Budget 2023 Likely To Indicate Road Map For OECD’s Pillar 2 Solution On Taxation In Digital Economy: Report

The upcoming Budget 2023 is expected to indicate a road map for ushering in the ‘Pillar 2’ solution, which is part of OECD’s inclusive framework and the G20, to tackle the issue of taxation in a digital economy. The Pillar 2 solution has been agreed upon by 137 member countries, including India.

The OECD and G20 Inclusive Framework on BEPS released further technical guidance on the 15 per cent global minimum tax agreed in October 2021 as part of the two-pillar solution to address the tax challenges arising from digitalisation of the economy. The Global Anti-Base Erosion (GloBE) Rules provide a co-ordinated system to ensure that Multinational Enterprises (MNEs) with revenues above EUR 750 million pay at least a minimum level of tax – 15 per cent – on the income arising in each of the jurisdictions in which they operate.

“The GloBE rules are unlikely to trigger for business operations in India carried out by MNEs, as the effective tax rate in India is higher than the prescribed minimum rate. Nevertheless, one relaxation which would be significant from the GloBE rules perspective would be to ensure adequate carve-outs for regulated sectors viz: International Financial Services Centres in GIFT city and the related tax exemptions.” said Abhishek Goenka, founding partner at Aeka Advisors, according to a Times of India report.

The Union Budget 2023 might have a broad-based reference but not specific amendments to the Income Tax Act, as the Organisation for Economic Cooperation and Development (OECD) is expected to release an implementation framework only in the coming months, according to TOI report.

Pillar 2 is founded on three principles: Income inclusion rule (IIR) and undertaxed payment rule (UTPR) – both of which are to be implemented by countries by amending their domestic tax laws – and the subject to tax rule (STTR), which falls within the tax treaty framework and is likely to be covered by multilateral instruments.

According to the TOI report, Malik Mehta, corporate & international tax partner at BS & Co, said, “The IIR imposes an additional tax on the ultimate parent entity, in its country of residence, with respect to the low taxed income of certain foreign subsidiaries. The UTPR acts as a backstop, it denies deductions or provides for adjustment for group entities to the extent of top-up tax not collected under IIR. Lastly, STR permits the source country to withhold tax on certain payments, if such payments are subject to tax at less than 9% in the recipient’s jurisdiction.”

The report also quoted Sanjay Sanghvi, tax partner at Khaitan & Co, say that it may be prudent to include a standalone provision under the I-T Act to cover implications under Pillar 2.

“It is expected that the government will formulate a document capturing the changes it intends to make to tax laws, invite suggestions, and then proceed further. Various other countries such as France, Germany, Netherlands have followed such a consultative approach,” Sanghvi was quoted as saying in the report.

Japan in December 2022 released a draft legislation for the implementation of the IIR. December also witnessed the EU member countries reaching a consensus on the implementation of Pillar 2 directives.

In November 2022 also, a consultation paper was released by the Australia Treasury. Singapore intends to introduce a top-up tax in the form of a minimum effective rate and will present draft domestic rules in its 2023 Budget.

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