India would require a detailed analysis of the potential changes in the revenue and a thorough determination of the net increase/decrease to finally ascertain if this bold new framework for international tax reform would be beneficial or detrimental to the nation’s interests.
On July 9th, the OECD or Organization of Economic Cooperation and Development shared a two-pillar deal for redrafting the international taxation rules. It claimed that the proposal has been agreed upon by more than 130 nations and stated that these nations represent about 90% of the global GDP. This deal is mooted to be finalized by October 2021 followed by a multilateral treaty in 2022 and the implementation in 2023.
Pillar one aims to reallocate the right to tax MNEs or Multinational Enterprises. It recognizes a MNE as a company having a turnover of € 20 billion and a profit of over 10%. It also proposes to reduce the minimum turnover to €10 billion based on a review to be conducted 7 years after the implementation of the deal. This new deal would allow larger jurisdictions from which the MNE in question derives revenue of € 1 million or more and smaller jurisdictions from which the MNE in question derives revenue of € 2, 50,000 to tax the given MNE.
Pillar two intends to put an end to the tax competition among nations by setting a minimum tax rate which is mandatory for every nation to charge. This competition refers to the constant lowering of tax rates by various nations to incentivize companies to establish their registered offices in those countries. The deal also puts an end to unilateral measures, which refer to a unique set of policies that are devised by each nation, on their own, without considering other nations.
These reforms are likely to bring about tax certainty which will undoubtedly benefit corporations and jurisdictions. The establishment of a floor rate of tax will create a level playing field for all nations as unlike developed countries, developing and under-developed countries might not be in a position to forgo taxes or charge taxes at extremely low rates. The differentiation between smaller and larger jurisdictions in pillar-one is also a welcome measure as it would ensure that smaller economies are given an opportunity to tax large corporations.
Another aspect that merits mention here is the digital tax. Digital taxes are the taxes which are imposed on digital platforms such as Facebook, Google, etc. by nations across the world. Several digital platforms have no physical presence in the nations where they carry out their operations and are, thus, able to evade paying taxes. However, since there is no international policy in place for charging such platforms, every nation is going about devising its own unique set of rules and policies. It is perhaps in the background of these unilateral measures that the OECD decided to draft a uniform set of rules. A set of uniform rules will definitely help nations, which previously had limited power, to bear the wrath of the United States of America, where the majority of the digital giants are situated. The USA currently enjoys the right to tax these companies. However, if other jurisdictions start levying digital taxes, the US would have to waive its rights under the protection from double taxation agreements, it entered into. Consequently, in the past years, it has opposed every move by any nation to impose any such digital taxes. While the European and other developed nations were able to fight the US, other nations were compelled to back down.
Moreover, these uniform rules might also cause a loss of revenue to countries like India as they would have to do away with their unilateral measures like the Equalization Levy. India will have to apply a cost-benefit analysis. On the one side, it would get the right to tax large digital corporations having the requisite turnover but on the other, it would lose the right to charge an Equalization Levy. The country would not be able to impose unilateral measures on digital MSMEs, which would wane the possibility of meeting the turnover criteria. Thus, India would require a detailed analysis of the potential changes in the revenue and a thorough determination of the net increase/decrease to finally ascertain if this bold new framework for international tax reform would be beneficial or detrimental to the nation’s interests.