India expects major gains for itself from joining a global tax deal that is in works under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
Officials in the Finance Ministry said that the terms of negotiations of the global tax deal have taken all the inputs that India had shared over the years for equitable distribution of tax revenue by multinational enterprises to the market jurisdictions, especially in the digital world where companies may not have physical presence in all geographies but derive a larger portion of earnings and profits from there.
"With negotiations on multilateral tax treaty now largely focused on a two-pillared approach taken by the OECD (Organisation for Economic Co-operation and Development), most of the concerns of India have been taken into account. The shape of the deal emerging from here on would benefit India immensely," said an official.
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India has been levying withholding tax on contain earnings of non-residents. It has now also put an equalisation levy to tax income transfers by digital companies like Amazon, Flipkart and Google, which may not have complete physical presence in the country.
The multilateral tax deal that is expected by October is expected to take note of the situation in countries like India to finalise the global and equitable tax structure.
"For the first time a digital nexus will result in 20-30 per cent of residual profits of large digital enterprises being allocated to market countries such as India. In addition, Pillar 2 provisions that combat treaty shopping and guarantee a global minimum tax rate of 15 per cent will also allow India to tax income flowing to low tax countries," said Rohinton Sidhwa, Partner, Deloitte.
He said that while the OECD framework is going in the direction that India has always wanted out of any global tax treaty, the nitty gritties as to how much profit distribution should be done by the multinational enterprises (MNEs) towards market jurisdictions and what should be the basis of distribution of this carved out profit between market jurisdictions are yet to be known.
With higher population and larger online hits, India would want that it gets a larger share of the residual profits that MNEs transfer to market jurisdictions.
"The principles underlying the solution (at OECD) vindicates India's stand for a greater share of profits for the markets, consideration of demand side factors in profit allocation, the need to seriously address the issue of cross-border profit shifting and the need for subject to tax rule to stop treaty shopping," a Finance Ministry statement said.
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India is in favour of a consensus solution which is simple to implement and comply. At the same time, the solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for the developing and emerging economies. India will continue to be constructively engaged for reaching a consensus, the statement added.
The OECD/G20 Inclusive Framework on BEPS has agreed on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. Pillar One is about reallocation of additional share of profit to the market jurisdictions, while Pillar Two consists of minimum tax and subject to tax rules.
BEPS refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries' higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries $100-240 billion in lost revenue annually.
The second pillar of BEPS on minimum tax where the broad agreement is coming at 15 per cent level would also help countries like India that sees a lot of investment coming from low tax jurisdictions under the garb of double taxation avoidance arrangements.
With minimum taxation in place, the country would be eligible to tax entities on their profits up to the minimum agreed tax levels.
The tax treaty would also provide flexibility to the countries to have separate tax arrangements with certain geographies based on an earlier agreed taxation plan.
"The consensus reached by the OECD Inclusive Framework among 130+ member countries on two-pillar solutions is undeniably a colossal outcome, and will accelerate the ongoing efforts to reset of nearly a century-old international tax rules enshrined in bilateral tax treaties," said Sumit Singhania, Partner, Deloitte India.
The latest agreement on Pillar One solution provides an objective in-scope definition for largest (sales >20bn euro) and most profitable (>10 per cent global profitability) MNEs to be subject to new nexus and profit allocation rules.
A 20 to 30 per cent allocation of super normal profits to market jurisdictions is definitely a decent bargain for large number of source jurisdictions.
The finality dawning on multilateral negotiations will also pave way for phase out of unilateral measures like digital service tax and any like measures such as equalisation levy in the Indian context.
Moreover, Pillar One will drive simpler cross-border tax compliances as taxes are to be allocated among jurisdictions through the central allocation formula.
"The latest negotiations on Pillar Two have led to a balanced outcome with an agreement on 15 per cent minimum tax, which is touch higher than the rates indicated under the OECD modelling a few months ago. This consensus on minimum tax would hopefully inspire much-spirited participation as the OECD gives finishing touches to implementation the plan in th next few months. On the flip side, the timeline for both th pillars to come into effect from 2023 does appear a touch ambitious, and within that, MNEs will have a lot of work to do to gear up to the new global tax rules," said Singhania.
