Organisation for Economic Co-operation and Development (OECD) on 8 October 2021 released a statement on the agreement reached by 136 member jurisdictions of the OECD / G20 Inclusive Framework (‘IF’), (i.e., revenue authorities of 140 countries) representing 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 too played an active role in these global discussions. The statement updates a previously released statement by the IF in July 2021, by finalising several key aspects of a framework or model, to reform the international tax system.
Pillar One of this agreement seeks to reallocate for tax purposes, more than US $ 125 Billion of profits from the top 100 or so of the world’s largest and most profitable multinational enterprises (‘MNEs’), to market jurisdictions (countries which have 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 INR 20 million / 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 EUR 750 million (~ INR 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 USD 150 billion. An important announcement is that the GloBE rules shall not be applicable in jurisdictions where MNEs have revenues less than EUR 10 million and profits less than EUR 1 million.
The global minimum tax of 15% may sound a death knell for the so-called tax havens, which exist primarily to help MNEs to avoid paying their legitimate share of taxes in countries where they do 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 for the Indian Revenue from Indian-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 co-operation between revenue authorities of member countries, helping their cause of collecting their fair share of taxes, especially when resources are needed to make up for the huge spending which most governments have done in this COVID laden era.