and tax information, not all of which would be available readily. MNEs would need to adapt their processes and systems in advance for Pillar Two analysis, compliance, and reporting. The complexity of the Pillar Two rules can also be gauged from the fact that out of 65 pages of the rules, the definition section alone runs into 17 pages (150+ new definitions).

Given the complexity of Pillar Two rules and the impact, it is advisable that India’s introduction of Pillar Two rules is preceded by a consultation with stakeholders.

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Such consultation should focus on Pillar Two’s interaction with India’s existing tax system, with ways to minimise compliance burden and interaction with existing incentive regimes like tax incentives for GIFT city, among others. Based on the experiences in other countries, such a consultation period could run from three to six months. Countries such as the UK, Ireland, Australia, the Netherlands launched Pillar Two consultation in 2022 itself—more than a year in advance of the planned implementation of 2024.

Timely consultation with relevant stakeholders, including taxpayers and tax experts, will ensure that the global minimum tax is implemented in a consistent manner, it doesn’t result in unintended outcomes, and that complexity and compliance costs for taxpayers are minimised to the extent possible. This will also give both tax administrators and taxpayers sufficient time to prepare.

Writers are respectively, advisor and associate partner, Price Waterhouse & Co. LLP