With the OECD/G20 global tax agreement, India will likely have to give up equalisation levy

October 19, 2021 4:15 AM

The global agreement, if successfully implemented, sets the stage for even more closer cooperation between revenue authorities of member countries, helping collection of fair share of taxes, especially in the Covid era.

OECDIndia is also set to benefit from the implementation of the treaty-based rule to deny deductions of payments made to entities based in those jurisdictions which levy an effective tax below 15%

By Hitesh D Gajaria, Senior partner, KPMG in India

The OECD, on October 8, released a statement on the agreement reached by 136 member jurisdictions of the OECD/G20 Inclusive Framework (‘IF’)—which involves revenue authorities of 140 countries (90% of global GDP). With Ireland, Hungary and Estonia also joining in, the agreement represents the consensus of all G20, European Union (EU), and OECD nations to a two-pillar solution to address tax challenges arising from digitalisation of the economy. Indian revenue authorities played an active role in these discussions. The statement updates a previous one (July), finalising several key aspects of a framework or model to reform the international tax system.

Pillar One seeks to reallocate, for tax purpose, more than $125 billion of profits from the top 100 or so of the world’s largest and most profitable multinational enterprises (MNEs) to market jurisdictions (housing many customers of the products and services of these MNEs). India is hopeful of boosting its tax revenues as it is primarily a consumer-driven economy. This reallocation will be made without regard to the hitherto prevailing permanent establishment (i.e., physical presence) or transfer pricing arm’s length standards.

Implementation of Pillar One needs jurisdictions to hold off from introducing new unilateral measures and withdrawing already introduced digital taxes and similar levies. India legislated a 6% equalisation levy on online advertisements from June 2016 and a 2% equalisation levy on e-commerce supply of goods and services from April 2020. In May 2021, India also prescribed the thresholds for the applicability of the ‘significant economic presence’ concept, which allows it to assert domestic taxing rights on profits earned by non-resident entities with revenues exceeding `20 million or users exceeding 300,000. An effective working of the two-pillar solution may require India to repeal such measures.

Pillar Two has attained an unprecedented agreement on a global minimum tax rate of 15% which every jurisdiction signing the agreement will levy, failing which, other interlocking domestic rules—known as Global Anti-Base Erosion (GloBE) Rules and a treaty-based rule, will operate to ensure such tax is effectively paid up by the MNEs. Pillar Two applies to a larger group of MNEs that have consolidated revenues above 750 million euros (~`66 billion). The focus on financial profits is because many MNEs operated in jurisdictions with higher headline corporate tax rates but ultimately paid minimal or low levels of corporate tax. Further, countries are free to adopt a lower threshold for MNEs headquartered in their own jurisdictions.

The global minimum tax of 15% is expected to generate approximate additional tax revenues to the tune of $150 billion. An important announcement is that the GloBE rules shall not be applicable in jurisdictions where MNEs have revenues less than 10 million euros and profits less than 1 million euros.

The global minimum tax of 15% may sound a death knell for the so-called tax havens, which exist primarily to help MNEs avoid paying the legitimate share of taxes in countries where they have a substantial market or which aid tax evaders by promising secrecy and confidentiality. Further, the global minimum tax deal directly impacts jurisdictions such as Ireland, which has, for a long time, had a corporate tax rate of 12.5% (i.e., below 15%). From an Indian standpoint, the GloBE rules could result in additional revenues from India-headquartered MNEs that have shifted profits offshore to benefit from no/low tax regimes. India is also set to benefit from the implementation of the treaty-based rule to deny deductions of payments made to entities based in those jurisdictions which levy an effective tax below 15%. The agreement targets the year 2023 as the effective year of implementation of both Pillars, with a lot of detailing to be done in the coming months and in 2022.

The global agreement, if successfully implemented, sets the stage for even more closer cooperation between revenue authorities of member countries, helping collection of fair share of taxes, especially in the Covid era.

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