India Joins OECD/G20 Inclusive Framework Tax Deal
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Context: India joins OECD/G20 Inclusive Framework tax deal.
Highlights:
- Recently, Majority of the members OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, including India adopted a high-level statement containing an outline of a consensus solution to address the tax challenges arising from the digitalisation of the economy.
- The signatories of the plan amounted to 130 countries and jurisdictions, representing more than 90% of global GDP.
- The new framework seeks to address the tax challenges arising from the digitalisation of economies.
- It also seeks to address concerns over cross-border profit shifting and bring in subject-to-tax rule to stop treaty shopping.
- Treaty shopping is an attempt by a person to indirectly access the benefits of a tax treaty between two countries without being a resident of any of those.
Two Pillar Plan:
Pillar One:
- It will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies.
- It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
- According to OECD, more than USD 100 billion of profit are expected to be reallocated to market jurisdictions each year.
Pillar Two:
- It is about minimum tax and subject-to-tax rules (All sources of income liable to tax without taking account of tax allowances).
- It seeks to put a minimum standard tax rate among countries through a global minimum corporate tax rate, currently proposed at 15%.
- This is expected to generate an additional USD 150 billion in tax revenues.
Expected Outcome:
- If implemented, countries such as the Netherlands and Luxembourg that offer lower tax rates, and so-called tax havens such as Bahamas or British Virgin Islands, could lose their sheen.
- It will make sure that large multinational companies pay their share of tax everywhere.
- The two-pillar package is expected to provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-Covid recovery.
India’s Stand:
- India will have to roll back the equalisation levy that it imposes on companies such as Google, Amazon and Facebook when the global tax regime is implemented.
What is Equalisation levy?
- In 2016, India imposed an equalisation levy of 6% on online advertisement services provided by non-residents. This was applicable to Google and other foreign online advertising service providers.
- The government expanded its scope from April 1, 2020, by imposing a 2% equalisation levy on digital transactions by foreign entities operating in India or having access to the local market.
- India favours a wider application of the law to ensure that the country won’t collect less under the proposed framework than it gets through the equalisation levy.
- India is in favour of a consensus solution which is simple to implement and simple to comply with.
- The solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.
- The Two Pillar Plan justifies India’s stand for a greater share of profits for the markets and consideration of demand side factors in profit allocation.
What is BEPS?
- Base Erosion and Profit Shifting (BEPS) is a tax avoidance strategy used by multinational companies by exploiting gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
- In order to combat this, many countries entered into agreements to share tax information with each other to enhance transparency and make such profit shifting that much harder.
- Here, profits are shifted from jurisdictions that have high taxes (such as the United States and many Western European countries) to jurisdictions that have low (or no) taxes (so-called tax havens).
- The BEPS Action Plan adopted by the OECD and G20 countries in 2013 recognised that the way forward to mitigate risk from base erosion and profit shifting was to enhance transparency.
- BEPS practices cost countries USD 100-240 billion in lost revenue annually.