136 countries reach an agreement to distribute MNEs profits among customer-centric countries and introduce a minimum global tax rate of 15% – Times of India
MUMBAI: One can say that history has just been made in the arena of international tax. One of the major reforms finalised today at an Inclusive Framework meeting under the umbrella of the Organisation for Economic Co-operation and Development (Oecd) ensures that Multinational Enterprises (MNEs) will be subject to a minimum 15% global tax rate from 2023.
Following years of intense negotiations, today an agreement on the Two-Pillar solution was reached among 136 countries and jurisdictions (which includes all Oecd member countries and G-20 countries). Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined the agreement. The solution will be delivered to the G20 finance ministers meeting in Washington DC on October 3 and then presented at the G20 Leaders Summit in Rome at the end of October.
From the very inception, India has been an active participant in these discussions. From India’s revenue standpoint, Pillar One which grants taxing rights and allocation of profits of MNEs to countries where the customer base is, regardless of whether the MNEs have a physical presence, is of paramount importance. To illustrate, highly digitalised companies that do not require a physical footprint such as Google and Facebook have a huge consumer base in India.
Under Pillar One, taxing rights on more than $ 125 billion are expected to be reallocated from around 100 of the world’s largest and most profitable MNEs to market jurisdictions (countries where the customer base is), each year. This would ensure that these companies pay a fair share of tax wherever they operate and generate profits.
Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues, states an Oecd release. But, the extent to which the new approach will benefit India remains to be seen.
India had taken the unilateral step of introducing an equalisation levy, more as a stop-gap arrangement, till a global consensus was reached. Equalisation levy was introduced from June 1, 2016. Under it an Indian payer is required to deduct 6% on payments (if in excess of Rs. 1 lakh in a year) to a non-resident entity – say Google or Facebook for online advertisements. The scope of EL was expanded by the Finance Act, 2000, to cover non-resident E-commerce operators (whose turnover was over Rs. 2 crore in a year). They would have to pay tax @2% on the consideration received for online sales of goods or services.
To curb such unilateral measures being adopted the agreement provides that no newly enacted digital services taxes will be imposed on any company from October 8, 2021 and until the earlier of December 31, 2023 or the coming into force of the agreement.
To point out the nitty-gritty relating to Pillar One, “MNEs with global sales above EUR 20 billion and profitability above 10% will be covered by the new rules. Under it, 25% of profit above the 10% threshold is to be reallocated to market jurisdictions,” states an OECD release.
The agreement has come in for flak in some quarters. Alex Cobham, chief executive at the Tax Justice Network, said the Oecd has failed to come anywhere close to its original ambition. “Pillar One ‘beyond’ the arm’s length principle, as was promised, for only a sliver of the profits of just 100 MNEs. The tokenistic measure keeps the century-old principle, widely recognised as unfit for purpose, unchanged for almost all multinational profits.”
Pillar Two introduces a global minimum corporate tax rate set at 15%. Ireland, with a low corporate tax rate of 12.5% had emerged as a tax haven for tech firms like Google, Facebook and Apple. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around $ 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
“Pillar Two does set a global minimum rate, but so low at 15% that the incentives to shift profit will remain substantial; and with the great majority of revenues captured by the US and just a few others,” states Cobham.
In the backdrop of Pandora’s papers – a global minimum corporate tax rate elicits interest. However, it should be noted that this applies only to MNEs meeting the high threshold requirements.
Senior advocate Porus Kaka said, “This is the most radical global reform in the last century”. However, the dispute resolution mechanism is one of the key points to look out for, he added.
“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform,” secretary-general Cormann said.
Following years of intense negotiations, today an agreement on the Two-Pillar solution was reached among 136 countries and jurisdictions (which includes all Oecd member countries and G-20 countries). Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined the agreement. The solution will be delivered to the G20 finance ministers meeting in Washington DC on October 3 and then presented at the G20 Leaders Summit in Rome at the end of October.
From the very inception, India has been an active participant in these discussions. From India’s revenue standpoint, Pillar One which grants taxing rights and allocation of profits of MNEs to countries where the customer base is, regardless of whether the MNEs have a physical presence, is of paramount importance. To illustrate, highly digitalised companies that do not require a physical footprint such as Google and Facebook have a huge consumer base in India.
Under Pillar One, taxing rights on more than $ 125 billion are expected to be reallocated from around 100 of the world’s largest and most profitable MNEs to market jurisdictions (countries where the customer base is), each year. This would ensure that these companies pay a fair share of tax wherever they operate and generate profits.
Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues, states an Oecd release. But, the extent to which the new approach will benefit India remains to be seen.
India had taken the unilateral step of introducing an equalisation levy, more as a stop-gap arrangement, till a global consensus was reached. Equalisation levy was introduced from June 1, 2016. Under it an Indian payer is required to deduct 6% on payments (if in excess of Rs. 1 lakh in a year) to a non-resident entity – say Google or Facebook for online advertisements. The scope of EL was expanded by the Finance Act, 2000, to cover non-resident E-commerce operators (whose turnover was over Rs. 2 crore in a year). They would have to pay tax @2% on the consideration received for online sales of goods or services.
To curb such unilateral measures being adopted the agreement provides that no newly enacted digital services taxes will be imposed on any company from October 8, 2021 and until the earlier of December 31, 2023 or the coming into force of the agreement.
To point out the nitty-gritty relating to Pillar One, “MNEs with global sales above EUR 20 billion and profitability above 10% will be covered by the new rules. Under it, 25% of profit above the 10% threshold is to be reallocated to market jurisdictions,” states an OECD release.
The agreement has come in for flak in some quarters. Alex Cobham, chief executive at the Tax Justice Network, said the Oecd has failed to come anywhere close to its original ambition. “Pillar One ‘beyond’ the arm’s length principle, as was promised, for only a sliver of the profits of just 100 MNEs. The tokenistic measure keeps the century-old principle, widely recognised as unfit for purpose, unchanged for almost all multinational profits.”
Pillar Two introduces a global minimum corporate tax rate set at 15%. Ireland, with a low corporate tax rate of 12.5% had emerged as a tax haven for tech firms like Google, Facebook and Apple. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around $ 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
“Pillar Two does set a global minimum rate, but so low at 15% that the incentives to shift profit will remain substantial; and with the great majority of revenues captured by the US and just a few others,” states Cobham.
In the backdrop of Pandora’s papers – a global minimum corporate tax rate elicits interest. However, it should be noted that this applies only to MNEs meeting the high threshold requirements.
Senior advocate Porus Kaka said, “This is the most radical global reform in the last century”. However, the dispute resolution mechanism is one of the key points to look out for, he added.
“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform,” secretary-general Cormann said.
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